These Were The Biggest Markets And Economics Stories of 2017

Joe Weisenthal (0:09)

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 themes 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 Nagi. He is a markets editor here at Bloomberg. And Matt Boesler, who is an economics reporter here at Bloomberg.

And so between the two of them, I hope to have a discussion, picking their brains about what we really learned and what we really saw in 2017

Chris, let me start with you. What was, in your view, the big story of the year?

Chris Nagi (1:21)

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.

Joe Weisenthal (1:54)

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 as 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 story as it was yesterday. And not only was it the same top story as 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, it 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?

Matt Boesler (2:34)

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, a 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?

Joe Weisenthal (3:02)

And for all this recession talk, Chris, like it's still like no stock investors actually seem to care about it.

Chris Nagi (3:09)

About the possibility of a recession?

Joe Weisenthal (3:10)

Yeah, about the flattening, like these things that would at one point maybe have seen like red flags.

Chris Nagi (3:15)

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.

Joe Weisenthal (3:22)

Yeah, 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?

Matt Boesler (3:45)

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 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?