These Were The Most Important Stories for Traders In 2018

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal. Tracy Alloway is out this week, unfortunately.

But with me in the studio here for today's episode, I have Bloomberg macro strategist, Cameron Crise, and Bloomberg cross asset reporter, Luke Kawa. And I'm very excited to talk to both of them because we are going to do our year in review of markets. We're basically just talk about what the heck happened in markets this year, because I think it was one of the most interesting times for markets across many asset classes that we've had in several years, maybe most interesting since 2011 or the financial crisis, or maybe at least 2015, 2016

And I think a lot of people have questions about what's going on, so hopefully we will try to answer them. So Cameron and Luke, thank you very much for joining us. Always a pleasure. So it's always tough to disentangle reasons for market moves. And Cameron, I think you're one of the most strident in sort of pushing back against any attempt to do that at all. Nonetheless, this year was characterized by a very sharp turn starting in early October, where we saw some major winners just completely fall out of bed. Tech stocks, US equities, which had been doing pretty well up until then, just started getting relentlessly destroyed. What happened?

Cameron Crise (1:40)

Well, I think you need to look actually back to February because we had a very similar phenomenon in February. And the Genesis was broadly similar, I think, in both instances, where you had a performance, a very good equity market performance that was punctuated with a sharp rise in market interest rates, say the 10-year yield, and at the same time, inflammatory rhetoric from the US president vis-a-vis trading relationships with China, and that is kind of a potent and lethal cocktail for risky assets, and you had a market that was out over its skis, and if you, you might not be old, neither one of you are probably old enough to remember the old Wide World of Sports intro where there was a ski jumper.

Joe Weisenthal (2:28)

I remember that, nope.

Cameron Crise (2:29)

Yeah, the thrill of victory in January and over the summer, and then the agony of defeat in sort of February and then October, thenceforth.

Joe Weisenthal (2:39)

And so when people try to say, oh, is it the Fed? Is it trade? Basically, you can't really say it's one good.

Cameron Crise (2:46)

I think it's a combination of a number of things. I mean, we need to take a step back and remember that the Fed is in the midst of a tightening cycle. Monetary policy has gone from unquestionably accommodative to arguably neutral.

We had a similar phenomenon, obviously, in 1994, 2005 In both of those years, Fed tightening years, the multiple of the S&P 500 fell pretty sharply. And this was just, I think, to some extent, the latest iteration of that phenomenon.

Joe Weisenthal (3:15)

Luke, come in here.

Luke Kawa (3:16)

When we write the story of this year, the story of this year will be the huge blow up of the shortfall trade, of the trade that essentially you could make your living easily from early 2016 through January 2018

Early in the year, we had pretty much every equity board and overbought territory. And things were great. We blew past everyone's S&P 500 target or at least like a quarter of analyst targets within the first five sessions. And then it all blew up. And then at two other points this year, two other large market moves that you can attribute to really the perils that can befall you when you sell options, when you sell volatility, the drastic fall in crude and the drastic rise in natural gas that wiped out optionseller.com. That I think this year is the year we learned how dangerous options can be or if people who needed a reminder of that lesson over the past couple of years, this is where you really learned it because there's nothing like your February and then recently what we've had in crude natural gas.

Cameron Crise (4:20)

And I think that speaks to a theme that old grumpy people like me like to talk about, which is as financial markets have become younger and younger, you've sort of winnowed out people who have seen previous rate hike cycles and know what a rate hike cycle looks like. And typically it is associated with higher volatility.

Joe Weisenthal (4:40)

So it's the kids, it's all the youth.

Cameron Crise (4:43)

Get off my lawn and quit selling options, kids.

Luke Kawa (4:46)

The Canadian millennials have already traded through a bear market though. So that narrative, I'd like to know.