Episode 9: The 2016 Predictions Episode

discussed what their favorite stories were for the year. As sort of a connoisseur of armageddon scenarios, I I sort of have to say that the August, the August August so often the stock markets. My favorite story so Valiant is sort of the bad boy of Farmer. Wait a second replaced? I know. I was just thinking they've been replaced lightly by cheering listening, but they were bigger and in some ways bader. So your favorite story is essentially

the end of a story? Yeah, I think so. This story about furious saving really did strike me is 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 in prediction is harder than looking back, and then presumably at the end of we're going to ridicule

them mercilessly forgetting everything wrong. We're get 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 A. G. The managing editor for Stocks at Bloomberg News. And Matthew Bosa I cover the Federal Reserve it happened, I covered deals for Bloomboog News. I'm Mattlivian.

I'm a columnist for Bloomberg View. Alright, so everybody wants to hear from the stocks guy about what's going to happen Chris and a G. You said last week that your favorite story for was the flash crash of August markets crater. What's what's your big prediction? So um, at the risk of of embarrassing, I mean, there's no doubt in my mind that the most the most variant view you could have right now coming into two thousand and

sixteen is that stocks are going to go up. So what I did was trying 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 loved the Big Short, and and my I was back with my family in Boston and a few people up there were talking about it when to 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 and then work for Bloomberg, and she just meant sort of white males. I think, um, but it's just it's one thing that could could happen as a result of these to the

big election year obviously and whatever. The 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 two thousand and sixteen. I think that, you know, there's a lot of a lot of opportunity for grand standing 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 two thousand and eight, that, um, the easiest thing in the world has been turned around, bash American commerce and markets and banks and things like that, and as and what's happened since then, it's markets have

staged one of the biggest rallies in their history. And I think, you know, anyone staring at it every day the way I do, the way you guys, 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, UM,

I think it has done. It's been able to sort of convince lots of people periodically people everyone's basically a nonbeliever, and I think that there's going to be a lot of opportunity for nonbelief this year. There already is. There's a lot of pessimism coming into it, and it just seems like what happens a 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're

really excited about oil. I just don't think we're anywhere close to seeing the acceptance of the recovery in the bull market and any widespread level that you would expect to see you before it ends. But if 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 FEDS extraordinary measures. Certainly, I mean, there's there's absolutely convincing arguments on both sides of this thing.

And as I say, I mean, who knows what's going to happen, obviously, but it just started this this one thing that isn't totally obvious to everym This thing that sort of sits in the background of the stock markets rally over the last five years, which is just incredibly negative sentent 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 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 guts to its lowest levels. All right, let's move on. Obviously, one of the big stories often was the Federal reserve raid hike, but nobody really knows what's going to happen with the future. Mad Bosler is rejoined us. Matt is our authoto reserve reporter.

What's your what's your big prediction for? It doesn't have to be a FED thing. If you don't want well, it is a FED I think. I think the interesting thing for FED reporters on the beat in ten, especially in the first few weeks and months of seen, is going to be a rethink of the Federal reserves 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 um 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. Are 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 lift off. But then you like sort of look at the numbers and it you know, some analysts, as you know, AC 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 FETE is going to come in and basically crowd out all those old players and become the ultimate shadow banker is an interesting theme. I gotta 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 I'm a five year old version and

you gotta get to your prediction. Okay, So picking up where Tracy left off, right, shadow banks like these 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, like term very safe 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 these 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 gonna 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 sheets sometime in ten, maybe even the first half of but a lot of the comments 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 seventeen, maybe well into seventeen.

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 where the prediction is so that the thing that we're going to come back here a year ago and saying was med Bosler 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 you're so harsh, Jo, No,

I mean it's like the Predictions episode. We can't just have someone here sit here and say smart things. We gotta have something that we could go back. We have to say them, have them say non smart things. No, they just have to say something that could either be shown right or wrong. All right, Um, let's turn to Mr Ed Hammond. I'm sure hundreds of M and A bankers are dying to know what you think is going

to happen in that market next year. So the many bankers will think that next year will be better than this year. With seventeen, we better than the sixteen, it's one and so on. But they are always looking up, and I guess we're trying to be a bit more realistic on this show. Um, so what are my predictions? I don't know. I always embarrass myself with these things,

but maybe that's the point. Um. One general one would be that we're going to see a lot more oil and gas M and 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, Haliberton, Baker Hughes being obvious one of the if you look at the spread on that today, it now looks like it's

probably gonna fall over. But I think a lot of the smaller, you know, sort of five to twenty billion dollar oil companies, I think we'll see them trade this year. There's there's a sort of a realization coming that they have diminished. They're not as important as they once were.

There maybe 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 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'll see a lot FIG. Also,

what would happen in FIG? So that's financial institutions. Yeah, So I think we're probably still some way off from seeing any big bank M and 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 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. UM and some industries, Cable being the obvious example, have kind of reached endgames, certainly in terms of big consolidation, so that will come off.

I think. In one other prediction, 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 Pierson, Laurel and Hardy show will have one more episode at least M like that one. How much does UM there's the there's the FED tightening cycle effect. One's forecast for M and 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 gonna be any great surprise to think the thing that tends to have the most sort of material negative impact on M and A is surprised, right, So anything that is really unpredictable one for seeing that happens. Then you see sort of deals drop off, for 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 when people say, is that bankers, you know, have these waves where they encourage companies to get soolidated, and then after they've all consolidated and they encourage spinoff something 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 historic banker? I think it'll 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 that we're bank because 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 way up

from where they were a year ago. So we will see many more activist campaigns next year, and the banks will, as they always do, will position themselves between the kind of the demands and the pressure on the companies and ensure that the raw stuff. Think greed has peaked. 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 has um has surprised me in its in

its intensity. Like I it's somewhat facetious to say greed has peaked, but I think, like, you know, well's being 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 Dad Point deal is like at the same time the merger in the splitting right two giant companies and the plan is emerge and then immediately

break up in the three separate companies. Yeah, it's you know, the M and 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? Well, 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 world. Where I think we're still so scarred by the by the last crisis that the idea of of of of not worrying about like a big bogeyman is just not It's gonna be a long time. But you you're skeptical on this bond market liquidity that it's actually going to be a big deal, right, Like I When you're write about it, you sort of have a bemused tone that

suggests to me that you don't. It doesn't confirm you too much. I think it's an interesting story, Like I think that, um, there are very interesting dynamics in terms of like arket 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 um caused sort of both financial and cultural anxieties, like those are like real things, and and that that changes I think meaningful in terms of will it be the catastrophe run risk that causes the next recession? That seems really unlikely to me? But do you think it will be a bigger story in than it was? No, okay, here's will go back? Um,

I think who knows? But like I think that, like you know, we keep having little tests of it, and those tests, you know, it seemed okay. So I think I think it'll it'll fade as the tests go on and they don't break the market. Well, we have lots of predictions to think about. I think we should. I think you and I know I was trying to escape it. No, it's only fair, No, alright, Well, 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 piggyback on Chris n Age'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, it's 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 salt water and never be heard from again. Delete their Twitter, delete their Twitter cout.

So I think this is the final chapter and their humiliation and without market armageddon, but capitulation is usually the ultimate journey, and then and then after and then we'll get a turning point, like we haven't had the final nail in the common steak and 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 y, I don't think that will come

from You've literally just negated our next year's predictions episode. Oh, 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 contrary in here. My prediction is that Brazil stabilizes and possibly bounces sentiment towards that country, which is an enormous economy, is so beaten down.

And then there's been this relentless march of negative headlines all through 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 Wha. Kim 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 Bob Bobosa who doesn't quite have that market lineage, but my end up being politically more affected. Is this call Brazil specific or can you 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 to you into it. But this is like a pretty big call because you have to imagine that at the end of TWI, 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 what

should be uh Brazilian government? What should we say, Okay, this um, this was the right call? How should we measure that? Well? You can know whether you're right or wrong or year. 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 twelve 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 contraryan 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 all out 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 Mass You can catch him on the Benchmark podcast. Thanks, thank you, all right, well, thanks everyone for listening to another episode. Yeah, thanks everyone for joining us in and I'm looking forward to a full year of odd lots in. I'm Joseph Wisn't thought. You can follow me on Twitter and was Stillbert and I'm Tracy Alloway. I'm on Twitter at Tracy Alloway. Thanks

very much. Joe and I are very proud of our new podcast, Odd Lots, but we are also very proud of Bloomberg's other growing suite of original podcast all designed to help you navigate the complexities of business, financial markets, and the global economy. So in addition to our own podcast, please don't miss Benchmark with Dan Moss, Tory Stillwell and Aki Edo, an informative, jargon free look at the inner

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