MARK RIEPE: Welcome, everyone, to Schwab Market Talk, and thanks for your time today. It’s February 3^rd, 2026. The information provided here is for general information purposes only, and all expressions of opinion are subject to change without notice in reaction to shifting market conditions. I’m Mark Riepe, and I head up the Schwab Center for Financial Research, and I’ll be your moderator today. We do these events monthly. We’re going to start out by talking to each of our strategists about some of the top themes that are on their mind, and then… we will do that for about 30 minutes, and then we’ll start taking live questions. If you want to ask a question at any time during the webcast, you can just type the question into the Q&A box on your screen, and click Submit. And as I mentioned, we’ll answer those during the latter half of the presentation. For continuing education credits, live attendance at today’s webcast qualifies for one hour of CFP and/or CIMA continuing education credit if you’ve watched for a minimum of 50 minutes. That means if you’re watching… you aren’t eligible for CE credit if you’re watching a replay. To get CFP credit, please enter your CFP ID Number in the window that should be on your screen right now. In case you don’t see it, don’t worry. You should see it again towards the end of the webcast. And then Schwab will submit your credit to the CFP Board on your behalf. For CIMA credit, you’ll have to submit that on your own. Approximately 50 minutes after the show started the direction for how to submit it can be found in the CIMA widget that will be appearing at the bottom of your screen. Finally, we’ve got one more option for people needing proof of attendance for their respective boards, and that is called the… the widget is called the Certificate of Attendance, and that’s found at the bottom of your screen in the Widget dock. The certificate will be available for 50 minutes after… after 50 minutes of attendance.

Before we get to the speakers, I want to call your attention to a couple of things on the webcast console. In the top right-hand corner, you’ll find a link to our latest investment outlook for advisors, and in the bottom right you’ll find links to additional resources, including a chart on international investing opportunities.

So our speakers today are Liz Ann Sonders, our Chief Investment Strategist; Kathy Jones, our Chief Fixed Income Strategist; Collin Martin, our Head of Fixed Income Research and Strategy; Michelle Gibley, our Director of International Equities; and Jim Ferraoioli. He’s also director here, and he’s our cryptocurrency strategist.

So Liz Ann, let’s start with you. Maybe why don’t we start with the big picture economy? What are your thoughts on where we are in the economic cycle, and whether kind of the K-shaped descriptor that a lot of people are using, do you think that really still applies?

LIZ ANN SONDERS: Yeah, I do, for the most part. And this has been much discussed, so I won’t go into a lot of minute detail on where we’re seeing the K. But at a high level, a lot of focus on the K within the consumer side of the economy, not just high income versus low income, but feeders related to that. So high income folks tend to be the asset owners. We’ve had a tremendous amount of appreciation in markets, so you’ve had that double benefit accruing to higher income people, given that they get the asset appreciation too, versus lower income. That has a feeder to some degree from inflation too, because if you break down inflation statistics we’ve had over the last several years, a number of Ks develop. You know, services versus goods inflation. More recently you can look at a big divergence between discretionary components of inflation and non-discretionary components, so needs versus wants. And we also know that lower income people spend a disproportionate amount of their take-home pay on those non-discretionary items and goods and services, so they get disproportionately hurt. You can see it within capital spending, much discussion of that, AI versus non-AI. We’re starting to see a little bit of a pickup in non-AI related capex, but I would expect that divergence to continue. You can even see it in terms of interest rates, monetary policy, where regardless of whether the Fed is lowering or raising interest rates, that has different impacts on different constituents within the economy, depending on whether you’re on the borrowing end of the spectrum or the saving end of the spectrum.

So I think we may start to see some convergence but not much. And I’ll end with a very recent example. Yesterday, the ISM Manufacturing Index came out. It was a very positive surprise that the ISM overall index jumped back above 50. It had been in the 40s for quite some time, suggesting still contraction. You saw new orders jump as well. The employment reading jumped. Then you look at the verbatim comments of the purchasing managers that are surveyed on a monthly basis, and you would think you were talking, or listening to a completely different crowd of people because it was really dour, the verbatim comments from companies. So either that ISM reading is a fluke or we have another example like we do with the difference between consumer confidence and consumer spending, what they’re saying and what they’re doing are a bit disconnected. So that’s something I’m going to keep an eye on looking ahead.

MARK: Liz Ann, you mentioned AI in your answer to the previous question. Could you expand on that a little bit and tell us a little bit more about how you think about its affecting capex, productivity, earnings of not only the AI companies, but some of the companies that are using their products?

LIZ ANN: Yeah, Mark, the latter part of that question I think is the key point. I’ve been talking about the sort of AI cycle as being brought to you by three Cs. So you had the very obvious create part of the cycle. That goes back to 2022, and the ChatGPT release, and the hyperscalers. It was the create phase of this thing we know of as AI. Then I think that that sort of didn’t really morph into but broadened out, and we then had the experience of the catalyze phase of AI, and that was the build out. That was the growth in data centers and the tie into the energy needs associated with that. Now I think we’re in the cultivate phase of AI, where there’s at least as much focus on the beneficiaries of AI. And we’re seeing that throughout earning season, not just a lot of AI-related questions from analysts to the companies that are the picks and shovels, the hyperscalers right in the meat of it, but questions across the spectrum of companies and industries, ‘How have you brought AI into the mix?’ ‘How are you using it? ‘ ‘What are the implications for your cost structure, particularly labor costs?’ ‘Are you starting to see benefits actually show up in a quantifiable way in earnings and productivity?’ And we’re starting to see that the answer to that is yes. It’s yet to be a significant relationship that we can quantify in terms of AI was specifically the reason why we expanded our profit margins or we saw this greater boost to productivity, but in the aggregate, the latest productivity numbers that we got was close to 5% growth in productivity. That’s not all AI, but there is absolutely a component of it.

There is, though, a re-rating that’s happening to some degree. Ongoing concern about the financing model of circularity of financing. There becomes some poster children for that, Oracle being an example, just a complete round-trip in the stock price, and concerns about the shift from what had been a cashflow-financed boom, to now one that is being financed more on debt, and maybe a legitimate concern that all the original players in this were competing for what was sort of a growing pie, and now it’s a little more of competition for how a non-growing pie is going to be sliced up. So that’s part of the reason why we’ve seen this broadening out to a bigger picture focus on who are the beneficiaries, more so than just who are the creators.

MARK: Yeah, Liz Ann, for a long time it’s just been Mag 7, Mag 7, Mag 7. We get a million questions about those companies. But tell me a little bit more about this kind of broadening out trade, and you think that has… do you think that has legs, or is it just kind of a blip in the road?

LIZ ANN: Yeah. No, I think it does have legs, and it’s not a brand new story, it’s not a calendar year 2026 story. Even in 2025, only two of the Mag 7 outperformed the S&P index itself, and the best performer was the 75^th… or the best performer within the Mag 7 was only the 75^th best performer, and that was Alphabet, in the overall S&P index.

And that brings up something that we’ve been pointing out a lot, which is you have to differentiate between these mega-caps and their contribution to index returns, cap-0weighted index returns, versus their price performance, and there’s a big spread there. That’s carried into 2026 as well. So right now, the Mag 7, all seven stocks are within the top 10 in terms of contribution to S&P returns, but that’s largely a function of the multiplier of their very large-cap size. The best performer within the Mag 7 is only ranked 110^th in terms of price performance. So that’s important for individual investors to think about because individual investors are not fund managers being benchmarked against the cap-weighted S&P, they’re not at the mercy of the construction of the indexes, so they can widen the lens. And I think that’s to some degree what’s being done. We’re seeing leadership shift away from sectors like tech, into the more traditionally cyclical sectors like industrials and energy and materials, and that’s working its way down into the types of stocks that are performing well, equal-weight doing better than cap-weight, small-cap outperforming large-cap.

And I do, Mark, think that that has legs. That doesn’t mean in a linear way, where every week and every month you’re going to see small-cap outperform large-cap, equal-weight, outperform cap-weighted. But I think we’re in a sort of a general shift because the fundamentals justify that kind of a… a valuation re-rating happening up the mega-cap scale and more opportunities being found as we think about AI more broadly in areas that until recently were the underperforming areas. So I think there is legs to that kind of trade.

MARK: Great. Thank you, Liz Ann. Let’s bring in you, Kathy. I’ve got a few questions for you. But before we do that, I just wanted to point out that today is your last market talk call. Kathy will be retiring at the end of March. It’s been an absolute privilege for really working with you, learning from you for 15 years. Thank you on behalf of all the Schwab, all the Schwab clients out there for your thousands of reports, and media appearances, and client events, webcasts like this one. It’s just been an amazing body of work. So thank you for all that. And maybe tell us a little bit about what’s next for you.

KATHY JONES: Well, thank you, Mark. It was a wonderful opportunity to work at Schwab, and I really have appreciated the steady hand you provided for the Schwab Center for Financial Research over these years amid myriad changes. You’ve always been a good, rock solid leader of the group. And of course I’ve appreciated your intellectual curiosity and your sarcastic sense of humor, which helped mitigate some of the tougher times. So I appreciate that. And of course I’m really grateful for the colleagues that I’ve had, just this brilliant group to be working with, people who are really, really dedicated to doing the best for clients. And I’m happy and very pleased to say that Collin Martin, who has been a friend and a colleague for nearly 20 years, will be taking my place. I’m sure he’s going to do a fantastic job.

In terms of the future, I’m going to chill for a little bit. I don’t have any solid plan, other than to not work for a little while. That is my plan. That’s retirement in my book.

MARK: It sounds pretty good. Well, before then, what are your thoughts on Kevin Warsh, who presumably will have a new job at some point as the Chairman of the Fed? What do you think the path forward is going to be, assuming at some point he’s installed as Chair?

KATHY: You know, I don’t think it’s clear. He’s changed his views a couple of times over the years. So we have to see kind of which viewpoint he’s running with at the moment. We do know that he’s been very loud about being opposed to the size of the Fed’s balance sheet. He wants to see it smaller, and he wants to reduce short-term interest rates in order to help Main Street, is the way he puts it. Shrinking the balance sheet can be done. It’s just it’s a little more complicated than it might sound. The Fed has reduced it by a couple trillion dollars from its peak level, but it did run into some problems in the process in 2019, with a scarcity of funds in the financial system, which is why they’ve kind of ramped down that process. So when the balance sheet gets too small, you don’t have enough reserves in the system for smooth transactions to take place and you can get some sharp movements in T-bills and other short-term instruments that create problems for banks and money market funds, etc. So the Fed has adopted this ample reserves scheme in order to provide… make sure that there’s just enough reserves in the system, and that requires a relatively large balance sheet. It’s also a bigger economy than it was years ago. We have a $31 trillion economy, so presumably the balance sheet tends to sort of grow along with the economy.

But I think the biggest question for me is not around that, which I think will require a robust conversation and planning, but he has a proposal. He’s mentioned wanting a new Treasury Fed accord, similar to that that was adopted in 1951, in order to finance the debt from World War II, and the Treasury sort of took control and the Fed held down interest rates, so that debt could be paid down. Again, that’s a question in my mind as to how that would work in this era, and whether that impinges on Fed independence. So something I think the markets will be keen on understanding.

For now, I think the committee will continue to do what they have been doing, hold policy steady, and wait for more evidence that inflation is coming down or unemployment’s going up before making a change. So it will be some time before he takes the role anyway, I’m going to be watching the congressional committee that would vet him to see how he connects the dots on his various theories.

So potentially very big change, but it really remains to be seen what the North Star is that’s guiding his view of how the Fed should function, not just in setting interest rate policy, but in the broader economy.

MARK: And Kathy, despite all the drama that it’s been surrounding the Fed for the last several months, and a lot of the headline economic news, my sense is the bond market hasn’t really done all that much. It’s been fairly tranquil, fairly range-bound. What do you make of that? Do you think that’s going to continue?

KATHY: Yeah, it’s interesting, the bond market has really been overall sort of caught in this range for quite some time. Despite all the minute to minute policy changes and things that have been going on, it’s been relatively low volatility for several months, with the occasional… with the occasional burst in volatility, but overall, not that reactionary to the news. I think the big… you know, part of it is, look, we have a situation where the unemployment rate is still low, inflation is steady but too high, and the market doesn’t know really what to do with that combination, so it’s doing nothing. But the dominant trend has been the steepening of the yield curve, and I think that that continues. We have had a softer dollar, we have rising deficits to finance, and we have stubbornly high inflation, which means that to attract new buyers into the long end, you know, yields have to stay elevated or even work a bit higher. At the short end, though, we have the promise of the Fed cutting rates, so… down the road at some stage of the game, although timing keeps getting pushed back a bit. So I think that steepening of the yield curve is the main thing going on in the market right now. It’s keeping yields sort of range-bound, but I think that’s the dominant trend we’re going to be looking at.

MARK: Last question for you, Kathy, and it’s one you suggested. What effect does the rise in Japanese bond yields have on the US market?

KATHY: Yeah, this is a question we’ve gotten a lot, so I thought it would be worth addressing here. So as most of you know, Japanese bonds were held, bond yields were held down by purchases. The government owned nearly the entire bond market at one point because they were coming out of this deflationary, or trying to get out of this deflationary environment after their big debt blow-up years and years ago. So they adopted zero interest rates and the very heavy hand in terms of keeping interest rates low in hope of boosting the economy. They have finally, after all these years, started to pull back from that because inflation has finally picked up, and they’ve been allowing rates to rise. And that shift from having ultra-low interest rates in one of the world’s biggest economies to positive interest rates and rising supply of bonds has meant that that anchor is lifting, and is helping to lift yields all over the globe, and particularly in the developed markets. And then you combine that with the fact that Japan is a huge net investor in other bond markets, particularly in the US treasury market, that has an implication too, because now we have to attract foreign capital with higher yields to make up for the shift that’s taken place in Japan.

So far it’s been a reasonably orderly process. We’ve had a few glitches along the way, and the recent political change has given people a lot of pause because the prime minister is proposing a more expansive fiscal policy, which could mean that Japanese yields rise even more. So it’s had an effect on the dollar-yen, where those carry trades are coming undone, and global bond yields, and particularly in the US. So I think that that’s another factor that’s kind of… underlying factor that’s keeping longer term yields elevated.

MARK: Alright, thank you. Thank you, Kathy.

Collin, I’ve got a few questions for you. How should investors approach some of the riskier aspects, or the riskier segments of the bond market, given that, as you’ve pointed out, many times the spreads are so low?

COLLIN MARTIN: Yeah, that’s right, Mark. Spreads are still really low pretty much across the risk spectrum right now. And if we go back a year, probably even two years, we’ve been relatively neutral on most risky assets. Not saying you needed to avoid them, but not saying that there was necessarily a ton of opportunity there. Our view hasn’t changed too much, although we’re acknowledging that the economy remains resilient, and we think it might be okay to take a little bit of risk.

So given that sort of outlook, one area we like to highlight, and we’ve been highlighting for a while, is investment-grade corporate bonds. Their yields are still pretty attractive. Depending on the actual credit rating, maturity, you can get yields in the 4-1/2- to 5% area, maybe even over 5% if you’re looking to take a little credit risk, maybe in the triple-B area. Even though we’ve seen rates rise and borrowing costs rise for corporations, for the most part, balance sheets are in healthy shape. There’s a lot of liquid assets on their balance sheets. Corporate earnings and profits continue to grow. We look at data from the Bureau of Economic Analysis, and corporate profits keep hitting new all-time highs. So companies are making money, and they can remain current on their liabilities.

Now, I mentioned the idea of taking a little risk. So given the resilient economy, and the fact that US stocks continue to rise, we do think it’s appropriate to take some risk. And some areas we’ve identified are high-yield bonds and preferred securities. Now, high-yield is an area that we have been a little bit cautious on. So even though that they’ve performed well, we have seen defaults pick up over the past two to three years, mainly after the Fed began to raise interest rates. But it hasn’t had a discernible impact on the high-yield bond market. They’ve continued to outperform investment-grade corporates and treasuries for the past few years.

And again, on the spread idea Mark, yes, spreads are still low. We’re looking at spreads in the 2-1/2-, 2.6%, 2.7% area. Those are near all-time lows, but I think that is indicative of the strength in corporate balance sheets and the resilient economy. And just the presence of low spreads doesn’t mean they necessarily need to reverse and move higher. It does limit the potential outperformance, but they can continue to outperform again as the economy continues to grow. So we think you can take a little risk for your clients who are willing to take that risk with high-yield bonds and preferred securities. And there’s more interest rate risk there, but our outlook for long-term yields, as Kathy mentioned, is for them to kind of stay range-bound for the near term.

When I talk about taking a little bit of risk, it doesn’t mean all riskier parts of the bond market. And we’ve started to see a divergence in bank loans and high-yield bonds, even though they’re both considered leveraged, financed, sub-investment-grade, junk issues. The leveraged loan space has really two things going against them right now. One is they have floating coupon rates, so if the Fed continues to cut rates later this year, you’ll likely see your income, or coupon payments decline. But the credit rating breakdown is a little bit different. If we look at the high-yield index, it’s relatively highly rated within that high-yield spectrum. About 55% of the issuers in the Bloomberg high-yield corporate bond index are rated double-B. So about 45% or so are single-B or lower. In the loan index, there’s a Bloomberg US Leveraged Loan Index, about 75% are single-B or lower. And when we look at what the defaults we’ve seen over the past few years, a lot of them have really been in the loan space, as opposed to the high-yield space. So again, kind of summing that up, if you have clients looking to take a little risk, we think there is still potential with high-yield bonds and preferred securities.

MARK: Collin, what are your thoughts on the mortgages, mortgage-backed securities, given that Fanny and Freddie have been starting to buy up some of those?

COLLIN: Yeah. Well, the Fanny and Freddie news has already impacted the market even though it’s just started. But the announcement alone was enough to bring credit spreads… or mortgage-backed spreads down near their all-time lows. So if you look at the relative yields that they’re offering compared to comparable treasuries, they’re only at 15 basis points or so. So they’re still positive, mainly due to the fact that most agency mortgage-backed securities are not backed by the full faith and credit of the US government, but there’s a lot of nuances there in terms of prepayments, extension risk, things like that. But the relative yields you’re earning have come down sharply. So a lot of the opportunity, potential positive impact has already occurred. Then you have the flip side, and Kathy went into this before about what a Kevin Warsh as Fed Governor might mean for the balance sheets. And if the Fed were to shrink its balance sheet more than we see right now, there’s a lot of mortgages that are on the balance sheet. There’s still about 2 trillion or so. So that would kind of work against what’s happening with the Fannie and Freddie news.

Now, one thing we’re looking at with mortgages is there’s still that asymmetric risk profile. If we do see intermediate- and long-term yields fall, the potential upside would be more limited with mortgages because of the pre-payment option. Now, most of the mortgage-backed security market is in lower coupon issues, so we’d still see some potential appreciation. We need to see mortgage rates fall pretty sharply before it would limit the potential price appreciation, but there is still some sort of limit. But if we see risks to higher yields, whether it’s Japan or other global bond issues, whether it’s sticky inflation, whether it’s budget concerns, they don’t have that support kind of capping the downsides.

So that’s something to consider. The yields are relatively attractive, around 4-1/2% or so, Mark, but from a relative attractiveness compared to other high-quality bonds, I don’t think there’s much juice left to squeeze.

MARK: Last question for you, Collin, and then we’ll go to Michelle. What are your thoughts on TIPS, given that inflation has been nudging ever so slowly down a little bit from some of its earlier highs?

COLLIN: Yeah, we think TIPS can still make sense, But as you mentioned, if inflation, as it has been nudging ever so slowly, it’s important to look at which inflation indicator we’re tracking because TIPS are directly tied to the Consumer Price Index, and that has come down a little bit. The headline index is around 2.7% on a year-over-year basis. And breakeven rates, they’ve been hovering in a tight range for a while, whether it’s five- or 10-year TIPS breakevens. And again, if you’re not too familiar with TIPS, that breakeven rate is the difference between a nominal treasury yield and a TIPS yield, but it’s what inflation would need to average over the life of that TIPS for it to outperform the nominal treasury. And just over the past month or so, we’ve seen it pick up a lot over the past… for two- and five-year TIPS. So it means the hurdle rate for outperformance is a little bit higher.

So we think they can make sense, but they’re less attractive now than they were, say, six months ago or so when breakevens were a little bit lower and inflation was a little bit higher. If you are considering TIPS for your clients, we always think it makes sense to just compare them to treasuries because they have similar credit risk, they’re backed by the full faith and credit of the US government.

So when we’re considering how to add TIPS to a portfolio, usually it’s we’re tweaking our nominal treasury allocation versus comparing them to munis or corporates or something like that based on the risk and return profile. But real yields are still positive. And if you have clients, or if you’re worried about inflation picking up, the yields offered today with whether it’s a five-year TIPS or 10-year TIPS, they’re positive. Five-year TIPS are around 1-1/4%. Ten-year TIPS are close to 2%. So if you buy individual TIPS and you hold them to maturity, you can lock in that positive real yield, meaning you’ll beat inflation if held to maturity, regardless of what inflation does. So we know a lot of investors, a lot of individuals are always worried about inflation. And given those positive real yields today, we do think they can make sense just to protect in case inflation stays sticky, or worse, re-accelerates from here.

MARK: Thanks, Collin.

Michelle, I’ve got a couple of questions for you. First one is really kind of a two-parter here. Global interconnectedness is weakening. How are other countries kind of responding to that and the changing relationship that they have with the United States? And that’s the first part of the question, and the second part, what are the investing implications of that?

MICHELLE GIBLEY: Yeah, we saw this last year. Other countries are really stepping up the pace to diversify away from the US, they’re forging alliances with each other, and that trend is continuing. We’ve had already this year, we’re just a little more than a month in, we’ve had some major trade announcements and some smaller agreements. The mother of all trade deals is the EU and India broke nearly two decades of deadlock signing a historic free trade agreement covering 2 billion people and a quarter of global GDP. So India is going to eliminate or sharply reduce tariffs on 97% of EU goods exports. And then European automotive companies could be the beneficiary of that. The EU also signed a free trade deal with Mercosur, a group of South American countries, that took 30 years to negotiate. The EU is considering the possibility of minimum prices on Chinese electric vehicles, and that’s a shift away from high tariffs. And then Canada has agreed with China to reduce tariffs on a list of goods, and also signed an agreement with South Korea to advance Korean automotive manufacturing in Canada, and also cooperate on critical minerals and energy. We also had Keir Starmer, the first visit by the UK Prime Minister to China last week, first since 2018. And then the South Korean president met with Chinese President XI to discuss full-scale restoration of Korean-China relations. So other countries are not sitting still. And there are several investing implications. The first relates to the decreased support by the US to underwrite military security for Europe. That resulted in NATO more than doubling its target for defense spending as a percentage of GDP back in June. So they’re going now from 2% to 5% by 2035. And we’re seeing defense spending potentially now a growth industry. Now, Europe is likely to prioritize European defense contractors. And we’re seeing defense contractors in Japan and Korea also experience increased opportunities, as governments in those countries also increase defense spending.

And then the other part is that we could see a shifting away from dollar-denominated assets. Now, we’re not suggesting a sell America trade, but rather more of a hedge. We’re seeing more move to hedge exposure to the US dollar by diversifying investment portfolios and currency holdings. And the mirror of a decline in the dollar is a stronger foreign currency. So for example, a stronger Euro relative to the dollar means returns earned overseas and Euros exchanges into more dollars, and that boost returns for US investors. And the weak dollar is part of our favorable outlook for both developed market and emerging market international stocks.

MARK: So Michelle, international stocks, both developed and emerging markets, they’re outperforming again this year. How much of that is due to, as you just mentioned, the weakness of the dollar, and how much is due to other factors?

MICHELLE: Yeah, it’s both, really. And just thinking back to last year, the dollar added 1,000 basis points to international stock performance, outperformance, but overall the EAFE outperformed the S&P 500 by 1,300 basis points. So currency was a lot of it, but not all of it. This year, EAFE is also outperforming by about 277 basis points through yesterday. 170 of that is from the dollar. Emerging markets are outperforming even more.

But if we focus just on this year, there are four main factors for the outperformance. One is the underperformance of technology, which is a much lower weight in EAFE, just 8% of the EAFE Index versus 33% in the S&P. A larger weight in industrials, which is outperforming. It’s 19% of EAFE versus 9% for the S&P. Also, better performance by financials overseas, and that’s the largest weight in the EAFE Index at 25%. And then of course the weaker dollar.

For emerging markets, they’re benefiting from a large weight in AI-related semiconductor and memory names in Taiwan and South Korea. Also benefiting from optimism about China’s ability to innovate. We had that wake-up call last year with DeepSeek. And there’s optimism about Chinese company’s ability to adopt AI into their businesses. And China has the advantage of plentiful low-cost electricity, which is a key AI input.

Both EAFE and EM are trading at discounts to the S&P 500. They’re trading at 16 times and 14 times next 12-month earnings, respectively, relative to 22 times for the S&P, and that’s also helping their performance.

MARK: Great, thank you. Thank you, Michelle.

Jim, let’s bring you in. I’ve got a few questions, starting with Bitcoin. It’s certainly been a rough few weeks for Bitcoin. Tell me, we’ve been talking internally about some things you’ve been putting together, showing kind of a general theory of what drives prices in cryptocurrencies. Maybe you could describe that a little bit, and then apply it to the recent weakness we’ve seen in Bitcoin.

JIM FERRAIOLI: So Bitcoin, just like any other asset, can be impacted by different factors. Some of the big macro factors that have historically been an impact on Bitcoin have been money supply, interest rates, the dollar, central bank liquidity, things like that. They can push; they can pull on Bitcoin in different directions. Looking at them all, they’re pretty supportive of Bitcoin right here. So a big question that I’ve been getting recently is why hasn’t Bitcoin been working? If you look at the crypto market, it’s largely a momentum-driven market. It doesn’t trade on fundamentals. There’s also a large liquid derivatives market on top of the spot markets. Last fall, you had a big de-leveraging event. In a period of a couple days, about $20 billion in levered futures got liquidated. And so after that we saw Bitcoin correct about 35% from its all-time high, and it really sapped the momentum out of the market. And so since then it’s been trading relatively range-bound as crypto investors kind of look for a new narrative to maybe reignite upward momentum.

MARK: Jim, do you see any connection with some of the stuff we’ve been seeing going on in the gold and silver markets? There was a lot of talk about sort of the debasement trade that’s kind of unwinding a little bit. Any relationship there with what we’re seeing in Bitcoin?

JIM: So yeah, Bitcoin is viewed as a debasement asset, and the debasement trade was centered around this idea that specifically, the US, its fiscal health has been deteriorating, there’s issues with debt and deficit. And how do you solve this, right? You inflate your way out of it. And so in that type of an environment, historically hard assets have done well. Precious metals are supply-constrained assets. So that’s where they got the bid.

Now, that trade, which started out maybe as a debasement trade, it became the momentum trade. And as more investors got into it, we saw prices rise parabolically.

So as I stated before, crypto is a momentum market, and so there are crypto exchanges where you can buy tokenized gold, tokenized silver, and you can also trade silver and other metals futures on that. And so in this environment where Bitcoin is actually trading range-bound and in a market that’s appealing for the debasement trade, what you saw was investors post their Bitcoin as collateral to open futures positions into these metals. And ultimately, last Friday what happened? We saw the prices correct. In crypto, margin trading is fully collateralized, and once you are underwater, you get automatically liquidated. And so as the metals prices corrected, you had forced liquidations on the margin side. And so that’s what ultimately pressured Bitcoin over the weekend. There were about $5 billion in liquidations over the weekend.

So that’s the connection. There shouldn’t theoretically be a connection between Bitcoin and metals, but the way that these trades were funded is kind of where that relationship came from in recent months.

MARK: So last question for you, Jim, and then we’ll start taking the questions that people have submitted. What does it take to see some of the, as you mentioned, momentum-driven market, what do you think needs to happen for there to be some positive momentum back into Bitcoin?

JIM: Right now, the Senate is working on the Clarity Act. That’s the market structure bill. And the passing of that would be a major fundamental catalyst. The crypto market is largely retail investors. Institutions are slowly getting involved, but there’s not a lot of active institutional investors, like mutual funds, investors of those types that are involved in this market yet. And they’re unlikely to change their investment protocols until there’s clear regulatory clarity. And so that would be a big catalyst. Now, what, again, people look for in a momentum-driven market is not necessarily the result. They’re looking for the narrative change. And that’s why within the crypto community, this is seen as a big driver, and potentially a way to reignite momentum later in the year.

MARK: Alright, thank you. Thank you, Jim.

Let’s take some live questions. And Kathy, I’m going to start out with you. ‘How do you view treasury demand at current levels, and what’s your outlook on the shape of the yield curve?’

KATHY: Yeah, I don’t think there’s been a significant shift in treasury demand. The only way you can really measure treasury demand is by the yield and… you know, relative to the supply. And yields have been pretty steady, maybe inching up a bit as you move out the yield curve, but I don’t see that inflows… outflows have shifted significantly. But if the Fed is going to shift… lower its balance sheet, typically they will do that with MBS, and other longer duration bond, so we may see some shift in the yield curve based on that. But in general, we’re still looking for a steepening yield curve, don’t see a big shift in demand. We’ve had one rough auction, I think, in the last year, and since then the auctions have gone reasonably well. So not a lot of evidence that things have changed dramatically.

MARK: Thanks, Kathy.

Liz Ann, I’ll send a couple of gold questions your way. ‘Gold and silver have been volatile lately. Is this due to indexes, rebalancing, or something else happening among precious metals?’ And we’ve got another question here. ‘What happened last week with gold and silver?’

LIZ ANN: Yeah, so I’ll kind of collect them together. The fundamentals that initially were supportive of gold’s rise starting, which started before silver’s, those really haven’t changed. It depends on the perspective of whoever is buying gold as to whether they see it as a geopolitical uncertainty hedge of some sort, whether it’s the part of the so-called dollar debasement or sell America trade, central banks diversifying in the case of, say, China, away from such a dominant holding in treasuries toward other assets inclusive of having become big gold buyers. Silver, more recently, also had a little bit of an industrial fundamental support to it, given that it’s used in a lot of things that go into the AI build-out. But it also had more of a supply demand imbalance because of that industrial demand.

The problem more recently is that both went absolutely parabolic. Speculators had stepped in, retail traders, FOMO kicked in, so you really had just incredibly crowded trades. At the same time, leverage had gone way up. And margin requirements were raised recently for both gold and silver, so some of the leverage traders had to start stepping out of those positions because of that increased margin requirement. So I think we had what is often described as sort of a clearing event. It was just quite violent. Now we’re seeing a little bit of a rebound on a day like today.

I think some of the triggers. You know, Kathy already talked in detail about Kevin Warsh, and the views he has expressed in the past, but at least knee-jerk was thinking, okay, he’s on the more hawkish end of the spectrum. You saw a little bit of a lift in the dollar. And I think a lot of lessons, or old lessons, are being retaught again about if you get a move up in real rates, you get a move up in the dollar that sometimes is to the detriment of precious metals.

We may not be past the clearing event. Some of those fundamentals still exist. Maybe you see a shift from weaker hands to stronger hands. But trying to time when that clearing event is past us and we can go back to relying on fundamentals, I just don’t have the ability to see that in my very cloudy crystal ball. But that’s basically what happened in the last few days.

MARK: Great, thank you. Thank you, Liz Ann.

Let’s see, Collin, given we had that question earlier about mortgages, ‘What are your thoughts on mortgages, mortgage-backed securities, given Kevin Walsh wants to reduce the Fed’s balance sheet, especially the mortgage-backed security holdings? It seems like that adds pressure to mortgage yields.’ Collin, what do you think?

COLLIN: Yeah, I’m looking at the question. It could add pressure to mortgage yields. I mean the Fed is still a big holder, not really a buyer anymore, but a big holder of mortgage-backed securities. If they were to do the opposite and start selling them… right now, they’re just letting them mature little by little. If they were to make a more active or take a more active approach to shrinking their mortgage-backed security portfolio, then we’d probably see mortgage yields rise.

So that’s why we’re a little bit cautious on mortgages right now. Low relative spreads and those asymmetric risks that I mentioned before. If we see long-term yields fall, you might not see as much price appreciation with mortgages, and you might with a fixed rate treasury. But then if yields rise, mortgage can mortgage rates can… mortgage-backed securities can suffer. So if we’re looking about how to position in a portfolio, we’re less enthusiastic about mortgages today than we were just three or six months ago, when relative yields were higher and absolute yields were higher. So a little bit more nuanced today, but less attractive now. And there are risks to the downside if we were to see a shift in the Fed’s balance sheet strategy.

MARK: Thanks, Collin.

Michelle, this one is for you. ‘Do you think that the Supreme Court…’ maybe, it’s… ‘Do you think… if the Supreme Court rules against tariffs, what are the implications for the markets?’

MICHELLE: Yeah, I think we’ll be getting this… potentially, the earliest would be late this month, the decision. They may rule against the use of IEEPA tariffs. But that doesn’t mean that tariffs are going away, and I think the markets know that. At the November 5^th hearing, the justices sounded skeptical about the use of emergency powers to use for those reciprocal tariffs, but they’ve also stated that… the Trump administration has stated they have other methods, and they intend to use them to quickly add back a large percentage of the tariffs. We could have this chaotic period of refunds. We don’t really know how that’s going to happen. But tariffs are likely not going away.

MARK: Thank you, Michelle.

Let’s see, ‘Does Kathy have a reliable custodian for her retirement assets?’ Well, I hope it’s Schwab. So we’ll go to the next question here.

‘Kevin Warsh has been a critic of the current Fed, and wants to reduce the Fed’s balance sheet. If he starts to reduce the balance sheet, should we expect the market to react as it has when the Fed has gone through quantitative tightening?’

KATHY: You know, I think the thing is that the Fed has been reducing the balance sheet. They really just stopped the process recently. So during that time, we had both… you know, mostly a steepening yield curve, occasionally a flattening yield curve, but mostly a steepening yield curve through much of that.

But I don’t think that that’s going to be the big driver for the market. I think if there were a sudden shift in the way… in the Fed’s holdings, I think the more… the near-term reaction is going to be a lot of volatility at the short end of the curve because they wouldn’t have the abundant reserves to manage the short-term volatility in the funding market. So you could see a lot of volatility in the short end of the curve, maybe reverberating through the long end of the curve.

Perhaps the market would take that as a signal of longer term tightening in policy and that could help long-term yields come down, but we’ve seen the market reaction to QE and QT be very different than what you would think would happen. So during QE, we actually saw the yield curve steepen because the expectation was that, ‘Oh, well the Fed is going to hold down yields, and that’s going to boost the economy.’ And so we actually saw a steeper yield curve, which is counterintuitive. Similar story with QT. Actually, market reaction to QT was pretty modest.

So it is hard to predict what the longer end of the yield curve might do. It will depend on a lot of the other stuff going on at the time. But if the announcement comes out that they’re doing QT again, that they’re going to resume reducing the size of the balance sheet, I would think, as Collin mentioned, you’re going to see mortgage spreads move, and see a lot of volatility of the short end unless they come up with a way to deal with the funding issues without ample reserves. So hard to predict what the long end is going to do. A lot will depend on the circumstances around it. But I think that in general… if I had to sum up what does Kevin Warsh’s nomination mean, if he were to get a lot of the things that he wanted from the committee, I think it would mean volatility.

MARK: Got it. Thank you, Kathy.

Liz Ann, ‘What’s your behavioral finance gem of the month?’

LIZ ANN: Okay, now I’m off mute. Yeah, I saw that question come in, and I thought about it. And I guess I would tie it to some of the comments I made with regard to what’s happened, the wild moves in precious metals in the last several days. And I think sometimes when you get these violent price moves, it’s much more evidence of positioning having changed, more so than fundamentals having changed. And I think these are healthy reminders, especially to maybe newer, younger retail traders, that momentum can kick in both on the downside and the upside.

MARK: Thank you, Liz Ann.

Jim, let’s see, this one is for you. ‘Can you extrapolate on the full-blown crypto winter we seem to be experiencing?’

JIM: So for those who aren’t familiar with the term ‘crypto winter,’ it refers to periods where Bitcoin has corrected 75% from its high. There’s been three throughout its history. In about 2014, a Japanese crypto exchange called Mt. Gox was hacked. That led to the first one. In 2018, there was another… there was a big bubble in initial coin offerings, and that bubble burst, and we saw Bitcoin correct again about 80%. And then the most recent one was in 2022. When the Fed started raising rates, the dollar strengthened, and ultimately, in the summer, a crypto exchange went under. And so there’s a debate as to whether we are in the midst of another crypto winter, but Bitcoin is down about 40% from its high.

So some of the things that I would point out is that over Bitcoin’s now 17-year history, it’s actually gotten less volatile as times goes on. So if we are in a crypto winter, there’s the potential that it won’t be as deep. The other thing to consider is Bitcoin is three times as volatile as the S&P 500. So if in a given year you would expect maybe a 10% correction in the S&P 500, a 30% correction should be what you expect at some point for Bitcoin. So it’s an ongoing debate and it’s unclear. I can’t predict the future to know if this goes further down or if it’ll stabilize, but that’s an ongoing debate right now in the digital assets community.

MARK: Great. Thanks, Jim.

Michelle, ‘China stock markets… China stock market long-term returns have been poor. Do you recommend emerging markets ex-China or just emerging markets with China?’

MICHELLE: Well, we prefer a diversified approach. I would say that emerging markets, in general, have more risk associated with them, and that’s why we like that diversified approach. In terms of China, you could say these very similar things to other countries. Its lower valuation has to do in part to less rule of law, less transparency for public companies and also economic data, some more government interference. So those are all reasons that we suggest it be a small percentage of your portfolio, EM, in general.

MARK: Alright, thank you. Thank you, Michelle.

So we’re getting near the end here and maybe we can wrap things up with one final question for each of you. What’s the kind of one or two things you want our viewers and listeners to take away from your remarks today? Liz Ann, why don’t we start with you?

LIZ ANN: I’d say the broadening out trade has legs and there’s fundamentals behind it. We already touched on the fact that AI and thinking around how it benefits sort of a broader swath of companies and industries, I think is part of it. But I also think that there’s a valuation angle, there’s a positioning angle, and I think that this idea of it being a more level playing field for active management relative to passive management, for equal-weight relative to cap-weight, and for stock-pickers out there, I think there’s a wider net that can be thrown in terms of where to find performance.

MARK: Thanks, Liz Ann.

Kathy, what are your thoughts?

KATHY: Yeah, I think we’re in the midst of a period of a lot of volatility in the bond market because we have the cross currents of different policies and policy proposals that are being debated, along with an economy that’s throwing off a lot of confusing signals. It’s healthy, but still with low employment. So it leaves policymakers in a bit of a pickle. And I think in an environment like that, sticking to intermediate-term duration and a mostly high quality portfolio, maybe tilting a little bit towards risk because we have a growing economy, but overall remaining intermediate-term, not taking a lot of tail risk in either direction, makes a lot of sense.

MARK: Thanks, Kathy.

Collin, what are your thoughts?

COLLIN: Yeah, I’ll build on Kathy’s comments about risk. And I think a way I would frame it is to cautiously take risk. We are not suggesting people dive in headfirst to high-yield or anything like that, but there still is a spread there. If you look at the high-yield market, for example, you get X… you know, yields above comparable treasuries in the 2-1/2- to 3% area. And that means that you’re already starting at an advantage. Now, building again on what Kathy said, we do expect volatility. So if we see spreads rise, you can see the prices of high-yield bonds fluctuate a little bit, fall relative to treasuries. But if you hold for a longer period of time, you know, six to 12 months, to actually earn that spread, we still think it can make sense. So cautiously take risk right now, but just be aware that maybe we see an increase in volatility this year.

MARK: Thank you, Collin.

Michelle, you’re up next.

MICHELLE: Yeah, we didn’t really talk about it today, but global economic growth has been pretty resilient, and that’s a benefit to international stocks, and they also have attractive valuations and could benefit from a weaker dollar. EM stocks, again, provide an opportunity to participate in AI at a lower valuation than in the US. And then in terms of risks, there’s a risk that the German fiscal stimulus is either slower or smaller than expected, and EM is also subject to similar AI risks as those in the US.

MARK: Thank you, Michelle.

Jim, you’re up.

JIM: Crypto is not right for everyone, but it’s a new and growing asset class. Some of the biggest financial institutions globally are adopting it, offering it to their clients. And so whether you think it’s appropriate for you or your clients or not, it’s still a great time to learn about cryptocurrency. Like I said, it’s fast-growing. It doesn’t appear to be going away anytime soon, and so just taking the time to learn a bit more would be helpful.

MARK: Thank you. Thank you, Jim.

Liz Ann, Kathy, Collin, Michelle, and Jim, thanks for your time today.

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