 Welcome to Bogle Heads On Investing, episode number 55. Today our special guest is Edward Chancellor. He is a leading financial historian, journalist, investment strategist, and the author of two bestselling books, Devil Take the Hindmost and The Price of Time. Hi everyone, my name is Rick Ferri and I'm the host of Bogle Heads On Investing. This episode, as with all episodes, is brought to you by the John C. Bogle Center for Financial Literacy, a non-profit organization that is building a world of well-informed, capable, and empowered investors. My special guest today is Edward Chancellor. One of the benefits of being a podcast host is I get to speak with some of the brightest people in the world. And as you listen to today's podcast, I think you will agree. Edward has studied economics and financial conditions in markets and economies going back literally thousands of years. And it's fascinating to listen to him lucidly talk through centuries of markets all over the world picking out similarities that others have not considered. Edward graduated with honors from Trinity College, Cambridge, and from Oxford University. He worked as a mergers and acquisition banker for his Lazar brothers, and later a member of the GMO asset allocation team. He currently is a columnist for Reuters. He has written two books, Devil Take the Hindmost, A History of Financial Speculation, which was published right at the top of the dot com bubble. And more recently, The Price of Time, The Real History of Interest, which ironically was published right at the top of the bond bubble. So with no further ado, let me introduce Ed Chancellor. Welcome to the Bogleheads on Investing Podcast, Ed. Thank you for having me, Rick. You've got such an interesting background. You've done so much and you've written so much. Could you tell us a little bit about maybe your schooling, how to get into journalism? I understand your family has a history in journalism. My grandfather was the Shanghai bureau chief of Reuters during the 1930s during the Sino-Japanese War. And then he later went on to become managing director of Reuters. And then his son, my uncle Alexander, became editor of the Spectator magazine here. I read history at university, decided not to become an academic after my postgraduate degree. I spent relatively little of my life in which journalism was my main or sole income stream. I made a mistake by going into the corporate finance side of things, in what you'd call now M&A banking. And that wasn't to my liking. And so after a couple of years I quit, I sort of heard these stories about the speculative manias in the past, which I'd never heard about before going into finance job. I looked around and I read the available literature, Charles Mackay's extraordinary popular delusions, Charles Kindleberger's manias, panics and crashes. And what I thought, being a historian, is that I could tell the story of the history of financial speculations that was more narrative driven than Kindleberger's taxonomy. So that's when you decided you were going to write a book and you ended up writing Devil's Take the Hindmost, a history of financial speculations. Well that book had fortuitous timing. I was working on it after I'd left the investment bank, Lazards, in about 93 and sort of finished it in late 98, just when the dot-com bubble was going sort of completely crazy and it came out in mid-99. What was nice about the book, when it came out, it got a little bit better. A good reception for the investment world. There were a lot of investors, in particular the quant investors, Jeremy Grantham, my old boss at GMO, Cliff Asnes at AQR, Rob Arnett, who was then at First Quadrant. They were all having problems at the time. This sort of historical account of speculative manias, which drew very strong parallels to what was going on in the US markets in the late 90s, was catnip to the quant investment community. That really was what introduced me to Jeremy Grantham and then a few years later I started to work for him. So that was my first book. Just to clarify, in your own words, what's the difference between investing and speculating? Lots of people have had a go at trying to distinguish speculation from investment. Some are quite boring and prosaic, the distinction, so you might say that investment is posted on yield and value and speculation by a desire for capital gains, not supported by yield or intrinsic value. Ben Graham put in the margin of safety, that an investment should have a margin of safety. The definition I like distinguishing investment from speculation is by Fred Schwed, Jr. in his 1930s book, Where Are All the Customers Yachts, in which he says that speculation is an attempt usually unsuccessful to turn a little money into a lot, whereas investment is an attempt usually successful to prevent a large pot of money from becoming a small one. And I think that alludes to both the sort of principle of safety in investment, but I think there's another aspect to it there, which is the speculators are often trying to gain their fortunes fairly quickly, whereas the investor having gained a fortune is trying to maintain a yield on it. In your book, you talked about signs of speculation and you listed several of them, rumors fueling a boom, rapid growth of leverage, and to create the signs that there might be a speculative bubble going on. So what we find, take US stock market in the 1920s, there was rapid growth in margin loans. And then if you look historically, the New York Stock Exchange juices data on margin loans and outstanding margin loans tend to rise during the speculative markets or bubble markets. If you lever your returns, you're getting higher potential return, but you're also going to face greater potential losses. So if a speculative market is characterized by both a sort of agreed to enhance returns and a fecklessness towards risk, you would expect to find more leverage. You can provide sort of checklists for speculative manias. Leverage would be one of them in margin loans. The new entrance into stock markets in experienced investors, you saw that 1920s Japan and 1980s, you see it China in its recent sort of bubble episodes of 2005 and 2015, even more recent are everything bubble, the surge of accounts at Robin Hood markets, the online broker. So that's how those new entrants, that's often associated with something a call for the democratization of markets. I noticed that speculative bubbles tend to appear at times when communications technologies are improving. The first stock market bubble in the UK occurs in 1690s, which is the same time when there's a proliferation of newspapers and journals and people are meeting to discuss investments in the coffee houses, London. And then, again, mid-19th century, you get the railway mania, which the railway is not just an object of speculation, but the railways and the telegraphs are means of transporting the speculative virus. And then you go into the 1920s and you get the telephone, again, as both object of speculation and means of communicating your orders to the broker. Then you go into the dot-com era, get new entrants, they're establishing stock market accounts with online brokerages, you know, Charles Schwab, but e-trade and e-trade becomes both a big player in the day trading market, but also an object of speculation. And it seems as though, more recently, using social media, a new app that you had on your phone called Robin Hood, which allowed you to discuss very quickly and easily that was adopted by these new entrants. What Robin Hood did, which was novel, is it introduced the gaming techniques developed in Las Vegas for the gaming machines in Las Vegas and introduced them onto an app for investing. But they also, as you're probably aware, they often leverage stock market loans at 2%, and if you had an account with Robin Hood, the sort of premium account, you could get zero percentage cost leverage, you know, so your margin notes would no interest charge on them. And then, you know, you're probably aware that the state of Massachusetts launched lawsuit against Robin Hood's markets in, I think, 2020 or probably 2021, in which they accused Robin Hood of gamification and you have this massive turnover trading of these inexperienced investors. And so this rising turnover in the market is another sort of classic speculative feature, at least in stock markets. And then this is more closer to the subject to my book is that you tend to find speculative manias occurring at times when monetary policy is abnormally easy. And really, as I point out in the new book, even the tulip mania in Holland of the 1630s occurred at a time when there was strong monetary growth in Holland, Dutch public, thanks to the establishment of a new central bank that attracted foreign capital inflows, and at a time of falling interest rates. And the Dutch, for that matter, the speculators in tulip bugs, they were using derivatives to lever their returns. I mean, another feature, I think, to speak, is consumption, luxury spending. That's a sort of social epiphenomenon of the bubble. Corruption in public morals or fraud is another common feature. I think Walter Badger, the Victorian journalist says, I'm going to paraphrase him, when people are most credulous, when they are most happy, and so to speak, high markets at times offer opportunities for ingenious mendacity. J. K. Galbraith sort of took the badgered insight and turned it into his notion of the bezel, the illusory increase in wealth that occurs to effective bubbles. And the original term bubble is a fraud, a con. That's what it means. It's an illusion of wealth that is deliberately dishonest. And so the term of South Sea bubble, which was when it came into popular usage, referring to the stock market bubble of 1720, really means the South Sea con. John Cassidy of the New Yorker wrote an account of the internet bubble, published after the bubble burst, called dot con, C-O-N. And then looking far forward to where we are today, you see the crypto market, the most speculative market ever created, it made the tulip mania of the 1630s look positively conservative. And you know, you see the what looked to be possibly fraudulent behavior in the crypto world and surrounding the collapse of the crypto exchange FTX. So one of the things you should look out for in a bubble is evidence of corruption and malfeasance. You know, we saw that going back to the 1990s that it was pretty clear that US companies were mistaking their earnings and manipulating their earnings. And then after that dot con bubble burst, then you had, you know, these scandals that you remember at Enron, WorldCom, Taiko. And then after that, you get the liar loans that push up the US real estate market in the bubble that peaks in 2006. So, you know, so corruption is an inherent feature of the bubble. Let's go on to your latest book, The Price of Time, the real story of interest. At the beginning of your book, you go back to the history of interest. My opening words to the book was it in the beginning was the loan and the loan carried interest. What I'm saying is that right at the dawn of recorded history, we have evidence of lending taking place at in at interest. So this makes interest alongside the act of lending the oldest financial practice, which Mesopotamians were lending at interest long before they'd invented the wheel. And I know millennia before the Greeks had actually come up with coined money. And then if we look into the etymologies of the word interest in ancient languages, they tend to be related, the offspring of livestock. So there is a sort of what you might call the fructification theory of interest that somewhere other lending an object lending your gap. We know that in Mesopotamia, there were loans of barley, grain, and presumably there were loans of cattle and goats and sheep. And the idea was that some of the growth of the livestock, the offspring would be returned to the lender. The first law code we have, the code of Hammurabi, is actually largely involved with financial regulation in determining what maximum rates of interest and when rates should be forgiven. And Mesopotamians also had these debt jubilies, which which meant the debt was forgiven at the onset of a new reign. And the Israelites, they took a dim view of interest that I think the ancient Hebrew word for interest is neshek, which means the bite of a serpent. As we know, the Old Testament forbids lending to each other at interest, but not to outsiders. But it's very succinctly in a primarily a pre-industrial, pre-capitalist economy. The danger is that farmers will borrow at interest and that the interest rate compound, the interest compounds at a high level, driving people into debt, into high levels of debt, leading them to lose their farms or or even in cases in the ancient world of going into slavery. So I think that's the the the ancient strictures against lend against interest or what was called usury that continue into the Middle Ages by the Catholic Church, which sort of really takes the position of Greek philosopher Aristotle, who complained about interest. And that so that continues through to you through to let's say the 15th, 16th century. But then as you come to a sort of more capitalist era, then it's realized, you know, that capitalists need the merchants need capital to trade with and that they're not going to get the money unless their office paid some interest. And then it's also seen as fair that the lender should have a share in the profits of the borrower. And even in the Middle Ages, before that was conceded, it was accepted that if the lender was taking risk, say for instance, lending to a merchant who was going on a on a sea voyage that ship might go down that that those type of risky loans would carry a legitimate rate of interest. In short, you know, by the birth of capitalism, interest was grudgingly accepted. And then there becomes a sort of new idea that comes in point with the justification for capitalism or market system in Adam Smith is that everyone should pursue their own interest and the acceptance of interest by the 18th century is uniform. And as the title of my book says, interest is a price placed on time. And we need to put a place on time in the finance world for a number of reasons, because all our actions take place across time. Now, what what are technically called inter temporal, whether we're lending or valuing, and you need to put a price on time for capitalism to make sense. We tend to think of capital being something solid. But in fact, really, capital is a flow of future income. Because you can have anything, any object that doesn't generate income is not really capital from an economic perspective. It might have value, but it's not capital. It's only when it's in an income producing function that it becomes capital. And the capital is the present value of the future income stream. Now, with this is pointed out by English writers in the 17th century, if you don't have a discount rate, if you don't use a discount rate, then it's impossible to distinguish the value of one acre of land from 20 acres of land is everything has an infinite value. So if you think about it, the whole notion of capitalism is actually meaningless without its underlying foundational support of the rate of interest. That is the main underlying argument my book is that we have really lost sight of the importance of interest and how it both, you know, affects valuation, risk assessment, allocation of capital savings and so forth. The system, our capitalist system is only given some type of coherence by there being a rate of interest. You talk several places in the book about what is an equitable rate of interest. And you've already alluded to in your comments that there's a minimum rate of interest for what the lenders are willing to accept for the price of capital over time. But then you've also talked about interest rates that are too high and ends up causing collapse. So there's some equitable rate. I think of interest rates sort of Goldilocks and the three bears, three bows of porridge, one's too hot, the other's too cold, the other's just fine. If you go back to the era before the proliferation of banking. So in Britain is a roughly 17th century where an act of lending would be sort of the equivalent of me lending you a book. I'm actually lending you in effect a physical object that is a finite supply. The state shouldn't try and make laws about interest but let the interest find its natural price or its natural level. So that becomes, you know, the first notion of a natural rate of interest. But when you get into a world where banks create money through the acts of lending, and then you get into a world where money is no longer redeemable or convertible into precious metal, and you have a monetary system in which the central bank is in the fact determining what at least short term interest rates are, therefore on what long term rates are, then the interest rate is no longer, so to speak, market determined or is no longer necessarily in line with the natural rate. And what the central bank has adopted over the last 100 years or so is a rule of thumb that says, as long as there's no deflation and as long as inflation is kept, you know, around what's now the 2% target, then we have discovered the market's natural rate. And I argue in the book that this is mistaken because there are some periods when consumer prices are declining for particularly benign reasons, such as, you know, improvements in productivity or falling traded goods prices as China starts selling stuff to everyone, and that these are not necessarily bad and not necessarily an indication of where the natural rate should be. You should look to other things too. You should look whether the strong credit growth or whether there's strong asset price bubbles and whether the financial sector seems to be growing very strongly. Those will be indications that lending is being done at what key players in the financial system would consider to be a very low rate, or at least a rate that's very favorable to them. You also talk about ultra low rates, zero interest rates, negative interest rates created by central banks. They're trying to get the economy going and get people to borrow money, but it causes unintended consequences. Let me preface my comments, first of all, there is a notion that interest actually emanates from within the individual in their so-called time preference. You prefer to have, which we express with the phrase, a bird in the hand is worth doing the bush. You prefer human beings by and large, prefer to have something now than at some date in the future. Therefore, future goods and services are worth less due than your current goods and services. The interest is a discount between the current and the future price. According to some views, is that interest or what Irving Fish of the American Economist called crystallized in patients is an inherent feature of human psychology of mankind. To set rates at zero is to suggest that mankind no longer has a time preference. To set rates at a negative level is to put the price of time in reverse. It's a concept that belongs to Lewis Carroll and Alice in Wonderland. It sets a position of normality back to front. So that I think is the sort of strangest thing about the error of zero negative rates. It's against human nature. As I mentioned to you earlier, it undermines the fundaments of the capitalist system. And in the later chapter of the book, I discuss in different chapters the role of interest in valuation. I discuss the role of interest in the allocation capital and interest as an inducement save, interest as a measure of risk, interest as a cost of leverage or all the cost of finance for the financial sector and interest affecting capital flows. And all those aspects, all those different features of financial system were sort of knocked out of whack by the end of 2021. Global debt levels have massively increased since the 2008 financial crisis. US stock market trading on record valuations, the so-called everything bubble, you get misallocation of capital into most absurd venture capital and technology ventures. Then you get the zombie companies. You get a legacy of decade or more of chasing yields, so declining credit standards of underwriting standards and the growth of debt. So I think you put all this together and you say that low interest rate immediately after the stock, after global financial crisis, it obviously less than the impact of the crisis mitigated unemployment and helped the financial sector hold together. So those are the plus signs, but then by continuing the same policies for a further, what, 13 years, you then get these other problems. And my main beef with the policymaking community is they focus only on the immediate benefits of the low rate era and the quantity of easing after the collapse of Lehman Brothers, where it averted, as they're keen to say, another great depression. And then they overlook the role of the very low interest rates after the dot combust when US Fed funds rate fell to one percent, which appears to have contributed to igniting the major fact in driving the real estate boom and also the low interest rates encouraged investment in the subprime securities, which had a higher yield. So after the crisis, then you have all these other problems that the policy makers, you know, to my mind, they don't pay attention to. And it's one of the other interesting aspect of this. And we're seeing it is a rise in inequality and social unrest comes along with this. Yeah. So I mean, think about it. The if you have some assets, a house, a stock market portfolio, bond portfolio and the interest rates go down, everything else being equal, value of your house goes up, value of your bonds go up and value. So you you are richer. You're better off, at least in sort of current in at least the valuation of all your assets. Whereas, as you know, when valuations go up, they're more expensive to buy. So a person trying to buy a house, get on the housing ladder, has more problems with obviously when the house price is higher. And actually, you know, valuations go up, expected returns, as you know, decline. So actually, it's very good if you've got a fortune to benefit. But if you're trying to acquire a fortune, it's different matter. And then, as I point out, and perhaps, you know, I'm being a bit hypocritical because I've spent my life working in the finance area. But you know, the very low interest rates benefit people working in finance, not your conventional banker, because, you know, yield curves are flat, and it's difficult for conventional banks to make a profit from their lending and borrowing. But, you know, if you're more on Wall Street, if you're helping companies do their leverage stock buybacks or leverage buyouts, or if you're just you're running an investment firm and your markets are going up and you're being paid a percentage of that. Then what you see after the global financial crisis is that despite the fact it was a financial crisis, you see that the role of the financial sector in the US actually increases and contributions to profits rise to a record high. I showed chart in the book showing that the share of wealth owned by the, I think it's the top 1% of the population seems to track the inverse of the long bond yield. So as long bond yields come down, the wealth of the richer section of population rises. As you're probably aware, there was this book came out, I think 2013 by the French economist Thomas Piketty, where he said that, you know, when rates of return were higher than growth and inequality increased, but I say when the rate of interest is below growth, then actually inequality rises. Historically, the gilded age, which was a period of these great trusts being put together by JP Morgan, funded with debt, creating the robber barons, no coincidence this occurred at a time of very low interest rates, just like the great financial fortunes for recent years. What you're saying does make the case for a market timing strategy, but we know that that's very difficult to do. You have to make two decisions when you do market timing. You have to decide when it's time to get out, and then you have to decide when it's time to get back in. I agree. And obviously, if one comes from the sort of active investment market timing side, one's always going to look for arguments to justify that position against the passive investment. If you pay taxes on capital gains, that's an extra, extra problem. What worries me in particular about passive investment or the growth of passive investment over the last decade? I mean, in some part, perhaps just to do with growth of ETFs and technology, another thing that I think was probably pushing it was that when you move into these bubble markets created by the ultra low interest rates, it becomes extremely difficult for the active investor with a value bias keep up with markets, particularly when those markets has happened in the US, become heavily concentrated in a relatively small basket of stocks. And so you get this sort of negative alpha drawdown going on year after year after year. And then it becomes a simple decision for the risk averse investment committee to say, hey, active doesn't work. So let's take our money from active, put it into passive. And as you make that shift, you're selling the active position, the active so value stock positions, which is everything else being equal lowering their price. And then you're putting it into market cap weighted positions in the index, which reinforces the demand for the large cap stocks that have already increased their position. So you get a lot of, if you will, blind capital going around. And I see this as indirectly related to the easy money conditions. There is, I didn't include it as a chart in my book, but there is a chart which I saw that Nomura, a Japanese broker put out in 2016, which showed that the active alpha and negative alpha roughly tracked the course of interest rates. So that as interest rates were falling, this was a very bad time in aggregate, the active. The markets are cap weighted and most active managers tend to be equal weighted. And because of that, they're investing the money more broadly across the market. So they may have 15 names in their portfolio, but it's closer to an equal weighting rather than a cap weighting. So as you get lower and lower interest rates pushing up, particularly in the US market, these large cap growth stocks, yes, then you've got not only is it a value growth issue for them, but it's also there's no breath in the market so that their names are not benefiting. I've seen research from the Qantros, AQR and research affiliates. And they both argued that value US value but also value in other parts of the world. But let's stick with US value was not at a record discount, but a close to record discount by the late 2000 and 20 when value rebounded. Now, the value was the greatest discount at the peak of the dotcom bubble, when long term valuation measures like Chiller PE or Topin's Q were at its highest level ever. And then you get to 2020, US market on Chiller PE is its second highest level with the exception of the dotcom bubble and value is once again, add a discount. And I imagine that active managers in the US, you know, looking looking at early retirement. No, not this year, quite frankly, what has happened in this last rally, I think is you look back over the last six months and active managers have outperformed because of the breath of the market. Active managers tend to sit on a bit of cash. Well, that's who the big bit of cash, but also because of the higher interest rates and the valuation equation of long term way out there, future earnings of large cap growth stocks, they came down a lot. And the the breadth of the market broadening out into other names and particularly value names and value industries like energy and materials have caused the active managers to outperform. I was saying that in 2020 that that was an add obviously 2021 market is a very strong market, too. And so last year, last year is heralds the return, both of value and active management. And if the sort of new mirror correlation between interest rates and alpha hold, I did a talk at some investment conference in Germany last summer, which I showed the new mirror chart as it to the value investors saying that all hope was not quite lost. Again, getting back to our discussion about market timing, very difficult to do it. And even if you are data says, okay, now the market is overvalued, you should begin to pull back. You could be much too early. And that causes other problems not only for the professional managers, but for individuals who now have to figure out how to get back in. But should you invest in growth? Should you go to a value tilt? Again, if you're going to do that, you can't time it. It's very difficult to time these things. So just going down the middle of the road is really what the Boglehead philosophy is. I'm aware of the timing issue. You know, obviously having works as an investment term when our models weren't necessarily producing timely or even very accurate forecast. Having said that, go back to what I was mentioning earlier about the credit cycle model or even a general understanding of the impact of alt-low interest rates, which is what my book is about. I think it's important for an investor, even if they're committed to only using index products for asset allocation purposes, to understand the environment in which they're operating. Let's take the most extreme example and say, you know, we were Japanese investors in the 1980s. Obviously, it wouldn't have been a very good idea in the summer of 85 to taking your money out of the Japanese stock market. However, what you would observe during that period, first of all, you see interest rates kept low and you see following from that strong credit growth and a real estate bubble and rising valuations in the stock market. And you'd have seen this phenomenon of Zitec or financial engineering, which profits are really being created speciously through direct and indirect exposure of Japanese corporations to the stock market or the real estate markets, which is being put through the P&L, sometimes goose with a bit of extra leverage. So you'd see the Zitec and then you'd notice towards the latter years of the bubble, you'd see inflation coming back in the system and you would observe the Bank of Japan tightening and putting it up interest rates very sharply in late 89 and into 1990. You'd have heard the governor at the Bank of Japan saying expressly that his desire to bring the real estate bubble to an end. And if you knew your financial history, you'd be aware that the end of periods of asset price bubbles of real estate bubbles after strong credit growth were likely to be fairly calamitous has turned out to be the case in Japan. Now, given that the Japanese stock market was trading on a price earnings ratio around 75 times at the time. And now, you know, we're speaking what 33 years later, the stock market still hasn't returned to the Nikkei peak of December 31st 89. That is a strong case, I think it's probably the strongest case you can make because I'm obviously giving an example where where actually big out of the market for a long time has paid off and at least getting out close to the top. I think that it behoves one to understand the environment in which you're investing. Yeah. And I suppose I would say quite strongly to to adapt your asset allocation, at least to extreme divergences from normal conditions. I also interviewed Auntie Ilmenin from AQR and his book, Investing Among Low Expected Returns, basically said the same case in the extreme, if you were to do a little market timing, you may benefit. In fact, there's a video out there by Jack Bogle talking about his own portfolio and how he incorporated this. Bogle got slightly tempered his US exposure in the late 1990s. Correct. By quite a bit. Now, realize he says in the video that he did in 1995 when he was having some very big health issues and then he had to have his heart transplant in January of 1996. So that had a big factor on him trying to prepare his portfolio if he didn't make it. He did say that in the video, but he did make the case that things were getting too in extreme. Now, remember he was four years early on that call and was out of the market generally. He said he was at 25% equity, went from 75 to 25 for four years while the market went up and it does create problems for investors watching the market go up and up and up and maybe believe they make a mistake and get back in at even a higher price my spot problem with market timing is market timing. It's if you're not right on your timing, it could lead to exponentially larger errors in your timing. And look, I understand that you familiar with the work of Andrew Smithers, who's an English, it's a British economist, sort of city of London economist, now retired, came out with a book roughly the same time as Robert Schiller's irrational exuberance called Valuing Wall Street. And Smithers uses replacement cost and the idea being that the market, US market has traditionally traded, I think slight discount to its replacement cost valuation, otherwise known as Topin's Q. And you can go to Smithers website and you can download his Topin's Q. It tells you the same story as the Schiller P but from a different angle. But Topin's Q, you know, for the last, you know, 28 years, has hardly has hardly hit fair value. You know, and the GMO methodology, which is not quite similar in its way to to the Schiller P but works on a mean reversion of valuation and a profit margins, that it was early the forecast with its negative signal in in the late 1990s when it was developed, but then it produces outstanding rankings of investment returns. In 2000, the 10 year forecast, the rankings of value and emerging and US broad stock market and ether those. I mean, if you look at them, it's almost it's sort of spookily good. It's all it's so spookily good, it might almost persuade you to believe in forecasting forecasts that were then made by GMO might the team I was part of in 2009 over the next 10 years were in it decisively inaccurate so that that moment of glory I didn't didn't last. It's the old saying that it works until it doesn't. And I think that's true. I have to say, I think that's an investment truism. And I think I I reckon sort of Bill Bernstein would agree with me on this, is that there's no sort of permanent investment truce and therefore really one sign of a good investor is a sort of flexibility to adopt different methodologies or different ways of looking at the world. Think of it this way, you know, you have Ben Graham with his sort of if you will hard value methodology and it's a price to book and earnings. And then you have Warren Buffett adapting that into a sort of more of a sustainability of ROE or what we would now call a sort of quality focus moving from Ben Graham pure value to a sort of quality value proposition. That's all great for people who do this maybe for a living. And I would say that people who do this for a living maybe the top one percent of those people could actually do that. You know, the other 99er basically have the title of portfolio manager and they're pushing buttons and following some model. But, you know, there is the one percent of the professionals who, you know, have this belief the problem with individual investors is they're always going to be late to the game. They're the ones who pick up the model right at the end when it's got its last maybe correct forecast in it. And then it then it all goes haywire and then they wait for the next model to come along that has worked for the last 10 years. And they they jump on that model, which is right at the end of it. You know, individual investors have this problem. I know. I mean, it is and you see it. And I guess I think, you know, I think I've even seen reports in the Wall Street Journal over the last couple of years with retail investors piling into the market in 2020, 2021. And then the market cracks and then suddenly they're getting out of the market just before the market's about to rebound. So and I think that, you know, if you're going to do market time, you not only need to understand the valuation aspects, you need to understand certain extraneous other factors that might influence a bit of help market timing work of which I think the monetary situation probably is fairly important one. And then you need to have strong confidence in your position and you need to have a strong contrarian aspect to be willing to go against the market. And I think you probably also, you know, going back to your question, whether you're out of the market, you also need to be able to reassess your decisions and if necessary, overturn them. You're asking a lot from the typical individual investor or quite a lot or you could do the bogal head version of it, which is to come up with an asset allocation, call it 60 percent stocks, 40 percent bonds, be super diversified into global equities on your stock side in the US index fund, international index fund, be diversified on the bond side as well, do an occasional rebalancing, which does pick up these valuation differences over time and then stay the course. And it ends up being the default model that ends up pushing these individual investors who actually do this model up into the 90th percentile as far as rates of return. So you're never going to be number one, but you're going to be up there in the 90 percentile. It's always quite dangerous to make generalizations of investment based on sort of a backtesting of the positions. I'm not saying the bogal head portfolio. No, no, no, I just wanted to explain what the bogal head kind of what how it ended up defaulting to that. In other words, the people who are the bogal heads are very intelligent. They study everything. They read everything. They're going to read your books. They've already read your books. They are into everything. We're talking to some of the smartest people I know, much smarter than me. They've come to the conclusion that, yes, there may be people out there who could do this, but it isn't me. And so what do I need to do for me that works for me? And that's where you end up with this the bogal head philosophy. So and we come off this period of very strong U.S. bull market and reasonably strong, but obviously not quite so good global markets with the U.S. market ending up at close to record high evaluation at the end of 2020. You've also had this period in which, you know, this 40 year bull market in bonds in which nominal bond yields declined around the world to their lowest level in history and negative in some countries, if you remember, 18 trillion dollars worth of bonds cited by Bloomberg with negative yields. And during this period is the correlation between bonds and equities is not stable at all times historically. But there seems to be the case that since we moved into the recent bubble era, which we might take collapse of the long term capital management hedge fund in September 98, that was a period in which there was quite a strong inverse correlation between bonds and equities so that as you were losing something on the equity side, you were gaining something on the bond and that was may have been due to the fact that the markets were aware of a sort of deflationary risk from all the debt and the bubbles that were being created and perhaps they were also aware that whenever the markets faced trouble, the Fed was likely to cut rates that would be good for bonds and they were and the markets were aware that inflation pressures would appear to be an abeyance and therefore there wasn't much of an inflation rate. So that was a very nice period on the whole to have your classic automated 60 40 portfolio. But you're aware 1970s you have a positive correlation between between the bonds and the equities and then inflation is permanently eroding the value of the bonds and temporarily depressing the valuations on equity. So but that let me stop for a second that that is a good point you see where we are right now in history and we've been here now for well since the financial crisis is bonds have given us a negative real return and that's before taxes and we all eventually have to pay taxes. This is a real dilemma. We are losing purchasing power with every bond that we hold unless you're going to buy triple B or double B rated bonds where you get a high enough yield or you buy Treasury inflation protected securities where there only recently the interest portion of it has been high enough so that maybe after you pay your taxes maybe you break out even. So bonds are a real dilemma right now for people who are actually trying to grow real wealth after taxes and inflation in their portfolio. First of all if you think it's difficult to time equities try timing bonds as another project I had a GMO I looked at our bond forecast I back tested it over the previous century and found that it was it had been right on about three occasions and would often it would often be wrong for sort of multi decade periods and then you actually realize and if you ever move in a circle of fixed income investors is they never they really don't talk about market time equity guys you know do talk it's interesting you're absolutely right about that that's interesting you say that there are no I think I'm in presentation saying there are no value investors in the bond world anyhow. But the thing is we also know and we let's throw ourselves back in time to the previous period in which interest rates in the let's stick with the US in interest rates were kept at an extremely low manipulated down to very extremely low position during the Second World War where I can't quite remember but I think sort of T bills were fixed at sort of 25 to 50 basis points and a handful of basis points but that for the countries and the yield curve was manipulated and then you come out of the Second World War pent up demand and you get a surge of inflation it's only there for a year or so but then the inflation comes down and you could say there are certain similarities to today although I actually think that the US from an investment perspective and an economic perspective in a much better position after the Second World War because you know the debt had been paid down during the Great Depression was a lot of sort of suppressed consumer demand and valuations quite low on the equity side so it wasn't sort of post bubble valuation problem to deal with anyhow if you're a treasury investor then you actually have to deal with 35 years of rising yields until you know they peak in the early 1980s and by the end of that period you know bonds are known as certificates of confiscation to you know if you and I went back in a sort of time capsule and someone to argue you know here a balance portfolio would be having equities and nominal but you know 40% nominal treasury bonds they would they would think you were completely mad having said that we do know that there are historically these bond markets their cycles have gone in roughly three to four decades sometimes five decades the bond bear market after the Second World War lasted 35 years and then the bond bull market that followed it lasted 40 years we know now that there is a strong incentive as strong if not stronger incentive for governments to push for keeping interest rates below the level of inflation if only to facilitate the reduction in the real burden of government debt the idea of negative real interest rates is here to stay for a very long time it becomes policy going forward and this is a real dilemma for investors who are on fixed income and we have this saying here in the US as you get older you should buy more fixed income your age and bonds and I'm not so sure that that's true that's just maybe a bad idea given this world that we're in from a practical investing perspective compared to where we were at the beginning of last year is that the tips that inflation protected treasury inflation protected securities now have a positive real yield at the beginning of last year they were in negative territory or at the end of 2021 and they took quite a a big hit the tips they did their yields real yields moved with nominal yields yes that's true but now as we stand today they are at short-term tips or at 2% like a one-year tip for us here in the US or at 2% yield and longer-term tips are at one and a half so you could actually invest in tips today and you will have a real return on your fixed income portfolio one of the arguments of my book is that the ultra low interest rate environment has created a bubble economy and contributed to misallocation of capital whether it's in your high-in-the-sky venture capital investments or in your zombie companies and it's also contributed to a lot of financial engineering and companies particularly in the US having levered themselves up and obviously a great private equity boom and then a decline in savings in actual savings discouraged by the low interest rates and also savings discouraged by frankly the extraordinarily strong position returns in the market if people are getting, you know 7 or 8% real returns from a balanced portfolio there's less encouragement to put money away and so I think the upshot of all that is that it will probably so there's not a forecast but there's a reasonable chance I would say that we are about to go through a period of continued low growth bear in mind that since the global financial crisis US and European GDP growth has been at sort of near record low levels and I argue in the book that the accommodating monetary policy and the resistance to allowing the market to clear by monetary policy has contributed to that if this were to continue at that low growth or even exacerbate that trend over the next decade and if as we've already mentioned the authorities have a strong incentive to keep interest rates below the level of inflation policy of financial repression as we had after Second World War then I think your 1.5% on tips today will look like an outstanding bargain you know for US retirement investors I think tips you know should be core holding and probably to my mind probably bigger than the 40% allocated in the average portfolio Thank you so much Ed for being on the show so we've talked about a lot of things a lot of concepts I've learned a lot today and I hope all the Bogleheads have also My pleasure This concludes this episode of Bogleheads On Investing Join us each month as we interview a new guest on a new topic In the meantime visit Boglecenter.net Bogleheads.org The Bogleheads Wiki Bogleheads Twitter Listen live each week to Bogleheads Live on Twitter Spaces The Bogleheads YouTube channel Bogleheads Facebook Bogleheads Reddit Join one of your local Bogleheads chapters and get others to join Thanks for listening