Liz Ann Sonders: Inflation, AI, and the Next Market Cycle

This podcast is brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.

Understanding where the economy and markets are headed has never been more complex or more consequential for advisors and their clients. Hi everyone, I'm business coach Steve Sandusky for Barron's Advisor, The Way Forward Podcast. My guest today is Liz Ann Sonders. Liz Ann is Chief Investment Strategist at Charles Schwab. In today's conversation, Liz Ann and I explore how investing has fundamentally changed since she started her career in 1986, from the speed of information to the rise of a new cohort of retail traders, and why distinguishing between investing and gambling matters more than ever. We dig into whether AI is the new internet, how its impact on the economy compares to the dot-com era, and why the companies driving this boom are in much healthier financial shape than those of the late 1990s. She also shares her take on the rolling recession phenomenon, the K-shaped economy, and what the wealth effect could mean if markets turn south. We also discuss the federal debt and deficit, why inflation is the single indicator she's watching most closely. We talk about the case for international diversification, the transition of the Fed chairmanship, and what's fueling the run in gold and precious metals. If you want a clear-eyed, historically grounded perspective on the forces that are shaping the markets today and the economy, you're in the right place. Please enjoy my great conversation with Liz Ann Sonders. Let's go back in time. So you have been working on Wall Street for about 40 years now, since the late 1980s. And so, I want to think about everything that has evolved over those years in investing. So, you were successful back then, you're still successful today. So, somehow you've been able to evolve with the time. So, what are some of the biggest changes that you've seen when it comes to trying to be a successful investor back then and what you need today to still succeed?

A great question. I think it's probably the speed of information that has been most transformative in terms of how markets work and how investors react to new as it's coming in. Lots of democratizing of investing, including from people like Charles Schwab, Chuck Schwab himself. I think time horizons have gotten notably shorter, both on the part of institutions and individual investors. There's a lot more what I would call internal research being done, not necessarily gone are the days, but a very different backdrop these days as it relates to how professional investors get research. I remember when I started in 1986 as a portfolio manager, we received research from a whole variety of sources and there were soft dollar payments and had, you had an institutional salesperson and a sales trader and analysts that would come visit you in person in the office. The provision of research was actually written research reports because this was pre-the internet. We didn't have things like 401(k)s. So as a young investor, you, or as a young just employee, as a young worker for me coming outta college in 1986, you, the only way to start saving in a traditional way was via an IRA, but it was very much do-it-yourself. So the access to information and education has never been better or more robust than it is now. So those I think would be the key differences then versus now.

So is it harder to succeed as an investor today because of all the information and how fast everything moves compared to, say, back in the late '80s to early '90s?

I'm not so sure it's harder to be an investor. I think it might be harder to be a trader in the current environment, but I would, I would distinguish those two. And I think that distinction is, is particularly important in this day and age because there are some new cohorts that have really become dominant players in the market, not least being what are generically called retail traders, which is distinct from individual investors. That cohort that skews younger, skews male, born out of the pandemic, became active participants in the market alongside the increase in popularity of sports betting and gambling. And I think that probably now more than ever is an important time to distinguish between investing, which is about owning, and gambling, which is about hoping. I think that that's an important shift that has occurred.

So let's go the other direction. Let's flash forward 20 years from now. So it's 2046 and you're still successful doing what you do as a—

Really? I'm gonna still be doing this at 81 years old.

Well, we're all gonna live to 150 because of technology and everything. So we're gonna be living our, our health span is gonna definitely be increasing with our lifespan. So they tell us. So let's just assume for a moment that it's 20 years from now and you're looking back on this period that we're in right now. What do you think you would say that investors today are getting right? And what do you think investors today are actually getting wrong?

When I think about what's probably going to be most important and most transformative, it's technological change and AI. And the specific answer to that question is actually not specific. I think right now we're in that moment. Of trying to figure out, is most of this transformation going to be to the benefit of the economy and society, or are we going to find that there were more negative unintended consequences? I tend to lean toward the more optimistic view. I also lean toward the optimistic view as it relates to even the disruption that AI brings about, dislocations in the labor market, that typical Joseph Schumpeter creative destruction. I believe we're probably in the beginning of the pros of that. But I think as we come through it, I think we will find that like with all technological transformations over centuries really, but certainly in, in the US's shorter history, as disruptive as they can be in particular moments in time, they end up being for the better as it relates to productivity and how we live our lives on a daily basis and lifting people out of poverty and creation of whole new industries and occupations. So I think everything AI-related, robotics, I hope that we look back in 20 years and say, remember that disease called cancer that we always fretted over? Isn't it amazing that there's a cure for that now? So I can't help but try to find the optimism. It's easy to find pessimism these days, but that'd be a pretty heavy blanket to wear every day. So I think, by the way, as it relates to being an investor, one of the great things I think that Chuck Schwab has always said is that investing is by its nature an act of optimism. So, So I, I think you have to be an inherent optimism in order to be ultimately a successful investor.

I think it's fair to say, and I think you've talked a lot about this as well, that we're in, some people call it like this K economy. We've got the really affluent people are doing really well, and then the rest of the folks maybe not so well. And then maybe we've got rolling recessions going on where we've got certain sectors are doing really well, other sectors not so well. So let's isolate AI since we're talking about that. And obviously there's hundreds of billions, maybe trillions of dollars being invested over the next few years in AI. If we were to freeze and pause AI development at its current level for the next 5 years, and the models were going to stay the same for the next 5 years— obviously that's not going to happen, but I'm just trying to get at how much of what is happening in the AI area today is really driving this economy. And if we just kept that at a flat level, yeah, would we be in much worse shape than we are now, or, or other areas going to be firing?

I wouldn't say in terms of the math that we're at a point where we can say that it's a massive driver of the economy. I think there are components of what's happening in AI, not least being the CapEx that has represented strength within the big thing that is GDP. But it comes at a time, to your point, Steve, in launching the question with the whole notion of the K and rolling both recessions and expansion periods. I think that we're looking at AI as, again, something transformative. We can start to make assumptions about the impact it's having on productivity. We can certainly measure AI-related CapEx versus non-AI-related CapEx. That's been where the capital spending strength has come from. But I think it's still relatively small in the numbers. And I also think that part of your question about freezing time, I think where we sit right now, because there's so much focus on disruption and the labor market, most of the sort of big picture debates that are out there ultimately are about the labor market and how much displacement AI is likely to represent, particularly for young people or white collar workers. I think at this stage, frozen in time, AI is an enhancement to what we do. I think it's a replacement of tasks, not quite yet a replacement of full occupations. That could change and probably will. But frozen in time, that's the way I think about AI. And we're all trying to figure out how to best use it in our day-to-day lives, whether in the work side of our lives or the personal side of our lives.

And from a magnitude standpoint, you were you were well along in your career back in the late 1990s as the internet became this big thing, and we know how big of the hype was in the dot-com and everything. How do you compare the magnitude of the rise of the internet to the magnitude of the rise of AI? Is AI multiples bigger, about the same? How do you put those in perspective?

It's hard to put numbers on it. A couple things though that I'll say. I think the internet represented the democratization of knowledge. AI, I think, represents the democratization of intelligence. And some might think that there's not much of a distinction between those two words, but I, I think there are important distinctions. And it's one way to think about the difference between what the internet represented and what AI represents. I also think that an important difference between the late '90s as it relates to the build-out of the internet and the capital spending associated with it and the bubble that ultimately we know burst in spectacular fashion, is it was a little bit more of a build it and they will come environment from a sort of telecom infrastructure perspective. There was assumptions made about the demand to come. I think what's different this time is we're much closer to an even balance between demand and the spending. So the massive CapEx spending is tied to the growth in demand, not pie-in-the-sky assumptions of that demand coming eventually or the road or it's going to, you know, multiply. So I think that's an important distinction, not to mention the fact that there was a lot of the best-performing stocks in the late 1990s were not profitable companies. And we now know with the benefit of hindsight really had no prospects to be profitable. And we were doing silly things like valuing based on eyeballs or population. Clearly, we're talking about a much healthier set of companies here representing the major players that have huge profits and they have strong balance balance sheets, and they've had really strong cash flows. Now, the one thing to be mindful of at this stage is that if we want to pick on the, the ever-popular cohort of the Mag 7, 2 years ago, free cash flow growth for that group was growing at more than 60% year over year. And for that group now, free cash flow growth is slight in slight negative territory, which is why in this sort of heavy CapEx environment and the circularity of spending that there's more debt being used. So that is a little bit of a kind of a warning to just do a lot of company-level research and don't think monolithically. Don't think or invest based on just cohorts. I think this is a time, as we've seen with this broadening out in the market and equal weight performing well relative to cap weight, I think this is an environment where you've gotta do company-level research and that monolithic, whether it's sector views or cohort views, are not going to pay the rewards like they did a couple of years ago when we had such a concentrated market. So I think that's an important shift that's still underway right now.

For many decades, we had a pretty clear business cycle because many companies were very capital intensive and We know how that whole business cycle would work. Companies today, although the AI companies are not becoming assets like a lot of them had been. So do you think the idea of the business cycle and recessions, has that concept changed in the past couple decades, let's say, both with AI today and with the internet itself, or have we repealed it, or is it just going to look different?

Is it going to be these rolling recessions? Yeah, it wouldn't surprise me if if you and I are sitting here 10 years from now and we said, what do you know, that whole rolling nature did persist for a really long time, wouldn't surprise me. You're right to point out the traditional business cycle, what would typically happen and the reason why there was the creation of the LEI, the leading economic index put out by the Conference Board. It's got 10 component parts to it, 3 or 4 of which are financial system components. So, the S&P 500 is a leading indicator and the yield spread and credit spreads. And then the majority of the remaining indicators are more manufacturing-oriented. And that's not because Conference Board's been asleep at the wheel and doesn't understand that service is the bigger driver of our economy. But in a normal business cycle, you would start to see dislocations first within the financial system, interest rates going up because of inflation or other reasons to tighten policy. Credit availability becomes more constrained. You tend to see it show up in the more cyclical segments of the economy first, and then ultimately the dominoes fall and bring services down with us. We really broke that cycle by virtue of, of what happened during the pandemic because of the uneven nature of the pandemic, how it unfolded. Then the stimulus that kicked in at a time where the global economy was still completely shut down. So all of that stimulus was automatically funneled into the goods side of the economy, and that caused manufacturing to pick up. It caused the inflation problem to accelerate, but very concentrated on the goods side. Then fast forward to when things started opening back up, courtesy of the creation of vaccines, you then had pent-down demand on the goods side of the economy. You had pent-up demand on the services side. Pent-down demand on the goods side meant you started to see disinflation there. You had the later rise in inflation on the services side. Many of those categories are more sticky in nature. You had the excess savings coming from that massive stimulus era that boosted consumer spending and provided that support for consumer spending that also kept the economy afloat, even though we went into a manufacturing recession. It just didn't represent the domino that it has in the past. And I think some of those forces, we're not dealing specifically with the pandemic forces anymore, but it wouldn't surprise me at all to continue to see rolling recessions, sectoral recessions, but offsetting periods of expansion, whether it's related to the business capital spending side of things, whether it's a function of different segments of the consumer, it's some sort of continuation of the K-shaped. I don't want to rule out a traditional recession, but I think that typically has come and probably in the future would— I don't want to go as strong as by saying only come if, but usually a prerequisite would be some serious problem within the financial system, some sort of credit crisis. And absent that, I think more likely than not, the roll-through will persist.

Well, along those lines also, as you look at, let's call it the wealth effect here. So there was a number that came out here recently from an economist or one of the research firms, which suggested that approximately half of consumer spending was driven by about the top 10% of the income or wealth folks here. And as long as the stock market keeps going up, those top 10% own the vast majority of the wealth. And so they can keep the spending going, they can keep the economy going, even if a good chunk of the rest of the economy is not doing well. Do you have any concerns that as AI continues to accelerate, and to some extent it looks like it's becoming a small number of people take like all the gains here? Are we going to run into an even bigger issue where that top 10% might account for 55% or 60% or 65%? Are we going to have some issues with that? And along with that, if we do enter into some type of prolonged bear market, could that really be a double whammy where if the wealthy folks stop spending and the rest of the folks can't pick up the slack, are we in for a bigger concern?

So I think it's a yes and a yes. I wouldn't say it's a base case, but that That would not be a great scenario, but is certainly possible.

This episode is brought to you by Indeed. Stop waiting around for the perfect candidate. Instead, use Indeed Sponsored Jobs to find the right people with the right skills fast. It's a simple way to make sure your listing is the first candidate see. According to Indeed data, Sponsored Jobs have 4 times more applicants than non-sponsored jobs. So go build your dream team today with Indeed. Get a $75 sponsored job credit at indeed.com/podcast. Terms and conditions apply.

Where that K widens out, and I think there's areas within the K that are likely to converge. I actually think there's signs of business capital spending outside of AI starting to finally kick back in a little bit. I think there's still a lot of policy uncertainty, not, not least being, of course, the last couple of weeks of policy-related uncertainty. So I think we could see some convergence in the K, but I think you're right. I think we could see continued divergence with those percentages and that Gini coefficient and the spread between the wealthiest widens out that differential from a consumption standpoint. But I absolutely think the wealth effect is real. And one thing we need to be mindful of, and there is precedent here. If you go back to what we were already talking about, which is the bursting of the internet bubble that started in the beginning of 2000, we all know ultimately brought on a bear market that went for 2.5 years between March of 2000 and October of 2002. We did have a full-blown economic recession in 2001. It was relatively mild, and it wasn't a long-lasting recession. I think we wouldn't even have had a recession were it not for the bear market in stocks, because at that time, the metrics that are relevant to this type of analysis were all at record highs, and now we've surpassed those records. So the metrics that are relevant are things like the percentage of household assets invested in equities, the so-called Buffett valuation model, which takes a total market cap of all publicly traded companies as a share of GDP. Both of those are well higher now than they were back in the late 1999, early 2000 peak. So I think that there are ripple effects that will undoubtedly in my mind impact the consumption side of the economy in a more traditional bear market. That said, in keeping with the rolling nature of the economic cycle, we could also continue to see the roll-through and rotations and churn occur within the equity market. That means an environment that looks quite like it has very recently, but unlike what we've seen in the past. And, and a perfect example of that is just what's happening year to date. We've seen at the index level a lot of resilience on the part of the S&P 500, even the NASDAQ. At the index level, the S&P has, has only had a 3% max drawdown so far this year, which is pretty mild. The NASDAQ's had a little bit more of a max drawdown at the index level, but it's only 6%. Especially in light of what's been happening in the last couple of weeks. It's surprising that the market has been so resilient, but the average member within the S&P 500 has had a maximum drawdown just year to date of 14%, and in the NASDAQ it's 27%. So the average member within the NASDAQ has had a meaningful bear market decline already at some point this year. It's just happened via a process of rotation as opposed to the bottom falling out at once. That's also driven by what I like to think of as a lot of short attention span money driving markets these days. The retail trader in particular, where, you know, data from the likes of Citadel that tracks this kind of stuff, some of the data that we can track suggests that at a minimum we're talking about 20 to 25% of trading volume is associated with just that cohort of the retail traders. In some of the more volatile periods, that percentage on a daily basis can go up to 50, 60, 70%. So I think the nature of the kind of money that moves around very quickly in the market lends itself to these sharp rotations and churn under the surface. That is a fuller picture of what the market is doing, as opposed to just saying, we just haven't had a bear market in a long time. Look at the indexes. You've got to peel at least one layer of the onion back. And that's not a bad way to heal excesses, whether it's sentiment excesses or valuation excesses. I think everybody would choose that kind of backdrop versus, okay, instead you get the NASDAQ dropping by 27% in one fell swoop.

It seems like though we almost have a backstop against the market dropping too much. So if we go back to the Greenspan days, I think he started it where the Fed's going to come in and they're going to bail out the markets if something happens. We've seen it through COVID where we had trillions of dollars of stimulus to support the economy, which ultimately supported the market. We've got the current administration.

We saw it in the mini banking crisis in 2023 where the Fed stepped in with their macroprudential tools and their funding facilities. Yeah. Right.

And Europe does the same thing. The current administration seems to be very preoccupied with the level of the S&P 500, and they seem to— it almost seems like policy decisions to some extent are based on what the markets are doing. And this is not a political show, so that's not a political commentary, but it seems like that's fair to say. And then, B, do you think that's like a new permanent feature of this economy that the powers that be are going to try and make sure that we don't let the market drop too much? Because if we do, then that's going to ruin our reelection chances or it's going to cause other bigger problems.

I think the key word in that question, though, Steve, was try. Will the authorities try to stem any meaningful decline in the market? Absolutely. Whether it's our political leaders or Congress or the Fed. But at some point, You run the risk that it doesn't stem the tide. And I think worst-case scenario, when you think about the current backdrop and things not going well or continuing to not go well, would be a '70s-style stagflationary backdrop where inflation gets out of hand, but you're seeing a serious deterioration in the labor market and the Fed finding themselves in a bit of a pickle. And not being able to address the economic weaknesses, the weakness in the labor market side, because inflation has gotten out of hand. That is not our base case by any means, but I'm paid to assess both opportunities and risks. So I don't want to put the rose-colored glasses on and just say, yeah, I think there's going to be backstops and we're never going to have to suffer a traditional bear market anymore. I think that that's naive, but will there be attempts to step in? Absolutely. We've certainly seen it with just what happened last April when the so-called Liberation Day tariffs were announced and all of a sudden the United States started to look like an emerging market with plunging stocks and spiking yields and a plunging dollar. And so there was the announced delay, but at some point it could be the case that there's only so much that authorities can do. And especially if you end up with serious, serious dislocations within the financial system. If Jamie Dimon is right, or he's not right enough. And it's not just a couple of cockroaches in credit. It's something much more significant. And we end up facing another 2008 kind of scenario. Not my base case. Certainly hope that that's not. We have to think about those tail risks.

Right. Well, speaking of credit, so you and I remember the 1980s when Reagan was president and everybody was worried about the massive federal deficit. It seems quaint today to look back at what the deficits were back in the '80s, and we thought that was a problem. And we look at where the deficits are today, both the annual deficit and the cumulative deficit, and we've got people like Ray Dalio out there that are basically saying this deficit is like the end of the world kind of thing. So how much of our debt situation here in the U.S. is of concern to you, or do you think should be of concern to investors over, say, the next 5 to 10 years? Because it looks like the trajectory is going to continue to get worse. There's no appetite in Congress to rein in the deficit anytime soon.

I think we all should be concerned, but when I'm asked questions about this, there's often a follow-on to the question, which is, what are your thoughts on the deficit and debt? The follow-on might be as broad and simple as, is it sustainable? But oftentimes there's more specificity in the question. Because of this, as a result, will and fill in the blank. Will the dollar lose its reserve currency status? Will there be a global buyer strike of US Treasuries? Will the US default on its debt? And our answer to those types of questions are for the most part, no. Dollar's not going to lose its reserve currency status. There's no replacement for it. We're already seeing certain foreign entities, not least being entities like China's central bank, diversifying away from what had been such a massive holding of US Treasuries. But that's a process that's been going on for more than 10 years now, right? And will continue to go on. The idea that China will literally or figuratively wake up one day and decide to stick it to the US by dumping all of their Treasuries— well, if they wanted to aim the gun squarely at their own economic foot, they could potentially do as much damage. And so I think that diversification is likely to continue. In the meantime, foreign private investors are still buying US securities inclusive of treasuries. So we're not seeing that. We can pay our bills. It's just a question of whether we choose to. So I don't think we're going to default. I used to, a few years ago, get the question about rating agencies downgrading US debt. Well, that ship sailed. The first one happened in 2011, and then the most recent one of the three happened in 2023. So that ship sailed and it didn't cause a major collapse because Really what the concern was regarding that was that pension funds and lots of institutions were going to have to sell all their treasuries based on the mandate that they hold only AAA-rated securities. Well, what they all did ultimately was just change the bylaws and say investment grade. So that ended up being— it was like the Y2K, like major concern, nothing to see here. The real implication is that a high and rising burden of is a constraint on economic growth because of the crowding out effect. And I think maybe the reason why there's more attention on this in the last year or two than I've noticed before is because of the chasm that was crossed about a year and a half ago when the interest costs on our debt now exceeds what we pay for defense. And I think that might have elevated the attention to this because centuries worth of books have been written about the fall of empires, starting when the cost of serving servicing your debt exceeds the cost of defending your country. I, what I think is interesting though, is that the investor class cares really deeply about this subject. I do not do any kind of client event where this isn't the first or second question that I get. I think the average constituent maybe cares about it in the abstract, but it's hard for them to quantify what $38 trillion in debt means and what deficit running at 7% of GDP means. And maybe as a result of not being able to quantify it, they don't tend to vote based on planet, which is the reason why both sides of the aisle, one thing they do fairly well together in Washington is kick this can down the road. The real solution to the problem is somehow getting the growth rate in debt to be lower than the growth rate in the economy, because then mathematically you start chipping away at the problem. I have very little hope that that is happening anytime soon.

Well, but all the people that are optimistic about AI are saying, hey, we could see double-digit GDP growth because of AI. And A, do you think that's even remotely possible? And B, if it is, is that something that's going to really chip away at the deficit because we're going to grow our way out of it through technology?

We could. I think even the AI experts can't say that with any definitive view. There's a reason why there's so many raging debates on AI and its growth and opportunity and what it's going to mean for productivity, but also what it's going to mean in terms of the labor market. And you can pit two incredibly brilliant brilliant technologists against each other with diametrically opposed views. So as someone who anytime something technologically goes wrong, I unplug it and plug it back in, and that usually solves the problem. I don't have the expertise to come down definitively. I already mentioned that in general, I'm optimistic just thinking about the history of major innovations and you get through the disruption phase and you end up finding other pockets of growth and industries that didn't even exist before. So I'll, I'll still stick with that optimism. Whether that translates into 10, 15% nominal GDP growth and productivity is through the roof, and then the extremes of none of us will ever have to work again. My optimism doesn't quite stretch that far. But yeah, there's nothing inherently wrong when you're a country, in the most powerful country, strongest economy in the world, of running deficits. It's not like we're a human being that is approaching retirement and now needs to draw down savings and has to be mindful of not having too much debt. We're a country with infinite duration. So I'm not one of those sort of absolute believers that running a deficit is inherently an awful thing and we have to do everything we can via austerity or whatever, massive tax increases to get back to that mid-'90s short-lived scenario of having a budget surplus.

We're going to have a new Federal Reserve chairman here before too long. Do you have any concerns about the new chairman? I guess I'm not really asking concerns about the chairman specifically, but like the role of the Fed chairman these days. Are they all-powerful like maybe a Greenspan was back in the day, or is it like, nope, there's just too many other constraints on it?

It's—

the economy is just too big that one person isn't going to control it despite what they may try to do.

Yeah, I think we have morphed away from that Greenspan era where I don't think he was all-powerful and everyone on the Fed at the time were pansies and they just said, "Whatever you say, Alan, is fine with me." But it was more contained messaging for sure. Greenspan was the voice. But that shift to what I often jokingly call the Federal Open Mouth Committee, and I don't say that in a derogatory way, but there's much more openness. And it started under Bernanke. It was continued under Yellen and now under Powell. For the allowance of the expression of views by the entire committee. And I think that's particularly good timing of that being the structure right now, given ongoing concerns about threats to the independence of the Fed. When you've got lots of voices out there, it's a reminder of those institutional checks and balances. It's a reminder that the C in FOMC is committee, not chair. And I think Kevin Kevin is very respectful of those institutions. Full disclosure, I've known Kevin since I first met Kevin in 2003 at the White House. I went down to talk to the administration about their proposed tax reform and ended up serving on President Bush's bipartisan tax reform commission in 2005. So I got to spend a lot of time with Kevin in those couple of years. I think he's incredibly bright. Interestingly, he's been relatively quiet since he was announced as the nominee. I don't think he's specifically shying away because he just doesn't want to show his cards. I think it's probably the appropriate thing to do when you're in that period before the actual nomination. And he has had a variety of views over the years, some of which have been slightly more controversial. The idea of shrinking the balance sheet, allowing for maybe easier policy on the Fed funds rate side, but he, he hasn't weighed in lately on what his views will be. And we have a much wider array of perspectives now on the part of the members that make up the FOMC. You're seeing it in a much wider dispersion in the dots on the dots plot. You see it in a wider array of assumptions embedded in the Summary of Economic Projections, more dissents at the meetings. My guess is he's not going to be the type that says we all have to be on the same page and speaking from the same playbook. And as a backdrop to concerns about threats to Fed independence, I think that's very beneficial because it is that reminder that there isn't that automatic ability that if you sway the chair, that you sway everybody. The other thing I'll say is what's going to be really fascinating is whether Powell stays on as a governor. Because he's got 2 more years as a Fed governor. That to me is going to be fascinating. It wouldn't surprise me if he opted to stay on, not because he's power hungry, not because he wants to be the shadow Fed chair. I think he enjoys it. I think he likes the intellectual challenge of it. And it may also be a little bit of a, I'm not going to get pushed around. But I don't know Jerome Powell. So that's just an interesting way to think about it in my mind.

Yeah, because it's by tradition the, the chairman doesn't stick around even if they have the ability to. So yeah, it'll be interesting to see. So this is a random question here that just, just came up. So let's say that you decide, I've had a great career here at Charles Schwab and I decide I want to do something different, and you have any pick of jobs that you want in the government. You could be Treasury Secretary, you could be Fed Chairman.

None.

None.

Okay, none.

None in government.

None in government. Okay, now I probably I probably would have said in the past that something on the Fed would be interesting. And maybe I would say that in the future.

Let me preface this by saying, let's take out any flak that you may get for the role that you have. You don't have to worry about any of the baggage that comes along with being a public official these days. Just look at the job itself and say, if all I had to worry about was this job, what is the job that you would want and why would you want that? What would you want to accomplish in that role may not be being accomplished today?

And I have to answer that in the context of something government/Fed related.

Yeah, let's assume government, 'cause you have a big control, or maybe you'll take Jamie Dimon's job at Bank of America.

Oh, that is something I do not want to do. I have no interest in being a CEO. Okay. I am very interested in eventually getting involved in corporate boards. I've been very involved in not-for-profit boards, but I think corporate boards. So that's really, as I think about about my future, that would be it. I did get some outreach a number of years ago when Richard Fisher was retiring from the Dallas Fed about whether that was something I might have interest in. But my children were younger at the time. A move to Dallas was not in the cards, and I loved my job and still do. I know Pat Harker very well. He's the now-retired president of Philadelphia Fed, and he was for 10 years prior to that the president of University of Delaware. I'm an alum. So yeah, I have always found roles on the Fed, whether it's at the regional Fed banks or at the Federal Reserve itself, to be fascinating. It just is not as appealing these days. These days.

Yeah, I get you. Let's think international here for a moment, and the U.S. markets obviously have done very well for many, many years, and the international markets have lagged. Do you feel like maybe we're starting to see that change? And sort of the context I'm thinking here is, as the current administration is trying to get NATO, for example, to really work more on their own and, and really support their own defense and everything, it seems like they're starting to get the message, and they're going to do a lot more deficit spending, they're going to build more in defense. So it seems like they're really going to try and aggressively try and get things moving a little bit faster over there. Do you see that as sort of a trend that's going to continue? Do you see Europe as an example of a place? Yeah, that's probably a place that might look good over the next 10 or 15 years.

Yeah. What a lot of people don't realize is that both MSCI EAFE and MSCI EM, Emerging Markets Index, have outperformed the S&P not just recently, but as far back as 2 years now. So, we hit that inflection point outperformance by non-US relative to US. However, it's very difficult to assess whether that is going to continue in light of what's been happening just in the last 2 weeks. So we have been very optimistic about international, not in a linear way, every week, every month, every quarter outperforming US, but that you tend to go in these multi-year cycles and you've got a lot of fundamental support in terms of non-US by the weakness in the dollar, which accrues to the benefit to the benefit of international markets. You've got, to your point, the increase in cyclical spending, the fact that as we have seen this shift in leadership within the market away from such tech dominance, which by its nature means it benefits the US market more than other markets because our market is so much more biased up the innovation spectrum. When you start to see leadership find its way into materials and industrials and mining, that accrues to the benefit of many non-US markets because it's a bigger weight in their economies. So that story has had legs. I just think you have to table the enthusiasm right now until we get a sense of what the resolution of this war is going to look like, particularly if oil flows continue to be hampered by an effective closure of the Strait of Hormuz. That really has the potential to cause serious dislocations, especially in places like Asia that do import a lot of their energy from that region. So all major bets should be corralled right now for somewhat obvious reasons. But we, we have had a view that international diversification makes a lot of sense. And for a long time, up until maybe a year ago, because people don't realize that the outperformance goes back even 2 years, recommending international diversification meant having to say, "I'm sorry," a lot. And now you get to say, "You're welcome." But it's a little trickier an environment now.

It's probably hard to answer. And I know the true answer is, well, it's like everything. But if you had to look at what do you think is, let's say today, or maybe for the foreseeable future, what do you think is going to be the biggest driver of markets? Is it going to be the level of interest rates? Is it going to be the direction of debt Is it going to be how AI continues to evolve? If you're looking at a dashboard here and maybe you've got several indicators to say, these are my health indicators for the markets and for the economy, and which one of those, let's say there's 5, which one of those sticks its head up just a little bit higher that you're going to pay more attention to as far as how this is going to drive the economy and markets over the next few years?

I would say in a word, inflation. Inflation. Okay. Is that when we think about the Great Moderation era, which has different start points depending on what the reference point is, but essentially the period from the mid to late '90s up until the first couple of years of the pandemic, defined as such by, I think Ben Bernanke was the first person to use that Great Moderation term. And it clearly was a period of disinflation largely for much of that time, save for the pop in inflation that we saw in 2008. As a result, it was a very benign inflation backdrop. We had massive globalization kick in, particularly starting in 2001 with China joining the WTO, flooding the world with cheap and abundant access to labor and manufactured goods. That led to much less economic volatility, less inflation volatility, less monetary policy uncertainty, and longer cycles, fewer recessions. And longer expansion periods. I think most of those ships have sailed, and I think we're really at a point where the market is figuring out whether what we're transitioning into looks more like the 30 years prior to the Great Moderation period, which I've been calling the temperamental era. So from the mid-'60s to the mid-'90s, and that was an era marked by much more inflation volatility. More equity market volatility, more monetary policy uncertainty, more geopolitical uncertainty, shorter cycles, meaning more frequent recessions. But on the other side, the expansion periods were more robust on the upside. And the most important distinction between those two periods that's not just relevant to your question, And my long way of getting back around to your question, but I think relevant to investors, is that for almost the entire 30-year period of the temperamental era from the mid-'60s to the mid-'90s, bond yields and stock prices moved inverse to one another because bond yields were generally keying off what was happening in inflation in a more volatile inflation period of time. So higher bond yields typically meant inflation was rearing its ugly head again. Negative for the equity market. Fast forward to the Great Moderation era, with the exception of just 2008, for almost the entire 25-ish year period, bond yields and stock prices moved in the same direction because bond yields for the most part were keying off the growth side of the equation, not the inflation side of the equation. So higher bond yields reflecting higher growth without the attendant concern about inflation, that's nirvana. Ghana for the equity market. Now, of course, when yields and stock prices are moving in the same direction, it means stock prices and bond prices are moving in the opposite direction. Classic 60/40, easy to get basic diversification. If indeed we're transitioning to something that looks a little more like the mid-'60s to the mid-'90s, that simplistic diversification story gets called into question.

You know that old saying, what's old is new again, and it feels like it's déjà vu all over again. Yogi Berra. Because if we go back to the '60s and '70s and the '80s, what were the two big drivers of inflation? Well, it was oil prices and deficits. We were concerned about both of those, paying off the debts from the Vietnam War. And today, what are we talking about? We're talking about oil and we're talking about deficits. And we had globalization, as you mentioned, which was certainly a key factor in keeping inflation down. Could AI be the new globalization in terms of keeping inflation in check? Or do you think AI— is it inherently deflationary, or is AI inflationary, or we don't know, or both?

I think probably it's both near-term, but I think long-term it's more disinflationary.

Disinflationary.

Yes. So I think that's a positive, but we obviously have inflationary currents going through the market right now. But I think ultimately long-term AI will represent maybe not deflation, but disinflation. Okay. But that's long-term.

So you're saying inflation is like one of the key things that might keep you up at night if it were to get outta control again?

Yeah. And even if it doesn't get outta control, I think we have the distinct likelihood of having more inflation volatility, that it's a more aggravating concern. But at times we'll have sort of relief periods. In most of the '90s, into the early 2000s, CPI and PPI did not get the attention that it does now. You also go in these waves of what economic indicators are the ones that everybody is waiting for with bated breath. And we're back into that as it relates to CPI and PPI and PCE, obviously labor market data. I remember when I started in the '80s, money supply was the big thing that everybody looked at. You go— different eras have a different sort of uber focus that investors have on what indicators matter. But I think the inflation piece of this and its feeders, everything from policy-related feeders like tariffs to geopolitical crisis feeders like wars.

Yeah. Well, and we haven't talked about precious metals, so I don't want to let you go without asking your thought on that. I'm not really looking for a prediction, but how do you think—

Oh, good, because you're not getting one. Okay.

So how do you think about gold? Gold, for example. It's been around for 5,000 years. It's been a store of value. It's certainly done very well over the past number of years here. Does that have a place for certain people in their portfolios? How do you think about it?

You know, we don't make specific recommendations on how much precious metals should represent in a strategic asset allocation portfolio. General guideline, if we're asked about it, is sure, you can— a few percent. But it really depends on what the rest of the portfolio looks like. What are your goals as it relates to having an asset class like that? How does it correlate with other asset classes? Blah, blah, blah. I think the I think the gold story is one of, of central bank diversification, which we already touched on because using China as an example, as they have been diversifying away from treasuries, particularly more recently, a lot of those proceeds have gone into gold. I think some of that interest in gold is a function of what has been to some degree the weaponization of the financial system, things like sanctions, which really kicked into higher gear when Russia invaded Ukraine. I think there's certain types of money that might have recently historically gone into crypto for geopolitical hedge, uncertainty, concerns about fiat currencies. There might be maybe more traditional money that for many of the same reasons has gone into gold. More recently though, it's also become an asset class that has done really well, which means it's attracted retail traders.

Momentum players.

Momentum players. Fomo, and that brings a different dynamic into the mix because then you get swings, as we have seen recently, that really aren't because of a change in the underlying fundamentals, like many of which I already mentioned, but getting technically overbought or oversold, sentiment getting way too one-sided and positioning reversals. And then you get increase in margin calls and the inflection point And the countertrend move is much sharper than any fundamentals would explain. So you need to be mindful of that when you get to this phase where it's really become part of the zeitgeist and captured the attention of the short attention span money, that there's a lot more of that whipsaw risk or maybe opportunity in the, the extent you're a trader and you like that kind of volatility. So that's the way, that's the way I think about it.

Okay, let me just wrap up with this. So earlier I mentioned that what position would you want in government or in finance? So let's say that you have an opportunity to speak in front of all of the world's top central bankers, all the Treasury Secretaries of these countries. What's the key message that you want to impart upon those financial wizards?

Wow. That's a big and tough one. Stick to your discipline. Stick to your mandate. That doesn't mean you don't take into account exogenous conditions, but staying true to the mandate that sits underneath how these institutions operate. We're unique at the Fed in having a dual mandate, and it makes it a little bit trickier than if you only have a singular mandate. But I think it's maintaining that discipline, but also Don't approach it purely academically. I think one of the benefits of having brought somebody into the Fed like a Powell is he brings some of that sort of practical, real-world application. I would say stick to the discipline, but be open to the forces that sit outside what you find in textbooks. Mm-hmm.

Excellent. All right. Well, I think that's a great way to wrap up. What's the best way for folks to continue to learn from you? I know you do a lot of public-facing things and videos and everything. What's the best way to connect?

Yeah. So, you know, everything that all of us as subject matter experts at Schwab put out, whether it's written reports or videos, it's all actually on the public domain. It's on schwab.com. So, a lot of people don't realize that all you have to know how to do is type schwab.com into a search engine. And oftentimes if I'm looking for my own stuff, I'll literally just Google Sondra Schwab and I'll remember part of the name of a title of a report and it pops right up. To be efficient, the most efficient way to follow me is to literally follow me on social media. I'm very, very active on Twitter. I still have trouble calling it X. I post throughout the day, a ton of stuff in the morning, just things that I'm working on, interesting charts and market data and reaction to economic reports and stream-of-consciousness stuff. But it's also where I post post every written report that comes out, every video that I do. I'm going to have an announcement, oh, I'll be on Bloomberg TV today. So it is one-stop shopping. The one PSA associated with this though, is I have had a massive number of imposters, not just of me on the platform that is Twitter or X, but on other platforms on which I'm not active at at all. So imposters of me on Instagram, on Facebook, on Threads, on Bluesky, and increasingly they've used AI-generated videos that it's actually me, it's my voice sitting in my office, but the words coming out of my mouth are nothing I've ever said. The common theme is I have apparently have a private stock picking club where I guarantee huge returns and you too can join it by going into this WhatsApp and providing however And it's been, it's been an epidemic. So my one PSA is make sure you're following the real me. It's just @LizAnnSonders. I have about 530,000 followers. So if you see a weird spelling of my name and they have 13 followers, I guarantee you that's not me.

Yeah, that's, that's the unfortunate price you have to pay for fame these days.

It is. It's, it's maddening, but that's the nature of the beast.

All right. Well, Liz Ann, thank you very much.

This has been great.

Appreciate it. And thanks for all the great work you've been doing over the decades here. And hopefully 20 years from now, as I asked my question, we'll have another conversation.

I hope so. I very much hope so.

Remember that time in early 2026 when we were talking? How did that work out? So again, appreciate it.

My pleasure. Thanks for having me. All right.

That's all for today. Make sure you like and share this podcast through your favorite social platforms and for For more great podcasts, visit us at barons.com/podcast. Take care and be safe.

This podcast was brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.