An Equities Rally, a GDP Revision, and the Likelihood of 'De-Dollarization'

KATHY JONES: I'm Kathy Jones.

LIZ ANN SONDERS: And I'm Liz Ann Sonders.

KATHY: 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.

LIZ ANN: Kathy, we had some of last week off for Thanksgiving. So most importantly, are you still full? How was your time, I assume with family? How was the holiday?

KATHY: Oh, it was very nice. And no, I think I've recovered from eating too much. But yeah, we got together with family, really enjoyed the day. And as I mentioned, I think last time, it was my mother's 98th birthday. And the surprise was that she got a lovely birthday card from the White House. It was very impressive, sort of acknowledging her as a member of a great generation. It was just so beautiful, and she was so happy. She was over the moon about it. So it was the best present she could have gotten.

LIZ ANN: That is such a cool thing. The White House sent my parents something when they celebrated their 60th wedding anniversary, and so I like that that's a thing that's done.

KATHY: Yeah, I do too. It was such a big surprise and so nice. So what about you, Liz Ann? What did you do over Thanksgiving? It's been a good month for the stock market too, so did you celebrate that?

LIZ ANN: It has. And, you know, as you know, I primarily live in Florida now. So that means that family is coming to us to enjoy warm weather. And we're not traveling anywhere. So it was just family, my husband and the two kids and my sister, who you've met, and her husband and kids and a bunch of his family. It was fun. It was about 21 of us, and I made all the desserts, which was fun. My sister doesn't cook. So it was takeout turkey from their country club, but really delicious. But I said no takeout on the desserts—I'm doing the desserts. So it was a lot of fun. And yes, it was, you know, it's been a great month for the stock market. And Kathy, I'm going to credit you for that. Well, maybe not you directly …

KATHY: Oh?

LIZ ANN: But well, in large part, I think it's thanks to what bond yields did that the equity market performed so well, just like, well, I didn't blame you for the correction that occurred from late July to late October, but that was certainly because of the surge in yields. And now, thanks … in the case of the 10-year going from five percent down to, as we record this, four and a quarter or so, I think that was a nice kind of pre–Black-Friday gift for the equity market. So it was a good month and a bit of a broadening out too, you know, over the past month, you've seen small caps perform in line with the S&P 500®. So that's certainly something I would like to see as a bit of a broadening out.

KATHY: So yeah, that's been a long time coming. I know you've been talking about the lack of breadth in the market for a really long time. So "you're welcome" from the bond market.

LIZ ANN: Keep it up, OK?

KATHY: Yeah, yeah, we're all happy the bond market is happier now. I think it's good for the entire financial complex and for people in general.

LIZ ANN: Although I have a question for you, Kathy. You know, in our 2024 outlook, which has already been published, I know yours is coming up and we're going to discuss all of our outlooks in the next month. But one of the comments that we put in the outlook was that it might be more about less volatility, a kind of calmer bond market and yield environment versus, say, a huge plunge in yields from these lower levels, only because what that might be a function of with much weaker economic growth. Are you thinking the same thing as it relates just to the world of the bond market?

KATHY: Well, I think we're still expecting volatility, but more because of the uncertainty about Fed policy. So, you know, the bond market for all duration to some extent is going to reflect what the market expectation is for the Fed. And I think right now it's still very hard to read, although we are building in some rate cuts for next year, the timing, the magnitude of those cuts—really hard to predict. And I think that that's a level of uncertainty that's going to stick with us. So we may see some volatility. I don't think we're going to see yields soar again by any means, but I do think volatility might be with us for a while.

LIZ ANN: Yeah, I think you're probably right. And it was one of the things that was interesting about this week was the GDP revision, and not so much as it relates to Fed policy, because we all know, and the Fed knows, that that's highly lagging. But it was sort of the innards of that report that I thought were fairly interesting, especially as it relates to what one of our thesis has been is around the whole roll-through nature of this unique cycle and rolling recessions having occurred in certain segments of the economy already, like in manufacturing and housing, but we've had that offsetting strength on the services side and in the labor market. So I just found the revisions were interesting in that almost all of the consumption categories saw downward revisions, and the upward revisions were heavily concentrated on the investment side. And as you know, and as we've talked about in some of our internal meetings, thinking longer term, not just about calendar year 2024, I think it could be the case that relative to not each other specifically, but their own share of GDP, I think we may see an easing in the share of GDP represented by consumption and a bit of a relative pickup in the investment share of GDP, both on the residential and non-residential side. And interestingly, not that one quarter makes a trend, but just for third quarter, relative to the prior quarters this year, you've seen the consumption share of GDP go from close to 71% now down to 68 and change. So that could still bounce around, but again, it's lagging data, but I thought some of the innards of the revision maybe were even more interesting than the headline.

KATHY: That's frequently the case with GDP, especially the revisions, because it takes so long to get the data. But I would agree it'd be a welcome development to have more investment and a little less in the way of consumption in the whole composition of growth.

LIZ ANN: Yeah, certainly the kind of consumption that is fueled by leverage and increased debt, that does not represent a healthy backdrop. So when I'm asked for sort of longer term, "Where's the light on the horizon? Where are the bright spots, as you think, longer-term investment, both in the housing market as well as business capital spending?" I think that continues to be a bright spot even if we have still some near-term economic volatility.

So Kathy, on this week's episode, you have an interview that I'm very much looking forward to listening to again with Jens Nordvig. So tell us a little bit about that. Give us a quick preview.

KATHY: Yeah, Jens is a really interesting guy. I like that he's European. He's from Denmark. So he can look at markets from a different perspective than those of us in the U.S. Also, his background is in foreign exchange and macro analysis. So that gives us a pretty broad view of what's going on in the world of finance. And he's also branched out into looking at some new ways to analyze data. So it was really fun to talk to someone who can span so many subjects.

One of the things that we did discuss was what the Fed might do next year. Of course, that's really anyone's guess, but we're both looking for rate cuts by mid-year, but there's a lot of potential for volatility, as I mentioned earlier. So we have a bit of a conversation about that. And then we also examined the U.S. dollar and government debt and what that means for the markets. He made a great point that the whole de-dollarization discussion was taking place at a time when the dollar was going up and its usage was increasing. So he had a lot of good perspective there. All in all, just a great conversation. So stick around for that coming up next.

Joining me now is Jens Nordvig. Jens is the founder and CEO of Exante Data, and he's the co-founder of the market intelligence company MarketReader. Jens was born in Denmark and holds a PhD in economics from the University of Southern Denmark.

Previously, he was a managing director at Goldman Sachs and a senior currency strategist at Bridgewater Associates. He's a frequent guest on CNBC and Bloomberg TV and has published op-eds in the Financial Times.

Jens, thanks for being here today.

JENS NORDVIG: Thanks for inviting me. We have so much stuff to talk about.

KATHY: We do. And I'm really excited to have you on, because one of the things that I really like is your very open-minded approach to the way you do your analysis. There's an old saying about analysts, I'm sure you've probably heard, "Often wrong, never in doubt." And what I've always been impressed with your work is that you ask a lot of questions. You're not coming from a point of view of, "Here's the answer. Let me show you why that's correct." So really excited to have you today.

But first I want to ask a little bit about how you ended up in this job. Were you always interested in finance and the markets? Is that what brought you to the U.S.?

JENS: Yeah, so we can decide how far back we want to go, but we can go back very far. So I grew up in Denmark in the '80s, and Denmark was kind of bankrupt when I went into fifth grade. And I couldn't understand why all the grown-ups would let the country go bankrupt and that kind of thing. So I started studying why that was, why we had so much debt.

And I remember I did a presentation for the whole school, I think it was in sixth grade, about the unsustainable debt of Denmark at the time. So I guess it comes from a few years ago. I'm not 10 years old anymore. So it's something I've been interested in for a while.

And then the reason why I live in the United States now is I worked for Goldman Sachs in London for a number of years. And at some point the head of research, Jim O'Neill, said, "Can you please do the global currency strategy job in New York?" And I said—actually he said, "Do you want to think about it for a couple of days?" And I said, "I don't need to think about it; let's go." So that's how I ended up in New York almost 20 years ago now.

KATHY: Well, Jim O'Neill is a big name. So having been tapped by Jim O'Neill to be the currency strategist is a big deal.

So let's, if you want to, let's just jump in. Jens, can you tell me how your company works? What does your company exactly do?

JENS: Yeah, I've spent my whole career really dealing with institutional investors, you know, hedge funds, asset managers, and so forth. And that's also what we do at Exante Data, right? Institutional investors are our clients. But at the same time, I always thought it would be really fun to solve a problem that everybody has, from big investors to small investors. And the most universal problem that everybody has is to literally understand why the market is actually on the move, right? "Why did I lose 2% here? Why did I make 5% there?" We all have that question, and the market is complicated, right? So it's not so easy to come up with the right answer.

So MarketReader essentially tries to give you real-time explanations why the market is moving, using a very multi-dimensional approach, right? So the market can move because there's news driving it. The market can move because there's some event on the calendar that is important. It can move because of flows. Somebody needs to do a big trade, right? And very often the market moves in a cross-asset driven way, right? You know, one little airline can move the big airlines. One technology stock can move others, right? So all those cross-asset links are important. And we've seen that in recent months, right? The bond market moves everything. So MarketReader's very good at capturing that link. And then we use AI to put all those different dimensions together and summarize it in bits of text that everybody can digest. So that's what we think is really exciting.

KATHY: Yeah, that's really interesting. I kind of got interested in it, particularly when I first learned about it, because my origin is on a trading floor where, you know, there's thousands of people standing around shouting but also talking all the time and information getting passed around. And so what was going on in soybeans might affect gold, might affect the bond market, etc. So it sounds like the modern version of this.

JENS: Yeah, I think that's right that we've tried to replicate what a really high-end institutional trading desk would do with humans. We're trying to program out and use AI to really focus on the essence, right? Get rid of the noise and focus on the signal. And it's a complicated process, but you have to embrace the complexity and allow this to be a very nuanced process, and I think the results are getting very good.

KATHY: That's great. So let's get down to the economy and markets right now. So what are you currently watching in terms of economics and the market environment? What's important to you and what's not important to you right now?

JENS: I think we've been through this massive wave over the last couple of years where it was all about inflation, right, because inflation surprised everybody. And I think the focus is a bit different now. So I think that the two main things is really whether the global economy is shifting down a gear. And related to that—number two—would be, OK, are financial conditions kind of like under control or do we have a really dramatic tightening of financial conditions?

So in the period like September, October, we had a really big financial conditions tightening for the first time in at least a year. And I think we could see as soon as that happens, monetary policymakers start to behave a bit differently—talking about, OK, long-end bond yields have gone up a lot. Maybe we don't need to do so much work.

So we have that interplay between what's going on in the market and the economy very much being a direct input to what the monetary policy setting looks like. And I think it's going to be so crucial right now because interest rates are high, right? We have so high interest rates relative to where we've been really at least for 15 years, right, that policymakers are very unsure about how much can the economy actually take. And if you'd asked somebody like three, four years ago, "OK, what's going to be the peak of the next rate cycle?" some would have said 1%, 2%, maybe some, then the max might have been 3%, right, and here we are at five and a half, and there'll be some people say we're going to go to 6%, 7%.

So it is so important what happens to growth in the next couple of months, right? Because if the economy does not slow, then it's kind of like we're entering a new paradigm, and the Fed is talking like that. They're saying, "If the economy does not slow, then we have to respond," right? So from my perspective, we had an extraordinary amount of growth in Q3 in the GDP numbers. And I would certainly be very reluctant to extrapolate that. There were some special forces behind that.

And one of the things that I don't think is getting quite enough attention is that we've had tax credits in the United States that really spiked over the summer. It's a quite unusual situation. It's actually some old COVID programs that have been sort of used with a lag. And I think that could have played a role in the GDP numbers—sort of very unusual situation. And the IRS has stopped those programs. They are essentially on hold now. And I think that in itself is something that over time—I don't think we can say whether it's from one day to the other, it takes some months before we'll feed into the numbers. But over some months, I think it will have an impact, and we're going to reset lower.

And then obviously there are sectors in the economy that are certainly not immune to high interest rates, right? So if you want to lease a car, those types of things, it's a totally different proposition than in the past. So I think there is a lagged effect of the high interest rates that will gradually slow the economy.

So my base case will be that we're going to have a substantially weaker growth pace, right? And that's going to allow the Fed to say, "OK, finally our policy is starting to work," and that will mean that we can get to the end of this tightening cycle. And then the next question will be "When can we cut rates?" as opposed to having this endless discussion about further hikes.

KATHY: Right. And do you want to venture to guess what 2024 rate cuts might look like? I think the market keeps varying between 2 to 4 of 25-basis -point rate cuts. You want to venture a guess as to what comes next here?

JENS: So let me put it this way. So I think it's going to take a while before the Fed is convinced that cutting rates is the right thing to do. The market is currently pricing right that we're going to essentially be sort of in a hawkish holding pattern, December and into the first quarter. And I think that's right.

So I think the Fed is going to take some time. It really wants to be convinced that it's beaten inflation. But I think where the surprise could be is that once they get comfortable that inflation is under control, and probably at that time growth will also be substantially weaker, then from 5.5% interest rates, they actually could cut by a meaningful amount, right? Because who knows what is tight. If you look at the Fed's so-called long-term dots where they think the equilibrium interest rate is, it's actually at 2.5, right? So we're way, way, way above what they think is the long-term equilibrium. Maybe 2.5 is going to turn into 2.75, right? But we're still a long way away from that number, even if they tweak it a little bit.

So could they cut 200 basis points relatively quickly? I think once they're convinced that inflation is under control, I think they could cut relatively aggressively. And actually, in a way, the longer they wait, the more sure they can be and actually cut pretty decisively when they get there. So that will be the sort of view that we have. So it's not something we want to bet on is going to transpire immediately, but eventually when they get going, it could be a big deal.

Maybe one other way of thinking about this is that real interest rates is something we've had to kind of like differentiate from just nominal interest rates, right, because inflation has been so high.

So if you look at the TIPS market—I know that's something you look at day and night, Kathy—we got to essentially two and a half percent real interest rates at this recent peak, and we're still pretty close to it. And that compares to real interest rates that really had been around zero for a long period of time, including in the first part of the tightening cycle where it was a lot about inflation expectations moving. So is it correct that now we should expect real interest rates to be two and a half or more if you think there's more upside to rates? I think that depends a lot on your view on artificial intelligence.

There's a link, not a simple one, but there's some association between what productivity is in the economy and what real interest rates are, right? And if you go back to the '90s, we had some years where productivity growth was like 3, 4 percent, and back then real interest rates was high, and much higher than we've had in the last 15 years where productivity growth has been closer to 1. So if you believe that we're going to have this artificial intelligence boom and our productivity is going to skyrocket over the next few years, then that is probably sort of the caveat to everything I'm saying that then maybe we can have something different.

But we did a client call with Exante Data clients in early October that was called like "When will rates peak?" And we discussed this in some detail. And there was a KPMG survey out, like I think it was literally on the day we did the call that I thought was very interesting. That was CEOs around the country had been asked, "OK, what is your main investment priority?" AI, almost all of them. "OK, when do you think you'll see the actual productivity boost from these investments?" And the large majority says, "Not in one year, not in two years, but three to five years out we expect to see it," right? So that's what makes me worried about being too optimistic.

I have a company where we use AI, and we're very excited about AI, but we also see it in our day-to-day business. Like if we present our AI technology to a big company, as they say, "Oh, we also have AI projects going on. We're going to start to launch product in '24 and '25." It's not something that is tomorrow. It is a long-term investment, and I don't think it's going to be in the GDP data too soon.

KATHY: That makes sense. I remember back in the '90s—you know, '80s and '90s—and the internet was coming on, and later I think it was Bill Gates who said, you know, "We always overestimated in the short run technological change, and then we underestimate it in the long run." And I have a feeling, and I'm no AI expert, but I have the feeling that could be how this plays out. Everyone's very excited right now, but we don't really see the benefits, you know, for quite some time or a couple of years down the road.

JENS: Yeah, we can see it in a very concentrated way, right? Nvidia sells a crazy amount of chips, and that's for research. It's actually not for the product. It's really for basic research that all that compute power is being used. It kind of supports the whole argument. It's the basic research that's being done now, and all the products, all the applications that is going to benefit productivity, is going to come later. So we're in the very early phases of this.

KATHY: Yeah, that's great, great stuff. I want to switch gears a little bit because I want to talk about the dollar. I think one of the big surprises of the past year or so, not to us but to a lot of people, has been that the dollar has stayed pretty firm. And the consensus was that this was the year that the dollar was going to go down.

So where do you see the dollar going, you know, 6 to 12 months? Are we reaching that peak where we're finally going to come down? Or what do you think's driving it and keeping it so firm? And when does that change, if it changes?

JENS: So this is a big topic. So I think I'll start this way. So in the spring, we had this huge spike in commenting on the concept of de-dollarization. Not just the dollar going down a bit in value, but somehow some kind of flight from the dollar, people not using the dollar anymore. And I've been doing currency strategy for a while, macro strategy for a while, right? It happens with some kind of regularity that there's a hatred for the dollar in the financial press, and people write about it. So … we have this wave of some people getting very upset about the dollar.

And this was sort of a special situation. It's kind of a very ironic situation because a lot of the focus on de-dollarization has to do with, "China is doing this and that to replace the dollar." And then you look at what's going on in China. And literally this has been the worst year in decades in terms of investment flows into China. So it's just an incredibly ironic situation. We talk about de-dollarization, and at the same time, the main alternative to the dollar, which would be the Chinese currency, is in serious, serious trouble. They have to intervene, right, to just keep it pretty stable. So that's sort of one side of it.

So now we've got that out of the way, we can talk about the stuff that actually matters, right? So like the Fed has been persistently hawkish. And what really has surprised a lot of people—and I would say this was something that was hard to forecast—was this bounce in U.S. growth expectations this summer. This late in the cycle that we can actually generate a 5% GDP number, even if there was some noise in the number, is extraordinary. And that's clearly keeping the Fed on a more hawkish path, right? So if I'm going to compare the Fed with the ECB, the other main central bank that sets policy in the same way as the Fed—China is a special case, right—I feel pretty strongly the ECB is going to cut rates before the Fed, even if the ECB started later. So it means we're going to have a much more drawn-out tightening cycle in the U.S., whereas the tightening cycle in Europe will start later, end earlier, so be shorter overall. So that is something that supports the dollar logically.

And I would say, like, when I think about dollar forecasting, right, if I'm going to summarize my framework in two variables—being a little bit simplistic here, but, like, if you're just going to stick with that—what are the two most important variables? Like, clearly monetary policy in the U.S. is important, but often the most important variable is what is happening with global growth. So global growth has been going the opposite direction of U.S. growth. U.S. growth has been revised up in the last three, four months. And global growth expectations have been taking a leg down because growth in China is weak, as we discussed a little bit. And European growth is quite weak now as the sort of reopening dynamics finally has run its course.

And like one thing that is an interesting difference that I think a lot of economists didn't pay enough attention to in this cycle is that different economies have totally different mortgage markets. And Kathy, I know you're very into the details like this, right? But in the U.S., it is so prevalent to have a long fixed-rate mortgage, right? Whereas in Europe, it's the opposite. A lot of mortgages are very short term. So it means when interest rates go up, the consumers, the borrowers, feel the pain way quicker in Europe. And I'm talking about both the eurozone and the United Kingdom. And that's been a huge thing, right? So consumers in Europe are really feeling the pain. Like the disposable income they have left after having paid their mortgage is something that's taken a big hit. Whereas in the U.S., that's not the case yet. So that's something that's led to decoupling in the cycle, right?

So the bottom line is that we have a Fed that's still pretty hawkish in the short term, and global growth is quite negative. And we spend a lot of time tracking global capital flows. One way you can see that in the flows, this concern about global growth, is literally what U.S. investors are doing in terms of international equity flows. And for a couple of months now, and it doesn't happen that often, you can see not only are U.S. investors actually cautious, but they're actually outright selling their foreign equity exposures, which very often coincides with them having growth concerns.

So that's the environment we've been in. I think given all that, it's not particularly surprising that the dollar is very resilient. Big question is what's going to happen next year, right? Are we going to be in a different environment? So happy to go into that, but I think the dollar is consistent with those two factors that over the last several decades have been the two most important forces for the dollar.

KATHY: Yeah, you know, it's interesting—that de-dollarization talk, that hatred for the dollar, then the disappointment that the dollar didn't go down among a lot of investors—you know, we hear that a lot. And I think sometimes the obvious story is a story that the U.S. economy has done better, and that attracts money, and that keeps it firm.

I think the surprise has been that it's been so firm for so long. And maybe it's overstayed its welcome. Maybe 2024 dynamics will shift, but you know, it does look like right now there's not a lot to change direction here.

JENS: Yeah, if we put it in perspective, right, it's really almost 10 years ago when the dollar cycle started to turn bullish, right? It was in the summer of 2014 and we've had some ups and downs along the way, but the big trend has been a dollar bull trend now for almost 10 years. So it's a big dollar run. If you look at valuation models for the dollar, it will look like it's on the expensive side relative to history now, but for some pretty good reasons. And then I think the question is whether there's going to be something that really changes. Is there something that's going to look different? And happy to go into that for sure.

KATHY: Well, how about quickly, what would be the big thing that would be different next year that would cause that pivot? Would it be the Fed starting to ease more quickly than people think, or would it be something external that happened?

JENS: I think the big sort of structural question that I think we all have to think about is—what sort of is the end game in relation to the debt in the United States, right? We have a fiscal deficit that is trending around 7% of GDP. It used to be the case that we talked about balanced budgets. And OK, if we had a deficit, it was like our big deficit was 2% to 3% of GDP. Now we're getting used to 7% of GDP. We're talking about quite enormous quantities, right? And that's the deficit on an annual basis. Even the interest rate expenditure is really going to shift up dramatically. We were used to the interest rate expense being maybe 1.5% of GDP per year, can go to like 3.5 if we have the yield curve sitting where it is now with these high levels of debt. So it's quite dramatic if you think about it.

So I think one way where that will come into the equation next year is that as the debt rolls into higher-coupon instruments, the foreigners that own U.S. debt will get paid more cash flow. So that's something that will have an impact in the balance of payments. The timing of that is not the same as the yield curve shifting up, right, because the new debt has to be issued. But with a lag, it will reflect what's happened to the yield curve. And that is something that shouldn't be underestimated. So that's sort of just the normal cash flow.

The one thing that's more unnerving and more unpredictable than that is to do with, OK, can we have like real financing issues, right? So it's not nice to see Treasury auctions not being subscribed well, and we have like considerable volatility after the last 30-year auction. That's something that is a bit unnerving. If we had more of that, and it started to sort of have contagion effects through the system—what I mean by that is that if it starts to be a situation where the long-dated bond auctions are problematic, and perhaps it feeds into more instability in markets broadly, equity markets being more affected, international investors not being so relaxed about U.S. equity exposure, then I think the dollar can really start to be impacted from it. We have not seen that yet, even though we had a couple of bad auctions. It's not like had those big ramifications yet. But I think that's something to think a lot about.

It would be strange if the debt, how should we phrase it, never matters to eternity, right? At some point there's going to be a bill to pay. I do think '24—it's likely to be the year when these debt concerns start to impact broader markets to a much greater degree than we've seen so far.

KATHY: Who knows, that might wake up Congress and make them actually do something about it, but that remains to be seen. So I just want to wrap up here with one more question. So we have a lot of individual investors out there and some institutional investors. What do you see as the kind of the best opportunities looking forward 6 to 12 months versus the big risks 6 to 12 months?

JENS: Well, I think there are some of these real interest rate opportunities that really should be considered very aggressively by individual investors, right? If you can get 2.5% real interest rates, maybe yields go up more, you can get—time it right, you can get 3% in coming months.

It's almost like you can think about a situation where if we're in a world where AI may have a big impact on the economy—if you have exposure to some of those companies that can benefit from AI, and have exposure to real interest rates, you could benefit from a lot of different scenarios at the same time. So I think that's something that people should think about having in their portfolio.

And then in relation to the international exposure that I mentioned, right? So we've been on a 10-year dollar bull run. If you are a U.S. investor or any investor really that has a big dollar share of your portfolio, I think it is the right time to think about, OK, is that really a diversified portfolio? Is that really a portfolio where you're going to be OK in many different scenarios, including the scenario where the dollar has a big turn? And obviously that kind of hedging or diversification can be done in many different ways. You can have gold in the portfolio. You can have international currencies. You can have international stocks. But I think it's easy to be sort of lulled into believing that having a huge allocation to the dollar is always the right thing. And I think after a 10-year bull run, and given the debt situation we have, it's worth being very open-minded that we could be reaching a turning point within a year or two where that strategic allocation to the dollar really needs to be considered.

KATHY: Yeah, that diversification that hasn't really worked that well eventually will likely work. Sometimes these long cycles, like you say, lull us into thinking everything's going to stay the same forever, and then suddenly we wake up and things do change. That's where diversification really, really helps.

Well, Jens, this has been great. I really appreciate you coming on. You're one of our first external guests. So we're honored to have you, and thank you so much for your time. It's been great.

JENS: Thanks for your good questions, and I hope we can do it again some other time.

LIZ ANN: Awesome interview, Kathy. Well done. So what's on your radar, Kathy, as we head into the final month of the year?

KATHY: Well, there's a lot of important economic data coming out, as you know. The big one that's coming up will be the unemployment report. We've got some indications that the labor market is cooling off, but I think the Fed will want to see confirmation of that with slower job growth and slower wage growth. So, really, when it comes to December, for me, that's the big one. And obviously, if it's stronger than anticipated, that's going to throw this whole idea of Fed rate cuts sooner rather than later off course.

If it's on the soft side, then I think it accelerates it. So what are you looking out for, Liz Ann? What are you going to be watching for specifically next week?

LIZ ANN: Well, obviously the jobs report, too. But of course, that comes later in the week. And I agree. I think it probably could represent a needle-mover for expectations around Fed policy. And one of the things we discussed in our outlook was clearly the Fed was keying off of half of their mandate, the inflation side of their mandate, for the most part in the tightening part of the cycle. And not that they aren't going to focus on inflation in the loosening part of the cycle, but I think the employment mandate, their other mandate, probably comes into focus for them a bit more, and they'll be making decisions based on the combination of those.

But you've got a lot of data out in advance of the Friday jobs report, things like factory orders and durable goods. I think that the goods side of the economy is important because of this whole idea of rolling recessions. You get S&P Global's version of the services and manufacturing PMIs.[1] And there's often some nuggets in there, even though it's the ISM PMIs[2] that get more attention. In fact, we've got ISM services coming out. And given that manufacturing rolled over and weakened again, I think that will be key to the outlook is what we see in services. You've also got mortgage apps, maybe not as compelling this time, but you get a sense of housing as it relates to changes in the yield environment and productivity and unit labor costs come out as well. I think the combination of those two things and the relationship between them is important. And then also related to jobs, you've got claims, which continue to be important, and not just initial claims but continuing claims. Challenger has their layoff announcements next week. And also consumer credit, as well as the University of Michigan version of consumer sentiment, which also has multiple components within, including inflation expectations. So it's a pretty busy week next week.

So that's just the short list of what we're looking forward to next week.

KATHY: And a busy week it will be. Thanks for listening.

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LIZ ANN: I'm @LizAnnSonders—that's S-O-N-D-E-R-S—and no E on the end of Liz Ann. I've had lots of imposters lately, so make sure you're following the real me.

KATHY: And I'm @KathyJones—that's Kathy with a K—on Twitter and LinkedIn. And I've also had a few imposters, so we'll try to be a little more careful about that going forward.

LIZ ANN: And definitely tune in next week. I'm looking forward to next week's episode, because it's that time of the season where we are all publishing our next-year outlooks, 2024 outlooks. Mine has been published, but we'll be discussing the U.S. economy and markets, the outlook on the fixed income side, also bringing in a perspective on Washington. There may be something going on in Washington next year of import, and the international front as well. So definitely tune in.

For important disclosures, see the show notes or Schwab.com/OnInvesting, where you can also find the transcript.

[1] Standard & Poor's Purchasing Manager's Index https://www.pmi.spglobal.com/

[2] Institute for Supply Management https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/