These Will Be The Big Markets And Economics Stories In 2018

we're going to be talking about. Chris and Matt, Thank you very much for joining us. Chris, let's start with you. What's your spat is the same as it would be every which is that the SMP will rise approximately nine point three percent. My actual prediction, though, is that nine is the average. Actually I'm making that it's roughly that, but I just feel like that's the one thing that

you should predict when asked that question. I feel like there's a possibility in two thousand and eighteen that even if you get the ten percent roughly gained in the SMP, the sentiment towards the stock market seems to me to be on the cusp of souring in a weird way. You have Donald Trump associating himself with the run up, and you have the tax bill that just passed, and a lot of sort of populous offense is being taken

towards the tax bill. The way they're framing their objection to it is that it's essentially a gift for the one percent or two big corporate donation. And I feel like if you see the things that the Trump critics are predicting actually happen, particularly if you see companies take their windfall and basically shower it on their shareholders, and that causes a kind of melt up in the stock market. The stock market is a kind of political whipping boy

that tame I could see take off. I really like this. So the just being Trump tweets about the stock market all the time. It's obviously doing phenomenally well, but ownership and participation in the stock market is not that widespread. And so what you then get is this contingent of people who resent the rising stock market and this feeling like all these people are getting rich or other people I mean, and the stock market, if you think about it, it stands for a lot of things that already annoy

people a lot. It stands for like the margin impact of automation and sort of the monopolistic powers of companies like Amazon and the outsourcing of labor. I think there's a general consensus or there's a feeling that basically pays off in the stock market. So there's already a kind of approaching critical mass for sort of vilification of equity. I mean it's hard to imagine. I mean everyone always said big thermometer of US well being is the stock market.

This could be completely wrong and maybe everyone will be happy, but yeah, I really like that. So it any seventeen, the theme was the stock market is boring, and the

theme is everyone's angry at the stock market. Matt Chris mentioned the tax bill and the perception that, you know, it's largely a gift of corporations and the wealthy, and something that I've been really struck by interviewing people mostly on TV, is I have yet to hear from a single economics person or even a market person who is not associated with administration who thinks that this is really

going to ignite a real spark in the economy. Have you talked to anyone who thinks it's actually going to move the needle on the economy. No. I mean, the only thing we've seen, you know, in that regard is the fed's latest round of forecasts, which they weren't really able to fully explain why, you know, they're expecting such

a big bump to growth next year. But it's interesting because at the same time, we have these sort of cyclical forces where nine years into this expansion, it looks like we might actually be on the cusp of a pickup in productivity, growth in een and the types of things that would lead businesses to spend more and invest more. And so just thinking about that in terms of the likely Trump tweets that we're going to see, it's kind of interesting because again, that might turn out to be

a red herring, but it's gonna be. I'm just I'm already imagining how furious his critics and detractors are going to be when the economy starts taking off, because if we hit a certain point in the cycle, that would cause greater capital investment, and Trump and all his fans

are deciding the tax cuts, yeah exactly. You know, like the reality is wage growth has been muted in this expansion, but it's been rising for several years, and we're getting to the point where just naturally businesses are starting to invest more in labor saving technology, that sort of thing.

That's kind of exactly what you would expect. Chris, on the matter of the tax cuts, you know, it's funny we're recording this just so everyone knows before they've technically passed it, we're assuming they're going to pass it because it doesn't look like there's any ambiguity. We've had this discussion a lot about what is so called like priced in, and you know, we've had this incredible rally in the stock market this year. What is your best view on

how much can be attributed to the presumption of tax relief. Well, we ran a story this morning that runs down all of the strategisies. Wall Street pundits were basically paid to advertise for stocks, and they a lot of them break out a separate impact for if and when the tax cuts are passed, and generally it's in the ten to

fifteen bucks per share for the SMP realm. So if SMP earnings are about thirty bucks to share, so it could add seven or eight percent to the SMPS earnings, which that sounds if you look at that relative to the gains this year, that's not implausible. Then basically maybe a quarter or third of the gains that came through this year were related to the tax break. That strikes

me as I mean all of it's the imprecisely. I think that really strikes me though, in this discussion, is all the idea that Trump is unleashed something and investors

really want tax cuts. Is that from basically two thousand and ten through the end of two thousands sixteen, we had this extraordinary market, really without d C being able to deliver anything because we've been a total gridlock, and so the idea that, like, suddenly investors that need to see tax cuts to continue this extraordinary rally always seemed a little It is, But by the same token, I think that if you look at the people designing the tax cut, they were aiming at a pretty squarely at

the stock market. It's part it seems like it's part of their trickle down philosophy. They wanted something that would be easily identifiable and appreciated by stock investors at least, and I feel like, for better or worse, they've done something that basically it's going to achieve that. It's hard to argue that the last couple of weeks haven't been

a slightly higher velocity rally than we'd seen previously. Matt Boler, I want to turn to you, what is, in your view, going to be the big economic story of I think the big economic story of teen is going to be how little changes in terms of the trends that we're in the economy, and specifically, I think we're going to continue to see a solid decline in the unemployment rate

without much inflation. And I think the way that those two are going to fit together is we're going to finally see that pick up in productivity growth that has been missing for a long time, and I think we're finally starting to get to that point. Well, this has been one of the funny questions to me. So you know, like unemployment has been plunging all year, and people are like, Okay, we're really getting close to full employment now. We must be, because it's going down so fast, and so wages are

going to pick up. What always struck me is that you could take the same data and make the opposite argument, which is that if unemployment is falling faster than people expect without a pick up in wage growth or inflation, that maybe it could just fall a lot further, because you know, it sort of gets to what we're talking about on the last episode. Maybe just the whole premise of there being some point where inflation and wage growth kicks in is just flaw. Yeah, that's what policymakers are

kind of starting to entertain. Right. So, this idea of full employment as this level of employment that would trigger runaway inflation was born in the nineteen eighties, right, and that was coming right off the heels of a high inflation environment in the nineteen seventies that was fairly unique. And then as you go forward into the nineteen nineties, we had a very strong labor market at the end of the nineteen nineties, a very low unemployment rate, but

it didn't really manifest itself in higher inflation. It manifests itself in higher productivity growth. And so if anything, you know, you're kind of weighing, does the experience of forty years ago seemed more likely to reoccur or does the experience of twenty years ago seemed more likely to reoccur? And given you know, all the big global changes that we've talked about, you know, over the last several decades, it seems like maybe the first one to reach for it

would be the most recent experience, Chris. If Matt is right, and we sort of continue to see this economy that homes along, but none of the inflation pressures that pick up that Again, it just sounds like a great recipe for Stoff. It's hard to imagine that being a problem for your typical infestor how dominant is fears of the FED as the entity that could kill this rally. If you ask people what could end this incredible market run, we've seen how many people would put that as their

first thing. I would say a fair number. One thing that's true, though, is that you have a dwindling population of people who even remember the FED killing a stock market rally. I feel like it probably should be the first thing that cursed everyone, because that's typically how it happens. I mean, but there there may not be that many people left. We have to admit that even I have a hard time imagining the FED actually killing a market rally.

And I don't know whether that's because of my experience or because I just sort of think of the FED is in this mode where it doesn't want to do any harm. But even even though it seems kind of obvious that could be a risk, it's hard for me to remember, well, right, it's hard for me to believe. Yeah,

this has been a unique experience of federal reserve policy experimentation. So, but the corollary is that for many history like the FED is sort of caused recessions and so or it's sort of like FED tightening proceeded a recession in our minds, I think, probably because we're still doing with the scars of the Great Recession and the financial crisis. We think of recessions, is these like cataclysmic events, But it's not.

You know, it wouldn't be that weird for the FED to tighten and you get to slow down for a few quarters and then you sort of go back to normal. Yeah. No, that's absolutely right. And I mean, to some extent, you could argue that's what we've seen over the last two

years or so. Right, So, before the FED started raising rates, you saw investors starting pricing that in coming in the global currency markets, and we had a big appreciation in the dollar alongside that crash and oil prices in and that really did lead to a large slowdown, not only because the US has become such a big oil exporting country, but also because of the effect it had on manufacturing, and so to some extent, we're just still kind of

seeing that work through the system. I remember that grow it's scared. So how much at the time did people see that as sort of like fear of like, Okay, the FED is getting ready to make its move, time for some shifts. Well, yeah, absolutely, And at the same time, what you had was, you know, the European Central Bank in the Bank of Japan notably also shifting towards an easier monetary policy, starting to launch their quantitative easing programs.

They were so far behind the FED with that that it just came at a time when you know, both were going in different directions for the first time in a long time. That that really had a powerful impact. So that exacerbates this sort of tightening financial conditions, that

surging dollar, that monetary policy gap exactly. So it's kind of like the tightening was extremely front loaded, you could say, in this cycle, and at least in terms of the economic effects Chris in terms of other risks to the market besides the fed like what would be the number two things people would say, just to take it slightly

out of the realm of economics. I feel like one of the big stories of the market this year has been boring lye the rise of passive investing, and along with that the weird thing we're covering the stock market has become this kind of weird science experiment. You're sort of have to be. You have to be in an

prepared to deal with financial economics. I remember there was that day that the Anomaly study came out and saying that all of these stock market patterns and academic papers were a little off, and everyone has absolutely freaked out

about it. I feel like there's so much quant underpinning of the market right now that it's not out of the realm of possibility that some kind of jam, not a meltdown, but somehow those underpinnings get jammed up somehow next year, and right like every little blip, now people if there's some quant explanation, right like you got half a percent, like people are selling winners, which is in another way of saying, no matter what happens, we will say it was a quantel You're not supposed to do

not really. Yeah, well I think that about does it. Chris and ag Mad Bosler, Bloomberg News, thank you so much for joining us looking ahead. I think there's are great themes for ther twenty eighteen. That does it for odd lots for We'll be back in the new year. Tracy will be back with a full suite of shows looking at the random, odd lots corners of the financial markets. In the meantime, you can follow Chris on Twitter at Chris and a g One. You could follow Matt Bosler

on Twitter at Bows Underscore. You can follow me on Twitter at the Stalwart, and you can follow Tracy on Twitter at Tracy Elloway. Thanks for listening.