Surveillance: Fed Is on Hold for First Quarter of 2017

of course on the Bloomberg and Frank. We start the show with a sad note. Uh former Bundesbank President Hansteep, his last president of the Bundesbank before the ECB, has died at the age of eighty five. I have a statement out from Buddhu's Bank president h Ian Fiedman just a few moments ago. Sad four is still a good life. But you're right, it's sad. And actually usually in the Christmas period we do get a little bit of this

always always sad news when it comes to death. Um away from sad news, Mike, and actually I don't know whether it's good news or bad news, but you know, you were talking about the fact that we had a day off yesterday. We're still trying to figure out and actually I urge all of our listeners if you like talking about Brexit. There's a great Brexit quiz on our Bloomberg dot com. But we're seeing as economic uncertainties may actually ratchet up in a lot more people holding cash.

So this is according Mike to the British Bankers Association, and it's the first time that we saw that personal deposits growing about five percent in November. I don't know whether it means that that people are just a little bit concerned about their house prices and things like that are inflation, but it's the first time we've seen it in eleven months. And they gotta pay their Christmas bills too, you know, all the money they spent on gifts, all

the money you see. I mean when when you say hoarding cash, I think of people putting their um, you know, sterling coins into a tin on the dresser or something like that. Um But you know, we have a new coin in One of the probably most popular cultural stories here is that we have a new sterling coin, which I believe will be unveiled by the Bank of England seventeen March or even April of next year that strangely looks like the euro. It's it's true, I've seen it.

Perfect timing. Well, let's ask Mark Chandler about that he had of currency strategy for Brown Brothers hairman and he has migrated over here with us from Bloombergshire. Aillance on television and uh mark um significant the Brits are introducing a new coin this year. Actually, the larger question is what is the pound? What happens to the pound in two thousand seventeen with bragsit in full flower Supreme Court decision coming up, the article fifty trigger theoretically in March,

what do you see happening? Yeah, that's a good question. I think that's like. One of the big surprises, of course this year was the Brexit, the refervendum. I still think that such an important decision made by a very small majority of people, less than fifty two percent. So some big changes coming to to the UK, and I think the market is getting frustrated that this idea of a soft Brexit hard Direxit, which is what the market's

really been debating about. I think next year that all that changes, And it seems to me these are splitting hair is really it's hard to see how the UK is gonna be able to maintain both access to it to the Common market and control its borders. It's that I think the EU is right that it's not a smortgage board type of opportunity where you just pick and choose what you want. And so I think that until this is resolved, it's hard to see how Sterling has

a substantial rally. So I'm looking at sterling still to be falling. I think that next year, as if I've write about the Euro going through parity, I think we could see sterling back down to those loads we saw on the flash crash. Bring this down about one fourteen or so, say a dime from here on the downside, And I'm looking at this new pound coin. Looks like it's a pineapple. I mean, what is that. I think it's a Scottish emblem, but close it's a thistle, it looks,

but I think it's a thistle. Um, we'll put it on social media for the for the people that are listening to us, so you can also have a look at the new twelve sided one pound coin being unveiled next year. Mark when you look at currencies, right it's very clear that volatility was largely played out in currencies in because docs just kept on going higher. Do you

think we'll follow a similar pattern in now? I think that's good because I think that what we have is that there's this idea that the capital markets that letting the prices of currencies and money in general, like interest rates move be volatile, that means that the real economy doesn't have to be That is that these financial instruments act as a shock absorber, and we see the economy has become more volatile as the financial markets become less volatile.

So I personally would rather see more volatility in the financial assets. So that the problem though with volatiling the financial assets that it implies a direction. So we say low volatiling in the stock market, what do we know? We know from some of the charts that Mike's shown before that the VIX tends to go down when the stock market goes up. So we're talking about more volatility. We're talking about lower stock prices, and we're probably talking

about lower bond prices. If bond market volatil is going to improve. Currencies are a different story. I think that some currencies tend to be more volatile. I'd say that the dollar, block, Aussie, Canada, Key, we tend to be a bit more volatile than say the Swiss shrink. But I think that in the year ahead, we still have to be careful about the end, which has had this big reversal this year. You know, we began at one five or so, sold off to almost one hundred, and

then bounced back here to one eighteen. I'm looking for dollar yend to continue to move higher. I'm looking for this to take place over the course of the first half of the year. But the same thing, I think in the other major currencies, we should be expecting a little bit more volatilitly, not just because of a trend, but really because of these periods of consolidation after these

large trends like we've just seen. We started a conversation with the pound, but you told us earlier that it is the euro is your currency of the year for two thousand seventeen, that it's going to really influence what happens to a lot of the markets in the coming year. Yeah. So the way I sort of think of this is that the what's going on. I think that beside this divergence between ECB policy and FED policy. We also have political issues, and I think for me the key the

political issues is this wave of populism. Nationalism may began off in Poland, hungry Czech Republic, moved to the UK with the Brexit vote, the US election with the Trump election, and now we have in Europe next year. We have several opportunities for these populist nationalists to show their hand. And I think that this nervousness, this anticipation, it keeps

the keeps the Euro on the defensive. And I think that is particularly problematic because Europe has been held together by integration and if we're seeing a wave of nationalism, that eats away at that integration. And so this is an existential challenge for Europe. And I think that's what keeps the Euro. Besides this monetary policy, this wide divergence. Investors get paid over two hundred basis points right now to belong the US dollar over the Euro, thinking about

financing through the Germany. This is the key incentive, the key driver for the dollar. But I think that the politics right behind it. But Mark aren't the politics extremely dangerous? And I don't know whether it's because we don't trust the polls, But is there a concern that actually one of the big countries I'm thinking into the fronts could

leave the Eurozone the next eighteen months. Oh, I don't know about eighteen months to leave the Eurozone, because here's what it would have to happen, right, I think about next year, we get the Dutch elections at first, most likely the Dutch elections, and the far right party does seem me pulling ahead, but the majority of the Dutch you want to stay in the EU, want to stay

in e MU. Then you've got the French action, and there there's a long tradition of the of the center to parties UH combining forces when faced with a UH, faced with challenge from the National Front. Even then, I can't see how it happens in eighteen months. And then of course in Germany where Merkele she might not be as popular as she was before due to her immigration policies, but doesn't look like she has a local rival that could unseat her. So you're right that other elections, like

in Italy, it's possible. But even then Italy has a has a constitutional ban on referendums to affect treaties, So I think that people are jumping the gun a little bit. You know, I was around for both of the Greek crisis, and many people thought Greece was going to drop out. I think those uh London bookies were making odds at like a seven to one or twelve to one chance that Greece was going to drop out. And I think that people have underestimated the political will, and that's what's

so important about now. The political will is being challenged. I thought Carolin was rounding off, but it really is a dollar four zero zero for the euro, which is Mark Chandler's currency of the Year for two thousand and seventeen. You think it will go down as low as eight two eight one, not next year, but I've got ninety seven by the middle of the year. But the A two and a half is the October two thousand low, and I think we're gonna head there. And during this

Obama slash Trump dollar rally. Well, when we last saw the euro that low, the rest of the world stepped in the G twenty intervened to prop it up. Currency intervention has sort of gone the way of the Dodo. But does it come back, Well, it could come back, but I think that depends on what's happening at the time. I mean, right now, it seems to me that the weakness of the euro is a good thing for Europe. It's a good thing for the world economy, because this

is how this is how it's supposed to work. The country that's growing quicker, has stronger fundamentals, gets a stronger currency, and those countries that have a weaker economies get a weaker currency that helps stimulate them. But so it depends only what happens when we get those kind of extremes and how fast we get there, right, But market that this is kind of the point that I was thinking about, is that a week or Europe will be welcomed for

a lot of the European exporting countries. Is the problem, if you want to call it a problem, is not dollar strength. Yeah so yeah, so exactly. So, I don't think that we had a point yet where the dollar is a is a problem for Europe. I don't think the dollar is yet really a problem for the US as long as the pace that we've seen in recent

months does not continue at this pace. So I'm not sure that we're at a point at a point in the foreseeable future, where the G seven will say, we've been telling the Chinese, we've been We've been making these uh high sounding platitudes that G twenty meetings that currency markets ought to determine the value of foreign exchange, and to overcome those comments with saying that, well, this time is different. We need to intervene because the dollar is

getting too strong. I think it's a very high hurdle. Bar I don't think we're anywhere close to that. All Right, other big currency of the year, perhaps in two thousand and seventeen, will be the Chinese when because the PRESIDENTI like the United States and City, is going after the Chinese because they unfairly manipulate their currency. They obviously have been manipulating it higher, not lower, as he has suggested, trying to keep a floor under it. But what happens

to the UN in two thousand and seventeen. Yeah, So I think that the first thing I say to keep in mind is that when it comes to people, you and I talk, we want to be uh we want to be honest with each other. But I think when politicians talk, they make a distinction between like declaratory policy what they say operational policy, what they do. And oftentimes

the US presidential candidates talk tough about China. When they get into office, they realize they get presented with new information, the complexities of the relationship and the nuances of what China is doing. And right now, I fully agree that China is if anything, it's trying to strengthen its currency. It does not want the currency to fall too fast.

It's keeping it relatively stable against the basket. But I have to because I have a strong dollar review and I'm bag back on FED raising interest rates, strength of the US economy while the Chinese economy likely to slow and if anything, some more monetary stimulus from China. I've got the dollar R and B, which now you stay

is right below seven, going about seven twenty next year. Okay, you're suggesting Mark that when the facts change, or the facts presented to the president like change, he will change. What will it take for Trump's trade advisor, Peter Navarro, who has written books called, for example, The Death of China, who has clearly on the show, also said he believes

China's cheating because they have a surplus. Yeah, this is uh is a good point you raise, and for me, the challenge as an observer is really is really trying to figure out which of these voices within the Trump administration are really going to carry the day. I first got involved in politics when Henry Kissinger was a National Securities adviser, and I think Will Rogers was at the Secretary of State, and yet it was Henry Kissinger that

was really running the show. So it really depends not just on who the formal appointments are, but where that power really lies. And if it's not clear to me, where's how it's going to play out. One thing, though, is clear to me, And even though Trump's has said that he'll declare China currency manipulator on day one in office, I would out hold your breath for that. That is to say that the Treasury Department has a has a quantitative list of factors and they say that China only

meets one of those three factors. And so whatever brush the Trump administration says that China is a currency market manipulator, that same brush could be could be used to tar many other countries, perhaps including Japan. Well, very quickly, what does it mean if they designate them a currency manipulator? Yeah, So there's to two parts of it. One is China would have to whoever we cited the currency manipulator would

have to have negotiations with the US. But more importantly how it affects like equity investors is that US companies could then sue China to get for their grievances that try to try to manipulate the currency. Take an X percentage dollars from them. How do they respond? They can sue them, And so I think that it just opens up that World Trade Organization. I think they might be

even separate judicial like tribunal set up for this. I don't think it's fully just at the w t O. All right, Mark Chandler for Brown Brothers Herman, thanks for joining us this morning here on Bloomberg Surveillance. Tony Kristenzi, pimco's Markets TRGY portfolio manager. He's come home for Christmas, all the way from Newport Beach to Brooklyn and UH and points here in Manhattan. We thank you for stopping by this poinning. Your latest note intrigued me because um,

everybody talked about the taper tantrum. It was a huge impact on the markets when the Fed suggested it might raise rates and did not. UH might taper and did not. Now you're calling what we're seeing in the bontom markets a Trump tantrum. But when you use those words is it's not the same effect. It's a lot different. On two thirteen, there was this fear of withdrawal of stimulus, the ending of quantitative easing, the bond buying that the

Fed had engaged in several trillion dollars of securities. This tantrum is a little different released a Trump and omics and more traditional factors that affect the bond markets, such as growth and inflation. The markets think that growth, which had has been subdued at around two percent or so, inflation also subdued, would might pick up towards the old normal. I mean, the new normal for growth had been around two percent. But the markets think that it could pick up.

The question is whether it will pick up permanently in the trajectory move up towards the old normal where suspect and the bottom market in fact is while many are talking about the all the optimism, look at where the bond markets priced for yields in the year. Looking at short term instruments difficult for anyone to the average person

to to see, but we in the bond market. Know that the market participants or priced for the Federal funds rate, the FEDS policy rate, which is today at about a half percent to move up to just two percent in that's about half of what is normal for a neutral rate, where the fit's either pressing on the gas of the brakes historically, so the markets still believe that growth will

be subdued over the long run. So while there has been a Trump tantrum, it's been relatively subdued in the sense that the markets are still priced for a very benign, shallow path on interest rates. Looking forward, Tony. First of all, congratulations on your greeting. Hi, Tony Um. I wanted to send you a Bloomberg message through the terminal and as a greeting I have. You are only as good as

your lost trade. I love that. I've used that since the nineteen nineties on my Bloomberg terminal and it served you well. So what is your best trade for well? Uh. For one, it's great news that bond yields have increased for bond investors because starting yield is the major determinant of future returns. The yield on the Barkley's aggregate, which

for those who don't know. It's similar to were watching these SMP five hundreds, the main barometer by which many bond managers are judged against, although there are a lot of them these days, the Bockley's aggregate is yielding about two and three quarters percent. That's upper percentage point from about six weeks ago. In other words, investors, as I said, uh can now expect with the idea that starting yield is the major determine at the future returns about two

and three quarters in a passive strategy. But bond managers like PIMCO historically earned alpha and earned something above that, and we historically have learned about a hundred basis points more than that. So bond investors are looking at returns in the high threes now and even near four on average going forward. So staying invested in bonds is one

of the important points. It's many are worried about rising yields, but as I as I said, higher yields are good for one and secondly, one can't try to mock at time the diversification benefits of bonds. It's like getting in a car and saying, well today I don't need car insurance. I'll take the risk. Uh, it's not a wise thing to do. So if investors want to buy equities, if they want to take more risks because they feel the

economic outlook is better than it was. Uh, owning bonds, of course enables them to get in the car and drive and take those risks. So it's good to have that anchor. So staying investation and bonds being overweight on credit and also being but but by being somewhat cautious and leaving some dry powders another factor, and also by um simply uh small staying investor is probably the biggest snack. I say, there's a lot of little details. Talk too long about things, things to buy. But we can talk

about that if you will. Well, I have to follow up, by the way, John Tucker points out, it's the Bloomberg Barclays index, So we have to do our own shoots. Plug here. So Tony's writing that down. He won't make that mistake never again. But how do I know? I mean, you don't have to go in to every detail of every bottom. But okay, you say I should have bonds, you sell bonds, Um, how do I know what kind

of bonds I want to buy? In the whole universe to offer myself protection at time when even if Trump produced zero additional growth, growth has picked up enough to

justify the higher rates that we're seeing right now. Right well, um in terms of the types of on course strategies, for one of the anchor that I mentioned, the insurance that investors tend to need at the vertification benefits the type of thing to stick with because investors these days want to take more risks, and equities have moved up significantly and they want to stay in the car and drive and take additional risks. Probably is good to be

in core strategies, but they're also good income strategies. That depends on investments in UH liquid and complex instruments. UH. These include non agency mortgages subprime mortgages, for example. We would expect returns in those, and we've been investing heavily in them to stay in the mid single digits called five so on a loss of justice laws adjusted whole to maturity basis. Second security of high interest to US

is a bank capital. Banks in Europe they're getting safer and safer, maybe not those in Italy, but in general banks are sharing up the capital levels and that's good for capital securities which are yielding between seven and nine in Europe, so we like those. And being overweight credit

is a general concept, but leave some dry prowd. If we had to put it on the scale of szewould attend how in terms of the overweight on credit, we'd probably place it around five or so because markets are somewhat fully priced for a good scenario, and they'll be ups and downs naturally in markets in tween and beyond that one will want to take advantage of so, so of course strategies number one income strategies UH. Secondly, complexity I liquidity good things. Taking advantage of volatility UH is

something to do in the bond market in as an investor. Really, and Tony, does that change given what you've just said in terms of the investment landscape? Does it change if the US enter as a trade war or something goes not to plant. I don't know if it's terriffs, I don't know if it's renegotiating messy renegotiations. Francine As you mentioned that the idea of the negative side of the Trump trade that markets don't seem to be thinking about.

And this is why when we say stay overweight on credit, but leave dry powder. We are thinking about the possibility of volatility in as markets now and then look at the negative side of or the risks I should say, the left tail risks for the Trump administration. And so those are things that can affect the market negatively and would add to volatility. And we'll have to wait and see how the Trump administration reacts to that volatility and markets and to any impact it may have on economies

with policies like that. And it suffice it to say that it will take many months to sort this all out. UH tax legislation, for example, may not be passed till next summer and will take a while before markets are sure about the future for the economic growth in terms of not just eighteen but the trajectory. Will it will us growth will permanently move higher or will it be

a Trump bump? The markets will be more interested in in what a permanent increase in growth, and the only way to get there is through high quality spending, high quality policies that encourage investments, unalization, educational attainment and plants, equipment, software and things that over the long run produce economic growth and proven to be growth producers. Just seconds we got the move index measure of altility going down. I mean it peak on election day and it's been going

down since well. End of of course, Historically the declines in volatility or something to be worried about. And always I always say beware quiet markets. One never knows what will be next. But the main goal of central bank policy you know we're wrapping up, has been to suppress volatility. And one has to question whether central banks can continue to do that because there has been a shift from

central bank dominance to fiscal dominance. Now all right, Well as who is the guy in Buck's money, um the Hunter Elbow Fund would say markets of VOI voy quiet. Not a lot of good quote as uh, we get through this holiday week between Christmas and New Year's a lot of people on vacation, but we are seeing markets higher. Do you get more movement off when you have volatility elevated because there are a few of people trading, but we're not seeing that so far in the market. Tony

Kristenzi is with us. He's a PIP called Market Strategistic Portfolio Manage, which means he's all about bonds. I want to go back to something You've started our conversation with earlier about how when you look at the forward curve for the bond markets UH, you are not seeing the enthusiasm in fixed income for trump pomics that you are

seeing in equity. I'm looking at the dot plot of the FED, which, if you go to dots go on the Bloomberg not only gives you the dot plot where the Fed essentially sees the proper setting of the various members of the open market. If you see the proper setting rates, but you see what the market, the overnight index swaps price out UH interest rates for the next couple of years. And you're right, there's no real enthusiasm for Trump boosting growth significantly over where we are right now.

Markets are quite familiar with the story on US economic growth, which is to say, they're very strong headwinds sti ILL and even with the perspective changes in legislation, and there's doubts about what these legislative actions will do for growth on a permanent faisis basis. Consider demographics. UM, that's a

major force in shaping the economic growth globally. It's empirically shown that it can affect growth in a nation considered Japan, which last year sor decline in the number of persons about a million in the population from a hundred twenty six million, and the population is expected to continue contracting about a half million per year and m until it goes to under one hundred million and twenty fifty. It's difficult for a nation to grow when there are fewer

people to produce goods and services. In the United States, the baby boom is born people born between nineteen forty six and sixty four began turning sixty five. Of course, that means in eleven UH it's a contingent of forty million people today that will grow to seventy five million when the last baby boomer that includes me UH will turn sixty five. And so the use doesn't have as many people entering the labor force to produce goods and

services as it used to. So when the bond markets thinking about growth prospects, it's thinking about demographic influences on growth. That's one thing. The second influence would be credit growth. Does the US banking system produce the same sort of loan loan growth that it used to know, So this means the impulse to growth from credit won't be as strong here in Japan and Europe as it used to be in Europe that had negative growth in loans through last year. Now it's up just one and a half

per cent or so year over year. It used to grow in the high single digits. So the credit story isn't as favorable. But the biggest thing is productivity. Companies government haven't been investing in people and in stuff. The sources of productivities are three. It's people human capital skills that people bring to the table. Secondly, it's stuff it's plants, equipment, software, infrastructure. And third to total factor productivity. They call it how

it all gets used? How do we use this stuff and people's skills in The data shows that the middle part, capital intensity it is called the stuff part, has declined on a year of year basis for the first time in over sixty years. In other words, companies have fewer things in place per unit of labor and the nation

as a holder. So a company of five years ago that had one hundred employees and fifty computers today may have based on these data, first decline in over sixty years, a hundred people and forty eight computers, fewer things in place per unit of labor and so markets to the boer market saying that until these things, until that changes,

it can't overwhelm these other headwinds. And so why not then pricing at lower than historical federal funds rate policy rate for the Fed and markets the price for Mike you said, they looked at the dot plot and o I S as it's called, the market the price for a two percent policy rate in the year historically the neutral rate where the it's neither pressing on the games of the brakes is four and a quarters as well, below normal for neutral rate. It's not even a tight rate.

Remember the Fed raised the funds rate to five and a quarter the last time around, and when it raised rates from two thousand four two thousand and six. Is this is a very subdued picture on growth in the bond market. So when you think, take a look at the bond market and west price for a few years, hence Tony, if you look at the spread, for example, between let's say the tenure bund and treasury yields, right, so that spread has peaked for the moment, I think

it wind in. I'm looking December to a record two thirty five basis points can that spread become bigger next year? It could widen, but we wouldn't expect to widen by much. And it much depends on the viewpoint on US growth and whether the view on the path for rates in the United States changes, And it depends in part on the toughness that the Fed shows towards inflation. When the sphere in the streets of the bondmark, the bond market needs a cop on the beat, and that cop on

the beat is Janet yelling and the Fed. Otherwise bondmarket vigilantes emerge, which is to say, bond investors take matches into their own hands and tighten policy for the FED by raising rates higher than otherwise. So the Fed is vigilant in seventeen and addresses the inflation fears developing in the bond market. That will limit the spread between US yields and foreign yields. And the Feed is tough on inflation.

If it keeps controls the view on the path for rates the destination point, which is that two percent level for twenty, then uh, the spread will be kept low. And remember, investors globally, we know this. PIMCO has offices thirteen countries visited many of them UM investors. They are very very keen and interested in and buying bonds that are harder yielding than those in their country, and so UH investors in Japan and Europe will be looking to the n s to invest tire if yields spreads widen.

And one final point for the Japanese investor yields at the start of the year switching from a tenure j GB Japanese government on to the tenure treasury UH that they pick up was about a hundred basis points after including hedging costs to the Japanese investor to hedge there yen back into the dollars they buy back into the end. It went to zero in the summer, is probably the

reason why US treasure yields arose. But now it's back up to about eight nine basis points, so they can pick up additional incremental yield now and so it's probably the reason for the stability and yields after the big jump in yields recently, is that the yields after hedging costs are considered for foreign investors look better, and so

we see we're seeing again their interests develop. What happens for the corporate market in two thousand seventeen, with the rates rising UH, we're going to see borrowers step back. You correct, my in fact key factor we consider in UH the outlook for corporate bonds. These technical factors, and because yields have increased, and because companies had been expecting the possibility of a yield increase UH and took advantage of it by barring more heavily in twenty than they

otherwise would have. This means the amount of supply of corporate bonds in may decline relative to in terms of new issuance. A technical factor will be very beneficial to a corporate bond market that is of keen interest to foreign investors, and so it's one reason to stay optimistic about credit and be overweight on credit in SEN is this technical force and will remain a technical technical force as yields mars. One other point in the high yield

bond market, very very few bonds mature. It's a very positive technical In the next three years, under ten percent of the entire universe of how yield bonds mature because many companies have turned out the debt pushed the debt will maturity far out into about and so that's a

positive technical that makes short dated how yield very attractive. Tony, Is there something so we talk a lot about creating jobs, reflating spending on infrastructure, is there anything that President leg Donald Trump can do to actually make the US more productive or at least, you know, try and fix that productivity puzzle. Yes, for one, encouraged give provide incentives to companies to invest in capital equipment that over the long

run will mean more output per hour. But secondly, the spending that the u. S engages in directly rather than through private sources is going to be need be of high quality. So investors should focus on not just the quantity of money that is set to be spent on infrastructure, about the quality. In two thousand nine, fifty billion was spent on infrastructure in the American carvering the Investment Act.

It was felt that it was of low quality when toward making roads a nicer but didn't really provide for more output. And also money was that was spent states would otherwise have spent, so it was merely a was a substitution effect there, And so the it's a very big challenge for the Trump administration to produce high quality spending. Someone is going to have to watch over how the money is spent rather than how much. And that's the key to the outlook for productivity and growth and even

interest rates U in the future. Tony Kristenzi, thanks for stopping in this morning. I know you're here to get some good Brooklyn pizza. Hope you are able to do that your travels. This is Bloomberg Surveillance on Bloomberg Radio. Who you put your trust in matters. Investors have put their trust in independent registered investment advisors to the tune of four trillion dollars. Why they see their role is

to serve, not sell. That's why Charles Schwab is committed to the success of over seven thousand independent financial advisors who passionately dedicate themselves to helping people achieve their financial goals. Learn more and find your independent advisor dot com. All right, and now onto the tweet, because we're always on tweet. Watch right, Mike, especially when it comes to the President electness. This is his latest one. He talks about Princed Obama.

This is after I guess it started on Sunday. It was a Sunday Mike where President Obama was talking about the fact that that had he been running instead of Hillary Clinton, he probably would have won. Again, I went back and listened to the interview twice. It was actually more thoughtful than a lot of the media portrayed it to me. Anyways, the latest Donald Trump tweet says this. It was posted a couple of minutes ago. He says, doing my best to disregard the many inflammatory president oh

so President Obama's statements and roadblocks. I thought it was going to be a smooth transition. Not that's in capital letters, exclamation mark this again. My concern in this, Mike is that this does not seem like a president that is trying to unify the country. Right. We were talking to a guest a little bit earlier on saying we should ignore wall Street, should not take too much notice of

his tweets. But he is someone that has to at the end of the day, govern um and govern well many different political factions, and he seems at the moment a little bit thin skinned. A little bit he seems rather thin skinned, and he continues tweets. Another one coming out now complaining about the president and his abstention on the Israel U n vote the other day. So Um, you want to follow the president elect, you gotta get

yourself a Twitter account. I guess one of the things that Donald Trump has made very clear is that he thinks the U. S. Intelligence community is not worth dealing with. He doesn't want the presidential briefings, and he says he does not trust the c i A, the d i A, and the other elements of our national security um and national intelligence operations. John Nixon is a former CIA senior analyst who says, uh that maybe Mr Trump has a point.

He's written a new book called Debriefing the President The Interrogation of Saddam Hussein. Mr Nixon was basically the CIA's Hussein expert, and when they captured the man, he sent him in to interrogate him, and he found that much of what the agency was telling the President of the United States was wrong. Welcome to surveillance, Mr Nixon. Um, you describe that does not do a particularly good job,

or at least did not around that issue. Yes, Um, you know, working on a rock, we were constrained by sometimes we're having very bad sources of information. Overall, we understood the sort of general arc of Saddam's career in his life and what he had done. But there were many of the sort of granular details that we were in a dark about and uh, it was pretty shopping when I started to be briefed him to learn some of these. Do you think John, this has changed. Has

it changed? Has either the the you know, the operatives or the way that communication between CIA and the president changed? Well? Um, Unfortunately, I would say no. I think that there are still problems in terms of analysis and in collection, and some of it is not the CIA's fault. For example, you know, if you don't have a doesn't in a country, it's very hard to get information sometimes and information that's good

and reliable. So that's one thing. Um. One of the things that is the CIA is balled is sometimes it's an analysis it's very watered down and because especially in the last ten years, I mean, the CIA has been like a pinata for policy makers to kind of take wax that and you know, uh, it just sort of at that point to sort of hunkers down and takes the blows. But the the the analysis itself gets kind of watered down and is not that good because the CIA doesn't want to be you know, a blame for

making mistakes. Um. In fairness, I will say this intelligence is not something that is a hundred hundred percent right all the time. And contrary to popular opinion, we don't have a scene uh uh crystal ball in the basement. But you know, we can often give policymakers a fairly good range of what might happen in what they can expect um. And sometimes it's policy maker problems that really are at fault because they do think that somehow, you know,

we can critic the future. John Dixon was a senior leadership analyst with the CIA from two thousand and eleven, regularly wrote for and briefed the most senior levels of US government. He's written a book about his experience in Iraq debriefing the President, the Interrogation of saddahm Lussein, in which he is critical of the CIA's efforts to understand what is going on in Iraq, although you are not a wholesale critic of the agency, as we were just

talking about. So I'm wondering, uh, from what we never quite know what the president elect is thinking, but from what he has tweeted and said, Um, do you think his distrust, dislike and disinterest in uh, the intelligence community is justified. Uh No, I think that. I think that it's very I'm very disturbed that there is this clash that appears to be happening between the president elect and the c I A. UM. The irony here is that

both sides need each other. The president is going to need good information in order to make decisions, and the CIA needs to have the President's trust and backing in carrying out its mission. Uh. And if a wall is brit And I hate to use this metaphor for obvious reasons, but if a wall comes up between the president and his intelligence community, that will that will just the only people that will benefit from that our enemies, and that's

what they really would like to see happening. Um. The thing is, the intelligence community really can for someone like Donald Trump, who doesn't have a steep background in foreign affairs. Um, the intelligence community actually can help him in terms of getting up to speed and understanding some of the issues

that will confront him in the next four years. And I get nervous when I hear him say things like, well, you know, I'm a smart guy and I already know things, and I'll just you know, if I need to hear from them, I'll ask them, Um, you really need to be engaged in in and you get your briefing every

day so that you can understand what's going on. It's a very complex world out there, and if you just jump into something when it's at a crisis point, you're you're probably not going to come up and make the right decision. You know. If I can sort of come back to the book, that's sort of the way that I'm Hussein operated in his government. He didn't have regular briefings. He didn't he didn't have an intelligence community that was

gaily serving his needs. Um. And a lot of times he when he asked a quid, when he did ask the questions, he would get back the answer that they thought he'd wanted to hear. And you know, he made a series of bad mistakes, chief among them the invasion of Kuwait in and you know something, Um, I I think if don Trump wants to avoid derailing his presidency, he really should try to develop a relationship for the

intelligence community. John, congratulations on your book. It's a great book and also an extremely important book because of what we're talking about with the president like Donald Trump. But actually in your book, right, you're right that the agency, no matter who the president is, will almost want to

give him the answer that he wants to hear. So, actually, with the dysfunctional or the fact that Donald Trump is now calling the agency dysfunctional, do you not see any hope that that this gets severed that actually we find a much more stable and fruitful working relationship between the president, any president, and the CIA. That's a that's a very

good question. Um, I'm hopeful that somehow they'll Right now, right now, the CIA is trying to probably is probably trying to figure out how best that the conservative needs uh. And you know, there are things that he has said that maybe might be able to they might be able to sort of get themselves in the door with him, which is you know, he said he doesn't want to read the same thing every day. Okay, well that's one indication. So they might not give him the same they might

not give him the same topic every day. And they also know that he wants to look at he likes Twitter, and he probably likes his information these small little tweet like messages. That's unfortunate, but you know that might be another way to kind of communicate with him. Um, it still remains to be seeing how this gets worked out. Um. But for all of its shortcomings, and you know, the CIA has many short tunnels, and I chronicle some of them in the book. But the thing is, you know,

you can't try that. You can't say to yourself, Okay, I know what Iron is doing, I know what the supremeter is up to. If you're not getting some so if you don't have some sort of grounding in the intelligence and some sort of grounding in the context in the history of what has happened before, Because if you don't do that and you say I'm going to make decisions a based on because I'm a smart guy, it's

going to be a disaster, you know. And and really, can this country afford many more fiascos like a rock I don't. I don't think so. Very interesting story in the Washington Post yesterday written by a former colleague of yours, Stephen Hall, of former CIA official, why the CIA won't want to go public with its evidence of Russia's hacking. We're gonna have these committees investigating at least maybe even

want just one supercommittee investigating the hacking thing. Um. Mr Hall makes case that you know, any kind of any time you give out information, you risk giving out sources and methods, and sometimes the cost of doing that is uh much greater than the benefit you gain from making the information public. So do you think we get anywhere with this Russian hacking investigation anywhere that would satisfy the American people, the people who believe Donald Trump when he

says it didn't happen. Uh, Can they be convinced without giving up sources and methods. Well, I think there's a way to do that, and I think the Obama administration was correct in wanting to ask passing the intelligence community to look into this. Where I think the problem is is that all of a sudden, it gets leaked to

the media before any conclusions are drawn. And then once it, once it's sort of into the public realm, then it becomes politicized, that it becomes sort of a football, that it gets kicked around by commentators and politicians and what have you, and your chances of really getting at the truth at that point become very small. And I think that that's a bad thing. The politicization of intelligence has done more, I think, to harm our foreign policy than

than anything in the last decade. Um. You know, because you know, we the CIA really should just be this institution that just comes to the president and says, here are the facts, this is what we know, this is what we think we know, and this is what we

don't know. Um. But now it's sort of like you get this brow beating from the Oval Office, and then you know, the CIA gets under pressure to kind of give the give the boss what he wants, and you know, it's just it's something that's snowballs and it has a very pernicious effect on our government and the conduct of

our own police. John Nixon, former CIA senior analyst, author of the new book Debriefing the President the Interrogation of Saddam Hussein, and I think fran it's very obvious that what happens within the intelligence community is going to be front and center in the Trump administration. Yeah, it's it's actually fascinating, and it was great having John Nixon on.

We I wonder how much of this actually will find out right, because the CIA is always a secretive I wonder whether Donald Trump will maybe give us more of a glimpse than previous presidents. Thanks for listening to the Bloomberg Surveillance Podcast. Subscribe and listen to interviews on iTunes, SoundCloud, or whichever podcast platform you prefer. I'm out on Twitter at Tom Keene. David Gura is at David Gura. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio.

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