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Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.

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Speaker 1: I'm Joe Wisenthald. Tracy Alloway is out this week unfortunately,

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Speaker 1: but with me in the studio here for today's episode,

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Speaker 1: I have Bloomberg macro strategist Cameron Christ and Bloomberg Cross

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Speaker 1: Asset reporter Luke Kawa, and I'm very excited to talk

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Speaker 1: to both of them because we are going to do

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Speaker 1: our year in review of markets, or basically just talk

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Speaker 1: about what the heck happened in markets this year, because

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Speaker 1: I think it was one of the most interesting times

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Speaker 1: for markets across many asset classes that we've had in

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Speaker 1: several years, maybe most interesting since or the financial crisis,

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Speaker 1: or maybe at least uh And I think a lot

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Speaker 1: of people have questions about what's going on, so hopefully

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Speaker 1: we will try to answer them. So Cameron and Luke,

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Speaker 1: thank you very much for joining us. So it's always

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Speaker 1: tough to disentangle reasons for market moves, and Cameron, I

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Speaker 1: think you're one of the most strident and sort of

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Speaker 1: pushing back against any attempt to do that at all. Nonetheless,

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Speaker 1: this year was characterized by a very sharp turn starting

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Speaker 1: in early October, where we saw some major winners just

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Speaker 1: completely fall out of bed text docs. US equities which

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Speaker 1: had been doing pretty well up until them, just started

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Speaker 1: getting relentlessly destroyed. What happened, well, I think you need

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Speaker 1: to look actually back to February, because we had a

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Speaker 1: very similar phenomenon in February, UH, and the genesis was

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Speaker 1: broadly similar, I think in both instances where you had

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Speaker 1: a performance of very good equity market performance that was

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Speaker 1: punctuated with a sharp rise in market interest rates, say

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Speaker 1: the tenure yield, and at the same time, inflammatory rhetoric

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Speaker 1: from the US president vsa V trading relationships with China,

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Speaker 1: and that is kind of a potent and lethal cocktail

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Speaker 1: for risky assets. And you had a market that was

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Speaker 1: out over at skis and if you you might not

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Speaker 1: be all neither one of you are probably old enough

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Speaker 1: to remember the old wild WARLD wide world of sports

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Speaker 1: intro where there was a ski jumper. Remember the thrill

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Speaker 1: of victory in January and over the summer, and then

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Speaker 1: the agony of defeat in sort of February and and

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Speaker 1: then October thenceforth. And so what people try to say, Oh,

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Speaker 1: is it the Fed? Is it UH trade? Basically you

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Speaker 1: can rely it's I think it's a combination of of

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Speaker 1: a number of things. I mean, we need to take

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Speaker 1: a step back and remember that the FED is in

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Speaker 1: the midst of a tightening cycle. Montary policy has gone

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Speaker 1: from unquestionably accommodative to arguably neutral. We had a similar

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Speaker 1: phenomenon obviously two thousand five. In both of those years

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Speaker 1: FED tightening years, the multiple of the SMP five hundred

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Speaker 1: fell pretty sharply, and this was just, I think, to

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Speaker 1: some extent, the latest iteration of that phenomenon. Luke, come

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Speaker 1: in here when we when we write the story of

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Speaker 1: this year, the story of this year will be the

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Speaker 1: huge blow up of the short fall trade, of the

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Speaker 1: trade that essentially you could make your living easily from

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Speaker 1: early through January. Early in the year, we had pretty

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Speaker 1: much every equity and overbought territory, and you know, things

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Speaker 1: were great. We blew past everyone's uh, everyone's und target

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Speaker 1: or at least like a quarter of analyst targets within

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Speaker 1: the first five sessions, and then it all blew up.

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Speaker 1: And then at two other points this year, two other

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Speaker 1: large market moves that you can attribute to really the

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Speaker 1: perils that can befall you when you sell options when

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Speaker 1: you sell volatility. The drastic fall in crude and the

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Speaker 1: drastic rise in natural gas that way douta options seller

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Speaker 1: dot com that I think. I think this year is

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Speaker 1: a year we learned how dangerous options can be. Or

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Speaker 1: if you know, people who needed a reminder of that

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Speaker 1: lesson over the past couple of years, this is where

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Speaker 1: you you really learned it, because there's no there's nothing

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Speaker 1: like you know, your February uh. And then recently what

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Speaker 1: we've had included natural guests, And I think that speaks

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Speaker 1: to a theme that old grumpy people like me like

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Speaker 1: to talk about, which is, as financial markets have become

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Speaker 1: younger and younger, you've sort of win out out people

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Speaker 1: who have seen previous rate hike cycles and know what

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Speaker 1: a rate hike cycle looks like, and typically it is

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Speaker 1: associated with higher volatility. So it's the kids, it's get

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Speaker 1: the get off my lawn and quit selling options kids.

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Speaker 1: The Canadian metalinnials have already traded through a bear market though,

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Speaker 1: so that narrative, I'd like, how much is this sort

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Speaker 1: of death of the short vall trade connected to changing

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Speaker 1: FED policy and a less accommodative a tightening cycle. Basically,

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Speaker 1: I find it I find it less so just uh,

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Speaker 1: given how you know, the trade did kind of blow

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Speaker 1: up spectacularly and we went on to then eat price

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Speaker 1: in even more, you know, FED tightening through through your

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Speaker 1: dollars for calendar nineteen than we had at the time

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Speaker 1: of and that the fact that you know, if we

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Speaker 1: were thinking this is you know, a rates fall transmission,

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Speaker 1: we still haven't gotten rates fall. So I'm I'm wondering

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Speaker 1: the extent to which this will be a twenty nineteen

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Speaker 1: story in which rates wall really amplifies the equity vaul,

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Speaker 1: because I'm not sure that's happened yet this year. I

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Speaker 1: think we also have to look at we're so used

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Speaker 1: to relying on Montrey policies are sort of signals. Let's

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Speaker 1: not forget the importance of fiscal policy. Because we had

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Speaker 1: the big tax cut past at the end of last year.

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Speaker 1: We're having a blowout in the fiscal deficit of the

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Speaker 1: United States this year. What that's me That's meant uh

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Speaker 1: much higher issuance both at the long end of the

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Speaker 1: curve and short end, and that short end issues tabillar

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Speaker 1: is showing to squeeze liquidity to a degree, and at

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Speaker 1: the same time, the FED is engaging in what's popularly

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Speaker 1: known as quantitative tightening um, which I don't think necessarily

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Speaker 1: has a direct impact on say, equity prices, but it

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Speaker 1: does make short term liquidity conditions less um ample less

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Speaker 1: ample than they have been over the over the last

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Speaker 1: few years. So we've kind of had UH. We started

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Speaker 1: the year with markets really excited about the earnings potential

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Speaker 1: created by the tax cut, and the rest of the

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Speaker 1: year to some extent, has been about, if you will,

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Speaker 1: the negative externalities of the tax cut in terms of

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Speaker 1: the deficit and what that's meant for fixed income markets.

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Speaker 1: One of the things you said in your first answer

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Speaker 1: is that what characterized recent volatility starting in October, and

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Speaker 1: what characterized the volatility spike we saw in February was

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Speaker 1: the fact that, unlike in previous UH sell offs in

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Speaker 1: the post crisis era, we saw people selling treasuries at

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Speaker 1: the same time, so that if you have diversified portfolio,

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Speaker 1: some stocks, some treasuries, you were losing on both sides.

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Speaker 1: You weren't getting that natural cushion. What changed there? Why

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Speaker 1: hasn't this year up until I guess maybe sort of December,

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Speaker 1: Why hasn't it been the case that when equity volatility spiked,

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Speaker 1: people went to treasuries as a safe haven. Well, I

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Speaker 1: think to some extent this issuance dynamic and the and

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Speaker 1: the and the deficit um played a part. You know,

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Speaker 1: you also have a new FED chair chairman in place

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Speaker 1: this year who essentially gotten the seat and came across

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Speaker 1: as more hawkish as his last couple of predecessors. Yes,

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Speaker 1: the yelling FED did hike rates three times last year

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Speaker 1: and initiate the balance sheet rolled down process. But I

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Speaker 1: think people had this underlying belief that listen, yeah, we

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Speaker 1: know that if the stock market rolls over, you know,

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Speaker 1: Janet's got your back. And there hasn't been the sense

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Speaker 1: I think that that the Powell Fed has got your

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Speaker 1: back until very recently. But Luke, even with the market volatility,

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Speaker 1: the US ECO data looks good. And of course ultimately

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Speaker 1: the FEDS, the FED has a dual mandate. It's uh

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Speaker 1: employment and inflation, it's not the stock market. And on

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Speaker 1: its dual mandate, the thing it's sufficially charged to do.

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Speaker 1: Things are still looking okay, yeah, right, like we've got well,

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Speaker 1: we've been at full employment since you know, you can

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Speaker 1: rewind the clocks on. People think we've been there for

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Speaker 1: for three years. We still keep managing to print well

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Speaker 1: over a hundred k inflation, you know, around two percent

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Speaker 1: by by most preferred measures. And I think this is

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Speaker 1: something that you know, you and I have talked a

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Speaker 1: lot about. This year is also characterized that macro economic vall.

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Speaker 1: You know, throw out your kind of your Turkey shocks

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Speaker 1: and you're outside U S stocks. Uh. The macro economic

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Speaker 1: volatility the U. S economy has not been large that whatsoever. However,

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Speaker 1: you know, it seems to speak to more changes in

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Speaker 1: market structure for why we're able to get these uh,

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Speaker 1: these moves that do make us think that something is

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Speaker 1: going I mostly the I would bow to cam here

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Speaker 1: and the withdrawal of liquidity UH post crisis regulation that

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Speaker 1: are making it essentially market making is is less of

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Speaker 1: a thing. Bank balance sheets are not really extended to

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Speaker 1: to the same extent, and and the rise of passive money.

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Speaker 1: All of this allows you to, I think, have sharper

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Speaker 1: market moves. And the thing I wonder is, if you're

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Speaker 1: an active manager in this environment, is generating alpha more

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Speaker 1: a matter of when you get in than what you buy?

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Speaker 1: Just because of how the liquid markets have been and

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Speaker 1: how sharp some of the moves we've gotten our camera

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Speaker 1: and your thoughts on that. Yeah, I think an underappreciated

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Speaker 1: UM factor, and I think it's underappreciated because it's difficult

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Speaker 1: to quantify. Is the increased prominence of quantitative stres rategies

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Speaker 1: as well, whether it's vault targeting strategies, which isn't quite

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Speaker 1: the same as as the vaal selling stuff, um, but

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Speaker 1: it's it's kind of the sort of the red headed

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Speaker 1: cousin uh if you will, where there's this requirement when

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Speaker 1: the stock market declines for for these types of strategies

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Speaker 1: to to sell futures essentially to reduce its portfolio risk

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Speaker 1: and then the risk parity stuff, which is a a

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Speaker 1: common sort of bogeyman in the in the closet. And

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Speaker 1: going back to your your previous question about stocks and

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Speaker 1: bonds and and sort of following in tandem, they are

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Speaker 1: a popular um cause for that because there they tend

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Speaker 1: to be their own stocks and they own generally own

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Speaker 1: a lot of bonds, and when bonds start to fall,

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Speaker 1: then they have to de risk everything and they sell everything. Um.

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Speaker 1: Who knows how much of it is down to these guys,

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Speaker 1: but they're they're they're certainly they weren't there twenty years

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Speaker 1: ago and they are there now, So it is at

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Speaker 1: least one change in the market structure. I'm picturing you

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Speaker 1: tweeting that and Cliff Asness say your tweet and him

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Speaker 1: freaking out about efforts to blame the computers. Well, funny enough,

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Speaker 1: you mentioned Cliff as nous I noticed that the a

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Speaker 1: q are risk parody is Mutual Fund. They're changing their name.

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Speaker 1: They're just branding, you know, They're they're removing the risk

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Speaker 1: parody name. So I mean that maybe that's ringing the

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Speaker 1: bell for the bottom of this phenomenon. Like, I don't know,

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Speaker 1: can we talk about the the year in trading and

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Speaker 1: the year in markets without talking about the effect that

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Speaker 1: just the trade issue has had, both state side and

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Speaker 1: on the broader outlook Like I you can take it.

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Speaker 1: You can take your pick whether it really started in

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Speaker 1: March with steal or really escalated later in May. But

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Speaker 1: it seems as though everyone was calling for to be

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Speaker 1: a year of convergence and the rise of the trade

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Speaker 1: issue completely blew that up. Yeah, I mean, it's been

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Speaker 1: one of the the stories of the year. And what

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Speaker 1: markets hate above everything else is uncertainty, right, And that's

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Speaker 1: what we've had with this this trade story. What you know,

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Speaker 1: will it be resolved? When will it be resolved? Will

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Speaker 1: there be will the tariffs that Trump has announced be enacted?

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Speaker 1: Will there be new tariffs announced and then enacted? Will

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Speaker 1: we have a deal. If so, what will it look like? Oh?

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Speaker 1: Who are we going to arrest next? Uh, It's it's

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Speaker 1: become very very difficult. I think you look at the

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Speaker 1: UK and the Brexit fiasco, which we haven't talked about

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Speaker 1: yet as another example of uncertainty, and look at how

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Speaker 1: that's impacted British markets, both stock market where the multiple

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Speaker 1: of the foot Sea has gone down by this year,

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Speaker 1: which is a heck of a lot more than most

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Speaker 1: other markets, and then obviously the pound which has been

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Speaker 1: well pounded. And an interesting story with trade is that

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Speaker 1: as the issue has been raised mainly, you saw whenever

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Speaker 1: it was having an effect on markets, it would have

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Speaker 1: an effect on a sector basis. Within the US, you know,

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Speaker 1: you sell your industrial as you try and high out

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Speaker 1: in small caps. But then on the global level it

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Speaker 1: was happening more on the index level, AK sell everything,

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Speaker 1: but US China especially underperforms. Yet from the beginning, we've had,

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Speaker 1: you know, this inkling or this idea that we were

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Speaker 1: going to move into tech sometime, that this was going

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Speaker 1: to be about tech, that this was eventually going to

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Speaker 1: become about i P supply change in SEMIS. And one

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Speaker 1: thing we've noticed since the recent trade truths, if you

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Speaker 1: want to call it, is that you're starting to see

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Speaker 1: more effects of trade play out on the index level

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Speaker 1: in the US. So that's one story that has been

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Speaker 1: story that is changing as we head into the tail

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Speaker 1: end of the year. I'm glad you brought up Brexit

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Speaker 1: and the international situation, because even while US stocks we're

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Speaker 1: doing fairly well up until early October, the international scene

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Speaker 1: was pretty ugly, particularly emerging markets this year. And I

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Speaker 1: think it's pretty remarkable because I think even as recently

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Speaker 1: as January, we were still talking about global synchronized growth.

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Speaker 1: I don't remember when we stopped, but I think it

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Speaker 1: was earlier this year, which just seems like I can't

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Speaker 1: believe that it was that global synchronized growth was a

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Speaker 1: phrase that people It was odd people's tongues because it

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Speaker 1: just seems like such ancient history. Yeah, I remember going

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Speaker 1: on your because on your television show in late January

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Speaker 1: and the the eight shares that the HINT Enterprise Index

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Speaker 1: hadn't gone down in almost a month, like it literally

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Speaker 1: had gone up every single day. Now, obviously that sort

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Speaker 1: of thing can't persist forever, and like all great parties,

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Speaker 1: you know, the hangover is usually pretty pretty vicious, which

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Speaker 1: it's been this time around. Yeah, it's interesting because I

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Speaker 1: think most people would focus on the trade stuff as

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Speaker 1: being a reason for this um this under performance of

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Speaker 1: emerging markets, and that to some extent that's true, But

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Speaker 1: there's a couple of other issues as well. Why is

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Speaker 1: the lagged effects of China's own de leveraging process, which

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Speaker 1: began last year, which is in the absence of any

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Speaker 1: trade tension with the US, was always going to slow

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Speaker 1: China's economy this year, and that obviously ripples through the

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Speaker 1: rest of the world, particularly emerging world who sell to China. Uh.

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Speaker 1: And to the hangover of dollar borrowing, which Luke alluded

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Speaker 1: to a little bit. UH, the dollar dollar borrowing over

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Speaker 1: the last sort of six seven years by emerging market

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Speaker 1: countries with large external vulnerabilities, the Turkeys, the Argentina's, you know,

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Speaker 1: the Indonesia's of the world, and as liquidity is withdrawn

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Speaker 1: from them. I think that ripples through the system as well. Yeah,

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Speaker 1: it was. It was kind of interesting in the early

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Speaker 1: stages of trade heating up. Uh. You know, everyone expects

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Speaker 1: the textbook tells you that, you know, this should have

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Speaker 1: been dollar positive. It wasn't quite in the early stages.

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Speaker 1: The figuring out the dollar this year has just been

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Speaker 1: you know, kind of a headache. At the beginning of

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Speaker 1: the year, we were you know, it was all about

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Speaker 1: twin deficits going to drive the dollar in a weaken

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Speaker 1: the dollar. And then you know, at a certain point

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Speaker 1: we said, you know, real rate differential, growth differential, it's

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Speaker 1: all going to be about strength of the the US dollar.

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Speaker 1: And and that's something that's that's weight on e m s.

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Speaker 1: Also the big under performance of batstocks, your by Do,

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Speaker 1: your Ali Baba, and your ten cent like in the US,

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Speaker 1: these are for those these are huge Chinese. These are

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Speaker 1: huge Chinese internet companies that also have a big weight

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Speaker 1: in emerging market equity indexes. And when you think about

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Speaker 1: how like early in the year, we were worried about

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Speaker 1: the potential for Facebook to really get regulated, to come

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Speaker 1: under the crush there that hasn't happened. Congress has been

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Speaker 1: kind of a joke on that. If anything happens, it's

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Speaker 1: been in Europe. Yet in China they're actually like cracking

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Speaker 1: down on ten sensibility to to offer new games. So

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Speaker 1: they've been swimming against, you know, a regulatory headwind as

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Speaker 1: well as a slowing growth head wind, as well as

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Speaker 1: a equity market that's coming under trade pressure headwind. Uh.

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Speaker 1: Going back to something you mentioned Cameron about again, I

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Speaker 1: think it was when you mentioned bregsit. But something I've

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Speaker 1: been thinking about is, Okay, markets hate uncertainty, and there's

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Speaker 1: a certainty really everywhere you look, and I think there's

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Speaker 1: a real dearth of institutions or individuals that you can

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Speaker 1: look to that you could say Okay, I feel like

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Speaker 1: really confident that they've got to handle on this. We

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Speaker 1: all know, we don't need to talk about our president.

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Speaker 1: Did is uh? You know is twitter habit? We have

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Speaker 1: a new FED chair who uh strikes me as very

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Speaker 1: competent but also inconsistent at times. And I think it's

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Speaker 1: hard to um like figure out the Powell doctrine or

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Speaker 1: what the Powell Powell world view looks like. There was

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Speaker 1: a point earlier this year where I thought, oh, he

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Speaker 1: might actually be more devilish than Janet Yellen. Then there

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Speaker 1: was a point was like, well, it seems more hawkish

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Speaker 1: than Janet Yellen. It's hard to put a finger on him.

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Speaker 1: And then you look, of course it bregsit and you

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Speaker 1: know you can't have any confidence in any institution there

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Speaker 1: talk about that what that does to the markets when

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Speaker 1: there's is no institution that someone could say, okay, the

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Speaker 1: adult is get a step in the room and said

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Speaker 1: a clear, clear policy path forward, we could feel confident

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Speaker 1: it will be executed. Well, I'll take a small issue

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Speaker 1: with your with your preamble there. I think Powell has

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Speaker 1: generally been fairly consistent. You can argue that he may

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Speaker 1: be overstepped a little bit in early October with his

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Speaker 1: comments about being a long way from neutral. But I

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Speaker 1: think if you look at that contact that comment in

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Speaker 1: the context of what he was saying at Jackson Hole

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Speaker 1: uh the symposium in August, which is that the whole

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Speaker 1: concept of neutral interest rates, particularly in real time, is

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Speaker 1: kind of specious. Um. You know, it's not sort of

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Speaker 1: a line in the sand that you approach it and

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Speaker 1: then as soon as you step over, different things happen.

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Speaker 1: The best you can say it's kind of arrange, and

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Speaker 1: you only know in retrospect what neutral really was, So

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Speaker 1: I'm going to give him a little bit of a

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Speaker 1: past there. Frankly, I find him quite refreshing because he

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Speaker 1: speaks relatively plainly, and I think generally he's been fairly

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Speaker 1: upbeat about the state of the economy right throughout throughout

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Speaker 1: the throughout the course of the year. So, uh, maybe

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Speaker 1: I'm just uh inclined to give a plane to speak

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Speaker 1: or a bit of a bit of a But in

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Speaker 1: terms of the you know, the effect on the effect

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Speaker 1: when you start to question or worry about institutions. I

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Speaker 1: think there was a while there in early October where

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Speaker 1: there was a popular narrative that you know, the fan's

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Speaker 1: gonna hike until something breaks. I think everything from October

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Speaker 1: three to now has been trying to put that issue

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Speaker 1: to bed and then trying to say, like, hey, if

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Speaker 1: the data weekends, we're gonna respond. We're not dead set

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Speaker 1: on moving very quickly. They've done a good job of

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Speaker 1: retaining uh, that optionality. But to the larger point of

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Speaker 1: what does it mean for markets when you start to

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Speaker 1: you know, question institutions, Well, you talked about the fitz

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Speaker 1: he rerating. We've talked about the SMP five hundred three rating.

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Speaker 1: Despite earnings throughout, it seems like you just pay less

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Speaker 1: for each to all our earnings because you're not as

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Speaker 1: confident in the in the backdrop, that seems to be

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Speaker 1: one effect, I mean, ultimately, uncertainty and lack of confidence

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Speaker 1: and institutions requires a higher risk Broomium across across assets,

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Speaker 1: across currencies, I mean, obviously currencies. It's it's a bit

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Speaker 1: difficult because you have to you have to buy something.

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Speaker 1: You know, if you buy euro dollar, you're you have

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Speaker 1: to buy one and your trade euro doll You have

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Speaker 1: to buy one to sell sell the other. I mean,

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Speaker 1: maybe you could argue gold, but even gold has been

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Speaker 1: pretty I mean, given the apparent manifest risks across markets,

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Speaker 1: it's been pretty man this year. That has been one

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Speaker 1: of the funny jokes of the year has been, well,

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Speaker 1: not not as funny as bitcoin, we should that's been.

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Speaker 1: That's been. That's been probably my favorite part of the year.

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Speaker 1: It was the demise of the Lambeau crowd. Hey, there's

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Speaker 1: there's a popular long long bitcoin toward the bankers trade

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Speaker 1: that's currently in early December on a six week losing streak,

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Speaker 1: even as banks have gotten absolutely pummeled. That kind of

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Speaker 1: speaks to how bad it's been for bitcoin. But I

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Speaker 1: think one of the and we'll see how it plays

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Speaker 1: out over the next year or two. But I think

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Speaker 1: what's been a change this year talking about institutions. It's

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Speaker 1: the first time in a long time that you've had

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Speaker 1: the President of the United States overtly criticizing the FED

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Speaker 1: and FED policy. And I think if you had gone

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Speaker 1: back five years ago and you you know, you know,

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Speaker 1: change the names to protect the innocent or or whatever,

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Speaker 1: you know, whatever the stock disclaimers on those reality TV shows.

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Speaker 1: H if you had said, if you had put the

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Speaker 1: quotes that we've had from Donald Trump uh this year

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Speaker 1: VSA V the Fed and shown them to people and

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Speaker 1: said what will just do to markets? I think they

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Speaker 1: would have said, Well, you're gonna you're gonna see a

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Speaker 1: lot of alatility and you're going to see the stalt

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Speaker 1: market lower. UM. And I mean there's a tendency this

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Speaker 1: kind of wave Trump off and say wow, it's just

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Speaker 1: Trump being Trump. But eventually this stuff kind of matters UM.

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Speaker 1: And maybe we were just accustomed last year to nothing

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Speaker 1: mattering est unless let's let's yeah, let's not forget last

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Speaker 1: year was the anomaly. This year is not the anomaly.

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Speaker 1: Last year was the anomaly in terms of the absolute

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Speaker 1: absence of volatility or draw down or anything. I mean,

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Speaker 1: the sharp ratio of the SMP or a sixty forty

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Speaker 1: portfolio was way too high relative to history. And then

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Speaker 1: this year we got in October the worst month for

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Speaker 1: the sixty forty portfolio since the financial crisis. So that's

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Speaker 1: the kind of that was their coming full. Every party

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Speaker 1: has a hangover, and as I learned to my Street

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Speaker 1: Grin over the weekend, on that note, I think that

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Speaker 1: is a perfect time to end it. This has been

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Speaker 1: another episode of the Odd Lots podcast. I'm Joe Wisenthal.

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Speaker 1: You could follow me on Twitter at the Stalwart. My

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Speaker 1: normal co host, Tracy Elloway is off this week, but

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Speaker 1: you should still follow her. She's at Tracy Alloway on Twitter.

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Speaker 1: And you should follow our guests. Cameron is on Twitter,

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Speaker 1: he's at Fifth Rule, and Lucas on Twitter he is

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Speaker 1: at Jake Kawa and sometimes they banter and go back

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Speaker 1: and forth and argue about all these things that we

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Speaker 1: talk about. If you want more and you should follow

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Speaker 1: our producer to fur Foreheads on Twitter. He's at foreheads

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Speaker 1: t as well as the bloomberg head of podcast Francesca

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Speaker 1: Leavy at Francesca Today. Thanks for listening.