John Bogle, founder of The Vanguard Group, says the recent temporary plunge by the stock market points to the need for more regulation.
“We’ve been operating in an illusion on Wall Street,” he says. “Speculation has been in the driver’s seat over long-term investment. Capitalism went out of control,” he told Fox News.
Even former Federal Reserve Chairman Alan Greenspan has acknowledged that free markets didn’t work during the financial crisis, Bogle says.
“We have to have regulation,” Bogle says.
But will the cure be worse than the disease? “I don’t see how it can be,” Bogle said.
“The bank lobby is down there in full force. It will keep us from doing as much as our congressmen want to do. That may be for better or worse.”
Derivatives represent an area where more regulation is urgently needed, Bogle says. “We need regulations for transparency of derivatives and exchanges for the derivatives market.”
The high-frequency computerized trading that contributed to the temporary stock plunge also must be policed, Bogle maintains.
With all the competing stock exchanges, “Transactions can go on in one without linkage to the other,” he notes. “Massive amounts of trading don’t have anything to do with investing at all.”
Real investment is owning a stock for the earnings growth and dividend payments that corporations provide, or a bond for its interest payments, Bogle says.
“All this shuffling of paper back and forth at an increasing rate serves no economic value at all, except for those croupiers – our friend down on Wall Street.”
Bogle says now isn’t the time to abandon the stock market. While returns were negligible in the last decade, that was natural after the boom years of the 1980s and ‘90s, he explains.
But this decade should be very friendly to stocks.
While the price-earnings ratio is unlikely to rise above its current level of 20, dividends are running at a rate of 2.25-2.50 percent, Bogle says. And corporate earnings are likely to increase 6 to 7 percent a year this decade.
Put that together and you get a conservative annual return of 8 percent for stocks this decade. That’s almost double the 4.5 percent you’ll earn for a mix of government and high-grade corporate bonds, Bogle says.
Not everyone is bullish on stocks.
Rising U.S. interest rates and continued debt bailouts around the world will send the Dow Jones Industrial Average down to 4,200-5,000 by June 30, 2011, says John Lekas, chief executive of Leader Capital.
“What’s the next bailout?” Lekas asked on CNBC. “Are we going to give China $6 trillion-$7 trillion?”
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