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

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Speaker 1: for everyone involved, it's just me here today. Tracy Alloway

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Speaker 1: has smartly decided to go on vacation, something that I

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Speaker 1: probably should have done, but whatever. The good news is,

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Speaker 1: I have two great guests in the studio with me

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Speaker 1: today and we are going to be talking about some

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Speaker 1: of our favorite market themes and stories from seventeen, which

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Speaker 1: was a fascinating year. So no real reason to have

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Speaker 1: a whole lot of banter from me. In the beginning.

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Speaker 1: I'll bring in our guests. I'd like to bring in

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Speaker 1: a Chris and Age. He's a markets editor here at Bloomberg.

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Speaker 1: Chris and Matt Bosler, who is an economics reporter here

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Speaker 1: at Bloomberg, And so between the two of them, I

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Speaker 1: hope to have a discussion of picking their brains about

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Speaker 1: what we really learned and what we really saw in Chris,

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Speaker 1: let me start with you, what was in your view

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Speaker 1: the big story of it's hard to be a stock

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Speaker 1: market editor this year and not feel like the big

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Speaker 1: overriding presence of two thousand seen was the way the

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Speaker 1: lack of volatility interacted with both political scene and just

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Speaker 1: the propensity of stocks to continually go up all year.

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Speaker 1: I mean, it's a little it's somewhat of a dead

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Speaker 1: horse at this point, but I mean that's what this

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Speaker 1: year will be remembered for, people just basically getting angry

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Speaker 1: at the market, basically for not being more chaotic, not

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Speaker 1: registering more of the sort of political effect I think

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Speaker 1: everyone else was feeling. I'm glad you brought that up, because,

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Speaker 1: of course, this is something that Tracy and I talk

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Speaker 1: a lot about on the show. The frustration that we

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Speaker 1: feel is people who cover markets. You know, we have

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Speaker 1: these conversations every morning. I was like, what's our top

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Speaker 1: story of the day. It's like, well, it's the same

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Speaker 1: top stories it was yesterday. And not only was it

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Speaker 1: the same top stories yesterday, no one really cared about

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Speaker 1: it either. I mean, especially like for years and years

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Speaker 1: after the crisis, like markets were these story and everyone

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Speaker 1: was clicking on our stories, and this year it's like, yeah, Matt,

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Speaker 1: you cover like the fixed income space. A lot of

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Speaker 1: sort of crosses over with your eco beat. Is it

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Speaker 1: a similar vibe in terms of the lack of volatility

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Speaker 1: or how do you see the same thing. So we

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Speaker 1: had two FED presidents just this morning on Bloomberg TV

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Speaker 1: talking about you know, how they're looking at the flattening

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Speaker 1: of the yelk curve and that's been a really reliable

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Speaker 1: recession indicator in the past, and and so that's something

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Speaker 1: that has them concerned. And so, you know, to some extense,

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Speaker 1: the same story playing out in the fixed income markets

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Speaker 1: of very low volatility yield curve flattening. But instead of

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Speaker 1: you know, being sort of this benign, boring thing, it's

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Speaker 1: actually causing a bunch of people to talk about is

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Speaker 1: there a recession around the corner type of thing. And

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Speaker 1: for all this recession talk, Chris like, it's still like

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Speaker 1: no stock investors actually seemed to care about it, about

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Speaker 1: the possibility of about the flattening, like these things that

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Speaker 1: would like at one point maybe have seen like red flags,

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Speaker 1: right like everything else, they don't care about the yield curve.

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Speaker 1: You would have a hard time naming anything that they

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Speaker 1: did care about. This year actually met for our listeners

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Speaker 1: who aren't steeped in this. You know, we talk about

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Speaker 1: the flattening yield curve a lot and how it's a

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Speaker 1: classic recession indicator when it inverts. Can you give like

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Speaker 1: the thirty second explanation of what it is that people

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Speaker 1: look out for. What what is the flattening yield curve

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Speaker 1: and why is it seen as something that potentially raises

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Speaker 1: alarm bells? Sure, so that the yield curve is the

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Speaker 1: difference between long term interest rates and short term interest rates, right,

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Speaker 1: and so short term interest rates are kind of set

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Speaker 1: by the Federal Reserve, the central Bank, and long term

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Speaker 1: interest rates are kind of a reflection of where people

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Speaker 1: think the central bank has ultimately going to take the

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Speaker 1: short term interest rates. And so we're in a situation

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Speaker 1: where the Fed is raising rates and you know, they're

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Speaker 1: telling you that they're going to go to this more

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Speaker 1: neutral level of interest rates, and so the yield curve

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Speaker 1: is flattening a short term interest rates rise and get

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Speaker 1: to that level of long term interest rates. Now, in

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Speaker 1: the past, that's tended to be a pretty good recession indicator,

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Speaker 1: just perhaps because the business cycle has tended to be

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Speaker 1: of a similar length as the central banks tightening cycle.

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Speaker 1: And so there's a bit of a you know, correlation

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Speaker 1: causation question there. Does the yelker really reflect anything intrinsic

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Speaker 1: about the probability of a recession or is it just

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Speaker 1: that the central bank tends to raise interest rates over

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Speaker 1: the course of an economic cycle, and then the economic

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Speaker 1: cycle invariably ends at some point, so stock investors don't

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Speaker 1: or equity investors or maybe no investors seem to care

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Speaker 1: about that. Something goes that you mentioned Chris in the

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Speaker 1: beginning that we obviously have to talk about is not

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Speaker 1: only are there sort of like no concerns about anything economics,

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Speaker 1: but politics. Absolutely extraordinary year for politics, geopolitics, all these

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Speaker 1: elections that went on, and you would think that there

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Speaker 1: would be some feedback loop or somehow that would be reflected.

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Speaker 1: But as you said, nobody seems to care. Why does

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Speaker 1: nobody care? So if we're talking about like literal favorite

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Speaker 1: stories of the last twelve months, one story that I remember,

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Speaker 1: and really everyone who works for me remembers because I

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Speaker 1: bring it up about every other day was a blog

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Speaker 1: post by Macroman Cameron christ and the m Live blog

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Speaker 1: where he took some of these wedged political chaos indexes

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Speaker 1: that exist these academics, these things that are piece good.

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Speaker 1: He took one of those, and a standard story for

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Speaker 1: the first half of two thousand and seventeen was look

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Speaker 1: how they're going up and look how the vix is

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Speaker 1: going down and basically this cannot stand. And and so

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Speaker 1: he took the political Disorder Index and he decomposed it.

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Speaker 1: He unpacked it and found out what all of its

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Speaker 1: components were, and part of it was policy guidance and

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Speaker 1: China and some economic stuff in enough, which he was like,

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Speaker 1: makes sense. That's pretty volatile. You can see why it's

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Speaker 1: going up priority of it. It was hilariously, we're media

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Speaker 1: mentions of political disorder basically, so it's this big sort

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Speaker 1: of echo chamber. I was worried that it was going

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Speaker 1: to go there because then, of course that always makes me,

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Speaker 1: it should make all of us feel guilty. We talk

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Speaker 1: about this political volatility and all this stuff going on.

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Speaker 1: How much is just us talking about it? Yeah, there

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Speaker 1: is this echo chamber aspector. I don't think it's I

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Speaker 1: think it's all unsurprising and basically forgivable. Like, what else

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Speaker 1: is a news person you're gonna talk about in two

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Speaker 1: thousand seventeen. Well, yeah, well, I mean I think the

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Speaker 1: truth is that my view is the way it seems

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Speaker 1: like there's one story and we all know what it is,

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Speaker 1: and it's everything having to do with Trump, and there's

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Speaker 1: no second story. And for a for people who are

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Speaker 1: interested in the news and reporting. It's not ideal. Well,

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Speaker 1: it's just it's unavoidable. There's just no no getting around

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Speaker 1: getting away from it. But one thing that like, in

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Speaker 1: terms of what drove this market and mad I know,

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Speaker 1: you know, coming from the eco perspective, is all this

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Speaker 1: noise aside, you old curviside politics aside. Things are good,

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Speaker 1: Like around the world we talked about global synchronous growth,

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Speaker 1: like things are pretty good, right, yeah, exactly, And it

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Speaker 1: kind of goes back to the point, you know, you

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Speaker 1: look at this flattening yield curve and it's supposed to

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Speaker 1: be this recession indicator, but like you say, things look

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Speaker 1: pretty good, and it's kind of hard looking around to see,

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Speaker 1: you know, where that recession is going to come from.

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Speaker 1: So I think it's it's more of these old narratives

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Speaker 1: being busted, which we've been dealing with a lot this

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Speaker 1: year and over the past few years. And earnings have

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Speaker 1: been really good. Yeah. Another pretty good story that my

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Speaker 1: team did during one of Trump's tweet fests about how

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Speaker 1: great the TAO is was to look at how earnings

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Speaker 1: estimates had evolved in two thousand seventeen, and you can

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Speaker 1: make a pretty good case that what happened was that

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Speaker 1: the earnings estimates that existed before election day were matched

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Speaker 1: where you got to they're about thirty bucks a share

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Speaker 1: in the SMP. That was the estimate before election day,

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Speaker 1: and that's pretty much what happened. So did Trump cause that?

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Speaker 1: I mean, you certainly say he didn't get in the

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Speaker 1: way of those being hit, but earning scrow, however you

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Speaker 1: frame it, was strong and the backbone of the rally.

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Speaker 1: All right. So, for as much as we'd like to

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Speaker 1: talk about how the markets ignored everything on an economic

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Speaker 1: basis and an earnings basis, things were pretty good. Matt

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Speaker 1: from the economic world, what was your favorite story of So,

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Speaker 1: I think my favorite story of seen had to be

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Speaker 1: just kind of the biggest story on our beat as well,

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Speaker 1: which was this surprise shortfall and inflation, because everybody thought

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Speaker 1: that inflation was going to continue going up this year

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Speaker 1: because the labor market was getting tight and the unemployment

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Speaker 1: rate was falling, and there's just been so much handwringing

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Speaker 1: in the economics community this year over the fact that

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Speaker 1: this relationship for some reason didn't hold up. And the

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Speaker 1: reason why it's so interesting is it's kind of leading

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Speaker 1: to all of these different theories. But you have this

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Speaker 1: sort of protagonist in the FED at the center of

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Speaker 1: the story, just sticking to its guns, but also kind

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Speaker 1: of telling us kind of looking forward to next year.

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Speaker 1: Next year, if things don't get back on track with

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Speaker 1: inflation the way that we think they should, then we

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Speaker 1: might have to have a rethink. So you mentioned there's

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Speaker 1: all these different theories for why inflation hasn't picked up

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Speaker 1: the way people expect. Various people have called this the

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Speaker 1: inflation mystery, And do you have a favorite theory for

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Speaker 1: why we haven't seen inflation. Well, I mean, I think

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Speaker 1: if you just look at the data, what we're seeing

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Speaker 1: is a slowdown in rental inflation, which is really always

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Speaker 1: kind of the key component in inflation. And so that

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Speaker 1: is an interesting story because a lot of the sort

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Speaker 1: of build up in sort of the residential sector that

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Speaker 1: we've seen in this expansion has been in apartments, right,

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Speaker 1: the home ownership rate coming down, people moving into cities

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Speaker 1: being renters more than owners, and so that's going to

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Speaker 1: be a very interesting thing to see if that continues

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Speaker 1: in or if we start to see you know, some

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Speaker 1: more ownership going back up. And Chris, this lack of inflation.

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Speaker 1: While it may cause people at the FED to wonder

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Speaker 1: about their models and it may cause a lot of

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Speaker 1: economist anxiety, investors have loved it because this is like

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Speaker 1: the Goldilocks story. Well. Absolutely, I mean anything that results

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Speaker 1: in the FED holding interest rates where they are I

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Speaker 1: think they're happy about. If you look at like reasonable

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Speaker 1: people can disagree about Trump's impact in the market. I

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Speaker 1: think it's very hard to argue that one percent interest

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Speaker 1: rates haven't been a great thing for stock investors. So

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Speaker 1: as long as inflations hasn't been a threat, they've been

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Speaker 1: able to maintain that. Are there any signs met that

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Speaker 1: inflation is actually going to turn around, because it's not

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Speaker 1: just this year that people have thought it was going

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Speaker 1: to come. People have been warning about inflation literally forever.

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Speaker 1: It seems like a good theory. There might eventually they

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Speaker 1: might be right. Right, Yeah, absolutely, I mean they eventually

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Speaker 1: might be. But to answer your question, no, there aren't

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Speaker 1: really any signs that it's necessarily going to pick up

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Speaker 1: when you look at the inflation data itself, and so

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Speaker 1: you know, we have all of these indicators that we

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Speaker 1: used to use to forecast and aation that worked better

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Speaker 1: than they are now, and so it's kind of a

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Speaker 1: wide open question as to whether they'll work again. Yeah,

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Speaker 1: so this gets to the key question, how much is

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Speaker 1: the economics community really preparing to sort of just rip

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Speaker 1: up the old models, or like, are they really willing

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Speaker 1: to take that step and say, we don't know? Yeah,

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Speaker 1: that's a great question. I don't, you know, looking at

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Speaker 1: what they have been working on, it's not clear that

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Speaker 1: they have really a ready replacement that's going to be

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Speaker 1: ready in six or twelve months time. So I think

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Speaker 1: they're kind of really hoping against hope that things start

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Speaker 1: to work out again the way that they used to

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Speaker 1: or else it's if there's going to be exponentially more handringing. Potentially,

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Speaker 1: it does feel like if we get to this point

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Speaker 1: next year and there's like no inflation in ten, things

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Speaker 1: are going to start to become really untenable for people. Yeah,

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Speaker 1: it's already starting to sink in a little bit in

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Speaker 1: that you see FED policymakers starting to come up with

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Speaker 1: their own unorthodox theories of inflation. But you know, as

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Speaker 1: yet no real economic work has been done on it,

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Speaker 1: so it's just kind of hearsay at the moment. I

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Speaker 1: guess all right, well, Chris and Matt, it was great

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Speaker 1: to have you on this episode talking about the big

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Speaker 1: themes for seventeen, the extraordinary lack of volatility, the flattening

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Speaker 1: yield curve, the incredible lack of inflation despite economists and

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Speaker 1: fed all predicting it would pick up. Really appreciate you

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Speaker 1: both coming out. Thank you, and that has been our

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Speaker 1: wrap up episode for seventeen, the big themes in markets

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Speaker 1: and economics, and stay tuned next week where we're going

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Speaker 1: to be tongue to Chris and Matt about what to

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Speaker 1: watch for. And you can follow our guests on Twitter,

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Speaker 1: Chris nag at Chris ag One and Matt Bosler at

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Speaker 1: Bose bo E s Underscore and myself Joe Wisenthal on

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Speaker 1: Twitter at The Stalwart and even though Tracy is not here,

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Speaker 1: you could follow her at Tracy Ella. Thanks for listening,