Transcripts For BLOOMBERG Bloomberg Surveillance 20170914

Lets quickly check on your did. We see somey where distortions are some of the key data points we need to watch out for. Risk assets seems to be taking a breather amid the further signs that chinas economy is cooling. Base metals seem to be dragging down a lot of the mining stocks. Bp and the stoxx 600 basic resources down 1. 3 . Major currencies drifting before the Rate Decision. The inflation data which is why want to show you the pound 1. 32106. And eurodollar. We will talk plenty more currencies throughout the hour, the lets get to first word news. North korea has been to use a Nuclear Weapon against japan. Agency quotednews that japans archipelago should be sunken into the sea. The japanese said that the threat was an abominable provocation. , some has blood chinese backed investors from buying a semi conductor. The fourth time in a quarter of a century that the u. S. President has stopped a foreign takeover of a firm. China says it is concerned by the move and that the u. S. Should create a fair and transparent this is a private. Business environment. According to one u. S. Official familiar with the matter, bob is zeroing in on how russia put fake news in social media. Saudi arabia is preparing contingency plans for the possible delay of an ipo with its state run aural copy. Iol company oil company. The company may not make an announcement until next month. Promisedchancellor has that britain will not use brexit to undercut financial regulations. In a speech, Philip Hammond said he accepts the e. U. Has fears on the issue but says the u. K. Will push for greater transparency, cooperation and stand as an international law. Global news 24 hours a day powered by 2700 journalists and analysts in 120 countries. This is bloomberg. Francine we get the bank of englands latest Rate Decision in a few hours. The situation facing mark barton is complicated mark carney is complicated. Wage growth trailing at 2. 1 , the squeeze on households is very real. Where does that leave the central bank . Lets bring in james bevan. Sbc. Simon wells, at hbs do you miss being at the bank of england it all . At all . It wouldve been a pretty exciting day today. Francine what would you advise they do . Given theyre very worried about this tradeoff. Theyve been saying for a while inflation is going above target. That trade offers now gone. By their own admission without a plummet yesterday now that there is no slack in the labor market 2. 9 ,flation is should be a nobrainer but it isnt. The reason it isnt is wage growth is still very weak. This phillips curve relationship is not coming. Can they be sure it is going to . Second, of course, they are forecasting the frexit process. How much can they count on it . They will try to sound hawkish and talk tough and say, we could do this, but suitably they will be hoping they have a reason not to go this year secretly. Francine how do you explain wage growth . This is the chart you were talking about which had inflation 2. 9 . With wage growth that is not really there. Worldwide problem or is this because of the pound weakness . In part, it is. All of this increased complication from the competition from the gig economy and increased automation. They need to president to the market. The bank of england pointed to it in its last report. In the private sector, real wages have transported to the. There have tracked productivity. Maybe well see wage growth in real terms. Francine james, what does that mean for your investments . James because of the composition of the u. K. Economy, i want to invest in a company that can continue to drive strong Earnings Growth on the back of quite honest revenue. Quite modest revenue. Within the u. K. Are do think there are Quality Companies but i think the pallet for investor should be global in nature and therefore, the lion share sould be should be in the united states. Francine if you look at the composition of the ftse 100, a lot of Companies May have been depressed because of the concerns on brexit, but they have so much exposure to international markets. Like for like basis, i think a lot of the ftse 100 companies are second tier players. If you take a global oil company, which are not want to take that company . On that basis, i do not think the u. K. Is in a nominal position in portfolios. Francine we are looking at parity. On a trend. Its kind of five days ago gone off that trend. What happens to the pound . Simon we think it is going to end up going to parity. A lot of it is brexit uncertainty weve got the speech coming up on the 22 of september. Maybe that puts the European Commission in october to say progress has been made and we can move on. For now, we are just realizing the complexity. Business investment has stagnated over the past year. We know there is a big squeeze going on. The net direction for sterling between now and the end of the year is probably still going to be negative. Francine how do you make brexit as excess . The u. K. Negotiates with the e. U. In the next 18 months, how would you manage the economy so that i know if anys to be fair are a lot more competitive with other markets . Mon it depends on politics, not economics. From an economic point of view, newmont to keep his much openness to trade in what matters is not which markets you can get to globally but gravity matters, proximity matters. Of course, we have to have close trading relations up with a lurch larger the Worlds Largest economic block, the european union. There is no good coming up with a conference of deal at one minute to midnight. This needs to, the sooner the better. Francine do you these pricing negotiations, how do you think they are going . James i think is always managed to assume these negotiations can be complete within two years. If one looks at the record of e. U. Negotiations with entity such as canada, they are not they are multiyear affairs. Onee, it is a question of the big issues is the pricing from the north asian economies. They have been a source of significant deflation for an extended period. Not necessarily taking on board the requirements to make profits. Very much a clarion call. I would say that there are changing. Therefore, we have a greater underlying inflation . Simon i think a lot of the global structural factors will persist for a bit longer. Does globalization mean that open economies like the u. K. Are in charge of their own destinies . On one are committee can say in no. Nt years, perhaps we should let inflation run softer. On the other hand, we know essential bank and always genearate inflation if it wants to, ask zimbabwe. Francine visit globalization, or the fact that we are sharing economies, and prices are automatically down is it globalization . Is a Global Supply shock. It would be expected to reduce prices particularly if trade is good. On the other hand if you look at Services Inflation and the u. K. , it has been remarkably stable. And this is part of one of the bank of england is wrestling with and had been for a wrong time. The big part ofs the challenge. Targeting 2 and average of you have very low goods inflation. Francine we will talk more about this inflation target and whether maybe we should have brought it to 1. 5 . We are back with our guests shortly. We will bring you the breaking news on the bank of england policy decision. At 12 10 u. K. Time. Stay with surveillance. The tricky business of coalition building. With german selection 10 days away, we speak with the secretarygeneral of the green cpaparty. Will todays cpi move the needle for the fed . This is bloomberg. Francine this is bloomberg surveillance. Lets get to the business flash. European car sales growth accelerated august. And therages purchases European Automobile Manufacturers Association says registration has jumped 5. 5 to 903,000, more than double the rate of growth seen in the previous two months. By harvey interim it will wipe out three quarters of its profit and turn the companys ability to meet its fullyear earnings target. It had previous given 2017 carelli has been put behind bars. The move comes after the former pharmaceutical executive offer a bounty for a strand of Hillary Clintons hair. The 34yearold was convicted last month of three charges and faces 20 years in prison. Thats the Bloomberg Business flash. Thecine now, secretarygeneral of Germanys Green Party says Coalition Talks after the election in 10 days will be difficult. Michael keller spoke exclusively to bloomberg. That is not good for the country on a longterm to have all of these strong correlations, so there, therefore, all parties are asked to see how, what else is possible. What we need to do is having a serious talks and to see what is possible and not possible. There is a huge difference with the right wing part of the conservatives and there is a huge gap between us and them. There is seems to be quite a challenge the speculation is right after the election at 6 p. M. On sunday i think it will be situation that we will see. Francine still of us is james bevan and simon wells at hsbc. When you look at the composition of the coalition, its done d eal. I do not know if markets are taking too much in stride that Angela Merkel stays as chancellor. Could it change when it comes to Nuclear Energy and diesel emissions . James the details are very important and not at all clear. We could go in a number of directions. This could have very significant market implications. E complexity issue i think markets are way too relaxed. I owrrworry about the target two system. A lot of people think the central bank is sorting this thing out. I look at the credit balance which the bundesbank is continuously building and the borrowing via the target two system, the balances that never square back to zero. And this is getting bigger and bigger. Francine for the help of the european union, can we care whos finance minister in germany . Simon given his popularity and germany, i would be very surprised if there was any change, and given that were strongly expecting another cdu led government, they are not going to abandon their key principles of balance budget. And not going to give away much more by way of money unless other countries give away more fiscal theall of macrons claims French Public is not going to go along with giving away huge amount of fiscal power. In terms of integration, a little tough around the edges but not a huge step forward. Francine how much of a headache for mario draghi is a high eruu . It depends on which country you are looking at. The less could, for competitive economies like france and italy, next year it could reduce export growth slightly. Will beably inflation around a percentage point lower than it would otherwise, given depreciation. Is it a massive headache . No. In some ways it is providing a bit of an excuse. Francine how much do like European Assets and what would you be buying right now . James equity. I do not understand who really wants to Fund Government deficits in two year paper across the european union. Francine because they are distorted . James absolutely. This is done in the backs of quantitative easing. If we look at the 10 year yield, think they are way too for growth and inflation. To me, it is an equity story and i think of Global Companies in are extremely wellplaced for the long haul. Agricole, we talked about in the past, is wellplaced to produce a paid in the resurgent French Economy i suspect mr. Macron is able to deliver at least in part. Francine up next, precipitation and inflation. Floodsrricane harveys make an impact on u. S. Cpi . This is bloomberg. Francine this is bloomberg surveillance. We get crucial inflation data out of the u. S. Later. Expected to have ticked up to 1. 8 on year on year in august. It comes as janet yellen and her college prepared to meet next week. They are widely expected to keep Interest Rates unchanged while announcing the start of the start of the slowmotion plan to 4. 3 trillion bounty. When you look at the u. S. , how much parallels are there between the european economy and the u. S. And how they do with inflation . Simon quite a lot of parallels pretty is the trillion dollar question. How is the fed going to respond if the inflation keeps on the downside . Even though the headline might pick up, cause probability not going to. The question is how much of this is autopilot and how much of it is data dependent . We still think there is going to be a rate rise in december. It is hard to have a huge amount of conviction and that call that even if inflation continues to disappoint, can they start stretch asset values . Francine is it more dangerous to wait to start normalizing more or is it too dangerous to normalize . Simon do you think that allowing things Financial Markets to continue to rally and rally and then risk a big cra sh . Its more damaging than tightening when you do not need to end slowing the cycle. Bondsne when you look at do you think they see something ugly in the World Economy and could that come from china . Bonds arehink that mispriced because of the actions of the Central Banks rather than because they reflect the consensus of real expectations. So, i expect we will see the fed finish the hiking cycle at two Percentage Points. Inflation will get to 2 . Gdp growth will be at about two Percentage Points and that is enough to keep markets on the up and up. The big swing must be china. It is the engine of Economic Growth. The provider of liquidity and cash flow for the pricing of markets. Rolin the 12 month position, arolling year ago, we seeing 1. 3 trillion coming out of china. Treasury markets equity markets and property and major cities. And football teams. Now that flow is down to 600 billion. Half the flow. We said seen in the prior 12 months we need to keep the capital in china. With policyt initiatives come i think the support for markets becomes much more varied. Francine do you worry about a trade war . Stick with the model. That one of the biggest risks to the u. S. Economy at this point or is it the fact that t reform may be delayed againax . Simon in terms of the underlying structure, in the mediumterm, trade war would be a lot more damaging. And history is not necessarily on our site here. These things go in cycles. We could be starting a super cycle protectionism. But lets hope not. Everyone has got a solution lets hope not. Francine what does that mean to assets, very quickly if we have a trade war . Jamesz it would be a bear market. Francine thank you so much. Theext, we will speak to chairman of the Italian Holding company chia bout its wide range of interests and its role and partner. We will talk about italian politics, reforms and talk about, how his businesses are doing. He also has exposure to the health department. We will have a great conversation on that and that we go to saudi arabia to talk ipo. This is bloomberg. Francine this is bloomberg surveillance. Lets get to the first word news. North korea has threatened to use a Nuclear Weapon against it had. The staterun news agency said the island of japan should be suckered into sea. Japan said that the threat was an abominable provocation. Donald trump has blessed chinese backed investor from buying a semiconductor. It is a fourth time that the u. S. President has stopped a foreign takeover because of National Security risks. Chinas ministry of commerce says it is concern and that the u. S. Should create a fair and transparent business environment. Russias efforts to influence u. S. Voters through social media is the focus of Robert Muellers investigation into the 2016 election. According to one u. S. Official familiar with the matter, his team is soaring in on how russias spread fake information to the media. It is looking for additional evidence from facebook and twitter. Saudi arabia is preparing contingency plans for a possible delay to the ipo of its state owned oil company. Aramcosting of saudi may slip into 2019. It may not make an announcement until next month at a conference. Global news powered by 2700 journalists and 120 countries. This is bloomberg. Francine thank you. Is 40 years old and remains controlled by the family. The Italian Company Holding Company has a wide range of interest across sectors including media and health care and financial services. It controls the publisher of newspapers, including manufacturers automobile parts for some of the worlds biggest carmakers. Employee for 2000 people, it reported revenues of 2. 6 l ast year. Joining us is the chairman of cir group. Always a pleasure to host you. Thank you so much for coming in. When you look at your various therest across the board, economy and growth is not that bad. Where do you see the biggest opportunities . I think the mood is actually good. This is refreshing and we are kind of not used to it in europe. I was in the u. S. A month ago, and iwas surprised to see how people are pretty concerned there about a bunch of issues. And very positive about europe. There is a lot of capital moving into europe. Thei think this is based on fact that the two largest countries in the continent, germany and france, look like they have found some political stability, which is clearly reassuring for markets. And the macro gdp numbers have been quite good lalteltely. Low Interest Rate environment. Francine i do not know if it is high euro because some of the things that you sell maybe a bit dependent on Favorable Exchange rates or whether it is centralbank policy. Im not too concerned about currencies, because yes, it is true, there has been a fairly Significant Movement in the euro dollar in the last few months, intoutting it in perspective, historically we are not that off that levels that europe that has been used to compete with in Global Markets for a long time. So, yes, it is a bit worse to compete at 1. 20 but europe has been used to 1. 50 a a few years ago but so im not too concerned. I think Central Bank Policies and how central bank will manage to get out of the very loose Monetary Policy and q. E. That has been with us for a long time now, and for which market has been used to it, i think this is going to be a challenge. And i think that is where i would see most risks in terms of how Central Banks manage this process. Francine for your business or also for the asset manager business . It means possibly more liquidity, more volatility which makes markets more interesting. Yeah, i think actually for the Asset Management business, we launched a company a bit more than three years ago. I think this is a fairly interesting environment in that business. There are a lot of changes but it means opportunities. You know, if you are flexible know, therehink you are plenty of opportunities. Clearly, managing capital in a very low Interest Rate environment is very challenging. It is challenging for everybody, and i think theres a business there. And i think there is added value if you have the right ideas. Or bade is it too good for you, we see consolidation. I think there is clearly going to be consolidation. For some, the Business Models is going to be a big issue. It seems to me that a lot of people are not ready for it. Thinking that they should happen january 1 next year. I still see a lot of confusion in the number of francine and the pricing . In the prices, research and how people pay for that and how banks will position themselves assetl research and how managers will charge or not their investors or absorb that cost. I think that is a bit still unclear. Francine are you ready for electric cars . Does that impact your car parts business . Definitely will. I think electrification in the car industry is a major trend. I personally think that the tim going to my opinion is be a bit longer than what some people expect. I think there is a lot of enthusiasm today, both from investors and Capital Markets as well as a lot of announcement from carmakers. Know, this is a big opportunity but also a huge risk for those that have legacy businesses that have been built and capital and technology that you know could become obsolete in a matter of a few years. This could be a huge change and this is also a challenge for suppliers and components as we are. But as always, also, it is also an opportunity. So, we are prepared for it and we are getting prepared. I think we will have ample time to adjust. I think theres still huge al challenges to reach a significant penetration of pure evs. And so, in my opinion, it is going to be more, take more time. Francine are we going to have electric Driverless Cars . Kindiverless, the the of deal that will take a longer time . Are we jumping the gun a little bit . I think so. I think definitely technology is reshaping a lot of industries. I think the car industry is certainly going to be hugely affected over the next 20 years by changing technology and we have seen this already. I mean, the Electronic Component of a car today as opposed to 10 years ago is just, you know, on comparable. Un comparable. This will continue and accelerate. To believe that we are going to have in large cities Driverless Cars tomorrow, i think we are not there. Francine thank you so much. He stays with us. We will have more and talk about italy and the reforms there and what that means for the companies affected by possible antiglobalization mood. We will discuss that next. This is bloomberg. Francine this is bloomberg surveillance. It is time for your data check. Mark 10 years ago, Northern Rocks request for emergency funding sparked the first run on a british bank in 150 years and helped start the crisis that push the ftse down 80 . With the help of government bailouts and the emergence of new challenger banks, the market value as you can see from this chart has recovered to 300 billion, similar to 2007. That green line is the index value. The day before the Northern Rock run 10 years ago. Shares up by 11 . The clothing retailer upgrading its forecast for full year earnings today. It has improved product ranges. Its bouncing back also from a difficult period. The chief executive has the acumen investors hope to steer through the uks secondbiggest clothing retailer, a pretty difficult position because investigators are witnessing the squeeze on disposable incomes and this growing tendency for brits to spend more on experiences than fashion. Its rallying today, up by 11 . Boe in the few hours time. Will there be a divide . Two voting for rate hikes, will it be three . What is going to be the impact on sterling . This is the british pound index. As you can see, is rising for the fourth day in five. On to it had the highest level since august 2. Since falling to that threemonth low in august. Has plunged 14 since the brexit vote. The record low for sterling index was october after the brexit vote which represented an 18 decline post june 23. In sight for the uks bond market, excel or inflation is eating into returns. This is real yields. This tells a picture of what is happening to the u. K. Bond market when used about inflation you have real yields at the lowest level since 2011. Its been a fascinating week. Inflation at the highest level since 2011. Relal pay is 4 . The boe has a real quandary today. Francine they do have a real quandary. It is kind of like an interesting thursday when it comes to inflation, boe and of course, possibly fed expectations. Lets get back to marx was a conversation with the chairman of chir group lets get back to our conversation. We were talking about the fact that you are more optimistic than you were in the past about prospects for growth in europe and your Asset Management business. What is the biggest unknown . I know you have various industry groups. Operate inthink we very different businesses that have different cycles and that have very little correlation between them, which is the whole purpose of having a portfolio, a diversified pull fo portfolio. I think one of the issues we have is exposure to the domestic economy in italy, because by r businessesf ou tend to be local, one is media and the other is healthcare services. Those are not businesses you easily export. And so, most of our business is in italy. So, we are tied to the performance of the domestic economy, which as you know, has been lagging the rest of europe for the last 10 years. And i think this is, you know, mostly due to the fact that there are Structural Reforms which have not been carried on as they should have. A diversion led to result in terms of the economy and the Growth Prospects for italy compared to some other countries. And i think, you know, the cases of, germany or even the case of spain, which is more similar and more comparable to italy, show that whenever you force play and decidedly attack those structural issues and implement those reforms, you can reap significant benefits in terms of gdp growth, employment, and therefore, consumption. And i think this is one of the issues that we have in italy which is were late. Francine is italy ready to be reformed . Everything comes with a political tinge. You have to have a country that wants to change. So, no matter who comes in power in the net selections that have to be held by the end of the First Quarter of next year, will people want the change that is good for the economy, or is there concern that they are just fed up . Rodolfo a good question. There is a difficult answer to that question. I think, you know, it seems that there is quite a lot of confusion today in terms of what the outcome could be because, know, it to polls, you might be the case that nobody, none of the three large blocs will have an absolute majority, and therefore, be able to form a government and basically govern. And so, the risk is a coalition government. And as it goes with coalition governments, you tend to choose the minimum, and denominator and basically try to smooth aplans and programs and that is not necessarily conducive to, you know, think again reforms. Francine you need the appetite for it. Lets go to the medical business. You were telling me in the break impacted bynt get budget so messed but do reforms in the medical system in italy, will have an impact on that unit . Rodolfo yes, i think we are in a regulatory business. E regulation in italy is done at the regional levels. There is not really a National Health care system in italy but regions 20 plus Health Care System which is funded locally and where the rules good decided locally. So, typically, tariffs or licenses or authorizations, all this is decided locally. So, what is very important in our market is to choose wher eyou want to go and where you do not want ito go, because not all are born equal and there are some pretty significant discrepancies between, we have built this business from scratch in the last 15 years, and that has enabled us to pick and choose and decide the footprint in terms of Geographical Presence that we thought was ideal. And the business has developed very nicely. Clearly, capitalize on aging population and the growing need of some sort of, you know, services for that population which tends to contract chronicle illness or become nonselfsufficient and that really creates the need. Francine very quickly, and we are running out of time, but is that the one that will grow the most . 1. 2 children for family. It is the lowest for a young population. Rodolfo we are one of the Oldest Country in the world and we are aging fast, which is bad for a lot of things but for this business good. And this actually one of the reasons why we decided to build this business back then. So, were pretty, you know, pretty constructive and pretty excited about this business. There is still a lot of fragmentation. So what we are doing is consolidating his industry and we are growing the business by internal growth as well as by an external growth, and you know, we see a lot of opportunities to grow that business. Francine thank you for your time. The chairman of cir group. Will saudi arabia be forced to postpone the ipo of its state owned oil company . We go live to the middle east. This is bloomberg. Francine you are looking at live pictures of the chancellor of germany Angela Merkel are addressing the frankfurt motor show. When you look at the strength of the economy, as long as you focus on the campaign and the germany goes to vote on some 10 the 24th, is of course on the emissions scandal. Interesting her comments. Anything that comes out of that we will bring it straight to you. Lets get to the Bloomberg Business flash. Sebastian european car sales growth accelerated in august. And renault won with hatchbacks. More than double the rate of growth seen in the previous two months. Storms led by hurricanes harvey and irma will probably wipe out Third Quarter profit and threatening the companies ability to meet the earnings target. The Worlds Largest reinsurance had given proper guidance between 2. 3 and 2. 4 billion euro s. Martin shkreli has been put behind bars after a judge revoked his bail. Offered a bounty for Hillary Clintons hair. Three convicted charges. He faces 20 years on each. Arabia saidw, saudi to be preparing contingency plans for possible delays to the initial Public Offering of its state owned oil company, according to people familiar with the matter. Sale is stillial scheduled for 2018, the timetable is looking increasingly tight and could be pushed into 2019. Now, the company says the ipo remains on track. Dubai. Joined from i read in this morning, and i was saying, wow, this is quite a big deal. What do we know about the drivers of this possible delay . H, saudi aramco is the crown jewel, the biggest and most important piece of the broader saudi store. Fast tracking reforms, and this is an integral part of that. Theyre fact that there could be a possibility there might be a delay, that is a setback or would be a setback for this government trying to put a new face of saudi arabia to Foreign Investors from around the world. Whats causing all of this . Our sources tell us the fact they have not chosen in exchange at where they are going to list, its a bit of a problem to remember there is a cascade of revelatory and preparatory work that needs to be done before they can sell the shares. They have not done that yet and that is what is causing the delay. They have chosen advisers for the ipo and they have been independent Oil Consultant for the ministry but, again, no decision has been made yet as to hwere. Francine is this a credibility problem, if you delay it or because it is such a big deal, investors will not want a part of it no matter what you do . Its definitely a step back a little bit. A lot of it is going to be tied down to. Who is going to give them the best deal theyve been talking to the nikkei or the new york and london stock exchanges. It is something we might get a decision perhaps at a conference in october but, again, the fact that they are drawing up contingency plans shows you that it is perhaps a lot more difficult to list a company with a possible valuation of 2 trillion. If you take 5 of that, that is 100 billion. The size and scale listen to this four times the size of whichibaba ipo in 2014, was 25 billion. Again, not much room to move because they need to deliver on their promises. Francine it is amazing. The size and scope when this thing is actually huge. Thank you. Now, in the meantime, Angela Merkel is looking at the frankfurt auto show. Matt miller has been covering that for us. Angela merkel making the Diesel Scandal one of the linchpins of her campaign saying much confidence was destroyed in the Auto Industry and she says the industry must do something to resolve the crisis. Tom keene joins us in new york. He has a couple of things to say about banks. Meaningout regulation, Central Banks. Itts boe day. This is bloomberg. So we need tablets installed. With the menu app ready to roll. In 12 weeks. Yeah. The world of fast food is being changed by faster networks. Data, applications, customer experience. Which is why comcast business delivers Consistent Network Performance and speed across all your locations. Fast connections everywhere. Thats how you outmaneuver. Sluggish wage growth. We get the Rate Decision in a few hours time. Savvy setback. The latest on what could be the worlds biggest share sale. Good morning, everyone. This is surveillance. Im Francine Lacqua. In new york is of course tom keene. It is a big day when it comes to how you measure inflation. Tom beginning in six days from today. Thursday to wednesday. The fed meeting next week. One of the themes is the inflation conundrum out there. It is great to have davide serra with us this morning. Francine first lets get to first word news with taylor riggs. Taylor kim jong un s reregime threatened to use a Nuclear Weapon against japan saying the country no longer needs to exist. Japan called the statement extremely provocative. President trump has blocked a hinese investors from buying latticesemiconductor. Democratic leaders in congress have a tentative deal with President Trump on the socalled dreamers. It is a law that protects children from deportation. And the investigation into russian influence on the u. S. Election now has what is being called a redhot focus on social media. Looking llers team is at facebook and twitter according to people familiar with the matter. 2700 news powered by analysts. Tom thanks so much. Quiet day. Lets look at equities, bonds, commodities. Crude getting up. That is american crude getting up near 50 a barrel. Next screen. I want to single in on the 10year yield. 2. 19 . Still migrating, a higher yield in the last 24 hours. 11041. Er as well up to francine further signs chinas economy is cooling. They are trying to figure out what it means, whether it mpacts markets, whether lick kidity goes down liquidity goes down interest here. Im looking at pounds versus b. O. E. Dollareuro because of u. S. Inflation. Tom the inflation conundrum. Lets tie it into the cleveland indians. It is extraordinary for our global audience whats happening with the Baseball Team the cleveland indians. They have won 21 games. That brings to mind my favorite inflation series, the red line here. The cleveland c. P. I. A core c. P. I. But with better math than the white line which is the regular old vanilla c. P. I. What every listener knows in america, maybe like in your united kingdom, the inflation we really feel is higher than the kind of inflation that the fed measures. You see that with clevelands c. P. I. Nicely above 2 . Francine the figures we had from the u. K. Put back the conundrum for the philips crew. Handle such markets. The situation facing mark carney is complicated. Inflation is running near a fiveyear high. Wages are not keeping pace as fed officials get an update on inflation. All of this, the conundrum. How should Central Banks look at inflation . Our guest host, davide serra is here. Always cool to speak to you. Especially on a big day like today when it comes to inflation. Are Central Banks looking at the right thing . Davide i think Central Banks have been looking at the right thing. Lets be clear. You know, without the fed, the b. O. J. , the b. O. E. , the e. C. B. , we would not be where we are. We can talk about full employment. They had the courage to step in and do what was right. At the point where governments were probably lost in which action they needed to take. Now the key question is are they doing too much . And the point is government should have stepped in. Do reforms. Where they had the opportunity for proper investments. Here unfortunately were in a situation where that was lack of leadership in terms of government, putting forward progress. In the u. S. , congress, both houses, you know, the same in england with brexit. As a result, are they keeping the pedal to francine also are they measuring things . Are we underestimating the huge transformation that our countries went through . The fact that were always on our phones and there is a sharing economy. Davide i think that is part of it. Most importantly what we need to consider on the medium term outlook. It took about the whole of history. 100 million people. 1,800, the first one billion people on the planet. Were now six, seven. Over the next 30 years, were adding 3 billion people to the planet. Were going to have every more human beings than what we had in the whole of history. Thats inflation. I can tell you that. The issue were facing, between chnology and transformation, italian inflation within the next 2030 years will be right. Tom i look at the dynamics and ambiguities. The different dynamics pushing against each other. What is it looking at . Currency . G. D. P. . Negative wage growth . Which is the factor that is really front and center . I think it is for bank of england, they are a in a because brexit is clearly weakening the economy. Has added uncertainty. At the same time, the pound shock is feeding into the inflation that might be temporary. As a result what could well happen is ultimately their decision is to wait. Having said so, our view is with gilt, shorter inflation and is rising of populists, what going to happen in this country, they will have to to keep happy. It is just a question of when, not if. I think markets are way too complacent. Francine all right. What is the one thing davide that on the markets now . Davide in terms of . Francine are you worried about the level of bonds . Is there something that youre uneasy about, symptomatic of something bad happening . Is it just distortion . Davide i think it might be the bigger distortion, Central Banks print at 40 billion. That is a huge amount. About 20 of g. D. P. Has been printed over the last seven years. Every month branks printing an extra 100 million dollars. 10 billion bank of japan. 10 billion bank of england. This is a huge stimulus still today at the time where evaluation in every asset class are high and we are extremely worried about the bond market. You have situations where you are going to get a shock. I think people are way underestimating it. The reason they are forced to ke risks, assuming the Asset Managers are charging fees higher. Basically they are stuck. They are forced to play. Francine do algorithms play in the situation youre describing . Davide unfortunately this has been exasperated. Because to e. C. B. Sorry, because the Central Bank Action has lower volatility that are free asset class. You have the overall fixed income market and equity on top. At the time where the volatility of the first pillar, the public debt has been crashed, inevitably the investor looking to lower the volatility, this in particular from c. T. A. s. They are selling volatility in every asset class to levels that are ridiculous. Sooner or later youre going to get a shock. I think this is going to happen in currency, bonds and equities. Tom a great chart from our london desk. Thank you sop to charlotte for killing with this chart of the negative 10year gilt. I wasnt aware of this. I love it when our reporters come up with killer charts. Here is the 10year, here is 2007. Down we go, up we go, here is brexit at zero. Here is a massive negative real kingdom the united 10year. It is not a normal u. K. Financial system. Davide ill tell you why that negative yield cannot last. Consider 100 the capital that has managed and traded out of london, about 40 , actually has european, continental european, with brexit, youre going to get an unwind. That means the liquid any the u. K. , the needs to be gilts wont be required to buy gilts. What are we going to keep . Were going not going to keep gilts. Selling off u. K. Assets. Replace it gilts, to with more liquid assets on the continent. This in my view is underestimated by market participants. Francine thank you so much. Davide serra. We have big breaking news from the u. K. The u. K. Government has decided to refer the deal to regulators. We heard from them yesterday in parliament. The reason she wants murdock to be under further scrutiny. That means we dont know whether the deal which is worth 11. 7 billion pounds will go through. It is the biggest investigation into the record of murdochs as owners. Well have plenty more on that next. This is bloomberg. Francine this is bloomberg surveillance with tom and francine from london and new york. Economic misses reported on today. Something is doing the rounds in washington, especially in the corridors over the white house. This is a fact that President Donald Trump has blocked a chinesebacked investor from semiconductor. Lets gets more on this with our Bloomberg Business correspondent stephanie baker. Also staying with us, davide serra. This is actually excite a big deal. Talking about a possible trade war with china. How will the chinese take this . I think they are taking it badly. We have seen it given the comments coming out of china overnight. This is an interesting deal because the committee on Foreign Investment in the u. S. Is this multiagency panel that looks at foreign buyers coming into the u. S. It is rare that it gets to this point that they appeal to the president to overrule decisions. It never a president in the last three decades has not overturned a ruling. It is unusual that it got to this point but what we know is they have been scrude scrutinizing deals from china and russian buyers, particularly since the Trump Administration came in and that in many cases, buyers walk away before being rejected and there by granted a security risk. Why the company decided to push this to the limit is curious knowing that it would probably be shot down. Tom steffi, i want to switch gears if we could. The dinner last night, which is all the rage now in waking america, i would suggest was the oddest dinner in history. I have to go back to the 19th century to figure out, what is your take on what republicans are doing right now. How do they respond to a president wining and dining with Speaker Pelosi . I think they are in a slight state of panic. I think trump has decided, it appears if he is going to get any of his legislative agendas through, he needs to work with the democrats and he is striking a new kind of bipartisanship that no one was expecting. They are in the same boat as we are. They dont know what he is going to do next. Tom they dont know what he is going to do next. Have you gleaned anything from the internal debate at the white house . Im thinking last night they are having this beef med alon and spinach and probably three scoops of ice cream. Gary, as a democrat has to be spinning, that doesnt begin to speak of republican leadership. It is not a coincidence that you have steve bannon and sebastian leave the white house and you now have trump striking a new tone of bipship and a willing describe bipartisanship to work with democrats. He actually does not have that mun much in commone common with them but many people have commented he has more in common with Chuck Schumer than he does with them. I think republicans should be prepared for trump to shake things up and perhaps put pressure on them to reach across the aisle. Francine a little bit like surveillance. You never know what tom is going to do next. Tom, when you look at the u. S. Economy, davide and the need of President Trump to get china onboard to deal with north korea. Do markets have too much of their blinkers on when it comes to Economic Growth because over the Trump Administration . Davide we think Trump Administration, look at trump, the market consensus was it is oing to be a disaster. U. K. Say as a result, on a global basis, we are overweight dollar. The size over the u. S. Economy and u. S. Markets, extremely high. As a result we think it is vulnerable. Particularly the tax space. You need to consider just by apple, facebook, google, they pay of the revenue and zero tax. A tragedy of the european union. Luxembourg and holland and just set up and sell across europe nd pay zero taxes. As a result i think were getting these Companies Might get taxed and as a result lower earnings. It could be a risk. Francine thank you. Well get back to that today and talk a little bit about the Swiss National banks. Coming up in the next hour, well speak with the former c. I. A. Director. This is bloomberg. Francine this is bloomberg surveillance with tom and francine from london and new york. Talking about havens, currencies. I dont know where you go into when there is risk out there in the markets. Our guest, davide serra. Davide, the dollar is now biggest safe haven if something goes wrong in the markets . Davide i think in terms of asset class, the biggest safe haven remains the treasury in bonds. The reason is the question of a combination between which assets, banks and insurance need to hold for regulatory purposes. As a result at the time where you have so many algorithm and computers making investment decisions. So i think the ultimate risk remains u. S. Treasury and bonds. Francine what will happen to treasuries from here on . Do they stay at these levels . Davide i think u. S. Treasuries, it depends. I think the fed, when you have such a low level of unemployment and growth is coming back, inevitably my view, youre going to have the fed following in its and as a result, i think u. S. Treasury are likely to be closer to 3 on 2 to 3 . It is it is a political shock. The asset goes back to u. S. Treasury because of size, liquidity and basically forces the buyer out of the regulated world. Francine thank you so much. Davide serra stays with us. Well talk a little bit more about some of his investments and european banks versus wall street. Coming up tomorrow, an exclusive conversation with jack ma. Watch alibaba, the global disruptor airing friday 8 00 p. M. In new york, 7 00 p. M. In london. This is bloomberg. Tom bank of england. We do that at 7 00 a. M. Wall street time. I dont know what time that is in london. Ill ask carney. An important day for the bank of england. Way out front in the conundrum of wages. Lets go over to the theme of the moment. Forget about Governor Carney. That is the revolution on wall street and the city. In london, folks, it is called and davide serra has seen both sides. You worked at Morgan Stanley years ago where you made money selling research to the street and there are others on the buy side who give the money to the sell side. Who is going to win the battle . Davide first of all, i think it is looking at the wrong problem because you see tom, if you take a Global Market cap, which is in billion. Of 53 today when someone invests in an Asset Management in europe, made 100 the overall cost. 66 . 2 3 of distribution costs. Here youre paying a salesman. The production cost is about 33. You look at research of the 33. Youre looking at less than three. Unfortunately here regulators are taking on something that does not matter. They shuled look at the distribution costs. Tom i know it doesnt matter but the c. F. A. Is out there and to people, this is a huge deal. Are we going to see a reduction of head count . Comp or both . Davide the smartest people are going to do research. Secondly, youre going to see the brighter people on the Asset Management side. And third, what youre going to see is the cost of research dropping. And a bifurcation. Those that stay in the middle and are probably going to keep seeing asset erosion. Francine you could argue that the big banks will have to do research inside instead of buying it from outsiders. The best Research Analysts are paid extra bucks but will almost reluctantly come in house. Davide the best Research People are going to move on the buy side. I used to be number one investor in my sector. Francine it is an advertisement, tom. Davide see the Research People moving in the act i ever sides. The problem of large barnings is that if you have a Great Research guy that knows how the invest, with doddfrank, you cannot deploy capital on the ack of that. You zpsh you want to sell that idea, i dont think many people are happy to pay for it to tell it to everyone as a result. Thats how i think now, look at the distribution costs. They are tackling 3 costs of the product and they are totally ignoring 97 . Tom how miserable is Alberto Gallo . How miserable is Alberto Gallo coming from r. B. S. Over to you . Davide i think alberto actually looks five years younger. [laughter] being an employee at the bank of scotland. Francine i think well have to ask him directly. Tom very good. Thank you davide for a wonderful discussion. This story is not going to go away. There are other stories in new york city with our news. Here is taylor riggs. Taylor president trunch is contradicting some of his fellow republicans when it comes to tax reform. He wants them to benefit the middle class and not the wealthy. Next week, british Prime Minister theresa may takes her brexit firm offensive to italy. She said the u. K. Can still work closely with the e. U. After leaving. Meanwhile the chancellor said they have over the super vision of Financial Markets. Later this month germany decides whether to give chancellor merkel a fourth term. There is talk the left leaning green party could join a grand coalition. Not good for the country on the longterm to have all of parties are asked to what else is possible . What we need to do is having serious talks to see what is possible and what is not possible. The german election is september 24. Global nows 24 hours a day powered by more than 2700 journalists and analysts. Im taylor riggs. This side bloomberg. Tom . Francine . Francine Mario Draghis attempt is falling on deaf ears as investors turnbullish. Attempts to exit the q. E. May result in strong currency swings. Still with us is davide serra. Elcome to the program. Research people and the media trying to make something out of that . We had talk of currency war soigts before. If you look at where currencies are at the moment, less in line with where they have been for quite sometime. We dont have extreme evaluations. Even if you look at many emerging markets as well. Francine the concern of the euro is it is not the same level. How do you calculate the kind of the fair value . It is not just a problem of calculating it for different countries. I dont think there really is a well defined or well accepted definition of fair value itself. I think you can get an average of several different measures. There are several other Real Effective Exchange rates. Relative to a long run average. If you take a few different measures altogether, we come up with an estimate around 125126, the euro dollar. That is not to say tom continue. Continue. Please. I was going to say that doesnt mean we should be at fair value now. Clearly the u. S. And it just gives us a sense whether where the long run dollar would be. Tom this is one of the most extraordinary charts in the bloomberg terminal. It is from the bank of england. You know this chart. Way back in 1992, george sorrows and he collapse, soros, the collapse. Here is the lehman low. Up we go. Brexit. It is absolutely stunning to me that on a tradeweighted basis, stirling is basically back to the time of george soros claim. What happens to carney if sterling breaks lower . I think at the moment youre seeing the passthrough from Priest Exchange rate weakness. Sterling has been relatively stable since adjusting to the shock of brexit. S we go forward, it is not were not going to see much Exchange Rate francine are we far away from Central Bank Coordination . The fact that there was a coordinated hawkish davide need to consider that the first discussion about currency war is when in 2008, the fed decided to print money and devalue the dollar. Euro was 1. 6. So basically got devalued. Now when the central bank started printing money, currency is a relative value. Everybody had to play the game. Today every central bank of the g7, it is about 20 of money printed. Is it better to start tapering and then hike rates or do we keep on playing the game . I think the negativefect of keeping on printing the money is not going to make you any healthier. In england, i think the key issue is it is better to let people pay for the cost of brexit by devaluing the urrency. The global u. K. Consumer is back to an alltime high. If you start hiking rates, youll have lots of people defaulting on mortgages, credit cards and as a result politically that will make everybody say brexit wasnt the right idea. Basically it is better to and et them eat less. Francine maybe that gives us a little bit of hope of what they will do next. In terms of currency, what is your favorite . Euroyen or something more obscure . Like naqi sake . If you want to get a little more obscure, the longterm, one thing we have been looking at closely is housing around the world and start with Central Banks and which Central Banks are able to hike rates and which ones will run into trouble because over the stretch of their Mortgage Market. One we like there is naki. You take oil out of the equation. You actually have in canada a Mortgage Market that is more able to accommodate high rates than norway. Tom i want to go back to something you said before. It is profound and how people flunk economy 101. You mentioned a one off adjustment. Ill buy there can be a oneoff brexit adjustment and then we Governor Carney have that luxury . I think if he looks at the wage data and the lack of wage inflation, he should feel fairly comfortable this is not the start of a wage spiral. If you recall in japan, when we first got the yen devaluation when abe was elected, he did see temporarily a large increase in inflation. Of course they quickly faded. I think the central bankers are wise enough to know they cant influence inflation through higher Interest Rates if this is really just a oneup adjustment to the price level. Tom thank you so much. Davide serra will continue with us. Get started in the morning with us. We thank you for that worldwide. Particularly in america, coast to coast, begin your day on radio, captured in your car with robert moon and karen moscow. They do bloomberg day break to get your day started. Today it really works with a dinner last night at the white house. This is bloomberg. Francine happy v. O. E. Day. We must talk about banks. If you look at some of the stress tests, we need to look at german and italian banks. Under pressure from regulators to strengthen its finances, expects to return to profit in 2018 as it boosts capital by selling assets and shares. It is last significant italian lender with major issues to resolve. Lets get back to davide serra. Davide, you really focus on the banks. You probably know italian banks like no one else. Are there second or third tier banks that need to be dealt with . Davide i think as i said here back in december when you had the italian referendum. In my view it would have been resolved and it has resolved. Youre looking at an accumulation over the stock. The capital about 50 billion euros. 20 billion from credit. Thats the most important. By 20 in the data, billion. 20 billion from unicredit. I think here what happened is if you go back when they were set up, italy spent zero public money on banks equal to france. The average capital injected has been 6 . Almost 40 for the u. K. And italy was just at doing its own job. Here with the capital injection, partly by state, the overall ost was less than 3 of g. D. P. The beauty now is that the fact that it is stable. Consolidation. He needs to cut costs. Carriage is one of the last banks to be dealt with. It is very small. I would call it i come from that region. It is a small region. Looking at a small amount of capital. The new c. E. O. Is comp at the present time, good. As we have seen, he can raise capital. Tom too big to female. What does Deutsche Bank do in the next 15 months . What does john crier need to do to get Deutsche Bank going . Davide john has done a terrific job. E took what i would define a casino that has been going on for 3020 years and trying to run a bank with decent businesses and Risk Management and great lient franchise. Five, sevenyear adjustments. The Capital Position is sound. The strategy is clear. He will address brexit. As soon as the rates in europe are back at about 1 which i think is going to happen over the next three or four years, youre going to get a return of about 8 sustainable. I think actually john and his Management Team are doing a terrific job. Over the last 20 years, Deutsche Bank never made the single euro profit. All the profits they made were fake because they had been losses. Now profits they are making are sustainable, clear, legitimate. The bonus Compensation Structure is more than fair. I think on good footing. It will take a while. For a good while, for 20 years, it was creating book value. They are clearly a few years ahead. Tom the other idea that we have here is a real study in september of what the city will do. Do you really buy the idea that management, that professionals will move out of london banking to other cities . Davide it depends on which side of brexit we will have. If you have a hard brexit, lets say the swiss model, today you take a banker that comes here with a statement he goes to jail. Criminal. It depends on laws. Banking is a regulated industry. It depends on what the law will allow. This should not be underestimated. 40 of activity in london has to do with assets and clients on the continent. We are doing Service Transactions in london to deal and Service European clients. If this is deemed illegal, they will have no choice. People will have to move. It is called law. Francine there you go. Speaking of law, you can put dwose davide as we speak. Thank you so much. Davide stays with us. You can ask them hard questions by click underneath the video screen and tom and i will ask him those questions next. This is bloomberg. Francine this is bloomberg surveillance. Im Francine Lacqua with tom keene. Lets go to the middle east. Saudi arabia is said to be preparing contingency plans to delay the i. P. O. On the oil company. The partial sale is scheduled for 2018 but the timetable could be pushed back until 2019. The company says the i. P. O. Remains on track. Lets get straight to dubai. How much of a credibility issue would it be if the i. P. O. Gets pushed backs . It would be a major credibility issue. You have to bear in mind that it is the crown jewel of the saudi reform program. Efforts over the kingdom to present a new saudi arabia to the world and to Foreign Investors specifically. The possibility that it could get delayed is driven by what our sources tell us, the lack of Decision Making when it comes to where to list under the nikkei, the new york stock exchange. That means all the paperwork that needs to get done before they can sell shares cant be done. Tom the wall street journal leads today with the turmoil of the family of saudi arabia. We interviewed the prince of turk dwri. What is the turmoil to have family . Will they shift as conservatived a some suggest . What were seeing right now, there is growing speculation there could be an imminent transition of power where he takes over from his father. That kind of power consolidation is where the tension is coming from. Were seeing a higher amount or a larger crackdown over the last few kays. That could be laying the ground work for another political transition. We already had one. This family is putting its stamp on the future of saudi arabia. Francine thank you so much. That is one of the stories we will follow closely for the next couple of months or maybe years if it gets postponed. Lets get back to davide serra. We just got a viewer question. A couple of them. Do you expect the e. C. B. To start tapering and what will that mean for European Asset prices . Davide i think the e. C. B. Will start in mid 2018. That means basically 60 billion a month. I think they are going to start shrinking. 40 and then lower and keep on monitoring. Thats what i expect. And what does it mean for European Asset prices . That means probably likely to be slightly stronger euro. I think upside up to 113 through next year. Secondly, this is very positive for european financials. It means steeping the yield curve. Tom davide, thank you so much. Davide serra in our london studios with Francine Lacqua. Were going to do this again in another hour. Coming up, richard of pimco will join us. The professor on one of his close studies and that is germany. In addition well go to kevin and the dinner the president had last night. With Speaker Pelosi and mr. Schumer of new york. Lets look at Chuck Schumers new york this morning. This is bloomberg. Tom last night after dinner and indigestion for republicans, the president agreed to quickly advance daca legislation. The president made nice with democrats with schumer and pelosi. No report of general kelly dropped his dessert fork on purpose. The gop awaits this morning outrage. Kevin cirilli will join us in one hour. The bank of england will consider real wage growth and the politics of brexit. And in north korea, they say that america will turn to ashes and darkness, but a great interview on rhetoric and what we know about u. S. Imperialist aggressors. Good morning. This is bloomberg surveillance. We are live from our headquarters in new york. Im tom keene with Francine Lacqua. Lets talk about the bank of england. It is front and center in america. How big of a deal of the bank of england meeting in one hour . Francine it is big because we had inflation figures. I am really looking for to speaking with jamie. We have to see if the and intion of the votes favor of a hike. Francine Richard Clarida will join us on interesting conundrums of our major Central Banks. Right now in new york city with her first word news is taylor riggs. Islor north korea ratcheting up the tensions after you hit with new united sanctions. Kim jong uns threatening a military regime. Japan called the statement extremely provocative. The first time in the last quarter century, u. S. President has stopped a foreign takeover on National Security grounds. President trump has blocked the chinesebacked investor for semi conductors. China said National Security reasons should not be used as a protectionist tool. Democratic leaders in congress if they have a tentative deal with trump on the socalled dreamers. Childrenprotect brought to the states by deportation. Investigation into russia influence on the election has a focus on social media. Special counsel Robert Muellers usedis looking how russia information on facebook and twitter, according to people familiar with the matter. Day andews 24 hours a more than 120 countries. Im taylor riggs. This is bloomberg. Tom thank you. On debt market, lets look at equity markets, yields, and currencies. Further steepening in the last 48 hours. Euro down under 119. Oil at 50 a barrel. Look at the dial. Look at the dow. 10 year yield, 2. 19 . Francine, im bored. Markets are quiet. Francine i am not board. Look at the rally we saw in risk assets. It is taking a breather. Either they are border they are worried about signs and chinas economy. You see movement, tom. You need to look at the market that are moving like commodities, including these metals. Pound, you c130 to. 02 looking at the pound, you see 132. 2. Carneyuation facing mark is getting complicated. Inflammation is running a fiveyear high and which is not keeping pace. Jamie, make me smarter. His inflation sticking are not . We think of inflation as a shock, pushing up prices. What we have seen and the latest data is a big boost from footwear and imported goods. That is likely to reverse in the it is nothingt the bank of england needs to respond to. This is not a wageled shock, but an external shock. Francine this is my chart of the year. It basically tom looks at and jamie is saying it is quite transitory. We have not good job numbers in for decades, yet there is no price pressure. There could be wage expectations. We know a lot about wage and inflation. Basis on that. There is a missing part of the puzzle. We dont know what both are expecting their wages to be. United . Ie, are the if the board makeup of the bank of england radically different from the fed board makeup. Or is there a distinction there from what we see today versus what we will see wednesday is thy . Jamie we see a very clear divide. It is a big split on the big issues. The fed is broadly united on the big issues. But the bank of england is not. We see two members who voted in favor of a rate increase. That is like a to remain the same at this meeting. We dont expect anyone else to join that party. So, i think the key uncertainty is how andy haldane people are concerned he might shift and vote for a rate hike, but he cited a weak wage growth preventing him for voting on a rate hike. That perspective has not changed. Tom jamie, thank you so much. One of the hallmark of bloomberg surveillance is to make you smarter with the worlds leading experts. What you need to know if you are swanson out in San Francisco and you ride up a fancy paper and you write a fancy paper. Ago, one of the seminole papers on monetary theory and the mysteries of this mumbojumbo. Richard clarida has led research at columbia and hold the shingle at pimco. What was it like writing that paper, which was the Foundation Citation in every paper that covered that . Richard it was quite exciting. We were not quite sure. I was at nyu that year and we wrote three papers that year. We knew we were onto something, but had no idea. Tom and it is always used with that word we toss out conundrum. What is the conundrum that mark carney faces today and yellen faces next wednesday is incorporated within the theory that is so under critic right now . Richard the key point about the conundrum, the similarities is the bank of england and the fed, a lot of what tries the economy is external. Policy ino a monetary the u. S. And the u. K. With a big global factor. Tom we are going this is a chart that Francine Lacqua tossed at me over cocktails eight months ago. This is straight weighted sterling. On the left is 1992 in the class of erm. England, the boom in and then down to go. In terms of degrees of freedom, this is the carney limitation. Jamie it did break. Because the u. K. Is an open economy, import prices have gone up. That is why there is a 3 inflation rate. They want to look through this because it is a onetime Exchange Rate shock. I think the tension is that they have to of said it. Tom francine, that is exactly what we heard in the last hour with rbc, this idea of a one off adjustment. How many people really buy that idea . Francine it depends if adjustment becomes a trend. Richard, why are we so focused on 2 . Tom good question. Francine because of the sharing economy, can we not say 1. 6 is accurate . Exactly right. The two Percent Inflation target, which is common across the world, is an accident. There is nothing magical about two. Also, the fed sets the target at 2 and does not give a range. Some of these decisions are a little bit arbitrary, but the important point is Inflation Expectations for the central bank. That is what drives the importance of inflation in Central Banks dont want that trading lower. Francine but does wage increase expectations one of our guests earlier said you need to feel that you are going to get richer through wage growth, otherwise it starts becoming selffulfilling. Richard indeed, you show a chart earlier about which is in the u. K. Are lagging inflation, and that means workers are taking a pay cut in real terms. From the bank of englands point of view, although they do not advertise it, they are willing to accept that one off reduction. But there will be a weight factor as well. Francine ok. Lacks change brexit negotiations . Or are they too far into the process that they cannot look at what the real economy is doing . Richard i would never tend to be an expert on brexit and i dont know who is because we are in uncharted waters. I think i said several months ago, the challenge for the bank of england is in part their monetary policies being held hostage by brexit. The are beginning to resemble. Tom i want to ask you a basic question. This is not some smart guy columbia giving you a lecture. Is the system rigged . You guys killed yourself thinking about a better social outcome from all of this economic mumbojumbo. The wood everybody sees his bullve qe and and equity market and an equity bull market boom. Richard what i would say is as and the of the crisis unconventional Monetary Policy, we have had a big reflation in asset prices supported by very low Interest Rates. Longerterm, we have not had that much delivering. Delevering. Tom Stephen Roach who invented Morgan Stanley economics, he writes is that assets is something a central bank should look at because it is a surrogate for all of the other dynamics you invented. Richard i think steve is right. He is not the first to make that point. That is not the only thing i would look at, but there is an insight you have, which is the way qe and low rates have worked is to reflate asset prices. That was the purpose and it delivered in terms of asset prices. It really hasnt delivered in terms of real wage gains. Francine richard, thank you. Richard clarida will stay with us. We have plenty coming up. We will bring you live coverage of the boe Rate Decision. This is bloomberg. Im taylor riggs. This is the Bloomberg Business flash. Apple is playing the role in king maker in the memory chip business. They are in talked to provide 3 billion in capital for a bid for the unit. That support led to toshibas understanding and a final agreement. Martin shkreli is going to gel. A judge revoked bail for his fraud conviction and jailed him immediately over a bounty Martin Shkreli posted on facebook for a strand of Hillary Clintons care. Hes still faces up to 20 years. The British Government has moved ahead with a review of 21st century foxs 15. 5 billion takeover for paytv company skype. The regulator look at foxs commitment to broadcasting standards and will look if the deal gives Rupert Murdochs family too much power. They expect the deal to close next june the 30th. Francine thank you. As we were talking about some of the standards needed by u. K. Media, tom said we should get a shot of toms phase. The u. K. Is committed to plurality. There you go. This is what happens when tom comes to london. If you are a u. K. Broadcaster, there is concern this bid, which is worth 15 billion. It accumulates too much power, but this is the first time, tom, that the murdochs are being investigated. The u. K. Believes in neutrality. You can have a channel that is very left wing and one that is very right wing. They are trying to figure out, this is what we talk about with media standards, if the murdochs are balanced in what they put out there . Francine i looked at the word vendetta. I was surprised it only went back to 1855. Is this a vendetta against the murdochs . Francine i dont think so. You are referring to regulators and working for a broadcaster in the u. K. , use the regulators are being very aggressive with people who do not comply. You have to have plurality and that is what they are looking into. Tom very good. Lets migrate back to a wonderful conversation that we were having with Richard Clarida of pimco. What does it mean for the market . It has been a great bull market. You dont the doom and gloom guys come out every friday saying the world is going to end and it keeps going up, and up, and up. To you have to build castro go to cash . Richard we are in that market, but we are also any market were a lot of good news is priced in. Investing is not just getting the macro call right, you have to get valuations right. At pimco, we are probably spending more time looking at valuations of iss of assets. Putting some of our resources into cash. Tom and what you can do in new per beach is go sell to san diego and hamilton. There is this whole economy of crime series in san diego that is killer. Look at this chart. This is like James Hamilton made this thing. This is an incredibly elegant chart about equity trends. For all of our viewers and listeners, can you stay on this trend, or is all of your radar up . Richard can you stay on the trend . Yes. But equities and a lot of assets are fairly valued. We are in a light stage. You have to factor in global expansions. But all equities are all driven by the last decade of quantitative easing and low rates. And big issue for markets, which we call pivot points. Tom what is so interesting. Francine, you are living in london. There is a lack of volatility. It is odd to say the least. Francine it is odd, but richard, do you really believe yields will go up . They are going nowhere. I dont know if there is a single event away from Central Banks opposing normalization that can give it that little, kind of impetus it needs. Richard in the case of the u. S. , the fed has hiked twice in the last four years. We will probably hear out of the ecb that they will begin to taper. We have had to rates two rate hikes out of the bank of canada. You are seeing a move away from accommodation out of major Central Banks. I think it is important to know we are still at a stage were Central Banks are not tightening policy. They are removing accommodations. It is very slow and very gradual, but the Inflection Point i think is clear. Tom Richard Clarida. I hope folks you have love this discussion on economics. Dont forget in 40 minutes, the meet. F england will business week this week is strong. Equifax, there is an uproar over equifax. Bloomberg businessweek goes deep on equifax. That is an important article. And francine troubles on the queen mary next week. Visa isan american easier than you think. Just ask francine. This is bloomberg. For those of you worldwide, it is no surprise. Over dinner last, we will touch on is the Kevin Cirilli, the president tweeting no deal with me last night on daca, the masses immigration issue the massive immigration issue. Goes on to say in a separate tweet, the wall, which is the under construction in the form of new renovations will continue to be built. This is the backdrop Richard Clarida. Forget does economic advancing an investment. You served in washington. Could you serve in this washington with this daytoday movement . Richard certainly, a lot of happened in the last 15 to 20 years. The advent of the internet is also changed the information sphere. But there is a lot of commonalities. We have had polarization really growing in this country for 15 to 20 years, so i dont think this is really dramatically new. Sometimet has been that we have had bipartisanship on key legislation. People talk about the reagan tax cuts. That was a bipartisan will, but that was 30 years ago. Tom the backdrop when we get to december, where will the fiscal stance be . When you buy to your managers when you write your managers, and is it a growing deficit to gdp . Richard obviously, we think there will be a fiscal package most likely next year. It could pass this year. It will initially increase the deficit. I dont think we talk about the deficit like we did years ago. The Debt Services costs are lower. Tom here is what we are going to do. Richard clarida with us and Kevin Cirilli will join us. Us James Woolsey will visit on north korea. From london, from new york stay with us, from washington. This is bloomberg. Francine this is bloomberg surveillance. Tom, you can see overlooking the isdge, a beautiful shot that very picturesque. Tom got that right. Francine here is taylor riggs. Taylor there are concerns about the safety of floridas 4 million Senior Citizens in the wake of hurricane irma. Eight patients died as a sweltering nursing home near fort lauderdale. Power outages could mean many for radiant could be without airconditioning for years for days. The forecast for Economic Growth has been boosted in france. Coincidenceappy that only a few months after president macron took offer, we are delivering this economic report. Mostly, it is about his reforms. His reform plan, his or form program. And also about the impact of the reforms of the previous administration. Once to make it easier for companies to fire workers and to limit the power of labor union. Takes heresa may brexit Charm Offensive to italy, speaking in florence argued that the u. K. Could work closely with the e. U. After leaving. Meanwhile, Philip Hammond says the e. U. Has legitimate fears over the future supervision of Financial Markets. Global news 24 hours a day powered by more than 2700 journalists and analysts in more than 120 countries. Im taylor riggs. This is bloomberg. Tom taylor, thank you. A phenomenal halfhour with Richard Clarida. Kevin cirilli in washington. The president is tweeting. There is a third tweet supporting the military people around daca. Here are the first to it a tweets here are the first two tweets. Alreadythe wall is under construction in the form of a new renovation. James woolsey with throw this out of the window. Kevin cirilli, brief us on the dinner last night. [laughter] last no food fights night, but it is fascinating because the reports we got last night, and some of the folks i talked with our texting with, suggested it was another solid meal. Another type of bipartisanship with the president extending across the aisle, trying to get a deal within the next few months on a host of issues. And then you get these tweets this morning that no deal was made on daca, the wall is under construction, and he just tweeted that he still wants to work with them on daca. Tom come on. Kevin, a lot of people want to throw him out. What is one to be the response of mcconnell and ryan . Kevin at this point, what you are going to have to do is wait and see in terms of what the president is going to signal. I think he is clearly signaling that she that he is really going to work with democrats if the republicans are not going to get on board and work with him. Tom one more question as we get to mr. Woolsey here. What is on your agenda today . My head is spinning on washington. What is Kevin Cirilli axa going to look for today and the september washington . You have to look at my, and ryan regroup and reload, and how they are going to lead the way and work with the white house on secretary mnuchin. They have been completely left out of the congressional news cycle the past week. The president into what the democrats. You sovin cirilli, thank much. We have had a wonderful conversation this morning with Richard Clarida on economics. Vintagere of a certain in america, you know what a Scoop Jackson democrat is. He is the closest thing we have to a Scoop Jackson democrat. 15 senator from Washington State come out of the trenches of oklahoma with great academics and a former cia director, james posey joins us this morning. James woolsey joins us this morning. Do withld Scoop Jackson this president . James would try to work with him. All of those are conservative dem of that. They believe that politics stops at the waters edge. As long as the president was taking steps up on policy that they could generally get behind, they would have worked hard with him. Probably far was from being a protectionist. He would have agreed with it. Tom is the Intelligence Committee undermining this president . James i dont think so. There have not been that many disputes about foreignpolicy issues or interpretations of actions by the russians. We know what the russians are doing. Theyre trying to dominate. So, i think there have been personality clashes, but nothing really serious. Is the president undermining the Intelligence Community . James no, i dont really think so. I think some back and forth early on occurred in which each side got a blister once or twice, but that is just washington. Madison puts madison put us together and kept is fighting. That is what checks and balances are about. Noise, halfling, disagreements. Francine are you concerned about intelligencesharing with other countries . I cast my mind back to when President Trump was in brussels, and things were said leading people to think that the u. K. And other countries would not pass information to the u. S. Like they used to. James i think the problem there is not policy decisions, it is the fact of the leaks. Some of the leaks in the case of britain and israel and other countries were very serious in a world of cyber. You can leak something that ends up being half of very seriousa problem, but i dont think it has to do with policy. It is an individual or two here or there that leak materials that is extremely damaging, but not a policy disagreement. Tom you gave a service to the navy over two decades ago. Servetus. Iral this is a mustread for those interested in north korea. A naval blockade is the best option to cut off north korea. The only way to keep the regime of violating human sanctions would be stranded naval blockade. He goes onto say this is the way north korea operates. Ports and the north coast of the peninsula and has ports in the far northeast of the country on the edge of russia. We know how to do this. Do you agree that the navy is the ultimate solution in impending the north korean economy . James it could be a feared within the context of the military it could be a feud within the context of the military. I am worried about the instability of kim jong un. We had two or three occasions during the cold war in which we came very, very close to going to work with the soviets. Soviet one case, one submarine captain this cannot be right. They are telling me the wrong thing and he turned away from it. We cannot push these things close to the edge. And especially if the president makes decisions really rapidly. Republicans and democrats and provided support and comfort to senator mccain in his run. When you look at the language we have seen in the last 24 hours, this fiery language of ashes and darkness, how does an intelligence guy like you distill this language from these adversaries . Tom its james its hard. As long as kim jong un is really that way, about disasters consequences for the west, the thing that comes to my mind that i am the most worried about, is they would use a Nuclear Weapon detonated and a satellite to create an electronic pulse and lockout electricity grid. People are having a hard time in texas and florida without electricity. Months andt was for you cannot get the grid repaired . Thing you are in a world of social disruption. Would be hard to get food and water, etc. And those kinds of threats that kim jong un comes out with get my attention. Tom you are going to come back with Richard Clarida and talk about the dynamics in europe. But we are going to come up with mr. Wolsey and talk about the u. S. Navy. We have had a huge response about the navy in the pacific. We are going to look at the fitness of our military. We are going to do that with James Woolsey next. After bloomberg television, you are on your commute. Kevin moscow, bloomberg daybreak europe. This is bloomberg. Francine this is bloomberg surveillance. We have to talk about saudi arabia. It is preparing a contingency plan for delay to the initial Public Offering of saudi aramco. The partial fill that company is scheduled for 2018. The timetable is looking tight and it could be pushed into 2019. Joining us to discuss this great story is bloombergs executive order over the reasons the for this to be postponed . They struggledng with his understanding just a difficult this is going to be. It is unprecedented with the company this size in this complex and the kind of ownership they have now is able to get to market. 2018. Rted in there is a possibility that if the timetable slips, it may need to be moved out a couple of months. Timetable as a figure out all the things they have to get done. Francine what does it mean for investors . Is there a credibility issue . If they push it, do investors look past the fact it may be delayed . I dont think the concerns investors had a week ago would have changed today. The issue is who owns the oil in the ground. The tax structure, the royalty structure, there is a general governance issues. The are sorting through the slowly but surely, but the key thing is the really important one is london or new york. Francine is that political . There is an element, but a lot of it is basic regulatory oversight. It will make a big difference if they are in london or new york in terms of how they structure that. Tom the real question about the finance and the politics of the nation. On our said, Richard Clarida of pimco. We will get to germany and the elections and a bit, but we continue our conversation with James Woolsey, the former cia director and his Public Service with the navy over two decades ago. For anyone who is ever put on a uniform, it must be stored in every to see the death and injury of these two ships of hours in the pacific ocean. Is a modern austerity of the military caused an exhaustion to the sailors . James i was there and the aftermath of vietnam. Ofwere starting to come out the fact that everything had been channeled dealing with the vietnam war. Wonsituation now is, having the cold war, a lot of people have felt that the government and the congress, you know, you dont really need a navy that much anymore. Lets take several billion away from them and put it here on that. What the navy and doesnt peacetime, the closest to what any service does in wartime. The navy gets right up to the point of dropping the bomb from the aircraft carriers. Everything else operates as if they are at war. They have a very difficult time allocating underspending on key things maintenance training, and so forth. It is not fair to them to say that way. Tom you are qualified to answer a question every american wants to know. Our drones a substitute for infantry . And is technology on a given ship or boat, is it a substitute for what the navy have to do. . Is all of this technology really a substitute . James no, but it is something of a substitute for satellites. It is something for a substitute for manned aircraft doing reconnaissance. Substituteionally, a for attack aircraft by using a drone to attack a terrorist in afghanistan, for example. As a partial substitution. Their 3 millionth mile flight on the predator. Millionth hour, sorry. That is helped a lot, particularly the counterterrorism side of things. Thatwe have seen a theory generals and managers about the president as a substitute for the traditional presidencies we have seen before. Do you buy the idea that general kelly, general mattis, secretary tillerson are a working government below this president given the daytoday cacophony out of the white house . James i dont think any of them are overreaching to try to take authority away from the white house. What they seem to be doing is background, all of which, several of them are marines, some military, they are doing they are doing a job they are doing an excellent job of helping things have gotten this oriented when things have gotten disorganized. Up they have tried to make with some decisions that have gone wrong. Woolsey, thank you for joining us. James woolsey, the former cia director. He will continue with David Guerrero on radio. Let me take about tv right now. I wantut clarida to bring out the ritas greatest hits. Come right over here. You click on that in there it is, tradeweighted george soros. Not bad. Francine this is bloomberg surveillance. Tom and francine from london and new york, counting down to the boe Rate Decision at the top of the hour. It is for the that the boe is grappling with the familiar tradeoff and something that might have to give suit on inflation, a rate rising rate rising on the rise again. Daybreak, bloomberg americas. I know you will be focusing on the boe Rate Decision, but what else . David we want to pursue the question of whether his bipartisanship breaking out of washington are not . We have been following with you and tom try to sort that out with the president and misses pelosi mrs. Pelosi. You are what you talk to rob portman and, a former senator of ohio. He is on the Senate Finance committee and he will help us sort out what this means for tax reform. And my goal is to figure out has to ask you about Scoop Jackson and herbert humphrey. Tom that is a great idea. David, i am begging you to ask the senator from ohio about the cleveland indians. It is extraordinary what they are doing. He has to be at the game tonight in cleveland. David bless you for that. Of course you know im a big Detroit Tigers fan. The tigers are losing again. Tom david westin, thank you so much. Lets go to the single best charge. This is fascinating. I will come over to the bloomberg and look at the 100 euros and bond issued yesterday. This is what happened to the 70th year bond when you bring up the 100 year bond. This morning, you are really happy with the bond worth 840. Down it goes. Richard clarida is here with us from pimco. This is a desperation for yield. For example, we want greece debt longer bonds to solve their financial crisis, but these are unintended consequences, and they can be unintended consequences for somebody as mighty as germany. Richard tom, it is important for your viewers to know that the big source of the demand for a 100 year bond is Insurance Companies and other investors who have a lot of liability. Depending on how the accounting treatment is, to them, the bond are not risky. Accounting plays a big part in the demand for longterm bonds and the underlying economics. Francine richard, are you buying any 100 year bonds . Richard i never comment on specifically what we are buying obviously, webut are a big part of the global auto market, but i will not comment on specific parts of what we are buying. Francine ok, but would you buy potentially, hypothetically a 100 euros . Richard i would not rule out anything hypothetically. What we tend to look at what we are looking at global duration, maturity of bonds, what are you going to get paid for . Your typically getting a higher yield by a shorter term bond, but you are taking a lot more risk as the chart showed yesterday. In investing, it is all about risk and reward. Tom your conversant with algebra and the simple dynamics of something as simple as ismo theory. Our audience does not care about that. But wait a minute, why would anyone buy a 100 year bond . The bottom line is that we are desperate for yield. What is the historical outcome with your expertise on germany of our desperation for yield . What are the bad concert dances as we are yield hogs and reach out, and out come and out . Richard the consequences for reaching for yield is taking on more risk, either Interest Rate risk of default risk. In essence, that is what global Monetary Policy has done. By driving down the rate of return on a risk less asset, you push investors into riskier assets. So far, this story has worked out pretty well, but the risk has not disappeared. Tom unreal. This has been a great discussion. Richard clarida through the hour with us. Francine, bank of england in four minutes and three seconds. I love our countdown francine i am really excited. I dont think we are going to get a hike. But if it changes the composition of how many people ask for a hike, that means they are worrying a lot about inflation. Tom lets look at sterling right now. 132. 07 on sterling. Stay with us, bank of england across all of our platforms. 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. Jon President Trump reaches out to Democratic Leaders over dinner. To push forward a deal on tax reform. Sanctions. Reacts to inflation,de risk to Downside Risks to growth, bank of england decision day. Good morning. A warm welcome to bloomberg daybreak. Rates unchanged at 0. 25 . The asset purchase programs unchanged as well. The target was 435 billion sterling. The bank of england, the eing scope for stimulus reduction in the coming months. The vote 72 on rates. We can cross over to london and bring in guy johnson, who was standing by and looking at this. G