Odd Lots - Episode 9: The 2016 Predictions Episode

Episode Date: January 4, 2016

(Bloomberg) -- It’s a new year and a new episode of Odd Lots. Co-hosts Joe Weisenthal and Tracy Alloway have re-stoked our proverbial holiday fire, refilled our wine glasses and are ready to continue our conversation with a newly relaxed group of Bloomberg News reporters and editors. This time we’re looking ahead to 2016, making predictions for key markets and finance events during the next 12 months. Hear how sentiment could affect stocks, why the Federal Reserve is about to become even more important and exactly what trouble might be in store for perma-bears. Featuring: Matt Boesler, Ed Hammond, Matt Levine, Dan Moss and Chris Nagi.See omnystudio.com/listener for privacy information.

Thanks for listening to OddLots. Follow the show on Amazon Music for more future episodes or just ask Alexa, play the podcast, OddLots on Amazon Music. All right. If you believe the bank is, it's going to get better and better. I don't know. I think we can see a lot of fake. All right.

Bits and peace elsewhere. All right, everyone. Welcome to the predictions episode of Odd Lots. We're going to be talking about what the big stories are going to be. in 2016 and what we think is going to happen. I'm Joe Wisenthal, managing editor at Bloomberg Markets. And I'm Tracy Allaway, executive editor at Bloomberg Markets. So once again, we've assembled an ace team of Bloomberg News, reporters, and editors. Last week, we discussed what their favorite stories were for the year.

As sort of a connoisseur of Armageddon scenarios, I sort of have to say that the August, the August 24th, the late August, so often the stock market is my favorite story. So Valiant is sort of the bad boy of farmer. Wait a second. I know, I was just thinking they've been replaced slightly by cheering recently. But they're bigger and in some ways badder. So your favorite story is essentially the end of a story. Yeah, I think so.

This story about Furious Seven really did strike me as encapsulating. This week I think it's going to be a little more challenging because we're going to put them on the spot and ask them what they think is going to happen in 2016. in prediction is harder than looking back. And then presumably at the end of 2016, we're going to ridicule them mercilessly for getting everything wrong, right?

We're getting it right, but yeah, we're definitely getting meat here exactly on this date again, one year from now, to look back at the predictions and we'll see how they did. Let's have everyone introduced themselves. I'm Chris Degey,

the managing editor for stocks at Bloomberg News. I'm Matthew Bosa. I cover the Federal Reserve. I'm Ed Hammond. I cover deals for Bloomberg News. I'm Matt. I'm a columnist for Bloomberg View. All right. So everybody wants to hear from the stocks guy about what's going to happen. Chris Nagee, you said last week that your favorite story for 2015 was the flash crash of August 24th with Markets cratered.

What's your big prediction for 2016? So at the risk of embarrassing myself. I mean, there's no doubt in my mind that the most variant view you could have right now coming into 2016 is that stocks are going to go up. what I did was try to fashion some kind of thesis, sort of back, reverse engineer, so that I could say that that was my opinion. I mean, I have no idea what's going to happen. But one thing that occurred to me over the weekend, two things struck me. One was that everyone on Twitter was saying how much they love the big short. And I was back with my family in Boston, and a few people up there were talking about it, went to a little party, and they talked about rereading it.

And then I watched the Democratic debate with my mom, and they were just going after Wall. Street in a huge way. My mother, my mother at one point turned to me and said, they hate you. And I was like, me? I thought I worked for Bloomberg. She just meant sort of white males, I think. But it just, one thing that could happen as a result of these two, the big election year, obviously, and whatever, that's sort of a cultural event around the big short, kind of, is that sentiment towards Wall Street and the stock market is probably not going to improve a great deal in 2016. I think that, you know, there's a lot of opportunity for grandstanding against banks and just sort of commerce in general.

They'll probably be unable to resist. And in my opinion, that's the best thing that could happen to the stock market. This has been true since 2008 that the easiest thing in the world is to turn around bash American commerce and markets and banks and things like that. And what's happened since then, markets have staged one of the biggest rallies in their history. And I think, you know, anyone's staring at it every day the way I do, the way you guys do, is aware that that's part of the reason stocks have been able to go up is because this incredible wall of worry exists politically against them. It's almost seen as immoral that the market do well. And as a result of that, I think it has done.

It's been able to sort of convince lots of people periodically. Everyone's basically a non-believer. And I think that there's going to be a lot of opportunity for non-belief this year there already is. There's a lot of pessimism coming into it. And it just seems like what happens. lot of the time when that's the case is that the market goes up. I couldn't agree more. It definitely feels like after the crash there was this huge reservoir of hate and skepticism and pessimism that built up. And I don't think it's even close to having drained. And I think, you know,

there are pockets of euphoria, like people were excited about Silicon Valley and startups. And for a while in Texas, they were really excited about oil. I just don't think we're anywhere close to seeing the acceptance of the recovery in the bull market at any widespread level. that you would expect to see before it ends. Right. But isn't the really easy counter argument to all of that, just to say that the recovery and the stock market rally was artificial and caused by the Fed's extraordinary measures?

Certainly. I mean, there's absolutely convincing arguments in both sides of this thing. And as I say, I mean, who knows what's going to happen, obviously. But it just started this one thing that isn't totally obvious to everyone, this thing that sort of sits in the background of the stock market's rally over the last five years, which is just incredibly negative sentiment, never repaired itself. If you look at like some of the worst sentiment readings in the history of the market were around the late August of this year.

And if you were building a trading case on, you know, a contrarian case on that, you would have done well. You would have done well frequently in this market over the last five years if you bought when sentiment, when just sort of, you know, sort of mental sentiment got to its lowest levels. All right. Let's move on. Obviously, one of the big stories of 2015 was the Federal Reserve rate hike. But nobody really knows what's going to happen. the future. Matt Bozler is rejoined us. Matt is our Federal Reserve reporter. What's your,

what's your big prediction for 2016? It doesn't have to be a Fed thing if you don't want. Well, it is a Fed thing. I think the interesting thing for Fed reporters on the beat in 2016, especially in the first few weeks and months of 2016, is going to be a rethink of the Federal Reserve's role in the money markets. Because, you know, over the last year or two years, you know, they've been doing a lot of testing all these new tools to be able to raise rates and money markets flooded with cash. And especially in the repo market, they have this big new reverse repo facility that members of the Federal Open Market Committee have seemingly been very reluctant to employ too much. And they've, you know, said things in the minutes of their meetings to the effect of this is

going to be a very temporary facility. Our, you know, intervention in repo markets is not going to last very long. And we're going to sort of wind it down shortly after liftoff. But then you, like, sort of look at the numbers and it, you know, some analysts, as you know, Tracy, are saying that this thing could get to a trillion dollars a day where the Fed is borrowing a trillion dollars a day in the repo market. So I remember the repo market used to be like when people talked about shadow banks, essentially the repo market was the shadow banking system. It was where banks and money market funds kind of fund each other by loaning out money against collateral. And the idea that the Fed is going to come in and basically crowd out all those old

players and become the ultimate shadow banker is an interesting theme. I got to play the role of the person listening to the podcast who like maybe hasn't been up on this stuff. But you know, there's like a Reddit page called Explain It to Me like I'm a five-year-old or something like that. So for those who haven't been in the weeds on this stuff, and when you talk about the Fed's role in the money market and the reverse repo facility and stuff like that, what's the explain it to me like of a five-year-old version and you've got to get to your

prediction. So picking up where Tracy left off, right, shadow banks, like these money market funds that have just had this big cash pile that's been growing and growing for several years. And before the crisis, they were lending a lot of that to banks, which were then taking it and doing all sorts of, you know. It's like short-term, very safe lending. Exactly. Maturity transformation and whatnot. And that is, you know, sort of one of the things that people blame the financial crisis on. And so now the Fed has essentially become the borrower in the...

markets, you know, of that cash, all that cash that money market funds have. And so they're saying, like, okay, we're not going to be doing a lot of this. But then some analysts are saying, yeah, you're going to be doing a lot of this. And where the rubber hits the road is you kind of have to do this if you're going to keep your balance sheet large. And for a while, you know, even a few months ago, everybody thought, okay, the Fed is going to start winding down its balance sheet sometime in 2016, maybe even the first half of 2016. But a lot of the comments we, we we've gotten from Fed officials in the last few months suggest that actually they're going to keep the balance sheet at a constant size until sometime in 2017, maybe well into 2017.

So there's really going to be no opportunity for them to sort of scale back their intervention in repo markets anytime soon. And in the meantime, we could see a lot of big changes to the money market landscape. So the thing that we're going to come back here a year ago and say, was Matt Bozler right or wrong is? Okay. The Fed is going to be borrowing, you know, at least a trillion dollars a day in the repo market by mid-2016. You're so harsh, Joe. No, I mean, it's like the predictions episode. We can't just have someone sit here and say smart things.

We got to like have something that we could go back. You have to say them, have them say non-smart things? No, they just have to say something that can either be shown right or wrong. All right. Let's turn to Mr. Ed Hammond. I'm sure hundreds of M&A bankers are dying to know what you think is going to happen in that market next year. So the MNA bankers all think that next year we'd be better than this year.

We're probably 2017, we're better than 16 and so on and so on. But they are always looking up, and I guess we're trying to be a bit more realistic on this show. So what are my predictions? I don't know. I always embarrass myself with these things, but maybe that's the point. One general one would be that we're going to see a lot more oil and gas M&A. I think this year it's been a bit surprising that there hasn't been more. Obviously, there have been some quite big ones attempted Halliburton and Baker Hughes being the obvious one.

Although, if you look at the spread on that today, it now looks. looks like it's probably going to fall over. But I think a lot of the smaller, you know, sort of $5 to $20 billion oil companies, I think we'll see them trade this year. There's a sort of a realization coming that they have diminished. They're not as important as they once were. There may be a sort of third of the size that they were this time a year ago. And a lot of them are just under pressure.

You know, whether it's the activists that's beginning to show up in a stock or whether it's kind of some sort of self-realization that they actually need to do something and probably merging with a rival or selling themselves to a major is a very good way out of that. So I think oil and gas is somewhere we see a lot. FIG also. What would happen in FIG? So that's financial institutions.

Yeah. So I think we're probably still somewhere off from seeing any big bank M&A, but I think the insurers will continue to consolidate. We've seen a few deals in the second half of this year, notably the health insurers sort of get together. And I think we'll see that spread to other parts of the insurance market. And, you know, look, I suppose the confidence is there to do those deals. It's just through our regulatory issues that people haven't got their head around yet.

But I think next year we'll see more of that. Conversely, I think healthcare has to slow down. It can't continue at the pace it's going. And some industries, cable being the obvious example, have kind of reached endgame, certainly, in terms of big consolidation. So that will come off. I think in one other prediction, and I know last week on here I beat up about Valiant and Bill Ackman, but just a specific prediction on that, I think we can be sure that Valiant will do another stupid deal within the next year and that the sort of Bill Ackman, Mike Pearson, Laurel and Hardy

show will have one more episode at least. Hmm, I like that one. How much does the Fed tightening cycle affect one's forecast for M&A next year? I think at this point not a huge amount. It's so well factored in. It's something that, you know, everyone has been expecting and expecting and expecting. So I don't think there's going to be any great surprise. the thing that tends to have the most sort of material negative impact on MNA is surprise, right?

So anything that is really unpredictable, unforeseen that happens, then you see sort of deals drop off or at least investors being much less willing to reward companies for doing deals. But at the moment, I think everything is expected. Rates go up, but it's still going to be very, very cheap to borrow. The cliche is that bankers, or what people say is that bankers, you know, have these waves where they encourage companies to consolidate. And then after they've all consolidated, then they encourage spin-off. stuff like that so they can get fees going in and out both directions.

Is that something that you see likely to accelerate? Do you mean sort of general bank of greed? Historic. Will banker greed continue in 2016? I think it will continue. I don't know if it has much room to grow, but I think it will definitely continue. I think we're not necessarily at the point yet where bankers are sort of lobbying their clients to split and sell.

But I think we are at this point where, you know, activism pressure is growing. Obviously, the funds on the management are way up from where they were a year ago. So we will see many more activist campaigns next year. And the banks, as they always do, will position themselves between the kind of the demands and the pressure on the companies and ensure that there are stuff coming out. Do you think greed has peaked? Do I think greed has peaked? I do actually think that what we'll see in the next few years is like the cultural shakeout from the financial crisis is still going on and has surprised me in its intensity. Like, I, it's somewhat facetious to say greed has peaked, but I think like, you know, Wall Street really is changing.

In terms of, will bankers keep, you know, lobbying to do deals? Like, of course they will. And you see, like, the Dow DuPont deal is like, at the same time, the merger and the splitting. Right. Two giant companies and the plan is merge and then immediately break up the three separate companies. Yeah, it's like, you know, the M&A cycle kind of like goes on and gets bigger and bigger deals. And you reach a point where you just can't do a bigger deal. So you have the, like, fusion and efficient at the same time deal.

and then, like, you know, you've solved that problem. Do you have a big prediction for next year? Will people still be worried about bond market liquidity? Oh, yeah, of course. The thing is, like, we need to have the next crisis before people will stop talking about the runny world where I think we're still so scarred by the last crisis that the idea of not worrying about, like, a big bogeyman is just not,

it's going to be a long time. But you're skeptical on this bond market liquidity that it's actually going to be a big deal. Like, when you write about it, you sort of have a bemused tone that suggests to me that you don't, it doesn't concern you too much. I think it's an interesting story. Like, I think that there are very interesting dynamics in terms of, like, market structure and how we trade financial instruments. They're very interesting dynamics, again, in Wall Street culture, right? Like, banks used to be these big warehouses of risk, and now they're not.

And that has caused sort of both financial and cultural anxiety. It's like, those are, like, real things. and that change is, I think, meaningful. In terms of will it be the catastrophe run risk that causes the next recession, that seems really unlikely to me. Do you think it'll be a bigger story in 2016 than it was in 2015? No. Okay.

There's the prediction that we'll go back at test. I think, who knows, but I think that, like, we keep having little tests of it, and those tests, you know, seems okay. So I think it'll fade as the tests go on and they don't break the. market? Well, we have lots of predictions to think about. Well, I think we should, I think you and I. No, I was trying to escape it. No, it's only fair. No. I predict everything in my portfolio is going to do really well. Tracy owns like a lot of physical silver. Not by choice. So that's good for the precious metal. And oil, right? I'm going to piggyback on Chris Nage's prediction about how this deep wall of

worry that still exists will mean it's another good year for the stock market. I was thinking, like, in this whole narrative that we've had since the crisis, the one thing that Perma bears, skeptics have always said is like, oh, there's no way the Fed will be able to do a tightening cycle without causing like a huge economic or market collapse. And the perma bears have been so humiliated throughout the years that this has got to be the last chapter. Because if this could happen, then they truly will have to be banished. They'll all have to unplug their computers, throw them into saltwater and never be heard from again. Delete their Twitter accounts. So I think

this is the final chapter in their humiliation. I'll take the other side of that. A hike and without market Armageddon. But capitulation is usually the ultimate turning point. And then we'll get a turning point. We haven't had the final nail in the coffin

stake in the heart event for them. And so I think that this is the year for that. So your prediction is that people will stop talking because they've been proven wrong. No, I don't think that will come. You've literally just negated our next year's predictions episode. Tracy, look who showed up to join us. It's Dan Moss. Dan, who are you?

I'm the executive editor for global economics. And what is your prediction? It's a little bit contrarian, but what the heck? We like contrarian here. My prediction is that Brazil stabilizes and possibly bounces. Oh, wow. Sentiment toward that country, which is an enormous economy, is so beaten down. And then there's been this relentless march of negative headlines all through 2015,

relating to whether the president gets impeached, relating to contraction in the economy, relating to the budget deficit, relating to the beating that stocks and the real, that's their currency, have taken. But perhaps things are oversold. there's been a lot of attention recently on the resignation of finance minister Wachim Levy and his replacement with planning minister Nelson Barbosa. Now Levy had this kind of market halo over him.

He came right from investment banking a year ago and he was seen as the market-friendly force of Dilma's government. However, he had all sorts of troubles getting his fiscal targets to stick, His relationships in Congress weren't terrific. Barbosa, on the other hand, is seen as closer to Dilma, closer to the party. And you've got to ask yourself, what's better, what's worse here? A levy with a great resume, but perhaps ineffective. And Barbosa, who doesn't quite have that market lineage, but may end up being politically more.

affected. Is this call Brazil specific or are you almost on the verge of calling a bottom in emerging markets across the board? I'm not quite at that point. I thought we could go do into it. But this is like a pretty big call because you have to imagine that at the end of 2016, the people who got this call right, especially if there is a turnaround, are going to be some of the big heroes on Wall Street. And what I want to know specifically, since the plan is that we're going to all be back here next year at this time reviewing calls. What is the measure that we should use to see whether this call turned out right? Is it a Real level? Is it a, what should be a government bonds? Brazilian government bonds. What should we say, okay, this was the right call.

How should we measure that? How do we know whether you were right or wrong a year from there? Well, look, in terms of market metrics, look at the real, look at Brazilian bonds, look at Brazilian stocks. But also, by the time we're sitting here in 12 months' time, we'll know whether the president has survived. We're hearing a lot in the Brazilian Congress about impeachment. I think a lot of things are probably going to become clear. We're in the maelstrom now. I like this call because, as you said, it is contrarian, but I also like the reasoning that while everyone else is concerned that this very credible finance minister has gone, that there may be a silver lining to this person who's more of an ally of the president. There's been a fairly intense debate over the past year.

Is Brazil's problem fundamentally one of politics or fundamentally one of economics? We will find out. All right. That's Dan Moss. You can catch him on the benchmark podcast. Thanks, Dan. Thank you. All right. Well, thanks everyone for listening to another episode. Yeah, thanks everyone for joining us in 2015. And I'm looking forward to a full year of odd lots in 2016. I'm Joseph Wisenthau. You can follow me on Twitter at the stalwart. And I'm Tracy Allaway. I'm on Twitter at Tracy Allaway. Thanks very much. Joe and I are very proud of our new podcast Oddlots, but we are also very proud of Bloomberg's other growing suite of original podcasts, all designed to help you navigate the complexities of business, financial markets, and the global economy.

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