Odd Lots - These Were The Biggest Markets And Economics Stories of 2017

Episode Date: December 26, 2017

The year is over, and now's the time to look back at the big stories of the past year. On this week's episode, we're joined by Chris Nagi and Matt Boesler of Bloomberg News to discuss what they saw as the dominant themes of 2017. For Nagi, it was the relentless decline in market volatility (despite a year of remarkable headlines) and for Boesler it was the persistent shortfall in inflation, and the challenge that that's posing to traditional economic models.See omnystudio.com/listener for privacy information.

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Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg Television, and wherever you get your podcasts. Hello and welcome to another episode of the Odd Lots podcast. Unfortunately for everyone involved, it's just me here today.

Tracy Alloway has smartly decided to go on vacation, something that I probably should have done. But whatever, the good news is I have two great guests in the studio with me today. And we're going to be talking about some of our favorite market theme. and stories from 2017, which was a fascinating year. So no real reason to have a whole lot of banter from me in the beginning. I'll bring in our guests. I'd like to bring in Chris Nagey. He is a markets editor here at Bloomberg.

Hello, Chris. And Matt Bosler, who is an economics reporter here at Bloomberg. Hey, Joe. And so between the two of them, I hope to have a discussion of picking their brains about what we really learned and what we really saw in 2020. 2017. Chris, let me start with you. What was in your view the big story of you? It's hard to be a stock market editor this year and not feel like the big overriding presence of 2017 was the way the lack of volatility interacted with both the political scene and

just the propensity of stocks to continually go up all year. I mean, it's a little, it's somewhat of a dead horse at this point, but I mean, that's what this year will be remembered for. People just basically getting angry at the market basically for not being more chaotic, not registering more of the sort of political effect. I think everyone else was feeling. I'm glad you brought that up because, of course, this is something that Tracy and I talk a lot about on the show. The frustration that we feel is people who cover markets, you know, we have these conversations every morning. I was like, what's our top story of the day? It's like, well, it's the same top stories it was yesterday. And not only was it the same top stories yesterday. No one really cared about it either. I mean, especially like for years and

years after the crisis, like markets were the story and everyone was clicking on our stories. And this year it's like, yeah. Matt, you cover like the fixed income space a lot of sort of crosses over with your eco beat. Is it a similar vibe in terms of the lack of volatility? Or how do you see the same thing? So we had two Fed presidents just this morning on Bloomberg TV talking about, you know, how they're looking at the flattening of the yield curve. And that's been a really reliable recession indicator in the past. And so that's something that has them concerned. And so, you know, to some extent, it's the same story playing out in the fixed income markets of very low volatility, yield curve flattening. But instead of, you know, being sort of

this benign, boring thing, it's actually causing a bunch of people to talk about, is there a recession around the corner type of thing. And for all this recession talk, Chris, like, it's still, like, no stock investors actually seem to care about it. About the possibility of a recession? about the flattening, like these things that would, like, at one point, maybe have seen, like, red flags. Right, like everything else, they don't care about the yield curve. You would have a hard time naming anything that they did care about to share. Actually, Matt, for our listeners who aren't steeped in this, you know, we talk about the flattening yield curve a lot and how it's a classic recession indicator when it inverts. Can you give, like, the 30-second explanation of what it is that people

look out for? What is the flattening yield curve and why is it seen as something that potentially raises alarm bells? Sure. So the yield curve is the difference between long-term interest rates and short-term interest rates, right? And so short-term interest rates are kind of set by the Federal Reserve, the central bank, and long-term interest rates are kind of a reflection of where people think the central bank is ultimately going to take the short-term interest rates. And so we're in a situation where the Fed is raising rates and, you know, they're telling you that they're going to go to this more neutral level of interest rates. And so the yield curve is flattening as short-term interest rates rise and get to that level of long-term interest rates. Now, in the past, that's tended to be a pretty

good recession indicator, just perhaps because the business cycle has tended to be of a similar length as the central bank's tightening cycle. And so there's a bit of a correlation causation question there. Does the yield curve really reflect anything intrinsic about the probability of a recession, or is it just that the central bank tends to raise interest rates over the course of an economic cycle and then the economic cycle invariably ends at some point? So stock investors don't, or equity investors or maybe no investors seem to care about that. Something else that you mentioned, Chris, in the beginning that we obviously have to talk about. Not only are there sort of like no concerns about anything, economics, but politics,

absolutely extraordinary year for politics, geopolitics, all these elections that went on. And you would think that there would be some feedback loop or somehow that would be reflected. But as you said, nobody seems to care. Why does nobody care? So if we're talking about our literal favorite stories of the last 12 months, one story that I remember, and really everyone who works for me remembers because I bring it up about every other day, was a blog post by Macromen, Cameron Christ and the M-Live blog, where he took some of these alleged political chaos indexes that exist,

these sort of academic, these things that are pieces together. He took one of those. And a standard story for the first half of 2017 was, look how they're going up and look how the VIX is going down. And basically this cannot stand. And so he took the political disorder index, and he decomposed it, he unpacked it, and found out what all of its components were.

And part of it was policy, guidance in China, and some economic stuff in China. which he was like, makes sense. That's pretty volatile. You can see why it's going up. Purality of it, it was hilariously were media mentions of political disorder, basically. So it's this big sort of echo chamber. I was worried that it was going to go there because then, of course, that always makes me,

should make all of us feel guilty. Hence to me. We talk about this political volatility and all this stuff going on. How much is just us talking about it? Yeah, there is this echo chamber aspect. I don't think it's all unsurprising and basically, What else is a news person you're going to talk about in 2017? Well, yeah.

Well, I mean, I think the truth is that my view is the way it seems like is there's one story and we all know what it is. And it's everything having to do with Trump. And there's no second story. Yeah. And for people who are interested in the news and reporting, it's not ideal. Well, it's just it's unavoidable. There's just no getting around, getting away from it. But one thing that like in terms of what drove this market and Matt, I know.

you know, coming from the eco perspective is all this noise aside, yield curve aside, politics aside, things are good like around the world. We talked about global synchronous growth. Like, things are pretty good, right? Yeah, exactly. And it kind of goes back to the point. You know, you look at this flattening yield curve and it's supposed to be this recession indicator. But like you say, things look pretty good. And it's kind of hard looking around to see, you know, where that recession is going to come from. So I think it's more of these old narratives being busted, which we've been dealing with a lot this year and over the past few years. And earnings have been really good.

Yeah. Another pretty good story that my team did during one of Trump's tweet fest about how great the Dow is, was to look at how earnings estimates had evolved in 2017. And you can make a pretty good case that what happened was that the earnings estimates that existed before Election Day were matched, where you got to, there were about 130 bucks a share on the S&P. That was the estimate before Election Day, and that's pretty much what happened. So did Trump cause that?

I mean, you can certainly say he didn't get in the way of those being hit, but earnings growth, however you frame it, was strong and the backbone of the rally. All right. So for as much as we'd like to talk about how the markets ignored everything on an economic basis and an earnings basis, things were pretty good. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report delivered right to your podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top stories. Episodes are published throughout the day with the latest information and data to keep you informed.

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the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. Matt, from the economic world, what was your favorite story of 2017? So I think my favorite story of 2017 had to be just kind of the biggest story on our beat as well, which was this surprise shortfall. in inflation because everybody thought that inflation was going to continue going up this year because the labor market was getting tight and the unemployment rate was falling. And there's just been so much hand-wringing in the economics community this year over the fact that this relationship for some reason didn't hold up. And the reason why it's so interesting is it's kind of leading to all of these different theories, but you have this sort of protagonist in the Fed at the center

of the story, which is sticking to its guns, but also kind of telling us kind of looking forward to next year. Next year, if things don't get back on track with inflation the way that we think they should, then we might have to have a rethink. So you mentioned there's all these different theories for why inflation hasn't picked up the way people expect. Various people have called this the inflation mystery. Do you have a favorite theory for why we haven't seen inflation? Well, I mean, I think if you just look at the data, what we're seeing is a slowdown in rental inflation, which is really always kind of the key component in inflation. And so that is an interesting story because a lot of the sort of build up in sort of the residential sector that we've

seen in this expansion has been in apartments, right? The homeownership rate coming down, people moving into cities being renters more than owners. And so that's going to be a very interesting thing to see if that continues in 2018 or if we start to see, you know, some more home ownership going back up. And Chris, this lack of inflation, while it may cause people at the Fed to wonder about their models and it may cause a lot of economists, anxiety, investors have loved it because this just like the Goldilocks story. Well, absolutely. I mean, anything that results in the Fed holding interest rates where they are, I think they're happy about. If you look at like reasonable people can disagree about Trump's impact in the market, I think it's very hard to argue that 1% interest rates haven't

been a great thing for stock investors. So as long as inflation hasn't been a threat. they've been able to maintain that. Are there any signs, Matt, that inflation is actually going to turn around? Because it's not just this year that people have thought it was going to come. People have been warning about inflation literally forever. It seems like in theory, eventually they might be right, right? Yeah, absolutely. I mean, they eventually might be.

But to answer your question, no, there aren't really any signs that it's necessarily going to pick up when you look at the inflation data itself. And so, you know, we have all of these indicators that we used to use to forecast. inflation that worked better than they are now. And so it's kind of a wide open question as to whether they'll work again. Yeah. So this gets to the key question. How much is the economics community really preparing to sort of just rip up the old models? Or like, are they really willing to take that step and say we don't know? Yeah, that's a great question. I don't, you know, looking at what they have been working on, it's not clear that they have really a ready replacement that's going to be

ready in six or 12 months time. So I think they're kind of really hoping against hope that things start to work out again the way that they used to or else it's, if there's going to be exponentially more hand-wringing potentially. It does feel like if we get to this point next year and there's like no inflation in 2018, things are going to start to become really untenable for people. Yeah, it's already starting to sink in a little bit in that you see Fed policymakers starting to come up with their own unorthodox theories of inflation. But, you know, as yet, no real economic work has been done on it. So it's just kind of hearsay at the moment, I guess. All right. Well, Chris and Matt, it was great to have you on this episode talking about the big themes for 2017, the extraordinary

lack of volatility, the flattening yield curve, the incredible lack of inflation, despite economists and Fed all predicting it would pick up. Really appreciate you both coming out. Thanks. Thank you. And that has been our wrap-up episode for 2017. the big themes in markets and economics. And stay tuned next week where we're going to be talking to Chris and Matt about what to watch for in 2018. And you can follow our guests on Twitter, Chris Nagy at Chris Nagy 1 and Matt Bosler at Bose, B-O-E-S underscore. And myself, Jill Weisenthal on Twitter at The Stallwart. And even though Tracy is not here, you can follow her

at Tracy Elley. Thanks for listening. On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16.