Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: Once again, sadly Tracy Alloway is not here, so I
Speaker 1: have to do uh soul hosting duties. The good news
Speaker 1: is I have too fabulous guests in the studio with me.
Speaker 1: So last week we talked about themes the big stories
Speaker 1: that we saw over the last year, and so we
Speaker 1: have the same two guests on this week, Chris and
Speaker 1: ag and Matt Bosler of Bloomberg News, and this time
Speaker 1: we're going to look forward and try to see what
Speaker 1: we're going to be talking about. Chris and Matt, Thank
Speaker 1: you very much for joining us. Chris, let's start with you.
Speaker 1: What's your spat is the same as it would be
Speaker 1: every which is that the SMP will rise approximately nine
Speaker 1: point three percent. My actual prediction, though, is that nine
Speaker 1: is the average. Actually I'm making that it's roughly that,
Speaker 1: but I just feel like that's the one thing that
Speaker 1: you should predict when asked that question. I feel like
Speaker 1: there's a possibility in two thousand and eighteen that even
Speaker 1: if you get the ten percent roughly gained in the SMP,
Speaker 1: the sentiment towards the stock market seems to me to
Speaker 1: be on the cusp of souring in a weird way.
Speaker 1: You have Donald Trump associating himself with the run up,
Speaker 1: and you have the tax bill that just passed, and
Speaker 1: a lot of sort of populous offense is being taken
Speaker 1: towards the tax bill. The way they're framing their objection
Speaker 1: to it is that it's essentially a gift for the
Speaker 1: one percent or two big corporate donation. And I feel
Speaker 1: like if you see the things that the Trump critics
Speaker 1: are predicting actually happen, particularly if you see companies take
Speaker 1: their windfall and basically shower it on their shareholders, and
Speaker 1: that causes a kind of melt up in the stock market.
Speaker 1: The stock market is a kind of political whipping boy
Speaker 1: that tame I could see take off. I really like this.
Speaker 1: So the just being Trump tweets about the stock market
Speaker 1: all the time. It's obviously doing phenomenally well, but ownership
Speaker 1: and participation in the stock market is not that widespread.
Speaker 1: And so what you then get is this contingent of
Speaker 1: people who resent the rising stock market and this feeling
Speaker 1: like all these people are getting rich or other people
Speaker 1: I mean, and the stock market, if you think about it,
Speaker 1: it stands for a lot of things that already annoy
Speaker 1: people a lot. It stands for like the margin impact
Speaker 1: of automation and sort of the monopolistic powers of companies
Speaker 1: like Amazon and the outsourcing of labor. I think there's
Speaker 1: a general consensus or there's a feeling that basically pays
Speaker 1: off in the stock market. So there's already a kind
Speaker 1: of approaching critical mass for sort of vilification of equity.
Speaker 1: I mean it's hard to imagine. I mean everyone always
Speaker 1: said big thermometer of US well being is the stock market.
Speaker 1: This could be completely wrong and maybe everyone will be happy,
Speaker 1: but yeah, I really like that. So it any seventeen,
Speaker 1: the theme was the stock market is boring, and the
Speaker 1: theme is everyone's angry at the stock market. Matt Chris
Speaker 1: mentioned the tax bill and the perception that, you know,
Speaker 1: it's largely a gift of corporations and the wealthy, and
Speaker 1: something that I've been really struck by interviewing people mostly
Speaker 1: on TV, is I have yet to hear from a
Speaker 1: single economics person or even a market person who is
Speaker 1: not associated with administration who thinks that this is really
Speaker 1: going to ignite a real spark in the economy. Have
Speaker 1: you talked to anyone who thinks it's actually going to
Speaker 1: move the needle on the economy. No. I mean, the
Speaker 1: only thing we've seen, you know, in that regard is
Speaker 1: the fed's latest round of forecasts, which they weren't really
Speaker 1: able to fully explain why, you know, they're expecting such
Speaker 1: a big bump to growth next year. But it's interesting
Speaker 1: because at the same time, we have these sort of
Speaker 1: cyclical forces where nine years into this expansion, it looks
Speaker 1: like we might actually be on the cusp of a
Speaker 1: pickup in productivity, growth in een and the types of
Speaker 1: things that would lead businesses to spend more and invest more.
Speaker 1: And so just thinking about that in terms of the
Speaker 1: likely Trump tweets that we're going to see, it's kind
Speaker 1: of interesting because again, that might turn out to be
Speaker 1: a red herring, but it's gonna be. I'm just I'm
Speaker 1: already imagining how furious his critics and detractors are going
Speaker 1: to be when the economy starts taking off, because if
Speaker 1: we hit a certain point in the cycle, that would
Speaker 1: cause greater capital investment, and Trump and all his fans
Speaker 1: are deciding the tax cuts, yeah exactly. You know, like
Speaker 1: the reality is wage growth has been muted in this expansion,
Speaker 1: but it's been rising for several years, and we're getting
Speaker 1: to the point where just naturally businesses are starting to
Speaker 1: invest more in labor saving technology, that sort of thing.
Speaker 1: That's kind of exactly what you would expect. Chris, on
Speaker 1: the matter of the tax cuts, you know, it's funny
Speaker 1: we're recording this just so everyone knows before they've technically
Speaker 1: passed it, we're assuming they're going to pass it because
Speaker 1: it doesn't look like there's any ambiguity. We've had this
Speaker 1: discussion a lot about what is so called like priced in,
Speaker 1: and you know, we've had this incredible rally in the
Speaker 1: stock market this year. What is your best view on
Speaker 1: how much can be attributed to the presumption of tax relief. Well,
Speaker 1: we ran a story this morning that runs down all
Speaker 1: of the strategisies. Wall Street pundits were basically paid to
Speaker 1: advertise for stocks, and they a lot of them break
Speaker 1: out a separate impact for if and when the tax
Speaker 1: cuts are passed, and generally it's in the ten to
Speaker 1: fifteen bucks per share for the SMP realm. So if
Speaker 1: SMP earnings are about thirty bucks to share, so it
Speaker 1: could add seven or eight percent to the SMPS earnings,
Speaker 1: which that sounds if you look at that relative to
Speaker 1: the gains this year, that's not implausible. Then basically maybe
Speaker 1: a quarter or third of the gains that came through
Speaker 1: this year were related to the tax break. That strikes
Speaker 1: me as I mean all of it's the imprecisely. I
Speaker 1: think that really strikes me though, in this discussion, is
Speaker 1: all the idea that Trump is unleashed something and investors
Speaker 1: really want tax cuts. Is that from basically two thousand
Speaker 1: and ten through the end of two thousands sixteen, we
Speaker 1: had this extraordinary market, really without d C being able
Speaker 1: to deliver anything because we've been a total gridlock, and
Speaker 1: so the idea that, like, suddenly investors that need to
Speaker 1: see tax cuts to continue this extraordinary rally always seemed
Speaker 1: a little It is, But by the same token, I
Speaker 1: think that if you look at the people designing the
Speaker 1: tax cut, they were aiming at a pretty squarely at
Speaker 1: the stock market. It's part it seems like it's part
Speaker 1: of their trickle down philosophy. They wanted something that would
Speaker 1: be easily identifiable and appreciated by stock investors at least,
Speaker 1: and I feel like, for better or worse, they've done
Speaker 1: something that basically it's going to achieve that. It's hard
Speaker 1: to argue that the last couple of weeks haven't been
Speaker 1: a slightly higher velocity rally than we'd seen previously. Matt Boler,
Speaker 1: I want to turn to you, what is, in your view,
Speaker 1: going to be the big economic story of I think
Speaker 1: the big economic story of teen is going to be
Speaker 1: how little changes in terms of the trends that we're
Speaker 1: in the economy, and specifically, I think we're going to
Speaker 1: continue to see a solid decline in the unemployment rate
Speaker 1: without much inflation. And I think the way that those
Speaker 1: two are going to fit together is we're going to
Speaker 1: finally see that pick up in productivity growth that has
Speaker 1: been missing for a long time, and I think we're
Speaker 1: finally starting to get to that point. Well, this has
Speaker 1: been one of the funny questions to me. So you know,
Speaker 1: like unemployment has been plunging all year, and people are like, Okay,
Speaker 1: we're really getting close to full employment now. We must be,
Speaker 1: because it's going down so fast, and so wages are
Speaker 1: going to pick up. What always struck me is that
Speaker 1: you could take the same data and make the opposite argument,
Speaker 1: which is that if unemployment is falling faster than people
Speaker 1: expect without a pick up in wage growth or inflation,
Speaker 1: that maybe it could just fall a lot further, because
Speaker 1: you know, it sort of gets to what we're talking
Speaker 1: about on the last episode. Maybe just the whole premise
Speaker 1: of there being some point where inflation and wage growth
Speaker 1: kicks in is just flaw. Yeah, that's what policymakers are
Speaker 1: kind of starting to entertain. Right. So, this idea of
Speaker 1: full employment as this level of employment that would trigger
Speaker 1: runaway inflation was born in the nineteen eighties, right, and
Speaker 1: that was coming right off the heels of a high
Speaker 1: inflation environment in the nineteen seventies that was fairly unique.
Speaker 1: And then as you go forward into the nineteen nineties,
Speaker 1: we had a very strong labor market at the end
Speaker 1: of the nineteen nineties, a very low unemployment rate, but
Speaker 1: it didn't really manifest itself in higher inflation. It manifests
Speaker 1: itself in higher productivity growth. And so if anything, you know,
Speaker 1: you're kind of weighing, does the experience of forty years
Speaker 1: ago seemed more likely to reoccur or does the experience
Speaker 1: of twenty years ago seemed more likely to reoccur? And
Speaker 1: given you know, all the big global changes that we've
Speaker 1: talked about, you know, over the last several decades, it
Speaker 1: seems like maybe the first one to reach for it
Speaker 1: would be the most recent experience, Chris. If Matt is right,
Speaker 1: and we sort of continue to see this economy that
Speaker 1: homes along, but none of the inflation pressures that pick
Speaker 1: up that Again, it just sounds like a great recipe
Speaker 1: for Stoff. It's hard to imagine that being a problem
Speaker 1: for your typical infestor how dominant is fears of the
Speaker 1: FED as the entity that could kill this rally. If
Speaker 1: you ask people what could end this incredible market run,
Speaker 1: we've seen how many people would put that as their
Speaker 1: first thing. I would say a fair number. One thing
Speaker 1: that's true, though, is that you have a dwindling population
Speaker 1: of people who even remember the FED killing a stock
Speaker 1: market rally. I feel like it probably should be the
Speaker 1: first thing that cursed everyone, because that's typically how it happens.
Speaker 1: I mean, but there there may not be that many
Speaker 1: people left. We have to admit that even I have
Speaker 1: a hard time imagining the FED actually killing a market rally.
Speaker 1: And I don't know whether that's because of my experience
Speaker 1: or because I just sort of think of the FED
Speaker 1: is in this mode where it doesn't want to do
Speaker 1: any harm. But even even though it seems kind of
Speaker 1: obvious that could be a risk, it's hard for me
Speaker 1: to remember, well, right, it's hard for me to believe. Yeah,
Speaker 1: this has been a unique experience of federal reserve policy experimentation. So,
Speaker 1: but the corollary is that for many history like the
Speaker 1: FED is sort of caused recessions and so or it's
Speaker 1: sort of like FED tightening proceeded a recession in our minds,
Speaker 1: I think, probably because we're still doing with the scars
Speaker 1: of the Great Recession and the financial crisis. We think
Speaker 1: of recessions, is these like cataclysmic events, But it's not.
Speaker 1: You know, it wouldn't be that weird for the FED
Speaker 1: to tighten and you get to slow down for a
Speaker 1: few quarters and then you sort of go back to normal. Yeah. No,
Speaker 1: that's absolutely right. And I mean, to some extent, you
Speaker 1: could argue that's what we've seen over the last two
Speaker 1: years or so. Right, So, before the FED started raising rates,
Speaker 1: you saw investors starting pricing that in coming in the
Speaker 1: global currency markets, and we had a big appreciation in
Speaker 1: the dollar alongside that crash and oil prices in and
Speaker 1: that really did lead to a large slowdown, not only
Speaker 1: because the US has become such a big oil exporting country,
Speaker 1: but also because of the effect it had on manufacturing,
Speaker 1: and so to some extent, we're just still kind of
Speaker 1: seeing that work through the system. I remember that grow
Speaker 1: it's scared. So how much at the time did people
Speaker 1: see that as sort of like fear of like, Okay,
Speaker 1: the FED is getting ready to make its move, time
Speaker 1: for some shifts. Well, yeah, absolutely, And at the same time,
Speaker 1: what you had was, you know, the European Central Bank
Speaker 1: in the Bank of Japan notably also shifting towards an
Speaker 1: easier monetary policy, starting to launch their quantitative easing programs.
Speaker 1: They were so far behind the FED with that that
Speaker 1: it just came at a time when you know, both
Speaker 1: were going in different directions for the first time in
Speaker 1: a long time. That that really had a powerful impact.
Speaker 1: So that exacerbates this sort of tightening financial conditions, that
Speaker 1: surging dollar, that monetary policy gap exactly. So it's kind
Speaker 1: of like the tightening was extremely front loaded, you could say,
Speaker 1: in this cycle, and at least in terms of the
Speaker 1: economic effects Chris in terms of other risks to the
Speaker 1: market besides the fed like what would be the number
Speaker 1: two things people would say, just to take it slightly
Speaker 1: out of the realm of economics. I feel like one
Speaker 1: of the big stories of the market this year has
Speaker 1: been boring lye the rise of passive investing, and along
Speaker 1: with that the weird thing we're covering the stock market
Speaker 1: has become this kind of weird science experiment. You're sort
Speaker 1: of have to be. You have to be in an
Speaker 1: prepared to deal with financial economics. I remember there was
Speaker 1: that day that the Anomaly study came out and saying
Speaker 1: that all of these stock market patterns and academic papers
Speaker 1: were a little off, and everyone has absolutely freaked out
Speaker 1: about it. I feel like there's so much quant underpinning
Speaker 1: of the market right now that it's not out of
Speaker 1: the realm of possibility that some kind of jam, not
Speaker 1: a meltdown, but somehow those underpinnings get jammed up somehow
Speaker 1: next year, and right like every little blip, now people
Speaker 1: if there's some quant explanation, right like you got half
Speaker 1: a percent, like people are selling winners, which is in
Speaker 1: another way of saying, no matter what happens, we will
Speaker 1: say it was a quantel You're not supposed to do
Speaker 1: not really. Yeah, well I think that about does it.
Speaker 1: Chris and ag Mad Bosler, Bloomberg News, thank you so
Speaker 1: much for joining us looking ahead. I think there's are
Speaker 1: great themes for ther twenty eighteen. That does it for
Speaker 1: odd lots for We'll be back in the new year.
Speaker 1: Tracy will be back with a full suite of shows
Speaker 1: looking at the random, odd lots corners of the financial markets.
Speaker 1: In the meantime, you can follow Chris on Twitter at
Speaker 1: Chris and a g One. You could follow Matt Bosler
Speaker 1: on Twitter at Bows Underscore. You can follow me on
Speaker 1: Twitter at the Stalwart, and you can follow Tracy on
Speaker 1: Twitter at Tracy Elloway. Thanks for listening.