Bloomberg Businessweek Weekend - November 29th, 2024 - Bloomberg Businessweek

Episode Transcript
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Speaker 1 (00:00):
Bloomberg Audio Studios, Podcasts, radio news.

Speaker 2 (00:08):
This is Bloomberg business Week inside from the reporters and
editors who bring you America's most trusted business magazine.

Speaker 3 (00:16):
Plus global business, finance and tech news.

Speaker 2 (00:19):
The Bloomberg Business Week Podcast with Carol Messer and Tim
Stenebek from Bloomberg Radio.

Speaker 4 (00:27):
Hi, everyone, Welcome to the Bloomberg Business Week Weekend podcast.
So we were recently in San Francisco broadcasting from Schwab
Impact twenty twenty four. It was just over a week
week and a half ago. We were surrounded by some
forty five hundred attendees. This is Schwab's annual conference for
independent registered investment advisors, you know rias, and also the
independent record keepers of Charles Schwab. What it does is

(00:48):
it brings together advisors from around the country and those
in the industry that support them with services and tools.
It was a lot of folks, a.

Speaker 5 (00:55):
Lot of people there, and for the next two hours
we're serving up highlights from the event in interviews withvarious
members of the Schwab universe, including the company's top strategists
on USN, international markets, also fixed income. We're also going
to hear about growth in the wealth management and ETF businesses.

Speaker 4 (01:11):
Now, we just want to point out at the time
president like Donald Trump had yet to name his pick
for US Treasury Secretary, his choice Wall Street veteran Scott Bessant.
It came after Schwab impact was over. We're pointing this
out because we know this is one of the top
jobs in an administration that is closely watched by global
investors in Wall Street alike. Who is the US Treasury Secretary?

Speaker 5 (01:31):
Folks, It matters, and so it wasn't a choice yet
public when we sat down with the president of Charles Schwab,
who also happens to be the incoming CEO of the
company as well. We're talking about Rick Worster, who takes
over the top spot on January first.

Speaker 4 (01:44):
Even so, we had a lot to talk about as
Charles Schwab recently reported earnings. The stock, by the way,
did rally on that earnings release and even had a
couple of analysts raising their price targets on the company.
This as core net new assets brought to Schwab by
new and existing clients came in at twenty four point
six plosillion dollars. Total client assets are now approaching ten
trillion dollars.

Speaker 5 (02:04):
We kick things off with Rick Wurster looking at the
big themes he's hearing about at the event.

Speaker 6 (02:09):
The big theme to me is always what can we
collectively do to make a difference in the lives of
every day investors. You mentioned the number ten trillion dollars.
It's an overwhelming number, but behind every one of those dollars,
it's a grandparent who's trying to help contribute to their grandkids' education.
It's a it's a family that's trying to take a
nice vacation that they've been saving for. That's what matters

(02:30):
to us.

Speaker 4 (02:30):
I love that you say that because as I walk
around and talk to some of the advisors, you know,
they're maybe a billion dollar shop, a two billion, maybe
even smaller, and they're always kind of apologizing. I'm like, no,
you're the guys who are managing everybody's money. I kind
of love that perspective absolutely.

Speaker 6 (02:44):
And the thing about this community. We serve fifteen thousand advisors.
They're in most communities across our countries, sitting down the
table to the table with people helping them understand how
to live their best financial life and the power of
that is so impressive.

Speaker 4 (02:58):
Rick, no doubt about it. The elections continue you to
come up. How are you thinking about the elections the
impact that a new administration, new people running different regulatory bodies,
certainly that plant to the financial industry. How it might
impact Schwap, Well.

Speaker 6 (03:11):
There's a lot of potential change at play. We've heard
a lot of proposals. It will be really interesting and
important to watch how those play out, and we stand
ready to do whatever we can to help the everyday investor.
That's our focus.

Speaker 4 (03:25):
And all things change much because of a new White
House and a new team. Do you anticipate from what
we've heard on the campaign trail and some of the
people that are being considered for positions.

Speaker 6 (03:36):
I certainly think that there will be change.

Speaker 7 (03:38):
Absolutely.

Speaker 6 (03:39):
I think with any administration there's change, and we've been
through all sorts of presidential cycles and election cycles, and
at the end of the day, what it means for
us is we adapt and we do whatever we can
to help the the end client.

Speaker 5 (03:50):
Why are you thinking about this from a regulatory perspective?
We did hear that SEC chair Gary Gensler is going
to step down by January twenty. It's certainly the crypto
community cheering that. How do you look at a change
in leadership at the SEC.

Speaker 6 (04:02):
Well, for us, our company is built on trust and
has been for fifty years. Our entire industry is built
on trust. If people can't trust their financial institution, the
whole premise of what we do goes away. And so
I think regulators play a really important role in that,
and we've always had a great relationship with regulators. I
think from our perspective, we want regulation that is thoughtful

(04:23):
and makes sense for the end investor. And when that's
the case, we'll do anything to support it. And we're
looking we're looking forward to, you know, to seeing who
the next chairman is going to be.

Speaker 4 (04:34):
Rick what does it mean for crypto? And I'm curious
if you guys see yourself getting into the crypto business.
Here we are approaching one hundred thousand dollars. We have
a president who initially maybe or president elect who maybe
wasn't so into crypto is now very interesting.

Speaker 5 (04:45):
He got his own crypto company.

Speaker 4 (04:47):
What about for Schwab what's the play here? Do you
see yourself getting into it?

Speaker 6 (04:51):
Well, we're in the crypto business to press, we have
lots of different ways for clients to participate. They can
buy ets today, they can buy big coin futures, they
can buy closed end funds. I think we will get
into this, into spot crypto when the regulatory environment changes,
and we do anticipate that it will change, and we're
getting ready for that eventuality.

Speaker 4 (05:12):
Is there some I don't know? Has crypto? Is it
growing up in your view?

Speaker 6 (05:16):
I don't know. You know, it's an interesting asset class
and people have really gravitated towards it, and you know,
we never like to judge what people want to invest in.
People on our platform, we think are very thoughtful investors,
very sharp. They make decisions about what they want to
invest in, and crypto has certainly caught many's attention and
they've made a lot of money doing it. I have

(05:37):
not bought crypto, and now I feel silly. So they've
been the ones making all this money.

Speaker 4 (05:41):
On crypto thinking about buying it now.

Speaker 6 (05:45):
Me personally know, but we certainly support our clients that
want to do that.

Speaker 5 (05:48):
You know what, you answered my next question, which is
going to be do you own any crypto? But talk
a little bit about that, because it's always interesting hearing
from somebody in your space about their views on something.
What's holding you back?

Speaker 6 (06:00):
Well, I think what's holding me back is just a
question around the true value of crypto. You know, I
like to invest in stocks, and with stocks, you there's
cash flows you can rely upon. There there's dividends that
accrue to you. With crypto, it's less certain what that
will be, and it's it's less certain how to value it.
So to me, on a personal level, that's what makes

(06:20):
crypto not something that I invest in. At the same time,
we encourage our investors to invest in what matters for them,
and I've talked to a lot of our investors who
tell me I'm completely missing the boat, and they tell
me all the great things about crypto, And you know what,
they've been right, not me, because so far keeps going up.

Speaker 5 (06:37):
So far they've been right. We'll see.

Speaker 4 (06:39):
It's one we're going to continue to follow. It moves
around a lot. It is a competitive space. Just this week,
I just want to look up my I know it's
Robin Hood announcing they're moving to the RIA space. I'm
curious about how you were thinking about Schwab for the
next fifty years. As you get ready to take over
as CEO and you know, not a new thing traditional investors.
They're getting older, younger investors how they want to play

(07:00):
and have more options. So what are your thoughts about
Robinhood's move and maybe what you guys need to continue
to do to attract younger investors who want those more options.

Speaker 6 (07:09):
Well, for fifty years, our central theme has been to
see through client size and do right by them, and
we attract a lot of young investors to Schwab. In fact,
sixty percent of our new to firm clients every year
are under the.

Speaker 7 (07:22):
Age of forty.

Speaker 6 (07:23):
Our client base actually gets younger every year, so it's
sometimes we're not thought of as that way, but we
attract a lot of young investors because we have what
we think is the best trading platform in the industry,
and it also comes along with what we think is
the best educational and training platform in the industry, and
that aspect has really appealed to some of our younger
newer investors.

Speaker 4 (07:41):
Got to ask you about the training side and talking
with advisors here. I was up on the stage doing
a panel on artificial intelligence, and so many people came
up to me afterwards and they're like, we got to
talk to Schwab because I think we need a schwab chatbot.
AI though, is impacting everything? How are you also, I
don't know, acknowledging thinking about how that needs to be

(08:02):
incorporated into what you offer up the advisory space.

Speaker 6 (08:06):
Yes, so that comment about wanting an AI chatbot, what
they don't recognize is that actually, behind the scenes, we
have built one for our client facing professionals. And so
it used to be that sixty thousand times a month
we would have a phone rep spend more than three
minutes searching for a piece of information to answer a
client question, and now we have built an AI capability

(08:27):
that finds that information in seconds, and so it makes
a better use of the client's time and allows them
to focus and go deeper on wealth issues that we
could potentially help them with.

Speaker 4 (08:35):
But is there another level that you continue to think about? Okay,
where does this go in helping advisors in terms of
portfolio management are building out their businesses.

Speaker 6 (08:44):
I think AI will have a really big impact on
our industry. I think it will do a lot to
help us better serve clients, to empower our professionals to
give them the right information at the right time. I
think it will also allow us collectively to help serve
clients that we Otherwise we have fifteen million retail clients,

(09:04):
we can only have a person to person relationship with
about ten to twenty percent of that client base. There's
eighty percent that we don't get to to have that
in person dialogue with and I think AI could bridge
that gap and allow us to reach more clients.

Speaker 5 (09:20):
Hey, before we let you go, I want to talk
a little bit about the balance sheet, because you basically
said you're trying to shrink the bank's balance sheet and
not hold as many loans on the balance sheet. Given
what happened a couple of years ago, close to two
years ago with the regional banking crisis in the way
you guys were brought into that, just give us an
update there on what you're going to do when you
become CEO.

Speaker 6 (09:38):
Well, I want to clarify, we never said we wanted
to shrink our balance sheet. What we did allude to,
and I think what you're referring to is on an
earnings call, we said, as our balance sheet grows, we
would consider using a third party bank to take on
some of those deposits. That's something that could make sense
for us because of the way the economics work, we
have to hold capital against deposits. We can send some

(09:59):
of those deposits to another bank and earn a better
return relative to capital when we do so. So it's
a tool to have in our toolbox. It's not something
we're going out and doing immediately, something we're considering. We'd
only do it as our balance sheet grows and when
it makes sense to do.

Speaker 4 (10:15):
Challenging here, certainly for Schwab with the regional bank crisis
and so on and so forth. We talked about a
lot on Bloomberg. Are we past it? Do you feel
confident or what's more to be done? In terms of
the impact that we've seen in the past year.

Speaker 6 (10:27):
I've never been more optimistic about our business than we
are today. We're number one or number two and the
two fastest growing segments of the financial services landscape, and
our client satisfaction scores have never been higher than they
are today. So we're hitting on all cylinders as we
roll into twenty twenty five, and I couldn't be more
excited about it.

Speaker 4 (10:45):
What's the most interesting thing in the investment space do
you think right now?

Speaker 6 (10:48):
I think the engagement among clients. It's just wonderful to
see how engaged they are in markets in their financial life.
When people own their tomorrow, they tend to have great
financial outcomes.

Speaker 4 (10:57):
Rick, thank you so much. I know there's a lot
going on.

Speaker 8 (10:59):
I know this is a.

Speaker 4 (10:59):
Big event, but I'm carving out some space for us.
We really appreciate it.

Speaker 6 (11:02):
Well. Thanks for making a commitment to be here. We
love having you here.

Speaker 4 (11:04):
It's a great perspective that we get to come and
take back to New York and kind of share with
us some of our other guests. Rick Worster, current president
of Charles Schwab taking over CEO on January first. This
is Bloomberg from Impact.

Speaker 2 (11:21):
You're listening to the Bloomberg Business Week podcast. Catch us
live weekday afternoons from three to six Eastern Listen.

Speaker 3 (11:27):
On Bloomberg dot com, the iHeartRadio app.

Speaker 2 (11:30):
And the Bloomberg Business App, or watch us live on YouTube.

Speaker 4 (11:35):
Time now for a strategy deep dive courtesy of the
team at Charles Schwab. Everything from global equities and macroeconomics
and presidential politics to fixed income and US domestic stocks.
It all happened recently when we broadcast from the Schwab
Impact Conference in San Francisco.

Speaker 5 (11:50):
At the event, two very familiar voices to investors and
the Bloomberg world from Charles Schwab, Lizanne Saunders, Managing director,
Chief Investment Strategists also along with Kevin Gordon, Director and
senior investment strategist.

Speaker 4 (12:03):
We want to note that this conversation happened before President
elect Trump vowed additional tariffs on Mexico, Canada, and China
that'll happen this past week.

Speaker 5 (12:10):
We began by asking about the conversations they're having between
each other about what's going on in the market.

Speaker 9 (12:16):
It's just such a unique period of uncertainty because of
the different directions policy can go. And one way we've
been talking about is we're all always mindful of of
sort of tail risks. I think the tails are fatter
because of not just the uncertainty associated with tariffs, immigration policy,
but the fact that much of what appears to be

(12:38):
the priority of the administration could be done by executive
order and doesn't have to go through that congressional And
we learned in twenty eighteen that you know, a lot
of the tariff announcements were done by Twitter, so it's unconventional.

Speaker 4 (12:51):
So then how do you think about what can you
kind of hang your hat on. Kevin, come on in
on the conversation.

Speaker 10 (12:56):
Well, I think you know, one of the hard parts
about going back to twenty eighteen two nineteen is what
you know as humans. It's natural to go back to
a period of time and say, yeah, you can bring
out that playbookdusted off, especially from.

Speaker 7 (13:07):
A tariff perspective.

Speaker 10 (13:08):
What's harder this time is that we're in a totally
different macroeconomic environment where you're still dealing with ripple effects
from the pandemic. You're still dealing with a bond market
that is a little bit more unruly this time than
it was going into the first administration for Trump. So
I think that, you know, to Lazand's point about what
can be done unilaterally versus what can be done with
congressional approval, really needs to be looked at here, especially

(13:29):
from an immigration policy perspective, because most of the labor
force growth we've had over the past four years has
been from the foreign born you know, work force, so
that if it gets restricted, I think could be more
of a more of a problem.

Speaker 11 (13:42):
Talk a little bit.

Speaker 9 (13:43):
The FED comes into the mix because the combination of
immigration policies and tariff policies, it's hard to argue against
them being inflationary. So then you have what's the FED
reaction function if it's policy driven inflation.

Speaker 5 (13:56):
I I based on the first Trump administration, I believe,
and I'm not getting political here, I'm just stating sort
of a theory. The president elect loves to look at
the S and P five hundred and talk about the
S and P five hundred. That's like his report card
for how he's doing. If there is an adverse market
reaction to one of his policies, I think that would

(14:18):
be enough for him to change his too.

Speaker 9 (14:20):
I think not just the S and P five hundred.
I think markets could be the decider, not just the
equity side of things, but the bond markets, the bond vigilances.

Speaker 7 (14:29):
Yeah.

Speaker 10 (14:30):
I think the other thing to keep in mind is
it's not as if, because you know, we know that
President elect Trump is very focused on markets, that doesn't
mean that you don't get downturns and you don't get volatility.
I mean, if you just use twenty seventeen as a
case study, if I came from the future and we
were in twenty seventeen and told you we were going
to get this massive fiscal stimulus in the form of
tax cuts at the corporate and the individual level. You'd

(14:50):
probably think that's Neirvada for risk assets. But the reality
is we had the shortfall implosion in twenty eighteen. You
had a near bear market almost by a tenth of
a percentage point for the S and P in the
fourth quarter of that year. And yeah, you bounced back
in twenty nineteen, was choppy but ended up being okay.
But it doesn't mean that you eliminate all of this
downside risk, especially if it's driven more by teriff related news.
And you know the hits to manufacturing in the US that.

Speaker 9 (15:12):
Are so speaking of the hits to manufacturing, if you
if you look at the ISM manufacturing index and put
a vertical line at the start of the trade war
in twenty eighteen, it went straight down. Now we're at
lows in manufacturing. So I don't know that we have
a potential implosion from these lows, but it could be
something that prevents what was the hope for pickback.

Speaker 12 (15:34):
Up and manufacturing.

Speaker 4 (15:35):
I guess I keep thinking about. You know, there's the
fundamental stories of companies and profits, right that really matters.
But then you've got a layer on top of that
the politics that's going to play out, and that's going
to kind of kick investors around. I mean, how are
you guys squaring when you're going to have a client
call up and say, listen, fundamentally, earnings growth is happening, but.

Speaker 9 (15:54):
You know, keep it if you're proxying or earning's growth
at the S and P level, that it's obviously biased
up the cap spectrum. You've got forty three percent of
the Rustle two thousand or nonprofitable companies, you've got a
similar share that zombie companies.

Speaker 12 (16:09):
So I think there's a there's a much.

Speaker 9 (16:11):
Wider spread, especially when looking on the cap spectrum, but
it often gets masked by virtue of there's so much
focus on the large cap indexes.

Speaker 4 (16:22):
Well, funny that you say that, because I feel like
the last two weeks everybody keeps coming on and said,
guess what, it's small caps turn again, So.

Speaker 12 (16:28):
What is it not monolithically Okay?

Speaker 9 (16:31):
Again, when you look at an index as large as
the Russell two thousand to to sort of just blanketly
say yeah, small caps look good.

Speaker 4 (16:38):
I think that there is there are interesting zombie companies
that you say.

Speaker 9 (16:42):
Yeah, those are not those with not sufficient cash flows
to pay e an interest on their debts. So I think,
you know, our our thesis around factors has been, Yeah,
there's opportunities down the cap spectrum, but you don't want
to sacrifice quality.

Speaker 10 (16:54):
Yeah, And to that point about quality, I mean, if
you just used positive earnings on a trailer twelve month basis,
so earnings of EPs above zero as your your you know,
only criterion for the Rustle two thousand, and you took
all of those companies, you know, it's about eight hundred
nine hundred change as a group. On average, they're up
by almost forty five percent over the past year. So

(17:15):
there are pockets of small caps that have worked. It's
just not equally distributed because of the interest rate environment
we've been in also the growth environment. And by the way,
all of these pops that you've had in the Wrestle
two thousand from time to time over the past couple
of years, every time they get a little bit of
momentum and everyone thinks it's changing for them, it hasn't
been consistent with the turn in forward earnings growth and expectations.
So until I think you see that actual move where

(17:37):
conviction starts to build. From an earning standpoint, it's tough
to get bullish on the on the index as a whole.

Speaker 7 (17:42):
But to Lezan's point about.

Speaker 10 (17:43):
You know a large chunk of it being not profitable
and zombie like, it's just tough.

Speaker 12 (17:47):
More within the Nasdaq.

Speaker 9 (17:48):
If you look at the top ten best performers this
year in the Nasdaq, none of them are large cap stocks.
They're all small yeah, to be a none of them
are in the MAGS seven. So I think we get
in this sort of tunnel of the megacap tech and
tech related names, and there's less analysis happening on everything else.

Speaker 5 (18:07):
On an index level. Is Anne, are you concerned about
the power of those megacap tech companies. It's a question
I could have asked five years ago. It just wouldn't
have included in Vidia.

Speaker 9 (18:15):
I think the problem of concentration and the perceived need
to be in those names in order to do well,
that's an institutional problem, that's not an individual investor problem.
If you're benchmarked against a cap weighted index, you are
at the mercy of what those largest names their contribution
to the index. But for individual investors, they're not benchmarked

(18:37):
against the S and P five under they don't have
to take that same kind of concentration risk. And it's
another point behind that what I just mentioned of top
ten best performers in the Nasdaq, they're.

Speaker 12 (18:47):
All small to mid cap stocks.

Speaker 9 (18:49):
Only one of the MAGS seven is in the top
ten best performers of the S and P five hundred,
So I think you don't need to have that concentration
risk if you're not professionally benchmarked against the.

Speaker 11 (19:02):
S and P.

Speaker 4 (19:02):
What do you think of the biggest risks right now?
Do we have clarity on it for twenty twenty five.

Speaker 10 (19:06):
I mean from a policy standpoint, that's probably the easy
one to throw out there, but I think just the
lack of.

Speaker 4 (19:10):
Policy, meaning government. We also said policy.

Speaker 10 (19:13):
More Washington policy, but I think they're tied together now. Yeah,
because I could see a scenario where if you do
get more restrictive labor force growth coming from the outside,
but also if there is a chunk of the labor
force physically removed from the country, that's probably an inflationary problem.

Speaker 7 (19:28):
And I've also yet to I love.

Speaker 4 (19:29):
That you guys are going there, because I don't think
people realize we certainly hear it from CEOs that they
are so worried that they're not going to have access
to a labor force and what that means for their
ability to do things.

Speaker 12 (19:38):
It's an increase in.

Speaker 9 (19:41):
The cost of l labor costs, right, and it's a
decrease in labor supply.

Speaker 12 (19:46):
There's the demand side.

Speaker 8 (19:48):
Of that as well.

Speaker 7 (19:48):
I can't shock in a demandsion.

Speaker 5 (19:50):
I can't get a CEO to seriously explain that that
will affect them at this point in the last two weeks,
even if they don't employ people who didn't come to
this country illegally. Right.

Speaker 12 (20:00):
How often do you talk to smaller company CEOs?

Speaker 5 (20:04):
I recently, did you actually talk to me?

Speaker 9 (20:06):
I talked to me in the spaces where migrant work
is a large construction.

Speaker 4 (20:12):
Hospitality construction rests.

Speaker 10 (20:15):
Almost twenty percent of the construction sector is undocumented.

Speaker 4 (20:18):
I have two brothers who are contractors. They're like, they
can't find work.

Speaker 5 (20:21):
But I think the important point is that it's not
just you could run a company that doesn't employ any
undocumented workers. You're still going to see labor costs rise.
If eleven million people are taken out of this country
who are doing work.

Speaker 10 (20:32):
That's right, Yeah, it's a demand shock, it's a supply shock,
and I think we we sort of lose sight of
the fact on the demand side, especially because the supply
side is looked at maybe sometimes more of an issue
in terms of the makeup of a particular industry or
the makeup of the labor force. But if you're taking
demand out of the country, but you're also not being
able to fill the supply hole that you're leaving, that's

(20:53):
sort of a stagflationary shock.

Speaker 5 (20:55):
So what does it do to the market if that
policy ends up coming to fruition.

Speaker 10 (20:59):
Well, I mean, I think it depends if it's phased
over time.

Speaker 9 (21:03):
Yeah, and you know, we don't know the logistics around
whether we even possibly could get to the high end
of what the campaign pledges.

Speaker 4 (21:13):
The reality on that right front.

Speaker 9 (21:14):
But Peterson Institute, I don't know if you guys saw it,
just did a study on Okay, let's take it to
the extreme, both on the immigration side of things, on
the tariff side of things, and they actually added an interesting.

Speaker 12 (21:26):
Little wrinkle into the mix.

Speaker 9 (21:28):
If there continues to be a threatening of FED independence,
all three of those collectively are unquestionably higher inflation, lower
growth kind of backdrop. Now we you know, the real
answer may be somewhere in the middle of nothing gets
done and the extremes, both on immigration and teriffs.

Speaker 4 (21:45):
But it's a wait and see.

Speaker 10 (21:46):
Mode right even on the tariffront, I've yet to see
a model, and all the research that we read, i've
yet to see them out of that doesn't suggest it's
a stagflationary shock where overtime you get this boost to inflation,
but you also get a hit to growth.

Speaker 4 (21:58):
I want to go back to the market kind of
a clearing house for all of the information, because I
do feel like the market smacks down policies or initiatives
very quickly. I feel like, much more than it did.
I don't know ten years ago. Maybe it's because of
social media and stuff just piling through. Do you assume
that will continue and that will send messages to Washington
and maybe so that things aren't so severe.

Speaker 9 (22:20):
It will send messages how much they're heated, that we
don't know.

Speaker 4 (22:24):
But especially when I think about the FED and the
independence of the FED, like that to me would be
something that would bring.

Speaker 12 (22:28):
Well to me.

Speaker 9 (22:29):
The most fascinating part of Palace press conference at the
most recent FOMAC meeting was the definitive no that as
soon as that happened, I thought, that's the headline, and
that should be the headline.

Speaker 12 (22:41):
So I don't worry about that piece of it all
that much.

Speaker 9 (22:45):
But one of our thesis is that this sector dispersion,
these rapid fire rotations that are happening at the sector level,
are going to persist. The drivers going forward may be
more specific to things like teriff announcement. So we saw
that in twenty eighteen, there was you know that that
voting mechanism that happened so quickly with markets maybe doesn't

(23:08):
appear acutely at the broad index level, but I think
you're going to see it at the industry level, at
the sector level, tied specifically to both tariffs and immigration.

Speaker 5 (23:18):
Sense Kevin, I believe a year ago we were sitting here.
It was October of last year in Philadelphia, s and
P five hundred is up forty percent since our conversation
with a Thunk.

Speaker 7 (23:28):
What a thunk And what was interesting too.

Speaker 10 (23:29):
I remember talking to you guys about the unique nature
of this bull market, and at that point it had
been so unique where even for something like small caps
in the rustle of two thousand, it was breaking new
bear market lows and that has just never happened before.
You also had sectors in the SMP that had not
been up, and that it was just so unique about
what the structure was of the bowl in its early phases,
where typically even after you go through a non recessionary bear,

(23:53):
you do tend to see a lot of participation at
any sector level, at any cap level, but we just
haven't seen that. But I will say in what's been
nicer to see this year is that participation has really improved,
especially since that Midsummer mark where broad Max seven really
started to take a little bit of a step back,
not outright decline, but take a step back. Tech took
a step back, even semiconductors. Recently, I find that the

(24:13):
weakening and that breath profile actually just fascinating, while the
rest of the market has actually been able to power forward.
And that's I think what has actually been lost in
all of the election related narrative recently, especially around some
of the strength around areas like financials. Financials were strong
heading into the election, Industrials were strong heading into the election,
So it's not as if you got this massive shift
in the leadership profile of the market. I think that's

(24:34):
been a relatively healthful all year.

Speaker 9 (24:36):
There's been massive churn under the surface of these cap
weighted indexes. So the Nasdaq had a thirteen percent draw
down in that Midsummer period of time, but the average
member draw down for the Nasdaq is forty seven percent
year to date. So sometimes when people talk about the market,

(24:58):
it sort of begs, well, what piece of the marketing
you're talking about? These cap weighted into its right dangerous?

Speaker 7 (25:06):
Actually, and we've been calling for a good chunk of
you ear.

Speaker 10 (25:08):
We're calling it the Michael Caine Duck market, you know,
just calm on the surface, like the dickens underneath.

Speaker 7 (25:13):
That's that's been how we've been describing it.

Speaker 4 (25:15):
So does though, all right, so what's the environment for
twenty twenty five? Can you make a call?

Speaker 12 (25:19):
Well, we never make a call.

Speaker 4 (25:21):
Okay, So what are we missing? We haven't had a recession.
We have had pockets of recessions, we've had the roll through,
so so are we done with it?

Speaker 8 (25:29):
Then?

Speaker 9 (25:30):
You know, my hope was that we were going to
get to a point where if we started to see
weakness show up more acutely in the services sector in
large pro probably driven by any further weakness in the
labor market. That, especially if the FED was an easing mode,
you might be in a position to see stabilization, if
not recovery in those areas that already taken their hits,

(25:50):
like manufacturing, like housing. I don't want to say that's
off the table now, but it's a little bit more
difficult post election to come up with a case or
stabilization and improvement in those areas, especially if the FED
doesn't stay in easing mode. We saw this and tempted
some recovery in housing, and then it faltered again courtesy

(26:12):
of the move up in long yiels.

Speaker 10 (26:13):
So I think the other thing too, from evaluation in
a sentiment perspective, is that you're getting pretty stretched across
most of the metrics that we track, and it's not
just in the traditional attitudinal how do you feel about
the market? You know, aaii bulbear indicator. It's now filtering
over into what are investors actually doing with their money.
We've seen equity ETF inflows completely spike akin to levels

(26:34):
that you saw a market funds too. Absolutely yeah, So
I think that becomes a little bit more of a
risk in the event there's a negative catalyst. We always
say sentiment for off. The sentiment and of itself is
not a reason that the market just goes lower. It
has to be tipped in that direction. It's just the
sentiment backdrop that makes things more.

Speaker 9 (26:50):
I also don't think we should look at the money
and money markets as some giant pool of imminent funds
dying to go into the equity market. I think that's
a lot of that is pretty sticky money.

Speaker 5 (27:00):
That's exactly one trillion tion we'll go into the ivy.

Speaker 12 (27:02):
Market, not necessarily the way Mark you get a run.

Speaker 7 (27:07):
Liz.

Speaker 4 (27:08):
Thank you.

Speaker 2 (27:09):
live weekday afternoons from three to six Easter on Bloomberg Radio,
the Bloomberg Business app and YouTube. You can also listen
live on Amazon Alexa from our flagship New York station,
Just say Alexa play Bloomberg eleven thirty.

Speaker 4 (27:29):
From Stocks and the Macro to Fixed Income and the Macro.
This past week, you as Treasury is added to the
gainspurred by the announcement of Scott Bessant, a Wall Street
veteran who investors expect will take the sting out of
the administration's more aggressive trade and economic policy proposals as president,
like Donald Trump's Treasury secretary choice.

Speaker 5 (27:46):
We also got the latest FMC minutes, which you can
of course check out on the Bloomberg terminal. And as
we continue our coverage from Schwab Impact, which happened about
a week and a half ago, we talked with two
members of the Schwab team to focus on fixed income strategy.
We're talking about Kathy Jones. She's a managing director fixed
income strategist and also Colin Martin, Director Fixed Income Strategist.

Speaker 4 (28:06):
We started by asking Kathy if her view of the
FED changed at all since the election.

Speaker 1 (28:11):
I think the case for a pause is growing a
bit stronger at this stage of the game.

Speaker 8 (28:16):
So, you know, we've had stronger than.

Speaker 1 (28:18):
Expected economic data now for a while, particularly like the
retail sales telling us the consumers doing well. And so
then the question is does a FED.

Speaker 8 (28:27):
Really need to cut rate to help out?

Speaker 1 (28:31):
We have very easy financial conditions as the stock market
keeps going higher and credit spreads get tighter and so
you know, and then we have all the uncertainty about
what physcal policy will be going forward.

Speaker 8 (28:45):
We don't know what tax policy will be.

Speaker 1 (28:47):
And then immigration reform, which I particularly think is one
of the most important components for inflation and growth going forward,
because again we don't know what the actual policy will be,
but if you kind of take things at face value,
that could reduce the workforce by seven or eight percent.
That's a huge, huge issue.

Speaker 4 (29:07):
So Colin, you guys, you guys, you and Kathy have
to figure out though fixed income strategy and what you're
thinking about.

Speaker 10 (29:13):
Right.

Speaker 4 (29:13):
People look to you to kind of get an idea
of what's to come maybe in twenty twenty five. So
what do you feel comfortable kind of saying about that.

Speaker 13 (29:20):
Yeah, well, we've kind of revised our guidance a little
bit lately because of so many the uncertainties that Kathy
just highlighted, where there's this wide range of outcomes because
of the proposed policies, what gets implemented, when they get implemented,
and what that impact is. So given that, and given
the I think the risk is to higher yields than
lower yields if we do get some sort of inflationary impact.
So our guidance now, our main guidance for investors is

(29:42):
to really focus on a benchmark or below benchmark average touration.
We don't think it makes a lot of sense to
dive in with long term bonds right now because of
the risk of those prices if they fall. I want
to make it clear though, that that's a tactical idea.
From a strategic standpoint, we still think the yields are
pretty attractive. So if you're an investor, you're looking for
for five six percent yields, you can get that right now,

(30:03):
if you have that time horizon, and if if that's
going to help you reach your goals, then I think
that's really attractive right now. But just be prepared that
if we see yields in show when we talk about
our upside, maybe maybe we go to five percent on
the tenure treasure yield.

Speaker 4 (30:17):
But maybe likely possibly possibly yes, okay, to all three.

Speaker 13 (30:22):
Yeah.

Speaker 1 (30:24):
So you know what we do is you try to
model out we deconstruct the tenure. Yeah, then we try
to model out, well, if we change this component, what
happens in that component?

Speaker 8 (30:33):
Or if you just look at the spread.

Speaker 1 (30:34):
There's a lot of components to play around with, right, yeah, exactly,
And or you just look at the spread between the
Fed funds rate and tenure yields. Historically it can be
a you know, one hundred to one hundred and fifty
bases point. So if the FED can't go below four percent,
you could easily get to five percent plus just based
on history. But we do think the FED will get

(30:55):
below four percent by some amount, but again, a lot
of ifs there, and so we're just trying to be
as cautious as we can right now without giving up
too much income.

Speaker 5 (31:06):
Hey, Colin, play that scenario for us, if we do
hit five percent on the ten year, what that looks like,
What the implications of that are for the economy? And
I mean I think a lot about different areas of
the market that have expected lower interest rates. If we
don't get those, what happens.

Speaker 13 (31:20):
So I think what it looks like. I think it
looks attractive, and I think if we get there, I
think that can draw in a lot of demand. I
think whether it's domestically or internationally, I think there'd be
a lot of demand, especially that we're seeing these interest
rate differentials. We're seeing other central banks expected to cut
more than the US. I think that's number one to
what happens to the economy and to barrow wers I
think it's more of a mixed bag right there, because
if you look at both the consumer side of the

(31:41):
equation and what I focus on in the corporate bond market,
corporations just haven't really had that negative impact of rising
interest rates. Something I've looked at recently as why so
because they because they did the same thing that that
homeowners did.

Speaker 6 (31:54):
They fly, they refined.

Speaker 13 (31:56):
So if you look at i'll use high yield bonds
for example.

Speaker 4 (31:58):
The average which is having a moment.

Speaker 13 (32:00):
They're having a moment. Spreads are at you know, the
fifteen year lows. The average coupon rate. Now that's there
can be high or lower the average coupon rate of
that index. It's right where it was in twenty nineteen.
It's risen a little bit over the past year or so.
But because companies just refinance. So if rates keep rising
from here, although the trend is the opposite right now,
but if they were to move up a little bit,
that would impact the leveraged borrower. But for the most part,

(32:24):
their fundamentals are pretty strong.

Speaker 4 (32:26):
So the opportunities. So when you know someone comes to
you and say, so, where are the best opportunities right now?
If I have to I want to put some money
in the fixed income area, Kathy, what do you say.

Speaker 1 (32:36):
Well, again, if your time horizon is five years plus
and you're willing to kind of ride out the ups
and downs, you're looking at five to five and a
half percent yields without taking much credit risks. So I'll
see their investment great corporate bond, if treasuries and mbs.
If just look at the egg, your total return is
going to be pretty attractive and your income stream is
going to be important. So keep in mind, you know,

(32:58):
we have the rocky period in twenty twenty two because
there was no coupon income. We're coming off zero now
we're starting with coupon's, you know, close to five percent.

Speaker 8 (33:08):
That keeps your return much more solid going forward.

Speaker 1 (33:11):
So we like higher credit quality in general, but definitely
lots of places to lock in that yield.

Speaker 4 (33:19):
How, oh, go ahead, No, you guy.

Speaker 5 (33:20):
I wanted to talk a little more macro and think
about policies come January, because Kathy, you mentioned a lot
at the top when it comes to labor market, when
it comes to tariffs. Do you believe these policies are
actually likely to be implemented given that they actually could
have severe economic consequences.

Speaker 1 (33:35):
I have no idea, and I will be honest with you,
because we know that one thing that President elect Trump
has been in favor of it forever is tariffs. So
we do believe pretty strongly there'll be some sort of terriffs. Now,
will they be modified, Will will industry is affected by
the tariffs be subsidized as they were in his previous
administration with the farmers.

Speaker 8 (33:57):
We don't know the details of that, but tariffs very
likely after that.

Speaker 1 (34:02):
Really hard to say, you know, tax policy and immigration,
hard to say what will really happen?

Speaker 4 (34:08):
Just got about thirty seconds. Is there a moment in
time that you're thinking, Okay, maybe six months from now,
eight months from now, Well, much more clarity about what
this new administration can get done and we can be
more definitive in terms of our thinking about going forward.
Is there a timeframe that you're thinking about for next year?

Speaker 8 (34:23):
Yeah.

Speaker 1 (34:23):
I think when they actually have to debate the Tax
Cut Act that was previously that we'll be expiring, then
we should get a better idea of what Congress is
willing to do.

Speaker 13 (34:35):
Final thought from you, Yeah, no, I would agree. I
think yes, we'll have more clarity just because more time
will have passed. But I think we're going to have
a lot of uncertainty over the next year, two years,
four years. So yes, more clarity, but not all the
answers that we're going.

Speaker 4 (34:49):
To need, keeping us on our toes again. Thank you
both so much so. I appreciate what we could kind
of finish up with the fixed incmentry. It's been such
an important one, no doubt about it, and something we've
been following so closely. He Jones, Managing director, Fiction comes Strategist,
Colin Martin, Director of Fiction Coome Strategist. Right here at Schwab.

Speaker 2 (35:04):
Impact, you're listening to the Bloomberg Business Week podcast. Catch
us live weekday afternoons from three to six Eastern Listen.

Speaker 3 (35:16):
On Bloomberg dot com, the iHeartRadio app, and the.

Speaker 2 (35:19):
Bloomberg Business App, or watch us live on.

Speaker 4 (35:21):
YouTube plenty ahead in our second hour of the weekend
edition of Bloomberg Business Week. As we continue with our
coverage at Schwab Impact twenty twenty four. It happened about
a week and a half ago. We were out in
San Francisco.

Speaker 5 (35:33):
There we were surrounded by some forty five hundred attendees
at Schwab's annual Conference for independent Registered Investment Advisors and
Independent record keepers of Charles Schwab. Great perspectives from those
managing the money of many folks. And so coming up
this hour investing outside of the US is twenty twenty five.
Finally the time to diversify.

Speaker 4 (35:52):
Globally tjevoo just a little bit. I'm just going to say,
plus the continued flows and expansion in wealth management and ETFs.
First up this hour, or going global, as in investing
in stocks outside the United States, which for many years
have lagged the US market.

Speaker 5 (36:06):
Over the last decade, the S and P five hundred
has returned on average thirteen point one five percent. Well,
the foot Seat Global Allcap XUS, which tracks stocks and
developed in emerging markets outside of the US, has only
returned five point two five percent on average. It's a
difference of nearly one hundred and eighty percent over the
last decades, so some pretty serious underperformance. It has been

(36:28):
hard to beat the US when it comes to equities
gains this year and this last decade.

Speaker 4 (36:32):
For the global view and where there are opportunities around
the world, we checked in with Jeffrey KLINP Managing director
and chief Global investment strategist about what's top of mind
for him.

Speaker 14 (36:41):
The obsession with AI and stocks like Nvidia have just
really been focused on the US market, and tech has
been the best performer in the US, and tech is
the biggest sector in the US and it's not elsewhere.
The other thing is that those other economies have been
lagging US economic and earnings growth. That could be different
next year, though she already seen a shift towards financials

(37:02):
leading markets overseas. That could be the next step for
the US as well, big break cup beneficiary. In addition,
we're seeing global economic growth finally begin to converge. US
and China expected to slow next year, but Europe, Japan, Canada,
Australia all expected to pick up economic momentum next year,
along with earnings growth. As a matter of fact, here
in the third quarter, we're just getting done with the

(37:23):
earnings reports. Earnings growth for European companies actually outpaced the
S and B five hundred for the first time in
five or six quarters, So we may be starting to
see a turn there.

Speaker 4 (37:31):
But what are you seeing in terms of flows, Because
it does feel like investors are still holding back and
just kind of all in on the US trade.

Speaker 14 (37:37):
They are in post election. I think a lot of
investors believe, hey, we just had an election. I probably
need to make changes in my portfolio. But they can
be detrimental. Think back to twenty seventeen, right, So, coming
out of the twenty sixteen election, America First policies were
thought to really help US small caps and really hurt
emerging markets. The exact opposite occurred. Emerging markets were the
best performers in twenty seventeen, small cap US the worst.

(38:00):
Not saying necessarily it's a perfect play again a repeat
of all that, but the flows can be misleading what.

Speaker 4 (38:07):
Happened last year, because we were thinking about our conversations
that we had with you and some of the other
members of the SHWAP TV you were bullish on international
what happened last year that you think okay was a surprise,
or just why it didn't pan out, or you misread
the tea leaves.

Speaker 7 (38:21):
Well a few different things.

Speaker 14 (38:22):
One, I think the technology thing has just run longer
and harder than I thought of what I thought we'd
see a broader arade exactly, Yeah, and so we didn't
see that broadening. I think we're starting to see some
of that now, but we just didn't. The other thing
was we did see a stumble in the manufacturing recovery.
So I was basing this on a what I call
it a cardboard box recovery, that demand for making things

(38:43):
and shipping things would pick back up again. It did
in the first half of the year, it rolled over
sharply in the second half, and the global purchasing managers
indext for manufacturing back below fifty I think that usually
as a lag with Central bank policy of about nine months.
We're at the turning point there where I think that
starts to pick up next year. So I think it's
delay aid and not disrupted.

Speaker 5 (39:01):
Where do tariffs come into this equation? Boy, this is
a tough one. If you're thinking international, you're saying, wait
a second, Okay, we get this America First policy coming
once again starting in you know, January twentieth. There's a
lot of Republicans in Congress right now who look like
they're ready to help the President elect push through that agenda.
What do you do if you're an investor outside of

(39:22):
the US and you're saying yourself, wait a second, These
companies outside the US could be hit with tariffs.

Speaker 7 (39:26):
Yeah, and the numbers are scary.

Speaker 14 (39:28):
Sixty percent on China, twenty percent across the board, two
hundred percent on John Deere tractors coming from Mexico. If
you add them all up and I have, and you
wait them by their import percentages, you get a twenty
six percent import tariff in the US on average. That's
up from two point six right now. That's like smooth
Hally level, great Depression era level tariffs. But I think

(39:48):
the reality is going to be quite different from that.
I'd look as an example in Europe. So Europe on
October twenty eighth just slapped forty five percent tariffs on
electric vehicles from China.

Speaker 7 (39:57):
Within two days, Chinese.

Speaker 14 (39:58):
Delegates where they are working out a way to get
rid of those, they seem to make some technical progress
over the last couple of weeks, maybe scrapping those tariffs
in favor of import quotas, which is a far less
disruptive way of doing things. So I think that's probably
maybe a way we can look at what the future
path of tariffs might look like.

Speaker 4 (40:12):
Jeff, how do you think about the pushback in globalization?
We have a lot of CEO say, listen, it's not
going away. Yes, supply chains are changing or bringing do more,
nor shoring or unshoring. But I'm just curious how what's
going on in globalization wars around the globe, how that
is impacting the international investment play.

Speaker 14 (40:32):
So it seems like there are multiple supply chains now
instead of just one. Right, so you don't just assemble
your product in the cheapest labor market, You're going to
have to multiple supply chains, and that seems to be
what's happened.

Speaker 4 (40:42):
Is that good for companies' costs, their earnings there, what
their balance sheets look like, for their investment potential.

Speaker 14 (40:48):
But it's less efficient, so it should be more costly.
At the same time, we've been able to miniaturize manufacturing
globally in a way that's made it not as inefficient
to have multiple supply chains as it used to be.
And with AI robotics a number of these potential innovations,
we could maybe scale that even further to where it's
less of a dragon corporate profits.

Speaker 5 (41:06):
Interesting. Okay, so how do you see this happening outside
of the US versus inside the US. If we're thinking
about the companies that are doing this type of innovation,
who are the beneficiaries here.

Speaker 7 (41:15):
Well, I mean, you know, I think it's those that
are really looking to scale.

Speaker 14 (41:19):
Up their productivity per worker. So you're looking at healthcare,
you're looking at financial services. Those are two areas very
much more representative outside the US than inside the US.
So the potential for productivity gains I think.

Speaker 7 (41:30):
Are skewed to those businesses.

Speaker 14 (41:32):
Your financials are the biggest sector outside the US, and
there's a whole lot that can be done with.

Speaker 4 (41:36):
They either all right, we know you don't do individual stocks,
but when you look at around the world, then I
do feel like I just want to talk some regions.
I think about Japan, and I do feel like the
momentum this year has definitely changed on Japan. Give us
kind of your thoughts about what we see in twenty
twenty five.

Speaker 14 (41:50):
So I think you see radmikes from the Bank of Japan,
and so I think that begins to bring some strength
back to the end and we start to see some
capital come back to Japan. We've got a number of
businesses really ramping up their share buybacks and their dividends,
and so the return to shareholders seems to be picking up.
And so if we get a manufacturing recovery. That's what

(42:11):
Japan does, and so if we get that global manufacturer recovery,
I think that does disproportionately benefit SPAN.

Speaker 4 (42:16):
What about Europe in terms of wars and stuff? So
what's the kind of smart I hate to put everything
in a bucket because I don't think that's fair. But
what are you thinking about for twenty twenty five in
terms of where are the pockets of opportunities in particular
for investors and where maybe not so much?

Speaker 14 (42:30):
You know, one of the things I think Europe might
look to do is buy US weapons to fund the
war in Ukraine, to narrow the trade deficit with the US,
avoid across the board tariffs and actually achieve maybe their
objectives in keeping Russia at bay. One of the things
I think it's interesting is European automakers. They could be
in the crosshairs of Trump tariffs. Right The stocks fell
seven to nine percent right after the election, but they've stabilized,

(42:52):
They've started a rebound because I think if you look
at what's likely to occur, maybe we go from a
two and a half percent tariff on Europeans cars to
ten percent. That will be equivalent to the US tariff
that's seven and a half percent increase in tariff's has
already been offset by the fact that the dollars up
five percent versus the euro right, So we've already kind
of adjusted for some of those factors, and I think
therefore that seven to nine percent to climb in those

(43:13):
stocks maybe for the reverse is what.

Speaker 5 (43:17):
Is the region of the world where your most optimistic.

Speaker 7 (43:19):
I think it probably is Europe.

Speaker 14 (43:20):
One thing, because price earnings ratios are pretty attractive. They're
below their ten year average.

Speaker 4 (43:24):
Such a great good deals valuation.

Speaker 14 (43:26):
Yeah, I mean, take a look at the difference between
Coke and Nestley. Nestley trading at a four pe discount
to Coca Cola. They have literally the same customers and
operations around the world, but you're paying a big premium
for Coke because the investor base is different.

Speaker 7 (43:36):
So I think that comes back. I think earnings growth
does pick up next year.

Speaker 14 (43:40):
We're already starting to see signs of that, and then
five rate cuts by the ECB by June of next
year versus maybe two for the FED. I think that
ease of financial conditions really does help to support that rise.

Speaker 4 (43:50):
And I'm glad you went there because I do think
a lot about the differences in central bank policy right
based on their specific outlooks and what that gap means
in terms of opportunities for investors, and saying that's spread
between what Europe does in terms of monetary policy versus
the US could provide opportunity.

Speaker 14 (44:05):
It's a drag on their currency versus the dollar. Obviously
the dollar would go up, but maybe that's a few
percentage points. Each point of pe expansion in Europe from
fourteen is a seven percent gain on prices, So you
get one or two of those, and that's going to
outweigh anything you're going to get in terms of currency drag.

Speaker 5 (44:20):
I want to go back to Carol's question about the war,
because if you are most optimistic about Europe, how do
you factor that into how you're thinking about the region,
Because there is a chance that with the incoming Trump
administration and the rhetoric around how they want to support
Ukraine or they don't want to support Ukraine, that there

(44:40):
could be a risk of that war ending in Ukraine losing.

Speaker 14 (44:45):
There certainly is a lot of uncertainty of course the
next year, in terms of where they draw borders into
sometimes cease fire agreement and in anticipation of that, both
sides trying to, you know, gather territory and try and
redraw those lines. Ukraine is funded through twenty twenty five.
Most governments have already committed those resources. There's a lot
of weapons on the way, So the whole idea of

(45:06):
a day one ceasefire probably doesn't seem likely. But somewhere
over the course of the year, perhaps where those lines
are drawn. I don't know, but I do believe that
there's going to be a lot more spent in terms
of defense in Europe and that could have some stimulative aspect.

Speaker 4 (45:19):
Jeff, you know, we've all been doing this a long
time and seen a lot of different market cycles, and
I'm just curious how you're thinking about, you know, the
investment environment for the international player or global play today
versus kind of where it was a few years ago.
Is it more difficult, is it more transparency? Give me
some thoughts on that. You know, you've seen a lot
of market cycles.

Speaker 7 (45:40):
Yeah, it's so this one is so much tied to sectors.
I think.

Speaker 14 (45:43):
So the US is basically a tech etf and nothing
wrong with that.

Speaker 7 (45:47):
It's just recognizing it.

Speaker 14 (45:49):
But there are other countries that align with a particular
sector as well. You know, Germany is an AUTOETF, Australia
is a metals and mining ETF, a Canada's a financials ETF.
So if you think about sector diversification, you may love
the US, but honestly, it's a tech et app. So
if you want some sector diversification, move away from just
what has become really kind of a really concentrated AI play.
You need that international diversification in your portfolio. And that's

(46:11):
a different way of thinking about it than maybe in.

Speaker 5 (46:13):
The past thirty seconds on China.

Speaker 7 (46:15):
China is very likely to slow next year.

Speaker 14 (46:17):
They're not allocating the resources to the consumer and to
the property market. It's still a strategic focus on self
sufficiency and semiconductors and so many other things.

Speaker 7 (46:25):
So slower growth but.

Speaker 5 (46:28):
Not really Reboundy what type of would it be?

Speaker 4 (46:30):
Yeah?

Speaker 7 (46:31):
What at this point? Maybe an infrastructure RETF. Yeah?

Speaker 4 (46:36):
Do you still feel like we're lacking transparency in China?
Just got about twenty seconds.

Speaker 7 (46:40):
I think it's getting better.

Speaker 14 (46:41):
I don't think they have the same incentives to create
the same type of economic data that we create in
the West.

Speaker 4 (46:46):
Yeah, all right, great stuff, Thank you so much.

Speaker 7 (46:48):
Pleasure around the world.

Speaker 4 (46:49):
We went well done. Well done. Jeffrey clientapp managing director,
a chief global investment strategist. That Charles Schwab Right here
at Schwab Impact.

Speaker 2 (46:59):
live weekday afternoons from three to six Easter on Bloomberg Radio,
the Bloomberg Business App and YouTube. You can also listen
live on Amazon Alexa from our flagship New York station
Just Say Alexa Play Bloomberg eleven thirty.

Speaker 4 (47:18):
Ubsked recently out with a report. It found that millionaires
already accounted for one and a half percent of the
adult population analyzed by the bank in twenty twenty three,
and by twenty twenty eight will have risen in fifty
two of the fifty six markets it's surveyed. Now in
some markets, the number of US dollars millionaires will increase
by as much as fifty percent over the next five years.

(47:39):
That's a lot.

Speaker 5 (47:39):
It's all kept to those involved in the wealth management business.
Pretty busy client assets at retail brokerage Charles Schwab and
the wealth arms of the sixth largest US bank searched
five trillion dollars in the twelve months through September. It
represents a twenty three percent jump as the group's revenue
from the business collectively topped eighty four billion so far
this year.

Speaker 4 (47:58):
All right, Tim, So a lot of wealth creation going on,
a lot of wealth management going on to manage it all.
And that's something we talked about at Schwab Impact held
recently in San Francisco. We did that with Omar Agolar,
the chief executive officer and chief investment officer of Schwab
Asset Management.

Speaker 15 (48:13):
We see a continuous need and continuous demand of clients
for advice. I think as people continue to grow in
their lives and they continue to accumulate wealth, you know,
they need for them to have somebody that can rely
on and continue to just work on how do what
do I do with their money?

Speaker 11 (48:32):
How do they actually set up?

Speaker 15 (48:33):
And you know, it's kind of interesting with all the
information that is available today, there's not a lot of
people that actually can make a decision on.

Speaker 11 (48:40):
What to do with their money seriously, and it's just
difficult to do.

Speaker 4 (48:43):
Why what is it that they're lacking? What kind of
information are they seeking?

Speaker 15 (48:46):
I think it's it's almost like when you go grocery shopping.
There is a lot, a lot of options. You know,
back back when I started my career, you know you
wanted to say, for retirement, there was one option, just
just buy a target day fund.

Speaker 11 (48:58):
That's it.

Speaker 15 (48:59):
You're based on what you're gonna plan to retire. That's
one option. But now today there's multiple options, multiple things
you can do, manager accounts, you could do it on
your own, you could do a model, you can do
there's several things that you can do. And therefore there's
a natural human bias that tells you, oh, well, if
there's too many options, I'm overly done. I cannot make

(49:19):
a decisions. Songs like me trying to find a shampoo.
It's like, no way you can actually pick something that
will be good, and then once you pick it, there
is a regret.

Speaker 11 (49:27):
It's like, well did I pick the right one? Did
I not pick the right one?

Speaker 15 (49:31):
Maybe it wasn't or the price, And that's a big
part of the same thing happens when it comes down
to finances, and when it comes that that's why there
is what we call a bull market for advice, especially
when you accumulate wealth. There is a significant amount of
need for clients to reach a financial advice or an
RIA to be able to just find what is the
right solution for them.

Speaker 5 (49:51):
What's interesting, though, is Charles Schwab offers both of these
sort of different areas. You could do it all yourself
using Charles Schwab's retail brokerage platform, or you could use
an RIA whose back end is supported by Charles Schwab.
How do you support both of those things even though
they offer very different things.

Speaker 15 (50:07):
Yes, well, that's a big part of you know, the
the institutional knowledge of trying to do things through client eyes.
And in many cases, there's many clients that you know,
want to use their tools on their own and in
many in many cases they actually know what they want
to do and they're looking exactly what it is and
just thinking about, you know, like a supermarket. You know,
there's people that know exactly the brand they want, exactly

(50:29):
how they want to do it, and they're loyal to
what their pieces are and they will continue to do that.
There are others that are feeling more comfortable, you know,
relying on an advisor for them to find what their
path is, and you know, both of them are reliable.
Both of them are actually things that have people. There's
some clients that like to trade every day. There are
other clients that want to buy it today and forget

(50:50):
about it. So there's a lot of flavors for everybody.

Speaker 4 (50:52):
Oh, in the wealth management business, I'm just curious how
many people are you know, find it, park it, leave
it there. They're thinking longer term. But increasingly we see
people wanting access to the private markets, private credit, all assets.
How much of that does that play with you, guys too?

Speaker 11 (51:07):
Well?

Speaker 7 (51:07):
It is.

Speaker 11 (51:07):
It is a big part of the market.

Speaker 15 (51:09):
And I think the first part of your question, you know,
there's a lot of clients that like to have what
we call a financial plan, that would like to have
an asset allocation, that would like to have a long
term setup, and the majority of clients and our philosophy
encourages for everybody to have a financial plan.

Speaker 11 (51:25):
Everybody should have a financial plan.

Speaker 15 (51:27):
And then once you have a financial plan, you can
set up your long term investment objectives on what you're
investing for. And in many cases you could be retirement,
it could be income, it could be you know, growing,
it could be buying a house, it could be a
lot of things that you can do and then put
the money to work that way. Now that being said,
the human part of every investor, on every client basically
shows that when you hear the word character currency bitcoin,

(51:49):
do you hear the worst AI? You hear them immediately
you pick up the phone and say how can I
be part of it?

Speaker 4 (51:54):
Do your clients do that?

Speaker 11 (51:55):
Of course they do that.

Speaker 15 (51:56):
All the time, and they do it all the time
in any situations where they have and then you know
how much exposure I have to the max seven? Do
I need to get out of the max seven? Do
I need to hedge my So the normal setup of
a human behavior to try to act on recent information
is something that happens all the time.

Speaker 5 (52:13):
What's the pressure that your clients are feeling when it
comes to fees? And when I say your clients, I
mean the arias and the wealth managers who are out
there offering their services for a percentage of the assets
that they're managing on your behalf. Because there are a
lot of robo advisors out there, including a robo advisor
from Charles Schwab.

Speaker 11 (52:29):
Yes, well, you know what we have done.

Speaker 15 (52:31):
We have run these studies over time that basically show
what clients are looking for. You know, number one, Yes,
they're incredibly price sensitive. You know, the price and cost
is a big part of the driver for decision making.
Transparency is a big party. Going back to the other
question that you had about private markets, that's a little
bit of the hesitation today for clients to try to

(52:52):
get more access to it. They are interested, they actually
like to have the custos, but they're cautious about it
because of the transparency and the liquidity, you know, and
in many cases, once you once you explain that there
is less transparency and they're less liquidity for a private market,
then they step back and say, oh, let me think
about it. I mean, initially sounds great, and initially sounds

(53:12):
like a great opportunity, and in fact, we encourage, you know,
a portion of their investments to be in private markets. However,
you know, once you explain the trade offs, then it's
started to just, you know, make a big difference.

Speaker 4 (53:23):
I kind of love to hear that, because I think
I feel like we've spent so much time at various
investment conferences and everybody just wants to talk about private
equity and in particular private credit. But a lot of
folks are saying, you know, you've got to understand that
you lock your money up, you can't get access and
the transparency issues are maybe not there. So it sounds
to me that like your investors are savvy enough to

(53:44):
be asking these questions.

Speaker 11 (53:46):
Yeah.

Speaker 15 (53:46):
No, And not only that, but the big part is,
like you know, the investors like to see, especially younger investors,
they like to see data. They like to see information,
you know, before they make a decision.

Speaker 11 (53:57):
And this is a very looking at.

Speaker 4 (53:59):
Him as younger investors, so you're not looking at me, looking.

Speaker 11 (54:02):
At both of you.

Speaker 15 (54:02):
But when I actually think about it, when we do
studies by generation, you know, like silent generation baby boomers,
they tend to be a little more trusting in that sense.
And the other words, like they trust the advisor, they
have a relationship with the advisor, and they don't necessarily
need to have that much evidence. You know, this happens
actually when my kids, even when I recommend a restaurant,
they still have to yelp it and try to figure
out what the stars are. And even in many cases

(54:24):
like that, why do you recommend that it only had
three stars? So it is one of these that they
suggest evidence. They need evidence to make a decision, and
in those cases, when you compare performance on private markets
and public markets, you immediately start saying, like why would
I lock my money in where I can actually in there?
Now that's not the whole story, but I think that's
a little bit of the hesitation.

Speaker 4 (54:46):
We tease that we were going to ask you about
key behavioral biases to be able to look out for
in today's environment.

Speaker 11 (54:52):
What are they say that again.

Speaker 4 (54:54):
The key behavioral biases that are out there in today's
investment environment, Well.

Speaker 15 (54:57):
There is, I would say there's three that are in
ply you know, prevalent in today's market. There Number one
is hurting behavior. Hurting behavior, which is exactly what we're
just talking about. And the Max seven was clearly a
big part AI Max seven, Bitcoin and video, you know,
definitely you know, part of like you know what's going
to happen. A lot of people will be watching this
afternoon actually in a few hours, just on that report.

(55:21):
But that that component about that and in fact, for
that particular thing, not a lot of clients knew what
NBDIA was five years ago. Is not until now that
became so popular and that's and that's a big part
of the what is it called the FOMO and that's
one of the biases. The second bias is called recency bias,
which is people tend to just you know, look at
the most recent information and extrapolate into the future. Oh,

(55:42):
you know, the market has been up for three months,
it should be going up forever. And that that's the
kind of behavior that people tend to have. Well, the
same thing goes back to, you know, to when things
go wrong. It's like immediately they become like, well, we
have had two bad two bad, this is time for
get out, and then try to just panic that okay,
And those are two of the typic you know, behavioral
biases that are very typical today.

Speaker 5 (56:03):
Carol mentioned crypto. So I got asked about bitcoin.

Speaker 4 (56:05):
Do everybody's doing your show that's just about crypto?

Speaker 5 (56:09):
Feel free to tune it, but it is. It's it's
interesting because it's you know, the whole market of bitcoin,
the whole market cap at bitcoin, not even the market
cap of nvideo. So I think a lot of people
would say there's still a lot of room for people
who are crypto curious. At this point, what portion of uninvestors' portfolio,
if any, should be allocated to crypto.

Speaker 15 (56:31):
Well, we we we have had points of view on
on crypto in general to basically say, like, look, any
any client could actually use you know, trades as a
way to just generate or try to find any solutions
they have for any strategic long term asset allocation. We
haven't adopted crypto as being part of like what you
would use for the long run. And in many cases

(56:52):
the reason why is because for our strategic asset our
location work, we normally tried to find what are the
fundamentals that allowed that to be valued and what are
the economic factors that drive the performance of certain asset classes.

Speaker 11 (57:06):
You compare MBDIA to crypto.

Speaker 15 (57:07):
Well, in the case of media, there is you know, earnings,
there is clearly financial situations, there are results, there is
everything else.

Speaker 4 (57:13):
In the case of this, it's actually regulatory sec filings right.

Speaker 15 (57:17):
There is exactly they are accountable cash flows and.

Speaker 11 (57:22):
Actually there is a product out there that you can touch.

Speaker 15 (57:24):
In the case of crypto, a lot of these prices
tend to be driven by supply and demand. It's supply
and demand driven it basically have people have asked me
the questions said, like, well, but gold isn't gold the
same like gold is also supply demand driven.

Speaker 11 (57:37):
Yes it is. But the difference is there is a
bar that you can touch.

Speaker 4 (57:40):
Oh mark twenty seconds. Top question you think on everybody's mind.
Are registered investment advisors right now in this environment? Number
one question investment question.

Speaker 15 (57:49):
The number one question is you know, what would we
think about the market, you know, next year, given you
know potential less regulation, potential tariffs and potential changes in
a way that you know the sec you know will
will move down their gender next year.

Speaker 4 (58:05):
All right, good stuff, thank you so much.

Speaker 11 (58:07):
It's good to see you guys.

Speaker 4 (58:08):
Great great setup for us here on this Wednesday. Amar
agolar He is the chief executive officer, chief investment officer
of Schwab Asset Management. Joining us here at Schwab Impact
in San Francisco.

Speaker 2 (58:22):
live weekday afternoons from three to six Eastern Listen.

Speaker 3 (58:29):
On Bloomberg dot com, the iHeartRadio app.

Speaker 2 (58:32):
And the Bloomberg Business App, or watch us live on YouTube.

Speaker 4 (58:37):
The insatiable appetite for the investor friendly wrapper and all
time high number of product launches and a relentless bull
market fueled by Donald Trump's presidential victory have helped push
total net inflows into US ETF's past nine hundred and
thirteen billion dollars. This is according to data compiled by
our Bloomberg Intelligence team, that beats twenty twenty one's record

(58:57):
hall with still one more month to go.

Speaker 5 (59:00):
Further signs of the markets exuberance, total US ETF assets
hit the ten trillion dollar mark for the first time
in September. More than six hundred new products have debuted
since the start of the year, and nearly all ETFs
in the US posted positive twelve month returns, up from
eight percent just two years ago. This according to data
from Bloomberg Intelligence.

Speaker 4 (59:18):
Now, Schwab started in the ETF business fifteen years ago
and it is one of the dominant players with thirty
one ETFs, including ten fixed income offerings, making it the
fifth largest provider of ETFs.

Speaker 5 (59:29):
With an ETF update, we were joined by David Botset,
He's managing director and head of Innovation and Stewardship over
at Schwab. He stopped by our setup when we were
at the Schwab Impact event out there in San Francisco.

Speaker 16 (59:41):
You know, the first thing we start with is what
are the investor needs? You know, that's at the heart
and the ethos of everything we've been doing in ETF.
So the past fifteen years you mentioned, and that's really
helped compel ust up to four hundred billion dollars in
assets in our ETFs. So we've been doing an annual
ETF investor study now for over a decade. That's asking
questions of both ETF investors and non ETF investors about

(01:00:02):
their various views on how do they think about ETFs,
what's most important to them, about what they're investing in,
and what categories they may invest in the future. That
provides us a lot of great insights to help drive
our innovation in the space.

Speaker 4 (01:00:15):
All right, So for non ETF investors versus ETF investors,
what they want.

Speaker 6 (01:00:20):
Is it different?

Speaker 16 (01:00:21):
You know, there are some nuances to that. So in
some cases it's very much the same. It's things that
they're looking at when they're selecting an ETF, like cost, Yeah, right,
that stands out in both categories.

Speaker 7 (01:00:33):
But there are other areas where we.

Speaker 16 (01:00:34):
See non ETF investors they need more education, they need
more insights because their confidence level in selecting an ETF
is much less than those that are ETF investors.

Speaker 7 (01:00:44):
Makes sense, it does.

Speaker 4 (01:00:45):
Hey, listen, one thing that they need is a mortgage
backed security ETF, which just you guys launched this week,
one day ago, yesterday, Yes it was so tell us
about that.

Speaker 7 (01:00:55):
You know what.

Speaker 16 (01:00:56):
We listen to our investor base. The one thing that
they tell us is we need more precise tools for
our fixed income allocation. You know, we go back a
decade and everybody was using the aggregate index to get
their fixed income exposure. But in a dynamic interest rate
environment like we're in today, they want to control for
sector exposure. They want to control for duration, they want

(01:01:17):
to control for the credit quality. And a portfolio. Mortgage
backed securities is one of those that frequently are under
utilized in a portfolio. But they think about how do
I redynamicize that aggregate exposure. They want that precision in
an MBS ETF.

Speaker 5 (01:01:33):
Are you thinking about getting into what our own Eric
Belcunas over at Bloomer Intelligence calls the hot sauce ETFs. Like,
if you've got ninety five percent of your portfolio, you know,
in large cap stocks and maybe some bond funds, you
got five percent to play with, Maybe you throw some
into ARC or you throw some into bitcoin ETF. Are
you guys thinking about getting into that sort of specialty category,

(01:01:55):
maybe go leveraged in Vidia ETF.

Speaker 16 (01:01:58):
You know, our bread and butter largely is in the
cot anas. Eric's a great guy to love to work
with them, But you know, our bread and butter is
really in the core products and solutions, right because where
we see the benefit that we can provide as an
ETF provider is on cost, which is number one in
our survey year and year again, Cost number one thing

(01:02:20):
people look at.

Speaker 5 (01:02:21):
So there's a race to the bottom with those sort
of big broad ETF because there is so much competition.
And that's why I think you see a lot of
innovation happening in the Okay, well, how can we make
our product unique and also charge fifty basis points instead
of eight basis points?

Speaker 16 (01:02:34):
Yes, well, I think you'll see us innovating in that
space is less on those hot sauce areas and it's
more thinking about how do we use the ETF wrapper
in other ways bring actively managed strategies. Earlier this year,
we launched the Schwab Alter Short Income ETF. You know,
you look at that Alter short space, it's really hard
to index that category. We also think it's an area

(01:02:55):
where an active manager can potentially provide alpha.

Speaker 4 (01:02:58):
Is it all about active going forward?

Speaker 9 (01:03:00):
Know?

Speaker 16 (01:03:00):
I don't think it's all about active, Yeah, but increasingly
you're seeing that in that space that's either coming through
new launches or conversions of active mutual funds and ETFs,
and they're in they're taking an outsized portion of the
flows this year.

Speaker 4 (01:03:12):
I always think about this, David. I began kind of
my career in business news.

Speaker 5 (01:03:15):
You had a show ATF show, right or mutual.

Speaker 4 (01:03:17):
Fund fun show not so long ago, and it's just
interesting to see the arc and how we move to ETF.
When is it that we just don't have mutual funds
and it's all about atfs. Is it just a matter
of time?

Speaker 16 (01:03:28):
I don't think so that there's a continue Well, I
think it's it's all about the benefits the ETF provides.
It can provide a cost benefit, It can provide a
tax benefit because they tend to be more tax efficient,
and a trading benefit. But in many accounts where it's
a qualified account you're not paying taxes, that tax benefit
isn't there.

Speaker 7 (01:03:47):
You also see a lot of strategic allocation.

Speaker 16 (01:03:49):
Long term, longer term investors for one K plans retirement
plans where you may not necessarily need that tax benefit
or the ability to trade every day in your location.
If I'm more of a strategic investor.

Speaker 4 (01:04:02):
Are investors, though, who are planning for the retirement missing
alpha though by doing mutual funds that way? Like I mean,
are they missing out on opportunities potent?

Speaker 13 (01:04:10):
So?

Speaker 16 (01:04:10):
I think potentially and increasingly they may miss out on
those opportunities because the innovation is going to be more
in the ETFs than it is in mutual funds. So
in those new opportunities that arise.

Speaker 5 (01:04:20):
What about money market ets versus money market mutual funds?

Speaker 16 (01:04:24):
You know, it's interesting. We're seeing some work by other
firms in that space. It'll be interesting to see.

Speaker 5 (01:04:29):
But right now, if I want to buy a money
market fund at Charles Shraub, I have to buy a
mutual fund.

Speaker 7 (01:04:33):
It is in a fund structure, that's right.

Speaker 5 (01:04:35):
Why is that?

Speaker 7 (01:04:36):
Well?

Speaker 16 (01:04:36):
I mean I think the people like the dollar nav right,
That's one of the big distinctions where we've seen that
the one product that is in the market today. You're
no longer trading at a dollar like you do with
a money market fund.

Speaker 7 (01:04:48):
It's dollar in, dollar out.

Speaker 16 (01:04:49):
You like that known factor, and I'm not sure that
investors will necessarily want to stray for that when they
think about their cash investments.

Speaker 4 (01:04:56):
How does the macro play into the ETFs that you
guys are thinking about in terms of launches?

Speaker 16 (01:05:01):
You know, for us, it's really about the long term view.
It's less about a macro current point in time. It's
really thinking about how do we serve investors' needs for
the long haul.

Speaker 4 (01:05:09):
So even like you know, a new administration, new policies
that might impact the economy and various sectors, it's not
the way you play it.

Speaker 7 (01:05:16):
It's not the way we play it, that's right.

Speaker 4 (01:05:18):
All right? Interesting does the macroview though? I mean, as
you look at what's going on in this space, how
does it impact at all your thinking?

Speaker 11 (01:05:26):
Yeah?

Speaker 16 (01:05:26):
So I think where it impacts our thinking is when
we talk to investors about how to allocate their portfolios.

Speaker 4 (01:05:32):
Okay, right, you think about our do they have lots
of questions right now?

Speaker 7 (01:05:35):
Absolutely?

Speaker 5 (01:05:36):
Let's say you were to just think about the universe
of ETFs in your world, how much of those ETFs
are when the money comes in? Is it about indexing
versus about something outside of indexing to try to get alpha,
you know, you.

Speaker 16 (01:05:50):
Know, I think it's the way that indexing is used
right model portfolio strategic allocations. It's more about how do
I tilt between large cap and small cap, domestic international,
looking for those alpha opportunities rather than within the asset
class itself.

Speaker 4 (01:06:04):
We mentioned you guys fifteen years just celebrate your anniversary
from your first ETF. How do you think about the
trajectory and kind of where the ETF market was at
the beginning. I remember a time I felt like every
guest or every other guest with somebody offering up a
new ETF. I feel like it's founded a different groove
now and it's matured. But tell us about it. You've

(01:06:24):
been in it.

Speaker 16 (01:06:24):
Yeah, I've been in the ETF industry for nearly twenty years,
so it's been a long time. It's been a great run.
But we've still got a lot of innovation to go.
So I think we're just in the early inning still
of what the ATF can bring to investors and video
ETF is it coming anytime?

Speaker 5 (01:06:41):
They have I think direction, yes, the direction.

Speaker 7 (01:06:44):
There are some single stock levered etfe in the market.

Speaker 5 (01:06:47):
That's what I was thinking of when I was referring
to that leverage, you were channeling your inner Eric.

Speaker 4 (01:06:52):
Yeah, David, thank you so much. Fun to check in
with you again.

Speaker 7 (01:06:56):
Thanks so much.

Speaker 5 (01:06:56):
I hope Eric is listening and knows that I'm giving
him all this love.

Speaker 4 (01:06:59):
He better. I'll point it out to Warner David bots At,
Managing Director, head of Innovation and Stewardship over at Schwab
joining us right here, chob impact. David, Thanks again, Thank you.

Speaker 2 (01:07:08):
This is the Bloomberg Business Week podcast, all available on Apple, Spotify,
and anywhere else you get your podcast. Listen live weekday
afternoons from three to six Eastern.

Speaker 3 (01:07:19):
On Bloomberg dot com, the iHeartRadio app, tune In, and
the Bloomberg Business App.

Speaker 2 (01:07:24):
You can also watch us live every weekday on YouTube
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Bloomberg Businessweek Weekend - November 29th, 2024

Episode Transcript

Hosts And Creators

Tim Stenovec

Carol Massar

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.css-14f5ked{margin:0;word-break:break-word;display:-webkit-box;-webkit-box-orient:vertical;box-orient:vertical;-webkit-line-clamp:2;overflow:hidden;}Bloomberg Businessweek Weekend - November 29th, 2024