LIZ ANN SONDERS: I'm Liz Ann Sonders.
KATHY JONES: And I'm Kathy Jones.
KATHY: And this is On Investing, an original podcast from Charles Schwab. Every week we analyze what's happening in the markets and discuss how it might affect your investments.
LIZ ANN: So hi, Kathy. Well, it's finally here, the first rate cut of 2025, on schedule and, to some degree, as expected. Interesting moves both in the bond market and the equity market. So what's your reaction? I assume you were tuned in during Fed Chair Jerome Powell's press conference, as was I.
KATHY: Well, it was one of the more interesting meetings that we've had in a long time, not so much for the outcome, which was, as you said, pretty much anticipated, but for kind of the underlying dynamics that were in the summary of economic projections. So this was one of those meetings where they released the projections that they have for economic growth, inflation, and unemployment, and the infamous dot plot where each member of the committee, the Federal Open Market Committee, puts down their expectations for where the fed funds rate will be going forward over the next couple of years.
And what was really fascinating was that this time around the median projection was for two more rate cuts between now and the end of the year, but there was one Fed member who projected no rate cuts whatsoever, just leaving the fed funds rate where it is, and one projecting a steep decline in rate cuts, would be 125 basis points, so the equivalent of, you know, a very, very sharp rate-cutting cycle between now and the end of the year.
So that was pretty wild to see that big of a dispersion in the short run. Further out you go, you see more dispersion because it's, you know, "The future is hard to predict," as Yogi Berra said, but the fact that between now and the end of this year, there's such a wide dispersion of expectations was really crazy. I think this reflects, to some extent, Stephen Miran, who was just newly appointed to the Fed just yesterday, I believe, and has been an advocate of lowering interest rates very rapidly. He dissented. He wanted at least 50 basis points in cuts, and clearly, he had some influence on the median estimate. Otherwise, it would have stayed about the same. But it's just interesting. You don't normally see that big a dispersion.
And then, you know, when we look at the projections, it's very difficult to kind of make sense of it all. They're projecting that economic growth, GDP growth, will pick up a bit, that inflation will stay elevated, and that unemployment rate might go up a little bit, but then come down again over the next year. So I guess that would be the magic of monetary policy, you know, cut a few times and everything's great, or it reflects a lot of uncertainty on the part of the Fed, and I think the bottom line is the labor market's clearly deteriorated. They wanted to respond to that with a rate cut. They're not comfortable going too far too fast because inflation's too high, and they're not really sure about what to expect going forward. So you know, we're kind of here, there, and everywhere, but I thought it was fascinating. What about you, Liz Ann? What was your take?
LIZ ANN: Yeah, it was fascinating. It's always funny when you get the dots plot because they don't attach a name to each dot. So you have to make inferences as to which dot belongs to which person. And I think it's pretty clear that the dot that was at the lowest end of the spectrum, as you mentioned, expecting 125 basis points of cuts, was probably Stephen Miran. On the other hand, the dot representing no need for rate cuts, I'm guessing probably wasn't a voter at this meeting. Otherwise, you might have gotten a dissent in the other direction. And there had been some chatter about whether this could be a somewhat rare meeting where if you got a couple of dissents, one could be in favor of a bigger cut, and one could have been in favor of no cut at all. But we didn't get that. It was just the one dissent.
I thought it was interesting that Jerome Powell called it a risk management move versus, you know, some signal that we have impending doom in the economy. But to me, it clearly represents a shift from what we gleaned from the minutes of the July Federal Open Market Committee meeting when they expressed more of a concern or focus on the inflation side of their mandate, where it's pretty clear now that they're focused a bit more on the employment side of their mandate. And from an equity, corporate earnings, margins standpoint, I think maybe one of the concerns, given that we haven't seen a meaningful move higher in inflation driven by tariffs and data suggesting that what we are seeing is the start of some margin pressure because of tariffs, given that companies at this stage anyway are absorbing more of the tariff hit versus passing it on to the consumer, that could begin the sort of spiral into weaker labor markets to the extent that companies, for whatever reason, feel they can't pass on those higher tariff-related costs. One way to cut costs elsewhere is on the labor-market side of things. So TBD, but clearly with two months in a row of weaker jobs reports and the very recent move higher in unemployment claims, I think that's the side of the mandate that we should all be watching very carefully because it's clear that the Fed is.
KATHY: Yeah, and in fact, that is what Powell emphasized, I think, in the press conference several times that this is a reaction to the weakness in the labor market and how it could and might and is expected to slow down demand going forward, if it continues to deteriorate. So I think that all makes sense if that's how it plays out. There's just a lot of ifs, and you can see in the bond market reaction was initially yields fell. We saw 10-year yields below 4%, and then they turned right around and went back up, because this wasn't really the resounding message of steady rate cuts going forward that had been built into the market. So you know, we're kind of back to not far from where we were before this waiting and watching all the data. How about the stock market?
LIZ ANN: Yeah, we saw the same thing. We saw on an intraday basis a pretty significant spike up in most of the indexes, but then a complete reversal of that actually in the case of the S&P 500®. Just before the press conference, you had reversed all of the pop in the aftermath of the announcement, and then you kind of bounced back up a little bit, but a pretty extreme move both up and down within the equity side of things. You know, it didn't really change the makeup in terms of what has been moving. You know, financial has kind of stayed at the top of the leaderboard today, and what we often call the growth trio of sectors being technology, consumer discretionary, communication services, hanging more down at the bottom of the, you know, daily ranking of performance. So there wasn't as much move in terms of the within part of the market, but certainly some extreme shifts that may have actually had some … in some degree tied to what was happening in the bond market, because we've talked about a lot, certainly on this show, of how our two worlds are very connected. And I think the stock market, certainly on days like this, is not just waiting to hear what the announcement will be from the Fed, but looking at how the long end is reacting to that.
KATHY: So I think this is a great time to have the guest that we have this week because this is a lot of the conversation I think that you're having with her. So why don't you introduce her?
LIZ ANN: Sure, excited about this. Joining us now is Freya Bemish. She is the chief economist for TS Lombard, which is a division of GlobalData. And Freya was previously chief Asia economist for Pantheon Macroeconomics and held a variety of roles at Lombard Street Research before it became TS Lombard. She holds master's degrees from the London School of Economics and the University of Edinburgh. And Freya is also the co-host of the Perkins Vs Bemish podcast, a great one. I've listened to it many times. And you'll recall that we actually had the other half of that podcast, Dario Perkins, who's also with TS Lombard, on our show earlier this year.
LIZ ANN: So Freya, thanks so much for joining us. We really appreciate it.
FREYA: Yeah, it's a pleasure. Thanks for having me on.
LIZ ANN: For our listeners, I'm an avid reader of Freya's work, as well as all the research that comes from her firm, TS Lombard. And so I want to key off, Freya, if that's OK, some of the most recent reports that you have put out there and really touch on some of the big picture topics that are top of mind for most investors, certainly our listeners.
And maybe let's start with just a state of the economy in the context of ongoing uncertainty, or as I've been describing, an instability maybe is the better descriptor from a trade policy, from a tariff policy, perspective. And you've had some interesting thoughts on the pass-through and how tariffs are having an impact, both actually on the economy and into the psychology of corporate leaders, so maybe just start big picture and then we can dive in as necessary.
FREYA: Yeah, wonderful. I think there's just such a focus in markets at the moment on the jobs side of the mandate and less so on the inflation side, which I think is picking up, which is basically the idea that jobs are weak, but not recessionary, as we sort of extrapolate from markets. And that there's this risk of a level shift in prices, but we don't see much evidence of inflation rates shifting higher as perceived by markets. And I think both of those risks are underpriced, which is to say that the weakness in the jobs market over the course of the summer
seems a lot more like a sort of freak weather event than something from which we can extrapolate the normal signals that we would from the labor market. Normally, the labor market lags right up until the point when you're in recession and then it's coincident. So at the moment, we haven't even properly had the types of signals that we would be looking for to assume that this is a recession from the labor market.
But even, you know, we're sort of around those areas with the weakness that we saw over the course of the summer. But it just seems like a leap to go from a lack of hiring that is induced by instability and uncertainty to, "Oh my gosh, this is reflexivity, and we can take this as a signal that companies are really in trouble." I think instead what's happening is that there is a shock coming into the economy, a negative supply shock, which is my least favorite type of shock. And that shock is creating inflation, which is then destroying demand. I would say that takes a chunk out of growth in the short term.
The wider context is it probably deteriorates the balance of growth and inflation in the wider context of everything that's happening with policy. But it's hard for me to look to the economy and find the imbalance that needs to be corrected or that could be triggered by this type of a shock for reflexivity to kick in. So the labor market doesn't look like there's a huge amount of imbalance that's left over from COVID, to the extent that there was any imbalance. It was always quite small in warehouse and retailing and technology. And all of those parts of the labor market where you could have perceived over-hiring look like they have already sort of corrected. So there's not a sort of an imbalance there.
And most of the sort of excess labor demand over the course of the pandemic was demand that never got realized. It was vacancies. That has now been sort of knocked off, as well. And so for this type of a shock, the tariff shock, effectively to feed through into something worse, it's hard for me to see what the trigger is within the labor market. There isn't an imbalance that needs to be corrected. And similarly, when I look at balance sheets in the private sector, it doesn't look like there's a big imbalance that needs to be corrected as well. So it's a slowdown rather than a recession. But I think that, at the moment, markets are sort of taking that as "Fine. Great. We're in the sweet spot." There's no recession, but also inflation is not really picking up. And I think over the course of the year, we will see the labor market start to recover, and pass-through rates recover at the same time. Those two things kind of go hand-in-hand for me.
LIZ ANN: So in terms of the tariff impact, and using the term you used a lot, talking about the balance, where we sit now, it seems to be that there's a mix of what we're seeing from an impact perspective. You do, at least if you look at the inflation rate at the subcategory level, at the goods that are directly impacted by tariffs or maybe peripherally impacted by tariffs or not at all, you do see a bit of a differential, but you're also seeing a little bit of demand destruction. Even when you look in the context of, as we're taping this, retail sales came out, and certainly on the surface, it was better than expected. Of course, retail sales is expressed in nominal terms, and I think these days you want to look at real data to get a sense of "Are we seeing some blend of impact in terms of the inflation?"
I agree with you; it's more going to be a level reset as opposed to ongoing rate of change. But are you starting to see some demand destruction or maybe category switching on the part of the consumer that either is directly or indirectly related to tariffs?
FREYA: I think we are starting to see the inflation coming through from tariffs. If you look in the details, I'd say the pass-through rate has sort of picked up month-by-month. I think that pass-through rate will continue to increase. And so I think the demand destruction flowing from that will also increase. But like I said, I don't think it's enough to push us into recession. It's just growth probably would have been around trend, and now it's going to be below trend, but it's not sort of reflexivity is kind of kicking in.
And just to sort of like clarify, I do think there is some cause to look to the longer term for inflation, by which I mean sort of like two years out or so. I think there will be a level shift in prices, there sort of has to be a level shift in prices to some degree, but I do see some systematically different dynamics starting to take shape in how inflation works in the U.S. economy, beyond just that level shift in prices.
I think the rate of inflation probably will be higher in the sense that the labor market is easier to overheat in the context of the supply-side damage, which comes from a bunch of different places. That labor market tightness is probably going to be more capable of feeding through into faster wage growth than under the period of hyper-globalization. And then that wage growth is also probably more likely to feed through into CPI inflation—CPI, which is the Consumer Price Index. If we look at the relationships between unit labor cost growth and CPI inflation, it seems more likely to me under a deglobalizing U.S., a deglobalizing economy, the labor market is more protected from outside influence of offshoring and some of those sort of effects of globalization that perhaps muted the transmission both from domestic labor markets to wage growth and from unit labor cost growth to CPI inflation. and some of those things start to come back online. So a 3% rate of inflation seems like where we would be gravitating to if this process of deglobalization continues.
LIZ ANN: Let me stay on the supply-side damage component of what you have talked about here and maybe tie it into the record-breaking downward revision of more than 900,000 payrolls. Now we know that just means that the level of payrolls, given the size of the U.S. labor force, was only slightly lower. But it was an eye-popping downward revision and certainly captured a lot of attention. How much of that downward revision is a function of the compression from an immigration standpoint and ties into the notion that maybe the break-even rate, the number of jobs that need to be created being quite a bit lower in order to maintain a somewhat steady unemployment rate?
FREYA: Yeah, totally. I agree that certainly the … if I've understood you correctly, certainly I wouldn't extrapolate too much from a downward revision to the level of labor supply that happened prior to the major shock. I don't think we can extrapolate a lot in terms of like recent trends from that. So in that sense, I think it's not particularly informative, but in the sense that you've highlighted, it feeds into the wider concerns over what actually is the NFP, nonfarm payroll, breakeven rate.
We're all used to sort of 100. And I think that's where a lot of people think it is. But there's a lot of research that's come out recently. We've done our own analysis on sort of at least the partial effects of the change in immigration policy on break-evens. And it's really hard to firm down the range here. There's a huge range of estimates coming out on what that new break-even actually is.
So we've sort of had to rely a little bit on scenarios thinking about if detentions climb back to that sort of 1,200 peak that we saw in June, and then from that we sort of extrapolate that self-deportations will continue to be high. Again, we don't really have great data on that, and that gross immigration will continue to be damaged. Then, in that case, the NFP break-even, I think from that partial effect, would get pulled down to around the 60 level, which is a really quite significant decline, which is what I meant by this is a labor market that is easier to overheat. So what does recovery mean from the perspective of the Fed? Recovery means getting above 60, given where we are with inflation, especially being nearly a percentage point above the target and probably going in the wrong direction. So it's a labor market that is easier to overheat. And if we get any further towards the targets on detentions, I don't think we can get to the 3,000 per day, but I think we can maybe get a little bit higher given the fiscal support that is flowing to that department, then NFP break-evens could even be lower than that.
The big question then is to what extent does the domestic labor supply respond to that? And the big part of the recovery in the labor supply over the course of the pandemic recovery was from the immigrant side. And so now there's the big question of, if there is demand for labor, can there be a sort of recoupling, if you like, of the different parts of the labor market, which until this point have been seen as sort of two different labor markets, like an immigrant low-skill labor market, and there's obviously an immigrant high-skilled labor market as well, but focusing on that immigrant low-skill labor market, sort of low cost, does that start to recouple and get pulled into the broader labor market, and people start to get pulled back into the labor market? Or is labor supply domestically just more sticky? In which case this is much more problematic for the balance between growth and inflation.
LIZ ANN: So you've talked a bit about the supply-side damage associated with the compression on immigration. What is the demand side of that immigration compression?
FREYA: Yeah, this is where it becomes even more complicated because it has both a demand side and a supply side impact. I've been focusing more on the supply side impact because I think there is that stickiness there on the supply side, whereas I think that there's more capacity, especially with fiscal policy going in the direction that it's going in to sort of stimulate the demand side and compensate for the demand side factor of that. So I would expect sort of recovery to sort of come through on the demand side, but supply a little bit less able to respond to that, which is where you get the more sort of inflationary outlook. As things stand, just to clarify on the fiscal side, there's no great fiscal stimulus coming through, as things stand, if you incorporate tariffs as part of fiscal policy, which I think you absolutely should.
But the question is, as inflation starts to pick up, I think alongside that, the likelihood that you get these arguments for sort of rebates and passing the tariff revenues onto consumers, that starts to pick up as well. And so that reinforces the sort of the inflationary shock, but it doesn't necessarily help with real growth because you're just taking money out of one part of the economy and giving it back to another part of the economy. So it really embeds that, at least the level shift in prices.
LIZ ANN: So how do you think about who is ultimately bearing the cost of tariffs? That's sort of an ongoing debate. And what I have found fascinating in my travels, and I do client events all the time, is I often find that there's just a lack of even a simple understanding of how tariffs work and the fact that it's the U.S. importers actually paying the tariff, and as everybody's trying to assess what the numbers are right now, what's the actual average effective tariff rate, where is it likely to go? If you think about the three ways tariffs can be, where the costs can apply, it doesn't appear to be much coming from exporters to the U.S., adjusting prices. The data is not supportive of that. Where do we sit now in terms of the share that is being eaten in profit margins and the share that is being passed on to the consumer? And do you think that that adjusts in the near term?
FREYA: Yeah, I do think it adjusts. I think, like you said, there's very little evidence that this is being paid by foreigners. There's maybe some sort of like very specific evidence of maybe like Japanese and Korean car makers cutting their prices. But broadly speaking, in the macroeconomic data from the U.S., there's just no evidence that this is being paid in any significant quantities by the rest of the world.
Instead, it's coming to exactly as you're saying, the compression of profit margins and the compression of the potential pass-through to consumers. I think because there's been such a high degree of uncertainty, instability in the economy, just as companies have not been willing to hire, they've also not been willing to pass on that tariff shock to consumers. If and when you start to see that recovery coming through, and some semblance of understanding of where the tariffs are going to settle, if that ever happens, then companies will probably begin to pass that through, and we'll see more of an uptick in the CPI inflation. And then especially if you get the rebates coming through on the fiscal side, then that's effectively like saying, "OK, well, we'll give consumers the money to pay these tariffs." And so that's where you're really going to start to see it showing up in the CPI inflation.
LIZ ANN: Let me ask another question. What is your perspective, or anyone at your firm's perspective, on what the possible outcome will be from a legal standpoint with the Supreme Court taking up whether the tariffs are actually legal under the IEEPA, International … I know we're supposed to spell out acronyms. International Emergency Economic Powers Act?
FREYA: I go with IEEPA …
LIZ ANN: I think I got that right. But what are your thoughts on the outcome of what we're going to hear from a legal perspective? And then what would the aftermath be, let's take the if the Supreme Court rules them illegal? What happens in the aftermath of that?
FREYA: Yeah, there's definitely been a lot of kind of legal pushback there in a certain sense, understandably, because the extent to which this can be classified as an emergency, and then keep on being classified as an emergency, is questionable. What would be more problematic from a market perspective is if there's a need to sort of go down different routes. I hope we don't get to the stage where Congress was having to get involved with that. I think politically that would be very difficult for tariffs to be codified. And if they were, that would be much more problematic for markets as well.
I'm assuming, though, at this stage in the game that what is perceived to be needed to be done to get tariffs over the line will be done, and they'll try all sorts of different ways. I think where that starts to change, though, again with the politics as the driver, is as you start to approach the midterms. So there's two ways of sort of dealing with the tariff effects: It's either to validate them and have them pass through to consumers by handing out the rebates, or it's just to pull back as inflation starts to come through and we approach the midterms. And I think there's quite good reason to see the election of Trump in the context of the level shift in prices under the previous administration. So there's a clear understanding that you bring inflation into the system, and that's problematic from a political standpoint. The problem is at this stage that there isn't a great deal of evidence at the headline level, or in terms of what markets are focusing on, that pushes back against the notion of tariffs as an economic concept, and so there's no sort of guardrail at this moment in time.
So going into next year, both the politics and as the actual inflation comes through, maybe there's a bit of a softening of the stance there on tariffs. As I said, I hope it doesn't come through the rebates channel.
LIZ ANN: So then what do you think about the Fed's reaction function over the next year? You and I are handicapped here by virtue of taping this on September 16th, and the Fed meeting happening tomorrow as you and I are. So let's just assume that consensus prevails and the Fed cuts by 25 basis points. Maybe also assume that Powell doesn't telegraph that "Hey, this is the beginning of a whole series of rate cuts. We'll emphasize data dependency." So under that base assumption, how do you think about … call it over the next year or so, the Fed's reaction function to inflation that could potentially continue to be sticky on the high side?
FREYA: Yeah, I think there's a sort of temptation from the policymaker standpoint not to want to get it wrong on the jobs side in the sense that if inflation really picks up, it's almost possible for them to sort of pass the buck and say, "Well, this is sort of tariffs," and they don't want to get it wrong and be seen not to have cut enough, and then a recession comes through.
But given that our economic forecast is that there is going to be some degree of recovery and everything we've talked about as to what's the bar for recovery, I would expect markets to be pricing out some of the cuts that have been priced in over the course of the summer, and the terminal rate is too low. Now the terminal rate is quite a long way off, and there's a lot of uncertainty. So in terms of how we actually play that, one might look more towards the long end of the curve and break-evens, where I don't think there's been a lot of movement yet to incorporate either the longer-term effects of shifts in inflation or the institutional attack, frankly, on the Fed, which again is a bit of an asymmetric process in the sense that when do you really need the Fed to be independent? Well, you don't need it to be independent right at this moment in time because the focus is on jobs being weak.
We're in that kind of sweet spot where they can cut and inflation is not seen as problematic, as it's seen as more of a price level shift, and the T-word starts to come back in. But when you start to need to have a more independent Fed is when inflation picks up, and potentially if jobs do recover to the bar that we've sort of talked about, then you would start to need a more independent Fed, and maybe that's when these things start to get priced into markets. Potentially if there's more control, you know, we don't know what's going to happen, but sort of further out the curve, then it starts to show up more in the dollar and in FX markets. So we don't know how far this is going to go, but it's going to show up somewhere at some point in time.
LIZ ANN: So on the subject of recession, one of the comments that you made in a recent report was that for a recession to kick in, there needs to be an imbalance to correct. So if we were to have the time machine that took us a year or two down the road, and we find out that, indeed, a recession was declared by the National Bureau of Economic Research at some point in the near term, what would be the trigger for that relative to what we know right now?
Whereas, you know, part of our jobs, doing what you do, doing what I do, is to assess risks. And so what could happen to make it more clear that recession is a risk, versus you viewing it as not a serious risk at this point?
FREYA: Yeah, so I mean, there could be a technical recession in the sense of the size of the tariff shock having more of an impact on … downward impact on demand than we previously thought. So that's one way that a recession could sort of get declared. In terms of the actual triggers, like I said, when we look at the labor market, I don't see an area on a sectoral basis that looks very overblown compared to previous trends or compared to the size of where it was as a percentage of the labor market. So it's hard to see the labor market itself being a trigger for imbalances that need to correct. And then similarly when we look at the private sector and the balance sheet, there's always going to be pockets of over leverage, but it's hard to find something that's kind of systematic, systemically a problem that needs to be corrected. So when we look for like a genuine shock that could be big enough, it almost has to come from markets and from sort of markets translating into a kind of a weaker growth outlook.
And the triggers there, you can argue for there being a bubble in tech-related stocks. You can argue for maybe the government debt being a problem. Personally, I don't see it as a problem in a way that a lot of investors might do. But government debt does become a problem if you're changing the dynamics of inflation. And this is where I think you could get a more bear market call if the certain kind of thresholds are passed with regards to how much inflation picks up. So if you get inflation on a 4% handle, then, statistically speaking, from where we are at this moment in time, then the dynamics of inflation really start to shift into what we refer to as a sort of rising volatile inflation regime. And in that environment, then large amounts of government debt issuance do become a problem from a market perspective because the correlations switch, and there is a positive correlation in that environment between government bond issuance and changes in yields, actually only in that environment and a couple of other specific environments.
So if we're looking for sort of triggers for equity market sell-off or sort of triggers for recession flowing from that, it really has to come from things that turn the correlation between bonds and equities positive, because the debt at this moment in time is in the government sector. So outside of that environment where we tip into those thresholds, I don't see debt as a massive kind of trigger for problems because the debt is in the government sector. So we're not looking for a kind of default situation unless it's sort of on purpose. It's just things that turn the positive, the correlation between bonds and equities. And that is big negative supply shocks. That's what tends to push us into that rising volatile regime where all sorts of bad things happen. But we're not at that threshold at this moment in time. It's questionable because we're quite close.
The threshold that we calculated for tariffs is if we go 22% tariffs across the board…
LIZ ANN: Meaning the average effective tariff rate.
FREYA: Exactly. Then we start to risk tipping into that kind of high and volatile inflation environment. But at the moment, what we have is tariffs, effective tariffs, between 15 and 20%, which is a little bit close for my liking to those kind of thresholds, especially in the context of negative supply shock in the labor market as well. We're kind of close to that, and this is the last moment in time when you would want to layer on top of that situation a threat to the independence of the Fed.
LIZ ANN: So I have one final question of the more existential variety. And I think to some degree, you've answered the more negative part of it, which is the general question I get all the time: "What keeps you up at night?" And there can be a positive side of that and a negative side of that. I'm guessing you essentially touched on some of the … what could go wrong here. So maybe in the interest, especially in an environment these days of so much negativity and big macro concerns, what are you most optimistic about when thinking about beyond the very near term, sort of the future, whether it's our economy, something AI related, what keeps you up at night in a good way?
FREYA: Yeah, love that. So I think actually since the pandemic, one thing we have seen in the U.S. economy is that there's been a breakout in productivity growth. I see that as very related to there being demand-led growth and supply being able to respond to that. I'm sort of worried about the negative supply shock precisely as the opposite of the positive demand shock and what effect that might have on productivity growth. But I think there's still some of that in the system for the U.S. economy.
And I think maybe some of that starts to come into the system for the European economy, if we can branch out a little bit as well. So that in that case, it's not exactly that we think the U.S. is not going to be exceptional anymore. It's just perhaps going to be kind of less exceptional. And the European economy, maybe some kind of pivotal moments are happening there with regards to German fiscal policy and the buildup of a sort of positive demand-led story in the case of Europe.
And then if we think about where that may and may not be priced. I think a lot of the time when we think … I'm sort of actually doing positive and negative at the same time here, where we think about that, where it may and may not be priced, I think as humans and investors, we have this terrible tendency to sort of extrapolate the previous boom to the current boom, where we're thinking about sort of maybe how did digitalization show up in company profit margins and how did hyper-globalization show up there?
And it was very concentrated in a select few firms and very concentrated in the case of digitalization in the case of a select few firms as well. Whereas I think, with AI, we're likely to get a much more diffuse response that goes out into the real economy to a much greater extent. And so a lot of the time when we get asked the question, "Well, why are you talking about Europe and sort of a positive macro story there?" It doesn't really necessarily even try, even if you believe that it doesn't translate into equities because all the AI companies are in in the U.S.
And in fact, what we're talking about is maybe if there is some sort of positive demand-led story where supply is able to respond, the benign way in which supply responses is through AI. And that goes out into the real economy rather than being captured narrowly by the tech stocks that are currently very highly valued in the U.S.
So it's not a question of looking for a European Microsoft. It's a question of sort of looking into the real economy and looking for sort of where we can see those margins starting to sort of fatten up again and productivity growth starting to sort of permeate out in a macro sense in the way that was just completely missing in the 2010s.
LIZ ANN: So Freya, before we close, this has been fascinating. You're brilliant. And I already mentioned that I love the work that you do. So for our listeners, how best can they read some of what you do? Listen to your podcast? What's the best way to access your thoughts?
FREYA: Yeah, we'd love if people want to reach out. The podcast is called Perkins Vs Beamish, where Dario Perkins and myself sort of try to knock lumps out of each other in a very sort of kind way, which is all fun and games. So that's probably the best place to start with.
LIZ ANN: Yeah, and I've been, become an avid listener of that podcast, and it is terrific. So I'm glad it's out there in the public domain. It's worth a listen. But Freya, thank you so much for sharing your wisdom. Really appreciate it.
FREYA: Yeah, thanks so much for having me on.
KATHY: Looking ahead to next week, rate cut decision is finally behind us. What else do you think investors should be watching?
LIZ ANN: Well, no surprise given what we already chatted about at the start of this show, I think labor-market data, that we don't have a big jobs report coming, but between now and when the following week's podcast drops, we'll have two claims reports, so I think what's important in the weekly claims data is not just the release of initial unemployment claims, but continuing unemployment claims. And that's one way to get a sense of whether we're seeing persistence in this notion of a low-hiring, low-firing kind of backdrop. This week actually post when you and I are recording this, but it'll be out by the time this episode drops, we get the Leading Economic Index that hasn't been a great forecaster, given that it's been flagging recession for a few years now. But sometimes the nuggets within can be fairly interesting.
We get some housing data, home sales and building permits. Building permits is actually one of the feeders into the Leading Economic Index. Trade balance these days tends to be a little bit more on the radar because of tariffs. I think we get another … the next update to the GDP report, gross domestic product.
And then probably the most important one would be the Personal Consumption Expenditures price index, which is the Fed's preferred inflation measure. It doesn't tend to print well outside the bounds of consensus expectations, but nonetheless, the inflation readings are maybe not quite as important as the labor market readings, but important nonetheless. How about you? Don't we get the TIC flows?
KATHY: Yes, we should. So it's Treasury International Capital flows. We should be getting those, always interesting to see. They're a little bit delayed in terms of the release, so the data is a little bit old by the time we get it, but always interesting to see where the flows are going. We had a surge in foreign households buying U.S. securities, both stocks and bonds.
I think it's cooled off a little bit recently, but we'll have to see just at what pace that is. And we know the official numbers have slowed down quite a bit. I think for me, the interesting thing is going to be in all the Fed speak now. So once the meeting's over, the quiet period is over, and you'll start to hear from the individual members, and that should be interesting this time around. I think there's maybe less toeing the consensus line than there might have been in the past. So should be interesting. And also to the extent that they're doing interviews, I think they will be asked about hot topics like Fed independence and why the Fed hasn't achieved its goals and etc. So I think those could be kind of interesting meetings coming up where we're hearing from various Fed members.
So that's it for us this week. Thanks for listening. You can always keep up with us in real time on social media. I'm @KathyJones—that's Kathy with a K—on X and LinkedIn.
LIZ ANN: And I'm @LizAnnSonders on X and LinkedIn, and make sure you're following the real me because of the ongoing imposter problem. And as a reminder, you can always read all of our written reports. They always have lots of interesting charts and graphs, as do our social media posts, but you can find those written reports at schwab.com/learn.
And if you've enjoyed the show, we'd be so grateful if you would leave us a review on Apple Podcasts or maybe a rating on Spotify or feedback wherever you listen, or tell a friend about the show. And we will be back with a new episode next week.
For important disclosures, see the show notes or visit schwab.com/OnInvesting, where you can also find the transcript.
