Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 1: I'm Joe Wisenthald. Tracy Alloway is out this week unfortunately,
Speaker 1: but with me in the studio here for today's episode,
Speaker 1: I have Bloomberg macro strategist Cameron Christ and Bloomberg Cross
Speaker 1: Asset reporter Luke Kawa, and I'm very excited to talk
Speaker 1: to both of them because we are going to do
Speaker 1: our year in review of markets, or basically just talk
Speaker 1: about what the heck happened in markets this year, because
Speaker 1: I think it was one of the most interesting times
Speaker 1: for markets across many asset classes that we've had in
Speaker 1: several years, maybe most interesting since or the financial crisis,
Speaker 1: or maybe at least uh And I think a lot
Speaker 1: of people have questions about what's going on, so hopefully
Speaker 1: we will try to answer them. So Cameron and Luke,
Speaker 1: thank you very much for joining us. So it's always
Speaker 1: tough to disentangle reasons for market moves, and Cameron, I
Speaker 1: think you're one of the most strident and sort of
Speaker 1: pushing back against any attempt to do that at all. Nonetheless,
Speaker 1: this year was characterized by a very sharp turn starting
Speaker 1: in early October, where we saw some major winners just
Speaker 1: completely fall out of bed text docs. US equities which
Speaker 1: had been doing pretty well up until them, just started
Speaker 1: getting relentlessly destroyed. What happened, well, I think you need
Speaker 1: to look actually back to February, because we had a
Speaker 1: very similar phenomenon in February, UH, and the genesis was
Speaker 1: broadly similar, I think in both instances where you had
Speaker 1: a performance of very good equity market performance that was
Speaker 1: punctuated with a sharp rise in market interest rates, say
Speaker 1: the tenure yield, and at the same time, inflammatory rhetoric
Speaker 1: from the US president vsa V trading relationships with China,
Speaker 1: and that is kind of a potent and lethal cocktail
Speaker 1: for risky assets. And you had a market that was
Speaker 1: out over at skis and if you you might not
Speaker 1: be all neither one of you are probably old enough
Speaker 1: to remember the old wild WARLD wide world of sports
Speaker 1: intro where there was a ski jumper. Remember the thrill
Speaker 1: of victory in January and over the summer, and then
Speaker 1: the agony of defeat in sort of February and and
Speaker 1: then October thenceforth. And so what people try to say, Oh,
Speaker 1: is it the Fed? Is it UH trade? Basically you
Speaker 1: can rely it's I think it's a combination of of
Speaker 1: a number of things. I mean, we need to take
Speaker 1: a step back and remember that the FED is in
Speaker 1: the midst of a tightening cycle. Montary policy has gone
Speaker 1: from unquestionably accommodative to arguably neutral. We had a similar
Speaker 1: phenomenon obviously two thousand five. In both of those years
Speaker 1: FED tightening years, the multiple of the SMP five hundred
Speaker 1: fell pretty sharply, and this was just, I think, to
Speaker 1: some extent, the latest iteration of that phenomenon. Luke, come
Speaker 1: in here when we when we write the story of
Speaker 1: this year, the story of this year will be the
Speaker 1: huge blow up of the short fall trade, of the
Speaker 1: trade that essentially you could make your living easily from
Speaker 1: early through January. Early in the year, we had pretty
Speaker 1: much every equity and overbought territory, and you know, things
Speaker 1: were great. We blew past everyone's uh, everyone's und target
Speaker 1: or at least like a quarter of analyst targets within
Speaker 1: the first five sessions, and then it all blew up.
Speaker 1: And then at two other points this year, two other
Speaker 1: large market moves that you can attribute to really the
Speaker 1: perils that can befall you when you sell options when
Speaker 1: you sell volatility. The drastic fall in crude and the
Speaker 1: drastic rise in natural gas that way douta options seller
Speaker 1: dot com that I think. I think this year is
Speaker 1: a year we learned how dangerous options can be. Or
Speaker 1: if you know, people who needed a reminder of that
Speaker 1: lesson over the past couple of years, this is where
Speaker 1: you you really learned it, because there's no there's nothing
Speaker 1: like you know, your February uh. And then recently what
Speaker 1: we've had included natural guests, And I think that speaks
Speaker 1: to a theme that old grumpy people like me like
Speaker 1: to talk about, which is, as financial markets have become
Speaker 1: younger and younger, you've sort of win out out people
Speaker 1: who have seen previous rate hike cycles and know what
Speaker 1: a rate hike cycle looks like, and typically it is
Speaker 1: associated with higher volatility. So it's the kids, it's get
Speaker 1: the get off my lawn and quit selling options kids.
Speaker 1: The Canadian metalinnials have already traded through a bear market though,
Speaker 1: so that narrative, I'd like, how much is this sort
Speaker 1: of death of the short vall trade connected to changing
Speaker 1: FED policy and a less accommodative a tightening cycle. Basically,
Speaker 1: I find it I find it less so just uh,
Speaker 1: given how you know, the trade did kind of blow
Speaker 1: up spectacularly and we went on to then eat price
Speaker 1: in even more, you know, FED tightening through through your
Speaker 1: dollars for calendar nineteen than we had at the time
Speaker 1: of and that the fact that you know, if we
Speaker 1: were thinking this is you know, a rates fall transmission,
Speaker 1: we still haven't gotten rates fall. So I'm I'm wondering
Speaker 1: the extent to which this will be a twenty nineteen
Speaker 1: story in which rates wall really amplifies the equity vaul,
Speaker 1: because I'm not sure that's happened yet this year. I
Speaker 1: think we also have to look at we're so used
Speaker 1: to relying on Montrey policies are sort of signals. Let's
Speaker 1: not forget the importance of fiscal policy. Because we had
Speaker 1: the big tax cut past at the end of last year.
Speaker 1: We're having a blowout in the fiscal deficit of the
Speaker 1: United States this year. What that's me That's meant uh
Speaker 1: much higher issuance both at the long end of the
Speaker 1: curve and short end, and that short end issues tabillar
Speaker 1: is showing to squeeze liquidity to a degree, and at
Speaker 1: the same time, the FED is engaging in what's popularly
Speaker 1: known as quantitative tightening um, which I don't think necessarily
Speaker 1: has a direct impact on say, equity prices, but it
Speaker 1: does make short term liquidity conditions less um ample less
Speaker 1: ample than they have been over the over the last
Speaker 1: few years. So we've kind of had UH. We started
Speaker 1: the year with markets really excited about the earnings potential
Speaker 1: created by the tax cut, and the rest of the
Speaker 1: year to some extent, has been about, if you will,
Speaker 1: the negative externalities of the tax cut in terms of
Speaker 1: the deficit and what that's meant for fixed income markets.
Speaker 1: One of the things you said in your first answer
Speaker 1: is that what characterized recent volatility starting in October, and
Speaker 1: what characterized the volatility spike we saw in February was
Speaker 1: the fact that, unlike in previous UH sell offs in
Speaker 1: the post crisis era, we saw people selling treasuries at
Speaker 1: the same time, so that if you have diversified portfolio,
Speaker 1: some stocks, some treasuries, you were losing on both sides.
Speaker 1: You weren't getting that natural cushion. What changed there? Why
Speaker 1: hasn't this year up until I guess maybe sort of December,
Speaker 1: Why hasn't it been the case that when equity volatility spiked,
Speaker 1: people went to treasuries as a safe haven. Well, I
Speaker 1: think to some extent this issuance dynamic and the and
Speaker 1: the and the deficit um played a part. You know,
Speaker 1: you also have a new FED chair chairman in place
Speaker 1: this year who essentially gotten the seat and came across
Speaker 1: as more hawkish as his last couple of predecessors. Yes,
Speaker 1: the yelling FED did hike rates three times last year
Speaker 1: and initiate the balance sheet rolled down process. But I
Speaker 1: think people had this underlying belief that listen, yeah, we
Speaker 1: know that if the stock market rolls over, you know,
Speaker 1: Janet's got your back. And there hasn't been the sense
Speaker 1: I think that that the Powell Fed has got your
Speaker 1: back until very recently. But Luke, even with the market volatility,
Speaker 1: the US ECO data looks good. And of course ultimately
Speaker 1: the FEDS, the FED has a dual mandate. It's uh
Speaker 1: employment and inflation, it's not the stock market. And on
Speaker 1: its dual mandate, the thing it's sufficially charged to do.
Speaker 1: Things are still looking okay, yeah, right, like we've got well,
Speaker 1: we've been at full employment since you know, you can
Speaker 1: rewind the clocks on. People think we've been there for
Speaker 1: for three years. We still keep managing to print well
Speaker 1: over a hundred k inflation, you know, around two percent
Speaker 1: by by most preferred measures. And I think this is
Speaker 1: something that you know, you and I have talked a
Speaker 1: lot about. This year is also characterized that macro economic vall.
Speaker 1: You know, throw out your kind of your Turkey shocks
Speaker 1: and you're outside U S stocks. Uh. The macro economic
Speaker 1: volatility the U. S economy has not been large that whatsoever. However,
Speaker 1: you know, it seems to speak to more changes in
Speaker 1: market structure for why we're able to get these uh,
Speaker 1: these moves that do make us think that something is
Speaker 1: going I mostly the I would bow to cam here
Speaker 1: and the withdrawal of liquidity UH post crisis regulation that
Speaker 1: are making it essentially market making is is less of
Speaker 1: a thing. Bank balance sheets are not really extended to
Speaker 1: to the same extent, and and the rise of passive money.
Speaker 1: All of this allows you to, I think, have sharper
Speaker 1: market moves. And the thing I wonder is, if you're
Speaker 1: an active manager in this environment, is generating alpha more
Speaker 1: a matter of when you get in than what you buy?
Speaker 1: Just because of how the liquid markets have been and
Speaker 1: how sharp some of the moves we've gotten our camera
Speaker 1: and your thoughts on that. Yeah, I think an underappreciated
Speaker 1: UM factor, and I think it's underappreciated because it's difficult
Speaker 1: to quantify. Is the increased prominence of quantitative stres rategies
Speaker 1: as well, whether it's vault targeting strategies, which isn't quite
Speaker 1: the same as as the vaal selling stuff, um, but
Speaker 1: it's it's kind of the sort of the red headed
Speaker 1: cousin uh if you will, where there's this requirement when
Speaker 1: the stock market declines for for these types of strategies
Speaker 1: to to sell futures essentially to reduce its portfolio risk
Speaker 1: and then the risk parity stuff, which is a a
Speaker 1: common sort of bogeyman in the in the closet. And
Speaker 1: going back to your your previous question about stocks and
Speaker 1: bonds and and sort of following in tandem, they are
Speaker 1: a popular um cause for that because there they tend
Speaker 1: to be their own stocks and they own generally own
Speaker 1: a lot of bonds, and when bonds start to fall,
Speaker 1: then they have to de risk everything and they sell everything. Um.
Speaker 1: Who knows how much of it is down to these guys,
Speaker 1: but they're they're they're certainly they weren't there twenty years
Speaker 1: ago and they are there now, So it is at
Speaker 1: least one change in the market structure. I'm picturing you
Speaker 1: tweeting that and Cliff Asness say your tweet and him
Speaker 1: freaking out about efforts to blame the computers. Well, funny enough,
Speaker 1: you mentioned Cliff as nous I noticed that the a
Speaker 1: q are risk parody is Mutual Fund. They're changing their name.
Speaker 1: They're just branding, you know, They're they're removing the risk
Speaker 1: parody name. So I mean that maybe that's ringing the
Speaker 1: bell for the bottom of this phenomenon. Like, I don't know,
Speaker 1: can we talk about the the year in trading and
Speaker 1: the year in markets without talking about the effect that
Speaker 1: just the trade issue has had, both state side and
Speaker 1: on the broader outlook Like I you can take it.
Speaker 1: You can take your pick whether it really started in
Speaker 1: March with steal or really escalated later in May. But
Speaker 1: it seems as though everyone was calling for to be
Speaker 1: a year of convergence and the rise of the trade
Speaker 1: issue completely blew that up. Yeah, I mean, it's been
Speaker 1: one of the the stories of the year. And what
Speaker 1: markets hate above everything else is uncertainty, right, And that's
Speaker 1: what we've had with this this trade story. What you know,
Speaker 1: will it be resolved? When will it be resolved? Will
Speaker 1: there be will the tariffs that Trump has announced be enacted?
Speaker 1: Will there be new tariffs announced and then enacted? Will
Speaker 1: we have a deal. If so, what will it look like? Oh?
Speaker 1: Who are we going to arrest next? Uh, It's it's
Speaker 1: become very very difficult. I think you look at the
Speaker 1: UK and the Brexit fiasco, which we haven't talked about
Speaker 1: yet as another example of uncertainty, and look at how
Speaker 1: that's impacted British markets, both stock market where the multiple
Speaker 1: of the foot Sea has gone down by this year,
Speaker 1: which is a heck of a lot more than most
Speaker 1: other markets, and then obviously the pound which has been
Speaker 1: well pounded. And an interesting story with trade is that
Speaker 1: as the issue has been raised mainly, you saw whenever
Speaker 1: it was having an effect on markets, it would have
Speaker 1: an effect on a sector basis. Within the US, you know,
Speaker 1: you sell your industrial as you try and high out
Speaker 1: in small caps. But then on the global level it
Speaker 1: was happening more on the index level, AK sell everything,
Speaker 1: but US China especially underperforms. Yet from the beginning, we've had,
Speaker 1: you know, this inkling or this idea that we were
Speaker 1: going to move into tech sometime, that this was going
Speaker 1: to be about tech, that this was eventually going to
Speaker 1: become about i P supply change in SEMIS. And one
Speaker 1: thing we've noticed since the recent trade truths, if you
Speaker 1: want to call it, is that you're starting to see
Speaker 1: more effects of trade play out on the index level
Speaker 1: in the US. So that's one story that has been
Speaker 1: story that is changing as we head into the tail
Speaker 1: end of the year. I'm glad you brought up Brexit
Speaker 1: and the international situation, because even while US stocks we're
Speaker 1: doing fairly well up until early October, the international scene
Speaker 1: was pretty ugly, particularly emerging markets this year. And I
Speaker 1: think it's pretty remarkable because I think even as recently
Speaker 1: as January, we were still talking about global synchronized growth.
Speaker 1: I don't remember when we stopped, but I think it
Speaker 1: was earlier this year, which just seems like I can't
Speaker 1: believe that it was that global synchronized growth was a
Speaker 1: phrase that people It was odd people's tongues because it
Speaker 1: just seems like such ancient history. Yeah, I remember going
Speaker 1: on your because on your television show in late January
Speaker 1: and the the eight shares that the HINT Enterprise Index
Speaker 1: hadn't gone down in almost a month, like it literally
Speaker 1: had gone up every single day. Now, obviously that sort
Speaker 1: of thing can't persist forever, and like all great parties,
Speaker 1: you know, the hangover is usually pretty pretty vicious, which
Speaker 1: it's been this time around. Yeah, it's interesting because I
Speaker 1: think most people would focus on the trade stuff as
Speaker 1: being a reason for this um this under performance of
Speaker 1: emerging markets, and that to some extent that's true, But
Speaker 1: there's a couple of other issues as well. Why is
Speaker 1: the lagged effects of China's own de leveraging process, which
Speaker 1: began last year, which is in the absence of any
Speaker 1: trade tension with the US, was always going to slow
Speaker 1: China's economy this year, and that obviously ripples through the
Speaker 1: rest of the world, particularly emerging world who sell to China. Uh.
Speaker 1: And to the hangover of dollar borrowing, which Luke alluded
Speaker 1: to a little bit. UH, the dollar dollar borrowing over
Speaker 1: the last sort of six seven years by emerging market
Speaker 1: countries with large external vulnerabilities, the Turkeys, the Argentina's, you know,
Speaker 1: the Indonesia's of the world, and as liquidity is withdrawn
Speaker 1: from them. I think that ripples through the system as well. Yeah,
Speaker 1: it was. It was kind of interesting in the early
Speaker 1: stages of trade heating up. Uh. You know, everyone expects
Speaker 1: the textbook tells you that, you know, this should have
Speaker 1: been dollar positive. It wasn't quite in the early stages.
Speaker 1: The figuring out the dollar this year has just been
Speaker 1: you know, kind of a headache. At the beginning of
Speaker 1: the year, we were you know, it was all about
Speaker 1: twin deficits going to drive the dollar in a weaken
Speaker 1: the dollar. And then you know, at a certain point
Speaker 1: we said, you know, real rate differential, growth differential, it's
Speaker 1: all going to be about strength of the the US dollar.
Speaker 1: And and that's something that's that's weight on e m s.
Speaker 1: Also the big under performance of batstocks, your by Do,
Speaker 1: your Ali Baba, and your ten cent like in the US,
Speaker 1: these are for those these are huge Chinese. These are
Speaker 1: huge Chinese internet companies that also have a big weight
Speaker 1: in emerging market equity indexes. And when you think about
Speaker 1: how like early in the year, we were worried about
Speaker 1: the potential for Facebook to really get regulated, to come
Speaker 1: under the crush there that hasn't happened. Congress has been
Speaker 1: kind of a joke on that. If anything happens, it's
Speaker 1: been in Europe. Yet in China they're actually like cracking
Speaker 1: down on ten sensibility to to offer new games. So
Speaker 1: they've been swimming against, you know, a regulatory headwind as
Speaker 1: well as a slowing growth head wind, as well as
Speaker 1: a equity market that's coming under trade pressure headwind. Uh.
Speaker 1: Going back to something you mentioned Cameron about again, I
Speaker 1: think it was when you mentioned bregsit. But something I've
Speaker 1: been thinking about is, Okay, markets hate uncertainty, and there's
Speaker 1: a certainty really everywhere you look, and I think there's
Speaker 1: a real dearth of institutions or individuals that you can
Speaker 1: look to that you could say Okay, I feel like
Speaker 1: really confident that they've got to handle on this. We
Speaker 1: all know, we don't need to talk about our president.
Speaker 1: Did is uh? You know is twitter habit? We have
Speaker 1: a new FED chair who uh strikes me as very
Speaker 1: competent but also inconsistent at times. And I think it's
Speaker 1: hard to um like figure out the Powell doctrine or
Speaker 1: what the Powell Powell world view looks like. There was
Speaker 1: a point earlier this year where I thought, oh, he
Speaker 1: might actually be more devilish than Janet Yellen. Then there
Speaker 1: was a point was like, well, it seems more hawkish
Speaker 1: than Janet Yellen. It's hard to put a finger on him.
Speaker 1: And then you look, of course it bregsit and you
Speaker 1: know you can't have any confidence in any institution there
Speaker 1: talk about that what that does to the markets when
Speaker 1: there's is no institution that someone could say, okay, the
Speaker 1: adult is get a step in the room and said
Speaker 1: a clear, clear policy path forward, we could feel confident
Speaker 1: it will be executed. Well, I'll take a small issue
Speaker 1: with your with your preamble there. I think Powell has
Speaker 1: generally been fairly consistent. You can argue that he may
Speaker 1: be overstepped a little bit in early October with his
Speaker 1: comments about being a long way from neutral. But I
Speaker 1: think if you look at that contact that comment in
Speaker 1: the context of what he was saying at Jackson Hole
Speaker 1: uh the symposium in August, which is that the whole
Speaker 1: concept of neutral interest rates, particularly in real time, is
Speaker 1: kind of specious. Um. You know, it's not sort of
Speaker 1: a line in the sand that you approach it and
Speaker 1: then as soon as you step over, different things happen.
Speaker 1: The best you can say it's kind of arrange, and
Speaker 1: you only know in retrospect what neutral really was, So
Speaker 1: I'm going to give him a little bit of a
Speaker 1: past there. Frankly, I find him quite refreshing because he
Speaker 1: speaks relatively plainly, and I think generally he's been fairly
Speaker 1: upbeat about the state of the economy right throughout throughout
Speaker 1: the throughout the course of the year. So, uh, maybe
Speaker 1: I'm just uh inclined to give a plane to speak
Speaker 1: or a bit of a bit of a But in
Speaker 1: terms of the you know, the effect on the effect
Speaker 1: when you start to question or worry about institutions. I
Speaker 1: think there was a while there in early October where
Speaker 1: there was a popular narrative that you know, the fan's
Speaker 1: gonna hike until something breaks. I think everything from October
Speaker 1: three to now has been trying to put that issue
Speaker 1: to bed and then trying to say, like, hey, if
Speaker 1: the data weekends, we're gonna respond. We're not dead set
Speaker 1: on moving very quickly. They've done a good job of
Speaker 1: retaining uh, that optionality. But to the larger point of
Speaker 1: what does it mean for markets when you start to
Speaker 1: you know, question institutions, Well, you talked about the fitz
Speaker 1: he rerating. We've talked about the SMP five hundred three rating.
Speaker 1: Despite earnings throughout, it seems like you just pay less
Speaker 1: for each to all our earnings because you're not as
Speaker 1: confident in the in the backdrop, that seems to be
Speaker 1: one effect, I mean, ultimately, uncertainty and lack of confidence
Speaker 1: and institutions requires a higher risk Broomium across across assets,
Speaker 1: across currencies, I mean, obviously currencies. It's it's a bit
Speaker 1: difficult because you have to you have to buy something.
Speaker 1: You know, if you buy euro dollar, you're you have
Speaker 1: to buy one and your trade euro doll You have
Speaker 1: to buy one to sell sell the other. I mean,
Speaker 1: maybe you could argue gold, but even gold has been
Speaker 1: pretty I mean, given the apparent manifest risks across markets,
Speaker 1: it's been pretty man this year. That has been one
Speaker 1: of the funny jokes of the year has been, well,
Speaker 1: not not as funny as bitcoin, we should that's been.
Speaker 1: That's been. That's been probably my favorite part of the year.
Speaker 1: It was the demise of the Lambeau crowd. Hey, there's
Speaker 1: there's a popular long long bitcoin toward the bankers trade
Speaker 1: that's currently in early December on a six week losing streak,
Speaker 1: even as banks have gotten absolutely pummeled. That kind of
Speaker 1: speaks to how bad it's been for bitcoin. But I
Speaker 1: think one of the and we'll see how it plays
Speaker 1: out over the next year or two. But I think
Speaker 1: what's been a change this year talking about institutions. It's
Speaker 1: the first time in a long time that you've had
Speaker 1: the President of the United States overtly criticizing the FED
Speaker 1: and FED policy. And I think if you had gone
Speaker 1: back five years ago and you you know, you know,
Speaker 1: change the names to protect the innocent or or whatever,
Speaker 1: you know, whatever the stock disclaimers on those reality TV shows.
Speaker 1: H if you had said, if you had put the
Speaker 1: quotes that we've had from Donald Trump uh this year
Speaker 1: VSA V the Fed and shown them to people and
Speaker 1: said what will just do to markets? I think they
Speaker 1: would have said, Well, you're gonna you're gonna see a
Speaker 1: lot of alatility and you're going to see the stalt
Speaker 1: market lower. UM. And I mean there's a tendency this
Speaker 1: kind of wave Trump off and say wow, it's just
Speaker 1: Trump being Trump. But eventually this stuff kind of matters UM.
Speaker 1: And maybe we were just accustomed last year to nothing
Speaker 1: mattering est unless let's let's yeah, let's not forget last
Speaker 1: year was the anomaly. This year is not the anomaly.
Speaker 1: Last year was the anomaly in terms of the absolute
Speaker 1: absence of volatility or draw down or anything. I mean,
Speaker 1: the sharp ratio of the SMP or a sixty forty
Speaker 1: portfolio was way too high relative to history. And then
Speaker 1: this year we got in October the worst month for
Speaker 1: the sixty forty portfolio since the financial crisis. So that's
Speaker 1: the kind of that was their coming full. Every party
Speaker 1: has a hangover, and as I learned to my Street
Speaker 1: Grin over the weekend, on that note, I think that
Speaker 1: is a perfect time to end it. This has been
Speaker 1: another episode of the Odd Lots podcast. I'm Joe Wisenthal.
Speaker 1: You could follow me on Twitter at the Stalwart. My
Speaker 1: normal co host, Tracy Elloway is off this week, but
Speaker 1: you should still follow her. She's at Tracy Alloway on Twitter.
Speaker 1: And you should follow our guests. Cameron is on Twitter,
Speaker 1: he's at Fifth Rule, and Lucas on Twitter he is
Speaker 1: at Jake Kawa and sometimes they banter and go back
Speaker 1: and forth and argue about all these things that we
Speaker 1: talk about. If you want more and you should follow
Speaker 1: our producer to fur Foreheads on Twitter. He's at foreheads
Speaker 1: t as well as the bloomberg head of podcast Francesca
Speaker 1: Leavy at Francesca Today. Thanks for listening.