Liz Ann Sonders on the 2023 Macro Outlook, Her 300,000 Twitter Followers & Inflation

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Joseph Cass

Hello, everyone. Welcome back. My name is Joe Cass. I'm the hosting creator of Fixed Income In 15. Today, I'm talking to Liz Ann Sonders, Chief Investment Strategist at Charles Schwab; and Paul Gruenwald, Global Chief Economist at S&P Global Ratings. Today, we're going to talk about markets in 2023 , impostor syndrome, and the World Cup. So a quick reminder that the views of the external guests are their views alone, and they do not represent the views of S&P Global Ratings. Okay. Great. Thank you both for joining.

Liz Ann Sonders

Nice to be here.

Paul Gruenwald

Great to be here.

Joseph Cass

Great stuff. Liz Ann, we'll start with you. I've heard you say before that you consider yourself a student of investment psychology and behavior in investment sentiment. So given this experience of cycles and investor psychology, what's going on in the heads of investors going into 2023?

Liz Ann Sonders

Yes. Sentiment has been an interesting sort of field of study, so to speak, particularly this year because of some of the particularly unique divergences that we're seeing, notably until recently between what I think of as attitudinal measures of sentiment survey-based sentiment metrics, probably the most popular common is AAII, American Association of Individual Investors.

It's really just asking, in that case, their members, their tens of thousands of members, are you bullish? Are you bearish? Are you neutral? But then there are behavioral-based sentiment indicators, everything from fund flows, or the put-call ratio in the options market.

Even interestingly, within AAII, they have a monthly component to their survey that actually asks, what's your allocation to equities? And what's really interesting is in the spring heading into the mid-June lows, you actually hit a record low of optimism in AAII in the kind of teens percent.

And that data goes back to 1988. So it's a fairly robust data set. So that, as a contrarian indicator, was a relatively positive setup. The problem was that equity allocation had only slightly dipped from the all-time high of well over 70%. So it was a time where what investors were saying and what they were doing or had done were in stark contrast.

It's only recently when we were in the kind of retest of the June lows in October that you finally started to see some of those behavioral measures match the attitudinal measures. And that's a better backdrop when you have the combination of survey-based data as well as action-based data. But the only place we haven't seen what I often call the puke phase is in fund flows. But you certainly saw it in a metric like the put-call ratio, which has had a couple of spikes to all or near all-time highs. So that's a better setup than where we were in the summertime.

Joseph Cass

Absolutely. And Paul, when the dust finally settles after COVID and also the current bout of inflation, how is the world different from 2019? And in what ways?

Paul Gruenwald

Well, first, the dust isn't going to settle for a while. So let's pretend we're about a year from now. Maybe then we'll have a slightly better picture. But we've been arguing that there have been two events that have changed the world in fundamental ways. One has been the COVID pandemic and the other has been Russia's invasion of Ukraine. So if we think the dust will be settling a year from now, the question is, would 2024 look like 2019.

And I can think of two reasons why that would not be true. First of all, because of COVID and the shock to supply chains, we kind of know that the supply chains, which had always passed the efficiency test, failed the resiliency test. So what we're seeing already is shorter supply chains, more inventory, more redundancy, nearshoring, friendshoring, a lot of changes around the geopolitics.

So it will be more expensive to produce, to move things around and store them. So that's going to give a lift to price levels and push up inflation potentially. And the second one is the green revolution and the move towards sustainability. I think that's accelerated over the last year or so. And we've seen the Inflation Reduction Act in the U.S. We've seen the Recovery Act in Europe.

We're going to see a lot more public investment going towards sustainability and adjusting capital stocks, power grids, et cetera. That lift in investment will tend to raise rates as well. So we think inflationary impulses will be higher because of supply chains. Interest rates will be higher because of the green transition. So in those ways, 2024 and beyond is not going to be the same as 2019.

Joseph Cass

Fantastic. Thanks, Paul. So Liz Ann, in your view, what three things could surprise markets in 2023?

Liz Ann Sonders

So let me caveat it by saying these are -- I'm going to answer precisely the question of what could surprise to distinguish from these are my forecasts of what's going to happen in 2023. I think -- well, first of all, there's always the black swan possibility, something that comes out of the blue, much like was the case almost three years ago with the pandemic. It could be something pandemic related or something completely out of the blue.

So I think that's always a potential surprise or a risk. I think another one could be if inflation continues to come down, which we think it will, and you see further deterioration in the economy, particularly in the labor market, but it doesn't lead the Fed to a near-term pivot. I think the market has been kind of convinced from what had been the narrative driving the June to August that, okay, an imminent pivot isn't happening.

But now there are -- the market is sort of obsessed with the other P word, the pause. But I think still expects that the Fed will quickly move to lower rates to combat the weakening in the economy that they're actually, to some degree, trying to engineer.

So I think standing firm on what they have been trying to telegraph of once we get to the terminal rate, we're going to stay there for a while. If they do that in the face of lower inflation and a weaker economy that, that could be a surprise. And then I'll end on a good surprise note, wouldn't it be great if we had some sort of resolution or end to the Russia-Ukraine war.

Joseph Cass

Fantastic. Thank you, Liz Ann. So Paul, Liz Ann just mentioned then, I want to talk a bit about the U.S. rate hike cycle. So where could the peak be for the Fed? And what is the current view on a transitory period of inflation?

Paul Gruenwald

Let me take the second part of that question first. I think it's pretty amazing if you think about it, a year ago, there was still a big debate in the profession, whether inflation was transitory or permanent, and we had some big guns on both sides of that debate. And now it's kind of blindingly obvious that we have an inflation problem. But even as recently as 12 months ago, there was a big debate as to whether central banks would be raising rates at all this year.

But here we are, the Fed's got a 7.7% headline inflation and even the narrower core PCE is above 5%, so the target is 2%. So there's a lot of work to do. We just put out a revised U.S. quarterly report yesterday. And now we have the Fed peaking at about 5.25% next year, early next year. So that's going to be the new terminal rate.

But to Liz Ann's point, the Fed is going to have to be watching the labor market, the strength of the economy, and the expectations, and that will dictate how fast they're going to come down. We're increasingly thinking that inflation is going to be sticky. So it's going to come down more slowly than it came up.

So there may be some surprises about how long the Fed keeps rates relatively high. I think given the miss on inflation forecasting over the last year or so, central banks everywhere, not just the Fed, are going to be leaning toward being a bit tougher and making sure we get inflation out of the system and expectations reanchored at around 2%.

So we think the peak is going to be early in 2023. If the economy is slowing later in the year, and we do have a mild recession in our forecast and demand starting to come off, then they will ease. But I think the risks right now is they go a bit higher and stay there a bit longer given the strength of inflation and given the forecasting miss over the last year or so.

Joseph Cass

Thanks, Paul. Liz Ann, what is your and Charles Schwab's view of inflation and the rate cycles going forward more broadly?

Liz Ann Sonders

So I agree with Paul. I think that we are not going back to a pre-pandemic environment. We're not going back to the great moderation era of mostly disinflation, the economy not really at all susceptible to supply shocks, only susceptible to demand shocks. So even if we're in that process of reversion to the mean, it could be a bit of a snapback. And in certain segments of inflation metrics like CPI, particularly the goods side, you are in disinflation already.

And inflation might, for a short period of time, come close to or maybe even overshoot. But I think ultimately, inflation lands. The inflation plane is kind of lands at a higher elevation than was the case. And I think that has a lot of implications for how we think about the future, including the relationship between the bond market and the stock market.

So for 30 years or so, from the late '60s to the late '90s, almost the entire time, you had an inverse relationship between bond yields and stock prices because that was more of an inflationary backdrop. So when you get a move up in bond yields, it was typically because inflation risk was brewing again, bad combination for the market. Fast forward to the two decades leading into the pandemic, again, the economy was more susceptible to demand shocks.

We had a disinflationary backdrop such that when yields were rising in that era, it was almost always because growth was picking up without the hit from inflation, that sort of nirvana for the equity market leaving the '08 crisis out of that discussion, and I think one of the potential tells for whether we're in an environment that is more of an inflationary backdrop.

That doesn't mean a 7 and an 8 handle on CPI as far as eye can see, but just a different backdrop would be if the current inverse relationship, again, between bond yields and stock prices persists. I think that may be the fundamental metric to look at to get a sense of whether that inflation plane, even if the Feds successfully lands it is at a higher elevation than what we've got used to pre-pandemic.

Joseph Cass

Yes. Very interesting, Liz Ann. Thanks. So Paul, I've heard you recently say that India is a shining star of the global economy. So can you go into a bit more detail on why you think that's the case?

Paul Gruenwald

Yes, sure. Well, first, our starting point for global macro is to look at the U.S., Europe, and China. Those are the big three, and each of those carries a weight of about 20% of global GDP. And the story has been pretty gloomy, right? The U.S. clearly has an overheating problem, and we've been discussing rate rises on this podcast. Europe has a geopolitical energy problem. And China has a zero COVID problem.

So the big three are all on a downward trend, although we've had a couple of good data prints for Q3. The one bright spot of the global economy is actually India, which is not a small economy. It's a $2 trillion economy.

But India is coming through this with 6% or 7% growth forecast for the next couple of years and balance sheets are cleaned up on both the banking and the corporate sector, and there's a big move toward energy transition, and India is not too connected with the rest of the world. So being relatively large and relatively independent is a good place to be.

And geopolitically, they're in a good spot as well as geographically, they're between all the energy and the big consumers of the energy in Eastern Asia. So just, I think by virtue of being a domestic story, they've had a great rate -- sort of run of structural reforms with a GST and biometrics and they deliver government benefits straight through the phones and everything.

They've got this productivity modernization story going. So while the rest of the world is slowing, it looks like India is going to be the star among the major economies, 6% to 7% growth for the next couple of fiscal years.

Joseph Cass

Great stuff. So Liz Ann, over the course of the past kind of two to three years, we've seen the rise of what some people would call the more speculative-driven segments of the market. So things like meme stocks, heavily shorted assets, SPACs, crypto, et cetera. So in your view, what is the future for these so-called speculative segments of the market?

Liz Ann Sonders

So I think there were unique drivers of the kind of speculation that we saw in this cycle versus, say, a period like the late 1990s. And history is littered over centuries of eras of speculative excess, so this is nothing new by any means. There have been probably thousands of books written on the subject.

But the pandemic and its impact was unique in the sense that it was lots of ingredients in this recipe of speculation to some degree, outside the traditional areas of the market, many of which you mentioned.

When you look at some of the data around crypto, NFTs, the meme stocks, other spec areas, and there sometimes is analysis on sort of gender and age of who is represented in kind of the cohort that was most enthusiastic in many of these areas, and it was predominantly male, predominantly on the younger end of the spectrum. And we all know some of the reasons. We were all home. We all have smart devices, commissions.

I think maybe Schwab had a little bit something to do with commissions going to zero, at least in the traditional averages. So further democratization of investing and access, the lack of ability to gamble on sports, and it was sort of a witch's brew that led to this.

The good news is that because that speculative fervor was not concentrated in the major averages, although there were some there, the carnage has not had the kind of significant impact on the financial system more broadly on markets. Yes, we're in a bear market, but when you look at the maximum drawdowns across many of those areas, crypto, and SPACs, and the meme stocks, you're talking 70%, 80%, 90%, 90-plus percent drawdown.

So we -- those were -- I were calling -- I was calling them micro bubbles. And in many cases, if not most cases, they have popped in spectacular fashion. The only question I think we're all grappling with at this point is FTX and the fallout looking of ahead, whether it will continue to be ripples like we've already seen or does it turn more into a serious wave. And I don't have the answer to that question, even the regulators don't at this point. But that could be another surprise in 2023, either on the positive side or the negative side.

Joseph Cass

Great. And Liz Ann, you're a senior figure in the investing world, very respected -- is very respected and have been for decades really. But I did read that in the past, you felt what was known as impostor syndrome. So asking yourself questions like, should I be here, am I qualified to be here? How did that impact you personally, but also professionally, too?

Liz Ann Sonders

So I have, I think, suffered from it certainly earlier in my career, much like I believe most people do. More people suffer from it than there are people willing to admit it and talk about it. I think it's sort of a natural thing, again, especially early in my career. So I had it in that traditional definitional way of, to your point, am I smart enough? Do I have the right kind of background? Am I communicating properly, all of those.

But I also suffered from a different version of an impostor syndrome in my first about 15 years of my career. I started in 1986. And until the early 2000s, very early 2000s when I joined Schwab, I was managing money. I was on the buy side. I was a stock picker. And I felt like an impostor doing that in part because I didn't enjoy doing it.

I was an observer of more of the top-down macro perspective because my first 13 years in the business, I worked for the late great Martin Zweig, who was very much top-down, and big picture, and sentiment. And I was always more fascinated by that. So I felt like an impostor doing what I was doing.

But in turn, the background, I think, as a bottom-up person, ultimately helped sort of that transition to what I've now done at Schwab for about 22 years. And it really made me realize this is not what I want to do. This is what I want to do. And it turns out I was right because I enjoy what I've been doing for more than two decades.

Joseph Cass

Fantastic. Thanks, Liz Ann. So Paul, you are an avid cyclist, as we've spoken about before on this podcast. So over the lockdown period, you made use of your kind of allocated exercise time. And I wanted to talk to you about kind of your -- the length of cycling you did in lockdown versus the length you're doing now. And hopefully, we can put a graphic up on screen for those who are watching on YouTube or watching on video right now.

Paul Gruenwald

Yes. Well, first of all, I guess it's hard to go through anything with an economist without putting up a chart. But yes, one of the things that happened during the pandemic is, one, my schedule shifted too early. So the call started at 7:00 a.m. And in a way, I was more efficient. They were one after the other, so I got a lot of work done. And then, obviously, big parts of the economy were locked down.

So -- and I wasn't traveling, so I had a bit more free time, and I needed a habit to get me through the pandemic. So I was always cycling a bit but I really put it into high gear, pardon the pun, during the COVID. So being an economist, too, I track this on an Excel spreadsheet by the week. But -- and also, I'm going to do this in kilometers because it's a global rule and not miles. But I got almost 10,000 kilometers, which is just short of 6,000 miles in 2020.

And then last year, I made the big personal commitment to try to get 10,000 kilometers for the first time in my life, and I managed to get that. And I think that's going to be the lifetime peak, at least until I retire because this year, it's come down a bit. I'm starting to travel and there's other stuff to do. So maybe come in around 8-ish or 5,000 miles. But it's been good fun.

There's a good cycling community in New York. We actually have a cycling club at S&P Global, so we can put up our stats every week and compare them. But it's been a little bit of a silver lining in an otherwise kind of gloomy period over the last couple of years. So hopefully, we'll get some persistence in this good habit and keep the level up as long as I can.

Joseph Cass

Excellent. Thanks, Paul. And I'll make sure to pick them in for 2023, so we can get an update on that one. So Liz Ann, you have over 300,000 Twitter followers, which is a very impressive kind of number. So what do you like about using Twitter? Are you the one who creates the posts on your Twitter personally? And do you think like more execs from the world of traditional finance should be more active on the platform?

Liz Ann Sonders

So I'll answer the second part in terms of who creates. So I do everything on Twitter. No one is on my feed posting for me. But my research associate, Kevin Gordon, is a big part of the morning chartfest, in putting them together in sort of rapid fire order. But then throughout the course of the day, it's a lot of just reaction to economic data, stream of consciousness, just whatever pops into my head. I think a lot of people, myself included, probably have a love-hate relationship with Twitter.

I love it as a provider of information in part because although all the research that we do at Schwab, not just mine, whether it's in written form or video form is on the public schwab.com site, we don't require that somebody has to be a client, but Twitter provides that day-to-day, minute-to-minute feed, which is not what you're going to find on the site, so I think it's a better way to engage, and educate, and interpret on a higher frequency basis.

As a user, it's a nice, consolidated way to get information, both traditional news feeds as well as research that may be we don't have access to. One example I often hear is Ray Dalio posting quite a bit on Twitter. Pre-Twitter, pre his decision to do that, you had to be a very, very wealthy client of Bridgewater. So that's just an example. The hate part, I think, is consistent with probably what anybody says that says they have a love-hate relationship with Twitter.

It's the trolls, it's the bullies. And I just -- maybe because I've been on the platform so long, I've got a large number of followers, I've become much, much, much faster with the block button, especially if it's sort of unfounded criticism. I'm not generally putting opinions out there. I'm putting data and charts.

And I often find that the uglier the comment or reply, whatever it is, there's an inverse relationship to how many followers that person has and almost 100% of the time, the handle is anonymous. It's not providing the name. So if you hide behind an anonymous handle and you just want to be a bully, you're not going to follow me anymore.

Joseph Cass

Yes. No, totally makes sense. And just on the topic of Twitter, is there any kind of recommended follows to people who would like to kind of keep track of financial markets that you really look to?

Liz Ann Sonders

Well, so if you go -- you can see who anybody is following, and I think I have more than 600 handles that I'm following. I wouldn't say look through all of them. But it really -- it runs the gamut from people inside the business. I love Grant Williams stuff, and I love Doomberg, and Scott Galloway, but then it goes outside the world of finance. I'm a big classical music person, so -- classical rock music person, I should say. So there are those types of follows that I have spanning into entertainment, just general interest. So it's a wide girth.

Joseph Cass

Fantastic. So Paul, similar kind of topic. Who are the individuals outside of S&P that you will always make a point to stop and listen to or stop and watch if they're talking about finance or markets in general?

Paul Gruenwald

Well, first of all, let me say I'm totally in all of Liz Ann's 300,000 Twitter followers. So I'm going to coin a new term here, which is social media impostor, right? We talked about impostors before. But I've got a LinkedIn newsletter. I think it's pretty well-received, but those numbers are totally awesome. Let me give you one person and then one institution that I follow and try to get my insights from.

Well, maybe the preface is that we economists tend to be very incestuous, right? We're always quoting each other and we're only listening to economists. So one of the things I try to do is listen to folks who look at the world in a different way. And I've been a big fan of Ian Bremmer for a long time. I think that geopolitics is super important. I think we're -- we've left this world where you can just do pure macro or pure finance.

We all need to be a lot more multi-disciplinary. I think the Russian invasion of Ukraine is an obvious example of that or just the rise of China and U.S.-China tension. So having a geopolitical lens in addition to a macro lens, or a finance, or a credit lens, I think, helps us be better forecasters and better representatives of our firm. So I would definitely say that. And also in terms of institutions, I'm a former IMF guy.

I spent 16 years there, and I love the work that the IMF does. But I really like the work of the BIS, the Bank of International Settlements. I think it's a much smaller shop, but they've done a really good job of trying to put the macro, and the finance, and the credit together in ways that are not traditional for economists.

So they often look at macro issues through a credit lens, or a market lens, or a finance lens, and I find that to be very helpful, and they've got these nice 5, 7-page research notes that I always circulate to my team. So I think BIS on the institution side, but Ian Bremmer on the individual side.

Liz Ann Sonders

Hey, Joe, I neglected to mention -- and this is maybe to your benefit, Paul, almost every day, courtesy of the daily dashboard I get from S&P Global, there are nuggets that find their way on to my Twitter feed. So that is a source of information that…

Joseph Cass

Thanks for the plug.

Liz Ann Sonders

You're very welcome. And if you've seen, it's almost every day, there's something from you guys that makes its way on my feed. So well done.

Paul Gruenwald

Great. Thanks a lot.

Joseph Cass

Fantastic. Great stuff. So a question for both of you here. At the time of recording, we are kind of bang in the middle of the 2022 Football World Cup being held in Qatar. So I'll start with you, Paul. Who are you supporting and who's going to win?

Paul Gruenwald

Well, as a U.S. -- as an American, I kind of been following the U.S. team. I'm really hoping we're going to win today and at least get to the second round. But I'm married to a Latin, so I tend to look at the football world -- not the soccer world, the football world through a Latin lens. And I remember I did see one World Cup live. It was in Korea in 2002. I was actually the IMF rep to Korea at that point. And I saw the Brazilians play, and this was like poetry at motion. And every time I watch them, they're just beautiful. So I think it's hard to bet against them. So I would go with the Brazilians.

Joseph Cass

Yes. So Liz Ann.

Liz Ann Sonders

Yes, I would -- I certainly agree that I think the big probably victory for the U.S., if they don't make it all the way to the end, which is probably not going to happen, is a win today against Iran. I think that would be as close to maybe the experience for fans in this country as the dream team, hockey team in 1980. So I think we're going to see a big drop in stock market volume, I think, this afternoon.

Joseph Cass

Fantastic.

Paul Gruenwald

But trading will be thin. Yes. supposedly, the U.S.-England game was the most watched soccer game -- sorry, football game in the history of the U.S. So maybe we get even more today.

Joseph Cass

Just a shame it was such boring, [ ill no draw ]. It wasn't a great advert for the game in the U.S. I was hoping...

Paul Gruenwald

Yes, I forgot who we're talking with here. I think we outplayed you guys, to be honest, Joe. I think we should have won that game.

Joseph Cass

You put up a great account to yourself. And the U.S. team always -- you always have -- you always put a good account to yourself. And I think -- I don't know if it's a next couple the one after, but it is being -- I think it's being hosted in the U.S. maybe...

Paul Gruenwald

U.S., Canada, and Mexico. It's kind of like a NAFTA World Cup, right?

Joseph Cass

Yes, which will be really interesting for you guys. So final question, Liz Ann, goes to you. So we interview kind of lots of individuals, generally investors, CEOs, founders on this podcast from the world of business and finance. So who do you think would make a kind of great future guest on the show?

Liz Ann Sonders

So I'm going to echo something Paul said as well about Ian Bremmer to the extent you haven't had him. I not only think his research is brilliant, but he's a good friend. And he's just a wonderful human being. And I think there's probably not a better time than the current environment to bring somebody on with that kind of expertise.

Joseph Cass

Right. Great. Liz Ann, I hear…

Paul Gruenwald

Maybe with the puppets as well.

Joseph Cass

Yes. No, they're great on the GZERO. I watch that stuff. It's really good.

Liz Ann Sonders

And Peter -- and also another fabulous geopolitical strategist who recently put out his newest book called The End Of The World Is Just The Beginning is Peter Zeihan, and he is fascinating to listen to as well.

Joseph Cass

Excellent. Great stuff. Well, great discussion. Thank you, both. Thank you, Liz Ann. Thank you Paul. And for everyone watching and listening and see you next time on fixed income and