Surveillance: Financial Conditions Do Matter, Crescenzi Says

and also the surveillance teams sometimes you get lucky. We did that before December thirty one when we said, Tony Cosenzi, you need to start our year, and then we enjoyed the summer thirty one where things fell out about concenz the PIMCO. He's definitive on short term paper. And bring up the chart of here McKinnon, if you would. This

is the I've never shown this chart before. I'm only doing this because Conscendi showed up in an early hour one year two year difference in yield and you've got the oudities before the crisis and then the normality of a difference in yield between a two year in a one year, and we fell off a cliff. Tony Cocenzi, let's start with the why of the short term paper market. Why is the one year two year yield inverted? Where

one year yields are higher than two year yields. This is a crystal ball is telling you about the future and what the market thinks of the Fed and what it will do with this policy rate. We know the Fed in December racist policy rate to two and a quarter two and a half. Here the market saying it will go back below two at some point. Are they predicting a rate cut at market point? Predicting a rate cut at the beginning part of next year, so we won't be roaring into the twenties like we did a

hundred years ago. Well, you could be stumbling into the twenties, is what the market is saying. What everybody wants to know in global Wall Street from you is when we talk commercial paper or library ois and the other arcane stuff that you and and Jerome Schneider and others at PIMCO look at every day. Okay, great? Is that a liquidity crisis is an attention within the corporate space. Absolutely not a liquidity crisis. There's still over one trillion dollars

of extra money that banks could utilize to keep themselves. Liquid. Banks are in exceptionally good shape today. Still many worry about it, but there's no there aren't the excessis there that many people cite. What is concerning is that we this all began in markets, the stress with political factors, not macroeconomic ones. It was related to briggsit was related

to Italy, it was related to trade stories. Now what markets have to worry about is the feedback loop where what happened in markets because of politics sus to feedback into the real economy and then back into the markets. So there's one of the major questions for this year is whether we can get past the tenth year of expansion in June, making it a record dating back to the mid eighteen hundreds or not when we stumble into

the twenties or roar like a hundred years ago. It looks like we may stumble, but there's a lot that could happen that changes things. When this sense of pessimism, of course, it's an accumulation period. Weren't you be thinking about building assets? But be careful, very careful about that. Okay, Tony, good morning to you. So if this inversion at the very short end, then it's telling us something kind of gloomy about where we'll be roaring or stumbling into the twenties.

And what kind of lag does this normally deliver them? When you look at the shorter end of the curve, what kind of lag does this kind of signal usually require. Well, it depends. Markets will tend to be correct on this, but not only call. Let's say nine months would be a period where it has Christine accuracy. One looking out

a year or two not so great. Think about a year ago markets said the Fed would put his policy very potentially yet around three now instead of rate hikes that would stay in place for through and even markets think there'll be a rate cut. So it shows you that looking past one year out becomes a bit precarious. And so this four cast that markets have today for an interest rate cut may not be correct. But is it that important anyway? The global story and interest rates

is quite benign. Look at the German boon today, the tenure point one five. There are trillions of dollars and ten trillion dollars of bonds globally negative yielding. So the worry and markets today is very little to do with interest rates and the FEDS rate hikes. It has a lot to do with the other factors I mentioned. I think one final final point of breaks it. The Bank of England said the UK economy could shrink eight percent

in the case of a heart breaks it. And so there are numerous other things markets are concerned about that need be resolved. And before this feedback loop starts to hit the economy and markets again, do you think the fet shured pools here? Tony, there is a very strong case for the Fed pausing at the March meeting when it's when the next rate hip potentially could occur. As

many have postulated. Uh, financial conditions do matter. The transmission of Monterrey policy occurs through five channels at stock prices, bond deals, credit spreads, the dollar and bank lending stands. To send all these combined today suggests the US economy will be weaker this year than otherwise. Let's come back, Tony Consenzi with us without questioning our conversation with the dam.

I'm gonna look to the terminal and tell you, Tony Consenzi has lifted the market here in the last ten minutes. What's great about free of amish with Pantheon in England? She has lived China, She's not only been there, but attempts at Mandarin? Can you order a pizza in Mandarin? Free? Are you to the point where your Mandarin is so good you can order a pizza to go? I'm I'm no fan of Chinese pizza, but um, yeah I can. Okay, Well, we got tom Honestly, you go to Shanghaio, Beijing and

order pizza. Yeah, sure, that's what I would do anyways for you for a good morning? Are we what is the thing you're searching in in in China GDP? After the comments of President she over the last three or four days, he's made some speeches, I think they're below the radar, But what is the data thing that you're trying to observe to gauge where China is? Well? I guess the PMS that we had out this morning we're

pretty unpleasant. I think the consensus was always a little bit high on that, especially we have we had the official out already, but um, in terms of the report itself and the kind of breakdowns that we had there, it was telling us that the employment situation is still quite um, quite shaky. We've still got producer price inflation slowing um, and that that feeds through obviously to the massive industrial sector, and it's a massive the tarrent on

on future production um. The good news, I think we're all very focused at this stage on on the on the bad news, and certainly I'm not going to jumping on any kind of good news bandwagon, but I think it is relevant at this stage to point out a few um kind of good news elements from from the data that we're seeing at the moment. I think, first of all, that the p M I is probably going to trough above where we saw in ten, so that was the last kind was the last kind of real

kind of significant downtourn that we had in China. I think we'll probably trough above that this time. The bad news is that we still have some further deterioration to go before before we get there. The leading indicators have kind of leveled off. We're starting to see the kind of the the most advanced leading indicators are pointing towards a pick up um in the second half of the year, but we still have some some further deterioration to go before then. In in the p MS and the GDP data.

Although the headlines might not actually show that. So we've got we've got some good news out that we've certainly got stimulus in the pipeline, not really coming through yet the UM the the overall level, we've put our kind of infrastructure. We've got our season ping and the work conference that we had at the end of last year

which sets out the the policy direction for for this year. UM. We had an important revelation there that there will be increase in the in the quota for local government bond issuance and that's where we get our infrastructure growth going from again. UM. And I think actually there is probably still room for a bit of a rate cut which would probably enhance the efficacy of the of the measures that they made, the targeted lending facility measures that they

introduced at the end of last year. UM. So there's stimulus there, the stimulus potentially more coming through. And I think probably on the trade front as well, we can we can be a little bit positive and that in that sense as well. Let's start with the policy tools they've got available to them, and then we can talk

about the trade negotiations. You mentioned the slowdown in fourteen fifteen that bled into sixteen as well, that slowdown was accompanied with some real policy shocks, and one of them was around the currency free Do you see the stage there for something similar again or is it very different this time? I think um, I think there's enough time for the PBOC to get a little bit scared in the first half UM that that things are not turning around.

I think, as they said, the stimulus is actually in the pipeline, but that the lag seems to be UM a little bit longer this time around them previously, and that leaves the p BOC and policymakers in the position of having to kind of sit on their hands and wait until the stimulus comes through. And I'm not sure that they'll be willing to do that. So I think we will probably see a rate cut or something that

is effectively like a rate cut. It might not be an actual publicized rate cut, but there will be something UM that will that will help to loosen monetary conditions further UM and that that obviously exerts a downward pressure and the women B But we are in a change situation here with with regards to the FED. UM, it's looking it's not looking likely anymore that they'll they'll hike in in March, and that gives the PBC a little

bit more room there. Um. And also, as I said, when we get to talk about the trade deal, that will release a little bit of pressure of depreciation, pressure from the from the room and b So it gives them a little bit more room there. But but I think there's there's definitely the potential for the PBOC to kind of surprise markets with it with a bit more of a of a stimulus. So free you brought up trade,

so let's talk about it. It's clear to me that there's an incentive for President Chesing Ping to come to the table and try and strike a deal with the President of United States Donald Trump through what's not clear to me as the concessions the president she is willing to make. What are those concessions? Well, the the UM in the policy setting meeting that we had at the

end of last year. UM, you don't get a lot of detail in that kind of a of a redoubt, but there was one sentence which said that they were going to prioritize the the agreement, reaching the agreement UM and implementing the the agreement that was made at the G twenty meeting in November. So that's a good sign to start with, at least rhetorically, UM. But they they've

also made moves in the direction of cutting pariffs. They've restarted or they've kind of signaled that they're about to restart UM imports from from the U S which they actually have pulled back on very sharply in the second half UM. And also they've they've critically made made kind of rumblings in the right direction with regard to the forced technology transfer. I like in your research note you're not going to affect to South Korea as well. What

are your adjacency effects of this supposed slowdown in China. Yeah, I think we've seen it UM. We often see it actually first in some of the Korean data because Korean UM sitting at at the head of the of the supply chain, and they also happened to publish very early in the in the kind of the data calendar. So definitely we've seen a slowdown in Korean export volumes. Unfortunately, there's been a lot of noise there because of changing holidays and that kind of thing, but that the overall

trend is one of of weakness from from Korea. We're starting to see that feed through to Japan as well. Um so it with there's there's definitely evidence there that these these economies are struggling as a result of China's slowdown. Free I have a great new year and we literally really look forward to catching up with you in Shanghai at DeMarco Pizza one f Golden Bridge Garden. I didn't ask, but it's there's many there's a lot of pizza places

in Shanghai. You know that I really should do Shanghai with you. It sounds like you have a really different experience of it. It's a different experience to what many other people would free of Bemish, thank you so much.

With Panthe on China. Serious news there out of China joining US now Dana Peterson with City Growth, their North American economist, Dana, If I look at the City group, well, have you people amended or adjusted your outlook for next year in the last two or three days, No, we haven't.

We still expected the set is going to be raising rates at least a couple of times this year, potentially in March, and certainly the impass in the federal government is not going to be a major determining factor in the set delaying any of the activities for this year. Will tightening financial conditions be a big factor? Well, I mean, financial conditions have tightened a little bit, but there's still

quite loose. But I'm certain that the set is going to be watching that along with all the other economic indicators that pays attention to when it's doing it's a monetary policy calculus. But at the moment, the only economic indicators that continues to surpass the economic expectations of the economists are the labor market and the household sector. Everything cows is deeply negative and disappointing to it. Do you

see that turning around anytime soon? Well, I mean when I look at certainly the fourth quarter, the economy still grew pretty robustly in the two and a half to represent range UM. Yeah, some of the most recent economic indicators have been a little bit weak, but you know, the set is looking at UH inflation, the set is looking at UM certainly labor market, and also you know overall GDP, and still on most of those fronts we're

doing well. I mean we will. We do anticipate some weakening of inflation, certainly because loil prices are are falling, and also you have some other underlying factors, and certainly that might cause us set to consider you hikes this year as you perceive it as an economist. Are the market? This has been my theme for this morning. I don't hate to bore people, but do you see markets is rational and normal with their new volatility or are there

discontinuities here that get your attention? Sure? I think you know the different markets will be are reacting for different reasons. Certainly you know the bond market is concerned about the YE curve uh flattening um and what signals that gives us. I would suggest that maybe this time is a little bit different. We haven't had QUEI in the past uh kind of muddling the signals from the yolker. But certainly

equity market has been very weak UM. I think some of that just a little bit of a steam coming out, but also concerns about the global economy as well as the trade to see. So then what do you see within your North American purview of YCLS C plus I plus G plus net X. I mean, is this all about the trade war or their investment and consumption dynamics that are leading to these instabilities? So I think consumption is still being super charged by the tax reform, but

we are concerned about investment. Indeed, with the equity market weakening, that's certainly the signal for our investors, and certainly with respect to CAPEX, you know the businesses are not going to have another big injection from tax reform this year, and you still have concerns about trade. I guess Dan, with one final question than today you say you haven't changed the city view, what is your view on FED calls? Because what we're hearing from guest if your guests is

a January thirty meeting has very suddenly become important. Yes, absolutely, I mean we we've we've always had a March hike and they did not have a hike in in January. But certainly January is gonna be important for how to said US easy economy, whether they're overly rather more concerned about weakening inflation, if they're more concerned about weakening in China, and certainly in the trade outlook for the US. And so I definitely think that's gonna be a very important

meeting that we should be looking at. Dana, Thank you so much. Dana Peterson was City Group. Um, we have been remiss, and it's importantly been remiss with the sobering idea Pim Fox of how wrong so many got the transformation in Brazil when Mr Lula came on board. It was I say this in every speech I ever give. It was one of the great miscalls I made. I was incredibly wrong about the Brazilian economy, their resiliency under political change. Him. Here we are again with more political change,

and we are all right, bringing Pim. I'll let you bring all right. Well, this all has to do, of course, with the new government of Mr Bullsonaro. President Bulsonaro taking office in the inauguration, and he's set to announce a variety of economic measures the design cut red tape and also fight retirement benefit fraud, while leaving pension reform for later on. Here to tell us about what's going on in the country, Oscar Decotelli, the chief executive of d

x A Investment. Oscar Decotel tell us a little bit about the President of Bulsonaro and what you believe his agenda includes. Hi, Pim, Hi Tom, thank you very much

for taking the time to talk to me. I think we're starting off a new year, a new administration that both on our government brings definitely a mentality of trying to reduce the size of the government with twenty two ministries only, with a mentality also of trying to reduce the whole corruption around the government what we've seen in this last year's but also trying to bring a new

agenda of bringing growth back to the country. And I think, uh, for all of us here, we're quite hopeful that this is going to become a reality, but there are definitely some challenges to face in the next a hundred days. Right, What are some of the specific measures that the government needs to get right and get right quickly? Yeah? Sure.

I think the first thing is that about the government spenditure are defined by the Constitution, and for that matter, there's not a lot of room to be able to change unless you go through a death very kind of a bureauratic process of voting through the Congress and the Senate. So what I think we're gonna be able to see in the short term are the new propositions for the social security reform and definitely a privatization agenda, trying to reduce the government that by selling some of these more

kind of assets to the government owns. How will the elites react to this president as compared to how they reacted to Mr Lula a lifetime ago. Well, Tom, it's a great point. I think it's quite different than two thousand and two, and we saw Lula coming on coming on board, the elite was very negative on the country, thinking that it would be kind of a big problem for the country, and at the end of the day, Lula became really a president that helped out, especially around

those years, for the country to grow. I think this time around is a little bit different. Now we're seeing the elite very positive, with a more of a right wing mentality government, and definitely the fact that he's bringing on board as ministers very technical guys that have very strong private sector success. I think it's been probably the government that people have been giving a lot more hope that we've seen in this last decades. Now. He just

raised a minimum wage, correct correct? Yeah, So it was already expected to see that the former president Tamar was going to release that, but it was releasing middle of the afternoon, not not big news. This already kind of expected. Will this help the domestic economy at all? Or are people more concerned about corruption and crime. Uh, definitely, this

was an election about corruption and crime. Uh, we didn't see I always say that Bosonado came as a representative of a cleaner government and not necessarily with a lot of the his propositions were Now seeing the propositions coming on board, uh and uh, so far they seemed positive. But I think this was much more of an election of discussing. I'm not wanting the old corruption scheme, of of the old politics go ahead on. Well, what's the

opportunity here? I mean for global investors, we look at reality, have I think a highly simplistic view. What is the domestic opportunity for international investors within this new Brazil? I think it's a It's a great question because Brazilian if you add exports and imports, and we don't even come up to the GDP. So really eighty percent of the stories is about domestics. Right, We've seen some of the stocks and some of the of the stories are related

to consumption going very well in these last year. I think we're gonna be able to see more of that. We see consumption related, we see healthcare related, education. I think we will be able to see now that there's a lot of slack in the economy with a very high unemployment rate, We're gonna be able to see some of these domestic stories coming on board, and I think that the wise investor will be able to select if

he's going to go to public. Uh, there's some very kind of low pe multiples that are still kind of applying here in the market that you'll be able to buy them. I'm more of a private equity guy, as you guys know. So I think there's some very kind of uh multi year possibly that kid trends are gonna happen here that are positi no brainers for us. Can you give us one example? Yeah, of course. So I've invested in the logistics company just to give an idea.

Amazon Prime is not president in Brazil. So in a country which is the fifth largest population in the world, fifth largest territory, we don't have just some time and logistics, there's no really delivery kind of of Okay, So well let's break some news here. Are you suggesting the Mr Bezos who listens religiously, are suggesting the Mr Bezos that

he needs to come to Brazil? Yeah, definitely. I think Mrs Basis will have a very hard time coming to Brazil without having a strategic logistics plan because differently than the other countries, the logistics is not present here. Only for four of the roads are paved here, so you need to have a different mindset of simply kind of building up a express company on top of a UPS

or FedEx structure. There's none here. So this means that if Tom wants to get away from all the Amazon boxes, he can go and find Brazilian boxes in Brazil, but not Amazon boxes. Yeah, but even the Brazilian boxes are very hard to get. You have a lot of regional players, you don't still have a national solution. So we ended up investing in a company that was the first one to to use airlines for instance. So can we tell

us the name of the company. It's called Modern Logistics, was founded by a former VP of Jet Blue that founded a zool in Brazil. Gldly Man interviewed. Interesting, Well, I can leave it there, Hosk. You can tell you thank you so much, greatly appreciate what day a window into Brazil. And again, I you know, I'll say this a million times. You remember where you were wrong so much more than the little victories. Thanks for listening. To

the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio