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Speaker 2: The Bloomberg Business Week Podcast with Carol Messer and Tim
Speaker 2: Stenebek from Bloomberg Radio.
Speaker 4: Hi, everyone, Welcome to the Bloomberg Business Week Weekend podcast.
Speaker 4: So we were recently in San Francisco broadcasting from Schwab
Speaker 4: Impact twenty twenty four. It was just over a week
Speaker 4: week and a half ago. We were surrounded by some
Speaker 4: forty five hundred attendees. This is Schwab's annual conference for
Speaker 4: independent registered investment advisors, you know rias, and also the
Speaker 4: independent record keepers of Charles Schwab. What it does is
Speaker 4: it brings together advisors from around the country and those
Speaker 4: in the industry that support them with services and tools.
Speaker 4: It was a lot of folks, a.
Speaker 5: Lot of people there, and for the next two hours
Speaker 5: we're serving up highlights from the event in interviews withvarious
Speaker 5: members of the Schwab universe, including the company's top strategists
Speaker 5: on USN, international markets, also fixed income. We're also going
Speaker 5: to hear about growth in the wealth management and ETF businesses.
Speaker 4: Now, we just want to point out at the time
Speaker 4: president like Donald Trump had yet to name his pick
Speaker 4: for US Treasury Secretary, his choice Wall Street veteran Scott Bessant.
Speaker 4: It came after Schwab impact was over. We're pointing this
Speaker 4: out because we know this is one of the top
Speaker 4: jobs in an administration that is closely watched by global
Speaker 4: investors in Wall Street alike. Who is the US Treasury Secretary?
Speaker 5: Folks, It matters, and so it wasn't a choice yet
Speaker 5: public when we sat down with the president of Charles Schwab,
Speaker 5: who also happens to be the incoming CEO of the
Speaker 5: company as well. We're talking about Rick Worster, who takes
Speaker 5: over the top spot on January first.
Speaker 4: Even so, we had a lot to talk about as
Speaker 4: Charles Schwab recently reported earnings. The stock, by the way,
Speaker 4: did rally on that earnings release and even had a
Speaker 4: couple of analysts raising their price targets on the company.
Speaker 4: This as core net new assets brought to Schwab by
Speaker 4: new and existing clients came in at twenty four point
Speaker 4: six plosillion dollars. Total client assets are now approaching ten
Speaker 4: trillion dollars.
Speaker 5: We kick things off with Rick Wurster looking at the
Speaker 5: big themes he's hearing about at the event.
Speaker 6: The big theme to me is always what can we
Speaker 6: collectively do to make a difference in the lives of
Speaker 6: every day investors. You mentioned the number ten trillion dollars.
Speaker 6: It's an overwhelming number, but behind every one of those dollars,
Speaker 6: it's a grandparent who's trying to help contribute to their grandkids' education.
Speaker 6: It's a it's a family that's trying to take a
Speaker 6: nice vacation that they've been saving for. That's what matters
Speaker 6: to us.
Speaker 4: I love that you say that because as I walk
Speaker 4: around and talk to some of the advisors, you know,
Speaker 4: they're maybe a billion dollar shop, a two billion, maybe
Speaker 4: even smaller, and they're always kind of apologizing. I'm like, no,
Speaker 4: you're the guys who are managing everybody's money. I kind
Speaker 4: of love that perspective absolutely.
Speaker 6: And the thing about this community. We serve fifteen thousand advisors.
Speaker 6: They're in most communities across our countries, sitting down the
Speaker 6: table to the table with people helping them understand how
Speaker 6: to live their best financial life and the power of
Speaker 6: that is so impressive.
Speaker 4: Rick, no doubt about it. The elections continue you to
Speaker 4: come up. How are you thinking about the elections the
Speaker 4: impact that a new administration, new people running different regulatory bodies,
Speaker 4: certainly that plant to the financial industry. How it might
Speaker 4: impact Schwap, Well.
Speaker 6: There's a lot of potential change at play. We've heard
Speaker 6: a lot of proposals. It will be really interesting and
Speaker 6: important to watch how those play out, and we stand
Speaker 6: ready to do whatever we can to help the everyday investor.
Speaker 6: That's our focus.
Speaker 4: And all things change much because of a new White
Speaker 4: House and a new team. Do you anticipate from what
Speaker 4: we've heard on the campaign trail and some of the
Speaker 4: people that are being considered for positions.
Speaker 6: I certainly think that there will be change.
Speaker 7: Absolutely.
Speaker 6: I think with any administration there's change, and we've been
Speaker 6: through all sorts of presidential cycles and election cycles, and
Speaker 6: at the end of the day, what it means for
Speaker 6: us is we adapt and we do whatever we can
Speaker 6: to help the the end client.
Speaker 5: Why are you thinking about this from a regulatory perspective?
Speaker 5: We did hear that SEC chair Gary Gensler is going
Speaker 5: to step down by January twenty. It's certainly the crypto
Speaker 5: community cheering that. How do you look at a change
Speaker 5: in leadership at the SEC.
Speaker 6: Well, for us, our company is built on trust and
Speaker 6: has been for fifty years. Our entire industry is built
Speaker 6: on trust. If people can't trust their financial institution, the
Speaker 6: whole premise of what we do goes away. And so
Speaker 6: I think regulators play a really important role in that,
Speaker 6: and we've always had a great relationship with regulators. I
Speaker 6: think from our perspective, we want regulation that is thoughtful
Speaker 6: and makes sense for the end investor. And when that's
Speaker 6: the case, we'll do anything to support it. And we're
Speaker 6: looking we're looking forward to, you know, to seeing who
Speaker 6: the next chairman is going to be.
Speaker 4: Rick what does it mean for crypto? And I'm curious
Speaker 4: if you guys see yourself getting into the crypto business.
Speaker 4: Here we are approaching one hundred thousand dollars. We have
Speaker 4: a president who initially maybe or president elect who maybe
Speaker 4: wasn't so into crypto is now very interesting.
Speaker 5: He got his own crypto company.
Speaker 4: What about for Schwab what's the play here? Do you
Speaker 4: see yourself getting into it?
Speaker 6: Well, we're in the crypto business to press, we have
Speaker 6: lots of different ways for clients to participate. They can
Speaker 6: buy ets today, they can buy big coin futures, they
Speaker 6: can buy closed end funds. I think we will get
Speaker 6: into this, into spot crypto when the regulatory environment changes,
Speaker 6: and we do anticipate that it will change, and we're
Speaker 6: getting ready for that eventuality.
Speaker 4: Is there some I don't know? Has crypto? Is it
Speaker 4: growing up in your view?
Speaker 6: I don't know. You know, it's an interesting asset class
Speaker 6: and people have really gravitated towards it, and you know,
Speaker 6: we never like to judge what people want to invest in.
Speaker 6: People on our platform, we think are very thoughtful investors,
Speaker 6: very sharp. They make decisions about what they want to
Speaker 6: invest in, and crypto has certainly caught many's attention and
Speaker 6: they've made a lot of money doing it. I have
Speaker 6: not bought crypto, and now I feel silly. So they've
Speaker 6: been the ones making all this money.
Speaker 4: On crypto thinking about buying it now.
Speaker 6: Me personally know, but we certainly support our clients that
Speaker 6: want to do that.
Speaker 5: You know what, you answered my next question, which is
Speaker 5: going to be do you own any crypto? But talk
Speaker 5: a little bit about that, because it's always interesting hearing
Speaker 5: from somebody in your space about their views on something.
Speaker 5: What's holding you back?
Speaker 6: Well, I think what's holding me back is just a
Speaker 6: question around the true value of crypto. You know, I
Speaker 6: like to invest in stocks, and with stocks, you there's
Speaker 6: cash flows you can rely upon. There there's dividends that
Speaker 6: accrue to you. With crypto, it's less certain what that
Speaker 6: will be, and it's it's less certain how to value it.
Speaker 6: So to me, on a personal level, that's what makes
Speaker 6: crypto not something that I invest in. At the same time,
Speaker 6: we encourage our investors to invest in what matters for them,
Speaker 6: and I've talked to a lot of our investors who
Speaker 6: tell me I'm completely missing the boat, and they tell
Speaker 6: me all the great things about crypto, And you know what,
Speaker 6: they've been right, not me, because so far keeps going up.
Speaker 5: So far they've been right. We'll see.
Speaker 4: It's one we're going to continue to follow. It moves
Speaker 4: around a lot. It is a competitive space. Just this week,
Speaker 4: I just want to look up my I know it's
Speaker 4: Robin Hood announcing they're moving to the RIA space. I'm
Speaker 4: curious about how you were thinking about Schwab for the
Speaker 4: next fifty years. As you get ready to take over
Speaker 4: as CEO and you know, not a new thing traditional investors.
Speaker 4: They're getting older, younger investors how they want to play
Speaker 4: and have more options. So what are your thoughts about
Speaker 4: Robinhood's move and maybe what you guys need to continue
Speaker 4: to do to attract younger investors who want those more options.
Speaker 6: Well, for fifty years, our central theme has been to
Speaker 6: see through client size and do right by them, and
Speaker 6: we attract a lot of young investors to Schwab. In fact,
Speaker 6: sixty percent of our new to firm clients every year
Speaker 6: are under the.
Speaker 7: Age of forty.
Speaker 6: Our client base actually gets younger every year, so it's
Speaker 6: sometimes we're not thought of as that way, but we
Speaker 6: attract a lot of young investors because we have what
Speaker 6: we think is the best trading platform in the industry,
Speaker 6: and it also comes along with what we think is
Speaker 6: the best educational and training platform in the industry, and
Speaker 6: that aspect has really appealed to some of our younger
Speaker 6: newer investors.
Speaker 4: Got to ask you about the training side and talking
Speaker 4: with advisors here. I was up on the stage doing
Speaker 4: a panel on artificial intelligence, and so many people came
Speaker 4: up to me afterwards and they're like, we got to
Speaker 4: talk to Schwab because I think we need a schwab chatbot.
Speaker 4: AI though, is impacting everything? How are you also, I
Speaker 4: don't know, acknowledging thinking about how that needs to be
Speaker 4: incorporated into what you offer up the advisory space.
Speaker 6: Yes, so that comment about wanting an AI chatbot, what
Speaker 6: they don't recognize is that actually, behind the scenes, we
Speaker 6: have built one for our client facing professionals. And so
Speaker 6: it used to be that sixty thousand times a month
Speaker 6: we would have a phone rep spend more than three
Speaker 6: minutes searching for a piece of information to answer a
Speaker 6: client question, and now we have built an AI capability
Speaker 6: that finds that information in seconds, and so it makes
Speaker 6: a better use of the client's time and allows them
Speaker 6: to focus and go deeper on wealth issues that we
Speaker 6: could potentially help them with.
Speaker 4: But is there another level that you continue to think about? Okay,
Speaker 4: where does this go in helping advisors in terms of
Speaker 4: portfolio management are building out their businesses.
Speaker 6: I think AI will have a really big impact on
Speaker 6: our industry. I think it will do a lot to
Speaker 6: help us better serve clients, to empower our professionals to
Speaker 6: give them the right information at the right time. I
Speaker 6: think it will also allow us collectively to help serve
Speaker 6: clients that we Otherwise we have fifteen million retail clients,
Speaker 6: we can only have a person to person relationship with
Speaker 6: about ten to twenty percent of that client base. There's
Speaker 6: eighty percent that we don't get to to have that
Speaker 6: in person dialogue with and I think AI could bridge
Speaker 6: that gap and allow us to reach more clients.
Speaker 5: Hey, before we let you go, I want to talk
Speaker 5: a little bit about the balance sheet, because you basically
Speaker 5: said you're trying to shrink the bank's balance sheet and
Speaker 5: not hold as many loans on the balance sheet. Given
Speaker 5: what happened a couple of years ago, close to two
Speaker 5: years ago with the regional banking crisis in the way
Speaker 5: you guys were brought into that, just give us an
Speaker 5: update there on what you're going to do when you
Speaker 5: become CEO.
Speaker 6: Well, I want to clarify, we never said we wanted
Speaker 6: to shrink our balance sheet. What we did allude to,
Speaker 6: and I think what you're referring to is on an
Speaker 6: earnings call, we said, as our balance sheet grows, we
Speaker 6: would consider using a third party bank to take on
Speaker 6: some of those deposits. That's something that could make sense
Speaker 6: for us because of the way the economics work, we
Speaker 6: have to hold capital against deposits. We can send some
Speaker 6: of those deposits to another bank and earn a better
Speaker 6: return relative to capital when we do so. So it's
Speaker 6: a tool to have in our toolbox. It's not something
Speaker 6: we're going out and doing immediately, something we're considering. We'd
Speaker 6: only do it as our balance sheet grows and when
Speaker 6: it makes sense to do.
Speaker 4: Challenging here, certainly for Schwab with the regional bank crisis
Speaker 4: and so on and so forth. We talked about a
Speaker 4: lot on Bloomberg. Are we past it? Do you feel
Speaker 4: confident or what's more to be done? In terms of
Speaker 4: the impact that we've seen in the past year.
Speaker 6: I've never been more optimistic about our business than we
Speaker 6: are today. We're number one or number two and the
Speaker 6: two fastest growing segments of the financial services landscape, and
Speaker 6: our client satisfaction scores have never been higher than they
Speaker 6: are today. So we're hitting on all cylinders as we
Speaker 6: roll into twenty twenty five, and I couldn't be more
Speaker 6: excited about it.
Speaker 4: What's the most interesting thing in the investment space do
Speaker 4: you think right now?
Speaker 6: I think the engagement among clients. It's just wonderful to
Speaker 6: see how engaged they are in markets in their financial life.
Speaker 6: When people own their tomorrow, they tend to have great
Speaker 6: financial outcomes.
Speaker 4: Rick, thank you so much. I know there's a lot
Speaker 4: going on.
Speaker 8: I know this is a.
Speaker 4: Big event, but I'm carving out some space for us.
Speaker 4: We really appreciate it.
Speaker 6: Well. Thanks for making a commitment to be here. We
Speaker 6: love having you here.
Speaker 4: It's a great perspective that we get to come and
Speaker 4: take back to New York and kind of share with
Speaker 4: us some of our other guests. Rick Worster, current president
Speaker 4: of Charles Schwab taking over CEO on January first. This
Speaker 4: is Bloomberg from Impact.
Speaker 2: You're listening to the Bloomberg Business Week podcast. Catch us
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Speaker 3: On Bloomberg dot com, the iHeartRadio app.
Speaker 2: And the Bloomberg Business App, or watch us live on YouTube.
Speaker 4: Time now for a strategy deep dive courtesy of the
Speaker 4: team at Charles Schwab. Everything from global equities and macroeconomics
Speaker 4: and presidential politics to fixed income and US domestic stocks.
Speaker 4: It all happened recently when we broadcast from the Schwab
Speaker 4: Impact Conference in San Francisco.
Speaker 5: At the event, two very familiar voices to investors and
Speaker 5: the Bloomberg world from Charles Schwab, Lizanne Saunders, Managing director,
Speaker 5: Chief Investment Strategists also along with Kevin Gordon, Director and
Speaker 5: senior investment strategist.
Speaker 4: We want to note that this conversation happened before President
Speaker 4: elect Trump vowed additional tariffs on Mexico, Canada, and China
Speaker 4: that'll happen this past week.
Speaker 5: We began by asking about the conversations they're having between
Speaker 5: each other about what's going on in the market.
Speaker 9: It's just such a unique period of uncertainty because of
Speaker 9: the different directions policy can go. And one way we've
Speaker 9: been talking about is we're all always mindful of of
Speaker 9: sort of tail risks. I think the tails are fatter
Speaker 9: because of not just the uncertainty associated with tariffs, immigration policy,
Speaker 9: but the fact that much of what appears to be
Speaker 9: the priority of the administration could be done by executive
Speaker 9: order and doesn't have to go through that congressional And
Speaker 9: we learned in twenty eighteen that you know, a lot
Speaker 9: of the tariff announcements were done by Twitter, so it's unconventional.
Speaker 4: So then how do you think about what can you
Speaker 4: kind of hang your hat on. Kevin, come on in
Speaker 4: on the conversation.
Speaker 10: Well, I think you know, one of the hard parts
Speaker 10: about going back to twenty eighteen two nineteen is what
Speaker 10: you know as humans. It's natural to go back to
Speaker 10: a period of time and say, yeah, you can bring
Speaker 10: out that playbookdusted off, especially from.
Speaker 7: A tariff perspective.
Speaker 10: What's harder this time is that we're in a totally
Speaker 10: different macroeconomic environment where you're still dealing with ripple effects
Speaker 10: from the pandemic. You're still dealing with a bond market
Speaker 10: that is a little bit more unruly this time than
Speaker 10: it was going into the first administration for Trump. So
Speaker 10: I think that, you know, to Lazand's point about what
Speaker 10: can be done unilaterally versus what can be done with
Speaker 10: congressional approval, really needs to be looked at here, especially
Speaker 10: from an immigration policy perspective, because most of the labor
Speaker 10: force growth we've had over the past four years has
Speaker 10: been from the foreign born you know, work force, so
Speaker 10: that if it gets restricted, I think could be more
Speaker 10: of a more of a problem.
Speaker 11: Talk a little bit.
Speaker 9: The FED comes into the mix because the combination of
Speaker 9: immigration policies and tariff policies, it's hard to argue against
Speaker 9: them being inflationary. So then you have what's the FED
Speaker 9: reaction function if it's policy driven inflation.
Speaker 5: I I based on the first Trump administration, I believe,
Speaker 5: and I'm not getting political here, I'm just stating sort
Speaker 5: of a theory. The president elect loves to look at
Speaker 5: the S and P five hundred and talk about the
Speaker 5: S and P five hundred. That's like his report card
Speaker 5: for how he's doing. If there is an adverse market
Speaker 5: reaction to one of his policies, I think that would
Speaker 5: be enough for him to change his too.
Speaker 9: I think not just the S and P five hundred.
Speaker 9: I think markets could be the decider, not just the
Speaker 9: equity side of things, but the bond markets, the bond vigilances.
Speaker 7: Yeah.
Speaker 10: I think the other thing to keep in mind is
Speaker 10: it's not as if, because you know, we know that
Speaker 10: President elect Trump is very focused on markets, that doesn't
Speaker 10: mean that you don't get downturns and you don't get volatility.
Speaker 10: I mean, if you just use twenty seventeen as a
Speaker 10: case study, if I came from the future and we
Speaker 10: were in twenty seventeen and told you we were going
Speaker 10: to get this massive fiscal stimulus in the form of
Speaker 10: tax cuts at the corporate and the individual level. You'd
Speaker 10: probably think that's Neirvada for risk assets. But the reality
Speaker 10: is we had the shortfall implosion in twenty eighteen. You
Speaker 10: had a near bear market almost by a tenth of
Speaker 10: a percentage point for the S and P in the
Speaker 10: fourth quarter of that year. And yeah, you bounced back
Speaker 10: in twenty nineteen, was choppy but ended up being okay.
Speaker 10: But it doesn't mean that you eliminate all of this
Speaker 10: downside risk, especially if it's driven more by teriff related news.
Speaker 10: And you know the hits to manufacturing in the US that.
Speaker 9: Are so speaking of the hits to manufacturing, if you
Speaker 9: if you look at the ISM manufacturing index and put
Speaker 9: a vertical line at the start of the trade war
Speaker 9: in twenty eighteen, it went straight down. Now we're at
Speaker 9: lows in manufacturing. So I don't know that we have
Speaker 9: a potential implosion from these lows, but it could be
Speaker 9: something that prevents what was the hope for pickback.
Speaker 12: Up and manufacturing.
Speaker 4: I guess I keep thinking about. You know, there's the
Speaker 4: fundamental stories of companies and profits, right that really matters.
Speaker 4: But then you've got a layer on top of that
Speaker 4: the politics that's going to play out, and that's going
Speaker 4: to kind of kick investors around. I mean, how are
Speaker 4: you guys squaring when you're going to have a client
Speaker 4: call up and say, listen, fundamentally, earnings growth is happening, but.
Speaker 9: You know, keep it if you're proxying or earning's growth
Speaker 9: at the S and P level, that it's obviously biased
Speaker 9: up the cap spectrum. You've got forty three percent of
Speaker 9: the Rustle two thousand or nonprofitable companies, you've got a
Speaker 9: similar share that zombie companies.
Speaker 12: So I think there's a there's a much.
Speaker 9: Wider spread, especially when looking on the cap spectrum, but
Speaker 9: it often gets masked by virtue of there's so much
Speaker 9: focus on the large cap indexes.
Speaker 4: Well, funny that you say that, because I feel like
Speaker 4: the last two weeks everybody keeps coming on and said,
Speaker 4: guess what, it's small caps turn again, So.
Speaker 12: What is it not monolithically Okay?
Speaker 9: Again, when you look at an index as large as
Speaker 9: the Russell two thousand to to sort of just blanketly
Speaker 9: say yeah, small caps look good.
Speaker 4: I think that there is there are interesting zombie companies
Speaker 4: that you say.
Speaker 9: Yeah, those are not those with not sufficient cash flows
Speaker 9: to pay e an interest on their debts. So I think,
Speaker 9: you know, our our thesis around factors has been, Yeah,
Speaker 9: there's opportunities down the cap spectrum, but you don't want
Speaker 9: to sacrifice quality.
Speaker 10: Yeah, And to that point about quality, I mean, if
Speaker 10: you just used positive earnings on a trailer twelve month basis,
Speaker 10: so earnings of EPs above zero as your your you know,
Speaker 10: only criterion for the Rustle two thousand, and you took
Speaker 10: all of those companies, you know, it's about eight hundred
Speaker 10: nine hundred change as a group. On average, they're up
Speaker 10: by almost forty five percent over the past year. So
Speaker 10: there are pockets of small caps that have worked. It's
Speaker 10: just not equally distributed because of the interest rate environment
Speaker 10: we've been in also the growth environment. And by the way,
Speaker 10: all of these pops that you've had in the Wrestle
Speaker 10: two thousand from time to time over the past couple
Speaker 10: of years, every time they get a little bit of
Speaker 10: momentum and everyone thinks it's changing for them, it hasn't
Speaker 10: been consistent with the turn in forward earnings growth and expectations.
Speaker 10: So until I think you see that actual move where
Speaker 10: conviction starts to build. From an earning standpoint, it's tough
Speaker 10: to get bullish on the on the index as a whole.
Speaker 7: But to Lezan's point about.
Speaker 10: You know a large chunk of it being not profitable
Speaker 10: and zombie like, it's just tough.
Speaker 12: More within the Nasdaq.
Speaker 9: If you look at the top ten best performers this
Speaker 9: year in the Nasdaq, none of them are large cap stocks.
Speaker 9: They're all small yeah, to be a none of them
Speaker 9: are in the MAGS seven. So I think we get
Speaker 9: in this sort of tunnel of the megacap tech and
Speaker 9: tech related names, and there's less analysis happening on everything else.
Speaker 5: On an index level. Is Anne, are you concerned about
Speaker 5: the power of those megacap tech companies. It's a question
Speaker 5: I could have asked five years ago. It just wouldn't
Speaker 5: have included in Vidia.
Speaker 9: I think the problem of concentration and the perceived need
Speaker 9: to be in those names in order to do well,
Speaker 9: that's an institutional problem, that's not an individual investor problem.
Speaker 9: If you're benchmarked against a cap weighted index, you are
Speaker 9: at the mercy of what those largest names their contribution
Speaker 9: to the index. But for individual investors, they're not benchmarked
Speaker 9: against the S and P five under they don't have
Speaker 9: to take that same kind of concentration risk. And it's
Speaker 9: another point behind that what I just mentioned of top
Speaker 9: ten best performers in the Nasdaq, they're.
Speaker 12: All small to mid cap stocks.
Speaker 9: Only one of the MAGS seven is in the top
Speaker 9: ten best performers of the S and P five hundred,
Speaker 9: So I think you don't need to have that concentration
Speaker 9: risk if you're not professionally benchmarked against the.
Speaker 11: S and P.
Speaker 4: What do you think of the biggest risks right now?
Speaker 4: Do we have clarity on it for twenty twenty five.
Speaker 10: I mean from a policy standpoint, that's probably the easy
Speaker 10: one to throw out there, but I think just the
Speaker 10: lack of.
Speaker 4: Policy, meaning government. We also said policy.
Speaker 10: More Washington policy, but I think they're tied together now. Yeah,
Speaker 10: because I could see a scenario where if you do
Speaker 10: get more restrictive labor force growth coming from the outside,
Speaker 10: but also if there is a chunk of the labor
Speaker 10: force physically removed from the country, that's probably an inflationary problem.
Speaker 7: And I've also yet to I love.
Speaker 4: That you guys are going there, because I don't think
Speaker 4: people realize we certainly hear it from CEOs that they
Speaker 4: are so worried that they're not going to have access
Speaker 4: to a labor force and what that means for their
Speaker 4: ability to do things.
Speaker 12: It's an increase in.
Speaker 9: The cost of l labor costs, right, and it's a
Speaker 9: decrease in labor supply.
Speaker 12: There's the demand side.
Speaker 8: Of that as well.
Speaker 7: I can't shock in a demandsion.
Speaker 5: I can't get a CEO to seriously explain that that
Speaker 5: will affect them at this point in the last two weeks,
Speaker 5: even if they don't employ people who didn't come to
Speaker 5: this country illegally. Right.
Speaker 12: How often do you talk to smaller company CEOs?
Speaker 5: I recently, did you actually talk to me?
Speaker 9: I talked to me in the spaces where migrant work
Speaker 9: is a large construction.
Speaker 4: Hospitality construction rests.
Speaker 10: Almost twenty percent of the construction sector is undocumented.
Speaker 4: I have two brothers who are contractors. They're like, they
Speaker 4: can't find work.
Speaker 5: But I think the important point is that it's not
Speaker 5: just you could run a company that doesn't employ any
Speaker 5: undocumented workers. You're still going to see labor costs rise.
Speaker 5: If eleven million people are taken out of this country
Speaker 5: who are doing work.
Speaker 10: That's right, Yeah, it's a demand shock, it's a supply shock,
Speaker 10: and I think we we sort of lose sight of
Speaker 10: the fact on the demand side, especially because the supply
Speaker 10: side is looked at maybe sometimes more of an issue
Speaker 10: in terms of the makeup of a particular industry or
Speaker 10: the makeup of the labor force. But if you're taking
Speaker 10: demand out of the country, but you're also not being
Speaker 10: able to fill the supply hole that you're leaving, that's
Speaker 10: sort of a stagflationary shock.
Speaker 5: So what does it do to the market if that
Speaker 5: policy ends up coming to fruition.
Speaker 10: Well, I mean, I think it depends if it's phased
Speaker 10: over time.
Speaker 9: Yeah, and you know, we don't know the logistics around
Speaker 9: whether we even possibly could get to the high end
Speaker 9: of what the campaign pledges.
Speaker 4: The reality on that right front.
Speaker 9: But Peterson Institute, I don't know if you guys saw it,
Speaker 9: just did a study on Okay, let's take it to
Speaker 9: the extreme, both on the immigration side of things, on
Speaker 9: the tariff side of things, and they actually added an interesting.
Speaker 12: Little wrinkle into the mix.
Speaker 9: If there continues to be a threatening of FED independence,
Speaker 9: all three of those collectively are unquestionably higher inflation, lower
Speaker 9: growth kind of backdrop. Now we you know, the real
Speaker 9: answer may be somewhere in the middle of nothing gets
Speaker 9: done and the extremes, both on immigration and teriffs.
Speaker 4: But it's a wait and see.
Speaker 10: Mode right even on the tariffront, I've yet to see
Speaker 10: a model, and all the research that we read, i've
Speaker 10: yet to see them out of that doesn't suggest it's
Speaker 10: a stagflationary shock where overtime you get this boost to inflation,
Speaker 10: but you also get a hit to growth.
Speaker 4: I want to go back to the market kind of
Speaker 4: a clearing house for all of the information, because I
Speaker 4: do feel like the market smacks down policies or initiatives
Speaker 4: very quickly. I feel like, much more than it did.
Speaker 4: I don't know ten years ago. Maybe it's because of
Speaker 4: social media and stuff just piling through. Do you assume
Speaker 4: that will continue and that will send messages to Washington
Speaker 4: and maybe so that things aren't so severe.
Speaker 9: It will send messages how much they're heated, that we
Speaker 9: don't know.
Speaker 4: But especially when I think about the FED and the
Speaker 4: independence of the FED, like that to me would be
Speaker 4: something that would bring.
Speaker 12: Well to me.
Speaker 9: The most fascinating part of Palace press conference at the
Speaker 9: most recent FOMAC meeting was the definitive no that as
Speaker 9: soon as that happened, I thought, that's the headline, and
Speaker 9: that should be the headline.
Speaker 12: So I don't worry about that piece of it all
Speaker 12: that much.
Speaker 9: But one of our thesis is that this sector dispersion,
Speaker 9: these rapid fire rotations that are happening at the sector level,
Speaker 9: are going to persist. The drivers going forward may be
Speaker 9: more specific to things like teriff announcement. So we saw
Speaker 9: that in twenty eighteen, there was you know that that
Speaker 9: voting mechanism that happened so quickly with markets maybe doesn't
Speaker 9: appear acutely at the broad index level, but I think
Speaker 9: you're going to see it at the industry level, at
Speaker 9: the sector level, tied specifically to both tariffs and immigration.
Speaker 5: Sense Kevin, I believe a year ago we were sitting here.
Speaker 5: It was October of last year in Philadelphia, s and
Speaker 5: P five hundred is up forty percent since our conversation
Speaker 5: with a Thunk.
Speaker 7: What a thunk And what was interesting too.
Speaker 10: I remember talking to you guys about the unique nature
Speaker 10: of this bull market, and at that point it had
Speaker 10: been so unique where even for something like small caps
Speaker 10: in the rustle of two thousand, it was breaking new
Speaker 10: bear market lows and that has just never happened before.
Speaker 10: You also had sectors in the SMP that had not
Speaker 10: been up, and that it was just so unique about
Speaker 10: what the structure was of the bowl in its early phases,
Speaker 10: where typically even after you go through a non recessionary bear,
Speaker 10: you do tend to see a lot of participation at
Speaker 10: any sector level, at any cap level, but we just
Speaker 10: haven't seen that. But I will say in what's been
Speaker 10: nicer to see this year is that participation has really improved,
Speaker 10: especially since that Midsummer mark where broad Max seven really
Speaker 10: started to take a little bit of a step back,
Speaker 10: not outright decline, but take a step back. Tech took
Speaker 10: a step back, even semiconductors. Recently, I find that the
Speaker 10: weakening and that breath profile actually just fascinating, while the
Speaker 10: rest of the market has actually been able to power forward.
Speaker 10: And that's I think what has actually been lost in
Speaker 10: all of the election related narrative recently, especially around some
Speaker 10: of the strength around areas like financials. Financials were strong
Speaker 10: heading into the election, Industrials were strong heading into the election,
Speaker 10: So it's not as if you got this massive shift
Speaker 10: in the leadership profile of the market. I think that's
Speaker 10: been a relatively healthful all year.
Speaker 9: There's been massive churn under the surface of these cap
Speaker 9: weighted indexes. So the Nasdaq had a thirteen percent draw
Speaker 9: down in that Midsummer period of time, but the average
Speaker 9: member draw down for the Nasdaq is forty seven percent
Speaker 9: year to date. So sometimes when people talk about the market,
Speaker 9: it sort of begs, well, what piece of the marketing
Speaker 9: you're talking about? These cap weighted into its right dangerous?
Speaker 7: Actually, and we've been calling for a good chunk of
Speaker 7: you ear.
Speaker 10: We're calling it the Michael Caine Duck market, you know,
Speaker 10: just calm on the surface, like the dickens underneath.
Speaker 7: That's that's been how we've been describing it.
Speaker 4: So does though, all right, so what's the environment for
Speaker 4: twenty twenty five? Can you make a call?
Speaker 12: Well, we never make a call.
Speaker 4: Okay, So what are we missing? We haven't had a recession.
Speaker 4: We have had pockets of recessions, we've had the roll through,
Speaker 4: so so are we done with it?
Speaker 8: Then?
Speaker 9: You know, my hope was that we were going to
Speaker 9: get to a point where if we started to see
Speaker 9: weakness show up more acutely in the services sector in
Speaker 9: large pro probably driven by any further weakness in the
Speaker 9: labor market. That, especially if the FED was an easing mode,
Speaker 9: you might be in a position to see stabilization, if
Speaker 9: not recovery in those areas that already taken their hits,
Speaker 9: like manufacturing, like housing. I don't want to say that's
Speaker 9: off the table now, but it's a little bit more
Speaker 9: difficult post election to come up with a case or
Speaker 9: stabilization and improvement in those areas, especially if the FED
Speaker 9: doesn't stay in easing mode. We saw this and tempted
Speaker 9: some recovery in housing, and then it faltered again courtesy
Speaker 9: of the move up in long yiels.
Speaker 10: So I think the other thing too, from evaluation in
Speaker 10: a sentiment perspective, is that you're getting pretty stretched across
Speaker 10: most of the metrics that we track, and it's not
Speaker 10: just in the traditional attitudinal how do you feel about
Speaker 10: the market? You know, aaii bulbear indicator. It's now filtering
Speaker 10: over into what are investors actually doing with their money.
Speaker 10: We've seen equity ETF inflows completely spike akin to levels
Speaker 10: that you saw a market funds too. Absolutely yeah, So
Speaker 10: I think that becomes a little bit more of a
Speaker 10: risk in the event there's a negative catalyst. We always
Speaker 10: say sentiment for off. The sentiment and of itself is
Speaker 10: not a reason that the market just goes lower. It
Speaker 10: has to be tipped in that direction. It's just the
Speaker 10: sentiment backdrop that makes things more.
Speaker 9: I also don't think we should look at the money
Speaker 9: and money markets as some giant pool of imminent funds
Speaker 9: dying to go into the equity market. I think that's
Speaker 9: a lot of that is pretty sticky money.
Speaker 5: That's exactly one trillion tion we'll go into the ivy.
Speaker 12: Market, not necessarily the way Mark you get a run.
Speaker 7: Liz.
Speaker 4: Thank you.
Speaker 2: You're listening to the Bloomberg Business Week podcast. Catch us
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Speaker 4: From Stocks and the Macro to Fixed Income and the Macro.
Speaker 4: This past week, you as Treasury is added to the
Speaker 4: gainspurred by the announcement of Scott Bessant, a Wall Street
Speaker 4: veteran who investors expect will take the sting out of
Speaker 4: the administration's more aggressive trade and economic policy proposals as president,
Speaker 4: like Donald Trump's Treasury secretary choice.
Speaker 5: We also got the latest FMC minutes, which you can
Speaker 5: of course check out on the Bloomberg terminal. And as
Speaker 5: we continue our coverage from Schwab Impact, which happened about
Speaker 5: a week and a half ago, we talked with two
Speaker 5: members of the Schwab team to focus on fixed income strategy.
Speaker 5: We're talking about Kathy Jones. She's a managing director fixed
Speaker 5: income strategist and also Colin Martin, Director Fixed Income Strategist.
Speaker 4: We started by asking Kathy if her view of the
Speaker 4: FED changed at all since the election.
Speaker 1: I think the case for a pause is growing a
Speaker 1: bit stronger at this stage of the game.
Speaker 8: So, you know, we've had stronger than.
Speaker 1: Expected economic data now for a while, particularly like the
Speaker 1: retail sales telling us the consumers doing well. And so
Speaker 1: then the question is does a FED.
Speaker 8: Really need to cut rate to help out?
Speaker 1: We have very easy financial conditions as the stock market
Speaker 1: keeps going higher and credit spreads get tighter and so
Speaker 1: you know, and then we have all the uncertainty about
Speaker 1: what physcal policy will be going forward.
Speaker 8: We don't know what tax policy will be.
Speaker 1: And then immigration reform, which I particularly think is one
Speaker 1: of the most important components for inflation and growth going forward,
Speaker 1: because again we don't know what the actual policy will be,
Speaker 1: but if you kind of take things at face value,
Speaker 1: that could reduce the workforce by seven or eight percent.
Speaker 1: That's a huge, huge issue.
Speaker 4: So Colin, you guys, you guys, you and Kathy have
Speaker 4: to figure out though fixed income strategy and what you're
Speaker 4: thinking about.
Speaker 10: Right.
Speaker 4: People look to you to kind of get an idea
Speaker 4: of what's to come maybe in twenty twenty five. So
Speaker 4: what do you feel comfortable kind of saying about that.
Speaker 13: Yeah, well, we've kind of revised our guidance a little
Speaker 13: bit lately because of so many the uncertainties that Kathy
Speaker 13: just highlighted, where there's this wide range of outcomes because
Speaker 13: of the proposed policies, what gets implemented, when they get implemented,
Speaker 13: and what that impact is. So given that, and given
Speaker 13: the I think the risk is to higher yields than
Speaker 13: lower yields if we do get some sort of inflationary impact.
Speaker 13: So our guidance now, our main guidance for investors is
Speaker 13: to really focus on a benchmark or below benchmark average touration.
Speaker 13: We don't think it makes a lot of sense to
Speaker 13: dive in with long term bonds right now because of
Speaker 13: the risk of those prices if they fall. I want
Speaker 13: to make it clear though, that that's a tactical idea.
Speaker 13: From a strategic standpoint, we still think the yields are
Speaker 13: pretty attractive. So if you're an investor, you're looking for
Speaker 13: for five six percent yields, you can get that right now,
Speaker 13: if you have that time horizon, and if if that's
Speaker 13: going to help you reach your goals, then I think
Speaker 13: that's really attractive right now. But just be prepared that
Speaker 13: if we see yields in show when we talk about
Speaker 13: our upside, maybe maybe we go to five percent on
Speaker 13: the tenure treasure yield.
Speaker 4: But maybe likely possibly possibly yes, okay, to all three.
Speaker 13: Yeah.
Speaker 1: So you know what we do is you try to
Speaker 1: model out we deconstruct the tenure. Yeah, then we try
Speaker 1: to model out, well, if we change this component, what
Speaker 1: happens in that component?
Speaker 8: Or if you just look at the spread.
Speaker 1: There's a lot of components to play around with, right, yeah, exactly,
Speaker 1: And or you just look at the spread between the
Speaker 1: Fed funds rate and tenure yields. Historically it can be
Speaker 1: a you know, one hundred to one hundred and fifty
Speaker 1: bases point. So if the FED can't go below four percent,
Speaker 1: you could easily get to five percent plus just based
Speaker 1: on history. But we do think the FED will get
Speaker 1: below four percent by some amount, but again, a lot
Speaker 1: of ifs there, and so we're just trying to be
Speaker 1: as cautious as we can right now without giving up
Speaker 1: too much income.
Speaker 5: Hey, Colin, play that scenario for us, if we do
Speaker 5: hit five percent on the ten year, what that looks like,
Speaker 5: What the implications of that are for the economy? And
Speaker 5: I mean I think a lot about different areas of
Speaker 5: the market that have expected lower interest rates. If we
Speaker 5: don't get those, what happens.
Speaker 13: So I think what it looks like. I think it
Speaker 13: looks attractive, and I think if we get there, I
Speaker 13: think that can draw in a lot of demand. I
Speaker 13: think whether it's domestically or internationally, I think there'd be
Speaker 13: a lot of demand, especially that we're seeing these interest
Speaker 13: rate differentials. We're seeing other central banks expected to cut
Speaker 13: more than the US. I think that's number one to
Speaker 13: what happens to the economy and to barrow wers I
Speaker 13: think it's more of a mixed bag right there, because
Speaker 13: if you look at both the consumer side of the
Speaker 13: equation and what I focus on in the corporate bond market,
Speaker 13: corporations just haven't really had that negative impact of rising
Speaker 13: interest rates. Something I've looked at recently as why so
Speaker 13: because they because they did the same thing that that
Speaker 13: homeowners did.
Speaker 6: They fly, they refined.
Speaker 13: So if you look at i'll use high yield bonds
Speaker 13: for example.
Speaker 4: The average which is having a moment.
Speaker 13: They're having a moment. Spreads are at you know, the
Speaker 13: fifteen year lows. The average coupon rate. Now that's there
Speaker 13: can be high or lower the average coupon rate of
Speaker 13: that index. It's right where it was in twenty nineteen.
Speaker 13: It's risen a little bit over the past year or so.
Speaker 13: But because companies just refinance. So if rates keep rising
Speaker 13: from here, although the trend is the opposite right now,
Speaker 13: but if they were to move up a little bit,
Speaker 13: that would impact the leveraged borrower. But for the most part,
Speaker 13: their fundamentals are pretty strong.
Speaker 4: So the opportunities. So when you know someone comes to
Speaker 4: you and say, so, where are the best opportunities right now?
Speaker 4: If I have to I want to put some money
Speaker 4: in the fixed income area, Kathy, what do you say.
Speaker 1: Well, again, if your time horizon is five years plus
Speaker 1: and you're willing to kind of ride out the ups
Speaker 1: and downs, you're looking at five to five and a
Speaker 1: half percent yields without taking much credit risks. So I'll
Speaker 1: see their investment great corporate bond, if treasuries and mbs.
Speaker 1: If just look at the egg, your total return is
Speaker 1: going to be pretty attractive and your income stream is
Speaker 1: going to be important. So keep in mind, you know,
Speaker 1: we have the rocky period in twenty twenty two because
Speaker 1: there was no coupon income. We're coming off zero now
Speaker 1: we're starting with coupon's, you know, close to five percent.
Speaker 8: That keeps your return much more solid going forward.
Speaker 1: So we like higher credit quality in general, but definitely
Speaker 1: lots of places to lock in that yield.
Speaker 4: How, oh, go ahead, No, you guy.
Speaker 5: I wanted to talk a little more macro and think
Speaker 5: about policies come January, because Kathy, you mentioned a lot
Speaker 5: at the top when it comes to labor market, when
Speaker 5: it comes to tariffs. Do you believe these policies are
Speaker 5: actually likely to be implemented given that they actually could
Speaker 5: have severe economic consequences.
Speaker 1: I have no idea, and I will be honest with you,
Speaker 1: because we know that one thing that President elect Trump
Speaker 1: has been in favor of it forever is tariffs. So
Speaker 1: we do believe pretty strongly there'll be some sort of terriffs. Now,
Speaker 1: will they be modified, Will will industry is affected by
Speaker 1: the tariffs be subsidized as they were in his previous
Speaker 1: administration with the farmers.
Speaker 8: We don't know the details of that, but tariffs very
Speaker 8: likely after that.
Speaker 1: Really hard to say, you know, tax policy and immigration,
Speaker 1: hard to say what will really happen?
Speaker 4: Just got about thirty seconds. Is there a moment in
Speaker 4: time that you're thinking, Okay, maybe six months from now,
Speaker 4: eight months from now, Well, much more clarity about what
Speaker 4: this new administration can get done and we can be
Speaker 4: more definitive in terms of our thinking about going forward.
Speaker 4: Is there a timeframe that you're thinking about for next year?
Speaker 8: Yeah.
Speaker 1: I think when they actually have to debate the Tax
Speaker 1: Cut Act that was previously that we'll be expiring, then
Speaker 1: we should get a better idea of what Congress is
Speaker 1: willing to do.
Speaker 13: Final thought from you, Yeah, no, I would agree. I
Speaker 13: think yes, we'll have more clarity just because more time
Speaker 13: will have passed. But I think we're going to have
Speaker 13: a lot of uncertainty over the next year, two years,
Speaker 13: four years. So yes, more clarity, but not all the
Speaker 13: answers that we're going.
Speaker 4: To need, keeping us on our toes again. Thank you
Speaker 4: both so much so. I appreciate what we could kind
Speaker 4: of finish up with the fixed incmentry. It's been such
Speaker 4: an important one, no doubt about it, and something we've
Speaker 4: been following so closely. He Jones, Managing director, Fiction comes Strategist,
Speaker 4: Colin Martin, Director of Fiction Coome Strategist. Right here at Schwab.
Speaker 2: Impact, you're listening to the Bloomberg Business Week podcast. Catch
Speaker 2: us live weekday afternoons from three to six Eastern Listen.
Speaker 3: On Bloomberg dot com, the iHeartRadio app, and the.
Speaker 2: Bloomberg Business App, or watch us live on.
Speaker 4: YouTube plenty ahead in our second hour of the weekend
Speaker 4: edition of Bloomberg Business Week. As we continue with our
Speaker 4: coverage at Schwab Impact twenty twenty four. It happened about
Speaker 4: a week and a half ago. We were out in
Speaker 4: San Francisco.
Speaker 5: There we were surrounded by some forty five hundred attendees
Speaker 5: at Schwab's annual Conference for independent Registered Investment Advisors and
Speaker 5: Independent record keepers of Charles Schwab. Great perspectives from those
Speaker 5: managing the money of many folks. And so coming up
Speaker 5: this hour investing outside of the US is twenty twenty five.
Speaker 5: Finally the time to diversify.
Speaker 4: Globally tjevoo just a little bit. I'm just going to say,
Speaker 4: plus the continued flows and expansion in wealth management and ETFs.
Speaker 4: First up this hour, or going global, as in investing
Speaker 4: in stocks outside the United States, which for many years
Speaker 4: have lagged the US market.
Speaker 5: Over the last decade, the S and P five hundred
Speaker 5: has returned on average thirteen point one five percent. Well,
Speaker 5: the foot Seat Global Allcap XUS, which tracks stocks and
Speaker 5: developed in emerging markets outside of the US, has only
Speaker 5: returned five point two five percent on average. It's a
Speaker 5: difference of nearly one hundred and eighty percent over the
Speaker 5: last decades, so some pretty serious underperformance. It has been
Speaker 5: hard to beat the US when it comes to equities
Speaker 5: gains this year and this last decade.
Speaker 4: For the global view and where there are opportunities around
Speaker 4: the world, we checked in with Jeffrey KLINP Managing director
Speaker 4: and chief Global investment strategist about what's top of mind
Speaker 4: for him.
Speaker 14: The obsession with AI and stocks like Nvidia have just
Speaker 14: really been focused on the US market, and tech has
Speaker 14: been the best performer in the US, and tech is
Speaker 14: the biggest sector in the US and it's not elsewhere.
Speaker 14: The other thing is that those other economies have been
Speaker 14: lagging US economic and earnings growth. That could be different
Speaker 14: next year, though she already seen a shift towards financials
Speaker 14: leading markets overseas. That could be the next step for
Speaker 14: the US as well, big break cup beneficiary. In addition,
Speaker 14: we're seeing global economic growth finally begin to converge. US
Speaker 14: and China expected to slow next year, but Europe, Japan, Canada,
Speaker 14: Australia all expected to pick up economic momentum next year,
Speaker 14: along with earnings growth. As a matter of fact, here
Speaker 14: in the third quarter, we're just getting done with the
Speaker 14: earnings reports. Earnings growth for European companies actually outpaced the
Speaker 14: S and B five hundred for the first time in
Speaker 14: five or six quarters, So we may be starting to
Speaker 14: see a turn there.
Speaker 4: But what are you seeing in terms of flows, Because
Speaker 4: it does feel like investors are still holding back and
Speaker 4: just kind of all in on the US trade.
Speaker 14: They are in post election. I think a lot of
Speaker 14: investors believe, hey, we just had an election. I probably
Speaker 14: need to make changes in my portfolio. But they can
Speaker 14: be detrimental. Think back to twenty seventeen, right, So, coming
Speaker 14: out of the twenty sixteen election, America First policies were
Speaker 14: thought to really help US small caps and really hurt
Speaker 14: emerging markets. The exact opposite occurred. Emerging markets were the
Speaker 14: best performers in twenty seventeen, small cap US the worst.
Speaker 14: Not saying necessarily it's a perfect play again a repeat
Speaker 14: of all that, but the flows can be misleading what.
Speaker 4: Happened last year, because we were thinking about our conversations
Speaker 4: that we had with you and some of the other
Speaker 4: members of the SHWAP TV you were bullish on international
Speaker 4: what happened last year that you think okay was a surprise,
Speaker 4: or just why it didn't pan out, or you misread
Speaker 4: the tea leaves.
Speaker 7: Well a few different things.
Speaker 14: One, I think the technology thing has just run longer
Speaker 14: and harder than I thought of what I thought we'd
Speaker 14: see a broader arade exactly, Yeah, and so we didn't
Speaker 14: see that broadening. I think we're starting to see some
Speaker 14: of that now, but we just didn't. The other thing
Speaker 14: was we did see a stumble in the manufacturing recovery.
Speaker 14: So I was basing this on a what I call
Speaker 14: it a cardboard box recovery, that demand for making things
Speaker 14: and shipping things would pick back up again. It did
Speaker 14: in the first half of the year, it rolled over
Speaker 14: sharply in the second half, and the global purchasing managers
Speaker 14: indext for manufacturing back below fifty I think that usually
Speaker 14: as a lag with Central bank policy of about nine months.
Speaker 14: We're at the turning point there where I think that
Speaker 14: starts to pick up next year. So I think it's
Speaker 14: delay aid and not disrupted.
Speaker 5: Where do tariffs come into this equation? Boy, this is
Speaker 5: a tough one. If you're thinking international, you're saying, wait
Speaker 5: a second, Okay, we get this America First policy coming
Speaker 5: once again starting in you know, January twentieth. There's a
Speaker 5: lot of Republicans in Congress right now who look like
Speaker 5: they're ready to help the President elect push through that agenda.
Speaker 5: What do you do if you're an investor outside of
Speaker 5: the US and you're saying yourself, wait a second, These
Speaker 5: companies outside the US could be hit with tariffs.
Speaker 7: Yeah, and the numbers are scary.
Speaker 14: Sixty percent on China, twenty percent across the board, two
Speaker 14: hundred percent on John Deere tractors coming from Mexico. If
Speaker 14: you add them all up and I have, and you
Speaker 14: wait them by their import percentages, you get a twenty
Speaker 14: six percent import tariff in the US on average. That's
Speaker 14: up from two point six right now. That's like smooth
Speaker 14: Hally level, great Depression era level tariffs. But I think
Speaker 14: the reality is going to be quite different from that.
Speaker 14: I'd look as an example in Europe. So Europe on
Speaker 14: October twenty eighth just slapped forty five percent tariffs on
Speaker 14: electric vehicles from China.
Speaker 7: Within two days, Chinese.
Speaker 14: Delegates where they are working out a way to get
Speaker 14: rid of those, they seem to make some technical progress
Speaker 14: over the last couple of weeks, maybe scrapping those tariffs
Speaker 14: in favor of import quotas, which is a far less
Speaker 14: disruptive way of doing things. So I think that's probably
Speaker 14: maybe a way we can look at what the future
Speaker 14: path of tariffs might look like.
Speaker 4: Jeff, how do you think about the pushback in globalization?
Speaker 4: We have a lot of CEO say, listen, it's not
Speaker 4: going away. Yes, supply chains are changing or bringing do more,
Speaker 4: nor shoring or unshoring. But I'm just curious how what's
Speaker 4: going on in globalization wars around the globe, how that
Speaker 4: is impacting the international investment play.
Speaker 14: So it seems like there are multiple supply chains now
Speaker 14: instead of just one. Right, so you don't just assemble
Speaker 14: your product in the cheapest labor market, You're going to
Speaker 14: have to multiple supply chains, and that seems to be
Speaker 14: what's happened.
Speaker 4: Is that good for companies' costs, their earnings there, what
Speaker 4: their balance sheets look like, for their investment potential.
Speaker 14: But it's less efficient, so it should be more costly.
Speaker 14: At the same time, we've been able to miniaturize manufacturing
Speaker 14: globally in a way that's made it not as inefficient
Speaker 14: to have multiple supply chains as it used to be.
Speaker 14: And with AI robotics a number of these potential innovations,
Speaker 14: we could maybe scale that even further to where it's
Speaker 14: less of a dragon corporate profits.
Speaker 5: Interesting. Okay, so how do you see this happening outside
Speaker 5: of the US versus inside the US. If we're thinking
Speaker 5: about the companies that are doing this type of innovation,
Speaker 5: who are the beneficiaries here.
Speaker 7: Well, I mean, you know, I think it's those that
Speaker 7: are really looking to scale.
Speaker 14: Up their productivity per worker. So you're looking at healthcare,
Speaker 14: you're looking at financial services. Those are two areas very
Speaker 14: much more representative outside the US than inside the US.
Speaker 14: So the potential for productivity gains I think.
Speaker 7: Are skewed to those businesses.
Speaker 14: Your financials are the biggest sector outside the US, and
Speaker 14: there's a whole lot that can be done with.
Speaker 4: They either all right, we know you don't do individual stocks,
Speaker 4: but when you look at around the world, then I
Speaker 4: do feel like I just want to talk some regions.
Speaker 4: I think about Japan, and I do feel like the
Speaker 4: momentum this year has definitely changed on Japan. Give us
Speaker 4: kind of your thoughts about what we see in twenty
Speaker 4: twenty five.
Speaker 14: So I think you see radmikes from the Bank of Japan,
Speaker 14: and so I think that begins to bring some strength
Speaker 14: back to the end and we start to see some
Speaker 14: capital come back to Japan. We've got a number of
Speaker 14: businesses really ramping up their share buybacks and their dividends,
Speaker 14: and so the return to shareholders seems to be picking up.
Speaker 14: And so if we get a manufacturing recovery. That's what
Speaker 14: Japan does, and so if we get that global manufacturer recovery,
Speaker 14: I think that does disproportionately benefit SPAN.
Speaker 4: What about Europe in terms of wars and stuff? So
Speaker 4: what's the kind of smart I hate to put everything
Speaker 4: in a bucket because I don't think that's fair. But
Speaker 4: what are you thinking about for twenty twenty five in
Speaker 4: terms of where are the pockets of opportunities in particular
Speaker 4: for investors and where maybe not so much?
Speaker 14: You know, one of the things I think Europe might
Speaker 14: look to do is buy US weapons to fund the
Speaker 14: war in Ukraine, to narrow the trade deficit with the US,
Speaker 14: avoid across the board tariffs and actually achieve maybe their
Speaker 14: objectives in keeping Russia at bay. One of the things
Speaker 14: I think it's interesting is European automakers. They could be
Speaker 14: in the crosshairs of Trump tariffs. Right The stocks fell
Speaker 14: seven to nine percent right after the election, but they've stabilized,
Speaker 14: They've started a rebound because I think if you look
Speaker 14: at what's likely to occur, maybe we go from a
Speaker 14: two and a half percent tariff on Europeans cars to
Speaker 14: ten percent. That will be equivalent to the US tariff
Speaker 14: that's seven and a half percent increase in tariff's has
Speaker 14: already been offset by the fact that the dollars up
Speaker 14: five percent versus the euro right, So we've already kind
Speaker 14: of adjusted for some of those factors, and I think
Speaker 14: therefore that seven to nine percent to climb in those
Speaker 14: stocks maybe for the reverse is what.
Speaker 5: Is the region of the world where your most optimistic.
Speaker 7: I think it probably is Europe.
Speaker 14: One thing, because price earnings ratios are pretty attractive. They're
Speaker 14: below their ten year average.
Speaker 4: Such a great good deals valuation.
Speaker 14: Yeah, I mean, take a look at the difference between
Speaker 14: Coke and Nestley. Nestley trading at a four pe discount
Speaker 14: to Coca Cola. They have literally the same customers and
Speaker 14: operations around the world, but you're paying a big premium
Speaker 14: for Coke because the investor base is different.
Speaker 7: So I think that comes back. I think earnings growth
Speaker 7: does pick up next year.
Speaker 14: We're already starting to see signs of that, and then
Speaker 14: five rate cuts by the ECB by June of next
Speaker 14: year versus maybe two for the FED. I think that
Speaker 14: ease of financial conditions really does help to support that rise.
Speaker 4: And I'm glad you went there because I do think
Speaker 4: a lot about the differences in central bank policy right
Speaker 4: based on their specific outlooks and what that gap means
Speaker 4: in terms of opportunities for investors, and saying that's spread
Speaker 4: between what Europe does in terms of monetary policy versus
Speaker 4: the US could provide opportunity.
Speaker 14: It's a drag on their currency versus the dollar. Obviously
Speaker 14: the dollar would go up, but maybe that's a few
Speaker 14: percentage points. Each point of pe expansion in Europe from
Speaker 14: fourteen is a seven percent gain on prices, So you
Speaker 14: get one or two of those, and that's going to
Speaker 14: outweigh anything you're going to get in terms of currency drag.
Speaker 5: I want to go back to Carol's question about the war,
Speaker 5: because if you are most optimistic about Europe, how do
Speaker 5: you factor that into how you're thinking about the region,
Speaker 5: Because there is a chance that with the incoming Trump
Speaker 5: administration and the rhetoric around how they want to support
Speaker 5: Ukraine or they don't want to support Ukraine, that there
Speaker 5: could be a risk of that war ending in Ukraine losing.
Speaker 14: There certainly is a lot of uncertainty of course the
Speaker 14: next year, in terms of where they draw borders into
Speaker 14: sometimes cease fire agreement and in anticipation of that, both
Speaker 14: sides trying to, you know, gather territory and try and
Speaker 14: redraw those lines. Ukraine is funded through twenty twenty five.
Speaker 14: Most governments have already committed those resources. There's a lot
Speaker 14: of weapons on the way, So the whole idea of
Speaker 14: a day one ceasefire probably doesn't seem likely. But somewhere
Speaker 14: over the course of the year, perhaps where those lines
Speaker 14: are drawn. I don't know, but I do believe that
Speaker 14: there's going to be a lot more spent in terms
Speaker 14: of defense in Europe and that could have some stimulative aspect.
Speaker 4: Jeff, you know, we've all been doing this a long
Speaker 4: time and seen a lot of different market cycles, and
Speaker 4: I'm just curious how you're thinking about, you know, the
Speaker 4: investment environment for the international player or global play today
Speaker 4: versus kind of where it was a few years ago.
Speaker 4: Is it more difficult, is it more transparency? Give me
Speaker 4: some thoughts on that. You know, you've seen a lot
Speaker 4: of market cycles.
Speaker 7: Yeah, it's so this one is so much tied to sectors.
Speaker 7: I think.
Speaker 14: So the US is basically a tech etf and nothing
Speaker 14: wrong with that.
Speaker 7: It's just recognizing it.
Speaker 14: But there are other countries that align with a particular
Speaker 14: sector as well. You know, Germany is an AUTOETF, Australia
Speaker 14: is a metals and mining ETF, a Canada's a financials ETF.
Speaker 14: So if you think about sector diversification, you may love
Speaker 14: the US, but honestly, it's a tech et app. So
Speaker 14: if you want some sector diversification, move away from just
Speaker 14: what has become really kind of a really concentrated AI play.
Speaker 14: You need that international diversification in your portfolio. And that's
Speaker 14: a different way of thinking about it than maybe in.
Speaker 5: The past thirty seconds on China.
Speaker 7: China is very likely to slow next year.
Speaker 14: They're not allocating the resources to the consumer and to
Speaker 14: the property market. It's still a strategic focus on self
Speaker 14: sufficiency and semiconductors and so many other things.
Speaker 7: So slower growth but.
Speaker 5: Not really Reboundy what type of would it be?
Speaker 4: Yeah?
Speaker 7: What at this point? Maybe an infrastructure RETF. Yeah?
Speaker 4: Do you still feel like we're lacking transparency in China?
Speaker 4: Just got about twenty seconds.
Speaker 7: I think it's getting better.
Speaker 14: I don't think they have the same incentives to create
Speaker 14: the same type of economic data that we create in
Speaker 14: the West.
Speaker 4: Yeah, all right, great stuff, Thank you so much.
Speaker 7: Pleasure around the world.
Speaker 4: We went well done. Well done. Jeffrey clientapp managing director,
Speaker 4: a chief global investment strategist. That Charles Schwab Right here
Speaker 4: at Schwab Impact.
Speaker 2: You're listening to the Bloomberg Business Week podcast. Catch us
Speaker 2: live weekday afternoons from three to six Easter on Bloomberg Radio,
Speaker 2: the Bloomberg Business App and YouTube. You can also listen
Speaker 2: live on Amazon Alexa from our flagship New York station
Speaker 2: Just Say Alexa Play Bloomberg eleven thirty.
Speaker 4: Ubsked recently out with a report. It found that millionaires
Speaker 4: already accounted for one and a half percent of the
Speaker 4: adult population analyzed by the bank in twenty twenty three,
Speaker 4: and by twenty twenty eight will have risen in fifty
Speaker 4: two of the fifty six markets it's surveyed. Now in
Speaker 4: some markets, the number of US dollars millionaires will increase
Speaker 4: by as much as fifty percent over the next five years.
Speaker 4: That's a lot.
Speaker 5: It's all kept to those involved in the wealth management business.
Speaker 5: Pretty busy client assets at retail brokerage Charles Schwab and
Speaker 5: the wealth arms of the sixth largest US bank searched
Speaker 5: five trillion dollars in the twelve months through September. It
Speaker 5: represents a twenty three percent jump as the group's revenue
Speaker 5: from the business collectively topped eighty four billion so far
Speaker 5: this year.
Speaker 4: All right, Tim, So a lot of wealth creation going on,
Speaker 4: a lot of wealth management going on to manage it all.
Speaker 4: And that's something we talked about at Schwab Impact held
Speaker 4: recently in San Francisco. We did that with Omar Agolar,
Speaker 4: the chief executive officer and chief investment officer of Schwab
Speaker 4: Asset Management.
Speaker 15: We see a continuous need and continuous demand of clients
Speaker 15: for advice. I think as people continue to grow in
Speaker 15: their lives and they continue to accumulate wealth, you know,
Speaker 15: they need for them to have somebody that can rely
Speaker 15: on and continue to just work on how do what
Speaker 15: do I do with their money?
Speaker 11: How do they actually set up?
Speaker 15: And you know, it's kind of interesting with all the
Speaker 15: information that is available today, there's not a lot of
Speaker 15: people that actually can make a decision on.
Speaker 11: What to do with their money seriously, and it's just
Speaker 11: difficult to do.
Speaker 4: Why what is it that they're lacking? What kind of
Speaker 4: information are they seeking?
Speaker 15: I think it's it's almost like when you go grocery shopping.
Speaker 15: There is a lot, a lot of options. You know,
Speaker 15: back back when I started my career, you know you
Speaker 15: wanted to say, for retirement, there was one option, just
Speaker 15: just buy a target day fund.
Speaker 11: That's it.
Speaker 15: You're based on what you're gonna plan to retire. That's
Speaker 15: one option. But now today there's multiple options, multiple things
Speaker 15: you can do, manager accounts, you could do it on
Speaker 15: your own, you could do a model, you can do
Speaker 15: there's several things that you can do. And therefore there's
Speaker 15: a natural human bias that tells you, oh, well, if
Speaker 15: there's too many options, I'm overly done. I cannot make
Speaker 15: a decisions. Songs like me trying to find a shampoo.
Speaker 15: It's like, no way you can actually pick something that
Speaker 15: will be good, and then once you pick it, there
Speaker 15: is a regret.
Speaker 11: It's like, well did I pick the right one? Did
Speaker 11: I not pick the right one?
Speaker 15: Maybe it wasn't or the price, And that's a big
Speaker 15: part of the same thing happens when it comes down
Speaker 15: to finances, and when it comes that that's why there
Speaker 15: is what we call a bull market for advice, especially
Speaker 15: when you accumulate wealth. There is a significant amount of
Speaker 15: need for clients to reach a financial advice or an
Speaker 15: RIA to be able to just find what is the
Speaker 15: right solution for them.
Speaker 5: What's interesting, though, is Charles Schwab offers both of these
Speaker 5: sort of different areas. You could do it all yourself
Speaker 5: using Charles Schwab's retail brokerage platform, or you could use
Speaker 5: an RIA whose back end is supported by Charles Schwab.
Speaker 5: How do you support both of those things even though
Speaker 5: they offer very different things.
Speaker 15: Yes, well, that's a big part of you know, the
Speaker 15: the institutional knowledge of trying to do things through client eyes.
Speaker 15: And in many cases, there's many clients that you know,
Speaker 15: want to use their tools on their own and in
Speaker 15: many in many cases they actually know what they want
Speaker 15: to do and they're looking exactly what it is and
Speaker 15: just thinking about, you know, like a supermarket. You know,
Speaker 15: there's people that know exactly the brand they want, exactly
Speaker 15: how they want to do it, and they're loyal to
Speaker 15: what their pieces are and they will continue to do that.
Speaker 15: There are others that are feeling more comfortable, you know,
Speaker 15: relying on an advisor for them to find what their
Speaker 15: path is, and you know, both of them are reliable.
Speaker 15: Both of them are actually things that have people. There's
Speaker 15: some clients that like to trade every day. There are
Speaker 15: other clients that want to buy it today and forget
Speaker 15: about it. So there's a lot of flavors for everybody.
Speaker 4: Oh, in the wealth management business, I'm just curious how
Speaker 4: many people are you know, find it, park it, leave
Speaker 4: it there. They're thinking longer term. But increasingly we see
Speaker 4: people wanting access to the private markets, private credit, all assets.
Speaker 4: How much of that does that play with you, guys too?
Speaker 11: Well?
Speaker 7: It is.
Speaker 11: It is a big part of the market.
Speaker 15: And I think the first part of your question, you know,
Speaker 15: there's a lot of clients that like to have what
Speaker 15: we call a financial plan, that would like to have
Speaker 15: an asset allocation, that would like to have a long
Speaker 15: term setup, and the majority of clients and our philosophy
Speaker 15: encourages for everybody to have a financial plan.
Speaker 11: Everybody should have a financial plan.
Speaker 15: And then once you have a financial plan, you can
Speaker 15: set up your long term investment objectives on what you're
Speaker 15: investing for. And in many cases you could be retirement,
Speaker 15: it could be income, it could be you know, growing,
Speaker 15: it could be buying a house, it could be a
Speaker 15: lot of things that you can do and then put
Speaker 15: the money to work that way. Now that being said,
Speaker 15: the human part of every investor, on every client basically
Speaker 15: shows that when you hear the word character currency bitcoin,
Speaker 15: do you hear the worst AI? You hear them immediately
Speaker 15: you pick up the phone and say how can I
Speaker 15: be part of it?
Speaker 4: Do your clients do that?
Speaker 11: Of course they do that.
Speaker 15: All the time, and they do it all the time
Speaker 15: in any situations where they have and then you know
Speaker 15: how much exposure I have to the max seven? Do
Speaker 15: I need to get out of the max seven? Do
Speaker 15: I need to hedge my So the normal setup of
Speaker 15: a human behavior to try to act on recent information
Speaker 15: is something that happens all the time.
Speaker 5: What's the pressure that your clients are feeling when it
Speaker 5: comes to fees? And when I say your clients, I
Speaker 5: mean the arias and the wealth managers who are out
Speaker 5: there offering their services for a percentage of the assets
Speaker 5: that they're managing on your behalf. Because there are a
Speaker 5: lot of robo advisors out there, including a robo advisor
Speaker 5: from Charles Schwab.
Speaker 11: Yes, well, you know what we have done.
Speaker 15: We have run these studies over time that basically show
Speaker 15: what clients are looking for. You know, number one, Yes,
Speaker 15: they're incredibly price sensitive. You know, the price and cost
Speaker 15: is a big part of the driver for decision making.
Speaker 15: Transparency is a big party. Going back to the other
Speaker 15: question that you had about private markets, that's a little
Speaker 15: bit of the hesitation today for clients to try to
Speaker 15: get more access to it. They are interested, they actually
Speaker 15: like to have the custos, but they're cautious about it
Speaker 15: because of the transparency and the liquidity, you know, and
Speaker 15: in many cases, once you once you explain that there
Speaker 15: is less transparency and they're less liquidity for a private market,
Speaker 15: then they step back and say, oh, let me think
Speaker 15: about it. I mean, initially sounds great, and initially sounds
Speaker 15: like a great opportunity, and in fact, we encourage, you know,
Speaker 15: a portion of their investments to be in private markets. However,
Speaker 15: you know, once you explain the trade offs, then it's
Speaker 15: started to just, you know, make a big difference.
Speaker 4: I kind of love to hear that, because I think
Speaker 4: I feel like we've spent so much time at various
Speaker 4: investment conferences and everybody just wants to talk about private
Speaker 4: equity and in particular private credit. But a lot of
Speaker 4: folks are saying, you know, you've got to understand that
Speaker 4: you lock your money up, you can't get access and
Speaker 4: the transparency issues are maybe not there. So it sounds
Speaker 4: to me that like your investors are savvy enough to
Speaker 4: be asking these questions.
Speaker 11: Yeah.
Speaker 15: No, And not only that, but the big part is,
Speaker 15: like you know, the investors like to see, especially younger investors,
Speaker 15: they like to see data. They like to see information,
Speaker 15: you know, before they make a decision.
Speaker 11: And this is a very looking at.
Speaker 4: Him as younger investors, so you're not looking at me, looking.
Speaker 11: At both of you.
Speaker 15: But when I actually think about it, when we do
Speaker 15: studies by generation, you know, like silent generation baby boomers,
Speaker 15: they tend to be a little more trusting in that sense.
Speaker 15: And the other words, like they trust the advisor, they
Speaker 15: have a relationship with the advisor, and they don't necessarily
Speaker 15: need to have that much evidence. You know, this happens
Speaker 15: actually when my kids, even when I recommend a restaurant,
Speaker 15: they still have to yelp it and try to figure
Speaker 15: out what the stars are. And even in many cases
Speaker 15: like that, why do you recommend that it only had
Speaker 15: three stars? So it is one of these that they
Speaker 15: suggest evidence. They need evidence to make a decision, and
Speaker 15: in those cases, when you compare performance on private markets
Speaker 15: and public markets, you immediately start saying, like why would
Speaker 15: I lock my money in where I can actually in there?
Speaker 15: Now that's not the whole story, but I think that's
Speaker 15: a little bit of the hesitation.
Speaker 4: We tease that we were going to ask you about
Speaker 4: key behavioral biases to be able to look out for
Speaker 4: in today's environment.
Speaker 11: What are they say that again.
Speaker 4: The key behavioral biases that are out there in today's
Speaker 4: investment environment, Well.
Speaker 15: There is, I would say there's three that are in
Speaker 15: ply you know, prevalent in today's market. There Number one
Speaker 15: is hurting behavior. Hurting behavior, which is exactly what we're
Speaker 15: just talking about. And the Max seven was clearly a
Speaker 15: big part AI Max seven, Bitcoin and video, you know,
Speaker 15: definitely you know, part of like you know what's going
Speaker 15: to happen. A lot of people will be watching this
Speaker 15: afternoon actually in a few hours, just on that report.
Speaker 15: But that that component about that and in fact, for
Speaker 15: that particular thing, not a lot of clients knew what
Speaker 15: NBDIA was five years ago. Is not until now that
Speaker 15: became so popular and that's and that's a big part
Speaker 15: of the what is it called the FOMO and that's
Speaker 15: one of the biases. The second bias is called recency bias,
Speaker 15: which is people tend to just you know, look at
Speaker 15: the most recent information and extrapolate into the future. Oh,
Speaker 15: you know, the market has been up for three months,
Speaker 15: it should be going up forever. And that that's the
Speaker 15: kind of behavior that people tend to have. Well, the
Speaker 15: same thing goes back to, you know, to when things
Speaker 15: go wrong. It's like immediately they become like, well, we
Speaker 15: have had two bad two bad, this is time for
Speaker 15: get out, and then try to just panic that okay,
Speaker 15: And those are two of the typic you know, behavioral
Speaker 15: biases that are very typical today.
Speaker 5: Carol mentioned crypto. So I got asked about bitcoin.
Speaker 4: Do everybody's doing your show that's just about crypto?
Speaker 5: Feel free to tune it, but it is. It's it's
Speaker 5: interesting because it's you know, the whole market of bitcoin,
Speaker 5: the whole market cap at bitcoin, not even the market
Speaker 5: cap of nvideo. So I think a lot of people
Speaker 5: would say there's still a lot of room for people
Speaker 5: who are crypto curious. At this point, what portion of uninvestors' portfolio,
Speaker 5: if any, should be allocated to crypto.
Speaker 15: Well, we we we have had points of view on
Speaker 15: on crypto in general to basically say, like, look, any
Speaker 15: any client could actually use you know, trades as a
Speaker 15: way to just generate or try to find any solutions
Speaker 15: they have for any strategic long term asset allocation. We
Speaker 15: haven't adopted crypto as being part of like what you
Speaker 15: would use for the long run. And in many cases
Speaker 15: the reason why is because for our strategic asset our
Speaker 15: location work, we normally tried to find what are the
Speaker 15: fundamentals that allowed that to be valued and what are
Speaker 15: the economic factors that drive the performance of certain asset classes.
Speaker 11: You compare MBDIA to crypto.
Speaker 15: Well, in the case of media, there is you know, earnings,
Speaker 15: there is clearly financial situations, there are results, there is
Speaker 15: everything else.
Speaker 4: In the case of this, it's actually regulatory sec filings right.
Speaker 15: There is exactly they are accountable cash flows and.
Speaker 11: Actually there is a product out there that you can touch.
Speaker 15: In the case of crypto, a lot of these prices
Speaker 15: tend to be driven by supply and demand. It's supply
Speaker 15: and demand driven it basically have people have asked me
Speaker 15: the questions said, like, well, but gold isn't gold the
Speaker 15: same like gold is also supply demand driven.
Speaker 11: Yes it is. But the difference is there is a
Speaker 11: bar that you can touch.
Speaker 4: Oh mark twenty seconds. Top question you think on everybody's mind.
Speaker 4: Are registered investment advisors right now in this environment? Number
Speaker 4: one question investment question.
Speaker 15: The number one question is you know, what would we
Speaker 15: think about the market, you know, next year, given you
Speaker 15: know potential less regulation, potential tariffs and potential changes in
Speaker 15: a way that you know the sec you know will
Speaker 15: will move down their gender next year.
Speaker 4: All right, good stuff, thank you so much.
Speaker 11: It's good to see you guys.
Speaker 4: Great great setup for us here on this Wednesday. Amar
Speaker 4: agolar He is the chief executive officer, chief investment officer
Speaker 4: of Schwab Asset Management. Joining us here at Schwab Impact
Speaker 4: in San Francisco.
Speaker 2: You're listening to the Bloomberg Business Week podcast. Catch us
Speaker 2: live weekday afternoons from three to six Eastern Listen.
Speaker 3: On Bloomberg dot com, the iHeartRadio app.
Speaker 2: And the Bloomberg Business App, or watch us live on YouTube.
Speaker 4: The insatiable appetite for the investor friendly wrapper and all
Speaker 4: time high number of product launches and a relentless bull
Speaker 4: market fueled by Donald Trump's presidential victory have helped push
Speaker 4: total net inflows into US ETF's past nine hundred and
Speaker 4: thirteen billion dollars. This is according to data compiled by
Speaker 4: our Bloomberg Intelligence team, that beats twenty twenty one's record
Speaker 4: hall with still one more month to go.
Speaker 5: Further signs of the markets exuberance, total US ETF assets
Speaker 5: hit the ten trillion dollar mark for the first time
Speaker 5: in September. More than six hundred new products have debuted
Speaker 5: since the start of the year, and nearly all ETFs
Speaker 5: in the US posted positive twelve month returns, up from
Speaker 5: eight percent just two years ago. This according to data
Speaker 5: from Bloomberg Intelligence.
Speaker 4: Now, Schwab started in the ETF business fifteen years ago
Speaker 4: and it is one of the dominant players with thirty
Speaker 4: one ETFs, including ten fixed income offerings, making it the
Speaker 4: fifth largest provider of ETFs.
Speaker 5: With an ETF update, we were joined by David Botset,
Speaker 5: He's managing director and head of Innovation and Stewardship over
Speaker 5: at Schwab. He stopped by our setup when we were
Speaker 5: at the Schwab Impact event out there in San Francisco.
Speaker 16: You know, the first thing we start with is what
Speaker 16: are the investor needs? You know, that's at the heart
Speaker 16: and the ethos of everything we've been doing in ETF.
Speaker 16: So the past fifteen years you mentioned, and that's really
Speaker 16: helped compel ust up to four hundred billion dollars in
Speaker 16: assets in our ETFs. So we've been doing an annual
Speaker 16: ETF investor study now for over a decade. That's asking
Speaker 16: questions of both ETF investors and non ETF investors about
Speaker 16: their various views on how do they think about ETFs,
Speaker 16: what's most important to them, about what they're investing in,
Speaker 16: and what categories they may invest in the future. That
Speaker 16: provides us a lot of great insights to help drive
Speaker 16: our innovation in the space.
Speaker 4: All right, So for non ETF investors versus ETF investors,
Speaker 4: what they want.
Speaker 6: Is it different?
Speaker 16: You know, there are some nuances to that. So in
Speaker 16: some cases it's very much the same. It's things that
Speaker 16: they're looking at when they're selecting an ETF, like cost, Yeah, right,
Speaker 16: that stands out in both categories.
Speaker 7: But there are other areas where we.
Speaker 16: See non ETF investors they need more education, they need
Speaker 16: more insights because their confidence level in selecting an ETF
Speaker 16: is much less than those that are ETF investors.
Speaker 7: Makes sense, it does.
Speaker 4: Hey, listen, one thing that they need is a mortgage
Speaker 4: backed security ETF, which just you guys launched this week,
Speaker 4: one day ago, yesterday, Yes it was so tell us
Speaker 4: about that.
Speaker 7: You know what.
Speaker 16: We listen to our investor base. The one thing that
Speaker 16: they tell us is we need more precise tools for
Speaker 16: our fixed income allocation. You know, we go back a
Speaker 16: decade and everybody was using the aggregate index to get
Speaker 16: their fixed income exposure. But in a dynamic interest rate
Speaker 16: environment like we're in today, they want to control for
Speaker 16: sector exposure. They want to control for duration, they want
Speaker 16: to control for the credit quality. And a portfolio. Mortgage
Speaker 16: backed securities is one of those that frequently are under
Speaker 16: utilized in a portfolio. But they think about how do
Speaker 16: I redynamicize that aggregate exposure. They want that precision in
Speaker 16: an MBS ETF.
Speaker 5: Are you thinking about getting into what our own Eric
Speaker 5: Belcunas over at Bloomer Intelligence calls the hot sauce ETFs. Like,
Speaker 5: if you've got ninety five percent of your portfolio, you know,
Speaker 5: in large cap stocks and maybe some bond funds, you
Speaker 5: got five percent to play with, Maybe you throw some
Speaker 5: into ARC or you throw some into bitcoin ETF. Are
Speaker 5: you guys thinking about getting into that sort of specialty category,
Speaker 5: maybe go leveraged in Vidia ETF.
Speaker 16: You know, our bread and butter largely is in the
Speaker 16: cot anas. Eric's a great guy to love to work
Speaker 16: with them, But you know, our bread and butter is
Speaker 16: really in the core products and solutions, right because where
Speaker 16: we see the benefit that we can provide as an
Speaker 16: ETF provider is on cost, which is number one in
Speaker 16: our survey year and year again, Cost number one thing
Speaker 16: people look at.
Speaker 5: So there's a race to the bottom with those sort
Speaker 5: of big broad ETF because there is so much competition.
Speaker 5: And that's why I think you see a lot of
Speaker 5: innovation happening in the Okay, well, how can we make
Speaker 5: our product unique and also charge fifty basis points instead
Speaker 5: of eight basis points?
Speaker 16: Yes, well, I think you'll see us innovating in that
Speaker 16: space is less on those hot sauce areas and it's
Speaker 16: more thinking about how do we use the ETF wrapper
Speaker 16: in other ways bring actively managed strategies. Earlier this year,
Speaker 16: we launched the Schwab Alter Short Income ETF. You know,
Speaker 16: you look at that Alter short space, it's really hard
Speaker 16: to index that category. We also think it's an area
Speaker 16: where an active manager can potentially provide alpha.
Speaker 4: Is it all about active going forward?
Speaker 9: Know?
Speaker 16: I don't think it's all about active, Yeah, but increasingly
Speaker 16: you're seeing that in that space that's either coming through
Speaker 16: new launches or conversions of active mutual funds and ETFs,
Speaker 16: and they're in they're taking an outsized portion of the
Speaker 16: flows this year.
Speaker 4: I always think about this, David. I began kind of
Speaker 4: my career in business news.
Speaker 5: You had a show ATF show, right or mutual.
Speaker 4: Fund fun show not so long ago, and it's just
Speaker 4: interesting to see the arc and how we move to ETF.
Speaker 4: When is it that we just don't have mutual funds
Speaker 4: and it's all about atfs. Is it just a matter
Speaker 4: of time?
Speaker 16: I don't think so that there's a continue Well, I
Speaker 16: think it's it's all about the benefits the ETF provides.
Speaker 16: It can provide a cost benefit, It can provide a
Speaker 16: tax benefit because they tend to be more tax efficient,
Speaker 16: and a trading benefit. But in many accounts where it's
Speaker 16: a qualified account you're not paying taxes, that tax benefit
Speaker 16: isn't there.
Speaker 7: You also see a lot of strategic allocation.
Speaker 16: Long term, longer term investors for one K plans retirement
Speaker 16: plans where you may not necessarily need that tax benefit
Speaker 16: or the ability to trade every day in your location.
Speaker 16: If I'm more of a strategic investor.
Speaker 4: Are investors, though, who are planning for the retirement missing
Speaker 4: alpha though by doing mutual funds that way? Like I mean,
Speaker 4: are they missing out on opportunities potent?
Speaker 13: So?
Speaker 16: I think potentially and increasingly they may miss out on
Speaker 16: those opportunities because the innovation is going to be more
Speaker 16: in the ETFs than it is in mutual funds. So
Speaker 16: in those new opportunities that arise.
Speaker 5: What about money market ets versus money market mutual funds?
Speaker 16: You know, it's interesting. We're seeing some work by other
Speaker 16: firms in that space. It'll be interesting to see.
Speaker 5: But right now, if I want to buy a money
Speaker 5: market fund at Charles Shraub, I have to buy a
Speaker 5: mutual fund.
Speaker 7: It is in a fund structure, that's right.
Speaker 5: Why is that?
Speaker 7: Well?
Speaker 16: I mean I think the people like the dollar nav right,
Speaker 16: That's one of the big distinctions where we've seen that
Speaker 16: the one product that is in the market today. You're
Speaker 16: no longer trading at a dollar like you do with
Speaker 16: a money market fund.
Speaker 7: It's dollar in, dollar out.
Speaker 16: You like that known factor, and I'm not sure that
Speaker 16: investors will necessarily want to stray for that when they
Speaker 16: think about their cash investments.
Speaker 4: How does the macro play into the ETFs that you
Speaker 4: guys are thinking about in terms of launches?
Speaker 16: You know, for us, it's really about the long term view.
Speaker 16: It's less about a macro current point in time. It's
Speaker 16: really thinking about how do we serve investors' needs for
Speaker 16: the long haul.
Speaker 4: So even like you know, a new administration, new policies
Speaker 4: that might impact the economy and various sectors, it's not
Speaker 4: the way you play it.
Speaker 7: It's not the way we play it, that's right.
Speaker 4: All right? Interesting does the macroview though? I mean, as
Speaker 4: you look at what's going on in this space, how
Speaker 4: does it impact at all your thinking?
Speaker 11: Yeah?
Speaker 16: So I think where it impacts our thinking is when
Speaker 16: we talk to investors about how to allocate their portfolios.
Speaker 4: Okay, right, you think about our do they have lots
Speaker 4: of questions right now?
Speaker 7: Absolutely?
Speaker 5: Let's say you were to just think about the universe
Speaker 5: of ETFs in your world, how much of those ETFs
Speaker 5: are when the money comes in? Is it about indexing
Speaker 5: versus about something outside of indexing to try to get alpha,
Speaker 5: you know, you.
Speaker 16: Know, I think it's the way that indexing is used
Speaker 16: right model portfolio strategic allocations. It's more about how do
Speaker 16: I tilt between large cap and small cap, domestic international,
Speaker 16: looking for those alpha opportunities rather than within the asset
Speaker 16: class itself.
Speaker 4: We mentioned you guys fifteen years just celebrate your anniversary
Speaker 4: from your first ETF. How do you think about the
Speaker 4: trajectory and kind of where the ETF market was at
Speaker 4: the beginning. I remember a time I felt like every
Speaker 4: guest or every other guest with somebody offering up a
Speaker 4: new ETF. I feel like it's founded a different groove
Speaker 4: now and it's matured. But tell us about it. You've
Speaker 4: been in it.
Speaker 16: Yeah, I've been in the ETF industry for nearly twenty years,
Speaker 16: so it's been a long time. It's been a great run.
Speaker 16: But we've still got a lot of innovation to go.
Speaker 16: So I think we're just in the early inning still
Speaker 16: of what the ATF can bring to investors and video
Speaker 16: ETF is it coming anytime?
Speaker 5: They have I think direction, yes, the direction.
Speaker 7: There are some single stock levered etfe in the market.
Speaker 5: That's what I was thinking of when I was referring
Speaker 5: to that leverage, you were channeling your inner Eric.
Speaker 4: Yeah, David, thank you so much. Fun to check in
Speaker 4: with you again.
Speaker 7: Thanks so much.
Speaker 5: I hope Eric is listening and knows that I'm giving
Speaker 5: him all this love.
Speaker 4: He better. I'll point it out to Warner David bots At,
Speaker 4: Managing Director, head of Innovation and Stewardship over at Schwab
Speaker 4: joining us right here, chob impact. David, Thanks again, Thank you.
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