 Hi, my name is Rick Ferry, and I'm the president of the John C. Vogel Center for Financial Literacy, a 501c3 non-profit organization that was created in 2012 by the founders of the Vogelheads organization with the assistance of Jack Vogel. The center's mission is to further financial education worldwide, promote low fees and financial well-being, and to foster a sense of community amongst our all volunteer membership. And of course your tax-deductible donation to the VogelCenter.net is greatly appreciated. The idea for this online conference came about because of COVID-19. As many of you know, we normally do an annual conference outside of Philadelphia, but unfortunately, we have not been able to do that in the last couple of years. For your planning purposes, we plan to have a large conference in 2022. The location has yet to be identified, but please mark your calendars for the fall of 2022 for our first large and expanded Vogelheads conference. In the meantime, we have the speaker series. And I wish to thank a lot of the Vogelhead members who have helped put this together, particularly Mike Nolan of Vanguard who has tirelessly spent a lot of time with his committee putting together this event and will also be working on the big event in 2022. Today we're happy to have our guests are from Vanguard, Joe Davis and Maria Bruno. Joe is the global chief economist and global head of Vanguard Investment Strategy Group and Maria is the head of the U.S. wealth planning research group at Vanguard. Joe and Maria will discuss the 2021 Vanguard economic and market outlook and Vanguard views on global growth, inflation, the financial markets, and the implications for your portfolio. We wish to thank all of you who submitted questions for Joe and Maria. We hope you enjoyed this presentation and tell others about it. Today's event is being recorded in a few days that will be available on Vogelcenter.net and we will make a post on the Vogelheads.org forum that it is available for viewing. Thanks again for joining us and over to you, Maria. Thank you, Rick. It's good to be here today. It's unfortunate we weren't able to be together in person in our fall conference but it's tremendous how we're able to do this virtually. So kudos to the team for putting all this together. So Joe, we're here together. As I was thinking, we've been working together on and off for about 15 years now and this is the very first time the two of us have actually shared the stage together. It's a virtual stage but nevertheless the first time we're together. So I'm looking forward to it and no better audience to do this with than our Vogelheads. So with that in mind, I think it's only right for us to talk a little bit about Mr. Vogel. So you and I both had the opportunity to work with him and know Mr. Vogel. Tell us a little bit how he influenced you and your approach to investing. Sure, Maria. And again, thanks everyone in the Vogelheads for making time. I hope this finds you healthy, you and your loved ones. And again, Maria, I can't believe it's 15 years. I've never done this. Shame on us. For those in the audience, Maria and I go way back. I know Maria since I started here at Vanguard and someone who touched me ever since day one of Vanguard was Jack Vogel. I do miss him considerably. I used to have the pleasure and the honor of having lunch with Jack probably about once every two or three months. We used to get together for lunch in the galley, which is our cafeteria. We call it the galley of Vanguard and I always recall him having a little cup of soup, whether it's minestrone or chicken noodle or whatever. There's two things I want to take back from this conversation. One, actually three, Maria. One was that tremendous leader known in the industry, obviously leading Vanguard, yet he always found time to talk with individuals. He was in that sense selfless with his time. So that was a wonderful attribute, number one. Second, what I always enjoyed talking about Jack was and was always impressed with his vest. He read widely and so I was always a student of history, but he certainly knew more history than I did. I think we hit it off in part because of that appreciation for history. It will warfare to early business cycles in the United States. So he was widely read and I think that was a tremendous asset for Jack because you would see that he would draw upon that in his speeches. He was one of the few individuals I never met in the world who could talk about Shakespeare and financial theory within the same conversation. In fact, he would make it actually very relevant. So he would span those different disciplines and something that I always admire and I always tell that to my colleagues at Vanguard, you know, to sort of, you know, aspire to. And then the third something more I watched from a distance when Jack was on stage, but he would see it in his readings and so forth, but he did give me this coaching once and that is or is that he said, you know, when you do, when you do the strong research and you have a finding that's in the aid and support of investors, he says, do not be afraid to show conviction in that idea. And so you would see that clearly from Jack led the industry for low cost investing in terms of our investment philosophy. He would not apologize. You know, he would come across in the industry as strident, but I always and that's a great that was he demonstrated leadership. He would not bend in his conviction on his ideas, particularly when they were well, well grounded as they always were and well researched. So those are the three things. I took back from Jack, continued to think about him on occasion. And again, when I passed through the statue, I'm on campus today, when I passed through Jack's statue, those images come back to me, you know, with with regularity. I'm your spot on. I think the one thing I would add to is just really the focus on our clients and we're clients, right? We're shareholders as well. And being a research team and doing the work that we do, unless we have key takeaways and how do you make it actionable, there's very little relevance to what we do, right? So how do we take our learnings and how do we apply these to help investors, you know, improve their financial outcomes, improve their chance for investment success? So, you know, I continue to take that, you know, through the years. We both, right? I mean, he's been aspiration for both of us. I love what you just said. I mean, it's like rigorous work, rigorous but relevant research, right? Because it's kind of be practical on a file. If not, I mean, it's it's nice. But, you know, why should the shareholder, you know, help support the work that you and I do? That's always that was always Jackson Moore star and something I've always aspired to be and to follow. But he set up, he set a very path, you know, a very strong path for all of us. And, you know, you and I both as part of the research at Vanguard, you know, in many ways we're trying to carry, you know, his legacy in our small way. So he continues to serve as inspiration for us and for our crew. Yes. So I think that segues really well into how we're going to spend the next hour or so, Joe. So as we think about our economic outlook and what does Vanguard expect? And then how do we take this and apply that into our own portfolios and key messages for investors? So let's start first with, so Vanguard published our 2021 economic outlook. And we think about the framework that we have for our near term prospects. But if we look at the recovery, highly contingent upon health outcomes and also consumer reluctance. So let's talk a little bit about that in terms of where we're heading as we're starting the year and as what we might expect throughout the year. Sure, Maria. You know, so as soon, you know, going back through even replaying these, you know, very challenging and traumatic events since the beginning of 2020, I'm very proud of the team. You know, we very quickly realized how significant, didn't know exactly how the events of 2020 and even today would continue to unfold. But proud of the team of really focusing on the framework that a healthy economy or an impaired economy would begin in any health. And so we very quickly, first time in my career, I had a very seriously think about health outcomes driving the economy in such around the world. And so what we did is, you know, we applied, you know, the sort of, you know, what the sort of the concerns around health, fear of catching the disease, the supply impacts, the inability to either go to school or to conduct business. And we applied a lot of data through that framework, say which sectors are going to be highly impaired because of social activity, so-called face-to-face activity. And that framework continues to serve us well. I mean, that told us that the global economy would suffer the deepest recession in world history. It would be short in the sense of it would fall very profoundly. It would start to grow. And that the pace of recovery would largely be dictated by the path of the virus. And that has generally held out to be the case. It gave us, I think, a great deal of accuracy, or at least as best you can have, given the uncertainties of the virus. So where do we stand today? It's an environment where, you know, we look at the percentage of the world that has yet to achieve immunity to the virus, which is considerable. And that once you can have an estimate of the immunity gap and how quickly that achieves herd immunity, so-called 70% or 80% of the world that becomes immune to the virus, the COVID-19, that will then dictate the pace of the recovery, particularly with respect to social-based activities. The thing about restaurants, hotels, travel, which has suffered the vast majority of the slowdown, whether you're looking at China, Europe, or the United States. And so when we look at that, you know, we look at our immunity gap as a factor of two variables. One is how effective is any vaccine? We long thought a vaccine would likely be developed, but that was certainly as much of our hope as our forecast. And secondly, you know, what surprises to the positively several months ago was that the efficacy of the vaccine, at least some of the two that are already approved to emergency use are well above the 60% threshold, which is deemed baseline. In fact, it was well above even childhood efficacy rates. So it's roughly over, even roughly 90% somewhat higher. That plus the percentage of the population that actually takes the vaccine, you combine those two percentages and then you get a timeline of when we will chronicle, get back to what normal or at least more normal activity. And so that when we apply that framework, it looks like certainly by the end of 2021, the largest economies in the world, the United States, China, Europe, will have achieved what's so-called herd immunity, which means such a large percentage of the society has effectively become immune that the spread of disease is much less rapid and it starts to dissipate. And so that continues to be our framework. It means that growth for 2021, our theme was approaching the dawn. We're not quite there yet. It's going to be some unsettling next few weeks. We expected actually a retraction activity. I think we saw for the jobs report, you know, Friday. We started to see lost jobs because some restaurants had to close. But as we proceed through 2021, that we will see an acceleration activity. Part of that is getting just recovering the losses from 2020. But certainly 2021 should be a stronger year for the economy. And that was even before additional fiscal stimulus, which will be enacted. But it's a positive economic outlook, but still that also has to, I underscore that, you know, we continue just our hearts are out to those that continue to be affected by this virus, both from the health side as well as for those that operate businesses, which, you know, they're still struggling right now because there's still a decent amount of pain out there in certain sectors. Okay. So you had mentioned acceleration. Let's talk a little bit about trends. So you and your team have talked a lot throughout the pandemic about certain trends that we've seen accelerated. But then equally are important are trends that we've seen that haven't been impacted that we maybe would have expected from the pandemic. Can we talk a little bit about that in terms of what we might have seen and what we might expect to see? Sure. I mean, I think we can bucket into three. We have three broad buckets into how the world may have been affected or we think will be affected by COVID-19. Again, I think it's the underscore. I know COVID-19 has impacted me profoundly on a personal level, you know, and I would imagine others as well on the call today. You know, I think our study of history as well as our own personal experience, this has been a traumatic global experience that is shared by billions around the world. But I think it is reasonable to expect some changes. I think what I think one bucket of changes are trends that were already on the way to have been accelerated. So the move, and much of this has been discussed by others in the media and so forth, things that we've researched as well. You know, the move to increase digitization of the economy, you know, whether it's media, financial services, others, that was already well on their way. That's only accelerated. We've seen this in the retail sector. Again, I think what, you know, the future has been, you know, fast forwarded to some extent. And so I think the five years of work of home call disruption, others call acceleration of certain business models, you know, that's been compressed into roughly a year's time. But that trend was on their way already and it's something we've researched. I think, you know, one thing that I think, you know, we did a lot of work on the future of automation and what that may or may not mean to the labor market. The one thing that at least I didn't worry about in the past was the location of that work. But looking at that framework, I think another bucket, something that, again, I think part, you could argue, was a trend that was going to occur anyway. But this is clearly been a step function. That is the move towards virtual work. As best we can estimate using all the data in our sense of the type of paths that can be conducted remotely versus the still the need for face-to-face interaction, Maria. This best I asked, we estimate roughly 15% of the occupations or the jobs in the United States, for example, will be are just as effective on a permanent basis or just as effective being conducted remotely as they are in a, let me say in the office, but it's not all jobs they're conducted in the office. Now, that may not seem like a lot, but that's equivalent to the number of jobs in the 10 largest cities in the United States. So there's going to be real estate implications for that. You know, I think there are some things in some of the largest cities, although there'll be some, there'll be some disruption there without doubt in commercial real estate. And then I think there's other trends that I think were, you know, I think in one sense, they weren't, I don't think they were completely changed or unaltered by the current crisis. One that clearly has, however, I think is the likelihood that we are going to see conditional stimulus. There was a reluctance, I think in some economies to provide additional fiscal stimulus. Clearly, we saw, you know, central banks very aggressive, taking interest rates to zero, even in some countries negative which they remain to this day. I think that has been a pivot from the past 20 or 30 years. And I don't think it'll stop. That has some implications for the bond market, potentially for inflation, which I think we could get to. And then finally, some things that I think have been unaltered, believe it or not, with COVID-19, I think some trends with respect to innovation and productivity, I think we were going to see this sort of innovation, whether we were working virtually or in person. And I think we could touch upon that with the vaccine because I think that ties to the vaccine discovery. And I think some of the, even the tensions quite critical between the United States and China, I think we were going to see continued tensions between two of the largest economies in the world with or without COVID-19. So I have not seen anything that will decelerate, I think, some of those tensions. And so I think that's something that will continue. We'll have to continue to monitor in the years ahead. So I think there's been, again, acceleration in some trends. Secondly, pivots. This goal is particularly a pivot. And then finally, something I think would be unaltered. And that would be, you know, like COVID, you know, the China tensions. Globalization is related to that as well. And then things around innovation, what we call the ideal model. Okay, good. All right. I do want to move over to monetary and fiscal jokes. I think that lends nicely into that. Although we got right into it and I forgot to do my job as a moderator to stress that we are taking questions. So we've got a few questions prior to the event. So we'll weave those in, Joe. But for those that are listening live, if you do have questions or want us to, you know, expand on anything, just let us know. Michael is at the helm there going through questions and he'll be able to share any questions that we might be able to take live as well. So please don't hesitate if you do. So, Joe, as we think about monetary and fiscal policies, right? We've seen a lot of stimulus activity. You know, how much will it continue? What will be required to continue the road to recovery in your thoughts? Well, I mean, I think, you know, policy, by and large, Maria will continue to remain very accommodative. I mean, again, to take a step back, we have some of this in our annual outlook, as you mentioned and referred to. The combination of fiscal monetary as well, but fiscal monetary support that we saw in many economies, the US in particular, in 2020, in part to address COVID, was among them the most significant we have seen probably since World War II. You know, the CARES Act, which was low over $2 trillion pieces of legislation, which we even a Vanguard, I spent a lot of time, even before some of those were enacted, just to give our thoughts from a macro perspective in a bipartisan way. That was significant policy response. And there are still areas that need address, I think, the $900 billion of additional fiscal support, particularly for those that are unemployed, in part with the inability to work, particularly the restaurants in face-to-face intensive sectors, that will be helpful. They tend to skew lower income, which is really unfortunate. I think going forward, I think we will very likely see increased tendency for fiscal spending. And that may concern some given our debt levels. I think, if we can talk more about that, I think fiscal policies should be split into two components. One is really addressing the near-term economic weakness. And I think there are still some impairment. If our forecast is right, the need for those measures will dissipate as we proceed through the course of this year. I think monetary policy, regardless, will remain interest rate, short-term interest rates by the federal reserve will remain near zero for the foreseeable future. I think the early state would raise rates in the year 2023, a little bit earlier than the bottom market expects, but not materially different. Inflation is a wild card there. And then the other component of fiscal, which is, I really relate to longer-term spending initiatives. Now, many will focus on Social Security and Medicare and Medicaid. I think the one area that regardless of your political leaning, I think you can make a very strong case. And I would make a very strong case for is infrastructure. There is the need for certain infrastructure spending, certainly in the United States, particularly if you travel by plane, train or automobile, the infrastructure needs. So I think we will see some of that in the coming year. And I think part of that could help. So I think we will see additional fiscal stimulus. At some point, I think the bond market will start to apply a little bit greater pressure through a little bit higher interest rates. I think that process is just starting. Again, I am not saying we're going to see a material rise in interest rates, but slightly higher than what they are currently today. I mean, the 10-year treasury, which is a benchmark interest rate, 10-year treasury is roughly 1%. I mean, it was 2% before COVID-19. So I think we will march over the course of 2021, maybe not quite get there, but perhaps close to it. And I think hopefully it does so in an orderly way. If it was unorderly, I think the Federal Reserve, I think actually would step into the markets and actually purchase some treasury bonds, because that would be counter-intuitive. The market dislocations, it would be counter-intuitive to be counter-productive to their objectives to kind of stabilize the rise in interest rates. But as a bond investor, longer term, I'm hopeful for somewhat higher interest rates. I mean, interest rates are negative after the rate of inflation. So I just hope that that rise is gradual and orderly and not unorderly. Yeah, Joe, and I do want to talk about that a little bit more as we get into the market outlook, because as on the financial planning side, those are lots of the questions I get in terms of what do we think we're looking at in terms of market returns, but also yields, and what does that mean for savers and spenders alike? Okay, you had mentioned inflation earlier. Is that even a very real risk for us right now? So if you think about who's with us today, many bubbleheads have seen different cycles. Inflation under the Volcker era where we see record high inflation rates in modern history, in modern times. But now we're seeing very low inflation, and there's other concerns that go along with that. How real is the risk of inflation, or what do we need to think about inflation in the context of our portfolios? Yeah, it's a great question, Ray. I mean, that's the one part, is an investor. It's one of the risks you always have on one's radar screen, right? I mean, anyone who particularly remembers their calls in the 1970s, even for two or three years of rapid rise in inflation can be near term, you know, some pain on a balanced portfolio. So we all should take it seriously. I would say, you know, three things with respect to inflation. One is just historical context. Inflation, believe it or not, is still fairly low. It doesn't feel like that when I go to the grocery store. It feels like everything is up like 2X. But in a broad basket of consumer prices, inflation is actually, it's only roughly one, one and a half percent. It's below where most central banks wanted to be. That's one. And that has been generally the case for the past 20 years. So that's actually been a problem. Central banks have, and that was actually our hypothesis, Maria, right? That central banks would, and the economy and the digital world would struggle to generate consistently 2% inflation. It's one of the primary reasons why interest rates are as low as they are. Not the only one, but it's one of the reasons. That's one. It's been actually lower, somewhat lower than what, quote unquote, is ideal if you want to use it in work. Secondly is the forecast. On a cyclical basis, it is very likely that we will see a rise in inflation. Part of that is just anticipated recovering the economy. Part of that is a little bit healthy. We will see a recovery in the service sector if our forecast is right. And that means a little bit of firming and things for air travel, hotels, and some social activity will return. There will be some long-term impairment in business travel and so forth. But domestic travel, if you look at China, is almost, quote, back to pre-COVID level. Restaurants, again, so we will see that. And so we will see a firming in those areas. And that will get us closer to the 2%. And then third is the risk. For the first time, since I've been in Vanguard, other than perhaps early 2006, we saw that oil prices recall going to $100 a barrel. For the first time, our team, Maria, sees a modest risk towards the upside in inflation. Now material, nowhere near the 70s, this notion that we will return to a high inflation world, I think, underestimates some of the forces that have kept inflation at bay for a long period of time. Technology, globalization, and the Federal Reserve. But that's not to say that even with those forces, you can't have inflation a little bit higher than expected. So I think fiscal policy is the wild card. Does fiscal policy increase fiscal spending if it's consistently aggressive over the coming three or four years? Does that start to raise everyone's expected inflation rate? Maybe not 2%, maybe 2.5%, 3%. That's the wild card. That's what we have started to model and what we think about. It would mean that interest rates would be a little bit, the rise would be a little bit higher than we anticipate. But that's the rest. But this is not a return. Believe me, it's certainly in the next few years, a return to the 7, the 1970s. And I am not complacent on it. I'm just telling you, when you do all the math and you look at all the what drives inflation, and understanding inflation is a very complex phenomenon. But when you apply all the variables that matter, we have an impaired labor market. We have also pent up demand. And when you do all that calculus, it does say we're going to have inflation start to rise. It should kind of crest roughly around 2%. Maybe a little bit higher and then kind of settle in around 2%. But if there's a risk, it may go a little bit at the end of this year, it may recover a little bit more quickly. And that could take that. Again, we have to stay in the course of our investment proposals, but that's the one probably source of volatility. This year, if the market's temporarily down 5 or 10%, I would say more likely than not, probably because we're going to have a month or two where inflation perhaps comes a little bit higher than expected. We had that a few years ago, eventually things will calm down. But that's probably the sort of, and we identified that in our risk report, that's by the one source of volatility this year that we should just be prepared for and just try to look forward. Okay. All right. Good. Okay. This is a common question. So 2020 was an election year. There's lots of uncertainty that goes along with that. Now that is we move into 2021 and we have more, and it was just not the presidential election, but also with Congress is we have more clarity as we're heading into this year. What do you think about the policy changes that might be proposed and then what we might need to keep an eye out on or your thoughts around any potential policy changes and implications throughout the year? Well, again, I mean, I think there's, that's actually among my biggest question marks as well. Maria, I mean, right now we're going to, you know, month's grayer, the focus is on, you know, aiding the recovery. And the biggest thing is the quickest we can get to anything, any dollars spent for vaccine distribution is you will make the recovery that much more quickly and have revenue stabilized. That said, I think in the long term we will see increased focus on tax rates to help fund some of the increased spending. Again, we had structural deficits under both parties, both political parties, you know, the past five or 10 years. And so that was an issue that if you look at Congressional Budget Office, which is non-partisan agency, projecting higher debt levels for the next 30 or 40 years, it's in the large part because revenues fall short of expenditures by roughly three or four percent a year. And so that gap's going to have to close. I think we will see a number of things on the table with respect to the revenue side. I think particularly for higher income households, I think we will, I think it's reasonable to expect that we will see modestly higher, you know, tax rates. But again, my personal view is, you know, there's a whole cottage industry that tries to guess, and you feel more implied, I do Maria, right? Like how exactly should I anticipate the tax rates? I would personally rather kind of wait to see actually how they unfold rather than prognosticate on what form of tax rates we will see. And then once I have that clarity, if that has some implications for my estate planning or my tax planning, I do it with 100 percent more information rather than trying to guess. I do know that, you know, regardless of that, you know, Vanguard will continue to underscore and I think will clearly endure the importance of retirement savings, the importance of savings. And I think the last point, which is not so much a tax policy perspective, it was everything you mentioned with respect to the headlines and the fact that all Vanguard investors, particularly those on the call, I mean, I think everyone's long-term orientation to continue to remain invested, balanced, diversified, staying the course, you know, if there was ever going to be a year that was going to challenge that investment philosophy, 2020 and COVID was going to be it. And if one had seen the headlines, I think many, in March and April, I remember seeing the media, many were saying run for the hills and look at the returns that we've seen this year. So again, I think it's just an indication and I think everyone as a long-term investor should be pat on the back because the headlines were extremely troubling. It was, you know, something that I felt because it was the headlines impacted once not only professional life, it also impacted once personal life and family and friends. It was a lot of emotion to take into account. And I think everyone should really pat themselves on the back because that was not easy to do emotionally. Do those. And so again, it was just another underscored moment for the long-term orientation. And that's always something I think that I know everyone on this call takes in mind but something I think I continue to remind family and friends, even more so than the tax, which are, you know, fair questions for you with respect to tax rates. And so we're like first order principles are continuing to stay invested in the markets and continuing to stay diversified. Okay, if that's yes, then I'm happy. Tax rates are going, but let's make sure that we take care of business first. Yeah, no, last year was hard, Joe. Yes, because I mean, a lot of individuals are impacted by it, not just personally, but professionally as well, unanticipated furloughs and things like that. And while some of the provisions in the CARES Act could help, I mean, we have individuals who are really dealing with some significant financial challenges, both, you know, near-term and long-term. So how do you actually unpack that and focus on the things that you need to now? You know, as opposed to just, you know, reacting and looking at this longer term. In terms of the taxes you're spot on, I'm starting to get more questions around that now in terms of, you know, some of the Biden proposal has some, you know, structural changes in it as well as with the state taxation, but we don't know exactly the proposal. We don't know what or when or how and if individuals are thinking through things, you know, my suggestion there would be, you know, maybe hold off until we maybe even have some more clarity around this or some certainty, but never really let the tax situation drive the fundamental decisions of investing. But there are, you know, certainly on our watchlist this year and as we get more clarity around that, we'll see more from Vanguard as well on that front, too. Okay. There is one note, that's why it's good to know Maria Bruno at Vanguard, not only because for my own, for my other questions I have, I mean, Maria is my first call. Help me out here. Well, the thing is, if I don't know the answer, I know where to go, right? We've got strong teams with us, right? All right, so, Joe, let me think about the financial markets. So the market recovery that we had in 2020 was just surprising as the decline was. Given what where we were, where we are now, do you think the markets are fairly valued? What are your thoughts there? Well, as everyone on the call, you know, it's, you know, Vanguard, you know, I'm really proud of our framework. We take, you know, we don't talk about short-term market, you know, ups and downs. When we talk about our reasonable range of expected outcomes for whether stock returns or bond returns, we're talking about broad portfolios, say that total stock market, total bond market. And we look out for a long period of time, at least 10 years. And I'm proud of our forecast. I think it's also reasonable to expect that those expected returns can vary through time. I mean, we all know that bond investment, right? The expected return on the bond portfolio today is materially different from where it was in 1980. And so that we just use that simple logic, but also recognize, you know, that this is the future we're talking about. So it's all ranges of return, but it's really grounded in the latest academic research from finance, which we apply at Vanguard. So we're both humble, but also rigorous with respect to that. That is context. I say, you know, our outlook, I've been fairly proud. I mean, even though the course of 2020, Maria, right, we were actually, you know, remember March and April, the free fall in the stock market? I remember, yes. Sometimes, you know, we're not market timing. We're just saying that if anything, our market outlook had gotten more positive for the first time. It was a material upgrade in our long-term equity projections, because we dropped below fair value. That's the market really sold off very aggressively. And so we said we didn't know the time and other, but again, close one's eyes next five or 10 years. Expected returns on stocks are going to be higher than what we have in the historical average. That came, so we got certainly the direction, right? But certainly the magnitude surprise may. I mean, it was a very aggressive rise, most of which can be explained by the drop in interest rate, but not all of it. So how do you read that? It means today that we are above these wide ranges of what we call fair value. Fair value for any asset is what is reasonably explained by, say, earning for the stock market earnings growth, the level of interest rates, because these are discounted cash flows in the futures for all, for all, say, public and trade US companies. And so you do have a wide fair value range. And most of the time, the stock market is in that range, which means historical expected returns of eight or nine percent for planning purposes is reasonable, right? But every so often you deviate from those ranges. We deviate it well above, we were way expensive in the late 1990s, which led to, had we had our capital market small, we would have had just expect lower expected returns of the next five or 10 years, not sell once investments just for planning purposes expect lower returns. We sit here today, the outlook for the equity risk premium is still positive, somewhat lower than historical average. The biggest reason why we expect lower returns, Maria, is not because the stock market itself, we still expect in the vast majority of cases, high probability that the next 10 years stocks will outperform fixed income. It's just that the fixed income and money market returns are materially lower. And that's because the level of interest rates and typically the Federal Reserve, right? So that is the prime. So all the expected returns for all assets in one's portfolio are modestly lower. It's not because we're bearish on the financial markets. It's because of just the level of interest rates in money market funds. It's not because money markets, but it's because the Federal Reserve and Fed Funds rate. That has implications for the bond premium. So why should I have expected returns higher for a bond fund than a money market or for a stock fund equity risk premium over bonds and money market? That compression is lower for everyone. So that's the primary implication. So we generally have shaved two or three, the model shaved two or three percentage points off the expected returns for all those portfolios on a five or 10-year basis. But it's not because the markets are gross, it will value. They're at the high end of the range. I had some concerns about some of the aggressive, I'm starting to see some aggressive behavior, not by Vanguard investors, but the industry at large, the IPOs, some mega-cap growth companies, really concentrated returns. So I think there's definitely flaws in parts of the market. Things even quite frankly like Bitcoin, I see. There's some flaws, one could argue, but it doesn't mean the market is unsustainably high. It just means that we may see a little bit of a correction. One thing I think that is missed by many in the market is that even if we have modestly expected returns, say for US stock, let's say in the four or five percent range over the next 10 years, that's certainly lower than the historical average of nine or 10, say roughly five percent. If you own a broad basket securities, that certainly could outperform a very concentrated one. Gross stocks have outperformed value companies by the largest in US history ever recorded. And so if one is taking a broadly diversified approach, I think that may mitigate some of the risks. Some investors I think have become very concentrated. It has served them well in the past several years, but past is not necessarily prologue. And so some investors could see actually lower expected returns than our central tendency because of those concentrated positions. So that's a broad brush. What happens is not bearish, lower expected returns, but that's important because of what is going on in interest rates in general, which I think is a natural expectation. Okay. Joe, actually, I'm looking over here at my monitor because we're actually getting some questions in. As we go deeper into the financial markets, I think we've got a question in that is interesting and maybe just to briefly set the context. The underlying philosophy of a true bobblehead is really to tune out the noise, particularly with the near term. Why are these projections when we think about either the near term or the 10 year important? And when you think about it in longer term planning, the relevance of a, say, a one year or a 10 year outlook versus a longer term? Yeah. And one of the reasons that I appreciate the question and Maria, you know, that's one of the reasons why even our outlook, we focus on 10 year numbers. I mean, most of the industry include many of our competitors. In fact, we're not even in some media surveys because they're one year outlooks. He refused to participate in them. That means we're not on TV as much, but so be it. Ten years is a, I think is a relevant horizon for very long horizon, but it's a relevant horizon, say for planning. Now for some, I'm 22 years old and staying for retirement, it's well beyond the planning cycle. I think the outlook is less relevant, but for many, they may have a 10 or 15 year planning horizon. And the cornerstone of asset allocation, which is the cornerstone of Vanguard's investment philosophy, say diversified, bounds long term. But one of the things that devising a portfolio and asset allocation, say between stocks and bonds, that is predicated and the foundation of that is based upon the expected returns. If one, I mean, that's the foundation of Vanguard's philosophy. So you have to have a reasonable expected return. And so if we don't have this sort of outlook, what does one assume for a bond portfolio to write my creeps comments, right, Maria? Should I assume, it would actually be fiduciary. It would not be responsible to say, you're going to get historical like six or seven returns and fixed income. If I'm saving for the next 10 years, that means that I'm not going to be successful. The odds of me, that would mean the probability of me being successful and whatever invested saving in spending strategy I have as a retiree, as a saver, it's going to be miscalibrated. And so we have a responsibility to say what are reasonable ranges of expected returns that one can then plug into the investment problem or the investment goal one is trying to achieve, right? It may not mean radical changes, but if you know that, right, and even our advice units and our calculators on our website, how much do I need to save for retirement? How can I spend safely in my retirement? That requires the expected returns being somewhat reasonable, not perfectly accurate. No one has that. We don't know one has that. But certainly we have, and expected returns do vary through time. And so we have a responsibility to say, what is a reasonable range for that? Sometimes a little bit higher than historical averages. Sometimes they're a little bit lower than historical averages. I think that's important to lay that information out there so that investors can make as intelligent decisions on their uncertainty as possible in this world. And we've done that for 10 years. I'm very proud of it because our first outlook 10 years ago, there was many investors very concerned to invest at all given the financial crisis, the low, this new normal. And actually we were, our outlook was the same. Actually, we're going to have a struggle like returns in the equity market, stay invested, stick to the plan. And that forecast was genuinely accurate. We didn't get the ups and downs along the way, but we got the endpoint. And that's important for planning purposes and doing risks return trade-offs with ones offline. Yeah, no, I agree, Joe. I get these questions a lot particularly for retirees, and we can talk more about that. But when you're doing long-term projections, it's fine to use a Monte Carlo simulation where you're looking at different outcomes. But if you are looking at in the next, you know, one to three to five years, how much I should be spending for my portfolio, it will be imprudent not to think about what the initial conditions are. It's risky to back on higher type return expectations when the portfolio isn't expected to produce that. Yeah, I said on some investment committees, I imagine you have many clients or, you know, council clients. Right. Like, for example, what's, I'm a very conservative investor, but I'm trying to draw 4% for my portfolio over the next decade for spending. Or some institutions I serve on, they have a fixed, they have a target of 4% spending. How should they allocate their portfolio now? It may be different. In fact, it is different. My council versus 25 years ago when they could have been 60-40 because of the bond return component. Does this not mean that bonds don't have value? It just means a lower expected return. It may mean they either cannot spend 4% from their portfolio. They have to say more. I mean, that's one certain viable path. Or they're going to have to, there's no magic bullet. They're going to have to take on more risk, which means more equity-like risk, perhaps 70-30. Right. And let's talk about those trails. Not one better than the other. And let's just, let's look at the comfort level with that, the pros and cons of that. And I think that's a sort of conversation that these sort of ranges of returns allow investors to have. Again, if one has a hundred-year horizon or so, the initial conditions do not matter. But for, again, for some investors, that's appropriate. For many investors, anywhere from a horizon from five years to 15 or 20 years, then I think that's where our sort of planning projections I think can be helpful. Right. So, Joe, let's get a little deeper with our market outlook. So US equity returns. We're looking at a projection rail, not much unchanged from last year. Right. Anywhere around 3.7% to 5.7%, I believe, in terms of the 10-year forecast for equities. Let's talk about that, I guess, in a couple facets. One, we would be remiss at a bubble heads event if we do not discuss US versus international. So, the projections are much more bulletin than national forecast. So, let's talk a little bit about what's causing that, what to expect, what to think about that in terms of diversification and asset allocation. Yeah, and that's one of those rich topics, Maria. Jack and I used to talk about. He was not as big of a fan, certainly, as our supporter of having non-US equity exposure. He wrote about it. I mean, obviously, the US market has been the strongest performing equity market among the highest in the world in the past five or 10 years. It's steadily out performed non-US markets. But, you know, past is not prolonged. I mean, without doubt, the lowest volatility portfolio is a global portfolio. That does not mean that necessarily that US will out or underperform depends upon where the fundamentals are. We are expecting or projecting more likely than not that non-US equity markets will have somewhat higher expected returns going forward. It's not because of any sort of view on the US dollar. It's primarily because of where valuations are. And if you look at, particularly in the US growth arena, valuations are at pretty high levels. I mean, they're close to the late 1990s. So, and there is certainly some strong evidence historically that when you have these sort of you know, dislocations or deviations, I should say, that over time they tend to, you know, conditionally tend to converge. And so, that is the primary reason why we anticipate non-US markets to have higher equity returns in the US. It doesn't mean that US, you know, it's not a negative view on the US economy. It's not a negative view on US earnings. It's the fact that the prices that investors are already paying for US fundamentals is markedly higher than they are for European companies, emerging market companies, and Asian companies. And history shows that where we currently sit, you know, the risks are towards, it's one sense, the prices being paid for the rest of the world's growth is much cheaper today. And so, if you have a multiple orientation, and certainly I adhere to this in our, in many of our portfolios we provide clients, right? Brown's portfolios have non-US exposure, right? And we can all debate what that optimal one is, but certainly have some non-US exposure is going to help on our return perspective. I think it's prudent to have it, even if one doesn't expect part of the world to outperform the other, because it's about modest volatility on average, but that is a component of our outlook. In fact, most parts of the equity market globally, if they're outside of US technology companies, are projected to modestly outperform. And we're not picking on that sector. It's just that those valuations are so extraordinary that it's, we've rarely, we have seen this before, but the times we've seen it before, you know, were the late 1920s and the late 1990s. I'm not saying, and that's the, that's the one thing about today's global equity market. We've seen a fantastic performance of the past five or six months, but it has not been broad-based. It isn't like every single company has, you know, has doubled in value. It's, so that's good news in the sense of being broadly diversified to help, you know, smooth out some of the underperformances, some companies that may have been starless. And I don't know when that time it is. I'm not picking on any one company. I'm just saying it's unlikely that all of them are going to continue to grow to the moon. And so having a basket, I think you'll see, if our forecast is right, companies that are more value-oriented, particularly some outside the US, will play some catch-up over the next several years. The timing, who knows, but over the course of the next five years, it's highly likely. Yeah, you beat me to that one because we got that question before Joe around the, what are we going to get out of this value coma? Well, it's fading in. It is. Yes. Funny, I had the honor and the privilege to present to Vanguard's board directors in December was on this topic, what's going on between growth and value. We have a lot of our active managers and our Vanguard active funds. Many of our active managers, some of us have a value sort of orientation. They tend to buy stocks that are lower in price to book. So today, some of those value-type companies are in the financial banking sector, energy companies, some tied to face-to-face services. Some of them have gotten absolutely hammered on a price relative to some large-cap technology companies. But the perplexion is that actually for the past 10 years, both companies on average have drastically outperformed value. So there's so many industry actually questioning the value philosophy, which is actually a cornerstone of everything from Vanguard's generally active approach and many academic research. So there's a big debate. What my research I presented to the Vanguard board directors was that you can explain not all, but a lot of values on a performance in part because of the sector drop in inflation and interest rates. And so if we have a modest recovery is participating, value companies will generally come back a little bit. They may not completely recover all the relative on a performance. I mean, the U.S. growth index is up by 40% over the U.S. value index. And that's astronomical. I mean, that's like five years of growth that's historically like we stock returns squished in the one year on a relative basis. And we've rarely ever seen that dichotomy. And then over and above the fundamentals growth stocks have continued to outperform even you control for things like secular change and platform effects and all these technology buzzwords. So I'm not saying that this is the returning point when some of these value companies start to come back and contribute more quality to the equity market. It's just that continued outperformance is unlikely, at least over a five year basis. But you know, that again, there's a lot of active management in part have underperformed in part because of the value premium not really manifesting themselves in the equity market. Okay. All right, Joe, we've got a few minutes left. Time is flying. Let's just real quick talk about there's two things I want to touch upon. One is we talked about the bond environment low yields. What's the message to investors, particularly retirees who are looking to try to eke out extra yield? Either through credit or the yield curve? What are your briefly your thoughts there? Well, I'd say, you know, I think again, the more the one tries to eke out the returns, I just the more one just is going to have to weather, you know, a month or two or a quarter to potentially where the nav drops a little bit potentially because you're just we're going to we have we have credit spreads that are approaching, you know, whether it's municipal spreads over treasuries or corporate bond spreads over treasuries that are approaching close to historical types. Yeah, there's still an expected return on a corporate bond portfolio or municipal bond portfolio is certainly higher than treasuries because of the risk there, but that doesn't that's not a free launch. And so that doesn't mean don't move news investors just means that you have a very low income. Well, the proposed yield to maturity is barely low. And so I think we all hope for a somewhat higher return from our bond portfolio. That means that we're going to have to just look through, you know, period two where you have a slight drop in the net. That's the natural reset, right? And you have less income cushion to absorb, you know, modest rise in corporate spreads or municipal bond yields, right? Particularly as the recovery continues. So again, a healthy recovery means healthier bond returns for the five or 10 or 15 year period. And that's what I'm hoping for. I mean, if we're here five years from now with the same interest rates, Maria, something has gone right. Yes. And terribly wrong. And so I don't think anyone wishes that. So the converse though is okay, if I want higher expected returns, you know, no pain, no gain. And I'm not talking about a lot of pain. I'm just talking about some math fluctuations as we kind of have a gradual rise in interest rates over the next several years. So that's going to be a little bit different from, you know, the past. But I do know, particularly for conservative investors, that can be a little bit unnerving if they see the bond portfolio drop down in value for a little bit, right? Because the more conservative investments, hey, I expect that from equity, I don't expect that from investing. Well, the more they're going to try to reach for yield then, particularly doubling into high yield or emerging market. Yes, there's a higher risk premium because of the greater volatility. So one, I just, I hope they don't have the expectations for money market like returns without any volatility, because we have a low income question. And so we just have to, you know, just have to be mindful of that. I know I'm prepared for that. But we're going to have to talk to ourselves, I think, before they occur. And I think generally, we won't have a massive spike in interest rates. We're not. Okay. All right, good. Thank you for that. And then last thing, we did get this question in before. I know you get this question a lot, Bitcoin. Well, it's not a currency. I think the market's expecting it to be a future currency. I think it's debatable. I don't think, to be honest, I don't think many central governments will allow it to become legal tender on particularly skeptical that China or the United States would allow Bitcoin to usurp the US dollar in Chinese, remember, the Bitcoin market is spitting in my face on that to be blunt. However, it could very well become a collectible. I used to collect baseball cards. If you if you collect the baseball cards or other the Mickey Man on baseball cards, what were I think over a million dollars in main condition. So it does not say something that is very finite supply that is valued by a community. It cannot have utility value. And collectibles generally have that words other would say, I don't care less if I have that baseball card that has utility for me. Others, it's be any day or something else. I don't mean to be dismissive of Bitcoin. It could have value, but I think, you know, so I but I've been shocked by its astronomical rise. The one thing that's difficult with Bitcoin, Maria, is that it's very tough to argue what is its fundamental value. I can tell you that the cost to mine the coin is lower than today's price. Right. And so that would suggest potentially it's overvalued. But again, I don't think it'll ever become legal tender that does not mean, however, that could mean the price could go closer to zero. But it may mean it's it could still stay up well above zero because it becomes a sort of I say, come on, I think collectibles the more the more, you know, there's there's value, right? Okay. And then the thing is just a piece of fabric, right? But the cost of paying is a credible value. I just don't know. I mean, is it a Picasso? Is Bitcoin a Picasso? Or is it the thousands of paintings that are produced every day that have hardly any value? I mean, that's the part of the question. Okay. Okay, good. Thank you, Joe, for that. So all right. So of course, we run out of time, but I do want to have a little fun because I think our mobile friends are expecting a little fun too. So I want to start with a quick lightning round of questions. And I mean, quick. Okay. So here we go, Joe. What's the first media source that you go to in the morning when you log on? Barry Reynolds. Okay. What's the last book that you read? White Fragility. Okay. So here's a good one. I came up with these this morning in case you're wondering, Joe. So what would Joe, the senior economist that you are today, tell Joe the more junior economist that I met 15 years ago? Be more patient in one's personal life. Is your wife watching? I'm a very impatient person that has positives and negatives to it. Okay. All right. And lastly, sum up 2020 for us in one word. Three days ahead. If I were to ask this question myself, I'd say hope. Yeah. Yeah. All right. Thank you, Joe. It's been a pleasure sharing this virtual stage with you. And I thank the Bogleheads as well for their interest in their time. So, Rick, I'll turn it back over to you. Okay. Well, thank you, Maria and Joe, for that great discussion. It's always interesting to hear Vanguard's perspective on what's going on and particularly what might come forward. This presentation has been recorded and it will be available soon on bogelcenter.net and our next Boglehead Speaker Series live event will be next month. And it will be a panel discussion from some of your favorite Boglehead experts. So thank you, everyone. And we hope you have a safe and happy new year and see you next time.