00:00:00
Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
00:00:07
Speaker 2: Kevin Gordon, who's been on board this bull market, joins US now had a macro research strategy at Schwab Center for Financial Research. They have Isabelle. They have in their offices actual like Vinyl.
00:00:20
Speaker 3: Really he queues up the led Zeppelin.
00:00:22
Speaker 4: You have to have a.
00:00:23
Speaker 3: Field Saunders, I love buried down here.
00:00:26
Speaker 2: If you're talking to Michael Dharta yesterday, you say the most important data point is six and a half percent nominal GDP discuss this boom economy.
00:00:35
Speaker 1: I think it is the most important because it's very much at the center of the discussion around what's going on in the treasury market this week. And when you think about the underlying fundamentals of the economy, you know, six and a half percent you over your growth, and nominal GDP is you know, I think a very sort of very indicative, of course of what we're seeing in terms of the AI boom. But I think also in the context of inflation as well. You know, you can't really get down to two percent unless you see sort of the greatest productivity boom. Ever, so it's not a bad thing. I don't mean that in a bad way. But I think that to the content, you know, to the point of this sort of booming economy and the resilience that we see in the US, we have sort of entered this new normal where it's now more normal to see nominal growth of that kind versus what we saw pre pandemic, which was much slower than six and a half percent.
00:01:22
Speaker 4: I want to talk about the bond market because Tom and I earlier in the show we said that is the big story of this week. What did the market learn from the bond moves and the best input, so to speak, and it's rapid reversal. Is it that skeptical about this move? I mean many people have called it the band aid, just a band aid really, but.
00:01:38
Speaker 1: No, I mean, I think that's probably the right way to think about it. You know, the sort of duct tape on a leaky pipe situation where they can you know, that can only last for so long and in terms of stemming some of the you know, some of the drippage there. But I think that the whole discussion around you know, higher deficits and the fact that you know, no one's really doing anything about it on either side of the that's been a theme you know, and a feature of the US for so long. But that in combination with this structurally higher growth backdrop that we've been in, plus the fact that you have STICKI your inflation, all of these elements fuse together and you get a higher for longer interest rate world and it's very very hard to pull down yields in that environment, especially of course at the long end. You also introduce I think another interesting dynamic, which I mean to be a fly on the wall right now for any of the FED meetings and discussions. It would be so fascinating because you do have a little bit of this vicious circle dynamic at play. We're on the one hand, someone is sort of actively trying to, you know, pull down yields or do what they can to stem the rise. But on the other hand, you did have FED check Kevin Warsh sort of take some comfort in the fact that the long end had risen and it was sort of quote doing the fed's job for it. So that dynamic, I think it'll be interesting to see if he addresses it at all in Jackson Hole. But I think over the medium term, to see how those kind of combat each other, that'll bet to me, I.
00:03:01
Speaker 4: Would love to go to Jackson Hole and where a Jackson Hole's outfit. I love having you because then you can talk all acid process. Why didn't stocks respond more to Washington signaling that it wants easier financial conditions?
00:03:14
Speaker 1: Well, you know, I think, you know, in terms as powerful as signaling might be, and we've learned that, you know, over the past couple of days, it isn't as powerful because of the reversal that we saw on yields. You know, we've been in this environment and we're we're we don't have too much high conviction these days because it's it's really.
00:03:29
Speaker 3: Hard to do so.
00:03:31
Speaker 1: But what where we do of higher conviction is the fact that or the feeling that we have sort of exited definitively this Great Moderation era where you had this harmonious relationship between the stock market and the bond market, where when yields were going up, they were responding to positive growth impulses. Stocks were also rising posts pandemic for most of that time. Most of this cycle, that relationship has slipped into negative territory. So that means that ALLOSEQL, which is of course never the case. But when yields are rising, that's putting downard pressure on next but he's and then vice versa, and you've seen that play out this week almost it's happening again today. You know, if fields are upstocks are down, vice versa. So that's not to say that if fields continue to go higher a year from now that the market will be the stock market will be lower. That's certainly not the case. If anything, when you get these more aggressive moves in yields, that's when you sort of had that reset period for stocks, the crush America.
00:04:20
Speaker 3: And is Friday. Kevin Gordon, with his years with Charles Schwab.
00:04:23
Speaker 2: Yeoman's Duty reappearing today. He's taking this skrski reappearing twelve noon. Bloomberg really got folks. I got ducky bumps over. It's sleepy August.
00:04:35
Speaker 3: No, it's not Rebecca Patterson into Kevin Gordon.
00:04:39
Speaker 4: Big names, Kenny.
00:04:40
Speaker 3: We're joining books.
00:04:42
Speaker 2: On Paris because everyone's there except me in Scarlett and Me.
00:04:46
Speaker 3: Yeah, we're not in Paris. We should be in Paris.
00:04:48
Speaker 2: We should be, Kevin, I want to remind ourselves in Emily Rowling. Coming up, folks, it's a Friday. We're going to brief you.
00:04:54
Speaker 3: On the madness at hand.
00:04:57
Speaker 2: Can we recall the broad come has free cash flow growth coming out of the COVID sixteen seventeen, nineteen, twenty six, thirty two and an anticipated fifty.
00:05:11
Speaker 3: Billion dollars a free cancilo.
00:05:14
Speaker 2: The heart of the matter is we forget these are profitable juggernauts were whining about. Yeah.
00:05:21
Speaker 1: No, the profitability aspect, I think is huge, and it is one of the biggest things we point to, you know, especially when we get questions, because we still get a lot of client questions around this, I think rightly. So is this a repeat of what we saw in the nineties, And I know this has sort of been you know, beaten a lot, but I think it's important because when you do look at the factor in the equity market that was most correlated with strong performance in the late nineties into the peak, it was negative earnings. That is not the case today. So I think that's a really important differential. Not to say that you can't have disruptions and you can't go through these you know, sort of momentum implosions like we did recently, but that I think for the broader structure of the equity market is much more important, especially in a context of an S and P five that has more than seventy percent of its members above their two hunred day moving.
00:06:03
Speaker 2: You get on the Schwab golf stream, you go down to Louisville. You're in some hotel room with four hundred major Schwab hitters in the fifteenth row. Someone raises their hand and goes, what do we do with cash? It vibrates across America right now.
00:06:18
Speaker 3: Yes, what to do with cash?
00:06:20
Speaker 1: Well, full disclosure, there's no golf stream in my life very much. In the commercial worlds want to you know, the cash question we get so much. I think more in the context and I know you've covered this recently in conversations with Bazan, But the cash question we get is sort of what is the potential for that firepower for the market. And I mean we've looked at the so many ways, but when you do look at it relative to market cap, the total cash position today is quite small relative to history in terms of allocating that cash and where to put it. I mean, we can't answer that question in a broad sense because we have, you know, tens of millions of clients. But if you're thinking about know the sort of how the market has looked this year and the fact that it is not just the megacap ai trade that is outperforming. There are other parts of the market that are participating, some of which have been sort of a sleep for years. I point to small caps as an example, not to say that you should just back up the truck and load everything into small caps, but that is an example I think of how you don't necessarily need to be so singular focused in terms of, oh, it's only the megacaps that really isn't the case hasn't been the case for a couple of years actually, in terms of out performance, there have been other parts of the market that have performed well.
00:07:32
Speaker 4: I want to go through the economy. You argue that the July jobs and retail sales numbers are false positives. What's one data point you're watching that you think may prove you wrong.
00:07:43
Speaker 1: Well, I do think that if you well, I think that for labor, I'll start with that, there's not a whole lot I think that is pointing to and is supporting this kind of outright weakness that you saw in July. And I do think that in an environment where we have constrained immigrations and flow and an aging workforce, it makes the labor dynamics a little bit harder to see and harder to read in a standard you know, non farm payrolls report, meaning you know, last year, last fall into the winter, when you did go through that significant slowdown in payroll growth, when everybody was sort of starting to raise those yellow flags around recession risk, because that's typically what you see going into recession. If you were looking at the layoff data, that's actually what was the more important signals. So to me, Java's claims have been the best labor indicator in this post pandemic cycle because even though we've gone through this low hiring cycle, hiring rate plunged, came down to you know, more than a decade low. You didn't have the response that you would typically see on the layoff side. So to me, that's why the labor stuff, at least from a non farm payroll sense, has been a little bit of that false positive because if you do strip out you know, what happened with local government, if you strip out what happened with the World Cup kind of hangover effect, you were still not positive on payrolls in July. It wasn't great. We also probably have a lower break even rate at this point.
00:08:58
Speaker 2: The features up twenty four right now down, fiatures up two hundred. Nancyck lifts six cents of a percent of vis up to sixteen, comes back down mid range for the week fifteen point sixty seven.
00:09:09
Speaker 3: The best and yield.
00:09:10
Speaker 2: I'm starting to call it that five point two five percent fractally elevated. Still some real stress. They're in a thirty year on five point twenty five percent. We're gonna rip up the script right now. We do that with Isabelle Leon's studio with Kevin Gordon in Denmark, a gallon in US dollars of diesel in Copenhagen approaches ten dollars. Again, wow, in Berlin at eight dollars, Madrid eight dollars. In the Philippines ninety eight percent of their petroleums imported in They're poppin' nothing like ten dollars a gallon US dollars.
00:09:48
Speaker 4: And the minimum wage back home is ten dollars a day.
00:09:51
Speaker 2: Okay, why perfectly said, But Kevin talk about the Brent crew to the gallon of guests here ninety four dollars seven cents.
00:09:59
Speaker 3: I'm rent to the third world, to the parcific rim. The distillate effect here is just immense.
00:10:06
Speaker 1: I know, I think when you're talking about the Philippines is Bille and I talk about sort of our home countries a lot. I think about Korea being having that import bias too, I mean, is it is amazing. I think the sort of the disconnect in terms of what we feel here in the West, especially being in a country where you know, we're a lot more insulated in terms of oil production versus having that depended. So it the longer this conflict persists, you do raise that question again of the difference between price increases being your biggest problem, which is clearly the case in a country like the US versus actual oil and energy sort of physical you know, shortages. That's the difference that you're sort of dealing with. But even in the US, you know, you sort of have to put a chart out on Twitter yesterday where you know, the rolling correlation between yields and oil prices has approached almost an all time high. And the longer that you see gasoline prices sort of rise and stay high or that acts as it, ultimately the consumer will start to treat that as.
00:11:03
Speaker 2: A I mean, I get the prices five dollars for five cents of Manila outside of Makati, they don't sell diesel at Maccatti And in so Korea's five dollars thirty cents is well, I mean those are low numbers, but as you say, Isabelle, these are nations with a complete reset.
00:11:19
Speaker 3: And what the wages. The wages you said ten dollars a day.
00:11:22
Speaker 4: It's really honestly very hard. And the Philippines they've imposed a lot of work from home because people just can't afford to go to They.
00:11:29
Speaker 3: Literally can't afford the guests to go to work.
00:11:31
Speaker 4: New slash internet there is so slow it'll take you a whole day.
00:11:35
Speaker 2: The highway there is called the EDSA am I right, Tommy, just visit packed right.
00:11:41
Speaker 1: Plus they do they do more rolling blackouts there too, so there's a lot more energy disruptions.
00:11:47
Speaker 3: Most of you should come with me.
00:11:48
Speaker 4: I'm going in October.
00:11:49
Speaker 1: Let's go.
00:11:49
Speaker 4: Let's go. Tom only travels first class. I'm sorry.
00:11:53
Speaker 2: We could remote from the peninsula, right, you know, we could do the thing for the beautiful hotel right by the Ile triangle.
00:12:03
Speaker 3: Is that what it's called very good yield?
00:12:05
Speaker 4: Yes, you definitely did.
00:12:07
Speaker 3: Bring Schwab along with US as well.
00:12:09
Speaker 4: Yes, conduct the fields.
00:12:10
Speaker 2: So I think this is really really important and that and that there's there's more going on here than just what a gallon of gases is Dawalla distill its and refineries.
00:12:21
Speaker 3: It's a huge impact.
00:12:22
Speaker 1: It is a huge impact, I think that. And you know, clearly the big wild cart in all this has been China over the past several months. I mean the import activity and sort of the collapse that you've seen and the plunge and import activity. So all it really takes is, you know, China sort of flip that back on and to see what they do with it. I think will be crucial in terms of the oil market for the rest of the year because that does have a potential to sort of be this really big swing factor when it comes to prices.
00:12:47
Speaker 3: Again, thank you so much for coming in
Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
00:00:07
Speaker 2: Kevin Gordon, who's been on board this bull market, joins US now had a macro research strategy at Schwab Center for Financial Research. They have Isabelle. They have in their offices actual like Vinyl.
00:00:20
Speaker 3: Really he queues up the led Zeppelin.
00:00:22
Speaker 4: You have to have a.
00:00:23
Speaker 3: Field Saunders, I love buried down here.
00:00:26
Speaker 2: If you're talking to Michael Dharta yesterday, you say the most important data point is six and a half percent nominal GDP discuss this boom economy.
00:00:35
Speaker 1: I think it is the most important because it's very much at the center of the discussion around what's going on in the treasury market this week. And when you think about the underlying fundamentals of the economy, you know, six and a half percent you over your growth, and nominal GDP is you know, I think a very sort of very indicative, of course of what we're seeing in terms of the AI boom. But I think also in the context of inflation as well. You know, you can't really get down to two percent unless you see sort of the greatest productivity boom. Ever, so it's not a bad thing. I don't mean that in a bad way. But I think that to the content, you know, to the point of this sort of booming economy and the resilience that we see in the US, we have sort of entered this new normal where it's now more normal to see nominal growth of that kind versus what we saw pre pandemic, which was much slower than six and a half percent.
00:01:22
Speaker 4: I want to talk about the bond market because Tom and I earlier in the show we said that is the big story of this week. What did the market learn from the bond moves and the best input, so to speak, and it's rapid reversal. Is it that skeptical about this move? I mean many people have called it the band aid, just a band aid really, but.
00:01:38
Speaker 1: No, I mean, I think that's probably the right way to think about it. You know, the sort of duct tape on a leaky pipe situation where they can you know, that can only last for so long and in terms of stemming some of the you know, some of the drippage there. But I think that the whole discussion around you know, higher deficits and the fact that you know, no one's really doing anything about it on either side of the that's been a theme you know, and a feature of the US for so long. But that in combination with this structurally higher growth backdrop that we've been in, plus the fact that you have STICKI your inflation, all of these elements fuse together and you get a higher for longer interest rate world and it's very very hard to pull down yields in that environment, especially of course at the long end. You also introduce I think another interesting dynamic, which I mean to be a fly on the wall right now for any of the FED meetings and discussions. It would be so fascinating because you do have a little bit of this vicious circle dynamic at play. We're on the one hand, someone is sort of actively trying to, you know, pull down yields or do what they can to stem the rise. But on the other hand, you did have FED check Kevin Warsh sort of take some comfort in the fact that the long end had risen and it was sort of quote doing the fed's job for it. So that dynamic, I think it'll be interesting to see if he addresses it at all in Jackson Hole. But I think over the medium term, to see how those kind of combat each other, that'll bet to me, I.
00:03:01
Speaker 4: Would love to go to Jackson Hole and where a Jackson Hole's outfit. I love having you because then you can talk all acid process. Why didn't stocks respond more to Washington signaling that it wants easier financial conditions?
00:03:14
Speaker 1: Well, you know, I think, you know, in terms as powerful as signaling might be, and we've learned that, you know, over the past couple of days, it isn't as powerful because of the reversal that we saw on yields. You know, we've been in this environment and we're we're we don't have too much high conviction these days because it's it's really.
00:03:29
Speaker 3: Hard to do so.
00:03:31
Speaker 1: But what where we do of higher conviction is the fact that or the feeling that we have sort of exited definitively this Great Moderation era where you had this harmonious relationship between the stock market and the bond market, where when yields were going up, they were responding to positive growth impulses. Stocks were also rising posts pandemic for most of that time. Most of this cycle, that relationship has slipped into negative territory. So that means that ALLOSEQL, which is of course never the case. But when yields are rising, that's putting downard pressure on next but he's and then vice versa, and you've seen that play out this week almost it's happening again today. You know, if fields are upstocks are down, vice versa. So that's not to say that if fields continue to go higher a year from now that the market will be the stock market will be lower. That's certainly not the case. If anything, when you get these more aggressive moves in yields, that's when you sort of had that reset period for stocks, the crush America.
00:04:20
Speaker 3: And is Friday. Kevin Gordon, with his years with Charles Schwab.
00:04:23
Speaker 2: Yeoman's Duty reappearing today. He's taking this skrski reappearing twelve noon. Bloomberg really got folks. I got ducky bumps over. It's sleepy August.
00:04:35
Speaker 3: No, it's not Rebecca Patterson into Kevin Gordon.
00:04:39
Speaker 4: Big names, Kenny.
00:04:40
Speaker 3: We're joining books.
00:04:42
Speaker 2: On Paris because everyone's there except me in Scarlett and Me.
00:04:46
Speaker 3: Yeah, we're not in Paris. We should be in Paris.
00:04:48
Speaker 2: We should be, Kevin, I want to remind ourselves in Emily Rowling. Coming up, folks, it's a Friday. We're going to brief you.
00:04:54
Speaker 3: On the madness at hand.
00:04:57
Speaker 2: Can we recall the broad come has free cash flow growth coming out of the COVID sixteen seventeen, nineteen, twenty six, thirty two and an anticipated fifty.
00:05:11
Speaker 3: Billion dollars a free cancilo.
00:05:14
Speaker 2: The heart of the matter is we forget these are profitable juggernauts were whining about. Yeah.
00:05:21
Speaker 1: No, the profitability aspect, I think is huge, and it is one of the biggest things we point to, you know, especially when we get questions, because we still get a lot of client questions around this, I think rightly. So is this a repeat of what we saw in the nineties, And I know this has sort of been you know, beaten a lot, but I think it's important because when you do look at the factor in the equity market that was most correlated with strong performance in the late nineties into the peak, it was negative earnings. That is not the case today. So I think that's a really important differential. Not to say that you can't have disruptions and you can't go through these you know, sort of momentum implosions like we did recently, but that I think for the broader structure of the equity market is much more important, especially in a context of an S and P five that has more than seventy percent of its members above their two hunred day moving.
00:06:03
Speaker 2: You get on the Schwab golf stream, you go down to Louisville. You're in some hotel room with four hundred major Schwab hitters in the fifteenth row. Someone raises their hand and goes, what do we do with cash? It vibrates across America right now.
00:06:18
Speaker 3: Yes, what to do with cash?
00:06:20
Speaker 1: Well, full disclosure, there's no golf stream in my life very much. In the commercial worlds want to you know, the cash question we get so much. I think more in the context and I know you've covered this recently in conversations with Bazan, But the cash question we get is sort of what is the potential for that firepower for the market. And I mean we've looked at the so many ways, but when you do look at it relative to market cap, the total cash position today is quite small relative to history in terms of allocating that cash and where to put it. I mean, we can't answer that question in a broad sense because we have, you know, tens of millions of clients. But if you're thinking about know the sort of how the market has looked this year and the fact that it is not just the megacap ai trade that is outperforming. There are other parts of the market that are participating, some of which have been sort of a sleep for years. I point to small caps as an example, not to say that you should just back up the truck and load everything into small caps, but that is an example I think of how you don't necessarily need to be so singular focused in terms of, oh, it's only the megacaps that really isn't the case hasn't been the case for a couple of years actually, in terms of out performance, there have been other parts of the market that have performed well.
00:07:32
Speaker 4: I want to go through the economy. You argue that the July jobs and retail sales numbers are false positives. What's one data point you're watching that you think may prove you wrong.
00:07:43
Speaker 1: Well, I do think that if you well, I think that for labor, I'll start with that, there's not a whole lot I think that is pointing to and is supporting this kind of outright weakness that you saw in July. And I do think that in an environment where we have constrained immigrations and flow and an aging workforce, it makes the labor dynamics a little bit harder to see and harder to read in a standard you know, non farm payrolls report, meaning you know, last year, last fall into the winter, when you did go through that significant slowdown in payroll growth, when everybody was sort of starting to raise those yellow flags around recession risk, because that's typically what you see going into recession. If you were looking at the layoff data, that's actually what was the more important signals. So to me, Java's claims have been the best labor indicator in this post pandemic cycle because even though we've gone through this low hiring cycle, hiring rate plunged, came down to you know, more than a decade low. You didn't have the response that you would typically see on the layoff side. So to me, that's why the labor stuff, at least from a non farm payroll sense, has been a little bit of that false positive because if you do strip out you know, what happened with local government, if you strip out what happened with the World Cup kind of hangover effect, you were still not positive on payrolls in July. It wasn't great. We also probably have a lower break even rate at this point.
00:08:58
Speaker 2: The features up twenty four right now down, fiatures up two hundred. Nancyck lifts six cents of a percent of vis up to sixteen, comes back down mid range for the week fifteen point sixty seven.
00:09:09
Speaker 3: The best and yield.
00:09:10
Speaker 2: I'm starting to call it that five point two five percent fractally elevated. Still some real stress. They're in a thirty year on five point twenty five percent. We're gonna rip up the script right now. We do that with Isabelle Leon's studio with Kevin Gordon in Denmark, a gallon in US dollars of diesel in Copenhagen approaches ten dollars. Again, wow, in Berlin at eight dollars, Madrid eight dollars. In the Philippines ninety eight percent of their petroleums imported in They're poppin' nothing like ten dollars a gallon US dollars.
00:09:48
Speaker 4: And the minimum wage back home is ten dollars a day.
00:09:51
Speaker 2: Okay, why perfectly said, But Kevin talk about the Brent crew to the gallon of guests here ninety four dollars seven cents.
00:09:59
Speaker 3: I'm rent to the third world, to the parcific rim. The distillate effect here is just immense.
00:10:06
Speaker 1: I know, I think when you're talking about the Philippines is Bille and I talk about sort of our home countries a lot. I think about Korea being having that import bias too, I mean, is it is amazing. I think the sort of the disconnect in terms of what we feel here in the West, especially being in a country where you know, we're a lot more insulated in terms of oil production versus having that depended. So it the longer this conflict persists, you do raise that question again of the difference between price increases being your biggest problem, which is clearly the case in a country like the US versus actual oil and energy sort of physical you know, shortages. That's the difference that you're sort of dealing with. But even in the US, you know, you sort of have to put a chart out on Twitter yesterday where you know, the rolling correlation between yields and oil prices has approached almost an all time high. And the longer that you see gasoline prices sort of rise and stay high or that acts as it, ultimately the consumer will start to treat that as.
00:11:03
Speaker 2: A I mean, I get the prices five dollars for five cents of Manila outside of Makati, they don't sell diesel at Maccatti And in so Korea's five dollars thirty cents is well, I mean those are low numbers, but as you say, Isabelle, these are nations with a complete reset.
00:11:19
Speaker 3: And what the wages. The wages you said ten dollars a day.
00:11:22
Speaker 4: It's really honestly very hard. And the Philippines they've imposed a lot of work from home because people just can't afford to go to They.
00:11:29
Speaker 3: Literally can't afford the guests to go to work.
00:11:31
Speaker 4: New slash internet there is so slow it'll take you a whole day.
00:11:35
Speaker 2: The highway there is called the EDSA am I right, Tommy, just visit packed right.
00:11:41
Speaker 1: Plus they do they do more rolling blackouts there too, so there's a lot more energy disruptions.
00:11:47
Speaker 3: Most of you should come with me.
00:11:48
Speaker 4: I'm going in October.
00:11:49
Speaker 1: Let's go.
00:11:49
Speaker 4: Let's go. Tom only travels first class. I'm sorry.
00:11:53
Speaker 2: We could remote from the peninsula, right, you know, we could do the thing for the beautiful hotel right by the Ile triangle.
00:12:03
Speaker 3: Is that what it's called very good yield?
00:12:05
Speaker 4: Yes, you definitely did.
00:12:07
Speaker 3: Bring Schwab along with US as well.
00:12:09
Speaker 4: Yes, conduct the fields.
00:12:10
Speaker 2: So I think this is really really important and that and that there's there's more going on here than just what a gallon of gases is Dawalla distill its and refineries.
00:12:21
Speaker 3: It's a huge impact.
00:12:22
Speaker 1: It is a huge impact, I think that. And you know, clearly the big wild cart in all this has been China over the past several months. I mean the import activity and sort of the collapse that you've seen and the plunge and import activity. So all it really takes is, you know, China sort of flip that back on and to see what they do with it. I think will be crucial in terms of the oil market for the rest of the year because that does have a potential to sort of be this really big swing factor when it comes to prices.
00:12:47
Speaker 3: Again, thank you so much for coming in
