57: Was November the Start of a Huge Turning Point In Markets?

Joe Weisenthal (0:09)

Hello, and welcome to another edition of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:14)

And I'm Tracy Alloway.

Joe Weisenthal (0:16)

So Tracy, markets have been pretty wild since the election.

All kinds of stuff happening that people have hadn't predicted, US stocks rallying, interest rates way up. It's a pretty exciting time to sort of be covering what's going on in financial markets.

Tracy Alloway (0:31)

Yeah, do you remember just a few weeks ago, people were still talking about Donald Trump as the ultimate tail risk and how the market was going to collapse if he won. And then it turned itself around almost immediately.

Joe Weisenthal (0:42)

The night of the election was crazy because we saw futures plunge like 5%. And then by the time markets opened, most of those futures losses had been erased, and US stocks have just been off to the races. And of course, the real big market story has been the rise in US interest rates, because it seemed like interest rates were just going to grind lower perpetually.

And now, I'd say US 10-year yields were at our highest since the middle of last year.

Tracy Alloway (1:11)

Yeah, it seems like, well, I think we've had a couple stories about how the investment outlook has essentially been turned on its head, right? We had years of low interest rates, low inflation expectations, lots of correlation, everything moving together. And that has totally flipped just in the past two weeks or so.

Joe Weisenthal (1:27)

And so obviously, the huge question now is, was this two weeks just a blip? Is it maybe a longer blip or are we seeing some sort of big regime change where the market correlations and the trends of growth and inflation correlations are going to be different going forward?

Tracy Alloway (1:44)

The end of the big bull run in bonds, which people have been worrying about for decades.

Joe Weisenthal (1:48)

So this is the huge question. So today we're going to talk about what's going on right now in financial markets. It's sort of a break from our usual fare because usually we talk about something sort of off the news and something like one specific thing. Yeah, that's not as timely per se. But today we're going to go super timely and talk about some of the interesting stuff that's happening right now. And we have a great guest in the studio is Mark Cudmore. He is a FX analyst, Bloomberg FX strategist for he works for Bloomberg. He's usually based in Singapore, but we have him here in New York, which is a real treat. Mark, thanks for joining us.

Mark Cudmore (2:27)

Yeah, thank you.

Joe Weisenthal (2:28)

Mark, before we start talking about it, what do you do?

Because you used to be an FX trader. Tell us who you are.

Mark Cudmore (2:35)

Yeah, I mainly just have great fun actually commenting on markets, but my job is a macro strategist for Bloomberg.

Joe Weisenthal (2:41)

Okay, macro strategist for Bloomberg.

Mark Cudmore (2:43)

So I tend to try to tie in the various different areas and look at things in a slightly different way.

And, you know, a mixture of that world between a trader who's very practical and an economist who's very kind of model based. I like my spreadsheets, but it's trying to provide some practicality with those spreadsheets and kind of see what people in the market are looking at.

Joe Weisenthal (3:00)

That does sound pretty fun.

Mark Cudmore (3:01)

It is great fun.

Joe Weisenthal (3:02)

So let's get right into it.

November turned out to be the worst month. We have this, the Bloomberg Barclays aggregate bond index, also known as the AG, it's sort of the most famous bond index. There is the worst month in the history of the index was November. It's been on this three decade bull market. Everyone's wondering, is it coming to an end? Is this regime change?

How do you see the world right now?

Mark Cudmore (3:31)

Well, I think the important thing to remember is we might be coming to the end of the massive bull market and bonds. As you said, it's been a three decade bull market. That doesn't necessarily mean it has to turn into a massive bear market now. We could be in the consolidation phase. It's not like bonds could continue to go much further. We already had negative yields around a lot of the world, negative real yields.

So the big issue now is, are we really reversing in a significant way, or have we just stopped appreciating bonds?

Tracy Alloway (3:57)

Well, we've touched on this in a previous episode, but the thing that amazed me the most is how Trump's win has pushed up inflation expectations. And it's kind of like, well, that was all we needed to do for the past six years since the financial crisis was promise some fiscal stimulus.