Surveillance: Hawkish Cut a Mistake, says Crescenzi

and I in the studio. I'm pleased to say here in New York, Tony Kriscenzi, Pimco market strategist and portfolio manage a good morning to your Tony chant. Thanks for having me here. Will they all? Won't they cut interest rates in a couple of hours time. Yes, we think it's highly probable the Federal Deserved did nothing to dissuade

the markets from thinking they'll be a move. And we know from our conversations that we have regularly with Ben Berninki that when the pocket has a very high probability of a certain action, that the Federal Reserve need follow through with it. And what could be called the hall of mirrors effect, where the markets looking at the Fed and the Feds looking back at the markets, and they

have to mirror what the markets are doing. So the probability of what the markets have in for a hike is that's too high for the Fed to say no today. What's a Harkers cut a mistake? Uh? In this climate, hawker Ish cut would be where the FED cuts and then it does something like it's done in the past, where it looks back and says, well, with these three

cuts now we think things will be fine. So if they look back at the cuts and speak to what they've done, and that would be a Harkets cut to the day Chairman Paul is going to be in the crucible of the press conference. Let's be honest. The furd of the question makes sense the rest of what's the question you want to ask? So he can define this new phrase, Hawkers cut the press. I'm going after the press today. Hawkers cut open for Jethro Tall about twenty

years ago, they were great Hawkers cut. How do you phrase that to the chairman in a constructive way one can? Michael McKee will be one of the best works. Michael McKee will asked the question, but you would expect that power will be evasive on the idea that the federal reserve is finished and that this potentially is simply a mid cycle insurance like adjustment. He will do everything he

can to leave his options open. And so those in the room asking him questions to try to push and say, do you really mean to tell us that you are open to another cut in December on the eleventh when you meet again, or or you're just trying to have us think, uh, there'll be more cuts? Most likely UM

to be straight. Um that FED in this optionality in the statement will probably say something that what has said last time in its policy meeting, that will continue to monitor the implications of incoming data and act as appropriate. That still could mean doing nothing. And so it's it's okay to say we are open to another cut and not actually file through with it. And markets importantly only price for thirty basis points more and cuts between now

and the end of next year. So you said, there's not that much tension between the market basis and FED forecasts right now, and he so Powell has been put in a very good position by the rising market interest rates recently and the re steepening of the yield curve. I want to John three months terms. I did a very careful study of it today and we are now

out with the question. As I said to Mr Consensi earlier, have we broken the curve flattening cycle got to be really careful though, now, because the FED is buying tabills.

Antonio just wonder if we can't take signal from when the curve was inverting, whether we can take any signal now The curve is stepening from a three month table at the longer end of an extent, but the purchases haven't happened in any meaningful size yet, and when the problems will become acute more in January or so, when the amount of bills available to be bought will be low, and so when the FED is out there buying, yes, it will have an impact on the curve for three

months TA bill, one month a bill especially two months can't possibly be impacted by future FED purchases because these bills will have matured. And so we would say that the steepening relates more to confidence in the FED, confidence in democracy and capitalism to extent that this faith that companies people will wake up each and every day and try to make a better living for themselves and produce

a better economic outcome. How with policy uncertainty down a little, and I emphasize a little on Breaxit and China, let's talk about that. Since the end of August, the beginning of September, when the tenure treasury bottomed out, for risks have receded, So repricing markets makes sense now. Whether risks have diminished to the degree that you think that everything is behind us, that the worst is behind us, and that things are going to gradually get better from here

on out, I guess it's a very different judgment. Cold where do you come down on that, Tony at the Mongment, As you know, John in your home country in the UK, even if breggsit, if the election goes as Boris Johnson wants on December twelve, Frank Sinatra's birthday, by the way, Amber to say that as an Italian um, if it goes as expected, and it goes well, and bregsit and and the UK does leave the European Union, as you know, there's a transition period and there'll be a lot of

squabbles about that and a lot of uncertainties that could cause businesses to say, well, I'm not so sure about the future because trade agreements between the UK and the rest of Europe will have to be rewritten. A lot of things will have to be rewritten, and no one will know what the writing will be, and so there

will be uncertainties there. And also with China because it is an election year in the United States and there will be it is a bipartisan issue and so it will be there will be tensions and the remaining through the election. And in the meantime, tony people are starting to load upon risk just a little bit incrementally once again, how yield spreads the tightest of the year in and around those kind of levels now through engine A fifty

basis points. Good friend of yours, Mr Rivason and the ft this week saying we don't like corporate credit risk. Why doesn't PIMCO like corporate credit risk? Right now? Daran iverson our group c IO is identified and as we all have that the corporate credit markets, the risk is part of the fixed income market. It has to do with something that happened in the that's endemic to the

markets in general. That happened in the money market, that the intermediaries, those who get between the buyer and the seller aren't playing the traditional role. And in other words, you saw in the money market when interest rates on the short term part of the bond market moved up towards ten percent, that was because intermediaries decided, well, we're not going to participate in the way we used to. This could happen in the corporate on market at a

time when there's a large amount of risk transfer. In other words, when investors go to sell corporate bonds someday when they have a reason to do so, and typically this is a recession risk. Who is it that will

be wanting taking these hot potatoes each primary deal? Are those who uh do a lot of this intermediary intermediation will say I don't want it, you have it, you take it risk in the corporate credit market in the United States, there's the problems in the in the money market, or endemic to the financial markets in general, because intermediaries are, due to regulatory changes, are unwilling to house inventry. And think of it this way. There no longer in the

storage business. There in the moving business. They will not hold inventories, they will not hold the securities of the world wants to sell to them. And so that's what the warrior is real quickly here, then you're saying that the repo uproar and the raging debate over this can fold over into longer duration fixing cumb assets to all all types of fixed income securities because of the lack

of liquidity in these other areas. If it happened in the treasury market, can happen in the corporate bond market, where many securities trade by appointment. Frank Sinatra December twelve, the same day as the UK election, and so he sings the song is famously uh old man river keeps rolling along, so you could uh the best version of ever in my opinion, and one of these emotional song.

But the ideas of capitalism, etcetera keeps rolling along the UK and democracy will keep rolling along on that day. SD you get back to two pm this afternoon, is

this going to be market moving? When they start defining whatever in God's name of Hawker is cut, is Powell meets what is likely to be his objective, there will be no movement in the financial markets because it's already priced for the idea that there could be a hawkish cut, or that the federal reserves three cuts might be enough with only about it one more cut price in between. Now in the end of next year, it should be a stable market. Yeah, well we'll see you. Thank you

so much. Appreciate that as well. So one place to say, we can bring in David Kirkpatrick of Teconomy, the CEO and founder and the author of that book You Love The Facebook Effect. It ends with Zuckerberg at the end of a driveway in California where his life is changing. David Kirkpatrick. I thought of that moment as you end your book illegiately and and just to cut to the chase out bunch of a train wreck on a Kirkpatrick meter was his testimony to Congress. I think it was

a big train wreck. I mean weirdly people said, um, you know, he performed well, and some people liked it. But I think he doesn't know what to say in public because he's really unwilling to actually compromise in any fundament where he's a genius. Come on, he got where he got, as you show in the Facebook. In fact, folks see it in theaters coming up. David, He's supposed to hand off the business stuff to other people. Has

he done that? Well, yes, he has hand. I mean, basically, all he cares about is the product and growth and growth, growth, growth. That's the mantra that Facebook has always had and it continues to have, and that's his obsession. Um. You know, some people said, listening to his testimony that he didn't even seem to understand what Liever was supposed to be or how it was actually supposed to work. Um. You know,

he didn't answer many of the toughest questions. Um. But but I think it's you know, what he goes to Washington, what he really wants is just people to understand that he's really doing a good thing. That's in his mind what it's all about. He believes he is a a gifts to the world. Facebook is a gift to the world that we just don't understand. And if he believes truly that if we just understood it, we wouldn't be so critical of him. That's what we say every day

about John Farrell. David, It's always great to have you with us on the program. Tom and I have thought and talked about Inside Bill's Brain, which is this great documentary about Bill Gates on Netflix, and within that documentary, Bill Gates has asked about his performance down in Washington, d C in the nineties and through the early two thousands, and he uses one word to reflect on the younger

Bill Gates naive. Do you think Marks Zuckerberg is repeating the errors that Bill Gates made when he had to go to d C in the same way. Absolutely, I mean, it's funny how much Gates has changed. And yes, I absolutely think that analogy is completely apt, and the age is not too dissimilar. Gates was a little older at that time, so Zuckerberg. Actually, Zuckerberg's probably five to ten years younger now that I think of it than it was then. So you know, his age, he's just so young.

Let's face it, the guy worth billion dollars at age thirty five or thirty six. And um, I think that also, in his own mind, is a legitimizer of his behavior. How could I be wrong if I'm so rich? I mean, really, so, you know, I think there's a tragedy unfolding with this company that is of monumental and historic scale. David Kirkpatrick,

it's a Facebook effect. David. There was a point in the dorms of AMers College a few years ago were you walked in some rich kid's room, and they had the Apple you know, the mac, the little cub thing now in the Smithsonian. Since that's time, Apple has been rumored to die what fifteen times every time as a product cycle. This is it. They're done, They're over. They're really once again proving the resiliency here based on the rumors on this new phone. Right, well, they are an

astonishingly resilient company. You joked before I came on that you might have to run down to the Apple store again later today. I actually I saw their new AirPod, and I was thinking, you know, I have a perfectly good AirPod, but I'm so reliant on it, and if it worked even slightly better, you like, it would probably be better. Therefore, it's worth it to spend twifty bucks

for a marginal increase of efficiency in my life. Yeah, I mean face Apple's products, Like you almost said, Facebook, Apple's products are the source of digital efficiency in my life. And really, I mean I might think I'm addicted, I might think that I'm overstressed because of all the things I do, but I need it might work. Life depends on it, and Apple facilitates it, and they do it with enormous skill and capability. I mean, David, my entire team wears AirPods so they don't have to talk to me.

You know, they in their ear all day, so you know, I think they're busy. Okay, over there, I'm okay. Are you okay? At Maria's on right now on Fox Biz with zet Bill. It's my dog Bill with a superman. How much you invoice in? I don't know, I'm not you know, you know that Bill is free to do what he wants. He can't get back to the conversation. I want to talk about Facebook earnings as well after the close. Any evidence so far, David, that the political

spotlight on Mark Zuckerberg is damaging the bottom line? Not really. I mean, we've got to keep our ears closely attuned to that because obviously their costs of remediating the many harms they cause society are raising their their costs generally a lot, but not so much that it's really had a significant effect on a company whose profits are so monumental. So so I don't think we'll see significant harm in today's earnings. I think, you know, uh, growth revenues are

just powering forward. Although you see a massive shift over time from the developed countries to the developing countries. I mean, really, Americans are not using Facebook as much as they used to, the same as true in Europe, and that is a significant long term problem for them. On the other hand, even to the degree we use it, we remain perfect targets for advertising on Facebook because the advertisers don't have a better place to go, and that continues to be

their ace in the whole. Well, David, let's explore the analogy and the parallels with Microsoft a little bit further. I forget the precise words you use, but it sounded like something like tragedy and what was about to happen with Facebook wasn't going to end very well. With Microsoft, things have ended really, really well. In fact, arguably they've got even better. Why does the movie end differently with Facebook? Well,

I'm not sure that it does. I'm not saying Facebook inevitably will cannot respond to these social concerns and revive itself somehow, But I think the key would be for Zuckerberg to have some kind of fundamental revelation that he thus far has not had about his need to change course. And you know, a changing course probably would also entail a significant hit to earnings over time. But then I

think they could possibly rebuild from their Look. They have a service people want to use, and it's growing in in the largest sense, you know, on a planetary level. So I think they could revive. But I just don't think yet they have the humility or, as we said earlier, maybe the maturity to see what they need to do. In February two thousand and fourteen, John Ferrell mentions Microsoft folks David Kirkpatrick, one of the best practices that Mr

Nodela did is he revolutionized modern Microsoft. Wow. Uh gee, I didn't know you were gonna ask about that. Well, you know, I think interview i got Maria's dog into the interview I'm doing. Okay. There's a humility at Microsoft that is, you know. I recently was interviewing Brad Smith, who's the number two of Microsoft stage about his new book,

which is really really excellent by the way. Uh, and it's if there's enormous humility to his book, Microsoft has, you know, I think you had to get rid of Bomber. Bomber was a great leader in some ways, but he had no humility. Uh. Satia recognizes that they are in a position that requires a bigger picture view. And somehow they had been a bomber, had positioned them in relation to the cloud, that the raw material was there and thought you had been a big part of it before

he became CEO. And you know they are now becoming I think they're a genuine threat to Amazon as the dominant cloud player. I wouldn't wouldn't rule out the possibility that over the next few years, Microsoft could grow equally strong and maybe even longer than Amazon. For a lot of reasons. If Amazon gets very quickly, if Amazon gets to a million employees, is out of signal for the government to break up Amazon, breakup Microsoft, break up Bloomberg.

Surveillance were shot. A huge government pressure to break these companies up is going to grow. I'm not a strong believer that it's the right answer, but the pressure is real. I mean. But the problem with Amazon and really some expend all these companies is even though everybody loves to complain about them and people in Washington hate their scale, the average American wants to use their services, and that's

particularly true with Amazon. So politicians who start messing with Amazon, you have to be very careful because customers, which are voters are not gonna want too much change. This has been wonderful. David. Thanks for a wide ranging fing here this morning. Really good. I'm glad you mentioned Facebook. Seriously, I would interview it was wide raging. I mean when you do that, Patrick. I had Paul Kadrowski and David Kirkpatrick on the day of the Facebook I p O

and they were both brilliant, and Kirkpatrick nailed it. Facebook was going down in flames and he said there is tangible growth, revenue and profit. This is a really important interview. John's got a million questions for IRA Jersey at fixed income IRA three months ten years spread, it's a pro spread. Everybody looks at it. Inverted, inverted terribly. World's coming to an end, summer into autumn, etcetera. It's come back out.

The tenure yield is higher than the three month Treasury bill out to standard deviations off the president's election trend. Can you say there's a breakout now away from inversion and all that bloom? Well, I think yeah, the answer

is yes, absolutely. Now part of this has been engineered by the Federal Reserve, because remember, the Federal Reserve is going to be buying you know, sixty billion dollars of tea bills a month over the next couple of months, and in doing so, what they've done is that three months TA bill yield has this dropped a ton so actually on that day that they announced it to drop ten basis points, so it uninverted and it kept on uninverting,

you know, primarily because of the Federal Reserve doing. You know, I don't know what you want to call it, but you know, not que is what what Jay pallis Ira Jersey with us fixing him. And the reason I was rattled John is because the only question I want to ask him is when John and I go over to do the election in Britain, We've got a delay and see arsenal Man City, Oh that weekend. Yeah, yeah, that'll

that would be a fun match. I'm sending laughing because our produced has got crazy at you for not introducing our guest properly. I Jersey, the FED decides will be I'm a Jersey of Blimberg Intelligence. Here's our chief US right strategist and it's great to have you with a Syrah good morning, good morning to talk about the FED

decision A whole Kish cut. Is that what you're looking for. Well, yeah, so it would only be considered hawkish in that like not hawkish, and that the Fed's next move is going to be hiking, right, So it's hawkish relative to not easing. Um, so I would say it's more like, like, does the Fed turn to neutral instead of being in an easing mode? And I think that the markets set up for that. So when you look at what the market is currently pricing, we're pricing a cut today and then not another cut

until May or June of next year. So basically the markets priced for a long pause, and I think some of the details around whether or not that's a realistic outcome is something that the market's going to listen to, particularly in the in the press conference afterwards. This is really important because typically we go into these kind of meetings with a little bit of tension between the market

and the Fed. We're saying there's not much tension relative to previous matings this time around, Well, it doesn't seem that way, you know. That. Being said, it also is not it's not out of the question that the Federal Reserve could wind up saying and sounding a little bit more dubbish maybe than the market currently expects because you could point to a lot of data, like even the

ADP data came out. Last month's data came out a little bit better than expected, but the prior month was revised down, so it actually winds up being closer to a hundred thousand print instead of a hundred print. So that means, you know, if if you're worried about the consumer, you know, jobs is a thing that you could point to that says, you know, it's still some fragility in the market. Do we have an information vacuum today at two because we're not getting all the other stuff we

typically get it a FED meeting. I don't think so, maybe from two to two thirds, but you'll wind up having enough information information after j PAL Now don't no forecast. We know there's a ton of division on the fo m C. We see in the dot plot. Well, I just put out on Twitter shows the division. So Ira talked to me about how the division comes out in the news conference. Where is the challenge for CHAM and

PAL today, what's the biggest challenge? Well, first, I would not be totally surprised if we saw one or two descents of some members who didn't want to cut today that would not surprise me at all. We saw a couple of them back in July. It would not be surprising if those same members ended up dissenting again today.

But that being said, you know, even if that happens, I think j PAL then has to go out and say, look, we have some members who think that the economy is not doing that badly and therefore we shouldn't be cutting. So you know, we're you know, we're going to be data dependent from this time forward. Are we cutting into negative real yields? Yes? Well so so really yields actually have moved a little bit higher recently m esthetics so so tenure really yields went from negative five basis points

to positive ten basis point. So it's not a lot, but it's still enough to say that the market is expecting some modest but not slowing growth from this point forward. And that's I think that's an important important to this because what you saw basically from November of eighteen through the summer of this year was a slowing manufacturing sector.

That seems like maybe it's starting to stabilize a little bit when you look at some of the survey data like I S M new orders, if that turns like it did in sixteen, then we can wind up with a better economic environment going into fascinating thanks are we going to be a different different afternoon today? It's it's gonna be just jie, thank you so much. With Bloomberg intelligence. Right now, we're gonna consider wester Ross. It'll be reporting late on December twelveth Wester Ross will come in a

little late. Raphael is going right there. She's nailing it with a Game of Thrones three theme onto December twelve. What's House Targarian gonna do here? On December twelve? Trust she'd let do that thing where I introduced the guest first original, Let me try it, Let me try it? Okayo bug opinion columnist. She's fabulous and she goes right to John Snow, okay, what's gonna happen with the House

Targaryan on December twelve. I did have a reader who sent me a note yesterday saying, uh, you know the remainders are the Lanisters. How can you write so uh leaving leaving aside you know who's going to benefit from this winter? But December twelfth is uh, I would say the most important election Britain has had in a generation.

It will determine not only Brexit, not only the how and the win, but also really um the shape of economic policy because we have two very different uh parties, the government and the opposition, with with very divergent proposals for how to run the British economy. Um, I wouldn't say the Conservative one is a traditional conservative government by

any means. It's it's uh, you know, they've they've opened the spending taps, but the labor offering is very radical and so I think the the question for voters on December twelve is is this a Brexit election or are they voting on something much bigger than that? Is this the first election where they become like Europe where it's not just classically labor Tory, but that finally it's three

and four in five parties. Well, it did look for a while like this would be a sort of four party race with the Conservatives, the Labor Party, the newly

resurgent Liberal Democrat Party and Nigel Farage is Brexit Party. Now, what's happened at Boris Johnson sealed his new deal with the European Union is that the Brexit Party has fallen back quite significantly in the polls um they were around I think even the last I looked and we haven't heard a lot from Farage, but the Conservatives are you know, quietly and not so quietly, telling him, look back off, you want Brexit. We're delivering Brexit. It would be you know,

crazy to to run against our deal. And indeed many Brexit Party UM candidates and supporters are you know, wavering, and some of them have said, look, this deal is is good enough for us. So I think now we're down to maybe three parties. We don't think the Liberal Democrats are going to be strong enough to to to get a majority by any stretch, but there is a possibility that remain parties, if they did well enough, could somehow cobble together a coalition. But really, at the moment,

this is Boris Johnson's election to lose. Told to me about the campaigning to wrest the mistakes so many of us made, myself included going into the nast election in saying June of that year was believing it would be a single issue election. Then the campaigning started and Jeremy Corbyn hardly talked about the EU and Brexit. Is this a lot more than just about Brexit this time around.

I think it will. It's always more than about Brexit because you know, for voters, in their day to day lives, what they really care about her you know, how how crowded is their child's school classroom? Just Phillips the Labor and he just stood up in Parliament and said, my son is turning eleven. He can only go to school four and a half days a week. His classroom is you know, thirty kids in it. What are you going

to do about that? So the Labor will try to make this election about those issues that will that will undoubtedly resonate. But Labor has got a problem. It's Brexit policy is a bit of a mess. Um entails a negotiation, a renegotiation, it entails a referendum, maybe two referendums if they if if they join with the Scottish National Party. And that's not an easy cell because you capture in your writing not only the elite of London and all the you know, the hardy stuff we look at every day,

but also what the people are talking about. Take us away from, you know, the day to day madness of this and for our American audience, explain and you name the village, you named the town, you name the city. How are the people responding to December twelfth? I think there was a time when people did not want another election. There's been you know, four or three or four votes,

You've had referendums, you had the seen election. At this point, they're so tired of the gridlock and parliament and hearing about Brexit. I think everyone is resigned to having a chance to change this parliament and move forward. But you know, you want to talk about a town or place where where it gets real. Wolverhampton in the Midlands, Brexit voting area but Labor supporting. So what do those voters do.

Do they go with Boris Johnson or do they stick with the Labor Party as their families all aways had that that's going to be where this is going to decided. Thank you so much. And this is a perspective we value. I you know, have to read in on this folks, to be honest. I think it's a soccer team. John Farroll talks about about once every twelve or fourteen weeks. But Chris Raphael, what is the affinity the attraction of the Prime minister to people who are generationally in doubt

of the conservative elite of London. Yeah. I think this Prime Minister is going to try to distance himself from past Conservative governments. And one way he does that is say, I will spend the money. Um, I'm not afraid to port into in the NHS. New This is something Americans I think. Um, you may not understand that the NHS has an eight percent approval rating in this country. Eight percent of people love the fact that they have health care free at the point of delivery. It's taxpayer funded.

And you have a concern p bit of government that is going, you know, full on towards spending more money on that, more money on police, more money on education. That's how he's going to try to win over those voters who have said, you know, the Conservatives there for uh you know, therefore the wealthy voters in the southeast and uh, you know, he will try to appeal to that. He's also going to try to peel to young voters. A Conservatives have lost the youth vote, um in and

he's going to try to bring them back. Um and uh, to the extent that he can do that, he's got very good chances, trust, thank you. So much writing for Bloomberg Opinion. Can't say enough about the game of Thronese angle from twenty four hours ago, as Trres roth Field dives into this election to December twelve. I learned a lot there. Hope that it it was good for all of you as well. She's with Bloomberg Opinion. 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 Key before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.