Joe Davis is Vanguard's global chief economist and also head of Vanguard's Investment Strategy Group, which conducts research on portfolio construction, develops the firm's economic and market outlook, and helps oversee Vanguard's asset allocation strategies for both institutional and individual investors. He is also is a member of the senior portfolio management team for Vanguard Fixed Income Group.
InvestmentNews senior columnist John Waggoner interviewed him in Washington, D.C., on Monday. In their candid chat, Mr. Davis addresses the U.S. and global economies, low interest rates, fiscal policy and emerging markets.
InvestmentNews: Is the economy moving fast enough to justify another interest rate hike?
Mr. Davis: Yes, but I wouldn't use the phrase 'fast enough.' The real question is, does the economy require the emergency measures that have been in place since the financial crisis seven years ago? We think we can be further from the zero interest rate bound. Typically, you have a cyclical acceleration of growth when the Fed raises interest rates. This cycle is different. Inflation will be well below the Fed's target: This will be the only period in our careers where inflation is what not where the Fed wanted it to be. We think a 1% Fed funds rate is probably the central tendency for the next several years. It doesn't mean we're super bearish on growth, because there's a bit less slack in the economy than one would think.
InvestmentNews: Why has the economy been so slow?
Mr. Davis: First of all, this has been a deleveraging cycle, and those usually entail slow growth. Secondly, we're comparing the economy to the wrong benchmark. The economic recoveries in the 1980s and 1990s had 3% growth, but those were periods that led to lots of consumer debt and leverage. If we strip that out, the recovery would have been 2% to 2.5%. It's not a new normal at all. It's what was left after the extension of leverage.
You have to go back to the 19th century to find a time when the trend of inflation was zero. Back then, too, there was a high level of innovation, but productivity was not commensurate with growth. The current period isn't unprecedented. There's some similarity with technology today and the spread of the use of electricity in the early 20th century. You have a low rate of growth and all this disruption across the board.
Some people are worried about
stagnation, but I think that's the wrong word. Stagnation implies no changes in the labor market, and the heart of that is the notion that innovation is over. I think that's categorically incorrect. We do have an extended period of slower growth, but that doesn't mean it's because of weak demand. It's not high debt, it's not low growth, it's not interest rates — it's the changing nature of work, and how that plays out will have profound implications for the future. We have to rethink what is retirement and what is full employment. Debating a 0.25 percentage point rise in interest rates seems comical in comparison. The biggest question won't be lack of demand, it will be the ability to fill it?
There are currently
five million jobs going unfilled — if we fill them it would get the unemployment rate close to 1%. There needs to be less talk on monetary policy and more on investment and structural reform.
InvestmentNews: Does this explain the global slowdown?
Mr. Davis: People agree that
China is slowing is a good thing. The best thing for China to do is to drop its growth targets. Their biggest risk is their fear of the business cycle. They do have a plan, and have been deliberate in executing their policy objectives. But every economy has its Achilles heel. If they drag their feet, they're increasing the risk that they become the next Japan and never fully revitalize.
The area we're most scratching our head on is Japan. They have implemented good monetary and fiscal policy, as well as structural reform. Maybe a more intangible element is the degree of risk-taking in Japan. When I've traveled, I get that sense of enterprise in China, but less so in Japan.
InvestmentNews: With a slowdown in China and the U.S., that doesn't sound terribly encouraging for emerging markets.
Mr. Davis: Some emerging-markets economies have not gone through any deleveraging, so their problems are structural, not cyclical. There are some countries, frankly, some that need a new business model. During the run-up, they benefited from China and the U.S. consumer. Those two engines are in reverse. Some countries have missed those windows to pursue those structural reforms, and they have to do some heavier lifting. They have to make some adjustments.
InvestmentNews: Where do you stand on barbecue?
Mr. Davis: Well, I got my Ph.D. at Duke, so I like North Carolina, vinegar-based barbeque. But I actually prefer more ketchup-based. And I think a good brisket is as good as ribs.
