WEBVTT - These Will Be The Big Markets And Economics Stories In 2018 0:00:08.280 --> 0:00:12.960 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:13.560 --> 0:00:17.400 Once again, sadly Tracy Alloway is not here, so I 0:00:17.480 --> 0:00:20.880 have to do uh soul hosting duties. The good news 0:00:21.000 --> 0:00:24.120 is I have too fabulous guests in the studio with me. 0:00:24.520 --> 0:00:29.560 So last week we talked about themes the big stories 0:00:29.640 --> 0:00:32.800 that we saw over the last year, and so we 0:00:32.840 --> 0:00:36.159 have the same two guests on this week, Chris and 0:00:36.240 --> 0:00:39.520 ag and Matt Bosler of Bloomberg News, and this time 0:00:39.560 --> 0:00:43.239 we're going to look forward and try to see what 0:00:43.400 --> 0:00:46.639 we're going to be talking about. Chris and Matt, Thank 0:00:46.640 --> 0:00:53.680 you very much for joining us. Chris, let's start with you. 0:00:54.840 --> 0:00:59.640 What's your spat is the same as it would be 0:00:59.720 --> 0:01:02.600 every which is that the SMP will rise approximately nine 0:01:02.600 --> 0:01:06.880 point three percent. My actual prediction, though, is that nine 0:01:07.200 --> 0:01:09.680 is the average. Actually I'm making that it's roughly that, 0:01:09.959 --> 0:01:11.760 but I just feel like that's the one thing that 0:01:12.000 --> 0:01:14.800 you should predict when asked that question. I feel like 0:01:14.959 --> 0:01:18.360 there's a possibility in two thousand and eighteen that even 0:01:18.400 --> 0:01:21.240 if you get the ten percent roughly gained in the SMP, 0:01:22.040 --> 0:01:25.480 the sentiment towards the stock market seems to me to 0:01:25.560 --> 0:01:28.280 be on the cusp of souring in a weird way. 0:01:28.480 --> 0:01:30.920 You have Donald Trump associating himself with the run up, 0:01:31.319 --> 0:01:34.120 and you have the tax bill that just passed, and 0:01:34.160 --> 0:01:37.040 a lot of sort of populous offense is being taken 0:01:37.080 --> 0:01:39.800 towards the tax bill. The way they're framing their objection 0:01:39.880 --> 0:01:41.800 to it is that it's essentially a gift for the 0:01:41.840 --> 0:01:45.839 one percent or two big corporate donation. And I feel 0:01:45.880 --> 0:01:49.560 like if you see the things that the Trump critics 0:01:49.600 --> 0:01:53.440 are predicting actually happen, particularly if you see companies take 0:01:53.480 --> 0:01:56.680 their windfall and basically shower it on their shareholders, and 0:01:56.760 --> 0:01:59.160 that causes a kind of melt up in the stock market. 0:02:00.160 --> 0:02:02.520 The stock market is a kind of political whipping boy 0:02:02.760 --> 0:02:05.040 that tame I could see take off. I really like this. 0:02:05.160 --> 0:02:08.840 So the just being Trump tweets about the stock market 0:02:08.880 --> 0:02:12.720 all the time. It's obviously doing phenomenally well, but ownership 0:02:12.800 --> 0:02:16.480 and participation in the stock market is not that widespread. 0:02:16.960 --> 0:02:19.480 And so what you then get is this contingent of 0:02:19.520 --> 0:02:23.200 people who resent the rising stock market and this feeling 0:02:23.280 --> 0:02:25.440 like all these people are getting rich or other people 0:02:25.560 --> 0:02:27.600 I mean, and the stock market, if you think about it, 0:02:27.600 --> 0:02:29.959 it stands for a lot of things that already annoy 0:02:30.080 --> 0:02:33.240 people a lot. It stands for like the margin impact 0:02:33.280 --> 0:02:36.720 of automation and sort of the monopolistic powers of companies 0:02:36.760 --> 0:02:40.320 like Amazon and the outsourcing of labor. I think there's 0:02:40.320 --> 0:02:43.240 a general consensus or there's a feeling that basically pays 0:02:43.280 --> 0:02:45.160 off in the stock market. So there's already a kind 0:02:45.160 --> 0:02:50.480 of approaching critical mass for sort of vilification of equity. 0:02:50.520 --> 0:02:52.280 I mean it's hard to imagine. I mean everyone always 0:02:52.280 --> 0:02:55.239 said big thermometer of US well being is the stock market. 0:02:55.480 --> 0:02:57.800 This could be completely wrong and maybe everyone will be happy, 0:02:57.880 --> 0:03:00.680 but yeah, I really like that. So it any seventeen, 0:03:00.760 --> 0:03:04.120 the theme was the stock market is boring, and the 0:03:05.080 --> 0:03:08.680 theme is everyone's angry at the stock market. Matt Chris 0:03:08.760 --> 0:03:14.000 mentioned the tax bill and the perception that, you know, 0:03:14.080 --> 0:03:17.400 it's largely a gift of corporations and the wealthy, and 0:03:17.600 --> 0:03:21.240 something that I've been really struck by interviewing people mostly 0:03:21.320 --> 0:03:24.200 on TV, is I have yet to hear from a 0:03:24.240 --> 0:03:28.520 single economics person or even a market person who is 0:03:28.520 --> 0:03:31.240 not associated with administration who thinks that this is really 0:03:31.240 --> 0:03:34.600 going to ignite a real spark in the economy. Have 0:03:34.680 --> 0:03:36.600 you talked to anyone who thinks it's actually going to 0:03:36.880 --> 0:03:39.360 move the needle on the economy. No. I mean, the 0:03:39.400 --> 0:03:41.960 only thing we've seen, you know, in that regard is 0:03:42.000 --> 0:03:44.640 the fed's latest round of forecasts, which they weren't really 0:03:44.680 --> 0:03:47.520 able to fully explain why, you know, they're expecting such 0:03:47.560 --> 0:03:50.280 a big bump to growth next year. But it's interesting 0:03:50.320 --> 0:03:52.440 because at the same time, we have these sort of 0:03:52.440 --> 0:03:56.520 cyclical forces where nine years into this expansion, it looks 0:03:56.520 --> 0:03:59.120 like we might actually be on the cusp of a 0:03:59.160 --> 0:04:03.480 pickup in productivity, growth in een and the types of 0:04:03.520 --> 0:04:07.520 things that would lead businesses to spend more and invest more. 0:04:07.680 --> 0:04:10.440 And so just thinking about that in terms of the 0:04:10.520 --> 0:04:13.040 likely Trump tweets that we're going to see, it's kind 0:04:13.080 --> 0:04:15.800 of interesting because again, that might turn out to be 0:04:15.840 --> 0:04:18.760 a red herring, but it's gonna be. I'm just I'm 0:04:18.800 --> 0:04:23.000 already imagining how furious his critics and detractors are going 0:04:23.040 --> 0:04:26.600 to be when the economy starts taking off, because if 0:04:26.600 --> 0:04:28.680 we hit a certain point in the cycle, that would 0:04:28.720 --> 0:04:33.080 cause greater capital investment, and Trump and all his fans 0:04:33.120 --> 0:04:35.840 are deciding the tax cuts, yeah exactly. You know, like 0:04:35.920 --> 0:04:39.240 the reality is wage growth has been muted in this expansion, 0:04:39.279 --> 0:04:41.559 but it's been rising for several years, and we're getting 0:04:41.600 --> 0:04:44.440 to the point where just naturally businesses are starting to 0:04:44.480 --> 0:04:47.480 invest more in labor saving technology, that sort of thing. 0:04:47.520 --> 0:04:51.039 That's kind of exactly what you would expect. Chris, on 0:04:51.160 --> 0:04:53.719 the matter of the tax cuts, you know, it's funny 0:04:53.720 --> 0:04:56.800 we're recording this just so everyone knows before they've technically 0:04:56.839 --> 0:04:59.120 passed it, we're assuming they're going to pass it because 0:04:59.120 --> 0:05:01.680 it doesn't look like there's any ambiguity. We've had this 0:05:01.839 --> 0:05:05.599 discussion a lot about what is so called like priced in, 0:05:05.760 --> 0:05:07.919 and you know, we've had this incredible rally in the 0:05:07.960 --> 0:05:12.000 stock market this year. What is your best view on 0:05:12.040 --> 0:05:16.360 how much can be attributed to the presumption of tax relief. Well, 0:05:16.480 --> 0:05:18.360 we ran a story this morning that runs down all 0:05:18.400 --> 0:05:21.279 of the strategisies. Wall Street pundits were basically paid to 0:05:21.279 --> 0:05:24.479 advertise for stocks, and they a lot of them break 0:05:24.520 --> 0:05:26.960 out a separate impact for if and when the tax 0:05:27.120 --> 0:05:30.279 cuts are passed, and generally it's in the ten to 0:05:30.360 --> 0:05:34.120 fifteen bucks per share for the SMP realm. So if 0:05:34.400 --> 0:05:37.839 SMP earnings are about thirty bucks to share, so it 0:05:37.880 --> 0:05:41.000 could add seven or eight percent to the SMPS earnings, 0:05:41.040 --> 0:05:43.440 which that sounds if you look at that relative to 0:05:43.440 --> 0:05:46.679 the gains this year, that's not implausible. Then basically maybe 0:05:47.000 --> 0:05:49.440 a quarter or third of the gains that came through 0:05:49.480 --> 0:05:52.760 this year were related to the tax break. That strikes 0:05:52.839 --> 0:05:55.360 me as I mean all of it's the imprecisely. I 0:05:55.560 --> 0:05:58.880 think that really strikes me though, in this discussion, is 0:05:59.160 --> 0:06:02.919 all the idea that Trump is unleashed something and investors 0:06:03.000 --> 0:06:06.279 really want tax cuts. Is that from basically two thousand 0:06:06.320 --> 0:06:09.240 and ten through the end of two thousands sixteen, we 0:06:09.240 --> 0:06:12.719 had this extraordinary market, really without d C being able 0:06:12.760 --> 0:06:15.719 to deliver anything because we've been a total gridlock, and 0:06:15.800 --> 0:06:18.320 so the idea that, like, suddenly investors that need to 0:06:18.320 --> 0:06:21.240 see tax cuts to continue this extraordinary rally always seemed 0:06:21.240 --> 0:06:23.159 a little It is, But by the same token, I 0:06:23.200 --> 0:06:25.159 think that if you look at the people designing the 0:06:25.200 --> 0:06:27.680 tax cut, they were aiming at a pretty squarely at 0:06:27.680 --> 0:06:29.800 the stock market. It's part it seems like it's part 0:06:29.839 --> 0:06:32.000 of their trickle down philosophy. They wanted something that would 0:06:32.000 --> 0:06:36.000 be easily identifiable and appreciated by stock investors at least, 0:06:36.520 --> 0:06:38.680 and I feel like, for better or worse, they've done 0:06:38.720 --> 0:06:41.080 something that basically it's going to achieve that. It's hard 0:06:41.120 --> 0:06:42.880 to argue that the last couple of weeks haven't been 0:06:42.920 --> 0:06:48.680 a slightly higher velocity rally than we'd seen previously. Matt Boler, 0:06:48.720 --> 0:06:51.640 I want to turn to you, what is, in your view, 0:06:51.680 --> 0:06:54.440 going to be the big economic story of I think 0:06:54.440 --> 0:06:57.159 the big economic story of teen is going to be 0:06:57.240 --> 0:06:59.800 how little changes in terms of the trends that we're 0:07:00.160 --> 0:07:03.400 in the economy, and specifically, I think we're going to 0:07:03.440 --> 0:07:06.560 continue to see a solid decline in the unemployment rate 0:07:06.600 --> 0:07:10.600 without much inflation. And I think the way that those 0:07:10.640 --> 0:07:12.320 two are going to fit together is we're going to 0:07:12.360 --> 0:07:15.840 finally see that pick up in productivity growth that has 0:07:15.880 --> 0:07:18.680 been missing for a long time, and I think we're 0:07:18.760 --> 0:07:21.120 finally starting to get to that point. Well, this has 0:07:21.160 --> 0:07:23.440 been one of the funny questions to me. So you know, 0:07:23.520 --> 0:07:28.160 like unemployment has been plunging all year, and people are like, Okay, 0:07:28.160 --> 0:07:31.040 we're really getting close to full employment now. We must be, 0:07:31.040 --> 0:07:33.400 because it's going down so fast, and so wages are 0:07:33.400 --> 0:07:35.520 going to pick up. What always struck me is that 0:07:35.560 --> 0:07:38.080 you could take the same data and make the opposite argument, 0:07:38.120 --> 0:07:41.760 which is that if unemployment is falling faster than people 0:07:41.880 --> 0:07:45.000 expect without a pick up in wage growth or inflation, 0:07:45.440 --> 0:07:47.560 that maybe it could just fall a lot further, because 0:07:47.600 --> 0:07:49.200 you know, it sort of gets to what we're talking 0:07:49.200 --> 0:07:51.840 about on the last episode. Maybe just the whole premise 0:07:51.920 --> 0:07:54.920 of there being some point where inflation and wage growth 0:07:55.040 --> 0:07:58.360 kicks in is just flaw. Yeah, that's what policymakers are 0:07:58.480 --> 0:08:00.720 kind of starting to entertain. Right. So, this idea of 0:08:00.720 --> 0:08:04.320 full employment as this level of employment that would trigger 0:08:04.400 --> 0:08:07.440 runaway inflation was born in the nineteen eighties, right, and 0:08:07.440 --> 0:08:09.760 that was coming right off the heels of a high 0:08:09.800 --> 0:08:13.480 inflation environment in the nineteen seventies that was fairly unique. 0:08:13.760 --> 0:08:16.440 And then as you go forward into the nineteen nineties, 0:08:17.080 --> 0:08:19.360 we had a very strong labor market at the end 0:08:19.400 --> 0:08:21.800 of the nineteen nineties, a very low unemployment rate, but 0:08:21.880 --> 0:08:24.840 it didn't really manifest itself in higher inflation. It manifests 0:08:24.880 --> 0:08:28.680 itself in higher productivity growth. And so if anything, you know, 0:08:28.720 --> 0:08:31.680 you're kind of weighing, does the experience of forty years 0:08:31.720 --> 0:08:35.199 ago seemed more likely to reoccur or does the experience 0:08:35.200 --> 0:08:37.480 of twenty years ago seemed more likely to reoccur? And 0:08:37.520 --> 0:08:40.720 given you know, all the big global changes that we've 0:08:40.720 --> 0:08:42.960 talked about, you know, over the last several decades, it 0:08:43.000 --> 0:08:45.920 seems like maybe the first one to reach for it 0:08:45.960 --> 0:08:49.840 would be the most recent experience, Chris. If Matt is right, 0:08:50.000 --> 0:08:52.600 and we sort of continue to see this economy that 0:08:52.720 --> 0:08:56.040 homes along, but none of the inflation pressures that pick 0:08:56.160 --> 0:08:59.480 up that Again, it just sounds like a great recipe 0:08:59.520 --> 0:09:01.560 for Stoff. It's hard to imagine that being a problem 0:09:01.559 --> 0:09:06.240 for your typical infestor how dominant is fears of the 0:09:06.280 --> 0:09:10.400 FED as the entity that could kill this rally. If 0:09:10.440 --> 0:09:13.280 you ask people what could end this incredible market run, 0:09:13.320 --> 0:09:15.760 we've seen how many people would put that as their 0:09:15.760 --> 0:09:17.719 first thing. I would say a fair number. One thing 0:09:17.760 --> 0:09:20.439 that's true, though, is that you have a dwindling population 0:09:20.480 --> 0:09:22.959 of people who even remember the FED killing a stock 0:09:23.000 --> 0:09:25.400 market rally. I feel like it probably should be the 0:09:25.400 --> 0:09:28.240 first thing that cursed everyone, because that's typically how it happens. 0:09:28.280 --> 0:09:30.600 I mean, but there there may not be that many 0:09:30.640 --> 0:09:34.400 people left. We have to admit that even I have 0:09:34.480 --> 0:09:38.040 a hard time imagining the FED actually killing a market rally. 0:09:38.080 --> 0:09:39.960 And I don't know whether that's because of my experience 0:09:40.280 --> 0:09:42.000 or because I just sort of think of the FED 0:09:42.120 --> 0:09:43.880 is in this mode where it doesn't want to do 0:09:43.960 --> 0:09:46.559 any harm. But even even though it seems kind of 0:09:46.559 --> 0:09:48.760 obvious that could be a risk, it's hard for me 0:09:48.800 --> 0:09:51.439 to remember, well, right, it's hard for me to believe. Yeah, 0:09:51.559 --> 0:09:55.920 this has been a unique experience of federal reserve policy experimentation. So, 0:09:56.960 --> 0:10:00.600 but the corollary is that for many history like the 0:10:00.600 --> 0:10:03.240 FED is sort of caused recessions and so or it's 0:10:03.240 --> 0:10:07.440 sort of like FED tightening proceeded a recession in our minds, 0:10:07.760 --> 0:10:10.120 I think, probably because we're still doing with the scars 0:10:10.200 --> 0:10:13.440 of the Great Recession and the financial crisis. We think 0:10:13.440 --> 0:10:17.120 of recessions, is these like cataclysmic events, But it's not. 0:10:17.320 --> 0:10:19.120 You know, it wouldn't be that weird for the FED 0:10:19.160 --> 0:10:21.240 to tighten and you get to slow down for a 0:10:21.280 --> 0:10:25.160 few quarters and then you sort of go back to normal. Yeah. No, 0:10:25.280 --> 0:10:27.560 that's absolutely right. And I mean, to some extent, you 0:10:27.559 --> 0:10:29.640 could argue that's what we've seen over the last two 0:10:29.720 --> 0:10:33.280 years or so. Right, So, before the FED started raising rates, 0:10:33.320 --> 0:10:37.680 you saw investors starting pricing that in coming in the 0:10:37.720 --> 0:10:41.760 global currency markets, and we had a big appreciation in 0:10:41.800 --> 0:10:46.200 the dollar alongside that crash and oil prices in and 0:10:46.280 --> 0:10:48.920 that really did lead to a large slowdown, not only 0:10:48.960 --> 0:10:52.079 because the US has become such a big oil exporting country, 0:10:52.400 --> 0:10:54.880 but also because of the effect it had on manufacturing, 0:10:55.280 --> 0:10:57.680 and so to some extent, we're just still kind of 0:10:57.720 --> 0:10:59.920 seeing that work through the system. I remember that grow 0:11:00.040 --> 0:11:03.000 it's scared. So how much at the time did people 0:11:03.160 --> 0:11:05.880 see that as sort of like fear of like, Okay, 0:11:05.880 --> 0:11:07.760 the FED is getting ready to make its move, time 0:11:07.840 --> 0:11:11.680 for some shifts. Well, yeah, absolutely, And at the same time, 0:11:11.679 --> 0:11:14.000 what you had was, you know, the European Central Bank 0:11:14.040 --> 0:11:17.199 in the Bank of Japan notably also shifting towards an 0:11:17.200 --> 0:11:21.119 easier monetary policy, starting to launch their quantitative easing programs. 0:11:21.400 --> 0:11:24.080 They were so far behind the FED with that that 0:11:24.160 --> 0:11:26.080 it just came at a time when you know, both 0:11:26.120 --> 0:11:27.959 were going in different directions for the first time in 0:11:28.000 --> 0:11:30.240 a long time. That that really had a powerful impact. 0:11:30.280 --> 0:11:34.440 So that exacerbates this sort of tightening financial conditions, that 0:11:34.520 --> 0:11:38.080 surging dollar, that monetary policy gap exactly. So it's kind 0:11:38.080 --> 0:11:40.720 of like the tightening was extremely front loaded, you could say, 0:11:40.720 --> 0:11:42.240 in this cycle, and at least in terms of the 0:11:42.320 --> 0:11:46.360 economic effects Chris in terms of other risks to the 0:11:46.400 --> 0:11:49.120 market besides the fed like what would be the number 0:11:49.160 --> 0:11:51.920 two things people would say, just to take it slightly 0:11:51.960 --> 0:11:54.199 out of the realm of economics. I feel like one 0:11:54.200 --> 0:11:55.760 of the big stories of the market this year has 0:11:55.800 --> 0:11:59.040 been boring lye the rise of passive investing, and along 0:11:59.080 --> 0:12:02.160 with that the weird thing we're covering the stock market 0:12:02.200 --> 0:12:06.040 has become this kind of weird science experiment. You're sort 0:12:06.040 --> 0:12:07.600 of have to be. You have to be in an 0:12:08.120 --> 0:12:10.560 prepared to deal with financial economics. I remember there was 0:12:10.600 --> 0:12:13.760 that day that the Anomaly study came out and saying 0:12:13.760 --> 0:12:16.480 that all of these stock market patterns and academic papers 0:12:16.480 --> 0:12:19.079 were a little off, and everyone has absolutely freaked out 0:12:19.120 --> 0:12:23.400 about it. I feel like there's so much quant underpinning 0:12:23.440 --> 0:12:26.280 of the market right now that it's not out of 0:12:26.320 --> 0:12:29.040 the realm of possibility that some kind of jam, not 0:12:29.160 --> 0:12:33.080 a meltdown, but somehow those underpinnings get jammed up somehow 0:12:33.160 --> 0:12:35.839 next year, and right like every little blip, now people 0:12:36.120 --> 0:12:38.720 if there's some quant explanation, right like you got half 0:12:38.720 --> 0:12:41.480 a percent, like people are selling winners, which is in 0:12:41.520 --> 0:12:43.480 another way of saying, no matter what happens, we will 0:12:43.480 --> 0:12:46.800 say it was a quantel You're not supposed to do 0:12:47.160 --> 0:12:51.000 not really. Yeah, well I think that about does it. 0:12:51.520 --> 0:12:54.400 Chris and ag Mad Bosler, Bloomberg News, thank you so 0:12:54.480 --> 0:12:57.640 much for joining us looking ahead. I think there's are 0:12:57.640 --> 0:13:01.640 great themes for ther twenty eighteen. That does it for 0:13:01.679 --> 0:13:05.040 odd lots for We'll be back in the new year. 0:13:05.080 --> 0:13:08.120 Tracy will be back with a full suite of shows 0:13:08.160 --> 0:13:12.080 looking at the random, odd lots corners of the financial markets. 0:13:12.520 --> 0:13:15.480 In the meantime, you can follow Chris on Twitter at 0:13:15.559 --> 0:13:18.720 Chris and a g One. You could follow Matt Bosler 0:13:18.920 --> 0:13:22.679 on Twitter at Bows Underscore. You can follow me on 0:13:22.720 --> 0:13:25.440 Twitter at the Stalwart, and you can follow Tracy on 0:13:25.480 --> 0:13:28.760 Twitter at Tracy Elloway. Thanks for listening.