Newsroom. Abigail it is great to be here on this selloff day. We have the three major averages sharply lower. That dow and s p 500 near special lows, the third day of declines. On pace for weekly declines, breaking the complacency for the u. S. Equity averages. Over the last few months, the s p was on day 43 of not making a 1 move. That has been broken. There are technical reasons the downside could continue. , thisk in the bloomberg is a twoyear chart of the s p 500. It is traded in a range. The orange oval is the range of complacency. That thisreasons could break toward the downside or to the bottom of the range. There could be more to come where todays risk off. One reason for the risk off oil confirming the risk off tone with oil down 2 on the session, paring gains. Investors seem to be reconsidering the plunge in stockpiles reported earlier, saying it is a oneoff due to a storm. The majors down, including chevron and show. The s p 500 energy index on pace for the worst decline since the beginning of august. It is a risk off day. Matt is not only crude oil rising, other National Resources are affecting the market. Trading we have steel lower. Iron ore is down five days in a row at an 11 week low, dragging on some of the u. S. Steelmakers, including allegheny we canogies, u. S. Steel, see big plunges. U. S. Steel and ak steel are on pace for the worst declines since june. A weakness for markets in the u. S. Matt lets check in for the bloomberg first word news. Mark the house of representatives voted to let families of 9 11 victims sue saudi arabia. Lawmakers cleared the bill a short time ago. President obama signaled he will veto the legislation over concerns of exposing americans overseas to legal risks. 15 of the 9 11 hijackers were saudi arabia nationals. There is probably enough congressional support to override the president ial veto. Hillary clinton will mark the 50th anniversary of 9 11 with a visit to ground zero. Hillary clinton was the new york senator in 2001 and was not scheduled to visit the landmark. Her campaign notified officials she would attend. Warned that russian interference with the u. S. Election is unlikely. He spoke to the International News network and said democrats might be putting out stories of russian interference. He has been criticized for his praise of russian president vladimir putin. American officials downplaying chances of reaching a ceasefire in syria civil war. Secretary john kerry met in geneva with his russian counterpart. U. S. Officials suggested secretary kerry would not go to switzerland unless a deal was imminent. Half a Million People have been killed in fiveyears of fighting in syria. The flooding that damaged 110 thousand homes and 110,000 vehicles in louisiana cost 15 billion according to a risk model income forecast. 80 of the homes lacked insurance. John bel edwards is calling on the u. S. Congress to approve 2 billion in aid for his state. Day, news, 24 hours a powered by 2600 journalists and analysts in more than 120. Ountries, i am Mark Crumpton this is bloomberg. Scarlet the vanguard 500 index was formed with 11 million in assets. In 1976 it seemed like a crazy idea. Today, jacobo will is having the last laugh. It is worked three it is billion5 dollars. Joining us is the one and only job global. Jacobo will. Jack bogle. The numbers, when it comes to investments are staggering. Active funds have seen 600 billion in outflows. Bill ackman recently broke recently referred to an index bubble. What caught you by surprise . I guess its strength. Im disappointed how long it took. 40 years is a long time. It took until the middle 90s. We started in 1975. Middle 90s until indexing caught on, then it caught on with a flourish and dominates the industry. The industry is in need of creative distraction for destroying old ideas and making life difficult for asset Money Managers with high cost. Active Money Managers at low cost can do a little better than that. Matt there has been criticism in part because of that success. A note, an analyst wrote saying index investing is worse than marxism. [laughter] matt i am sure you have heard these criticisms before. Index investing does not participate in the price setting mechanism. How do you feel about that accusation . Jack well [laughter] a silly attempt to get across an argument that is terribly flawed. Willarxist article, if you , says any field of endeavor that attracts value from society is doomed to fail. Indexing in general should create a Mutual Fund Industry adding huge amounts of value to our society, to investors. If they do not understand that, im not sure what they do understand. It is a funny article. It is long, detailed, im not sure how many readers could understand all of those formulas printed page after page. The comparison with the financial business to the Mining Industry struck me as absurd, until i realize that they are both extracted industries. The Mining Industries taking gold and coal and the financial industry extracting value from the clients it serves. Scarlet we know the rise of passive investing is a threat to Company Specific bottom of research. Does it provide value, what is it . How should they adapt to the new world . Jack you are right. Research, it does not have the bias of south side efficientcreates markets. The issue is at what point is indexing making the market less efficient . The reality is that you could get right now, indexing is 30 of the total market. You could get 50 or 60 before anything would be noticed. The index moves a certain portion of the market for trading activity. Might make it easier for active managers to win. Or, so it is alleged. When the market is less efficient, it is easier for the bad guys to win and for the guys to lose. Have to balance each other out. On the simple mathematics. It is not seem to have dire effects so far. The reality is that year after year, in terms of performance, investment returns, indexing outpaces active managers. 8 for the s p 500, 6 for the average largecap growth fund. That is huge. 6 compared to 8 . It has to do with taking cost out of the equation. Those costs are Fund Expense Ratios and cluster fund takeovers. When you dont know how much that is, you know it is large, but if you take those two numbers together you will take 2 . Should be the margin by which and s p 500 fund reads the average largecap fund. . 99et for active funds, dropping to . 70 today. Matt a story was written about the vanguard affect a couple of weeks ago. He estimates that you and vanguard have saved investors about 1 trillion over the last four decades. Do you reckon that that is a fair calculation . Jack i think that it may be understated. They compare our expense ratios to the average of our competitors. The fact that we are not trading , a huge cost saving, but they do not take the savings each year and enter return on the accumulated savings, the cost of capital. Return on the money that we save investors every , you will20 years find a huge staggering number. Whether one trillion is the right number or 1 trillion and a half, i would not know, but it is very big and good for the investor. Matt let me get back to a point you made earlier where you say hassan investing, were you investing investing is part of the market. What about individual investors . Is there a place for active investing in some portion of regular investors Retirement Savings or funds . Jack for the individual Investor Trading stocks is condemned finally to lose. He shoulders the emotions of the market. He has a marketplace that is probably more informed than the typical investor. I do not see that the individual can do very much that will make him any better or worse. There is, however, a gambling effect. Investors love to gamble and play the lottery. My own belief is, i do not do this myself i would add, but money in theour low risk safe account, longterm , real money, and up to 5 on the funny money account. Do it you want with the 5 and you will be fine. Everyone sit a while, every five years, look how you are doing with that 5 . If it is not doing as well as the remainder of your report olio, the serious the portfolio, theur real money account, you would question if that is a strategy to keep following. Scarlet talk a little bit about the kinds of risks passive investing has created. It has cut the cost of investing and democratized the financial markets, but some argue it created increased correlation within the stock market, between stocks and other asset classes. What do you think . Do canm doubtful to her prove a lot of things with statistics that are not true. Missouri on the fact that these effects exist. Ive never seen documentation that establishes that to my satisfaction. Im a tough critic, but i do not think it is a good idea. I would add, i do not know less correlation or more correlation among the stocks in the market is good or bad. Im not sure it makes much difference. Matt what you think about what we are seeing . Bonds and stocks are down. This is the correlation we have in assett, even more classes. Everything seems to be moving in the same direction. You would normally think there is a flight to quality, people are piling into the safety of u. S. Treasuries. Why doesnt that work anymore . Jack that is a good question. Im not sure i am qualified to answer it, to be honest. Negative Interest Rates, which we see around the world, not in the u. S. , seem to make no sense at all. That cannot be a permanent condition. I do not think the correlation between stocks and bonds is meaningful. The market does peculiar things for sure times. Deep down, i believe this is just one more of them. Haveet longerterm, we seen modest returns for a couple of years. What are you telling people that need to put kids through college and need to fund their retirement . How do they plan ahead with financial banks so aggressively easing . Jack i have reasonable a reasonable expectations formula i have used for 25 years and it has worked almost perfectly. Expectations has been almost exactly the same as returns delivered by the s p 500. It is a very simple system. You have the dividend yield that is 2 going back a long time it was 4 or 5 . That is a law suggesting no returns in the future. Earnings growth is 5 , i think that will be tough in the future. Maybe we can do 4 . The first two are what i call investment debt aspects of the investment return. The second is specular return. What will people say for what will people pay for 1 worth of earnings . Historically, 16 times earnings. Today it is 24. I do not thank you will get anymore mileage out of a rising price earnings multiple. You are looking at lower returns in the stock market up to 4 to. before costs are taken out the typical Mutual Fund Investor could get as little as 2 per year. He wants to be very careful for lower return markets. Matt you do not see any more multiple expansion boosting , and, im assuming from what i have read, you do not see a pickup in earnings either . The u. S. Corporate earnings situation is not to be viewed optimistically from your point of view . Forecast thet future. I can make judgments, reasonable expectations. It seems the handwriting is on the wall for lower returns. Fors certainly on the wall lower price earnings multiples. Market can that, the go into a lunacy phase and 40 earnings at the high. I cannot say that will not happen. I guess that one would say you do not want to be near the stock market when it does. There is no more room. Matt why will not corporate earnings pickup . Vastlyor market is improved. Around the world it is improving. The consumer seems strong and ready to spend. Outlook,l, most of the people predict the outlook. 2 the economy, looking at 2. 5 for gdp most growth. 96 wth has been at corporate earnings have a 96 correlation with gdp growth. A high correlation. Corporations make money when the economy is good him a less money when the economy is growing more slowly. For not see the case substantial gdp. It would be ok, but hardly sensational. It will be a tough slope to get to 3 gdp. Scarlet you mentioned negative Interest Rates make no sense. I know you like to invest based on risks you understand. Which of todays risks, in the u. S. Or outside the u. S. , do you struggle to get your head around . Isk the most obvious one the political situation in the United States of america. I find it deeply worrisome, unpredictable, unfathomable about what might happen come election day and what the consequences might the. Might be. The World Economy is not doing as well as the u. S. Economy, and i do not see that europe and japan, may be the emerging but i doill do better, not think europe and japan will be able to grow as fast as we do. Those are risks. There is always the risk of nuclear war get a view not think it is a likely risk, but we live in a very fragile world. Someones finger on the nuclear button, in moscow or washington, d. C. , is something im no ability to verdict. I hope that same heads will prevail, but you cannot be sure. There are a lot more. Global warming seems to be accelerating, it certainly is in philadelphia today. That will be a big problem, a costly problem. If it continues in this direction. There are those that feel it will come on us in a serious way more quick way than anyone anticipated. Matt what about market risk . Over your career we have seen so many incredible changes, some good, some not so much. There has been a rise in the use . Andfs, what do you think the use of computer algorithms and robo advisors, which i would guess would lead to more index investing or passive investing. How do you view that stuff . Jack robo advisors almost universally use index funds and Vanguard Index funds are theyre not making big bets on market sectors or individual foreign countries. Withare basically going the total market as a part of the stock allocation. I think that is very wise. Theetf thing, every day standard 500 etf is the most widely traded, turning over 4000 a year. I am the person that thinks a 5 turnover is pushing the envelope. Etfs are heavily traded. They have lots of perfectly good uses. Etf is dominated by traders. In the long run, traders are a gift to wall street, and by definition, not a gift to investors doing the trading. Softet with the rise of beta and faster form etfs, we talked about the vanguard effect at work. What would you tell hedge funds that charge high fees . What is coming to them in the future . Jack what has happened to hedge funds, deteriorating returns is a product of the fact there are smart people running these things. I mentioned one of the leaders , but there areqr more of them. There is only so much undervalued security in the market, price discovery to take place. Economically, the more participants in the hedge fund area, the more difficult to differentiate yourself in a positive way. I think that hedge funds, i will say this clearly, no place in the portfolios of individual investors. They are too unpredictable. The spreads between the best and worst, in the last three years, maybe, 100 or 200 percentage points, it is amazing how much of a different. They are expensive here they are a managers dream, but for many, and investors nightmare. Scarlet thank you. Jack bogle for sharing your thoughts on everything from hedge funds, the political situation, the rise of correlation between classes. Joining us from valley forge, pennsylvania. Matt coming up, where are the Growth Opportunities right now in etfs . We will discuss that pure and we talked a little about etfs. I find it fascinating that he thinks robo advisors are a fantastic idea week as they use index funds. Mostly passive investing and vanguard funds. You would think that is why come he is talking his own book. Jack bogle is not a huge, megabillionaire like people that started other big Mutual Fund Companies like the Johnson Family at fidelity. It is a mutual fund. They did not ever have the big ipo to cash out the executive. It is interesting. He seems to be truly concerned about saving the investor money and making markets more efficient. Scarlet the focus on cost is good thatessive speaks of his stature in the Mutual Fund Industry, particularly or index fund investing. Gundlach made a reference to one of our favorite functions on the bloomberg. The world Interest Rate probability. He referred to this when he was discussing the Federal Reserve in the timetable for raising rates. Lets listen to what he told his investors. Will be whent time it is below 50, maybe 45 or 48. They will say, we cannot be replaced by this work function. Scarlet he said 40 or 45. Where are we . Matt 32 . Yesterday, when he said this, we were on with Joe Weisenthal and it was 28 . Has gone up a little. Very interesting looking at the 10 year yield, which has continued to climb. I think Eric Rosengrens comments chains perspective. Scarlet and people are wondering if she will move the needle. We have more coming up with markets and etfs in the next 10 minutes. This is bloomberg. Scarlet live from bloomberg World Headquarters in new york, i am scarlet fu. I am matt miller. This is bloomberg markets. Lets start out with headlines from first word news. Mark crumpton has more. The United NationsSecurity Council has scheduled an emergency meeting on north koreas latest nuclear attacks. Expectingmbers are discussions on further measures, including sanctions. The 15 members are expected to meet behind closed doors late today. The council strongly condemned the latest missile launches and hinted at quote significant measures if they refused to stop the test. What could be a pivotal phase of the present election begins today in north carolina. Allowrst state to balloting by mail. Crashed off a bridge in eastern india today. At least 21 people were killed and another 30 injured. Authorities say the driver lost control of the vehicle while talking on his cell phone. It plunged nearly 50 feet into a ditch. India has the highest road death toll with over 110,000 people die each year in accidents. Nasa is celebrating the successful launch of a rocket that will have a rendezvous with an asteroid.