2020 Global Outlook, Six Word Market Narratives

to do? So we're so lucky to have tourist in stock with US chief economists and managing director at totter Bag Securities here in our interactive broker studios, Touristen puts out some of the most interesting and provocative charts that I get in my inbox. I'm very excited to have you on. Let's just first talk about how much you've found that the FED stimulus last year actually bolstered stock valuations.

So what we try to do was to ask the question, when the fit basically expands that balance sheet, there various reasons why banishing could go up, and we can discuss for a long time, whether it's called qui or not.

But the bottom line is when the Fed expanses balance sheet, then you can measure that on a weekly basis when the balance sheet data comes out, and then you can try to ask the question, let's try to go back since October when they started expanding the balance sheet and say for every one percent that the balance sheet expanded, how much did the stock market go up or down?

And what we found in our very simple scatter diagram is that for every one percent increase in the fifth balance sheet, this in p. Five hundred has actually gone up by roughly one percent. Also, so in that sense, fit banasheat expansion has at least been correlated with the increase in the stock marget that we have seen since October. Now you can ask, looking ahead, of course, if this will continue, if the fIF balant sheat expansion is continuing, but at least for now, that has been a very

tight relationship for the last several months. Has the FEDS activity as it relates to the balance sheet and growing its balance sheet? How unusual is that? You know? Kind of activity? Is it something that we should consider for so a very important part of that question is that Traditionally, when the fit has done que or quantity V saying they've been buying the long end of the yield curve with the whole intention of trying to lower long term

interst rates. What's really unusual about what they're doing today is that they're buying T bills, meaning the short end of the yeld curve, And therefore we're getting a lot of questions from clients about, well, why should that be helping the stock market. It makes sense that when you shift long bunds that you could begin to buy long

duration assets. But if you buy a T bill, why would that be substituted with the S and P. That's probably not many who on their own just substitute directly a four week th bill with a long term asses by S and P five. But remember money is much fungible, so in that sense, if there is a portfolio induced re balancing, you could easily to see that someone at the end of a long process would end up allocating

more money to risky assets. Therefore, this in the long answer to a question Paul, is that I still think that as we look into this year, the more the fat penalty is going to expand, it will be still something that provides support to the stock market. So that's fantastic perspective as to what potentially could drive stock gains further in te thing that I love about your research is you take a more holistic approach, not just stock valuations,

diving deeper into the economy. And one thing that you've highlighted increasingly is that there is a whole swath of Americans that have been left behind in the rally, whether it comes whether whether it comes to income gains, whether it comes to spending more than their bringing in every month,

whether it comes to healthcare costs. Can you give us a sense of just your overarching thesis when it comes to the widening gap and what that could potentially do economically and frankly as as surprise wise, absolutely, we think a very important issue going into two thousand twenty, and of course, particularly with the election in November, continues to be inequality in all dimensions. The way we look at it is that there are four different dimensions to an equality.

There's income inequality, there's wealth inequality, but there also two other very important dimensions that are often ignored, namely health inequality. Different people have different access to healthcare and finally education in equality, that education has become very expensive, which also means that different people have different access And if look at these different dimensions, it is basically things that are

dominating the political conversations. So we're trying to think about and trying to figure out, as hard as it is, should we just ignore this and say, hey, I just look at the stock market, this is what I do. Or should we say, well, these are actually now indicators and data points that have become so important in the conversation politically that maybe we need to take into account.

How should I think about as an investor? Should I take it into account and see this could apply something in terms of policy changes on education, healthcare, student loans, taxes. There's a lot of time mentions that become very important for the overall business environment and therefore also for the out there, for the stock market, and ultimately also for

the fit and rates. So in short, this agenda is very confusing and fluffy in the sense of there's a lot of arm waving around a lot of these data points, but it still turns out in almost all our conversations to be at the end of the day, a very very critical input to how will markets actually do as we sit here on the first days of two thousand twenty, do you think some of those inequalities that you identified have had an economic impact in the US? Has it

impacted g d P? There's a lot of folks, a lot of economists are saying we're gonna be slower growth for a longer, you know, kind of two percent GDP. Do you think one of the contributors of that could be some of these inequalities were seeing. Absolutely, we do think that a very important reason why this expansion was so weak for the last ten years was probably that the main boost from policy makers. Remember policy in two thousand nine and ten basically responded less with fiscal policy

and mold with monetary policy. And what did mind story opposed to do. It lifted stock prices and home prices. Who benefits on that people who own stocks, people who own homes. And because there were fewer people who own homes, the home ownership rate was going down. Fewer people owning stocks. That meant that the benefits in this expansion were concentrated on a fewer hands. So in that sense, the benefits of highest stock price and high home prices were basically

more concentrated in a smaller group of the population. That meant that the impact on consumer spending, the wealth effect, the impact overall on the economy turned out to be driven a lot by asset prices going up in some sexes and some people benefiting, but a significant part of the population not efiting. So we do believe that one critical reason why these expanion has been so weak is because of inequality that has continued to widen Torsen's law.

Thank you so much for joining us. We really appreciate you coming into our Bloomberg Interactive Broker studio. Torsen's and chief economist at Deutsche Bank Securities hockey stick growth. That is what people are expecting for the first quarter of the first half of joining us here in our interactive

broker studios. Nick Cholis, co founder of Data Track Research, and I want to talk about the consensus idea that we have here, which is that the first half of the year will be frontloaded in terms of gains in the SMP and beyond as companies report earnings that are solid and show study growth in the U S economy. Do you agree with that consensus call. I think it's

a bit tough and I'll tell you why. If you look at the first half of last year, you saw that SMP five companies registered revenue growth of five percent in Q one and four percent in Q two, and that's trailed off to three and then two percent what we're expecting for the fourth quarter. And those are tough comps because the U. S economy and global economy is

still growing only fairly slowly. And even though the effect of FED rate cuts and perhaps the trade US UM trade war settlements will spur business spending, it'll be in the back half of the year. So I'm not as optimistic that we'll see those really healthy comps in Q one and Q two. So Nick, I'm looking at your research, and I love your your theme here, six word market narratives.

Give us your six word market narratives for nineteen and maybe how we should think about You know, the six word narrative is an exercise to try to just to steal down what happened in twenty nineteen, then what could happen this year. The summary of it was that eighteen was a year of a huge policy mistake. The FED thought that neutral rates were much higher than they were. You know, if J don't touch that. Dial's kind of the six word market narrative in we had a reversal

of that. Basically, the FED came out on January four, apologize for getting it wrong, and spent the rest of the year cutting So it was okay, we know, you're sorry, it's okay. Is going to be this issue of look, there's a hundred different ways to cut this market and say you shouldn't be involved. Valuations are very high. Corporate that's very high. We talked about the earnings cops, all

very real issues. But at the same time, we still have the flow through of these policy makers, both at the FED now saying they're not going to raise rates and in the White House saying, you know what, the trade war probably should be over because President Trump wants to get reelected. And it's a flow through of those two narratives that says this year might be okay. All right, let's talk about where it's going to be most okay. I was looking at the City Economic Surprise Index for

both the US and Europe this morning. In the US it's going down and it is negative. In Europe, it's the highest level UH since February, basically meaning that the economic data coming out was beating expectations by the most since then, do you agree that this sort of supports the narrative that Europe will perform the US at an economic basis on a relative basis, meaning they're going to grow a little faster on a quarter of a quarters quantial basis. Absolutely. The issue with Europe as a stock

market is it's so little exposed to technology. The IFA index is only seven percent technology, and that includes Japan obviously, but developed non US US. Here we're tech between tech, Amazon, Google, and Facebook. So you really have to make a very big bet on financials, which is fine. European financial has done really well in the fourth quarter and should continue to do well as bodon rates continue to rise. So it's a good story. It's just not the same kind

of story as the US market. I still like the US market better, but it's for that tech exposure. So typically after a very strong year like we had in in the SMP, what is your research show to what the markets tend to do in the year after. Well, here's the good news, let's star. The good news is. The good news is you don't see markets puke the next year. The market is pretty efficient and it tends to see through. The only time we had a really bad sequential year after a bat after a great year

was thirty seven. Uh yeah, nineteen thirty seven market was down thirty eight percent thirty eight um and then but on average you do about ten percent. Is a short answer to your question. You know do as well as average because there is a little bit of pull forward, but you tend to have another good year. The problem is the wind rates not as good on average S ANDP win rate since night against these years, it's more like sixt so a little bit closer to a coin toss.

We had tour sence lock On earlier from Deutsche Bank and he was talking about something that you mentioned, the FED support of markets, and talking about the correlation between the increase in the Fed's balance sheet and increases in the SMP five hundred. Granted it's not a long time time set. Do you, though, believe that the expansion of the balance sheet, call it whatever you will, perhaps don't

use quantitivities because it is controversial. Do you think that that is supporting a rally much more than some people are allowing. I think it is absolutely helpful. It does show that the FED put and we all hate that phrase, but it's real. The FED put applies to a whole range of things, including things like the repo market, and they want to make sure that the system can use to work as it should. So I think it's a comforting notion. I don't know how much it directly affects

stock prices, but let's put it this way. It helps more than it hurts. So again, are you in the camp that like I? This is where at least And I had a little bit bund of contention before the holidays. I said, if the data was to come in, you know, strong economic data, that is there a scenario where the FED could hike raise And she quote unquote rejected that. She rejected that assertion. Is there any scenario where in an election year the FED would even consider if the

data lead them there to be raised rates? Absolutely? No. It doesn't feel like if I'll tell you why, we do. Every time we see a new set of dot plots from the FED would do a standard deviation of all them participants and look at how certain they are about their future expectations. The FED is more certain now, right now about than it has ever been since the dot plots started for a future year. They are signaling very strongly that they are not going to raise rates. It's

really unusual. Standard deviation is like a third of what it usually is from an end of year forward year. Look, that sounds like a rejection. He didn't reject lightly helitely rejected your assertion. I I very impolitely rejected your just we just follow the numbers. Yeah, right, I just reject things out right. I do think when you say, Jay, don't touch that dial, the idea that they will be on hold at best, uh, you know, at worst, if things do deteriorate, they will cut rates and support the

economic and asset price expansion. One thing I noticed is that you came in with a prop today. Yes, the prop has to do with the fact that a hundred years ago today was the liftoff point for radio as a medium. The first broadcast news was Warren Harding winning the nineteen twenty election, and it was really what spurred radio into popular use. You know, the at the being in eighteen twenties, one percent of the population I had

a radio. By nineteen thirty, it was closer. He has this, uh, the wireless age issue from April nineteen twenty two, Uh, it's got wow. It was Amazon eBay five five bucks on eBay. Wireless Age was the hobbyist magazine of the radio age in the nineteen twenties. Uh, and it looks exactly like a computer nerd magazine from the nineteen eighties and nineties. It was really you know, the industry was

built by enthusiasts and only slowly commercialized. It's funny. We're just talking to Justin Fox of Bloomer talking about the evolution of media, and primarily from a news perspective, about the obviously the decline in the local newspaper and local media and how that may be contributing to the polarization of the US and you know the left and the right, and how cable television and you know, talk shows and so on and so forth may have contributed to that.

So it kind of brings into context the one hundred years of it and it all started with radio, and it all started with radio. And yes, and here we are, and here we are continuing to beat that drum exactly. Thank you so much for going with us. Nick Nichole's co founder Data Track Research, joining us here on our Bloomberg Interactive Broker Studio giving us lots of perspective on

the markets coming from the disappointment extraordinary performance. The question is what does what do the markets hold in store for us? With a launch of Disney Plus in November of last year, many expect to be the year that the streaming wars really heat up. To get a sense kind of where we are here in the early days, we welcome Roman Crossing, He's said, of data analytics at Eagle Alpha, joins us on the phone from Dublin, Ireland. Ronan,

thanks so much for joining us. It seems like, you know, as we entered twenty nineteen, it was all pretty much a Netflix story. But it's getting pretty competitive out there, isn't it. It is absolutely yeah, no, it is getting

more competitive. But what we're actually seeing is that with the launch of Disney Plus, what we've actually seen is Disney Plus have grown the market um like we around the time of the Netflix they're disappointing Q two earnings last year, we started tracking Netflix using social media data, particularly from Twitter, and what we noticed was that Netflix was continuing to gain momentum and was continuing to get

stronger and stronger. Then around the time of the Disney Plus launch, in November, we saw that actually that grew the market, and Netflix continued to grow as Disney Plus did, and so we're seeing, actually, it's it's not necessarily a zero sum game. The market continues to grow overall. All Right, This is a really interesting take because I think Netflix x is one of the most compelling companies to watch in because of Disney Plus, because of this consensus that

there can only be so many streaming services. What do you think will drive their profitability the fact that they might not just burn through cash. Is it going to be uh, charging subscribers more, Is it going to be expanding their subscriber base, or is it going to be

monetizing things like advertising or data streams? Well, I think it always comes back to the content, right, and the Netflix has consistently invested in their content, and we actually saw that as we track the conversation online, it's the top shows that are continuing to gain momentum. And actually, what we saw in twenty eighteen was that there was somewhat of a depth of news shows coming on that we weren't seeing the same appetite and enthusiasm on one

on on online for those those shows at Netflix. But actually nineteen. It feels like they got it right, particularly towards the second half of the year, and so we think they did take the higher subscription um Earlier last year, they increased their subscription prices, and we think that that, combined with the weaker content of teen was probably what

led to those leaker, weaker numbers in Q two. But actually the content has got much stronger and we think we can can absorb that pricing, and we we were seeing that in terms of the momentum coming out of the year. So running as you monitor and analyze social media, you know, commentary as it relates to some of these streaming companies, are you hearing anything about some of the

others out there? What are you hearing about some of the others, whether it's a an existing streaming thing, a brand like Hulu or something new like the you know, HBO max is coming out, and then I think Comcast has uh coming out with Peacock. Are you are they registering at all on social media right now? Yeah, so

so no, it's a it's a great question, Paul. So what we're seeing is not with Disney Plus was definitely a breakthrough compared to see Apple TV Plus and what we've seen is that, yes, Netflix has continued to perform well, but Disney Plus is really showing strong momentum and has gone straight in there at number two if you like, within the streaming streaming universe, whereas we see someone like Hulu and Roku are continuing continuing to to to tread

at a similar level, whereas Apple TV plus come out and come in at a much lower level. So we see certainly we see Disney or Netflix at number one, but Disney Plus is doing really well and that continued into the holiday season. We're seeing the Mandalorian in particular has has proven to be particular, particularly popular. All the people say that the real game changer will be live sports and whether the cable networks will lose live sports

streaming to some of these services. Do you foresee that being a significant game changer that potentially creates losers and winners the results in either insolvencies or mergers. Yes, So so as a firm, Eagle also we look right across

the alternative data spectrum. So we've talked a lot about the Twitter social media analysis, but as a firm, we're looking at many more data sets out there, and I think they will be really crivotal in analyzing this trend, because you're absolutely right, this is a very fluid market and I think we're going to have to you know, we're gonna have to monitor that date over time. Live

sports is absolutely a hot topic. We're seeing it in terms of online conversation and there's definitely the appetite for more live live sports via the streaming platforms, and I think that it's something we're gonna have to monitor very closely, and we will be monitoring very closely. Ronan, thank you

so much for being with us. Ronan Crossing, the head of data analytics with Eagle Alpha, joining us on the phone from Dublin, Ireland, talking about what I think will be one of the most fascinating fields in which is the streaming Paul. I love it when we talk about cybersecurity because it's always some iteration of why we should all be really scared and we're about to deal with something really tragic and and regret regretful based on the excess of our data out there in the mainstream. Joining

us now to talk about that. Steve Grogman, he's chief technology officer at McAfee, joining us on the phone from Dallas. I want to get your son, Steve. So when we talk about why we should get scared with respect to all of the cybersecurity threats, what are the main reasons that we should be nervous right now? Sure you bet.

First off, Happy New year, Lisa and Paul, and you know, cybersecurity is really one of these areas that impacts consumers, It impacts business, it could even impact the upcoming election cycle, and maybe just to kick us off, if we look at it from a consumer standpoint, the thing that consumers really need to worry about is having their accounts and account data stolen. One of the things that we seen is over two billion dollars of consumer account information with

up for sale on the black market. That's eventually going to be sold to individuals that will use it for identity theft or fraudulent purposes. What's really interesting for folks to be on the lookout now is how they can be targeted because it's not just through fitting emails. We now see things like phishing texts or even robo calls, and really having consumers understand that these are all things

they need to be aware of. His key, So, Steve, give us a sense of where the regulatory environment is. It just seems like they're the regulations cannot whether it's you know, robo calls or whatever, cannot stay ahead of the technology. What do you think is the best way, assuming that you know, government regulation is not there to protect us per se, what do you suggest for your corporate clients that they do sure so, so, first off, there's actually been a lot of great progress s against

robocalls in both on the regulatory and technology side. On the regulatory side, the carriers have now received higher levels of empowerment to go after and block some of these robocalls, so monitor them. When they detect patterns that look like it's not legitimate, they are now authorized to block them. There's also some new technology. It has kind of an interesting name. It's called Shaken and stir uh so either

Martini or James Bond reference. But a Stir is for those business systems the void systems, and Shaken is for cell and landline. And what these technologies will do is it will make it so that when you get caller I D information, it will be authenticated such that it's

going to be much harder to spoof. The challenges is that it's gonna take some time to implement these new technologies across the board and in the um consumers M businesses really need to have a very heightened state of alert anytime they get a text or a or a phone call because it's very likely not coming from the source that the caller I D says that it is. So how is McAfee seeing the business spending when it

comes to cybersecurity? I mean, has it been steadily accelerating at an exponential speed or they bring it back and being more selective about how they invest. So what we've seen is businesses now recognize that they need to protect all of the technologies that they're using to run their business in and we'll see the trend continue in there's a significant movement and embracing of cloud technologies, and with that move of business to the cloud, we see cyber

threats now starting to target the cloud environment. So one of the things that McAfee has done is we've extended our enterprise portfolio to include both traditional environments and cloud and where we see a lot of the business investment is making sure that as they moved to the cloud to run their business, that they can protect those environments

as well as their traditional environments. Steve, give us a sense of how much of the cybercrime or cymber, you know, the issues that people are dealing with, the threats, are how much of that a state sponsored versus maybe individual or criminal. Do we have a sense of kind of that breakdown these days, So we don't have very specific quantitative breakdowns, but we do see some interesting patterns. For example,

last year we saw a major ransomware campaign. It was called the Sodan the Kibi campaign, and what was interesting about this was it very specifically targeted North America and Western Europe. The way that it did that is part of the code looked at what was the local language that was installed on the computer it or that got infected, and if it was one of those languages from the

former Soviet Union, it would basically not run. What that essentially did is even if individuals or businesses in certain parts of the world got targeted or or were exposed to this ransomware, it was essentially benign on their environment and only selectively impacted certain parts of the world. So whether that was a cyber crime organization that was focusing on areas that they won't be prosecuted or other reasons. You know, those are typically some of the reasons we

see that that sort of behavior. Hey, Steve, thanks so much for joining us. We appreciate your thoughts. Steve Groban, chief technology officer for McAfee, joining us on the phone from Dallas, Texas. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. And Lisa bram Woids I'm on Twitter at Lisa Abramo. It's one before the podcast.

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