Schwab Center for Financial Research's Kevin Gordon Talks Bond Market

**SPEAKER_1** (0:02)
Bloomberg Audio Studios, podcasts, radio, news.

**Tom Keene** (0:07)
Kevin Gordon, who's been on board this bull market, joins us now, had a macro research strategy at Schwab Center for Financial Research. They have, Isabelle, they have in their offices, actual vinyl record.

**Isabelle Lee** (0:20)
Really?

**Tom Keene** (0:20)
He cues up the Led Zeppelin.

**Isabelle Lee** (0:22)
We have to have a field trip.

**Tom Keene** (0:23)
He's in Saunders.
I love, Barry, down here, if you're talking to Michael Dardy yesterday, you say the most important data point is 6.5 percent nominal GDP. Discuss this boom economy.

**Kevin Gordon** (0:35)
I think it is the most important because it's very much at the center of the discussion around what's going on in the Treasury market this week. When you think about the underlying fundamentals of the economy, 6.5 percent year-over-year growth in nominal GDP is, I think, very indicative, of course, of what we're seeing in terms of the AI boom. But I think also in the context of inflation as well, you can't really get inflation down to 2 percent unless you see the greatest productivity boom ever. So it's not a bad thing. I don't mean that in a bad way. But I think that to the point of this booming economy and the resilience that we see in the US, we have entered this new normal where it's now more normal to see nominal growth of that kind versus what we saw pre-pandemic, which was much slower than 6.5 percent.

**Isabelle Lee** (1:22)
I want to talk about the bond market because Tom and I earlier in the show, we said that is the big story of this week. What did the market learn from the bond moves and the Bessent put, so to speak, and its rapid reversal? Is it that they're skeptical about this move? I mean, many people have called it just a band aid really.

**Kevin Gordon** (1:38)
But no, I mean, I think that's probably the right way to think about it. The sort of duct tape on a leaky pipe situation where that can only last for so long in terms of stemming some of the drippage there. But I think that the whole discussion around higher deficits and the fact that no one's really doing anything about it on either side of the aisle, that's been a theme and a feature of the US for so long.
But that in combination with this structurally higher growth backdrop that we've been in, plus the fact that you have stickier inflation, all of these elements fuse together and you get a higher for longer interest rate world and it's very, very hard to pull down yields in that environment, especially, of course, at the long end. You also introduced, I think, another interesting dynamic, which, I mean, to be a fly on the wall right now for any of the Fed meetings and discussions, it would be so fascinating because you do have a little bit of this vicious circle dynamic at play where on the one hand, someone is actively trying to pull down yields to do what they can to stem the rise, but on the other hand, you did have Fed Chair Kevin Warsh sort of take some comfort in the fact that the long end had risen and it was sort of, quote, doing the Fed's job for it. So that dynamic, I think, it'll be interesting to see if he addresses it at all in Jackson Hole, but I think over the medium term to see how those kind of combat each other, that'll be interesting to me.

**Isabelle Lee** (3:01)
I would love to go to Jackson Hole and wear a Jackson Hole outfit.
I love having you because then you can talk all asset classes. Why didn't stocks respond more to Washington's signalling that it wants easier financial conditions?

**Kevin Gordon** (3:13)
Well, I think in terms of, as powerful as signalling might be, and we've learned that over the past couple of days, it isn't as powerful because of the reversal that we saw in yields.
We've been in this environment, and we don't have too much high conviction these days because it's really hard to do so, but what we do have higher conviction is the fact that, or the feeling that we have sort of exited definitively this great moderation era, where you had this harmonious relationship between the stock market and the bond market, where when yields were going up, they were responding to positive growth impulses, stocks were also rising. Post pandemic, for most of that time, most of this cycle, that relationship has flipped into negative territory. So that means that all else equal, which is of course never the case, but when yields are rising, that's putting downward pressure on equities and then vice versa. And you've seen that play out this week almost, and it's happening again today. If yields are up, stocks are down vice versa. So that's not to say that if yields continue to go higher a year from now that the stock market will be lower. That's certainly not the case. If anything, when you get these more aggressive moves in yields, that's when you sort of have that reset period for stocks.