PREFACE: SKAGWAY, JACK BOGLE, AND MEGATRENDS

COMING INTO VIEW

At 3:30 p.m. on August 16, 1920, a de Havilland DH-4 cleared the Coastal Mountain Range and descended toward Skagway, Alaska-a port town established during the Klondike Gold Rush. The Daily Alaskan chronicled the bi-plane's arrival: "There was surely some excitement in Skagway yesterday when the shout went up that the aeroplanes were coming. The first one arrived at three thirty in the afternoon and was seen by almost everyone in town and it was certainly a beautiful sight."

In a black-and-white photograph preserved by the National Park Service,1 men and women stand frozen in a field beyond Skagway's wood-framed buildings, their heads turned skyward (see Figure P.1). What did these pioneers think as two tons of wood and steel clattered across the sky in this remote corner of North America? Many had likely read about the Wright Brothers and "flying machines," but to see one with their own eyes must have been a revelation.

As a child, I would stare at this photograph, mesmerized by the airplane. I could almost feel the rush of wind from the airplane's wings as it passed over my head. But now that I'm older, I no longer stare at the airplane. Today, my eyes gravitate toward the people in the crowd. They were ordinary men and women, living in a gold-rush town clinging to relevance.

That day, in the shadow of the jagged mountain peaks, the future came roaring into view. Were they filled with excitement or fear? I imagine they asked the same questions that we ask when we glimpse the future. How will our lives and fortunes change? Will our children's future be better or worse?

Figure P.1 Skagway residents witness the first airplane passing over their remote port town, 1920.

SOURCE: National Park Service, Klondike Gold Rush National Historical Park, Candy Waugaman's Collection, KLGO Library TA-8-8917.

A CENTURY OF TRANSFORMATION

History answered these questions for the residents of Skagway. The de Havilland DH-4 epitomized innovations that transformed the U.S. economy. Over the next century, some of these Alaskans might have experienced once unimaginable possibilities-a trip from the farthest reaches of western North America to New York City in hours rather than weeks; washing machines, dishwashers, and ovens and cooktops that eliminated much of the drudgery from household chores. And by 1969, some of those same descendants of Skagway's pioneers watched astronaut Neil Armstrong walk on the moon, a moment perhaps as unimaginable to them as that first airplane was to their grandparents.

Material progress in the United States has multiplied since then. In 1920, the median family income was less than $25,000 in today's dollars. A newborn male could expect to live to age 54, a newborn female to 55.2 A century later, the median family income is $74,580.3 Male life expectancy is 74, 80 for a female.4 And unimaginable possibilities have multiplied, from autonomous vehicles on the road in San Francisco to NASA's plan to send astronauts to Mars in the next decade.

GAZING UPWARD AGAIN

As we gaze toward a future that feels both exhilarating and uncertain, do we see our generation's de Havilland DH-4 coming into view to transform our own work and lives? Artificial intelligence (AI) is a candidate.5 Will AI disappoint, or will it be the invention that propels our economy and society into a new era? If it is to be the latter, should we be excited about the remarkable feats that AI might soon perform? Or fearful that this rapidly developing technology will automate and eliminate our jobs?

Even if AI delivers extraordinary breakthroughs, there is still the real possibility that technology will not rescue us from the headwinds the economy faces. It will have to contend with slowing population growth, rising geopolitical and trade tensions, and building national debt. These forces-a complex mix of headwinds and tailwinds-will reshape the economy, our jobs, and the financial markets in the years ahead. As investors, how should we best navigate this uncertain future? Should we prepare for the best, or brace for the worst?

Most days I feel like those Skagway pioneers, gazing up at the sky and wondering how the future will affect us all, our livelihoods, and our financial future. But unlike those Alaskan pioneers, we have tools that they didn't-data, models, and the benefit of hindsight from technologies of the past-to guide us in understanding what the future may hold.

MOVING BEYOND OPINIONS

Opinions about our future economic prospects, even informed ones, are not enough to navigate an uncertain future. Just as a patient expects a doctor to discuss the odds of success of a medical treatment when an illness is diagnosed, investors should expect the same range of outcomes when planning for their financial future. An effective strategy must be grounded in a range of outcomes, not conjecture on only one path, and it must account for the interplay of powerful forces like technology, demographics, globalization, and debt that shape economies and markets.

This book introduces a data-driven framework designed to do exactly that. The framework-detailed in the Appendix-provides probabilities of the most likely scenarios that will shape our economic and financial future, primarily focusing through the year 2035. By connecting the forces of technology, demographics, globalization, and fiscal debt-what I call megatrends-with the building blocks of economic growth, inflation, and investment returns, this framework is intended to go beyond speculation.6 Acknowledging the uncertainty of our future, my aim is to offer actionable insights for anyone seeking to build a resilient investment portfolio in the years ahead.

FROM SKAGWAY TO LUNCH WITH JACK BOGLE

My focus on these megatrends is the result of a conversation with Vanguard founder Jack Bogle. In 2004, I met Jack for lunch in the "Galley," the cafeteria in Vanguard's nautical lexicon. I was new to Vanguard, hired to generate insights on the economic outlook for our investment teams and clients. I braced for a debate about the Federal Reserve Board's recent rate hikes or whether next quarter's GDP would exceed expectations.

We discussed none of this. Jack was quick to remind me why I had secured a Vanguard key card and cubicle. "What I need from economists, and what our clients need," he said, "is a framework to determine the long-run earnings and dividend growth for stocks and interest rates for bonds." Jack was talking about the building blocks of returns and the forces (i.e., megatrends) that shape their outcomes. Jack had long advocated for a simple yet elegant formula for predicting long-run (which Jack often defined as 10?years) stock and bond returns:7

Decades earlier, Jack had noted in his classic 1993 investment book, Bogle on Mutual Funds, that using the three components of stock valuation shown here "has led to remarkably helpful predictions of long-range returns" (p. 247). Still, Jack understood that forces like technology and debt shaped these variables in ways that his formula couldn't capture.

As we finished lunch, placing our plates on the conveyor belt to the dishwasher, I told Jack that I would begin working on extending the framework he wanted, a more dynamic approach that would account for the push and pull of megatrends. "Keep me posted," he said. I've been working on it ever since.

PROBABILITIES AND HUMILITY

This book is the culmination of 20?years of economics, investment, and asset allocation research. It integrates insights from three different economic disciplines (business cycles, endogenous growth, and asset pricing) and real-world experience into a unified framework, the Megatrends Model. This framework has benefited from discussions with policymakers, Federal Reserve researchers, business leaders, leading universities, and some of our 50 million clients. It is my hope that the end result will help all investors-financial advisors, investment consultants, self-directed investors, and endowments-build portfolios consistent with their objectives.

This book integrates megatrends with the financial markets to present a range of possible future outcomes, rather than a view of simply one future. This approach to forecasting is an asset, not a liability. Indeed, in his best-selling 2012 book The Signal and the Noise: Why So Many Predictions Fail-But Some Don't, Nate Silver rejects such singular "point forecasts" in favor of forecasts that present several scenarios, with odds (or "probabilities") assigned to each. Probabilities are often displayed in sports or in games of poker and chess in trying to handicap outcomes, thus proxying for real-world uncertainty as events unfold.8 Annie Duke, a champion poker player and best-selling author of Thinking in Bets (2018), shares a similar perspective. By estimating the potential performance of stocks and bonds in one scenario versus another, an investor can make better decisions based on the expected values of those different outcomes. By linking megatrends with investment recommendations, this book is intended to bridge books that focus...