RIP John Bogle – Warrior For The True Free Market
John Bogle is dead at 89. Of course, every headline hails him as the founder of Vanguard group and a father of index investing. But in my opinion that really belittles his legacy. No, I am not undermining the impact of Vanguard; it did revolutionize investing in many ways. Still, Jack Bogle’s intellectual contribution is much bigger than that and underappreciated. Maybe his passing will cause people to examine his writings more carefully. I think it is fair to say that Jack Bogle cared deeply about free markets, was worried about their potential disappearance. He tried very hard to protect the markets from the unproductive short term casino like mentality.
One of his last books’ titles says it best: “The Clash of Cultures: Investment vs. Speculation.” It almost reminds me of “Samuel Huntington’s Clash of Civilizations”, so profound is the antagonism between investing and speculation. And it would not be too far-fetched, speculation vs. investing are really two completely different civilizations. They both seem to be free market economies, but ‘seem’ is the operative word. When speculation takes over, the short term trading drives all sorts of unhealthy outcomes that subvert financial markets. In fact, short term outlook places tremendous pressure on regulators and lawmakers to sustain these bull markets and rallies. Jack called out this unhealthy approach repeatedly. Here is what he said in a 2011 interview:
“As for capital gains, there ought to be some distinction between capital made by people who start businesses, and contribute value to society, and capital made by gamblers on Wall Street, some of whom win. Earned capital income should carry the regular dividend rate, but capital income gains by trading, and particularly short-term trading, should pay a higher tax, even than the present ordinary income rate.”
If policymakers had listened to him, I believe the economic and political tensions in the United States would be far more muted today. And things got much much worse since 2011. High frequency trading has gone parabolic and is now really the tail wagging the dog (the economy being the dog). We are yet to reap the bitter fruits of that harvest (check out my recent article When Skynet Runs Beauty Contests – Watch Out!).
Fetish of Liquidity
When short term trading rules the day, liquidity risk becomes extremely dangerous and financial economy requires never-ending stimulus to avoid liquidity collapse. A slight threat to take that stimulus away and markets throw a temper tantrum or something even worse, resembling a withdrawal of an addicted person. Another investing genius Jeff Gundlach recently held his much anticipated annual webcast and shared the following chart:
Yes, you read that chart correctly; central banks collectively own roughly $15 trillion of financial assets. That is almost the whole GDP of United States! And yet, as soon as the Fed starts raising the rates (from zero!) by a quarter of a percent, ensuing volatility causes screams and groans and panics.
This could not happen in a John Bogle designed financial market. Short term trading against which John Bogle railed so much, causes the liquidity fetish. This was best summarized by John Maynard Keynes (the most misunderstood and misapplied economist in history): “Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine of that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of ‘liquid’ securities. It forgets that there is no such thing as liquidity of investment for the community as a whole.”
It is sad that the utlra-short term financial mindset prevailed against the warnings of a man like Jack Bogle. RIP.