Global Central Banks Face Uncertain Policy (With Robin Brooks)

LIZ ANN SONDERS: I'm Liz Ann Sonders.

KATHY JONES: And I'm Kathy Jones.

And this is On Investing, an original podcast from Charles Schwab. Each week we analyze what's happening in the markets and discuss how it might affect your investments.

Well, hello, Liz Ann. Now that the markets have had a week or so to digest the Fed meeting and process some of Powell's comments, we had comments just yesterday again as we're recording this. And then we've had just a ton of Fed-speak. I think now that the quiet period is over and the meeting's over, they're all out speaking. I think I counted 18 speakers the week following the meeting. But that included Stephen Miran, who has just recently joined the Fed. So where do you think things stand in the equities market and in your world now that that's all over?

LIZ ANN: Well, Kathy, one of the things that we've been emphasizing more recently is that to get a fuller picture of what's going on in the, and we don't do this on camera, you're going to see me do the air quotes around what "the market" is doing, it does require going under the surface of these cap-weighted indexes to pick up what are the themes that are working, what's not working, and maybe sort of provide some data around, I think, what are many misperceptions of what the market is doing. Yes, at the index level, the market has been extraordinarily resilient from the April 8th closing low. We haven't had even a 2% pullback in the S&P 500®. That's relatively long from a historic perspective. It's certainly not breaking a record in terms of duration of not having a 2% pullback. But even since the April 8th closing low, the average member in the S&P 500 has had a 14% drawdown, and the average member within the NASDAQ has had a 32% drawdown. And that's just since April 8th, this period of incredibly strong gains at the index level. 

And I think sometimes you get just more interesting stories told under the index level in terms of the connection between what's going on in the economy and what's going on in the market. Some of the bifurcations that we've been highlighting that are occurring in the economy and how that relates to what's happening in the market. Still a lot of attention and focus on the cohorts like the Magnificent Seven or AI[1], AI-adjacent names. That certainly represents one of the bifurcations in the economy with CapEx spend and anything AI related still booming ahead, but non-AI related CapEx has been somewhat stalled because of uncertainty with regard to tariff policy. 

But in terms of leadership, I've been using this as an example in client events, and it's been met with lots of, "I had no idea. Oh my gosh, are you serious? Is that actually, right? Really?" So let's use the poster child of AI in Nvidia, and it's the number one contributor to S&P 500 gains on a year-to-date basis, but as you and I are recording this, it's only the 65th best-ranking stock from a performance standpoint. And if you take that over to the NASDAQ, again, Nvidia is one of the largest contributors, but it's ranked 635th within the NASDAQ in terms of year-to-date performance. And I track a lot of these baskets, and the number one basket that's outperforming the S&P, and not every stock is in the S&P, but as a cohort within the broader equity market, the meme stock basket is the number one best performer.

So I think we … to understand the market, we not only have to look underneath the surface, but we have to understand the cohorts that are driving the market. And I think retail traders are still really dominant in this market. A lot of studies suggest they're somewhere in the 20 to 25% of daily trading volume. And they don't tend to focus a lot on the stuff that you and I focus a lot on, whether it's trade policy or monetary policy or fiscal policy or even things like earnings and valuation. They tend to have kind of blinders on and just continue to plow into the sort of FOMO categories of the market where momentum has been high. They have relatively short time horizons. So to me, that's some of the interesting things that have been happening within the equity market, maybe emphasis on the within. How about you, what's been going on in your world?

KATHY: Well, remarkably not that much. So you know, we got the, finally got the Fed rate cut … 

LIZ ANN: Take advantage of that!

KATHY: Yes, I know. I'm catching up on a few things. But I think the interesting thing is that since the Fed meeting, as we speak, yields really haven't moved that much. Short-term yields continue to follow the Fed and fed funds rate, and that's to be expected. But if I look at 10-year yields there, they, you know, they had dipped below 4% before the Fed meeting, and now they're back at about 4.10% to 4.15% area, which is just where they were before the Fed meeting, or the week before the Fed meeting. So not that much has happened, and I think there's a recognition that although the Fed cut rates, they're not in a big hurry, at least what we hear from Fed Chair Powell, "We're not in a huge hurry to keep cutting rates rapidly." And they have this tough thing. I think Powell put it well. There's no risk-free path for the Fed here. If they cut too fast, inflation picks up, and they've got a problem there. If they cut too slowly and the unemployment rate rises, that's a problem for their mandate as well. And so they're going to just keep moving real cautiously. And I think the market was positioned ahead of the meeting for a more aggressive Fed.

And then you just have a whole lot of background noise going on right now at the Fed. And I think the market's a little bit nervous about that, although not demonstrating a lot of issues. It may be turning up more in the foreign exchange market where people are worried about Fed independence and some of the things going on behind the scenes or at least away from the policy decision-making area. Seeing that sort of translate into the dollar continuing to trade soft. 

And then we just recently got an indication that the Treasury is going to open a swap line with Argentina, a $20 billion swap line, meaning we will basically lend them money, and possibly buy Argentine dollar bonds. You know, kind of a remarkable move. I think it's trying to defend what Treasury Secretary Bessent said is an important ally. But Argentina has defaulted nine times in my career. So this is not exactly, you know, the best credit in the world. And so it's an interesting use of taxpayer money at a time when I'm just not sure that this is going to work out well, but it's an activist approach that we haven't seen outside of a crisis. Like during COVID, we saw that the Fed opened up swap lines with a lot of countries that were desperately in need of dollars. You see it in the financial crisis, but you don't sort of see these one-offs, particularly with a credit that has been dodgy for a long time.

You know, more on that to come, I guess. We'll see where we go from there. It hasn't affected the Treasury market too much, but it's there. I would say the other thing in the background is we could have a government shutdown coming. And haven't seen much reaction yet in the market. I think we always go on the assumption that this will get settled at the last minute, but something to keep an eye on as we go forward. So there's a lot happening in the background, but not that much in the foreground of the Treasury market.

LIZ ANN: You know, and speaking of the activist approach, I have been getting an increasing number of questions about the U.S. government taking stakes in private-sector companies, Intel being the most dominant, but also some profit sharing announced with Nvidia. And then just today, as we're taping this, some discussion about the government taking a stake in a lithium company. And there's been chatter about doing the same within the defense companies.

And the way I've been answering it in a very broad sense, not being an expert on these specific deals, but I think the most relevant concern is the misallocation of capital. When you have a large shareholder, if not one of the largest shareholders, being the government, who also happens to be the tax authority and the regulator, does that mean that companies are now going to make capital decisions, whether it's around labor or capital spending, based on politics versus being there for the benefit of shareholders and employees and communities. So that's a general way to think about that.

KATHY: Yeah, it's certainly not something that you would have thought would happen a few years ago. So it's a new development. And I guess we have to just wait and see where we go from here. It's not something we have a lot of experience with in recent years.

LIZ ANN: All right. So this week, Kathy, it's your turn to interview our guests. So why don't you introduce him?

KATHY: Yeah, a great guest to have on. It's Robin Brooks. He's a senior fellow in the Global Economy and Development Program at the Brookings Institution. His research focuses on global growth and inflation dynamics, capital flows to emerging and frontier markets, as well as Western sanctions policy and the G7 oil price cap on Russia.

Frequently cited in such places as the Financial Times, Wall Street Journal, New York Times, among others. And he appears regularly on CNBC and Bloomberg. Prior to Brookings, Robin was managing director and chief economist at the Institute of International Finance. And prior to that, he was chief foreign exchange strategist at Goldman Sachs, where he was responsible for the firm's foreign exchange forecasts and publishing international macro research.

He also spent eight years as an economist at the International Monetary Fund, or the IMF, where he worked on the IMF's fair-value models for foreign exchange, published academic research, and participated in missions to the IMF program countries. He holds a PhD in economics from Yale University and a Bachelor of Science in monetary economics from the London School of Economics.

KATHY: Well Robin, thanks for being here. Looking forward to the conversation.

ROBIN: Thanks for having me. I'm a big fan of yours and your research and your market views, so it's an honor to be with you.

KATHY: Well, thank you very much. Kind of back at you, I follow you closely on X and your writings and have for years. And I was really excited to have you on because I think a conversation about central bank policy, globally, and trade, and a lot of things going on internationally, I think is really interesting at this moment in time. You know, we've got … there's a lot going on. I think there's no shortage of things to discuss. But I thought maybe we'd just jump off from the recent Fed meeting and what your takeaways were from that meeting, what you expect going forward.

ROBIN: Well, I think you're starting at a really important inflection point for markets. The Fed last week obviously cut by 25 basis points. Markets, last week when this was happening, had wild moves. When the Fed first announced its cut, the dollar fell very sharply, and U.S. interest rates also moved lower, a lot, but then fully retraced those declines as soon as the press conference started, and it became clear that the path to easing is a lot more complicated than the initial statement and the initial rate action made out. So net-net, the dollar has been flat ever since Jay Powell's Jackson Hole speech on August 22nd. That really was the speech, three weeks ago, that kind of set the stage for this resumption of Fed easing. 

But in the big picture, I think what's kind of remarkable is that the dollar has been flat, even with this resumption of easing for now four or five months, ever since May. And you know there is this overwhelming sense of negativity on the dollar which, of course, is heavily emotional also, but I think it's worth flagging that even with all that sentiment in the market, the dollar is basically flat and a pretty meaningful Fed easing campaign, which is now priced in markets, has done essentially nothing to weaken the dollar. So I tend to take the glass-half-full perspective on the dollar. I'm what people call a dollar bull. And the recent price action, I think, is quite encouraging.

KATHY: So do you think part of the reason the dollar has not fallen in response to signals at the start of the Fed easing cycle is because other central banks are also easing policy at this stage of the game, or is there another contributing factor to that?

ROBIN: So that is a huge question, and there's a huge amount going on in markets. You know, in your opening you were talking about how there's all these crazy things going on, and I have to say half the time when I get up in the mornings, I'm terrified. Half the time I'm excited. I can never quite decide what it is that I'm feeling in the moment. But what's clear is that markets price a very bearish view on the United States. So they're pricing, including last week's cut, five cuts for the Fed this year and next year. So we're pricing above and beyond the cut that we already got of 25 basis points and at 100 basis points in cuts, give or take. So two more this year and two more next year. 

That's really an expression of a very bearish view on the United States economy, and it is basically a view that we are going to have either a very weak economy or a recession so that the inflationary impact from tariffs will be very muted because a weak labor market and weak activity prevent inflation from running out of control. And so the Fed can ease in spite of the inflationary impulse from tariffs. So that's actually kind of like, if I think about a Venn diagram[2] of all these potential overlapping scenarios, the market is actually pricing like the extreme left of the Venn diagram. Like there's all kinds of joint probabilities that have to happen. And I think in reality, things could be a lot more complicated. And I think last week's press conference where Jay Powell, you know, pushed back on the idea, for example, of a 50-basis-point cut at last week's meeting, you know, that was an illustration of the complexity of what really is going on. 

And so my first answer to your question, you know, "Why is the dollar flat?" is so much negativity is priced. And so the hurdle for the dollar to fall just for that reason is, I think, pretty high. 

It's also the case, as you mentioned, that foreign central banks have eased significantly. They ran ahead of the dollar. The Fed kind of went on hold after easing last year, and that might explain why the president is so critical of Jay Powell and the Fed. Other central banks have been easing, even as the Fed was basically sitting on its hands. And so I think that's also part of the equation, but it's less, honestly. I think most of it is an extremely negative view on the U.S., which is priced.

KATHY: OK, that's really interesting because I think the consensus is for further decline in the dollar from here. So it's good to be contrarian sometimes. I think it makes life much more interesting. But that's kind of the short-term view. From the long-term perspective, you know, views range from, "Hey, you know, it's the world's reserve currency. It's not going anywhere. We got a great economy. Dollar has plenty of room to move back up," all the way to, you know, "We're going to debase the currency to try to finance the deficit," etc. So if I took a step back and you take a longer view, what are you thinking about the dollar a couple of years down the road?

ROBIN: So you're totally right. There are several debates that the market is having about the dollar. We basically just now in our opening discussion, we're talking about the conjunctural picture, right? What's going to happen to the dollar over the next year or so? And I think that's largely a debate on is the U.S. going to go into recession or not. There is a much bigger debate about the potential undermining of U.S. institutions which many see as integral to the status of the dollar as a reserve currency and so over the medium term there is a big debate on whether those institutions, that institutional integrity, are being undermined.

One example of this is the whole Lisa Cook thing, the attempts to fire that governor from the Federal Reserve. We can come back to that, but there is a huge discussion around that in markets. What I will say is the debate around U.S. dollar reserve currency status was extremely active earlier this year when the dollar, in April in particular, fell very sharply. I think at that point, this shorter-term conjunctural debate that was going on and this longer-term structural reserve currency status debate, they kind of got intermingled, and it was all big one … one big dollar negative discussion. 

I think what's … where we are now, and this is my characterization of sort of the market consensus, and then I'll give my own opinion. I think the market has kind of stepped back from these medium-term considerations and is right now only trading is the U.S. going to go into recession or not. On the medium term, I'm quite worried. I think these institutional integrity things are really important. The undermining of Federal Reserve independence, the way that people are appointed, the potential use of things that they did in the past before they joined the Fed to discredit them and push them out. These are all things that are really worrying. I spent a lot of my time, Kathy, in previous jobs working on emerging markets. I spent a lot of time working on Turkey where President Erdogan completely gutted the central bank. 

What happened in that instance is that the central bank, in the end, ended up doing his bidding. They cut interest rates. Erdogan thinks high interest rates are an abomination. Turkish lira went into freefall. Inflation spiked. And Turks ended up with higher interest rates than they had before this whole fiasco. So it is a real warning sign that messing with your central bank's independence is a foolish game. It's very dangerous. You just don't want to do it because the sort of the siren song of low interest rates, it doesn't get you anywhere. It doesn't actually get you lower interest rates. It gets you higher interest rates.

Last thing I'll say on this, there's this acronym, TINA. "There is no alternative." I think that is really important. The U.S. is running reckless fiscal policy. There can be no doubt. We're running budget deficits that are around 6% of GDP, as far as the eye can see, in a non-crisis period after giant deficits during COVID. Our fiscal policy ever since '08 has been running out of control. The Fed periodically buys large amounts of Treasuries that never then get sold back into the markets. So they sit permanently on the Federal Reserve's balance sheet. That's basically monetary financing. I mean, you can sweet talk around it, but it's monetary financing. The thing is, everyone's doing this.

The U.S. isn't alone. The ECB, the European Central Bank, has bought lots of government debt. In fact, it's gone even further down the rabbit hole of helping highly indebted countries like Italy, Spain. The Bank of England holds large amounts of debts. The BOJ, which is the Bank of Japan, is like the sumo wrestler in all of this. They hold huge amounts of debt. And so the problem with currencies is everything is relative. And so making a judgment on whether, in this respect, the U.S. is materially worse than everyone else, I think it's really hard. So I'm most concerned about what's going on with the Fed, with the composition of its leadership. I am more agnostic on the fiscal shenanigans, which are honestly a global phenomenon.

KATHY: I think what's really interesting to me is that I too spent some time on emerging markets back in the day. I'd say in the late '80s and during the '90s. 

ROBIN: You saw the best, most turbulent times.

KATHY: Yeah, there was a lot of turbulence. And I think the lessons that were supposed to be learned were you need to manage these things because if you lose the confidence of the market, then your bond yields go way up. Your currency goes way down. The government eventually turns over because you can't survive politically in that environment, and bad things happen. 

And it feels like, in the developed world, we are leaning in that direction. We're the ones who supposedly help teach this lesson. And now it feels like we're heading in the opposite direction ourselves. Not that we're anywhere near … you know, I say the U.S. is a large and wealthy country with a capacity to finance its debt and do a lot of things. We just don't seem to be demonstrating the willingness. And I think that that's true in most developed countries as well. But this idea of fiscal dominance is becoming more popular for people to talk about and to worry about. And I would agree with you, a little bit of leadership out of Washington would be very helpful in reassuring markets because, you know, right now, I mean, currency markets, it's all about confidence, right? It's always about, as you say, it's a relative game, and who do you have the most confidence in? In managing? 

ROBIN: Totally. Yeah, there are some really nerdy ways to calculate the special status of the United States, right? We've always prided ourselves on having a Treasury market that's the ultimate refuge, right? It's the safe haven. It's the biggest safe asset. It's incredibly liquid. So you can park cash there when things head south globally and be secure in the knowledge that your principal is safe. Now, There are ways to look at whether that special status of the Treasury market is being eroded. So academics calculate what's called a convenience yield, which is basically just the idea that the Treasury yield is abnormally low relative to other countries' government bond yields because people basically are willing to accept lower yields in return for the special status, the safety of their principal. And so when you look at how that convenience yield, this premium, has evolved over time, 10 years ago on average, the 10-year Treasury yield was about 25 basis points below the equivalent foreign 10-year yield when you convert it back into dollars.

And these days, it's about 25 basis points above. So we are no longer really in a position where we are being awarded a premium for good policy. We're actually paying a penalty. And I think, you know, that there's two important points out of that. We've lost that convenience yield or this special status gradually.

And that basically maps completely into this debt accumulation, which ran out of control after the '08 crisis. And then second, as perverse as it might sound, recently, even with all the ups and downs of the Trump administration, it doesn't look like there's much of a further loss or erosion in the Treasury safe-haven status. And when I talk to people about this it drives them bonkers because it seems so counterintuitive, but the important thing to understand is the U.K. currently is in sort of a quasi-fiscal crisis. France is in a quasi-fiscal crisis. Japan is up dire straits in terms of managing 240% of GDP while the BOJ is trying to disentangle itself from capping these yields. So you know, besides currencies, global government debt markets are really in very bad shape. And so on a relative basis, again, the U.S. doesn't look that bad.

KATHY: Yeah, I think that the markets are continue to give us credit because as you say there's just so much going on, and the one thing that's still true of the U.S. Treasury market is the size and depth of liquidity, and you know that you can't get it in Europe because you've got a fragmented bond market. The Bank of Japan still owns so much of the debt and you … they're letting interest rates rise, so why would you go there? And just doesn't … in a world of relative value, you don't have a lot of choices if you have a fair amount of money. 

But I'd agree, it's a worrying trend, and I guess it's going to take a lot of fortitude for somebody to climb out of this in a way that's credible. 

You know then, I get back then to, OK, we've got a lot of investors on this podcast who say, "Now, what do I do? This all sounds kind of bad, right? You know, it sounds kind of troubling. Do I worry about my Treasury bonds? Do I worry about the U.S. dollar collapsing?" And we have not been in that camp. We've been in the camp that says "Look, yields will rise, relative to where they otherwise might be, because the market will demand more yield to compensate for these risks." And I suppose when I look at the dollar, that's a risk as well, that at some point, although I know you're bullish on the dollar right now, perhaps at some point, if other countries get their acts together, the dollar will come down also because there'd be less demand for it.

If you're sitting in the seat of investors, what's the kind of key thing that you would be thinking about right now when you're looking at various markets?

ROBIN: So there is a wonderful lady on Twitter who we both know, Lyn Alden.

She has this amazing saying, which she tweets out periodically, including after the Fed meeting last week, and it's just so funny, and it's just so true, and it's just so succinct. It's "Nothing stops this train." And I love that because we are, big picture, in a situation where we're unable to get our fiscal policy act together. We therefore are constantly flirting with debt problems. Therefore, we need our central banks to buy more and more of this stuff and to manage yields.

And so the first thing that I, as an investor, think about is, "OK, well, how do I navigate around this very long secular trend? Do I think that, in the United States, fiscal policy will be brought under control anytime soon?" No. So let me give you two examples. First, after Jackson Hole, which Powell gave a very dovish speech, and it was a clear inflection point, gold since then is up 10%, and it keeps rallying. 

And the rally in gold is being fanned and made much stronger than in past similar instances because we are running out of other countries that traditionally have played the role of debt safe havens. So Japan, I mentioned before, has an unsustainable debt burden. Yields, as you mentioned, are rising. The BOJ is trying to hike interest rates. That's not a safe haven anymore these days.

Germany, similarly, I'm half German by the way, which accounts for some of my fiscal hawkishness. Germany has kind of succumbed to the European debt bug. You might know that Germany had the infamous debt break, so that was basically a balanced budget amendment. It's meant that German debt is an enviable 65% of GDP. It's incredible. Actually, when you look across the Nordics, there's nothing incredible about it. They all have debt around 30% of GDP. These guys, it's basically a Northern European phenomenon. But again, Germany in the past at times like this would see yields going down because people would be looking for a stable low-debt sovereign. And that's not true anymore. Longer-term yields in Germany are rising along with everyone else. So again, that safe haven isn't there. 

So people are looking for places like Switzerland, which has debt around 35% of GDP. So the search for safe havens is on. What I do is super simple. I'm in all my retirement accounts. I'm just long equities on a very broad basis. And I'm long the dollar, I should say. So I'm basically trying to go into growth because I think the nothing stops this train acronym is basically about pushing growth at the expense of fiscal responsibility, and so inflation equities are an inflation hedge. They are a hedge of this fiscal mess, so that's what I'm doing.

KATHY: Well, thank you for sharing that. I just, you know, we talk to a lot of individual investors who kind of ask these questions when we talk about these topics about, you know, what needs to be done that isn't being done by our erstwhile representatives. And I think it's sensible to adopt the view that, yeah, I like that. Nothing stops this train. We will continue to go for growth because that's something that politicians can run on and continue to probably win on. People like to have jobs. And when we grow, we have jobs. And that tends to drive things until inflation gets too bad. But I'm a little bit more optimistic, I think, than you might be that we may have an inflection point where people wake up in Washington and decide to actually address some of these issues before it's a real crisis, but I understand the wanting to hedge your bets, not a bad idea. 

Well, thank you, Robin. They've been really fun. I think we could go on for hours, but we'll have you back again.

ROBIN: Great, thanks so much for having me.

LIZ ANN: All right, Kathy, it's that time in our program to look ahead and have each of us chat a little bit about what's on our radar. So what's on yours in the next week plus?

KATHY: Well, watching a lot of things, you know, in terms of the economic data, it's kind of the warmup to the jobs numbers coming up. And that, of course, is going to be very important since that's been a big part of what has been driving Fed policy. So we'll get that on October 3rd, so that'll be the next reading we get on the job market. More broadly, just watching what's happening in the short-term funding markets. It gets a little bit into the nitty-gritty, but with the Fed rate cut, we're seeing kind of short-term money move around a little bit, and it could create a little bit of tightness and liquidity in the short-term funding market, so keeping an eye on that just because that can kind of ripple through the markets. It might be something that has to be addressed from a policy perspective. But mainly just kind of the run up to the jobs numbers is the big thing for the bond market. What about you, Liz Ann?

LIZ ANN: Well, we are in the lean-in, in addition to the jobs report, as you mentioned, to the start of third-quarter earnings season. So I think there'll be a decent amount of chatter. We may get some pre-announcements. So that'll be on my radar. We get the trade balance for maybe extremely obvious reasons, I think some of the data embedded in there can be important. I think we get another update to GDP, gross domestic product. We always like to spell out acronyms. I hope everybody knows what GDP is, but just in case. 

I think the unemployment claims data continues to bear watching. We saw a pop-up, but it turned out a lot of that had to do with one state, Texas, and there was a bunch of fraudulent claims, and good news is those overall claims trended down again, but we also get the Personal Consumption Expenditures price index, which is the Fed's preferred measure of inflation. That doesn't tend to be a big market mover. It tends to come in typically around consensus expectations, because you can feed into estimates what you get in the Consumer Price Index and the Producer Price Index. But given it's the Fed's preferred measure in an environment where the Fed is in everybody's sights, that's important. 

We get the Job Opening and Labor Turnover Survey, the JOLTS data, which does lag a month, most of the labor market data. But again, it's something the Fed focuses on, especially the relationship between job openings and the number of unemployed people in the United States, and also a metric like the quits rate. So higher quits rate suggests that people are confident in finding a job because they're voluntarily leaving, though when it starts to drop down, it suggests less confidence. So those are some of the things in addition to the jobs report that are on my radar.

KATHY: So Liz Ann, that just raises an issue I wanted to ask you about. And when you talk about confidence, I think it's fair to say that valuations are fairly high in the equity market now, but investors seem very confident. And it's always one of those things that raises the risk. The higher the price you pay, the more it affects your total return in the long run. And people don't perceive risk when things are going up.

So is that something you're really focused on right now, or is it not at levels that you're too worried about?

LIZ ANN: Well, so it's a nuanced answer to that. Just at the aggregate level, the S&P is trading at about 22 times forward earnings, which is on the upper end of the historical spectrum. But given that a question like yours is often a component of a question about, "Is this a bubble? Is it an artificial intelligence bubble? How does that compare to the late 1990s?" The big difference is there's more there there in terms of many of these companies that are driving valuations for the cap-weighted indexes higher are actual companies, you know, real companies with huge cash flow generation and relatively strong balance sheets, and they've got strong top-line growth and bottom-line growth, so there's more in the denominator of the valuation equation than there was back in the late 1990s. 

But the broader answer to that is valuation should be something in the proverbial toolbox that you used to think about the health of the market, but it is a really, really awful market-timing indicator. As we learned from the 1990s, the market can get incredibly expensive and just get even more expensive until it gets, via the benefit of hindsight, into silly season. But it really doesn't tell you anything about what the market's going to do. Call it in the short term. In fact, you've seen our scattergrams that we've used many, many times. If you have a one-year outlook for what the S&P has done at different levels of starting-point valuations using a forward price-to-earnings ratio, there's almost no correlation. Now, if you go out 10 years, and to your point about thinking long-term, then that valuation starting point does come into play in terms of whether the market has above or below average returns. You do sort of bend the curve a little bit and have that more normal expected relationship.

And maybe why it doesn't work in the short term is, I think, of valuation not as a sentiment indicator, but an indicator of sentiment. Other times where just the optimism, the froth, the euphoria, the complacency, whatever terminology you want to use, which manifests itself in how the market is doing and what components of the market, what cohorts are doing, that works its way into valuation as well. So it's just something to be mindful of.

KATHY: Yeah, thanks for that. I mean, the bond market, we don't get a lot of frothiness, usually. 

LIZ ANN: You guys are, you're on the sane side of the aisle.

KATHY: Bond investors, maybe you could say the high-yield market, but frothiness is not something characteristic that one sees in the bond market typically. So I'm always curious. 

LIZ ANN: I'm jealous.

KATHY: You know, it makes it more exciting for you.

LIZ ANN: All right, so that's it for us this week. Thanks as always for listening, and you can keep up with us in real time on social media. I'm @LizAnnSonders on X and LinkedIn. My typical public service announcement: Please be wary of imposters and make sure you're following the real us.

KATHY: And I'm @KathyJones—that's Kathy with a K—on X and LinkedIn. And you can always read our written reports, full of charts and graphs and other good graphics to grab your attention, at schwab.com/learn. If you've enjoyed the show, we'd be really grateful if you'd leave us a review on Apple Podcasts, a rating on Spotify, or feedback wherever you listen. And please, tell a friend about the show. We'll be back next week with another episode.

LIZ ANN: For important disclosures, see the show notes or visit schwab.com/OnInvesting, where you can also find the transcript.

[1] Artificial Intelligence

[2] A Venn diagram uses overlapping circles or other shapes to illustrate the logical relationships between two or more sets of items.