Quick links: Breaking Election Invest Bitcoin Syria North Korea Startups Scandal
Barrons / Biz - Money

Bogle on Bubbles; Frankel’s Response

John C. Bogle reacts to Jeffrey Frankel’s essay on the VIX surge. Frankel responds.


John C. Bogle. File. Photo: Bloomberg News

To the Editor:
I’m not sure how a mere A.B. from Princeton (’51) found the temerity to challenge a Ph.D. from MIT (and a professor at Harvard), but an error in the recent Other Voices essay “VIX Surge Is a Wake-Up Call for Investors” (Feb. 24) is so egregious and so pervasive that I just can’t help myself.

Jeffrey Frankel wrote, “In a speculative bubble…everyone buys because everyone else is buying…[then] the bubble bursts, and everyone sells.” Really?! The simple, self-evident fact is that when “everyone” is buying, someone else is selling, dollar for dollar. And when “everyone” is selling, someone else is buying. This is the eternal reality of the financial markets.

Yes, I realize that my simple statements are not precisely correct, but they are surely 99%-plus correct. I’d also, again humbly, take issue with the conclusion that “we can say with confidence…that the abnormally low financial and economic volatility of last year is over.” I’ve been in this business for 67 years now, and I’ve been well served by my unwillingness to say anything about short-term market behavior with confidence.

But I did agree with the thrust of this well-reasoned essay.
John C. Bogle
Founder, Vanguard Group
Valley Forge, Pa.

Jeffrey Frankel responds:
First let me say, you are a hero of mine. That isn’t something I have said lightly…or ever. For 35 years, I have put my spare savings into Vanguard index funds, and done very well with it. As a professional economist, maybe twice a decade I form a view that some major market is out of line…my response is to write about it, but to shift only about 5% of my portfolio.

It seems to me that I have usually been right, judged at a two- to three-year horizon. But in giving general advice to others, I am a true believer…diversify in Vanguard index funds and leave it alone.

Now to your questions. 1) You are right, of course, that for every buyer there is a seller…it is the price that adjusts. The language that you identified was knowingly loose, for journalistic purposes. I would never use those words in a more scholarly paper.

2) My language on the end of last year’s low volatility was also shorthand. Word limits, you know.

It stood for two propositions. First, I am willing to bet that volatility from here on will be higher than in 2017 (both realized and the VIX). Second, we already know for sure that the period of continuous low volatility ended four weeks ago!

Thanks for your comments.

Jeffrey Frankel
Professor, Harvard University’s Kennedy School of Government

ADS