Jack Bogle & Bill Bernstein Fireside Chat - Bogleheads Conference 2018

Bill Bernstein compares Fidelity's zero expense ratio funds to the failed e-machines business model that gave away computers for free. Jack Bogle discusses the competitive threat, noting Fidelity's funds aren't true S&P 500 funds (likely to avoid S&P licensing fees) and explains how Vanguard is constrained from matching zero fees due to cross-subsidization concerns. He notes investors should consider tax implications before switching funds.

Bill Bernstein raises concerns about the approaching trillion-dollar federal deficit and $22 trillion in outstanding treasury debt being serviced at only 1.3% interest. He warns that if rates return to historical 5-6% levels, servicing costs could reach $1 trillion annually out of $3.4 trillion in federal receipts. Jack Bogle identifies debt as the root cause of almost every bubble in history, highlighting consumer debt, student loans, mortgage debt, and home equity debt as major concerns.

Jack Bogle criticizes the recent tax legislation that gave substantial tax cuts to corporations while raising taxes on individuals over time, calling it 'economic insanity.' He notes the irony of fiscal hawks being responsible for policies that dramatically increase the deficit.

Bill Bernstein asks about behavioral signs of bubbles. Jack Bogle observes that everything happening today is 'great for the short term and terrible for the long term,' including fiscal policy, wealth inequality, racial gaps, and immigration policy. He expresses concern that markets are focused on short-term gains while ignoring long-term consequences.

Jack Bogle discusses climate change as a long-term threat, noting Philadelphia is 10 degrees above normal and citing administration predictions of a 7-degree temperature rise by 2100. He mentions increasing hurricanes and rainstorms as evidence of climate upheaval.

Jack Bogle reveals he maintains a 50/50 stocks and bonds allocation and uses a unique metric for determining proper allocation: spending equal time regretting having too much or too little in stocks. Bill Bernstein endorses this as a perfect indicator of proper allocation.

Bill Bernstein highlights that worker compensation as a percentage of GDP has fallen from 52% to 42% over 40-50 years, with that income going to equity holders instead. Jack Bogle acknowledges this as a problem and discusses broader concerns about wealth inequality, noting the gap between the wealthiest 1% and everyone else, particularly the lowest 15%.

Jack Bogle discusses America's declining role in the world and the threat to American exceptionalism. He emphasizes that immigration built America, citing his own family as descendants of Scottish immigrants from 1866. He expresses concern about China's rising influence and America's shrinking global position.

Jack Bogle articulates his philosophy: he's an extreme conservative who loves American institutions, entrepreneurship, and liberty, but becomes 'liberal' in recognizing that preserving these requires caring for those less fortunate. He notes the underclass has an average income of $15,000 per year.

Bill Bernstein notes the decline from 8,000 to 4,000 publicly traded companies. Jack Bogle corrects that it's closer to 3,000 from a baseline of 5,000 (Wilshire 5000), but notes most departing companies are very small. He questions why national policy allows so many mergers and calls for stricter anti-trust enforcement, reminiscent of Teddy Roosevelt.

Jack Bogle criticizes the use of pro forma accounting in mergers, stating that 99.5% of the time it's used to manipulate numbers. He expresses skepticism about claimed merger synergies, noting they're always talked about but almost never realized.

Recalling the 2008 conference during Lehman's collapse, Bill Bernstein asks if things are better now. Jack Bogle says yes because the mortgage debt and mortgage-backed securities problems aren't as severe, but cautions we're 'not a lot better.' Bill notes we now have lower interest rates and four big banks instead of five managing a higher percentage of assets.

Bill Bernstein asks about the decline in civility of public discourse. Jack Bogle defends the press, noting newspapers have editors and fact-checkers providing the 'straight story.' He criticizes attacks on media credibility and warns about the Internet as a medium for fake news, citing Russian interference in elections. He also expresses concern about loss of privacy.

Jack Bogle emphasizes the importance of voter participation, noting that registered voters who don't vote is 'shocking' and that universal voting would create 'a very different kind of America.' He criticizes money in politics, specifically mentioning Sheldon Adelson's $100 million campaign contribution and questioning the legitimacy of wealth from gambling establishments.

Jack Bogle recounts being invited to a White House dinner with President Nixon in May 1970 during a market crash. He was the only person to ask a question, confronting Nixon about what he would do to fulfill his campaign pledge to 'bring us all together' in the face of divisions. Nixon appeared uncomfortable but acknowledged it was the right question.

Jack Bogle concludes with a reflection on individual responsibility despite feeling small in the universe. He describes Vanguard's mission as a crusade to give investors a fair shake and spread stock ownership to those who weren't getting fair treatment, emphasizing that one person can make a difference.