Head of Macro Research & Strategy at Schwab Center for Financial Research Kevin Gordon Talks...

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, 6 and 1/2% year-over-year growth in 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 inflation down to 2% unless you see sort of the greatest productivity boom ever. So, it's not it's not a bad thing. I mean that in a bad way, but I think that to the context, 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 than 6 and 1/2%.

No, I mean, I think that's probably the right way to think about it. You know, the sort of duct tape on a on a leaky pipe situation where they can only, you know, that can only last for so long and in in terms of stemming some of the, you know, some of the drippage there. But, I think that the 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 aisle. That's been a theme, you know, and a feature of the US for so long.

But that in in in, you know, combination with this structurally higher growth backdrop that we've been in, plus the fact that you have sticky inflation, all of these elements, you know, fuse together and 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 for any of the Fed meetings and discussions, it would be so fascinating because you do have a little bit of this, you know, vicious circle dynamic at play where on the one hand, someone is sort of actively trying to, you know, pull down yields or do what they can to stem the the rise, but on the other hand, you did have Fed chair Kevin Warsh sort of take some comfort in the fact that the long end had risen and 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 if he addresses it at all in Jackson Hole, but I think in over the medium term to see how those kind of combat each other, that'll that'll be interesting to me.

Well, you know, I think, you know, in terms as as 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 the reversal that we saw in 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 hard to do so. But where we do have 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. Post-pandemic, for most of that time, most of this cycle, that relationship has slipped into negative territory. So, that means that all else equal, which is of course never the case, but when yields are rising, that's putting downward pressure on equities and then vice versa. And you've seen that play out this week, almost it's happening again today. You know, if yields are up, stocks are down, vice versa. So, that's not to say that if yields 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 have that reset period for stocks.

No, the profitability aspect I think is huge and it is one of the the biggest things we point to, you know, especially when we get questions cuz we still get a lot of client questions around this. I think rightly so. Is this a repeat of what we saw in the '90s? And I know this is 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 late '90s 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&P 500 that has more than 70% of its members above their 200-day moving average.

Well, full disclosure, there's no Gulf Stream in my life. Um very much in the in the commercial world. So, I just I wanted to say this.

You know, the cash question we get so much. Um I I think more in the context and I know you cover that you've covered this recently in conversations with Liz Ann, 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 this so many ways. But, when you do look at it relative to market cap, the the total cash position today is 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, you know, the sort of how the how the market has looked this year and the fact that it is not just the mega cap AI trade that is that is outperforming. There are other parts of the market that are participating, some of which had been sort of asleep for years. I point to small caps as an example. Um 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 in terms of oh, it's only the mega caps. That really isn't the case. Hasn't been the case for a couple of years, actually, in terms of outperformance. There have been other parts of the market that have performed well.

Well, I do think that if if you Well, I think that for labor, I'll start with that. There's not a whole lot, I think, that is is pointing to and is is supporting this kind of outright weakness that you saw in July. And I And I do think that in an environment where we have constrained immigration flow and an aging workforce, it makes the labor dynamics a little bit harder to see and harder to read in a in a standard, you know, nonfarm payrolls report. Meaning, you know, last year, last fall into the winter go through that significant slowdown in payroll growth, when everybody was sort of starting to raise those yellow flags around recession risk, cuz that's typically what you see going into a recession. Um if you were looking at the the layoff data, that's actually what was the more important signal. So, to me, jobless claims have been the best labor indicator in this post-pandemic cycle because even though we've gone through the slow hiring cycle, hiring rate plunged, came down to, you know, more than a decade low, um you didn't have the the response that you would typically see on on the layoff side. So, to me, that's why the the labor stuff, at least from a nonfarm 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 net positive on payrolls in July. It wasn't great, but we also probably have a lower break-even rate at this point.