They Built a Retirement "Bomb"
Jack Bogle built the device. The industry connected everything to it. This month... the Treasury put it in the bassinet.
Dear Fellow Traveler:
There is a massive device built decades ago that worked exactly as was intended…
A massive strike into the heart of the global economy… Most devices do half of what they promise and are never brought up again. This one is different. This one did the whole job, and then some, and then a lot more…
While it’s easy to think that this device is just another weapon of war…
This device was the index fund.
Tomorrow, I’m covering the retirement industry in my weekly address called What Are We Missing. And using a timeline, I’ll show how this index fund went from a rescue tool for regular workers into a machine we are now handing, wrapped in ribbon, to newborn American children…
If you are still trying to understand how and why the market behaves like it does…
Please tune in… Here’s a preview…
Understanding The Device
About 50 years ago, an extremely serious group of men decided to build a weapon capable of destroying the American mutual fund industry.
The target deserved it.
Managers charged a fortune and lost to the market on an annual basis…
I’ve heard the takes of brokers that sold financial garbage with a handshake, and smooth-talked American workers into trading shares in General Electric, Exxon and a regional bank and for a 2% annual fee.
You’d have thought these brokers had a great track record of crushing the markets…
They didn’t.
So, then a man named Jack Bogle built a device.
The very first index fund launched in… 1976.
This thing was cheap, democratic… and what’s the term I’m looking for…
Unkillable, I suppose.
This thing didn’t try to beat the market…
Why? Well, it became the market, and charged almost nothing for the exposure.
The industry basically accused this thing of being Un-American… and critics of Bogle and his Vanguard fund called the whole experiment “Bogle’s Folly.”
These critics believed that settling for average was surrendering to the markets…
But Bogle had the last laugh, and this device detonated in slow motion… over 40 years, it turned out that owning that device at a tenth of the price of professional management beat the very active managers that cursed it (and charged full price).
The salesmen lost as the carnival and extraction closed down. Ordinary workers were able to keep more of their own returns… all for the price of an index fund.
This device worked as the archichtects planned…
And then?
America Goes “Full America”
What does an industry… and a country… do when something really works?
It mimics it. It aligns with it. It connects it to almost everything possible.
We wrapped the pension system inside of it, and wired it to almost every paycheck that offered a retirement plan. We created laws that blessed the device as the default fund category, and instituted automatic enrollment in bi-weekly payouts. We made it so that employer matching programs for retirement funds became part of compensation, incentivizing American workers to put 6% of their paycheck into the device.
We then… of course… linked advisors, trustees, benefits departments, options dealers, and federal policy makers to this machine.
In a world where everyone is now an expert on “Democracy…” it’s important to remind everyone that NO ONE voted on this systemic adoption. We didn’t hold ribbon cutting ceremonies or bring people out on the baseball diamond ahead of the All Star Game to tell Americans just what the hell was going on with their retirement money… (Although Michael Green and Andrew Lapthorne have been on top of this for a long time…)
We had laws, payroll systems, and decades of quarterly decisions that all made sense one at a time… until we came to find that all of the incentives and all of the decisions ultimately led to a sudden realization of what the hell we’ve actually built…
(Narrator: Everyone was working toward building a time bomb…)
Now, the moment that made the entire thing self-feeding wasn’t the invention of the fund… It was just the physics and incentives of decision making. The moment that mattered was out of the marriage between the target-date fund default… and the automatic enrollment.
From that morning after… every paycheck has arrived on schedule, buying with pure price agnosticism the index, all while this index bought America’s largest companies at their existing weights based on market capitalizations.
Look at the mechanism… Paychecks arrive, and the contribution strikes the target-date fund.
Then the target-date fund strikes the index.
And the index strikes the giants, according to their existing weights.
This chain reaction is not powered by conviction.
It is powered by payroll.
Robert Oppenheimer needed uranium.
This device runs on Fridays.
This is a Contained Chain Reaction
For years now, every institution in this country has repeated the same official sentence, and I want you to listen to it get less true every time you read it.
The ten largest stocks now make up close to 40% of the S&P 500. This is the highest concentration in the American stock market since the mid-1960s (since the crash of the Nifty Fifty).
According to Lapthorne, professional money managers now hold companies they privately believe are overpriced, because being underweight the giants is career risk.
The target-date funds will keep buying… all while these companies repurchase their own shares.
Momentum systems and mechicaly buyers follow the move. The options dealers adjust their hedges (which is part of another central nervous system for the market as options fuel directional movements). Oh, and the Fed keeps bailing everything out...
Somewhere, a regular guy… let’s call him James… he just raises his hand and asks what happens when millions of retirees stop putting money in and start pulling it out.
He is told, politely, at a benefits meeting that such a scenario falls outside today’s containment presentation.
Filing an Objection
There have been warnings before about this… About what comes…
And the cleanest concern came from the man who created the index fund.
In November 2018, months before he died, Jack Bogle wrote an essay in the Wall Street Journal titled “Bogle Sounds a Warning on Index Funds.”
Bogle had spent 40 years building the cheapest, most democratic financial product ever given to ordinary Americans. He wrote that if current trends continued, a handful of giant fund complexes would one day hold voting control of almost every large American corporation (cough… cough… BlackRock).
He then wrote a sentence that should be put on our money…
“I do not believe that such concentration would serve the national interest.”
The creator objected publicly… much like Oppenheimer warned about the nuclear bomb… The industry was corporate-polite to Bogle, and valued his scientific contribution. Then, they just kept feeding this device…
And now… they’re going to feed it to our kids…
Here Comes the Kid’s Fund
On the Fourth of July, the Treasury launched Trump Accounts.
I’m going to be fair before I swing… For qualifying children born 2025 through 2028, whose families opt in through IRS Form 4547, the government drops $1,000 into an account. Families, employers, and states can add up to $5,000 a year.
The account is locked until roughly age 18.
Yes, owning stocks matter… and compounding matters, and this is a great idea to help people start investing at a very young age. Of course, a cheap index fund is genuinely better than some expensive garbage stuffed with hidden fees.
Handing a lower-income kid a real asset at birth could help a family build wealth it would otherwise never touch. Plus, these are private, opt-in accounts.
But let’s get to what happens next…
You shouldn’t be surprised that the default investment for a Trump Account is…
An S&P 500 fund.
The statute allows any primarily-US-equity index fund, but the launch default is the SPDR S&P 500.
Somewhere tonight, in a maternity ward, a nurse hands a family a form.
Sophie is born at seven pounds, four ounces. This child can’t control her neck, but we have been good enough to ensure that she is exposed to benchmark risk immediately.
She doesn’t know yet that her hands belong to her. But the account has already been arranged to purchase the largest companies in America, at their existing weights, no questions taken.
We’ve decided to give children… benchmark risk.
Near Zero is Not Zero.
At Trinity, the night before the Atomic Bomb test, some of the physicists took side bets on whether the device would ignite the atmosphere and end all life on earth.
The dominant view was that the chance was near zero. That figure was thematic more than measured, and the formal paper on it (LA-602) was not published until after the test.
But the wager was real, and the phrase stuck.
We have our version of that calculation. We have models for retirement withdrawals, glide paths, actuarial schedules and simulations showing that the system can process the coming transition in an orderly way.
The largest generation in American history is preparing to move from contributing to withdrawing, on a schedule you can already see coming. The assumptions say the machine can handle it. The official answer is that the risk is manageable.
Which is not the same thing as zero.
This Saturday on What Are We Missing.
Saturday’s episode is called “They Killed Retirement Investing and Replaced It With the Index.”
It runs the whole machine end to end. Set your calendar… It will arrive in your inbox at 10:30 am.
Stay positive,
Garrett Baldwin
"It is powered by payroll.
Robert Oppenheimer needed uranium.
This device runs on Fridays."
LOL!
If I remember correctly, the total number of persons in the labor force is down by 1.5 million people in the US since last December. That's almost entirely due to retirements. The total population in the U.S. is forecasted to peak in 2030 now.
At the same time, I read that existing workers are putting in a smaller percentage of their income than they have historically as a result of needing more of their money today to cover the rising cost of living.
So, fewer and fewer people are going to be bearing more and more of the weight to not only keep a bid under stocks, but to keep the shelves stocked at the local store.
That sounds inflationary for services and deflationary for assets. Goods inflation will probably stay stable. But Lord help you if you need to hire a mechanic or an electrician.