 Okay, a number of years ago Jack Asgiff, he and Bill Bernstein could have an informal non-political chat as part of the agenda, and we all know that what Jack wants Jack gets has become a regular part of our conference agenda ever since, and it's now affectionately known as the Farside Chat. Jack's companion for this Farside Chat is a retired neurologist who helped co-found efficient frontier advisors. He's written a number of best-selling titles on both finance and economic history. He holds both a PhD in chemistry and an MD. Please welcome one of the smartest guys I know, Dr. Bill Bernstein, and the disclaimer that I always have to say, Jack and Bill, the bowheads community is a politics-free group, and we respectfully request that you honor that and refrain from discussing anything political. Other than that, the floor is all yours. Take it away, Bill. Okay. Well, thanks. I guess I mumble so badly that I get two microphones. The first thing I wanted to bring up is just a segue from your comments, Jack, about Fidelity's zero expense ratio funds. When I first read about them, the thing that came immediately to my mind was one of the most notorious tech funds of the late 90s, a company called eMachines, and their business model was giving away computers for free so they could advertise and make money on the advertising, and it seems to me that's what Fidelity is doing as well. And the question is, how do you really think that's going to play out for Fidelity? Well, I think it's going to draw a lot of business. The advertising is pretty blunt, and it's pretty clear who they're taking aim at. When we see our name, and when we see Vanguard and big capital letters, both face, you can't have any doubt about the name of the game they're playing, and it's a tough game. I mean, I get letters from people saying, you always told me that by the lowest cost index fund, what do I do now? And that's a perfectly good question, and the answer is a little complex. I mean, I'm not sure, I have no idea actually, what Vanguard is going to do in response. I have some things that I would think would be well done in response, working on larger accounts, but we are in a, as I think everybody understands, we are in kind of a box because if we did our index funds at no cost, which is an option always available to us, they will be obviously subsidized by the Welling and Fund shareholders and the prime capital and shareholders. The shareholders of all our active managed funds, and the shareholders of all our other index funds, if we did just the S&P 500, and they don't actually, Fidelity's fund is not an S&P 500 fund, the big one they're working on. And I think the reason for that is that if they use an S&P 500, S&P gets away with murder and would probably be charging one basis point just for using their name. And when you want to be a zero, one basis point, it's a killer. But there is an issue of implementation, what do we really got here? They have their own indexes, will it do better than the S&P? I have no idea, I'm not saying it won't, might do better sometime, worse others, that's the most likely scenario. So I would just regard it as very tough competition, and as I think I said in my remarks earlier, it's what I would do if I were Fidelity. They're out of the game, get in the game with a bang and become one of the big four and now the big three. And that's their goal, although one wonders a little bit why it's their goal. I mean that kind of immensely profitable company doing everything else, and I think it's just to preserve their mutual fund business, which is probably, I'm guessing here, 25% of their total revenues, I'm not sure exactly. And I'm not sure exactly, I don't really just venturing a total of gas. So they're doing it, I hope nobody is in retrospect, moves $3 million over and tells me that they're saving $10,000 a year or $6,000 a year, something like that. And then gets their tax bill for selling the Vanguard fund at $3 million and paying $200,000, well I don't know what it would be, a couple hundred thousand dollars anyway, of taxes, which would eat up that income. But we feel it now. I mean I don't have the data for you, but we see it in our own data that Fidelity is making a pretty big splash here. And we'll have more, they just did this in August I think. And so we have the August data and the data I showed you, but we'll have September, which will be very revealing, there'll be a trend there, there'll be October, and the data will come in. Vanguard has the data for Vanguard for all these periods, I do not, and that's fine. I don't need it, just reporting what it is, and we will find that out. But you never know where the next competitive threat is going to come from. And everybody, we know who everybody is shooting at. Everybody in this business is shooting at it. And they're all, all of you here in this room, they're shooting at the Bogleheads, that's who. And the big Bogle themselves. And at least some of the time. So I don't see that there's a good competitive, a really good competitive response. I don't think there's a winning competitive response. There may be an ameliorating competitive response, and I think there is, but that's up to Vanguard. I think that it might be who Vanguard, to point out to members in the fourth estate, how generous the owners of Fidelity's active funds are for subsidizing the zero-expense funds. Well, there's a lot of that going on, subsidization. And actually, I tell this story, it's one of the landmarks in my book, and it made it possible for us to be a competitor in this business seven or eight years ago, 1993, I think it was actually more than that 15 years ago. Because we had a very proscribed formula, set up series of formulas telling us in our original service agreement that established Vanguard how to allocate expenses between all the funds in the group. And it was very formal, like number of shareholders, number of transactions, executive time, that would be something you just allocate and direct and indirect expenses, classic, for doing that. And I could see that we were in a box because we were starting to have price competition. We had cost competition. We knew what the costs were. And so I put in a proxy, we put in a proxy, giving us the right to match competition in our pricing for the funds to use that as another indication. We kept the original standards, cost allocation standards, so we could also consider committing competition, committing competitive prices. So that's enabled us to do what we've done. But I don't think anybody is going to want to, I hope not, by the way, anybody is going to want to go to zero on new investments in our funds because it would be so apparent somebody else was doing just what you say, subsidizing the fund. And there's going to be a little bit of that no matter what you do. And you never know who's subsidizing it, who. We do the best job on that, we can, and are still able to compete. Okay. Well, I want to shift gears now and talk about the much bigger picture. We try to stay away from macroeconomics because speculating about it doesn't really do the average investor much good. But there's some things that are out there that I think that are of great concern. The federal, because of the recent tax cuts, the federal deficit is going to approach about a trillion dollars, and there's already almost 22 trillion in outstanding treasury debt out there on which the interest, the current servicing costs, are only $276 billion a year. If you do the math, that means that Uncle Sam is financing his debt at 1.3 percent. That is going to be changing very rapidly. The good news is that the term of that is about six years or so, the average term of that debt. So it's going to take a while for the Ottoman to hit the fan. But the bad news is that when it does, it's not going to be very pretty if servicing costs go up to the historical range of 6 percent treasury debt, which is a six-year treasury debt, which is around 5 percent. That puts the servicing costs at a trillion dollars a year out of federal tax receipts of about 3.4 trillion a year. So do you think that's of concern? And that's even before we get to the issue of corporate debt, which is also becoming very frothy and very covenant light out of control as well. So during the next downturn, corporations are not going to have a walk in the park either servicing their debt. So do you worry at all? Do you think that's of concern to the people in this audience? We used to say, people used to ask me, what keeps you awake at night? And my answer would be the same now, Bill, as it has always been. Nothing. If staying awake all night would help solve the problem, by God, I'll stay awake all night. Okay. But let me use that question as much more serious than that. I believe we're going to have a trillion dollar deficit this fiscal year. That would be the 2019 fiscal year, a trillion dollar deficit. And I won't get into politics, I hope this isn't politics. But let me just say that giving a ten trillion dollar, I think it is over time, a tax cut to businesses and a five trillion dollar, I can't remember the numbers, but say a hundred billion tax cuts to corporations and a five billion dollar tax increase to individuals, which is what's happening over time, say next decade, burges on economic instability. And I'm tempted to say in political brilliance, but I won't say that. So I look at it as, let me go back a little further, and say almost every bubble that we've had in the history of the world has been brought about by debt. And our debt in the United States is out of control. It is, I mean, it's in control, but nobody pays any attention to it. And I don't want to get into politics, but it is amusing to think the Republicans of fiscal hawks have been the ones responsible for this. That's not necessarily for or against it, but it is interesting to see that they're total in the face of political reality, given away on economic reality. So we have high consumer debt. We have not particularly high automobile debt, high credit card debt, and the whole new, you probably know this, the biggest single piece of debt in this country, by far, is student loans. And can they all be paid off? How can they possibly be paid off? I mean, it was a bad deal in the beginning to suggest, particularly from the private colleges, that you go here and you'll be able to make so much money that we can charge you a lot and you'll go out in the world and make a lot of money. It isn't that easy. There are only so many good jobs in America, good high paying jobs. And so you put a lot of debt together. There's still a lot of mortgage debt. There's still home equity debt. There's debt sort of everywhere. And I think that is where the next crisis, if it comes, and it probably will, I have no idea when, is going to be the basis for that. Too much borrowing. Well, that segues into another subject, which is you mentioned the B word bubble. And debt quite, quite accurately identified that as the source throughout history. There over the past several centuries of bubbles is what has me, there's the negative signs, which is the underlying condition, the amount of debt that's eventually going to have to be liquidated. Do you see any positive signs of bubbles out there, any behavioral signs of bubbles that worry you at all? I mean, Bitcoin, for example, Bitcoin, there's no question that there were the behavioral signs. Do you see any behavioral issues out there among investors that point to a bubble? Well, that's really an interesting point. And I can't avoid a political, I guess it's an economic comment, but also a political comment. Everything that is happening today is great for the short term and terrible for the low term. And I'm not only talking about the fiscal situation, but I'm talking about, and these issues are really important, the gap between the incredible gap between the wealthiest fraction, wealthiest 1% of America and everybody else, and particularly the lowest 15%, and I'm talking about an attenuation, acceleration of the gap between white and black, which is clearly there. Immigration built this country, and if you don't believe that, look in your own family trees, my traceability laws, I've got parents, grandparents, great grandparents, come off the road from Scotland in 1866. So I'm a child of immigrants or grandchild, and to stamp on immigration when it's been such a force for good in the country, all these things, and they're less tangible. It doesn't matter a heck of a lot on any of those issues, those broad social issues, but in the long run, it makes all the difference in the world. So what does that say? We have Bill, a market focused on the short term with a prayer that everything will be all right. And I haven't even gotten into climate change. I got here in Philadelphia, every day we're 10 degrees above normal, and this is only one season. And I read that the administration is not a political comment, happily. The administration predicts that the temperature of the world by 20, 20, by 2100 will be 10 degrees higher than it is today. No, I'm sorry, seven degrees higher than it is today. Just imagine what that's going to do to everything that we think about and do. And leave aside the upheaval in the climate that we're getting even now, the bigger hurricanes, the bigger rainstorms, and all that. So we're really on dangerous ground, and yet the market goes blindly along. And I do, in a sense, worry about that. As I tell people, I've been for quite a few years around 50, 50 stocks and bonds. And I spent half of my time wondering why the heck I have so much in stocks. And the other half wondering about why I have so little. This is the investor's dilemma. But by the way, that's one of the metrics I use to identify a proper stock bond allocation, is if you spend an equal amount of time regretting having too much or too little, you've got the perfect allocation. Let the record show that I'm really doing my best here to stay away from politics. On to another subject, which is completely non-political. Over the past 40 or 50 years ago, the percent of GDP being paid to workers as salary has decreased from 52% to 42%, which is huge. Where is that extra income going? Well, it's going to us in this room. And it's being on the other side of the balance, is that it's not going to people who are working for us. And so the question is, is that something that you worry about simply as an equity holder? Concerned about. Nothing keeps me awake. But of course, that's a problem. It's fine to say that we should avoid political problems or political issues, but there's no divorcing political issues from economic issues and from social issues. They're all part of what constitutes the United States of America and her role in the world. And you can see that shrinking. You can see China rising. Not sure what that means, but it doesn't mean anything good. When they start taking over islands in the sea of China, so-called, and the sea of the Philippines, and building little tiny reefs in the huge airports, let's take a lot of sand to do that. Competition in the world, America's place in the world, is threatened. It doesn't have to be given up. But what we're doing now is taking the nation away from its, what's the phrase they use, American tradition or the uniqueness of America. And that's been our biggest asset. Where does everybody want to go in the world when they're not in the US? They want to go to the US. That's a good sign. And I recognize you can't take as many immigrants as you might like to take. But they're all bound up, I think, Bill, and one part covered by your question and the part goes even beyond that. You know, one big issue in that is what kind of a country do we want this to be? And I want it to be a better country than it is. And I think it was a better country than it is. And I tell people, this is a political statement that falls both ways. I consider myself an extreme conservative. I love the country. I love our institutions. I love our entrepreneurship. I love our ability to do what we want, liberty, if you want to call it that. And I want to keep those things as much as we can. But I all of a sudden become a liberal to say that to keep those things, we have to make sure that the people in America who are not here in this room and get well taken care of. The underclass of America is large, average income $15,000 a year, I think. Imagine that, anyone in the room. Imagine that. So I guess the phrase I was searching for before was American exceptionalism. We're starting to lose that. And so I become so conservative that I want to be liberal enough to handle all of those who are not in the most favored places in America. Well, I don't think there's any way of spinning this next question politically, so I'll ask it. Which is that if you look at the number of publicly traded companies in the United States, around 1970 or 8,000 publicly traded companies, now there's 4,000. And so that raises several issues. Number one is why do you think that it's happening? Is it all the fault of Sarbanes-Oxley? Is it the rise of private capital as a source of funding? You don't need public capital anymore. Are there other reasons? And then the second part of the question is what does that mean for the people in this room? If you, you know, the number of publicly traded companies that we can invest in is slowly shrinking. Well, that's the first aspect of the data. I think the data is somewhat worse than you say, because I think the number of public companies remaining is more like 2,800 or 3,000 is compared to 4,000. But I'd also note that that 8,000 was probably, I don't have the data firmly in mind, was probably at a very high point. When we got into late 2000s, an awful lot of new companies came in. And probably the fairest comparison is we used to have an index called the Wilshire 5,000. So we're now, I would say, the best baseline is 5,000. And we're now down to 3,000, let me say. So the shrinkage is large, but not quite as large as it's billed to be. Second, if you look at the data, almost all the companies that are leaving are very small companies, small and very small. And some of my guests don't like to have to register with it or file information with the government. I think that's a very small part of it. Some of them just didn't make it. You know, in these boom years, led up to the market peak in 2000, the companies blossomed and then went away. A lot of tech companies. So I don't think it's as serious an issue as you say, but I do think it's a very serious issue. And I kind of wonder when I see one more damn merger, darn merger after another. And I think when we see a lot of that, I wonder, why are we doing this? Why does national policy allow all these mergers? You know, Teddy Roosevelt would have been out there with a shotgun. And he's my classic Republican. If that's, I hope that's not a political comment. He'd been dead a long time now. And so I worry, I'm concerned about it. But more than that, the underlying reasons that we allow companies to get bigger and bigger and bigger as a matter of fair international policy is I think the wrong way to be going. I think we ought to be much different antitrust, much different in everything we do to make these things and much stricter even bill, much stricter in accounting. You know, how many mergers are done just to muddy up the figures? You know, you can do whatever you want. When you read pro forma, 99.5% of the time, not all the time, when you read pro forma, boy, put your hand over your wallet. Somebody's playing games with the numbers. And that's an important part of all this. And, you know, synergies, we're going to make, you know, yeah, everything's going to go down. We're going to make it up with synergies. Those synergies are always talked about and almost never realized. This is savings because you don't need two chief financial officers, blah, blah, blah. And they just don't seem to materialize. So I'm unhappy with it. I hope it won't go any further. And there must be some limit because you may only have to own one stock to have the S&P 500, which I would think would be very bad. Okay. Well, it's, you know, it's 2018. So you have to ask the decadal question. I can remember almost 10 years ago to the date we were all together and we were in San Diego. And you were talking about the collapse of lame. And I remember that your voice rose about two or three octaves when you simply said the word. And do you think we're in a better place, a worse place now? I think I know what the answer is, but I want to hear what you think. Well, I think we're in a better place now than we were in 2008 because the particular debt was financial debt and mortgage debt. And then the creation of these, idiotic to the one of a better word, mortgage certificates, mortgage back certificates, which mortgages, which had no value, made money for the people that gave them the money, made money for the people that were buying houses. They gave them the best deals possible, even more than the value of the house. And then they sell them, and then they sell them to somebody else and they're put into a certificate. And everybody forgot that there were people at the bottom of the pile that could not possibly pay their mortgage debt. And that is not happening now. Well, I'm not saying there's none of it, but that is not the excessive thing and not the junk thing. So I do think we're in a better place now, but not a lot better place. And the market is telling us we're in a lot better place. I think that's right. I think that in some ways we're in a worse place because we had relatively high interest rates and five big banks that couldn't fail. Now we've got much lower interest rates to start from and we've got four big banks that are too big to fail, that are managing a higher percentage of financial assets. But on the other hand, as you point out, the epicenter of the crisis in 2008 was real estate. If the value of stocks falls by half, that's owned by maybe 10% of rich people and their net value, their net worth goes down by 50%. It's not that big of a deal in terms of the overall economy. But if 25% of the population owns an underwater house, that really does affect spending. And I think that's why what happened back then was so catastrophic and isn't likely to happen now. All right, well, one last question. I don't think that it's political to observe that there's been a decrease in the comedy of public discourse in this country. It would be political to try and blame someone. I wouldn't dare ever do that. And so the question is, what do you think are the limited implications for investors? And do you think that it's a problem, and the larger political sense of our country that is going to heal itself and mend itself at some point? And answer this in non-political terms. Yes, absolutely, yes, yes. So I certainly won't talk about fake news. No, no, no, no, no, no. The, I think it's tragic the way the power of the press has been more or less subverted to a certain number of people anyway. And it's told you don't need to pay any attention to them. You know, just listen to me, listen to the Internet you would think with the Russian interference, obviously interference in the last election campaign. People would now become aware that the Internet is talking about the medium for fake news. I mean, it's an outrage and the loss of our privacy is an outrage. And, but particularly the idea that what you're seeing there on your little computer, if you do these all, I don't do this stuff. So all this texting or I, you know, I don't know what is that number sign mean something, call this number. Cashmark, cashmark. I don't even know what it means, but I think it says, I think it says, you better get over here quick. And, but so I don't do that. But the press in the United States has been singularly responsible. You know, not always, not all newspapers. And now they're vilified. And the people that believe they're vilified cadre that believe they're vilified is large. And, you know, they've been vetted. They've had editors going over. They have fact checkers. My God, you wouldn't believe the fact checkers. Find us little things in the world. And they're giving us what I believe is the straight story of America today. And a disomat gives us a feeling that all is well. And I would say all is not well. You know, there's so much going on that's important to the country. And we spend so much time on trivia and little tiny things. And I won't get into the Supreme Court today. I mean, the implications of that are, of course, much more than trivia. A person on the Supreme Court was conservative leading. But the issue, you know, will resolve these issues eventually. But only if we can wake up people to vote, number one, to vote, because the absentee voting, the voters that don't show up, registered voters who don't vote, is shocking. And the whole underlying strength of democracy is to have everybody vote. And believe me, if everybody votes, we have a very different kind of America. So, and I worry about, by the way, building the money involved in the electoral process. The fact these, I saw Sheldon Adelson devoted $100 million to the coming campaign. He's a big Las Vegas, something, Macau. He owns gambling joints. I'm sorry, gambling establishments. Well, over the world. And he's my idea of a fraud. You know, God knows how many people got paid off to get a franchise in Macau or even for that matter in Las Vegas. And yet he's regarded by Forbes as a great businessman. I'm sorry to be in his company, by the way, they regarded me that way. I may not be much, but I'm more of a businessman than he is. Talk about damning with fake praise. So, no, these are big issues and soft issues and divisive issues. And, you know, I don't know how, I'm a little bit reminded that DeSanne Cdota is in the book, in a section called Presidents. I talk about the presidents that I've met briefly, mostly. And the one I talk a little bit more about is that I was invited to dinner at the White House in May of 1970. And the stock market was falling apart. And some genius in the White House, PR staff, decides that it would help investor confidence if they asked about 25 or 30 people like me, heads of financial institutions, which I was then. And I guess, no, I'm not still. But to the White House for dinner. And I got off the train in Washington, dial up 40 percent on, I'm sorry, 400 points or 40 points or something big for that day on news of meeting. The fact that these people like me are, by the way, a pretty ordinary crowd had anything to do with getting the stock market up. I don't know. So we went to dinner with the president. And it was in the state dining room in this little square table. And right across from me is that brooding portrait of Abraham Lincoln. And right below him is Richard Nixon. And so he gets up and he had all the joint chiefs of staff, council of economics, blah, blah, blah, all those people talk to us. And then he said, are there any questions? Nobody stood up. Not one person in that room. And I thought, after a moment's hesitation, they held with it. So I stood up. And this is very, this part of the question is very relevant for today. I said, Mr. President, you've reassured us all about our military strength and how well we're doing in Vietnam, how well we're doing in Vietnam. He did reassure us in that. And how the Federal Reserve will be Phil's usual role of lender at last resort. And all these, the economy is doing well and so on. But you haven't touched on the issue that I think is really the responsible for what is dividing America today. In view of your campaign pledge to bring us all together, what are you going to do about it? The silence could be cut with a knife. And he looked first angry and first astonished that this investment group would even think, be thinking about bringing us all together. I think annoyed that that was the first and it turned out to be almost the only question he got. And something he didn't really want to deal with. He really looked like someone to hit him in the face with a wet washcloth. Somebody did try and answer. He'd got point Chancellor Hurd of Vanderbilt to head a commission on looking at the divisions in the schools, things of that nature. And so he gave a kind of a fumbling answer. But he clearly was not happy with it. Well, he was there and I was here. So when you go out the door that's there, have you figured it out yet? We're going to be in the same place. So I can walk out there right next to President Nixon. And I said, you know, I hope you didn't think my question was rude. Oh, no, no, no. He said, that was exactly the right question. And that's why I'm doing what I'm doing or something like that. So I'm very lukewarm. But the divisions in this country, we should be united on so many things. And we are not united today. And so I think we have to face up to that fact and do what we can as citizens. And when we sit in this room and we'll be like, I wrote about the universe, what I wrote about the universe. You know, it's so big and we're so small, but that doesn't mean that one person doesn't make a difference. So I think we have to try and do better as individuals. And I've tried to do better not as an individual, but in a corporate sense, try to contribute something to the world and something to make America better. Spread stock ownership among people who get a fair shake. This is not, this is a crusade. And it was so easy because they were getting such a lousy shake before. Uh, so that's too much rambling. And I think you've heard quite enough from me today. Okay, well that was, that was fun. I think we better give it back to Mel before his hair catches my fire. Well, thank you, Jack and Bill. We're gonna take a...