Transcripts For BLOOMBERG Bloomberg Daybreak Americas 20170830

Take a look at gasoline, another twoyear high at 5 and the spread getting wider. Wti versus brent off by six dollars, really speaking to the overproduction and oversupply of oil in the u. S. As the impact of Hurricane Harvey is truly felt. 2 10 of a up by percent. Steady for now. And the commodity we are really watching, copper. Seven 7ch million a ton . And emma chandra has first word news. Emma Hurricane Harvey hitting louisiana, making its second landfall today coming ashore in the western part of the state after dropping 50 inches of rain on southeast texas. It is blamed for at least 18 deaths in the houston area and Law Enforcement says 13,000 people have been rescued. 80 billion, hit making it the second costliest Natural Disaster in u. S. History. A warning from north korea, kim jongun saying the testfiring of a missile over japan was a meaningful gesture toward guam. He said he will watch the response of the u. S. Before deciding on further action. He is readying his military to conduct more Missile Launches into the ocean. And President Trump renewing his pitch to tax cuts. He is traveling to spring for, missouri to discuss tax reform. He will only focus on why it is needed. He is leaving the how. Up to congress and has raised questions on whether he is reflecting tax content. Global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. I am emma chandra. This is bloomberg. Jonathan imagine going to a Campaign Rally to talk about tax cuts, you are going to be ok and most people put their hand up for that. It will pay for it i imagine one of the discussed. And whether they talk about tax reform at the rally, that is a separate thing. Alix and will there be the bodies . Over the weekend in arizona, there were not many bodies. And who is responsible for the campaign rallies. Jonathan i will rally the cause for a tax cut. The risk aversion fading for the markets over the last 24 hours. Equities rebounding. 500 with ap reversal. We have a macro strategist and the cohead of fx. We want to talk about the reversal from yesterday session and what it means Going Forward. Are we still conditioned by the buy the dip theme . Is it getting shallower . Behind these political headlines we are having from but is u. S. And north korea, it very strong and it is against the backdrop where Central Banks are saying they are in no hurry to tighten financial conditions. We have seen really yields in the u. S. Stepping back into negative territory. That is positive and it explains why we see this buy the type phenomenon. Jonathan the worries we discussed around the conversation we are having now on a program like this seem to be divorced from data michael is speaking about. You can see the confidence numbers in the u. S. , the second highest level since 2000, the economic section numbers coming out of europe today, so why is a group of people so worried about the risk but at the same time the data is still ok . Pointse are two specific to be made on the question. The first is in our metrics, the levels of asset prices are pricing low risk aversion. That is not a negative thing. There have been long periods where that can happen. But it raises vulnerability. The second is it is not the level of the growth data, it is about the data. That has slowed down since april. What is consistent is the momentum of growth. The equity returns, that is what we have seen since april, positive but less equity returns. And with this environment, there is Downside Risk and some of us ahead of us, china will be tightening, do not forget about italy and everything from the u. S. , there are concerns. We do not necessarily share those concerns at this time, but it does not mean you do not need to be savvy on where they are taking risk or not. Alix michael, if you take a look at what happened yesterday, it was europe that was hit hard. And if you will look at the economic fundamentals, it would seem europe wouldve held at the best because they are outperforming now. Can you help explain the . Michael i think we are starting to see the market start to digest the ecb information and mario draghi could be removing some of the Downside Risk of the ecb and what they perceived to be out there. I think the market is digesting the uptrend from the euro dollar. The likes of the dax, where the large gap in european stocks seems to be sensitive to the impacts of the euro dollar. Alix we will get to inflation in the euro later, but it was interesting to see equities with north korean headlines coming in and we have Hurricane Harvey, this couldve been used as an excuse to sell. What in the u. S. Is giving the fundamentals a boost to equities my but not the dollar . Equities, but not the dollar . You have a decent backdrop for the dollar. At a strong level you are experiencing positive returns. The second component has to do with the fact that the tenure rates in the u. S. And fixed income ask as a cushion axts as a cushion so you see those yields lower and it has to be a support. That may have gone slightly too far, particularly in the front end of the u. S. Where there is little chance for significant adjustment to policy rates. Jonathan we stated the importance of north korea is it a practical response from the u. S. White house yesterday and it was supportive of risk . Think the reaction, even of asian stocks around the time of the event is telling. We do have geopolitical situations around the globe and we have the experience of how these things tend to impact the markets and markets tend to take time before they price escalation. I do not think they will present it as an escalation yet. Jonathan what have we learned about the most resilient hedge to have really for a diversified portfolio . Is it gold in 2017 . Michael in terms of look across the spectrum, the dollar yen is one of the most favored by investors and that is because not only are you playing the expectations we have from the u. S. Side, but also expectations from japan. Here investors are starting to look at Downside Risk appearing idiosyncratically to japan. When you look at the skew in the Options Market and dynamics there, putting on the downside is quite attractive for risk and reward. Alix at the same time when it is risk on you want to buy the yen. Ofit is also a reflection the Monetary Policy set up. In the sense that as long as you anchor your policy at a certain level, you become out of the u. S. With japan, sorry. You move up or down, it will have an impact on your currency. I would add another hedge to it. Sterling is interesting, not what many investors think. It has received a boost from global earnings strengthening in the last six months. Any kind of slow down you can get hit hard. Jonathan let me get that straight you think sterling is a head for risk . Hedge for risk . Yes. The way that investors use to play, sterling is becoming the new in this scenario. Alix that is the headline of the morning. Jonathan thank you very much. Coming up at 3 00 p. M. , an interview with Brian Moynihan. From new york city as we are counting on to that interview and the cash open, futures stable and positive, you are watching bloomberg tv. Is bloomberg daybreak. Im emma chandra. Ceos official, the expedia has been named the new chief executive of uber. This is concluding a surge to replacetravis kalanick. Calls it anshahi opportunity of a lifetime. The central bank in russia trying to keep a crisis from spreading. A governmentbacked fund set up by the government of russia which a month ago was the largest private lender. The rescue prompted the central bank to provide funding to other banks to contain the crisis. And Economic Confidence in the euro area has risen to the highest level in decades according to a European Commission index of industries and consumer sentiment. European central bank policymaking next week will decide whether to pare back the stimulus. That is your Bloomberg Business flash. Jonathan the euro is in focus. Breaking another level since the First Time Since 2015 and the strength of the currency against the dollar could spark some ecb intervention or trigger and unwelcoming tightening of financial conditions in the eurozone. Whorg sat down with is not concerned by the headwinds strengthening the euro. We are used to seeing the euro going up and down. 160,ve seen it go up to so, you know, there are highs and lows, so that is life. We are, you know, i business is very global so it is very balanced so it is not helping of course, but we understand. Jonathan still with us is michael and thelmos. He is not concerned, business is not concerned, they were several years ago when the euro was at 120, but he seems to be ok. What will mario draghi be thinking at the same time . Thelmos there are Different Levels were items of concern. If you are worried about competitiveness, do not be worried about it. The diameters from the longterm perspective say that 120, the year is to competitive. Euro is still competitive. And measures point higher for the longterm. The shortterm, there is the issue you just mentioned, mostly as it translates to inflation. If you look at the headline cpi, oil prices in euro terms, at the beginning of next year you could have a meaningful dop with inflation which will create Community Issue for the ecb. They will signal the tightening of monetary conditions at a time with the headlines for the nations could be soft and low. That is the main issue to tackle, how to tighten, but not too fast, not to the market and doing what they are trying to do. Jonathan is it fair game to intervene in the fx market because we have seen the currency move so far this year. Is it a game that mario draghi should not engage with next week . Euro issue is not one of competitiveness. Typically you see Central Banks give verbal intervention because they are afraid the currency will be hampering exports. In this case it is more about the features it will have on inflation. So we see a 10 rise in the around. 4 , the euro drag on headline inflation. At the moment, we have to take into consideration we think the inflation number will be good, 1. 5 year on year for the headline measure. We have to think about it in context over the longterm, since 1999 the headline inflation has not hit 1. 6 , so the 1. 5 we are expecting on thursday does not look that far off of the mark. The inflation story we have had over the last few months, the growth story we have at the moment, argues that the ecb needs to be moving toward the exit on the program. Alix spanish inflation picking up. And in terms of business impact, should we look at europe again, because you have a german depreciationying should not be a worry, but French Business lobbyists say this will really hurt exports . Do we need to look at that divergence . Michael that is something we will see a lot more of. The reason for that is while the eurozone is a whole, we see the longterm value to be about for individual members, when we break down what is the value for the german euro and french euro and italian euro, there is diversion among the eurozone and it has narrowed since the crisis, but it is still big. The longterm value for a german euro we estimate to be around 1. 45. At 1. 20, they are so competitive. Italy, we estimate the fair value to be around 1. 15, 1. 20. It does not seem to pick up competitive advantage from the weakness of the euro. Jonathan we are talking about the euro side. So far the story has been about treasuries and in the dollar. Yesterday we caught up with mikes well and he talked about what to do with the trade. Take a listen. The biggest has been the dollar. Very unexpected the recent underperformance of the dollar, and i think it is related to the treasury move as well. You really have to look at the fundamentals and step back from the geoPolitical Risk, Political Risk in the u. S. , weaker inflation over the course of the last two months and really look at what is going on from an economic perspective. Jonathan so the trade is to get short euro dollar, what are your thoughts . When you look at the speculative position as well, the aggressively longer dollar at the start of the year, not aggressively short going into the backend of the year, is the Inflection Point now how difficult it is to call . Themos in the beginning of the year, in our view the dollar was quite expensive and the yields were high and we are arguing were arguing for lower yields. This has now gone further than expected, but nothing crazy in terms of levels. From a longterm perspective, the yield on not too far, maybe slightly low from a longterm perspective. The dollar is still expensive particularly against the euro, but in shortterm you would expect these things to consolidate and you would expect rebound action in the euro. I do not know if i would trade that. In fact, in yields the front is for the first time in a long while pricing more with an optimistic fed considering what is going on with the data. Alix help us rapid up. We talked about wrap it up. We have european equities flattening out, so what is the Tipping Point . Michael i think the Tipping Point Going Forward, or the one thing we are focused on is the impact of the dollar. It could make or break or change views between now and the end of the year. The reason for that, there is a lot of pessimistic news priced into the dollar. If you look at fed expectations, the market is not looking at a rate hike until the end of next year. If we do start to get a dell a rebound, which dollar rebound promoted catalyst could be donald Trump Building confidence he can deliver tax reform over the coming year, that could change the outlook for european equities and the dollar. Alix thank you so much. You will be sticking with us. Is the euro leading or the dollar leading . Jonathan both. Alix the answer is yes. Jonathan both. Alix coming up later, david westin will be back from his vacation for one interview only, interviewing Warren Buffett. That will be at 11 00 a. M. Eastern. You do not want to miss that. This is bloomberg. Alix President Trump goes to missouri today to kick off his tax tour, getting americans fired up about reforms. It is set to emphasize populist reforms,ike why tax but not how. This approach is very different from the one that he took on health care. Walk me through it. Ok, i believe the white house has learned a lesson from health care. They knew the president was somewhat disengaged from the process and he did not really get handson and he did not go out into the country two americans how has Health Care Bill to americans how the Health Care Bill would help them. Now on tax reform, they believe the president will be more engaged. He is starting with the event in misery and he will be going out, not necessarily getting into the details, but talking about why tax reform is so important, something that has not happened in 30 years. He will say the economy has been rigged against the middle class and this effort will help middleclass americans. He will go up against democrats that will tap this effort as a bail out for the 1 , tax cuts for the wealthy and the president will try to counter message that by talking about how it will help the middle class americans and low income americans. It will be the first of several events we expect him to do over the next few weeks as the tax reform package gets rolled out. Alix i am wondering who he is talking to, because if you ask anybody who wants tax cuts, it would be anybody who says yes. Is he trying to push Mitch Mcconnell in a paul ryan further . It was the target . Who is the target . The president wants support among the American People to get the bill passed. It is evident that everybody supports pain lower taxes for themselves paying lower taxes for themselves, but the president , the problem is, he will come against a Broad Campaign from the democrats who will pass this off as tax cuts for the wealthy. The president is likely cap tax cuts for the wealthy in his plan, but he wants to change the message that this is tax reform that will help the middle class as well. Jonathan great to have you with us. Make sure to get the president s remarks from springfield, missouri at 2 30 p. M. Here on bloomberg television. They want a tax cut, everyone. But who wants to pay for it . The bond market will pay for it, that used to be the conversation. Now revenue neutral. Alix so there is that. And how can you approach the public without specifics . I do not understand. Jonathan coming up, Investment Management chief economist joining this program shortly. From new york, this is bloomberg tv. Jonathan the score is as follow, the risk aversion phase as quickly as it arrives, teachers are stable and positive on the dow. We go nowhere on the s p 500. Yesterday, all 19 Industry Groups in negative territory. All 19 Industry Groups in the stoxx 600 in positive territory. If you get to the bond market, what a story yesterday. We put new lows on the 10 year yield. Up a basis point, still very near the bottom end of the range. Market, nine out of 10g10 currencies are weaker against the u. S. Dollar, including the euro and the japanese yen. Lets get you some headlines outside the Business World with emma chandra. Kim jongun ones that the latest Missile Launch may just be the beginning. He says the test firing of a missile over japan is a meaningful prelude to containing the u. S. Territory of guam. Onsays he will not decide for the reaction for the reaction further actions until he sees the u. S. Reaction. As the grounds for a future agreement with the u. K. In the final stages of negotiating with the European Union while the u. K. Is taking away from the bloc. Now harvey is louisianas problem. The storm came in to western part of the state, yesterday. It is expected to drop substantial amounts of rain before heading north. The rain has ended in houston, but the trouble has not. 18 people have died and more than 13,000 people have been rescued and floodwaters are still rising. Global news 24 hours a day powered by more than 2700 journalists and analysts in more than 120 countries. This is bloomberg. Alix and we are not done yet. Jonathan totally incredible. Alix this is your function on the terminal and it is going to move across louisiana right at the border between louisiana and texas. London,us now from Michael Mckee with Bloomberg International economics and policy. I wonder if you can help us put into perspective how long this recovery is going to take and how much we dont know. Micahel we talked about how Natural Disasters are shortterm impacts on the national economy. The rebuilding dollars coming in to help boost gdp afterwards. It is a very long recovery for the city that is affected. I brought along a chart. This shows new orleans. You can see where katrina took place, at the end of 2005. It took until 2010 until the economy grew larger than it was, even though all this time, the u. S. Economy is getting larger and a lot of the impact of the recovery from katrina was because the u. S. Economy was recovering quickly from the great recession. After 2010 as you can see, the economy has flat lined and this is what is going to happen to houston. Houston has a different situation, and much larger city and a much larger economy and it has the Oil Production facilities. It may be able to recover more quickly, but it is a long road, ahead. Alix i feel like what we need to talk about is exports. We had a lot of terminals in houston. How long will those export capabilities be down . That is a important question isause the main difference how much the u. S. Has changed. If you look at 2005 with katrina, that was mostly a story with the ability to import crude and some crude production shutdown and very little of u. S. Exports going down. Crude the u. S. Is a major oil exporter and supplier. 20 . Ing is down mostly concentrated in texas. That is going to have an effect that is felt beyond the borders of the United States and we are beginning to see the impact in places as far away or as close as mexico. Alix not only that, but petrochemicals, things like vinyl and plastic it exported. Those products get made in asia and then shipped back here. To louisiana is a major Production Center for that. Here is a chart that shows what happened after katrina and remember we had those two back to back hurricane seasons. In productionff from katrina to rita. That really hurts the larger business and manufacturing world going on. 2008, a bige in impact but lost in the recession. See thet you cant effect as much. The petrochemical complex complex is the major. Component, here major component. Alix who benefits, here . You have refining margins in europe going killer right now. Are we going to see european products exported to the u. S. East coast . Javier absolutely. We will see a lot of gasoline from the middle east and across the atlantic into the United States east coast. We are also going to see products in europe that rely on gas oil. Gas oil or diesel prices in europe are going to start to increase. In general, any refinery that is , elsewhere in the u. S. , europe, asia, they are going to benefit. A lot of petrochemical elsewhere in the world is going to benefit with more than 40 of the capacity in the United States hit at the moment. Alix what are the stocks . Over going to have to really import . That is going to benefit a lot of the european buyers. Micahel i brought along this chart. It shows gasoline stocks. This is the good news for the national economy. Maybe not overseas because we do export, but gasoline stocks higher than they have been any long time. In a long time. We will see elevated prices for a little while, but it may not last all that long because it can draw down some of those stocks. Really a question of how badly damaged on the refineries. Alix how long are we going to see an impact on weekly Inventory Data . How hard is it right now . Todays report reflects last week until 7 00 a. M. Eastern time on friday. It is not going to reflect any impact of harvey but this report is going to be important because we will set the benchmark of where we are. The level that we are departing, also inventory levels levels are going to be important. I one point, we will be looking at those numbers very closely. At one point, we will be looking at those numbers very closely. It will take three or four weeks before we clear up the data and see what the real picture is. Alix great stuff, guys. Michael mckee with 17 charts of his own. Is, whater question will rebuilding look like and how much will go into that . We weighed in on that, yesterday. We do have a aging infrastructure in this country. A lot of things are probably in need of replacement that do not get upgraded until there is some catastrophe. How do you account for that is kind of h kind of a tough question. You can get some pretty extreme numbers. Seet of the numbers you floating around for sandy and katrina, as as much as a are f those extensions expenses are what we call mitigation. It is not putting back things the way they were. Alix analyst estimate the cost told range from 30 billion 40 billion. A lower portion will be covered because a regular homeowner policies including flood damage. The uncertainty really rains. Michael, what is your base case . The shortterm impact of the gdp is probably going to be quite minimal. Where we could see a bigger impact is in the inflation numbers. If you do get this increase in refined products, particularly tooline pleading feeding higher prices at the pump, you can see these are likely to be temporary impacts. Alix if you were looking at equity sectors, is this a homebuilding opportunity . Is it a mobile Home Opportunity . Is it construction . Where do we see the more sustained equity impact . Michael thinking about it from an economic step standpoint, this is where you economic perspective, this is where you get more of a gdp impact. Not necessarily a reduction in production at the time, but the boost that provides to the gdp. That will be benefiting retail sectors, the Home Building and construction sectors that you mentioned. Alix Michael Mckee, kicking off jobless claims, tomorrow. What is the distortion . Michael it definitely lasts for several weeks. You can even get to the jobless claims offices to file. Jobless claims from Hurricane Katrina and Superstorm Sandy and earlier, the japanese earthquake which interrupted production chains in the United States. A lot of people were out of work for weeks to months. It is a major spike but does not suggest. The u. S. Labor it does not suggest the u. S. Labor market is going to be in trouble. Construction workers on unemployment had risen, so they were more construction workers available. It is going to be hard to find people. 450,000 homes were damaged and that number with could go up. It will take a long time for people to get their homes repaired. Were you might see it right away is retail sales for automobiles. Automobiles might be covered. The distinction between wind and water. You might see a spike in auto production. Sales after sales had kind of stagnated. Both of you are sticking with us. The American Red Cross is asking for your help with the disaster. The organization has dozens of shelters up and running. It expects the crisis to grow exponentially and thousands of texans will and not relying on the red cross for food and water and a place to stay. Cross. Org for further details www. Redcross. Org for further details. Emma this is bloomberg daybreak. Coming up on friday, bill gross joins us on bloomberg tv and radio. Jonathan payrolls have topped expectations and markets expect the trend to continue this friday. And this is consensus project the hiring game in the months previously. Michael mckee and Michael Sneed are both with us. Michael mckee, lets get the set up for friday. Michael investors will be looking past this because we have this huge month coming up in washington with the debt ceiling and continuing resolutions and not your have harvey aid on top of that. I would say is that historically over the last 10 the 20 years, the august report has tend to tended to come in under analyst expectations. Maybe a little bit of an impact in the bond market, but in general, we have seen investors sort of ignore the job market, a little bit of a reaction but at the end of it, we always finish higher. The jobs and payroll diminished somewhat, it feels like a bit of a snooze and i just wonder if that is the correct way to approach it. Michael i agree that the emphasis on the payrolls has declined. Beenis because they have fairly consistent and there have not been any big surprises that have come out of the data. As Michael Mckee mentioned, there are a lot of other things that investors have their focus on, at the moment. The ecb meeting next week, the debt ceiling. Jonathan did we look at the payrolls payrolls report and say what does it mean for the fed and chair yellen . What are they looking for besides wage growth . Alix anything. Michael they are expecting solid growth and that means the Unemployment Rate is set to go down over the next couple of months. When does that start to pull up wages and have an effect on inflation . That is the question for the fed. Most of them that we have spoken to, the general agreement seems to be that as long as things dont get worse, we are still on track for one more rate increase. It would take a lot in the jobs report for them to see their minds change one way or the other. Alix one more increase in that is kind of it. Here. L sneyd, take a look 1. 4 for terminal rates. We are at 1. 15 right now. Is the market woefully underpricing the rate hike cycle . Michael we think it has gotten to the point where it is underpricing the rate hike cycle. A we are not expecting the next rate hike until march, but it has gotten to the point in the bond market and the fx where the pessimism in assets is at a very elevated level. Jonathan does it make a difference to the next fed chair is, for you . Theael when we look at names, all the names come across as people who are going to be keeping a very steady rise in rates. The policy is likely to continue to remain. They are reasonably dovish. In terms of the outlook, we separationa huge against the different candidates. Alix very thank you to our michael duo. Weve got you covered on payrolls on friday, the love the apathy deter you from watching. We have bond king bill gross joining us after the numbers. Check out tv to watch us online and interact with us to rightly. You can do lots of stuff, this is bloomberg. Jonathan Warren Buffett is making headlines. Billiont converted a 5 investment in bank of america into a 16 point ive billion 16. 5 billion stake. Joining us now is tom russo, managing member at Gardner Russo gardner and a longterm shareholder of Berkshire Hathaway. Great to have you with us on the program. Lets talk about the current trilogy of Warren Buffett. The current strategy of Warren Buffett. We dont hold shares in bank of america at the moment. I would have loved to have taken the transaction that was presented. Option whichn call was exercised at the end, at the market price and it was extraordinarily attractive and bank of america got more than they bargained for because of the benefit that warren provided them to reassure investors. Jonathan bloomberg tv will be catching up with Brian Moynihan and buffett himself, later on. What are your thoughts on cash deployment at Berkshire Hathaway and when is it going to get deployed in a more substantial way . Tom the forces of nature in the economy will conspire to eventually make warrens 100 billion very valuable. At the moment, they are conspiring, so it feels like a heavy burden. Berkshire has had the capacity to do nothing for great long periods of time. Alix what would be the number one thing you want him to do with the cash . Ultimately, dividend policy. , over time, the flow continues to grow, if the Cash Flow Properties continue to exceed their own ability to reinvest, it will beg the question of a dividend. The dividend is raised as shares go into foundations, and they have spending requirements. There is a link to relieve the business of some of the pressure. Jonathan how difficult is it to be a Value Investor right now when one of the companies with the biggest climb horizons is also the biggest growth stock, and that is amazon . Are we seeing a serious challenge to the current investment model . Tom everything is changing with amazon. They have hit a stride that seems to allow them to take on ever more amounts of business with superior economics. Delivery costs go down because they are no longer relying on fedex or ups. I am trying to understand how it changes things for you. They understand what it means to be a Value Investor. How much has that actually changed . Tom in this context of trying to stretch out investment horizons, it is different because if anything happened so far, it has been that amazon has been given a pass by investors to invest for the longest term. Other Companies Struggle to have the ability to make a quarter estimate for the fall short, for the investment process and gerterm games turn longerterm gains. Working as well as it does informs other managements that they might want to talk about the benefit that comes from stretching out the horizon. Alix we have seen Warren Buffett try to execute some feels that did not work and as you wind up seeing, consolidation of so many sectors, many in part by amazon and overcapacity. Where does it leave him being able to do deals when he does not want to go hostile . Tom warren will continue to find deals. Alix but harder and harder. Tom the time he will find them is when anything for the rest of us will be the hardest. That is when his capital will be the most valuable. Thats what it was when he set the terms to bank of america. That was a horrible time to do anything with the banks and warren extended a preferred investment and received this call option. Tom russo, of Gardner Russo gardner, thank you very much. Dont miss our coanchor, david westin interviewing Warren Buffett, later tonight. You are watching bloomberg tv. So new touch screens. And biometrics. In 574 branches. All done by. Yesterday. Banks arent just undergoing a face lift. Theyre undergoing a transformation. A data fueled, security driven shift in applications and customer experience. Which is why comcast business delivers Consistent Network Performance and speed across all your locations. Hello, mr. Deets. Every Branch Running like headquarters. Thats how you outmaneuver. Jonathan Hurricane Harvey makes landfall in southeastern louisiana. The oil market braces for even more disruption. The war of words over north korea continues. Risk aversion fades. Investor sentiment sentiment gains a stronger footing. Equities recover in europe and asia. Good morning, this is bloomberg daybreak. I am Jonathan Ferro alongside alix steel. The scores as follows. Futures on the board dead flat is the story. In europe, we are raced some of the losses. Eurodollar a racist some of the gains from yesterday. We are down 4 10 of 1 . Atth of 120 the south of 120 1. 1928. At 2. 14, we are at the bottom end of the range for 2017. Alix unbelievable. Having the Hurricane Harvey impact on commodities, wrestling at a twoyear high. The brand spread continues to widen. How much production will be stuck in the u. S. . That is the question for that spread. Gold barely up by about . 50 is that safe haven trade unwinds a little bit. I am watching copper. People talking about 7,000 a ton. How did we get there we are also scared in the copper in the market . Lets get the update on what is making headlines outside the Business World. Emma chandra is here with the first word news. Emma Tropical Storm harvey is now hitting louisiana. That is after dropping more than 50 inches of rain on southeast texas. The storm is blamed for at least 18 deaths in the houston area. Font forstmann says more than 13,000 people have been rescued. One analyst estimates damages could hit 18 billion. President trump lower new his pitch for tax cuts for the middle class and small business. He is traveling to springfield, missouri to discuss tax reform. The president will only focus on why it is needed. He is leaving the how part of the congress. That has raised questions about whether his tone will reflect the tax bill dickey actual contents. A warning from north koreas kim jongun. A says the test firing of missile over japan was a prelude to containing the u. S. Territory of guam. Kim says he will watch the response of the u. S. Before deciding on further action. News, 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. This is bloomberg. Global jonathan markets risk aversion faded almost as quickly as it arrived. The s p 500 seeing its biggest intraday reversal this year. Is vincentm reinhart from Standish Mellon investment. I wonder if the lesson was when is that the ultimate takeaway . Michael it is more nuance than that. What you are starting to see is what happened when the missile and over japan, the futures did not look very hard. We certainly had that relief rally, yesterday into today, but the velocity of these relief rallies, so far has been pretty tepid. I think it is a little bit aggressive to say we can just buy this like we bought every other geopolitical dip in the past. I think the dip narrative is dying a slow but steady death. Jonathan what is the evidence of that . Michael if you look at how rapidly we are responding, futures are up on the s p 500, but not by much. We could get volatile in the next couple of days, but if you look at the technical profiles that have been doing the heavy , those like the ndx technicals are not really that great. It a very shortterm or more mediumterm. Alix in terms of yesterdays rally, it was industrials and tech that led the way. How much of that can be a treated to Hurricane Harvey, as for the rebuilding effort versus the geopolitical difference situation . Is the economy talking about a Natural Disaster. We destroy a lot of capital, we we should expect stronger auto sales in the Fourth Quarter, you should expect rebuilding efforts and that will give a little bit of a boost to fourthquarter gdp, probably more than the drag in the Third Quarter. Alix we saw industrials move higher, yesterday. When we look at what will be the as toatalyst, im curious potential tax reform from President Trump. Is that going to be a catalyst or a justification of where we stand . Vincent there are three parts. One is we have to get past the two hurdles, continuing resolution to keep the governmentfunded and raising the debt ceiling. Number two, we have to make meaningful progress that will be a legislative achievement out of congress and number three, in the background, nobody is talking much about is the ongoing efforts on deregulation. Of the three, the regulation is going to be the one that has the bigger kick to Economic Activity over time. Jonathan lets die then do some of that. And markets, you can ask the questions and gauge what you think about the politics. It is a full week bill sale coming up in the United States. How is that sale going to go . Michael one thing you can measure with the threemonth Treasury Bill spread is that thing has not really come to those extreme levels that we saw back during leading up to prior debt ceiling showdowns. Jonathan the kink in the Treasury Bill kerr was more significant two months ago. Michael it is there, but is much more modest. May bes a narrative that horrible devastation in texas will help galvanize everyone and herd all the cats. They only counterargument to that is people of have short memories and of the government runs out of money in early october, will the casket unheard it will be cats get will ded . Cats get unher you have the tea party there potentially becoming very ideological and moderate republicans wanting to keep the government running. Showdownke on the debt is not so much the government gets shut down and does that impact the economy, it is much more about if the fishers continue to grow and even perhaps leading democrats to get something done, that would be very interesting, but if those fishers keep growing, does trumps agenda fall even further . Alix there are two scenarios i keep hearing and one is you tie Hurricane Harvey relief to raising the debt vigil the debt ceiling so that a clean bill and passed. What is your understanding of it . Vincent probably the former rather than the latter. The spend out is not all that fast in terms of Hurricane Relief and basically, i think the washington consensus is following emmanuels rule, which is dont let a crisis go to waste. They only have 12 working days in september. If they occupy some of it by talking about Hurricane Relief, it just makes it even more important to work quickly on the debt ceiling and some sort of budget. They are inclined it is inclined to be a cleaner piece of legislation. Everyone is focusing on tax reform to boost growth. Why do you think it is deregulation that will be the big boost . Vincent when you think about it, it is pretty much a rule of the political economy that the regulatory pendulum swings too far in both directions after a crisis. We significantly increase the amount of capital banks need to hold. We increase the regulatory burden, generally. We heard on friday, chair yellen talking about the good parts of that. It makes the Financial System more resilient, but the fact is it is the cost of business is higher. It is not just in banking. It is in all sorts of environmental restrictions. There are new people in place that are rolling back some of those regulations and also remember, it is not just what is written down, it is how what is written down is interpreted. The Federal Reserve board undercut glasssteagall in the 1990s by its interpretation of a single word. They commercial bank was preponderantly supposed to be involved in commercial activity. When Alan Greenspan started, preponderantly meant 13 . When the decade was over, it was 55 . Jonathan the fed chair pointed out that she does not think the Regulatory Regime is has harmed lending. Where do you stand . Vincent i think the issue is, it is difficult to understand get a gauge of lending intentions. If you look at the senior loan officer survey, banks have essentially narrow the door to get into the building, but they say we dont see much demand because people are not coming through the door. Andhe end of the day, immediately hast an intermediary has to pass through cost. It are lower deposit rates or higher lending rates. Weve got both. Reason thet of the real Interest Rate is lower. Alix michael, do you agree that potential deregulation has the most benefit. Are you a tax reform guy . Michael if you look at the overall earnings forecast for , for 2018, i think the bottoms of consensus is around 45 and the top and value is somewhere close to that number. I have a hard time getting to those numbers without tax reform. I think tax reform depending on how you are counting, traditionally it has been as low as 10, maybe as high as 15 or 16. I think there could be, if tax get done in a very gets done in a very watereddown way, there will be down the road on how you get to those numbers. Vincent reinhart from Standish Mellon and Michael Purves from weeden co, you are sticking with us. Coming up later, bill gross will be joining us. This is bloomberg. Jonathan we get some Economic Data in the United States in about 10 minutes time. Europe, we are raced some of the losses from yesterday. Up about 1. 5 on the ftse. This is the appetizer for payrolls friday as the adp employment change report comes through. The previous number, a revised 201000 and the estimate, one had 185,000. The dollar index near recession high, up by about 4 10 of 1 . Treasury yields pushing a little bit higher on a 10 year and on a 2year note. Twoyear notes, plus two basis points, the upside surprise. Alix u. S. Equities around the lows of the session. Reinhart from Standish Mellon investment and Michael Purves from weeden co, this blowout number, what does it mean for friday . Michael it means you will hear the whisper number on payroll north. O up from 180 two it also means that it does not mean much because you know what the Federal Reserve is going to be doing at september. The only game in town is what you think the Federal Reserve will do in december and that matters more in terms of what inflation data we get. In some sense, the most important print on friday will be what happens to average Hourly Earnings. Jonathan i would agree that it does not mean much, but it means a whole lot but we think about the debate over the last couple of years, that payroll growth was going to slow as the market reached full employment. What is the economic justification . To that and parts it is the good news, bad news. The good news is janet yellen was basically right. If you run a hot labor market, then you will pull workers in and that will mean that you can get stronger payrolls, even as the Unemployment Rate is quite low. The second part of it is we are gaining though strong payroll gains and tepid gdp growth. We will hear more about where the Second Quarter was, but around 2. 6 growth with these sorts of payroll gains implies not much increase in productivity. We are not increasing our output per hour. Jonathan you will remember that landmark speech by the payroll chief when she took over from janet yellen. It basically said the Federal Reserve has more work to do. Potentially and inevitably, she will be stepping down at the end of her text her single term. If she had to write that speech again, whether the Federal Reserve has more work to do. Michael that was an important part of the discussion on jackson hole. If you believe there is just a fixed constant, the natural rate of unemployment, a fixed level of monthly additions to unemployment, then the federal erves and the business business i forget demand management cannot do anything about aggregate supply. If aggregate supply is flexible and you can pull in workers and induce firms to add more capital, then the Federal Reserve can have more longlasting influences affecting both aggregate supply and demand. Yellenospect, janet should not change many words in that speech, that in fact the record suggests that lower for longer was associated with more job gains than we would have gotten, otherwise. Alix we dont need someone to say what she really meant was. Michael, the story on the equity are going toanies have to pay out more for workers. How far away are we from that story . Michael pretty far. Look at the bottoms up estimates for this year and next year, they are implicit in some significant market expansion. Bit hard to get your arms around unless you think that a huge amount of that is coming from overseas business. From a core u. S. Economic impact, i think it is going to be you cannot have your cake and eat it, too. I think at some point, these margins are going to get pushed down. What we are seeing here in the gdpsy is so far, nominal in the 4. 5 range and that is where the market bond market seems to be pricing it. Jonathan Michael Purves and Vincent Reinhart will be sticking with us. This, an interview with Brian Moynihan, the ceo and chairman at bank of america. A big reversal over 24 hours and we close higher in many of the benchmarks in the United States. This morning, futures unchanged and a reversal in risk appetite. This you are watching bloomberg. Jonathan with bank of america passing its test in announcing an increase to its dividends, Warren Buffett is making some moves. Investmentverted a into a 16. 5 billion stake, booking a gain. Now us it is great to have you with us on the program just give me your thoughts on bank of america and as we sit down with mr. Moynihan a little bit later, the kind of questions you would like to ask him. I think this is a very strong sign of Berkshire Hathaway with Warren Buffett has had a long track record of investing in some of the bestperforming banks in the United States. I conferred can converting this preferred ownership into stock, it gives them greater liquidity and turns them into the largest common shareholder of bank of america and the dividend because of the increase following seat car, that is what triggered the decision by Warren Buffett to convert into common. Inis a sign of confidence Brian Moynihans ability to run bank of america and for bank of america itself to grow and be more profitable as we grow forward. Jonathan Brian Moynihan has done a great job of writing the bank of america ship. Is this a board room that can get offensive if we do get that the regulatory story in the United States . A greatbrian has been job in turning this company around. Now he has to lead it into the growth phase and with their Cutting Edge Technology that this company is implementing, both at the consumer and commercial level, it is becoming one of the leading banks in the United States. I think he has the tools to do it and we just have to give him time to execute on the plan. Why isnt buffett best converting in his shares being considered a top . Gerard Dividend Income is one of the strong reasons why he did it. As we anticipated earnings for bank of america and its peers to continue to grow, we expect dividend payout ratios to grow as well. We are going to see Warren Buffett has made this investment because he knows that Dividend Income will steadily grow over the next couple of years as bank of americas earnings growth. If you could take that steak and put it on any bank on and put it on any bank on wall street, would it be bank of america or somewhere else . Gerard i would say bank of america is the best bank to benefit from economic its tension in the United States. It is also attractively priced. I think this is the name for people to own and buffett obviously made that same decision. Jonathan thank you very much, d cassidy. Idy gerar david westin abandoning his vacation to interview Warren Buffett. We will bring you that interview at 11 00 a. M. Eastern on bloomberg tv. From new york, on the adpside report ahead of payrolls friday. The lawmaking a bit of a comeback against the yen and zero, the eurodollar at 1. 18. In at 3 , 83 handoff a three handoff for u. S. Gdp. The previous rate was 2. 6 , personal consumption comes in as well. That comes in at 3. 3 . The estimated 3 , the previous line for a, and on Second Quarter. The second rita read out for the gdp is a surprise him the three handle and Something Else i want to highlight is nonresidential fixed investment rose 7 , much higher than expected, and corporate pretax earnings were up 7 , that should be year on year. Those are some good numbers as well. We have ip investment rising, so good numbers to take a look at here. What is your initial read if we have gdp revised for the second originally 2. 6 and now at 3 . Gdp for q3 tracking at 3. 4 . In excess ofwing potential output growth, we are narrowing resource slack, which suggests the economy has some real momentum and will give the Federal Reserve something to think about, i. E. An opportunity jury normalize Monetary Policy later this year. If you get yourself drowning in political hysteria and geopolitics in north korea, it is fundamental to her memory the data they are ok. They are stable. In some spaces, they are solid. Explain, and it helps those strong reports we had over the past few months. It makes everything a little more real. Ishink the broader question while this is an uptick, these gdp prints can move around. I think the broader question is how much can this really impact the market, either like the dollar and 10 year treasury yields and pushing really hard this week, you will see a big reaction again. So i think one of the market tells is what kind of aggressive reaction will they have . If they do not move up a lot, it is a broader tell about some other factors that are driving the market. I can envision the tweet from President Trump 3 growth, that is my target. So is this kind of growth sustainable . Probably almost twice the rate of growth with potential output. That means we are narrowing resource slack, and it will be hard to sustain tax reform hard to sustain. Tax reform and ongoing deregulation can matter, but an s toward thistate trend, and unless we do some thing to bend that upward, 3 is not sustainable. And exports also added 2 10 of 1 , to be held even more by a weaker dollar. Look, i think this tells you we ended the Second Quarter on a stronger note. There was less the drag. Ssociated with inventories it was positive about our history last quarter and positive about our current thisis quarter quarter. We have grown in excess of 3 for the last two quarters of the year. That is good news, because we have been stuck in a 2 growth channel for most of this economic expansion, sometimes high, sometimes low. This is one on the high side. I think about two weeks ago, the Federal Reserve was data dependent, and they fired back, saying was the data dependable . We were having a conversation in two months ago when we first got this a few months ago and we first got this read, and it was shaped by the 2 and now it is shaped by the 3 . How important is it that the data is dependable . The answer to that question, is aonomic data dependable . The answer is always no. You are not supposed to look at one number. That is why policy members come outlook based on a lot of input. One of them is gdp. However, the reality is how Federal Reserve policy and tensions are communicated to the wider worldhowever, the realityu will have on bloomberg. That importantly depends on what the last couple of data prints have been. It is easy to explain Monetary Policy being renormalized, starting trimming the Balance Sheet with the last read with the percent growth was 3 growth. Shake peoples perception of what policy is doing. , so we have had this story and now it is a strong dollar story. In 19 a one figure move hours. In a gdp read as well. Get moree going to interesting over the next 30 days because it has been a oneway train through much of the year so far. In the near term and has been positioning has been consistently very heavily long that euro for some time now. Expect some moves back and some volatility there. I think the fact that the euro is giving back some gains here is not an indictment that they long euro trade is over. There are some work forces in the mediumterm that are at work here. I will not be surprised we get to 1. 25 at this point. No one wants to make a judgment call based on the intraday move and a u. S. Gdp read. That is one of the questions going into the draghi news conference, how long of a euro do you want it to be and what is going to test president draghi . You are seeing a reflection of that in the euro stocks, where the correlation with the currency has reasserted itself in a dominant way. And you have already heard some on fx drivening payment to the european economy. But i guess they will mention i do not know how it is hard to get a read right now, how aggressively they will keep chirping on this thing, but you know it is coming. So to wrap that up, what is leading fx in the markets . Orit going to be the euro u. S. . Who has more control . Positionbank has more to surprise . I think it is the ecb. Thank you so much. You will be sticking with us, so i wanted to get ahead on what is making headlines outside of the biggest world. Is now louisianas problem. The Tropical Storm came ashore in the western part of the state earlier today. It iss expected that it is isected to drop it expected to drop substantial amounts of rain. The rain has stopped in houston, but 80 people have died and more than 13,000 people have been rescued. The companys largest has reported a power loss. Ae u. S. Has completed missiledefense test off the coast of hawaii. This is the second time the weapon intercepted a ballistic missile. This is days after north korea fired a missile off of the coast of japan. May benefit high earners the most. The president goes to missouri today to push a tax cut for the middle class, but it will be congress to write the legislation. Global news, 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. Im emma chandra, this is bloomberg. Alex . We will beg up, joined to discuss the reaction of the job numbers. Estimates coming in, coming in at 237,000 for last month. This is bloomberg. This is Bloomberg William gaybrick. Coming up later, david westin will interview Warren Buffett, the Berkshire Hathaway ceo, 11 00 a. M. And Hurricane Harvey takes a second pass at texas and louisiana. Will show the path of the storm it will take today. It is may louisiana landfall and will move further across. Further flooding in the area around texas and louisiana. On the us on the phone ground and houston is ryan collins. How bad is it today versus the last few days . Ryan think for having me. Today is the first time i saw the sunlight for a while. Real not sure how the case will be when the storm actually takes landfall again in the Mississippi Valley on thursday. Alex it will be moving through there and ending up in kentucky. We talked about what happens for Oil Production and product exports as well, but i want to focus on natural gas. How much natural Gas Production is at risk . We used to get a lot more from the gulf of mexico and that is changed has changed in the past 10 years. Isn what is being affected shale in southern texas and all production. Hore arebillion cubic feet today being cut off from the storm so far. Outages,p of the power they estimate that about 5. 2 billion cubic feet today of natural gas demand has been cut. So we have these forces of fought,nd demand being and that is why we are seeing no real effect on natural gas prices. Alex that is a good point, and i did not a natural gas counts no net i did not know that natural gas counts for 45 of texas power. As of 6 45 a. M. This morning local time, there are about 3006000 outages 6000 outages. 100 , 97 of customers still how like to see at this point. Thisve electricity at point. So we are used to seeing 100 degree temperatures at this point in the middle of august, and at this point it has been high 70s to mid 80s, so even the people that are here and able to turn on their airconditioning are not rushing to do so area do so. Alex good news, thank you so much and stay state. International export story for natural gas . If you take a look at them in the past five years, there is a big surge in that they are up in the triple digits. You wind up having a lot of export terminals now at work. We have one export terminal operational, and three that are being constructed currently. Damage have is what they incurred in the last few days . Is our natural gas analysts, still with us are brian hart and Michael Purves. What is the damage to the export terminal . The first and biggest impact was on mexico exports. Those are pipeline exports that happen through the southern part of texas through the golf course gulf coast into mexico. There was immediate pressure on those pipelines, and we saw the exports curtail relatively immediately. That is a little bit over the right unite now bcf d now, but we will wait and see. Have the mexico export story as a big part of the north American Natural Gas story right now because it has been a growing segment for natural gas demand, we also have export as well. There has not been a huge effect there, but we are watching what it might mean for construction phases. The traineted up to for, so that looks relatively safe. There might be something following the storm in respect to recovery and flooding damage that has been done, so we will be falling that. Koke point is the next facility, but it is off the coast of maryland. Alex so it is ok . Jonathan its not it should not be impacted by that. Ok. the issue that we are ryan is what we i in reiterated, the flooding. Evil first. We are migrating toward haynesville. To belaces work specter solid growth places for natural Gas Production over the next few months, so anything detrimental to the pace of rig activity could be jeopardizing the growth trajectory for natural gas in the next few months. Jonathan i wonder if people ir investmentsthe in this area Going Forward. Will they question more fundamentally those Investment Decisions . They could be eyeing some of the risks now that this has happened, this is not an event that is normal. We have had record rainfall, something that has necessarily been seen across the shale plates. Shale Oil Production is relatively new, it really started after 2007, 2008, so we do not have many text test cases. There was flash flooding in alberta in 2016, and alberta is the oil and gas hub for canada. There were some detrimental impacts to the plates up there. Easilyere relatively recovery is, but they were still effective. The do we see global lng export prices rise . There are two sides of it. The issue with that story is that over the next eight months, we could possibly see a rise up in the global gas pricing, but the global gas industry is actually on the verge of a wave of lng, and we are headed toward a global oversupply in the back half of 2018 into 2019. From a global standpoint there could be an upside, especially over the next six months because we are going into a winter season in north america. It is also the winter in europe, which is the marginal demand market for lng. That gives you a bit of upside price support and increases the risk if there is any kind of tightness in the community. What we have seen as the cut offs of export down to Mexico Mexico does not necessarily still have demand, so it does increase their pull on the lng market, which means it is taking from the rest of the global lng supply stack. We could see some pinch points in there. In general, with our significant amount of global lng coming in from australia, we do have koke point, a Merrill Lynch terminal mary land terminal maryland terminal. With that continues to expose the next 610 months. Alex that will be interesting to see what happens with those export facilities. Vincent and michael, we will talk to you in just a minute. Think you for sticking with us. , thank you doherty so much. Check out tv. You can check out our charts and graphs on your terminal. And you can ask a question, and we can do so in the second. This is bloomberg. Jonathan [indiscernible] with improved fuel economy and acceleration, but in the shift toward technology, the company will also offer other versions of the cayenne. Matt miller spoke with the porsche chairman about the future of diesel. Dieseltruth is, the engine in the normal Combustion Engine will be important for a long time to come in order to reach the co2 values. Once you expect the Combustion Engines to stick around for a while, and to set a date as to when they might not be there is too premature. Is important for maintaining Carbon Dioxide levels. We would not be able to reach the lower thresholds without it. That is why there will always be a mix. Us now is mattng miller of bloomberg. We and you know as well as anybody that this story with foldedemissions has been into a wider Election Campaign and concludes next month. Do about it and how are they changing their strategy . . Are it seems like they phasing out diesel to some extent. Wolfgang porsche also told me it is not important to their dna is a company, it is important to their larger industry, their parent company, and to porsche itself diesel only makes up ofut 14, 15 14 , 50 their sales worldwide, and they were able to save them out of the u. S. Market in 2015 after dieselgate. Now they can do that here as well. Jonathan you pointed out in the past that if you look region to that differs very vastly in terms of how this conversation is taking place on the subject. Talk me through at . It . Matt this has become an absolute storm. It is the Biggest Issue of the election, even more and always been the immigration problems in some ways then the immigration problems. In some the opposition senses, also the Junior Coalition partner right now, is so deeply involved in Companies Like volkswagen, where they own state thatrol the owns it that they cannot say much about it. Meanwhile, Angela Merkels governing has been along for the e the entire time, as her and so has her transport minister. It does not look like anyone can really capitalize on this for the election. We got some pull levers out, Angela Merkel is slipping down to 38 . Has risen up to 24 . And the third parties in germany are hovering around 10 or less. Like merkel easily clench this cleanses us will clench this election, and then the question is who will be her Coalition Partner . If you could walk away and have one standard behind you, which one would it be . Matt i was looking at the five spider, the one that james dean was killed in, and it is absolutely gorgeous. I might consider cutting my legs off at the ankles just to be able to fit in that thing. It is a bit too small for me. Jonathan bloombergs matt miller, joining us from porsche. It was great to speak with you. You are watching bloomberg tv. Hurricane harvey makes landfall again, this time in southwest louisiana. The oil market braces for more disruption. War of words out of north korea continues. A bit. Lar catches u. S. Secondquarter growth is revised to the fastest pace in two years, and job growth in the adp report delivers a positive surprise. Welcome to bloomberg daybreak, im Jonathan Ferro with alix steel. Futuristic a leg lower, the dollar takes a leg higher. The euro at 4 10 of 1 . 4. 20 yesterday. Petering out your 2017 lows is how we trade, just off of that on the u. S. 10 year. Lets go back over to alix steel. Wednesday, so you have the 2. 10 on the 10 year, and you have bank of america on the other side. Converted these loans it is 700 million shares at 714. Purchase there. He is now the largest shareholder of bank of america. 6 percent stake. We have the exclusive interview at 3 00 p. M. , and you do not want to miss that. Are there more catalysts . On the downside, die, is getting hit, down by 14 . Telecom industrial industry, it at that comcast and centurylink at about 36 of their revenues, and their contract revenues had a bad miss as well for the First Quarter. Not so good for ycom. Tanker in the world. Opec countries like saudi arabia are not shipping that much. They called the taker market decidedly weak since the Second Quarter, have the suspended have suspended dividend payments, and now the question is how Hurricane Harvey will impact any exports are imports into the u. S. From the United States, economic rebound continues in the Second Quarter. It was stronger than initially reported. Consumer spending was the main engine for strength in the Second Quarter, rising a revised 3. 3 in the Second Quarter. Michael mckee. Is gdp with a three handle . Good times. Michael Consumer Spending and business spending both revised up, which is good news. The interesting thing this time was that inventories and trade played a very little role in the change between the two quarters, so that could still come in to play in the next quarter. We could see a dragon the next quarter inch rate after houston, because we have fewer petrochemical exports that we might see. We might see some inventory building because companies will matt be able to sell as much. The outlook is good Going Forward. And it is already pointed out that race on the gdp numbers we have so far, we will hit the 2. 2 number that was expected for the year by the Federal Reserve. If we continue to see strength in the Third Quarter, you can revise up 2007 gdp growth. Usathan how does that set up for friday . Michael gdp has been overestimating for a while. Numbers coming in from the government, and it is hard to say whether it gives you much of a clue or not, but we are seeing withheld tax receipts rise of it. We have seen low jobless claims, and the numbers from the most recent spending numbers suggest strengthill see some in august. The only difference is that august tends to come in lower than expectations, see might see reluctantctive to raise their estimates at this point. But it is strong to continue the trend we have seen. You and real incomes, if back out for inflation, did not rise. Is that a problem Going Forward . Problem that has been a for a wild. Growth is going higher, unemployment is lower, and we are not getting paid for it. There was the paycheck survey they do a survey of Small Businesses, suggesting Small Businesses are starting to raise salaries because they cannot find workers we will see if that translates into the larger economy and how everyone will be watching average Hourly Earnings tomorrow. Alix Michael Mckee, thank you very much. Also with us are walter todd and brian levitt. That is the gdp read at 3 . I do have to point out that futures are starting to roll over, and i think we can thank a trump tweet for that, earlier the u. S. Has been talking to north korea and paying them extortion money for 25 years. Talking is not the answer. We learned yesterday that geoPolitical Risk might not matter. What do you do today . Want toou might downplay some of that geoPolitical Risk. We found that every generation faces challenges, and the markets generally go up as long as the economy is improving and the Federal Reserve is not significantly type. Those two components still exist. It is a reasonably Good Environment for risk asset given that growth is Strong Enough to support corporate earnings, not just across the board but in general. To her prior comments, we do not see the wage growth for significant inflation, so the fed is going to remain accommodative. If we try to make decision based a decision based on joe Political Risk, most investors will never be geoPolitical Risk, most investors will never be in the market. We need to focus on the longterm. Said it wasl purves a completely different story. Here is what he had to say earlier. Michael it is a bit aggressive to stay. We could buy this like we have bought every geopolitical dip in the past. I think this narrative is dying a slow but steady death. Alix walter, to be fair, the dow ended up by 57 point. 57 points. Is there something to that . Walter i think there is some truth to that. On 2498. , it was only i do not think it should react to a trump tweet. If you do that, you would be reacting every minute of every day, but the Bigger Picture is looking at the next 30, 45 days. You have some other bigger issues be on the geopolitical in terms of beyond the geopolitical in terms of this country, getting a budget in place, and looking to some kind of tax reform. We think there is some more downside here in the meantime, so we would not rush to by the dip if we saw it again. Not want todo diminish the statement from the president of the United States, because of the platform that statement has been put on. The president of the United States is saying that talking is not the answer. Say this iseasy to a trump tweet, but this is saying thatt talking is not the answer. Do we need to take this seriously . Do, from a geopolitical perspective and what that means for society, for the United States. Have dealt with situations like this before in the past. If you were to sell equities during the cuban missile crisis 1980s cold war, you would have missed out on significant performance. My comments are not to suggest we should not have some concerns about this, my comments are to say that if investors are going to allow themselves to get whipsawed and pull out of the market every time they are concerned about geoPolitical Risk, theyre are never going to be in the market. What we find over time is not time in the market, but not timing in the market, but time in the market. Looking fores are concerns about down turning the u. S. , but no part of the world is going to be fined if there is Nuclear Activity between the United States and korea. If you are looking to limit some of your exposure in the United States, there are good opportunities outside of the united dates europe, the economiesarkets where are improving and currencies are improving, and there is a nice tailwind in those parts of the market. Jonathan there is a conversation not exclusively around geopolitics, but a politics paralysis policy paralysis. There is a crisis in texas, houston unfolding at the moment, abroad, potentially more tension rising with north korea, and the domestic him pain promise of campaignugh process of getting through fiscal tax reform. That is a lot to get done over the next couple of months. That is the real question, how this bleeds into Everything Else . But we would have talked about an election and austria, france, and many people would have said not to invest in europe but it has been a great performance this year. We need to raise the debt ceiling. Either commitments we have made a we need to pay out that money, otherwise we will prioritize spending. We need a budget, and we do need to help repair and recover the texas gulf coast. These things need to be done. These will bets done. There could be some volatility in the nearterm as we go to the break with the debt ceiling, but 2011, 2013, we went to the brink with the debt ceiling and the secular vollmar let bull market continued. In order for this cycle to end, we need significant deterioration in Economic Activity in one of the big economic blocs of the world, the united dates, europe united , or china. Ope my focus would be on the monetary side, where it is not the like it is coming where it does not seem like it is coming, or on the fiscal side. I want to pick up on something you said, because the politics in europe are certainly orter than one anticipated the core of people anticipated at the start of the year, the economics better than many anticipated as well. The fact is, the european stock market peaked back in may. Why . A very big rally at the beginning of the year, expectations were low, we jumped over those expectations, and markets have settled into what is around expectations, which is a couple percent of growth. If you think about your up, this is likely to continue well into the future. Europe had a prolonged. Amount ofonged austerity. What you have now is the beginning of credit creation, earnings growth, it has following a big rally is. Nlikely to be the end of it alix thank you so much. Both of you are speaking with us. Coming up later today, david westin will be interviewing Warren Buffett. Interview. That making bank on the bank of america share conversion. This is bloomberg. Alix the u. S. Dollar heading for the second day of gains for the session high. Why . President trump and his recent tweets on north korea, saying the u. S. Has been talking to north korea and paying them extortion money for 25 years, talking is not the answer. Where is the bottom, where is the time to buy . There is no consensus. The biggest pain free has been the dollar, very, very unexpected. It is very related to the treasury move as well. You have to look at the frommentals and step back geoPolitical Risk, Political Risk in the u. S. , weaker inflation over the course of the last few months, and what is going on from an economic perspective. The dollar is still expensive against the euro, but in the shortterm you would expect these things to consolidate and expects some range bound action in the euro. Alix also with us are brian walter from oppenheimer. Around when we came in 100 on the dixie, there were a lot of bulls. An interesting nearterm bottom yesterday, on the dxy, which goes back to the spring of 2016, which coincided that with the low we hit then. So i think you could see some thisthe data we have seen morning on gdp. One thing you have to remember is the reason the dollar has somewhat is geopolitical, somewhat the president ial messages and so forth. But it is also the differential in Economic Data coming from overseas. Europe has been particularly strong. Nearterm, you could see some strength with some significant downsides. Jonathan but those are not been captured by rate differentials. Why . Europe you talked about peaking earlier in may, and one of the things coinciding with that is rates moving higher in europe. You have seen the differential between the german rates and the u. S. Rates close a little bit, but you have seen weakness in rates here in the u. S. That has underpinned the fall of the dollar, and you could see bottom in rates yesterday at 2. 08, strengthening thats coinciding with a reversal but the dollar in the nearterm. Reversalding with the with the dollar in the nearterm. Rates have fallen faster in the bond part of the world than in the twoyear treasuries right now. They are at 133, 134. The rate differentials story has ratesen it is not driving it, so i am wondering what it is. Walter in terms of the dollar . Jonathan in terms of the eurodollar on that cross. Walter rates aside, you have seen better Economic Data coming out of europe versus the u. S. We had a wall in the u. S. You have seen pressure from the dollar because some of the messaging coming out of the administration, the lack of confidence in the Current Administration has been putting downward pressure on the dollar. That has been a combination of factors, and the fact you had too many people leaning one way, and they will inflict the most pain on the most people with financial markets. In that was the dollar bulls the beginning of the year. Had a and remember, we big rally in the u. S. Dollar and 2015 to the beginning of 2016. Ofething along the lines 30 . That was the u. S. Economy, our expectations for the economy building, and the Federal Reserve raising Interest Rates at a time when emerging markets had a little bit of an inflation problem, real yields were not very attractive, so you sucked a lot of money out of the emerging markets into the u. S. Dollar. About an earnings recession in the United States and beginning of 2016, and as soon as janet yellen and the others backed off and said ok, were just kidding about the for Interest Rate hikes this year, we the four Interest Rate hikes this year, we saw the dollar stabilize and trend significantly weaker. Expectations in the u. S. Had been really high, for growth, and low in the emerging markets in europe. The u. S. Had underwhelmed, and the european markets had outperformed expectations. If we really expect europe to outperform expectations and youre looking at that move for the ecb to remove accommodation, i should not just see that in euros, i would see that in on this in s, and i dont. Why is that . We have had a year around austerity and raising Interest Rates in the heart of the crisis. The ecb will be accommodative for a long amount of time, longer than we are in the united dates. Unitedted states states. Here, we will start scaling down our Balance Sheets. The United States will be more cautious, and that will be promoting growth. Nonetheless, it will continue to be accommodative and supportive. Alix you guys are sticking with us. Coming up at 3 00 p. M. Eastern, a mr interview you cannot miss. Brian moynihan, this is bloomberg. Alix apple is planning on changing the way you use your phone. We are to weeks away from the big unveil, and a major feature is missing the home button. Apple touched another record high yesterday. Joining us now is Adam Satariano of bloomberg news. What have we learned after viewing this phone . Adam hes are some images of the new phone, and the biggest thing that people will notice is a lack of a home screen. There will be a gesturebased way that you turn on the phone, as well as cameras to have rasul facialn recognition to open up. This will give more real estate , thehe screen to be bigger phone is supposed to be thinner and have faster processor, includes a camera, and this is the 10th anniversary phone. There has been a lot of anticipation around it, and some features are getting to trickle out. Alix so Jonathan Ferro is going to buy a phone that has been cracked for an entire year . Jonathan but i cannot say if it is an iphone on air or not. Alix are the center going to be enough are the changes going to be enough to ignite an apple super cycle . Adam that could be the case, but there will features are geto trickle out. Be three new phones that will essentially, out. One of them is the overhauled look up the phone, it is upposed to be the god phone with a much more overhauled look. And the improved components will not be as radically different. Ooking so losing the home button is somewhat controversial. It is the way people get into their phones, so you have to think about whether or not you want to use it in this different sort of way. They have these other ones just in case. All of the signs point to this being a big hit. Alix and we heard a headline crossing bloomberg that apple is in talks for bidding for toshiba chips. How much do they know they need to start buying if they have this super phone cycle . Adam they have not done many acquisitions, but when they do they are strategic about it. To keepd the components making these phones in as big of a volume as they do, and toshiba is an important supplier. You way tod would ensure that they could continue to get the components that they need. Jonathan thank you for catching up with us after apple hit a record high in yesterdays section. We are four minutes away, and futures are slightly negative. You are watching bloomberg tv. Jonathan the United States gdp at the three handle, brokers sell it, and futures slightly negative going into the opening bell. 20 seconds away, and here are the scores. Have geopolitical jitters not completely drained from this market. As we go into the open, futures. Ead flat those 42017, yields are a little bit higher this morning by basis for 2017, yields are a little bit higher this morning by basis point. Atare up at 92 , were up 92. Lets cross over to alix steel. Alix you have the dow and s p flat, the nasdaq flak as well flat as well. That other revision is coming in at 3 , personal consumption at 3. 3 , at the same time, you get that tweet from donald trump that basically says we will not be talking with north korea, that does not work. If you credit the rally by the dip yesterday to the white houses measured response, what happens if the rhetoric increases . It feels like the markets are in flux and confused about a few things at the moment. Individual stocks, we are still seeing fallout from hurricane now about 4ll, Million Barrels a day of refiners and product exports closed gulf coast. Multithe shutting the majority of its multithough incrementally, you can see those stocks doing well. I want to hire light highlight freeport, because those stocks are down after being up yesterday. It owns the stocks with rio tinto, they share that, and freeport will offer that to the government. They were only going to sell a 30 stake, but now they are selling a 51 stake. So there are questions about what rio will do the test for the project as well. A lot of weight was made by the dip we saw yesterday, so climbing the wall of worry is the theme it has been for the past 10 years. Showss the chart that that. The blue light is the s p and the white line is the Short Interest. It has been grinding higher throughout the whole year, moving and other led lower in lower asries leg the s p drives higher as well. We still get 3 gdp growth, and i feel like that dynamic is causing a lot of questions in the market. Hedge funds might be able to make a shortterm return, but longerterm, do people care about that, or is it about the 3 growth . Forgetn lets not walter todd or ryan leavitt brian leavitt. What do you make of this . Brian i always try to focus less on 1600 pennsylvania avenue and more on the Federal Reserve, a couple miles southwest of that. Markets,ackdrop for and how to cycles and . With policy tightening, credit spreads blowing out, a deterioration in Economic Activity and we do not have any of those ingredients. Just the opposite. Spreads her tight, maybe a hiccup in the energy market, but no reason for the fed to be aggressive. The economy just revised higher. I do not think we sustained 3 without significant fiscal policy accommodation, but the reality is that the shorts have been wrong for a long time now because this is a modestly improving world. It is generally synchronize. You cannot point to a major part of the world were Economic Activity is disappointing right now. So investors do not want to be in this secular bull market, they will likely miss out. Jonathan so is this the right approach . I think the right approach is to stay in these markets. Away, or amonth month and a day away from the 30th anniversary of october 19, 19 87, some five years into a 1987, some five years into a secular bull market that ended in 1999. Im not anger will be drawdowns around the debt dealing that might be unforeseen at this point, what im here to say is that investors to do not stick to their plan and try to time it based on what the hedge funds are doing on an individual day or based on what donald trump is tweeting they have to make three decisions right. No way to get out, where to go, and went to get back in. That is very difficult to do. If i am right and this is a secular bull market, some years out we will be happy we stayed on our course. Alix the Short Interest is weighed toward energy and as well. What is the trade their . They would write to be short . They would be right to be short. Like the dollar discussion we had earlier in terms of getting oversold, we think some of those areas could be potentially oval sold oversold in the short term. You can see a recovering rally in the Fourth Quarter with retailers as we approach christmas, and that turns out to be ok, a short rally in that sector. And certainly there are Energy Disruptions with the storm, which could cause some distortions in the data. Down 20 the sector year to date, it is not a place you want to be pressing shorts necessarily at this point. Tox but walter, if you want play high short trade, you have to look at places like energy and retail, which begs the question what about tech . It has been a killer trade. Apple hitting a record high yesterday, what is your take on tech . Walter it continues to do ok for the remain your of the year remainder of the year, but the set up for the Fourth Quarter would be if you want to move some money out of areas that have outperformed, like technology, keep our core position there, but playing in those areas that have underperformed. If we get a move higher in rates in the fourth order because of gdp numbers, they will do well in that scenario. Industrials underperformed a little bit recently, we energy and retail. I think there are better opportunities in other parts of the market, but make no mistake tech will be a solid performer of the economy is growing at 3 . Brian, your thoughts . Walter slow growth type of trade. The economy can sustain 3 , we can perhaps start to look at some of those more valueoriented parts of the market. In order for value to do well, you need a catalyst. So the technology companies, as they continue to grow in a slow growth world, they may likely continue to be the winners. Me personally, when i am looking for growth in a slow growth world, i am tilting more to the emerging markets, where Growth Continues to be good and pick up. What i am worried about in the United States is the amount of money that is going into passive strategies. Some of those larger tech names get a bad component of that because of their market capitalization. Cycles no economic environment, investors have reasons that passive strategies work out just fine. Quite frankly, for a large cap mastic, it has. When we look at some type of investment cycle, some of the names that keep eating bid up and those valuations will likely break, does that have to happen tomorrow . No. But at some point in the future. You had a concern about passive strategies, but around the United States, what about a passive strategy going toward the end . Walter a lot of these a lot of the indexes are not constructed appropriately. You end up with a lot of state owned enterprises for a lot of obvious reasons, and is active investors we do not have a particular appetite to being invested in it own enterprises who have the best interest of the government in mind rather than the shareholders in mind. Exciting looking at trends taking place in Online Retail in china or search in ,hina, ecommerce globally those exciting trends where as if you are in the bigger emergingmarket indices, Something Like 3, 4 for top 10 names of your top 10 will have interests like the Chinese Government or Vladimir Putin at heart. Alix we have seen flows coming out of u. S. Equities and high yields, many point to this as the crack in the trade. That is where we see risk starting to come off. Is that you are buying opportunity into that in terms of highyield u. S. Equities, or do they need to follow that trend, the risk, and where do they go . I think the setup for us for the rest of the year is some nearterm volatility around the debt ceiling debate and Budget Discussion over the next 30, 45 days ahead. We can continue to see the market drawdown because of that. We drew down around 5 when the government was shut down, but in the Fourth Quarter, the First Quarter of next year, you could have that melts up scenario that was mentioned earlier, where you could get tax reform in the market could move higher as a result from excitement about that deal, and peak sometime around the First Quarter of next year. I think as the discussion was earlier, it is difficult to try and time exactly the market. I think you just want to be a bit more cautious in the very near term, but with the setup being into the Third Quarter and Fourth Quarter of next year, probably pretty favorable for equity markets. Youthan it is great have with us on the program. About 10 minutes into the session, as we open, 10 minutes in, the munich games again on the s p 500. We are positive by not even a single point, some marginal softness on the dow, dead flat at the moment in the United States. This is bloomberg tv. Alix is bloomberg daybreak. Coming up, david westin will interview Warren Buffett, Berkshire Hathaway chairman and ceo at 11 00 a. M. Jonathan Warren Buffett making headlines once again, the billionaire just converted a 5 in bank ofestment america and 2011 to a 6. 5 billion stake, locking and 11. 5 billion investment gain. Is our us now by phone guest, and Michael Moore of bloomberg news. Lets begin with you. The money made aside, what is the significance of this Going Forward . Cements the deal that Warren Buffett made in 2011. At the time, bank of america was not doing great. There were questions about the capital levels and its future, and the legal issues. Buffett stepped in and help to stabilize that. It gives him another major in a consumer focused bank, along with wells fargo. Jonathan is this the new boring on wall street . Bank of america is the new boring bank on wall street, which is not a bad thing, but for investors thinking about whether we get that the regulatory story involved, how to make a more offensive bank . Is not really bank of america, is it . Michael you do not think buffett would be in favor of that. He has liked the commercial banking side of things traditionally more than the Investment Banking business models. Consumer operations tend to have better probability at this point in the cycle. We will see if the credit picture changes on that, but over the past few years, that is where you want to be in terms of profitability. Nelle, what is Warren Buffetts relationship with bank of america and Brian Moynihan . Noah it is very positive. When buffett takes a large position in the company, he is praiseworthy of management, he says often that the reason he makes investments is because of his confidence in management, and we have very much seen that in this case. With is that why he did it bank of america, or was this too awesome of a deal for him to pass up . Point, he actually dreamed this one up himself. Im sure it played into it somewhat, but at the end of the day, what is important to remember with berkshire is buffett makes investments when he thinks he can pay a good price for them, and does his investment game shows, he paid an incredible price for what he ultimately got here. He spent 5 billion for the sharesto buy 700 million at what turned out to be a steeply discounted price. In the interim, he was on his preferred shares in collecting 600 million annually in dividends. I think we need to focus on that in the terms of the deal he struck rather than the relationship to management. And it does point out as well that is a Value Investor who looks for the best deal, you are not that many opportunities out there for him. Is the point he has made many times over. Size isd indicator an indicator of performance. Your Investment Universe can just shrink. I think this is a good example his name,fett used reputation, and his franchise to make an investment that nobody else could. Jonathan i want to bring in charles peabody, he is on the phone. Charles, we sidestepped the question as to whether will wish he had made this investment. Lets talk about bank of america Going Forward and how this story in the United States of vault, and it is said to evolve more materially in the coming year . Charles i think the big challenge for moynihan right now is the ability to grow the franchise. They had shown tremendous ability to cut expenses, but now they have to show Revenue Growth. That is the challenge. Jonathan and where will that Revenue Growth come from, charles . Charles there were hoping it would come from a steeper yield curve, and that is a big his appointment. Disappointment. I actually think this has been the less well performing bank stock this year, and it has been disappointing. But they are starting to invest, they have been losing market share in places like cards and mortgage banking, Investment Banking, trade, finance, so they need to invest happily, and the question is can you invest and grow revenue at the same time. They are trying to cut expenses and grow revenue. Is whatd the question you do is the next catalyst . Deregulation is not really going anywhere, how much of a substantial material catalyst will that be . If we do not get steeple yield curves, what about that cattle it steeper yield curves, what about that catalyst . Hard to i see it believe that they are earning ,ore than . 45, . 48 per share and loan Growth Continues to muddle along it to point 3. 5 . There are two good stories on the bloomberg tour terminal, what about paypal introducing a new card and American Express introducing more competitive financing terms. Trading is probably going to be 8 10 , so it is hard to see were the catalyst other than cutting expenses, which they have done. And the other thing getting a lot of russians from our client from ouruestions client base is where are we in this credit cycle . In bank of america, they are probably in a loanloss permission right now that is half of what a normalized be forgetting a recession, just a normal one. I would argue people are paying multiples on peak profits because they have not normalized current earnings to support higher provisions. Alix we appreciate it. Both. O see you coming up at p. M. Eastern, it is interview an interview with ryan monahan, the bank of america chairman and eeo ryan monahan Brian Moynihan, bank of america chairman and ceo. Alix President Trump added on twitter this morning about north korea, saying america has been paying north korea extortion money for 25 years. Talking is not the answer. Joining us is marty shanker. Change the conversation ordered President Trump change that conversation . I do not think he really has. Maybe talking is not the answer, but i do not think tweeting is either. He has obviously looked at all the options that the military has given him. Of talking is not the answer, there is only sanctions and military action, and the latter, as we all know, could lead to a disaster of biblical proportions. He has change the narrative for there wasinutes, but some feeling of normalization in the days ahead of this tweet, and it is looking like the markets are going back to that, so i do not think it is changing. Alix yesterday, the white house official response to north korea and the missile that flew over japan was very measured. And then you get the tweets. How do we understand that . I think you have to understand it, and we and others have written about this general kelly has imposed some very clear discipline on this white house. , thatas the whole plan the next time north korea took a provocative action, there would be a measured response, but you cannot control this president. And that is continuing to be the narrative that donald trump will talk directly to his base and to the world through his twitter account. General kelly pelosi general kellys plans notwithstanding. Mean when you take into account the tragedy unfolding in houston, texas . Is the government provided Harvey Relief aid, a stopgap funding bill, and a relief package, the chances of a Government Shutdown would drop because of the hurricane. Could you explore that logic for me and whether that is something that could play out . Try to, but i think goldman is right. There seems to be a consensus emerging on the hill that a combined bill would attract high partisan bipartisan support and go to the president s desk, and he would sign it. I think goldmans analysis is astute. You have a tragedy in texas that has, in fact, decreased the chances of a Government Shutdown. Extent have what partisan politics died down a little bit . The rhetoric diminished and reduced because of the tragedies unfolding in texas . It is true. In times of national calamity, partisan politics do get put aside to a certain extent. I do think there is a willingness that she represented peter king, he would tweet out immediately even though that texas delegation does not san support sandy not support eight, they do a for harvey. Do big interviews coming up later, do not miss them. David westin will interview Warren Buffett, Berkshire Hathaway chairman and ceo. Then bank of america, we speak to the ceo, Brian Moynihan later. Bloomberg markets is up next. You are watching bloomberg tv. 10 00 a. M. In new york bonnie welcome to bloomberg markets. Vonnie here are the top stories we are covering from the bloomberg and around the world over the next two hours. Tropical storm harvey making a second landfall in louisiana as the gulf coast continues to grapple with devastating floods. Houston and other areas tried to dry out, we have the latest. And the impact on the oil market. And the next step for ages biggest economy as chinas yuan strengthens. And how is china dealing with all the backandforth rhetoric regarding north korea . And then company news, apples grand plans for the upcoming iphone. Ditching the home button, could it lead to a wave of new sales or scare customers away