Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Jack Bogle — The Failure of Capitalism, Double Dip Is a Reality


The drum beat toward the mid-term elections is quickening: 39 days and counting folks!

The disgust over the state of our nation's politicians can be heard on grocery store lines and around water coolers in our great nation.

The uncertainty over the election outcome is still there and investors are waging on a big GOP win. But is that the safe bet?

I decided to talk to one of my contacts who has seen his share of economic uncertainty—Jack Bogle, Founder of Vanguard and the author of a new book "Reflections on Investment Illusions, Indexing, Capitalism, "Mutual" Funds, , Idealism, and More ". We started off our discussion looking at how capitalism has changed. I asked him how does he define capitalism now.

JB: The only way I can define capitalism right now is casinoism!

The rampant trading that goes on is just foolish and creates no value for both the buyer and seller combined. We have this casino mentality. Its a rapid turn over.

In high frequency trading some firms hold these stocks on average for 11 seconds and it seems to me that's a little short to call it a long term investment. For over the long term, if you can avoid getting sucked into this vortex you will actually do better than if you did get sucked into it. Wherever the stock market is a decade from now, its not going to have anything to do with the stupidity of today or tomorrow.

Under normal circumstances, I think the concerned investors should be aware that these are no normal circumstances.

We're in an economic crisis. We remain in a global economic crisis. Corporations are having good earnings, but there is a lot of instability in the global financial system. We have seen a lot in the price of gold.

A fluctuating yen, dollar and Euro. So I say now is a good time to be conservative. You may end up with smaller gains you otherwise would have gotten but you would have slept a lot better too.

LL: If we were going to characterize the economy in terms of a baseball game what inning are we are in?

JB: I'd say the sixth. A lot of history still needs to be written.

LL: What things are you afraid of that will impede this recovery?

JB: The economic growth is extremely modest. This is not a really spirited recovery. If it is even a recovery at all. There is a one and three chance we may go into a double dip.

The unemployment situation doesn't seem to be getting any better. I think and hope it will. But the economy recovery is one of the short term things in nature that's in peril, but not written off. And I want to be very clear— I would not want to get out of stocks.

I don't know enough to tell anybody to make their stock allocation zero. Or if I was bullish I would never know enough to tell somebody to go 100% into stocks. It all depends on how you feel. But don't keep changing your the ratio of your portfolio. Just leave your darn ratio alone. Don't change things often. You'll be doing more guessing than anything.

Another thing I'm worried about is the global financial crisis.

The staggering deficits we are running here and abroad is a concern. And worse, here in the US they can't get a grip politically as to how to resolve it over the long run.

Social Security for example is one huge long-term liability. Fixing it today would be very easy with some moderate changes but we keep waiting too long.

We can raise the retirement age a little bit, raise the social security wage base a little bit, adjust future payments for a more realistic and modest cost of living, and those things can do a net improvement of one to one and a half percent a year and that's all we're talking about.

The system then would be fine but they don't even have the political courage to do that. Underlying all of this is the lack of political will and underlying all that is this ghastly position of corporations being able to give vast amounts of money to political organizations because of our Supreme Court. It bothers me the money managers have not said one word to stop it. That to me is going to be a real national disgrace when its all over.

LL: You say we are a one and three chance in going into a double dip. What would be the catalyst to push us into one?

JB: We are very close to one. And the reasons why is the investment illusions I talk about in my new book. We rely much too much on data. One of the investment illusions is we think the data we get is revealing but it is not.

Its actually revised and revised and revised. So I just don't think the data we have so far is overstating an economic recovery and therefore if they revise and lower those numbers it would look like a double dip.

The other thing is employment is not improving at all. When you look at the real unemployment-those who find a job if they can find it is something like 18%, not the government's 10%. When you add the people who are not working its way over 18%. And when you add in the consumer expenditure which is normally two-thirds of the GDP, where is that going to come from?

LL: I have found since the fall of the financial system common sense has sometimes given you a better sense of the economy rather than these economic numbers.

You just have to look around see how many people are either out of work or working two or three jobs to make ends meet. What do you look at to get a pulse of the economy?

JB: To be honest, I try and avoid looking at the economic numbers. Over the long-run I believe the economy will grow and will continue to grow. It won't happen this year. Next year we should have a very productive nation.

We have terrific technology, terrific . The administration is trying to get help to small businesses and my guess is nothing will happen in a double dip tomorrow or the next day but we should have something like a 4% nominal GDP growth over the next decade. Normal long-term GDP growth is 5%.

LL: What do you have to say to all of those who say 'buy and hold' is dead?

JB: I say they don't understand. Its dumb. First I would say buy and hold WHAT?! Buy and hold never dies. Its a stupid comment to say it is dead. As a group we are all buyers and sellers. If I buy you sell, if you sell, I buy. Together we buy and hold. It's a good long term strategy

LL: We are 39 days away from the Mid-terms. Are you confident of a big GOP win or do you think it is greatly exaggerated?

JB: Uncertainty depends on how it comes out. I think some of these extreme Tea Party candidates whose some credentials' are pretty damning might make it easier for the Democrats to get elected.

My gut is I think the Democrat's loss is greatly exaggerated and the Republican wins are greatly exaggerated because of what is going on in the combination of the Republican, slash, Tea Party. If that's what happens I think we'll have greater certainty in the future.

LL: In terms of looking at the GOP. This is the time for the GOP to rise to the occasion. Today they are releasing their 20 points agenda. Do you think the GOP can get their act together especially by 2012?

JB: There seem to be many acts within the GOP. I think this election will be decided less on ideology and the character and traits of the individual candidates and I hope America would vote for the best people regardless of the party label.

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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."