Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast. Unfortunately,
Speaker 1: for everyone involved, it's just me here today. Tracy Alloway
Speaker 1: has smartly decided to go on vacation, something that I
Speaker 1: probably should have done, but whatever. The good news is,
Speaker 1: I have two great guests in the studio with me
Speaker 1: today and we are going to be talking about some
Speaker 1: of our favorite market themes and stories from seventeen, which
Speaker 1: was a fascinating year. So no real reason to have
Speaker 1: a whole lot of banter from me. In the beginning.
Speaker 1: I'll bring in our guests. I'd like to bring in
Speaker 1: a Chris and Age. He's a markets editor here at Bloomberg.
Speaker 1: Chris and Matt Bosler, who is an economics reporter here
Speaker 1: at Bloomberg, And so between the two of them, I
Speaker 1: hope to have a discussion of picking their brains about
Speaker 1: what we really learned and what we really saw in Chris,
Speaker 1: let me start with you, what was in your view
Speaker 1: the big story of it's hard to be a stock
Speaker 1: market editor this year and not feel like the big
Speaker 1: overriding presence of two thousand seen was the way the
Speaker 1: lack of volatility interacted with both political scene and just
Speaker 1: the propensity of stocks to continually go up all year.
Speaker 1: I mean, it's a little it's somewhat of a dead
Speaker 1: horse at this point, but I mean that's what this
Speaker 1: year will be remembered for, people just basically getting angry
Speaker 1: at the market, basically for not being more chaotic, not
Speaker 1: registering more of the sort of political effect I think
Speaker 1: everyone else was feeling. I'm glad you brought that up, because,
Speaker 1: of course, this is something that Tracy and I talk
Speaker 1: a lot about on the show. The frustration that we
Speaker 1: feel is people who cover markets. You know, we have
Speaker 1: these conversations every morning. I was like, what's our top
Speaker 1: story of the day. It's like, well, it's the same
Speaker 1: top stories it was yesterday. And not only was it
Speaker 1: the same top stories yesterday, no one really cared about
Speaker 1: it either. I mean, especially like for years and years
Speaker 1: after the crisis, like markets were these story and everyone
Speaker 1: was clicking on our stories, and this year it's like, yeah, Matt,
Speaker 1: you cover like the fixed income space. A lot of
Speaker 1: sort of crosses over with your eco beat. Is it
Speaker 1: a similar vibe in terms of the lack of volatility
Speaker 1: or how do you see the same thing. So we
Speaker 1: had two FED presidents just this morning on Bloomberg TV
Speaker 1: talking about you know, how they're looking at the flattening
Speaker 1: of the yelk curve and that's been a really reliable
Speaker 1: recession indicator in the past, and and so that's something
Speaker 1: that has them concerned. And so, you know, to some extense,
Speaker 1: the same story playing out in the fixed income markets
Speaker 1: of very low volatility yield curve flattening. But instead of
Speaker 1: you know, being sort of this benign, boring thing, it's
Speaker 1: actually causing a bunch of people to talk about is
Speaker 1: there a recession around the corner type of thing. And
Speaker 1: for all this recession talk, Chris like, it's still like
Speaker 1: no stock investors actually seemed to care about it, about
Speaker 1: the possibility of about the flattening, like these things that
Speaker 1: would like at one point maybe have seen like red flags,
Speaker 1: right like everything else, they don't care about the yield curve.
Speaker 1: You would have a hard time naming anything that they
Speaker 1: did care about. This year actually met for our listeners
Speaker 1: who aren't steeped in this. You know, we talk about
Speaker 1: the flattening yield curve a lot and how it's a
Speaker 1: classic recession indicator when it inverts. Can you give like
Speaker 1: the thirty second explanation of what it is that people
Speaker 1: look out for. What what is the flattening yield curve
Speaker 1: and why is it seen as something that potentially raises
Speaker 1: alarm bells? Sure, so that the yield curve is the
Speaker 1: difference between long term interest rates and short term interest rates, right,
Speaker 1: and so short term interest rates are kind of set
Speaker 1: by the Federal Reserve, the central Bank, and long term
Speaker 1: interest rates are kind of a reflection of where people
Speaker 1: think the central bank has ultimately going to take the
Speaker 1: short term interest rates. And so we're in a situation
Speaker 1: where the Fed is raising rates and you know, they're
Speaker 1: telling you that they're going to go to this more
Speaker 1: neutral level of interest rates, and so the yield curve
Speaker 1: is flattening a short term interest rates rise and get
Speaker 1: to that level of long term interest rates. Now, in
Speaker 1: the past, that's tended to be a pretty good recession indicator,
Speaker 1: just perhaps because the business cycle has tended to be
Speaker 1: of a similar length as the central banks tightening cycle.
Speaker 1: And so there's a bit of a you know, correlation
Speaker 1: causation question there. Does the yelker really reflect anything intrinsic
Speaker 1: about the probability of a recession or is it just
Speaker 1: that the central bank tends to raise interest rates over
Speaker 1: the course of an economic cycle, and then the economic
Speaker 1: cycle invariably ends at some point, so stock investors don't
Speaker 1: or equity investors or maybe no investors seem to care
Speaker 1: about that. Something goes that you mentioned Chris in the
Speaker 1: beginning that we obviously have to talk about is not
Speaker 1: only are there sort of like no concerns about anything economics,
Speaker 1: but politics. Absolutely extraordinary year for politics, geopolitics, all these
Speaker 1: elections that went on, and you would think that there
Speaker 1: would be some feedback loop or somehow that would be reflected.
Speaker 1: But as you said, nobody seems to care. Why does
Speaker 1: nobody care? So if we're talking about like literal favorite
Speaker 1: stories of the last twelve months, one story that I remember,
Speaker 1: and really everyone who works for me remembers because I
Speaker 1: bring it up about every other day was a blog
Speaker 1: post by Macroman Cameron christ and the m Live blog
Speaker 1: where he took some of these wedged political chaos indexes
Speaker 1: that exist these academics, these things that are piece good.
Speaker 1: He took one of those, and a standard story for
Speaker 1: the first half of two thousand and seventeen was look
Speaker 1: how they're going up and look how the vix is
Speaker 1: going down and basically this cannot stand. And and so
Speaker 1: he took the political Disorder Index and he decomposed it.
Speaker 1: He unpacked it and found out what all of its
Speaker 1: components were, and part of it was policy guidance and
Speaker 1: China and some economic stuff in enough, which he was like,
Speaker 1: makes sense. That's pretty volatile. You can see why it's
Speaker 1: going up priority of it. It was hilariously, we're media
Speaker 1: mentions of political disorder basically, so it's this big sort
Speaker 1: of echo chamber. I was worried that it was going
Speaker 1: to go there because then, of course that always makes me,
Speaker 1: it should make all of us feel guilty. We talk
Speaker 1: about this political volatility and all this stuff going on.
Speaker 1: How much is just us talking about it? Yeah, there
Speaker 1: is this echo chamber aspector. I don't think it's I
Speaker 1: think it's all unsurprising and basically forgivable. Like, what else
Speaker 1: is a news person you're gonna talk about in two
Speaker 1: thousand seventeen. Well, yeah, well, I mean I think the
Speaker 1: truth is that my view is the way it seems
Speaker 1: like there's one story and we all know what it is,
Speaker 1: and it's everything having to do with Trump, and there's
Speaker 1: no second story. And for a for people who are
Speaker 1: interested in the news and reporting. It's not ideal. Well,
Speaker 1: it's just it's unavoidable. There's just no no getting around
Speaker 1: getting away from it. But one thing that like, in
Speaker 1: terms of what drove this market and mad I know,
Speaker 1: you know, coming from the eco perspective, is all this
Speaker 1: noise aside, you old curviside politics aside. Things are good,
Speaker 1: Like around the world we talked about global synchronous growth,
Speaker 1: like things are pretty good, right, yeah, exactly, And it
Speaker 1: kind of goes back to the point, you know, you
Speaker 1: look at this flattening yield curve and it's supposed to
Speaker 1: be this recession indicator, but like you say, things look
Speaker 1: pretty good, and it's kind of hard looking around to see,
Speaker 1: you know, where that recession is going to come from.
Speaker 1: So I think it's it's more of these old narratives
Speaker 1: being busted, which we've been dealing with a lot this
Speaker 1: year and over the past few years. And earnings have
Speaker 1: been really good. Yeah. Another pretty good story that my
Speaker 1: team did during one of Trump's tweet fests about how
Speaker 1: great the TAO is was to look at how earnings
Speaker 1: estimates had evolved in two thousand seventeen, and you can
Speaker 1: make a pretty good case that what happened was that
Speaker 1: the earnings estimates that existed before election day were matched
Speaker 1: where you got to they're about thirty bucks a share
Speaker 1: in the SMP. That was the estimate before election day,
Speaker 1: and that's pretty much what happened. So did Trump cause that?
Speaker 1: I mean, you certainly say he didn't get in the
Speaker 1: way of those being hit, but earning scrow, however you
Speaker 1: frame it, was strong and the backbone of the rally.
Speaker 1: All right. So, for as much as we'd like to
Speaker 1: talk about how the markets ignored everything on an economic
Speaker 1: basis and an earnings basis, things were pretty good. Matt
Speaker 1: from the economic world, what was your favorite story of So,
Speaker 1: I think my favorite story of seen had to be
Speaker 1: just kind of the biggest story on our beat as well,
Speaker 1: which was this surprise shortfall and inflation, because everybody thought
Speaker 1: that inflation was going to continue going up this year
Speaker 1: because the labor market was getting tight and the unemployment
Speaker 1: rate was falling, and there's just been so much handwringing
Speaker 1: in the economics community this year over the fact that
Speaker 1: this relationship for some reason didn't hold up. And the
Speaker 1: reason why it's so interesting is it's kind of leading
Speaker 1: to all of these different theories. But you have this
Speaker 1: sort of protagonist in the FED at the center of
Speaker 1: the story, just sticking to its guns, but also kind
Speaker 1: of telling us kind of looking forward to next year.
Speaker 1: Next year, if things don't get back on track with
Speaker 1: inflation the way that we think they should, then we
Speaker 1: might have to have a rethink. So you mentioned there's
Speaker 1: all these different theories for why inflation hasn't picked up
Speaker 1: the way people expect. Various people have called this the
Speaker 1: inflation mystery, And do you have a favorite theory for
Speaker 1: why we haven't seen inflation. Well, I mean, I think
Speaker 1: if you just look at the data, what we're seeing
Speaker 1: is a slowdown in rental inflation, which is really always
Speaker 1: kind of the key component in inflation. And so that
Speaker 1: is an interesting story because a lot of the sort
Speaker 1: of build up in sort of the residential sector that
Speaker 1: we've seen in this expansion has been in apartments, right,
Speaker 1: the home ownership rate coming down, people moving into cities
Speaker 1: being renters more than owners, and so that's going to
Speaker 1: be a very interesting thing to see if that continues
Speaker 1: in or if we start to see you know, some
Speaker 1: more ownership going back up. And Chris, this lack of inflation.
Speaker 1: While it may cause people at the FED to wonder
Speaker 1: about their models and it may cause a lot of
Speaker 1: economist anxiety, investors have loved it because this is like
Speaker 1: the Goldilocks story. Well. Absolutely, I mean anything that results
Speaker 1: in the FED holding interest rates where they are I
Speaker 1: think they're happy about. If you look at like reasonable
Speaker 1: people can disagree about Trump's impact in the market. I
Speaker 1: think it's very hard to argue that one percent interest
Speaker 1: rates haven't been a great thing for stock investors. So
Speaker 1: as long as inflations hasn't been a threat, they've been
Speaker 1: able to maintain that. Are there any signs met that
Speaker 1: inflation is actually going to turn around, because it's not
Speaker 1: just this year that people have thought it was going
Speaker 1: to come. People have been warning about inflation literally forever.
Speaker 1: It seems like a good theory. There might eventually they
Speaker 1: might be right. Right, Yeah, absolutely, I mean they eventually
Speaker 1: might be. But to answer your question, no, there aren't
Speaker 1: really any signs that it's necessarily going to pick up
Speaker 1: when you look at the inflation data itself, and so
Speaker 1: you know, we have all of these indicators that we
Speaker 1: used to use to forecast and aation that worked better
Speaker 1: than they are now, and so it's kind of a
Speaker 1: wide open question as to whether they'll work again. Yeah,
Speaker 1: so this gets to the key question, how much is
Speaker 1: the economics community really preparing to sort of just rip
Speaker 1: up the old models, or like, are they really willing
Speaker 1: to take that step and say, we don't know? Yeah,
Speaker 1: that's a great question. I don't, you know, looking at
Speaker 1: what they have been working on, it's not clear that
Speaker 1: they have really a ready replacement that's going to be
Speaker 1: ready in six or twelve months time. So I think
Speaker 1: they're kind of really hoping against hope that things start
Speaker 1: to work out again the way that they used to
Speaker 1: or else it's if there's going to be exponentially more handringing. Potentially,
Speaker 1: it does feel like if we get to this point
Speaker 1: next year and there's like no inflation in ten, things
Speaker 1: are going to start to become really untenable for people. Yeah,
Speaker 1: it's already starting to sink in a little bit in
Speaker 1: that you see FED policymakers starting to come up with
Speaker 1: their own unorthodox theories of inflation. But you know, as
Speaker 1: yet no real economic work has been done on it,
Speaker 1: so it's just kind of hearsay at the moment. I
Speaker 1: guess all right, well, Chris and Matt, it was great
Speaker 1: to have you on this episode talking about the big
Speaker 1: themes for seventeen, the extraordinary lack of volatility, the flattening
Speaker 1: yield curve, the incredible lack of inflation despite economists and
Speaker 1: fed all predicting it would pick up. Really appreciate you
Speaker 1: both coming out. Thank you, and that has been our
Speaker 1: wrap up episode for seventeen, the big themes in markets
Speaker 1: and economics, and stay tuned next week where we're going
Speaker 1: to be tongue to Chris and Matt about what to
Speaker 1: watch for. And you can follow our guests on Twitter,
Speaker 1: Chris nag at Chris ag One and Matt Bosler at
Speaker 1: Bose bo E s Underscore and myself Joe Wisenthal on
Speaker 1: Twitter at The Stalwart and even though Tracy is not here,
Speaker 1: you could follow her at Tracy Ella. Thanks for listening,