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00:00I think it is the most important because it's very much at the center of the discussion around
00:03what's going on in the treasury market this week. And when you think about the underlying
00:07fundamentals of the economy, you know, six and a half percent year over year growth in nominal GDP
00:13is, you know, I think a very sort of very indicative, of course, of what we're seeing
00:18in terms of the AI boom. But I think also in the context of inflation as well, you know,
00:23you can't really get inflation down to 2 percent unless you see sort of the greatest productivity
00:27boom ever. So it's not it's not a bad thing. I don't mean that in a bad way. But I
00:31think that
00:31to the content, you know, to the point of this sort of booming economy and the resilience that
00:35we see in the U.S., we have sort of entered this new normal where it's now more normal to
00:40see
00:41nominal growth of that kind versus what we saw pre-pandemic, which was much slower than six and a
00:45half percent. I want to talk about the bond market because Tom and I earlier in the show, we said
00:50that
00:50is the big story of this week. What did the market learn from the bond moves and the best input,
00:55so
00:55to speak? And it's rapid reversal. Is it that they're skeptical about this move? I mean, many
01:00people have called it the band aid, just a band aid, really. But no, I mean, I think that's probably
01:04the right way to think about it. You know, the sort of duct tape on a leaky pipe situation where
01:08that can only, you know, that can only last for so long in terms of stemming some of the, you
01:14know,
01:14some of the drippage there. But I think that the whole discussion around, you know, higher deficits
01:19and the fact that, you know, no one's really doing anything about it on either side of the aisle,
01:24that's been a theme, you know, and a feature of the U.S. for so long. But that in combination
01:31with
01:31this structurally higher growth backdrop that we've been in, plus the fact that you have
01:36stickier inflation, all of these elements, you know, fuse together and you get a higher for longer
01:41interest rate world. And it's very, very hard to pull down yields in that environment, especially,
01:45of course, at the long end. You also introduced, I think, another interesting dynamic, which,
01:50I mean, to be a fly on the wall right now for any of the Fed meetings and discussions,
01:54it would be so fascinating because you do have a little bit of this, you know, vicious circle
01:59dynamic at play, where on the one hand, someone is sort of actively trying to, you know, pull down
02:03yields or do what they can to stem the rise. But on the other hand, you did have Fed Chair
02:08Kevin
02:08Warsh sort of take some comfort in the fact that the long end had risen and it was sort of,
02:12quote, doing the Fed's job for it. So that dynamic, I think it'll be interesting to see
02:16if he addresses it at all in Jackson Hole. But I think over the medium term to see how those
02:22kind
02:22of combat each other, that'll be interesting to me. I would love to go to Jackson Hole and wear
02:27a Jackson Hole outfit. I love having you because then you can talk all asset classes. Why didn't
02:33stocks respond more to Washington signaling that it wants easier financial conditions?
02:38Well, you know, I think, you know, in terms as powerful as signaling might be, and we've learned
02:42that, you know, over the past couple of days, it isn't as powerful because of the reversal that we
02:47saw in yields. You know, we've been in this environment and we don't have too much high
02:52conviction these days because it's really hard to do so. But where we do have higher conviction is
02:57the fact that or the feeling that we have sort of exited definitively this great moderation era where
03:03you had this harmonious relationship between the stock market and the bond market, where when yields
03:07were going up, they were responding to positive growth impulses. Stocks were also rising post
03:12pandemic for most of that time, most of this cycle, that relationship has slipped into negative
03:17territory. So that means that all else equal, which is, of course, never the case. But when yields
03:22are rising, that's putting downward pressure on equities and then vice versa. And you've seen that play
03:26out this week almost. It's happening again today. You know, if yields are up, stocks are down, vice versa.
03:31So that's not to say that if yields continue to go higher a year from now, that the market will
03:35be,
03:35the stock market will be lower. That's certainly not the case. If anything, when you get these more
03:39aggressive moves in yields, that's when you sort of have that reset period for stocks.
03:43Across America on this Friday, Kevin Gordon with us. He is with Charles Schwab. Yeoman's duty,
03:49reappearing today. He's taking the Sikorsky, reappearing. 12 noon, Bloomberg money.
03:54Really? I have to tune in.
03:56Folks, I got ducky bumps over. It's sleepy August. No, it's not.
04:00We got Rebecca Patterson into Kevin Gordon.
04:04Big names. Can't get any better.
04:05And we're doing books on Paris because everyone's there except me and Scarlett.
04:09And me.
04:10Yeah, we're not in Paris. We should be in Paris.
04:12We should be in Paris.
04:13Kevin, I want to remind ourselves, and Emily Rowland coming up, folks.
04:17It's a Friday. We're going to brief you on the madness at hand.
04:21Can we recall that Broadcom has free cash flow growth coming out of the COVID, 16, 17, 19, 26, 32,
04:33and an anticipated $50 billion of free cash flow.
04:38So the heart of the matter is we forget these are profitable juggernauts we're whining about.
04:45Yeah, no, the profitability aspect, I think, is huge.
04:47And it is one of the biggest things we point to, you know, especially when we get questions,
04:52because we still get a lot of client questions around this.
04:54I think rightly so.
04:55Is this a repeat of what we saw in the 90s?
04:57And I know this has sort of been, you know, beaten a lot, but I think it's important because
05:01when you do look at the factor in the equity market that was most correlated with strong
05:06performance in the late 90s into the peak, it was negative earnings.
05:09That is not the case today.
05:11So I think that's a really important differential, not to say that you can't have disruptions
05:14and you can't go through these, you know, sort of momentum implosions like we did recently,
05:18but that I think for the broader structure of the equity market is much more important,
05:22especially in a context of an S&P 500 that has more than 70% of its members above their
05:27200-day moving average.
05:28You get on a Schwab golf stream, you go down to Louisville, you're in some hotel room with
05:32400 major Schwab hitters.
05:35In the 15th row, someone raises their hand and goes, what do we do with cash?
05:40It vibrates across America right now.
05:43Yes.
05:43What to do with cash?
05:44Well, full disclosure, there's no golf stream in my life, very much in the commercial world.
05:49Sorry, I meant Lizanne's.
05:52But, you know, the cash question, we get so much, I think more in the context, and I
05:58know you've covered this recently in conversations with Lizanne, but the cash question we get is
06:03sort of what is the potential for that firepower for the market?
06:07And, I mean, we've looked at this so many ways, but when you do look at it relative
06:10to market cap, the total cash position today is quite small relative to history.
06:15In terms of allocating that cash and where to put it, I mean, we can't answer that question
06:19in a broad sense because we have, you know, tens of millions of clients.
06:22But if you're thinking about, you know, the sort of how the market has looked this year
06:27and the fact that it is not just the mega cap AI trade that is outperforming, there are
06:32other parts of the market that are participating, some of which had been sort of asleep for years.
06:36I point to small caps as an example.
06:38Not to say that you should just back up the truck and load everything into small caps,
06:42but that is an example, I think, of how you don't necessarily need to be so singular focused
06:47in terms of, oh, it's only the mega caps.
06:49That really isn't the case, hasn't been the case for a couple of years, actually,
06:52in terms of outperformance.
06:54There have been other parts of the market that have performed well.
06:56I want to go to the economy.
06:58You argue that the July jobs and retail sales numbers are false positives.
07:03What's one data point you're watching that you think may prove you wrong?
07:08Well, I do think that if you, well, I think that for labor, I'll start with that.
07:13There's not a whole lot, I think, that is pointing to and is supporting this kind of
07:18outright weakness that you saw in July.
07:20And I do think that in an environment where we have constrained immigration flow and an aging
07:25workforce, it makes the labor dynamics a little bit harder to see and harder to read in a
07:29standard, you know, non-farm payrolls report.
07:32Meaning, you know, last year, last fall into the winter, when you did go through that significant
07:36slowdown in payroll growth, when everybody was sort of starting to raise those yellow
07:39flags around recession risk, because that's typically what you see going into a recession.
07:44If you were looking at the layoff data, that's actually what was the more important signal.
07:48So to me, jobless claims have been the best labor indicator in this post-pandemic cycle,
07:53because even though we've gone through this low hiring cycle, hiring rate plunged, came down
07:58to, you know, more than a decade low.
08:00You didn't have the response that you would typically see on the layoff side.
08:05So to me, that's why the labor stuff, at least from a non-farm payroll sense, has been a little
08:10bit of that false positive.
08:11Because if you do strip out, you know, what happened with local government, if you strip
08:14out what happened with the World Cup kind of hangover effect, you were still net positive
08:18on payrolls in July.
08:19It wasn't great.
08:20But we also probably have a lower break-even rate at this point.
08:23The future's up 24 right now.
08:24The future's up 200.
08:25NASDAQ lifts six-tenths of a percent.
08:28The VIX, up to 16, comes back down mid-range for the week, 15.67.
08:33The Besson yield, I'm starting to call it that, 5.25%, fractionally elevated.
08:39Still, some real stress there in a 30-year bond, 5.25%.
08:43We're going to rip up the script right now.
08:45We do that with Isabel Lee in the studio with Kevin Gordon.
08:48In Denmark, a gallon in U.S. dollars of diesel in Copenhagen approaches $10 a gallon.
08:57Oh, wow.
08:57In Berlin, $8.
08:59Madrid, $8.
09:00In the Philippines, 98% of their petroleum's imported.
09:07And they're popping nothing like $10 a gallon U.S. dollars.
09:12And the minimum wage back home is $10 a day, FYI.
09:16That's perfectly said.
09:18But, Kevin, talk about the Brent crude or the gallon of gas here, $94.07 on Brent.
09:24To the third world, to the Pacific Rim, the distillate effect here is just immense.
09:31I know.
09:31I think when you're talking about the Philippines, Isabel and I talk about sort of our home countries a lot.
09:36I think about Korea having that import bias, too.
09:38I mean, it is amazing, I think, sort of the disconnect in terms of what we feel here in the
09:45West, especially being in a country where we're a lot more insulated in terms of oil production versus having that
09:51dependence.
09:51So the longer this conflict persists, you do raise that question again of the difference between price increases being your
09:58biggest problem, which is clearly the case in a country like the U.S., versus actual oil and energy sort
10:05of physical shortages.
10:07That's the difference that you're sort of dealing with.
10:09But even in the U.S., you know, you sort of have to ā I had put a chart out
10:13on Twitter yesterday where, you know, the rolling correlation between yields and oil prices has approached almost an all-time
10:19high.
10:19And the longer that you see gasoline prices sort of rise and stay higher, that acts as a ā ultimately,
10:26you know, the consumer will start to treat that as a permanent pinch.
10:28I mean, I got the prices here, $5.45 in Manila, outside of Makati.
10:33They don't sell diesel in Makati.
10:35And in Seoul, Korea, it's $5.30 as well.
10:39I mean, those are low numbers.
10:40But as you say, Isabel, these are nations with a complete reset on what the wages, the wages, you said,
10:45$10 a day.
10:46It's really, honestly, very hard.
10:48In the Philippines, they've imposed a lot of work from home because people just can't afford to go to work.
10:53They literally can't afford the gas to go to work.
10:55But newsflash, internet there is so slow, it'll take you a whole day to download Netflix.
11:00And the highway there is called the EDSA.
11:01Am I right on that?
11:02Yes, EDSA.
11:03Tom, you should visit.
11:04It's packed, right?
11:06Plus, they do more rolling blackouts there too.
11:08So there's a lot more energy disruption.
11:10Look at you.
11:11Both of you should come with me.
11:12I'm going in October.
11:13Let's go.
11:14Let's go.
11:15Okay.
11:15But Tom only travels first class.
11:17I'm sorry.
11:17I don't do that.
11:19We could remote from the peninsula.
11:21Oh, okay.
11:22Right?
11:22You know, we could do a thing for the Peninsula Hotel right by the Ayalo Triangle.
11:28Is that what it's called?
11:28Very good.
11:29I nailed that.
11:30Yes, you definitely did.
11:31Bring Schwab along with us as well.
11:33Yes.
11:33Conduct a field study there.
11:34But folks, I think this is really, really important in that there's more going on here
11:40than just what a gallon of gas is at the wall.
11:43Yes.
11:43Distillates and refineries.
11:45It's a huge impact.
11:46It is a huge impact.
11:47I think that, and, you know, clearly the big wild card in all of this has been China
11:51over the past several months.
11:52I mean, the import activity and sort of the collapse that you've seen and the plunge in
11:56import activity.
11:57So all it really takes is, you know, China's sort of flipped that back on.
12:01And that's what I mean.
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