Back of this. They decided not to go with the hawks. Hes always been on the precipice, he decided to stay with the pack. Despite that, because of the fact we have a majority talking about stimulus over the next few months, a reduction of stimulus over the next few months, sterling is big. It has been reasonably well bit coming into today. Not news that the bank of england is saying that the market is underpricing the future Interest Rate rises. Once again, reiterating that line. Why do you think that is . Will the bank of england followthrough on the kinds of things its talking about now in a few months . Guy everyone i talked to says rates are rational right now. We have an 80 probability that the bank of england will deliver a hike in february. 50 in november. The bank will execute on a hike fairly soon. Everyone says that kind of makes sense, but then you have a whole conversation about why its never going to happen and the bank of england is not going to be in any hurry within the next six months to hike rates. The bank of england is thing that markets are underpricing, but the markets have come a long way with expected rate hikes. Donttally, the markets seem to believe its going to happen. Jon lets have a quick conversation about the economic backdrop to all of this. The eroding slack reduces the tolerance for faster inflation. What we have seen in the data so far this week with the upside price to inflation and downside price to wages, unemployment kissed the 42 year low. Is this a central bank saying that on a women rate Unemployment Rate is a sign of Spare Capacity in the economy and the labor market slack is being eroded and the wage growth is just around the corner . Jon, we areically, at the point where inflation should be coming through. In theory, you should be getting inflation coming through at a rate constant where we are now in terms of an appointment. Its not happening. It is a completely artificial number, but nevertheless, policy works with a lag. You would think theyd be looking to years down the road and saying this is where we want to be and that some point its going to generate Wage Inflation. Cutuiti. To william from hes watching the net migration numbers. If they start to collapse, you may see a shock to the system. That could be the catalyst to drive wages higher. David they keep saying we are going to do something. Between keeping growth going and lifting inflation . By saying that will come off the they, morema are concerned about inflation than growth . Guy if they were to signal that they were going to be hawkish going forward, the pound would go up very sharply. People tell you theres a massive air pocket north of 135 on the cable rate that takes you all the way up to 150. If theres any indication that we will have a hawkish bank of england, you could see sterling rocket through that level all the way up to 150. That would solve the inflation problem. The flip side, it could hammer growth. They find themselves in a difficult position because they could get big outsize moods if they were to start hawkish and it would be hard to finesse that kind of process. Jon thank you very much, guy johnson. A nondecision at this point, but a decision to make in the coming months. 89. 56. Rling firmly higher by. 5 . In the gilt market, yields a higher across the board. , david kelly andkelly jeremy stretch. A firmer pound story in todays session. Seeing aity on the mpc tightening in Monetary Policy in the coming months. Why is that going to happen when we all thought they would move to focus on supporting output . Jeremy obviously, there are inherent concerns regarding the inflation over the medium run. The question is whether these expectations become ingrained. That is a source of some concern for the bank of england. Clearly, they still work with that presumption that we will see that labor market resilience leading through into an uptick in wages and they want to get ahead of that. The bank of canada also making reference to the lack of Spare Capacity and the inference that has in terms of potential inflationary pressure. We have to be mindful, there is that overarching history of brexit looming very largely over the outlook for the u. K. Economy. Stay the handle on the bank of england. Has forewarned the market of a potential Monetary Policy tightening only for that not to happen. Perhaps the bank has cried wolf on a number of occasions and investors will be mindful that the bank could be enough kind of scenario once again. Jon weve heard this so many times. We dont depend on analysis we want economic analysis. When on up women dropped below 3. 7 unemployment dropped below 3. 7 we are at 4 or something. They are still talking about wage growth coming in at naught. They have cried wolf many times before. The data comes out and its off the table again. Why do they keep putting it on the table . What is the objective here . Just to bring in some twoway risk . Jeremy i think they dont like having the market with any directional bias. They want to have some installation of twoway risk. Mr. Carney did make that reference to 7 . Theeen Downgrades Bank assuming its around 4. 5 . We are below that could the labor market is advancing. We could see closer to 4 before the bank of england updates their forecast in november. There is a push me pull me language. The banks if the bank is mindful of the influences of inflation over the medium run by allowing a modest repricing of sterling higher, it is alleviating those inflationary pressures. 135, you get Commodity Prices driving up goods prices. Alix what does coming months mean for you . Is that december, next year . England, the bank of we believe they will not move until next year. The Federal Reserve will begin to normalize policy starting in october. We still think there will be a rate hike in december. We are seeing a common problem in banks around the world. We should have seen Wage Inflation in the u. S. Around 4. 4 . We should have seen Wage Inflation in japan, they are below 3 . Theres easy money and its not pushing up wages or core inflation. Its pushing up asset prices. The bank of england has a special problem with this Tropical Storm of brexit hovering before them. Its going to cause problems. We just dont know how much of a problem for the british economy. They want to keep sterling low going into that. In general, i dont think we should look at Wage Inflation as the trigger. Are distorting asset markets more and more and that is dangerous. Alix thank you very much, jeremy stretch and david kelly. A vote of 72. Later, Jurrien Timmer will be joining us. His take on the boe. This is bloomberg. David this is bloomberg. Another night, another dinner at the white house. This time, it was for democrats only as the president entertained nancy pelosi and Chuck Schumer. The democrats came away with what they said was a deal with the president on immigration. No deal was made last night on wall, which is already under construction, will continue to be built. Joining us on the phone to go over what may or may not be a new outbreak of bipartisanship is the director of policy research at Compass Point washington. What is going on in your city . Good morning. The plume ismps he few weeks has surely made the evenings more interesting in d. C. What is important to note here is the episode last night is a crystalclear reminder that the president still needs Congressional Republicans to govern. The deal he brokered over the fiscal cliff was a mustpass bill for Congressional Republicans because they wanted harvey assistance. Everything else is on the docket from immigration to infrastructure. All of those that would supposedly mean democratic support need them a chronic support, still need Congressional Republicans to carry it. You need a dozen republicans in the senate and you need each of the leaders to decide to put the paper onto the floor. Last nights episode really crystallizes that despite whatever deal the president may cut with Democratic Leadership, he still has to carry his own party in congress. David would it comes to business and the financial markets, the larger goal here is tax reform. The president has been pushing tax reform this week. He may need republicans to get that done. Does he need them as badly as he did before or is he cunningly saying, republicans, you better go along with me or i will go with the democrats . Im becoming incrementally more optimistic about tax cuts during this congress by some of the actions of the past week. The president s attempt to seemingly outflank some of the moderate democrats in the senate, especially senator manchin in west virginia. Does two things. It is those moderate democrats into play. More importantly, it helps catalyze the greater cohesion among republicans as they begin the real nittygritty work of legislating on tax reform. Alix thank you so much. You will be sticking with us. What the you do in the market . You have Domestic International companies the white line. Blue line is buy back stock versus the s p. That has rolled over. You have high tax versus load yellow. Ock in is it time to put those traits back on trades back on . I think we should be optimistic that something will be done on tax reform and tax cuts. I think what of the crucial things that happened last week is we broke apart the issues of the continuing resolution to keep the government open and the debt ceiling. The debt ceiling is financial armageddon. We have to suspend the debt ceiling or get rid of it. Come december 8, there will be another issue of do they shut the government down. We can go on another few months after december 8 even if the debt ceiling comes back in force. What that means is theres been tremendous pressure on Congressional Republicans to get orudget passed by december 8 at least a continuing resolution followed by a budget. Otherwise, the democrats can shut the government down without much consequence for them and all the political consequences for the republicans. The democrats and republicans would have to both like some parts of this budget. If they get past that, they get to tax reform. That is an area republicans can win on. Everybody likes a tax cut. Tax cuts for corporations and the middle class is something the republicans will like. I see how this compromise could work out. Repatriation will be part of it. You get strong Infrastructure Spending in the short run. Its really the same question to you, jeremy. And was all about shorting the dollar. What is the risk to the upside . Jeremy we are getting to that summit. Clearly, we have a period where there was an enormous degree of expectation. There has been over pessimism about any guilt being done. Perhaps trump will come through as the great dealmaker hes always if you can advance this process. It may be at the expense of higher deficits. In terms of a higher growth trajectory, that suggests the anotherlar may well see shortterm cyclical bounce here. In may be the case that those appropriates may be to moderate them to the back end of this year. That puts additional owners back the market is underpricing the prospect of fed action toward the end of the year. The combination of those two issues does provide a potentially more constructive dollar back drop into the end of this year and into the early days of 2018. David david kelly and jeremy stretch will be staying with us. Later, we will be talking with republican senator rob portman of ohio. This is bloomberg. Ma this is bloomberg daybreak. Apple is in talks to provide 3 billion in capital with bain capitals bid for the toshiba unit. They will work toward a final agreement. For the fourth time in the last corner center, a u. S. President has prevented the foreign takeover of an American Company on National Security grounds. President trump blocked a chinese backed investor from buying a Semi Conductor company. That is your Bloomberg Business flash. David in case anyone had any doubt, President Trump underscored how much china is not in his mind last night when he dined with senator schumer and pelosi. Themesumably served chinese food and the first 30 minutes was a conversation about china trade. A little bit ironic. The same day he was affirming his decision to say that china cannot buy a semi connector company. What is going on . Isaac the white house wanted to say thelattice deal to president means what he says this will be a red line for all industry. The Semiconductor Industry is a particular Strategic Value for the United States whereas some of the other companies in the , he will crack deals that protect personally identifiable information that has concerned domestic parties and hes already got the deals done. David how much of the line is there really . Theres the National Security issues on the one hand and more ng on the china tradi other . Isaac its always been part of dialogue its always been a threat. It hasnt been used that often. This is the fourth time weve seen it stopped. This white house is more willing within thetool broader chinese u. S. Interaction than previous administrations. Jon i will review the following you theh read following paragraph that line came from president obamas administration. Is this one finally getting real about it . What else can they do . What other leaders can they pull . Isaac its just one part of the broader strategy here. Its important for us to be any one of looking at of them in a vacuum. Be influencedily by broader issues such as u. S. Relations with north korea and how china plays into that dynamic as well. There will be a multipronged effort to try to pressure china on trade, on north korea and on everything else. This is just one of those tools. Compassac boltansky of point. Have you ever heard such hypocrisy that china is telling the mainland states to have fairer and more transparent trade . Erming up, stephen england will be joining us to weigh whats happening in the fx market. The bank of england crying wolf. Is it on the table . This is bloomberg tv. Jon from new york, two hours away from the opening bell. Futures are slightly negative. Down two points on the s p 500 after three days of gains and three alltime highs on the s p 500. In europe, the miners leading the losses today. 8 . 100 way down by , one poundrength the a 1. 33 handle against dollar. This after the bank of england kept Monetary Policy unchanged rates at 0. 25 . Seeingority on the mpc stimulus reduction in the coming months. Are you excited . David very excited. Thrilled. Jon im sure. Thats the asset picture. Emma President Trump is the nine Democratic Leaders claims that they reached a deal on the socalled dreamers. Chuck schumer and nancy pelosi said a deal would keep immigrants legally in the u. S. From being deported. The president says theres no deal. There are concerns about the safety of floridas 4 million Senior Citizens in the wake of hurricane irma. Eight patients died in a sweltering nursing home. Power outages could mean many floridians will be without airconditioning for days. North korea is ratcheting up tensions after being hit with new United Nations sanctions. Useregime threatened to weapons against japan, saying the country no longer needs to exist. Japan called the statement extreme the provocative. Thats extremely provocative. Global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. m emma chandra alix i like that rhetoric and then nothing happens in the market. David markets not paying attention to geopolitics right now. Jon weve heard that kind of thing before. Alix you dont need to exist . That seems aggressive. We are one hour away from the latest inflation read. 1. 6 . Pi to slide to the main debate is why isnt the philips curve working . Our next guest says it is, but higher wages arent seeding into broader inflation. Joining us is Michael Ashton. Reat to see you you are the guy i call when i want the nerdiest read on inflation possible. We all think instead, you say its not. Michael i keep hearing about how the fed has one tool and it broken. I dont see anything broken about this. Phillips wrote a paper that was about unemployment and the rate of change in money wage rates. That was in the u. K. That was the title of his paper. It had nothing to do with overall inflation come it had to do with wages. You have unemployment on the x axis. When you have low unemployment, you seem to have bigger changes in wages. The observation that, like with any product, if you have demand exceeding supply, the price goes up. That seems to work quite well on the chart. Alix looking at the wages lagging on a ninemonth basis. If wage increases to come, there is a lag. Michael thats right. The atlanta fed wage tracker tracks continuously employed people over the last year. We have different people coming in and out. The atlanta fed is tracking the same people. Its unemployment goes down, if you look at the same wages, those wages are going up. We would be much closer to that curve right now. Alix why isnt it seeding threw two inflation through to inflation . The belief is wages are directly tied to inflation. Maybe we had the Business Owners set prices thats not how business works. Wages, at the inputs on what capital is costing us, what plant equipment is costing us, what productivity is doing, changes in the economy and the Competitive Landscape for our goods and services. It would be weird if all of that canceled out and the only thing that mattered was wages. Saying itou are is not a oneoff that we have general inflation determined by employment. If you go back in time, theres normalt same this is for unemployment to not explain overall inflation did michael it is an ugly correlation and it has been for a long time. I remember in College Reading about the mystery of why unemployment didnt necessarily trigger inflation. David take us through a sector here. Whats going on with autos . Autos for a long time has been helping us hold that core inflation. Its about 5 of overall inflation, 7 or 8 of core inflation. , pricesng time comin have been sort of flat. That has been tending to put downward pressure on core inflation. Weve just had this hurricane that took one million vehicles off the roads permanently. I went back and looked at a similar storm that took 750,000 vehicles off the road. Cash for clunkers back in 2009. Vehicle inflation went from 3 to plus 5 in a short period of time. This is in 2009 at 2010 when overall inflation is dropping dramatically. It stayed for about a year in that case and then gradually came down. For a year, we had vehicle inflation over 5 . If we had a 5 bump in vehicle prices persisting over the next. 4 on core about inflation just by itself. Alix many say this is not a phenomenon just of the u. S. You have inflation low elsewhere even though unemployment is low. If underlying inflation continues to take up, if you see slack continue to be eroded, they will have to hike. What about globally . Michael this is another nice chart. This shows core inflation in europe, u. K. And china and the u. S. Has beenflation turning higher with the exception of the u. S. Most of whats happening in the u. S. Seems to be one off things telecommunications, medical services have been going down, usedcar prices have been flat. A lot of these things are one offs. Global inflation appears to be going higher. Jon Michael Ashton thank you. Back with us is david kelly and jeremy stretch. , i always look forward to getting your insights on inflation. We have this near conversation around this arbitrary target of 2 . Is it as bad as some people suggested really is in terms of being the theme of 2017 . David i dont think global inflation is as bad i grew up in the 1970s when people sit high inflation was a bad thing. You have to worry about deflation. Its important to distinguish between cyclical forces and structural forces. Cyclically, you will get some kick to Wage Inflation. The bar in terms of how low you have to get unemployment to do that has been moving down for a long time. Losing bargaining power. Back in the expansion of the 1990s when you got down to four point 4 unemployed, you had 4. 3 yearoveryear which growth 4 unemployment and 2. 3 wage growth. It keeps shifting down. Iformation revolution means can buy the Cheapest Airline the cheapestnd Wireless Service berrie very easily. That is putting downward pressure on core inflation all over the world. The bias toward lower core inflation and lower wage growth doesnt mean Monetary Policy needs to be as easy as it is. It will be hard to get inflation to rise. Jon what is the Monetary Policy response . To wait or get ahead . Theres definitely something to be said about not waiting too long. They have been looking to tighten policy they could have utilized opportunities to hike to get themselves into a higher normal nominal rate trajectory for the next cycle. Theuld agree entirely with comments from david in terms of the structural changes which are very noticeable and is having a major impact on Inflation Expectations and the wage dynamics in the labor markets. It will be interesting to see without an uptick in core inflation whether Central Banks will be able to get nominal that io anything like t see fed nominal rates stickingmy stretch with us. Tune into tom keene and david gura on radio. I hope tom is following us. David of course he is. Alix you guys are best friends. We are best buddies. From new york, you are watching bloomberg. Emma this is bloomberg daybreak. Coming up tomorrow, an exclusive conversation with jack ma. Hurricane harvey and irma taking a toll on the insurance industry. The storms will probably wipe out profit and threaten the companys ability to meet its fullyear target. Shares of credit raising from experience lower today in london. Mark warner is calling for an investigation into experian, trans union and equifax after at what fact after at what equifaxs security breach. Ipo mightsaudi aramco im trying to push it for 2017. It will benefit the saudi economy as a whole. Without a doubt, it will be in the market by 2018. Heres what the ceo said earlier this year. Go late 2018. To i would say in the second half of 2018. Alix now, it could be 2019. Javier blas. Why the potential pushback . Taking a longer time for the government they have not decided where they will lease saudi aramco outside riad. They want an international leasing. A decision has not been taken and thats having a knock on effect on everything else. It is possible in 2018, but everyone involved in the ipo process, theres a growing it is lookingat increasingly tight today and in the late may be needed a delay may be needed. Alix why is it so hard to choose in exchange . An exchange . The preference of the saudi authorities would be new york. There are political considerations. You have legal complexities of leasing in new york. They potentially could go to london. Here in london, the u. K. Regulators are doing a review of leasings of companies controlled by government. That will not be finished until october at the earliest. Although oil prices have recovered, they still remain between 50 and 55 a barrel. The saudis want a high valuation for aramco. The market doesnt seem welcoming for High Oil Prices next year. Alix fair enough. Does that mean we will see an opec cut that will be quite long in the tooth now . Yes. Emad you are starting to see the data pointing towards entry levels the cuts are just about to kick in and compliance remains high. They are talking about an extension. Alix what kind of oil price would they need to see consistently or lack of volatility to ramp up the saudi aramco timetable . A 6070 range is ideal. Its about the complexities of the reform. The National Transformation plan is being redone. Theres a lot of moving parts in saudi arabia itself further causing a delay to this process. Aramcothis entire floating was part of an overall plan of the crown prince, his vision for 2030. Is that plan in some trouble . Us is ithat it tells is in part symbolic. It is more complicated than it looks. The announced this grand plan to transform the economy. At the same time, it could have been much earlier. We are talking a delay of a few months. The saudis remain committed to do the ipo, but also telling us is a lot more complicated than i thought when they started the process. Alix delayed to times square three times, four times. Delayed two times come three times four times. Delayed two times, three times, four times. Have your boss and Emad Mostaque is sticking with us. This is bloomberg. David this is bloomberg. China Economic Data out overnight shows its economy is still growing, but maybe not as much as we thought. Industrial output, retail sales were up, but up less than what was forecast. Over time, there has been a drifting down on retail sales and fixed asset investment. Still with us, Emad Mostaque and david kelly. A problem or is it simply a manifestation of a decision to cut back some on the expansion of credit in china . Emad the credit impulse in china has been coming down. Impulse you will not see an acceleration again before the congress coming up. The next leg for china is the externalization of this model. Globe doesnt do well when china starts slowing down. Do we needed to slow down a little bit so it doesnt overheat . David china needs to slow down certain things that are going on in china. There are financial bubbles in terms of the growth in private credit, which is a problem for china. Anyall, we are not seeing great sign of weakness. I would say these that i would take these economic numbers with a grain of salt. Overall, when we look at whats going on with korea and taiwan and places near china with the other information suggests china is growing more slowly. Maybe you dont need quite as much gas on the accelerator. Overall, i dont see a big slowdown in china. The Global Economy itself is at its strongest in six years. Moveshe data is managed some would say the data is exec the what china once the data to be thats exactly what china wants the data some would say the data is exactly what china wants the data to be. Quite they have been effective over the last 34 toades in moving the economy a bigger economy, stronger economy. They still need to move to the Service Sector. They will not be able to grow on an export model. They are trying to expand their influence around the world. They are amused by the political situation in washington as they are trying to figure out how to work with america in a competitive way going forward. The difference with china, they are able to control so much of the information that is decided on their economy that i wouldnt bet against them. They will have to move more toward a Service Sector model. Jon the plan is to build a massive m a machine through 2025. How much resistance will they get from the u. S. And europe . David it depends on what industry. I think they will run into some problems. European regulators are more attacking the chinese are very strategic and tactical. Usingect that over time, m a among many other tools, they will grow therir economic influence around the world. Jon coming up next, Steven Englander will be weighing in on the bank of england decision to keep rates on hold. The door may be open, but no one is going through it. From new york, you are watching bloomberg tv. 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. Jonathan ashes there is darkness. Policymakers sees stimulus removal in the coming months. From new york, good morning. This is bloomberg daybreak. To get you up to speed on some of the Market Action, monday, tuesday, wednesday three Straight Days of gains on the s p 500. Futures are trading water. Were almost a dead flat. In the fx market, alix will go through that. Eurodollar at 1. 1891. And what a turnaround in the 1 . T week, from 2 to 2. 2 alix i am looking at the boe effective and commodities. You look at sterling, up by wonderful percentage point, the dollar right now is that a oneyear high, all because the bank of england sounded more hawkish than the market asked acted, a market expected. In the commodity market, after the week of data out of china, there is one thing you need to know, its brent, one month versus 12 month. The more green it gets, the tighter the market is getting. Stephen donald trump invited nancy pelosi and Chuck Schumer to the white house and said they had a tentative deal on Border Security. Ithen he says not so fast. The question is whether his reaching out to democrats making sweeping tax reform more or less likely. Joining us now is one of the people who will decide the answer to that question, the republican senator from ohio, rob portman. A member of the Senate Finance committee and expert on the federal budget. He joins us from capitol hill. Thank you for being with us, senator. Give us an answer, give us some sense. There seems to be a bipartisan possibility in washington. Is that going to make tax reform easier or harder . I think these conversations are always helpful, and i think it is important we try to bring democrats and the mix. I inc. Democrats have to decide on the fundamental western do they think tax reform that would it moretes and make efficient will improve the economy . I truly believe that, therefore we are willing to do progrowth tax reform and not be too restrained by what folks call a static tax reform. I think democrats as a rule will be favorable toward tax reform because it will be improving prospects for middleclass families in ohio and around the country. Side, ihe International Think everyone agrees having the highest business rate in the world doesnt make sense, and the way we tax National Companies doesnt make sense because it keeps money offshore. I think the fundamentals are not something where we can our something we can see bipartisan agreement on, but the question is how would you look at that, and would you insisted be done on the static basis, meaning the tax cuts wouldnt be in effect, or would you be willing to add tax relief, knowing it will grow the economy, and in the end result in more. In your response you illustrated two issues, one is how middleclass families will benefit, and on the other hand Corporate Tax relief, which is something that republicans by and large talk more about. Can we do both of those without breaking the budget . You know the budget. Absolutely. I think our system is so frankly, the tax code is so inefficient and so ant iquated, that those things will help. One of the things we miss is not just middleclass tax relief, but wages. All the analysis i have seen of the tax reform we are talking about will create more jobs, more demand for labor, and higher wages. That is the big challenge in the economy today. We have flat wages, higher expenses. The best way to get at the wage growth sides tax reform. Regulatory reform and other issues are important, too, but nothing would have a bigger bang for buck then tax reform. David we have heard from various people that growth is the distortion, and it will take care of some of the deficit spending. But how much deficit can we afford to take on, at least in the short or medium term, to get to that growth from your point of view . We should be responsible about it, and i think we have guideposts. One is that the joint committee on taxation doesnt macroeconomic score, sometimes called a dynamic score, meeting that it takes into account what the Behavioral Changes will be from things like reducing taxes theapital, Capital Gains, last time we did any significant tax reform was important to getting it good, balance the budget. In 2000 we got to that balanced budget earlier because of the changes on the Capital Gains tax rate. Lowering the rate brought more revenue into the coffers. That is an example of it, but the same would hold true for getting our business rate down so it is competitive, so jobs wont be going overseas. Repatriation where you bring money back, been encouraging people who are in Small Businesses to invest more. I met with a bunch of small Business Owners yesterday from ohio to talk about the basic outline of the tax reform proposal. Arentke it because they big corporations but they are companies that will benefit from the tax relief we are talking about. What they would do with that money is invested businesses and create more jobs. Jonathan senator, we spoke with Mick Mulvaney yesterday, who said everything was on the table. Our take away from that was if everything is on the table, then there isnt a plan right now. Is that true . I think everything is on the table in the sense that everybody is listening to one another, and that is positive and important, but i do think there is a growing sense among republicans that lowering the rate, broadening the base, getting rid of tax preferences, is simplifying the code, making it more progrowth. On the international side, there is International Consensus that the rate is too high. Jonathan we expect to hear will be progrowth, but the thing i want to draw down on, the president mentioned offhand y could payhat the more and the wealthy could pay more and its not such a bad thing. Could we see taxes rise on the wealthy in the United States . I think what hes talking about is the individual rate we currently have a tax rate of 39. 6 , but for people at the top it is higher because of the additional 4 from the Affordable Care act. What he is talking about is that its a relatively high rate, and the productivity of the tax code would continue under republican or democrat proposals. The question is, who pays that tax . I think you wanted to not fall themall businesses, companies that pay their taxes at the individual level. Those would allow the folks driving our economy right now you want the Economic Growth to not be 120 or 2 , budget 2. 8 or 3 or more. If you can do that, it solves a lot of problems, and that is the opportunity here. You do have people who are small Business Owners who pay high taxes because their business is making money, but they reinvested and they have to pay a big tax. The idea is to bifurcate that from wealthy individuals who are not in Small Businesses. The Corporation Signs to make us competitive globally, so you are bringing jobs and investment back here. Specifically repatriation of profits that would come back to the company, to be reinvested in jobs and equipment. This is an opportunity for us across the board. David finally, in talking with director mulvaney yesterday, he admitted that we cant just get there through growth. We will also have to make tough choices on eliminating exclusions. Refer to them. You had experience at omb as a practical matter, can we do all we need to do without taking up something really controversial, like mortgage deductions, interested actions, taxes on local and state levels . Do we have to make decisions and what would you recommend . I think its a great question, and i think if you have a low enough rate, if you can show that you will lose your specific industry and the economy is going to improve, your customers, the people who will help you to be successful will help you as well, i think that is how we will get it done, and i think it is possible, in talking to people yesterday from ohio who are business people, theyre are willing to see some of these change. In some cases eliminated altogether. But certainly this is one that has gotten a lot of attention on bloomberg and the question is how low will the rate be and what will the effect of the. How are you feeling about cleveland these days . I called them the windians this morning. Breaking another record, going for 25 wins now. Its awesome. Their pitching has really come on at the end, everybody is healthy, offense is doing great. High hopes for the indians in the world series. David congratulations. Thank you so much, senator rob portman of ohio. Alix get a smile, ask about sports. [laughter] lets take a look at the Market Reaction to the potential trump trades on new tax reform. Here is what we set up. The white line, domestic versus international. Blue line, buyback stocks versus the s p. Purple, dollar spot index. They all rallied after the election and have all come off. You need to put those trades back on. Ndining us from boston, a onset, our guests. Do you need to put the trump trades back on . If so, where . To me, the ultimate barometer of the trump trade is the ratio of the russell to the s p 500. Russell small caps tend to be domestically oriented and the s p is more of a global indicator through the Global Business cycle which has been quite strong for the past six quarters. What we saw after the large,n,s mall versus the dollar, Interest Rates, fed hikes, they all shot higher. Over the last three or four months they have reversed the entire gains they made. In a way we have a clean slate as you look at the ratio they are pretty much back to november lows. 2 05 and itt was at was close to where we were around the election. At this point with some potential momentum coming out of washington and the trade completely on price i think there is definitely some room for that to get priced back in in some way or form, maybe not as much as they did before, but i do think the potential is there and when you look at Interest Rates in the fed and the boe, chances are the market is going to have to start pricing in a little bit more of a hawkish cycle than what we have done. Alix do you get the dollar on that . If it comes through. Alix you are still not optimistic. Republicans are talking to each other but the question is how far they can go. What will helpnk the middle class is helping business with lower tax rates, creating jobs comes to one. Democrats say lets just cut taxes on the middle class. There is some intersection, it may not be 100 . Jonathan the question stephen atses, is there any question all that companies are ready to take that tax break and invested or pass it on, when we see them have easy access to cash already, and are more intent on buying back stock . Stock buyback angle is really more for large companies. I dont inc. The average Small Company in the u. S. Does that. Its really the domestically oriented Smaller Companies that will benefit, because large multinationals dont pay the Corporate Tax rates anyway. The s p is driven by the global cycle which is strong regardless of whats happening in washington. I think we are really talking about small, u. S. Based companies and if there regulations are getting cut in their earnings go up that should eventually find its way to higher stock prices and maybe a stronger economy but that is several steps removed. X Stephen Engle coming out tomorrow, we have a great lineup. Jordan rochester of nomura, citibank, dan jeffries all, with us. This is bloomberg. Jonathan the Monetary Policy committee voted to hold Interest Rates at. 25 in a sevento vote. As a 25 basis point increase which would reverse the cut immediately after brexit. 1. 4 ing spiked, almost saidse the bank of england it will reduce the scope of stimulus reduction. Joining us is mark, good to catch up. Why is it different this time . Clearly they are worried about the erosion of slacking the economy and that could accelerate inflation which reads 2. 9 close to the level. It also mentioned the pickup and underlying wage growth and the fact that the economy has improved since the inflation report. Essentially the bank of england is saying if the economy continues to improve at these levels it might warrant some stimulants being removed look at the Market Reaction. Fully pricing in a february rate hike. Earlier stay, we were at 80 . Last week, 40 . And look at work for the u. K. Look at november. 42. 9 . Its november on is when the bank of englands next release is. 20 buture was below the fact that it is spawning forward something has changed. Jonathan you were giving david excited. I am thrilled and im sure you are as well, but i want to get to the following phrase. One and done. Is that is something we will discuss over the coming months, that this is just a removal of the emergency package they delivered after brexit, and not necessarily the beginning of some kind of tightening cycle, whatever that might look like . It is going to be slow and gradual. I think one and done is probably the best bet for now. Michael saunders, one of the two who voted for a high, said that it should notaid be at record lows. Is that insurance necessary, even with the risk of wrecks it . Brexit is still the great uncertainty and if you look ,eyond one whenever it happens theee that sentence a lot, npc holds fire but hints at future rate rises, why should anyone believe this when they have been doing the same since 2013. They have been calling for a rate hike since 2013. He says the bank of england missed the trip and the question lets go one step at a time because we heard a few moments ago. The boe has called up the last many, many times and that is why mr. Carney is called the unreliable boyfriend. But he has raised the stakes, look at the bond market. It is bst,han katie martin at normally it lands in your inbox within two minutes but it took 17 minutes this time to get the First Response from the south side. If you are aggressively trying to write your know headlinek that the initially suggested that there hold, buttation on carney has said this repeatedly based on where we are relative to the output gap we should be hiking but the fear oft there is this monster brexit coming down the road is what is stopping them stop he thinks there is a long time until november. David is one of the lessons that markets respond to what the economies are doing rather than what they are saying . It seems to be true with the fed. I think the larger narrative ire is that the boe and ecb, inc. They would love to be able to replicate the seemingly impossible thing that the head just data, to raise rates while Financial Conditions got easier. Usually the whole point of pricing is to tighten up Financial Conditions because you are offsetting an overheating economy. But they raised rates four times and Financial Conditions are the easiest since 2013. The fed is probably a static about it because they want to normalize policy without disrupting the economy and that is one way to do it. My guess is they are testing the toers to see if they start signal a gradual exit or normalization policy, what will that do to the pound and zero but also what does that do to Financial Condition . , if thereome back to is enough growth the central bank usually tightening is not the end of the world but as long as there is growth, which there is, Central Banks can normalize policy. Jonathan i want to jump in for the bank of england, have they lost the ability with Market Participants . A lot of them will pick up the bank of england watch what they do and not what they say and what they say is they might raise Interest Rates and what they do is they dont. What they say is unemployment could hit 7 and they will inc. Sout raising Interest Rates why is it any different this time and why can the bank of england still has any ounce of credibility with market when they communicate these kinds of things in their minutes and then never follow through . I think the bank of england is doing what all the other Central Banks have been doing, they are asking for permission from the market. The markets are so intertwined with Monetary Policy because we are in the era of negative rates and that has brought the term premium down and has insulated every asset class. Andything is connected now a central bank they need the markets to be on board or we get a repeat of 2015 where the said signaled a rate hike and the markets would have a tantrum and they would back off. I think all they are doing is the odds of a wasmber hike are 40 it 25 a week ago and maybe will be 50 in the week after next depending on what happens. I think the Central Banks, if they really want to tighten, will get above 50 and then they get the green light from the markets to do so. Not,ess is credibility or they are playing that same game. To take agoing different focus because i think the issue is not the central bank, but the market. If you look at when markets have priced in, it is such a flat hike curve, that even a noncredible central bank says, we are thinking about it. Even if there is a one in three chance that is still a lot more. Thats the issue with the cpi today in the u. S. If it comes in at all allies at all allies it is totally inadequate. The market focuses on what the banks are saying versus what could happen. Add that the bank of england is not in isolation. The bank of canada is normalizing, ecb is signaling it will do that as well. This is just part of the overall narrative. Jonathan the bank of canada doesnt talk about it, they just do it. But still, it is part of a larger narrative. They are basically going with the flow. Offsets the currency each other in theory. It is when the policy diverges like in 2015 with the fed it trying to tighten that you get these real dislocations in the currency front. I think everyone is trying to go with the same flow. Alix i cant get a grip on it, are Central Banks convergent or divergent . I think its a question of which central bank is converging faster. Last year we talked about how they were hot to trot and they cant say the currency effects anything. , once the north korean , marcus beganside focusing on the cpi and they are saying may be there is a root by which the fed could hike in december and they could get annualized numbers that look closer to 2 . Maybe the u. S. Will bound ahead of the ecb. Canada is different which is a victory lap but the other Central Banks they are following the data. Alix where is the biggest miss price . I think markets are very complacent about the u. S. They are making a big bet that inflation is going to be soft. I dont think that is going to be the case. But if you look at what they have priced in, they are expecting it to be dead as a doornail. They think we will have these big episodes where the numbers come in stronger than expected, it looks as if the fed right now to going tape we got of the president on his way to florida. We are going to get massive Border Security as part of that. We will see what happens, but something will happen. They are doing a great job on power, they are doing a great job historically, there has never been anything like this, we are working along with the governor and they have done an amazing job and power is being turned on rapidly, the Power Companies we have the largest assemblage of human beings ever in one area for power and we are very happy with it. The global come later. We are right now renovating large sections of wall, massive sections, making it brandnew, we are doing a lot of renovations. We are building for different samples of the wall to see which one we are going to choose, and the wall is going to be built. [indiscernible] massive we want to get order security and i think that both nancy pelosi and Chuck Schumer i think they agree with it. We met last night with the whole group and i think we are fairly close but we have to get massive Border Security. [indiscernible] i think he is on board. Mitch is on board, paul ryan is on board. Well feel 92 of the people agree on that. But what we want is we want very, very powerful Border Security, ok . We are going down to florida, see you in florida. Ryan and mcconnell agree with us on daca. We are very much on board. I spoke to them, yes. David what you have been watching as President Trump on his way to florida to inspect the devastation of hurricane. The of her left, the president s helicopter. It is fascinating because what we are watching is a deal being worked on and last night the president was at the white house for dinner they said they had children daca for brought here without proper documentation. The president came out and said they dont have a deal. Now we see the president saying, well, we want to take care of the people, 92 of the people make sure it goes forward. That the same time we need massive Border Security. Eva lees nancy pelosi and Chuck Schumer agree but that the wall will come later. He also says the republicans agree with him so its not quite a deal. Jonathan lets switch things up. The dollar catches a red, cpi month on month comes in at 0. 4 from 0. 1 previously. 0. 3 was the estimate. 0. 2 ,out food and energy, in line with expectation. We are up from the previous month as well. The year on year numbers, the month on month numbers looking good, reflationary elements coming through the data. As far as initial jobless claims , 284,000 it will be tough to get a read on jobless because of the hurricane of. We dropped to 284 from 298 previously that the impact of the market is clear. Up by abouts back 4 10 of 1 on the session. Thed i am surprised at jobless claims because a lot of people thought they would go up. Us, our guests. You had a chance to look at these numbers and it looks like it is encouraging. As a oneoff, it looks like to a large extent a 6 rise in gasoline prices, Hurricane Harvey hit at the end of our guests and prices spiked immediately. We will see that effect in their, it will come down slowly. There was a big rise in housing prices. Good news for americans who want their homes to be worth more but that is probably not going to be sustained. The question is how much of this does the fed look past as hurricane distortion. Jobless claims are still elevated, it is not like they reach raised it from last week. Its just 16,000 fewer than last week. One thing the market will look like, if you look at month on month it was a very strong 0. 248. The consensus on bloomberg was point 0167. I think it comes up to rounding to. 3 and that is something markets will Pay Attention to. Alix i want to dig into the Services Numbers that came out, up 2. 5 . You also had medical Care Services up over 1 . Rent of a primary residence was up, Hospital Services up, Transportation Services we saw that yesterday in the ppi, is that where the inflation kicks in . That is where that is where they have been. News is if you are looking for more inflation it is hard to say whether it continues are not. It seems to be the one area inflation has consistently shown up. The temporary factors we kept looking for were airline fares and Wireless Services. Airlines are down another 3 so how do they factor that in . They have used this excuse of one offs for quite some time, and that we will get one offs in the other direction. They are going to have to look at Something Like four which takes out the biggest movers each month and tries to figure out from there where inflation actually is if you want to rely on this one off reasoning. Jonathan dollaryen, im looking at the chart. Dollaryen is lower on the back of the headline that north korea is said to show signs of a Missile Launch program. Higher, up about. 3 . Dynamic the of felicia of the woodside driving the dollar and then you have the yen hes in story kicking in off the back of north korea. You widen your spots and shrink positions. You have these kinds of gyrations two or three times a you were going to get stopped. Jonathan one thing we grapple with on this program is the tossup the between the fundamental data and your sentiment, which is driven by things like the north korea disruptions. How do you get those two things and put them together. Most of us arent experts on politics. We are stronger on the economy. What you have to do is gauge when the Political Sentiment has gone to our, when everything is priced in and beyond, and then you feel going with the fundamentals. But these things are very erratic, and you have to recognize that is the world we are operating in. You might be able to put the do together in Inflation Expectations, its a way to track whats going on both with fundamentals and sentiment. These are sentiment indicators and if you look at the chart, ive got the university of michigan fiveyear consumer expectations. They always run high. It is more that they have come down. The market wage sentiment has really fallen off. Aboutis a question Inflation Expectation which is important to were future expectation goes. My colleague at Bloomberg News had an excellent piece on this today that everyone should check out. We are a week away from the fed having to decide what to do and if you take these numbers, what does it do to the feds thinking . To me the question is not will the fed continue to normalize policy, the question is how quickly will they do it. The inflation angle is really about that. Ore pc is at 1. 5 it allows the fed to go slow and not disrupt Market Conditions stop if that number were to jump higher than the fed might be forced to go faster but it is still going to go there and i think the market is probably underestimating the magnitude of the cycle. Right now they are pricing 1. 5 more hikes over the next two years and it will be interesting to see what the dot plot will look like because the dots are all over the place that are also much higher than the curve. My guess is the dot plot will come down if they pare down the balance sheet. The fed is trying to normalize policy it has gotten away with it with Financial Conditions and to my earlier point the key thing to remember is that when the economy can handle rising rates, the fed has a green light to go. In2014 when it was tapering, 2015 when it was trying to get the first hike, earnings were falling, the Global Economy was getting softer. Now over the last six quarters, the Global Economy is stronger, the fed can do this, and it doesnt have to cause a taper tantrum. Market will have to see is what the december dots are. A number like we got today, which showed that they may or may not be right but it supports the view that things might be normalizing, if they come out with three hikes in 2017, i think that is enough to back up yields more into support the dollars in the shortterm. I think three hikes 2017 is what will be the key. Jonathan i cant think of a more redundant summary of economic projections. Obviously we are losing more fed officials. It will be interesting to see if he contributes the summary of henomic projections because is leaving in october and traditionally people dont vote at their last meeting. If we lose one it changes the average. Simon michael mckee, thank you. I want to give you an update on whats making headlines. Heres emma chandra. President trump tells reporters he is fairly close to a deal on the socalled dreamers asterisk he met with the senate house senate and House Minority leaders saying they we reached an agreement with the president that would keep children brought to the u. S. Illegally as children from being deported. Previously he had so there would be no deal without massive money for Border Security. North korea is ratcheting up security. The regime threatened to use a Nuclear Weapon against japan, saying the country no longer needs to exist. Japan called that statement extremely provocative. North korea is that to show signs of preparing another missile for lunch. Global news, 24 hours a day, powered by over 2700 journalists and analysts in more than 120 countries. Im emma chandra. This is bloomberg. David thank you. As you commute in today, you can listen to tom keene and david gura over a radio. They can be heard in new york, washington, d. C. , boston, and sirius xm radio. This is bloomberg. This is bloomberg daybreak. Coming up, an exclusive interview with jack ma, and our special show premiering friday. Now to your Bloomberg Business flash. For the fourth time in the last quarter century a u. S. President has prevented a foreign takeover of an American Company on National Security brand. President trump stop the Chinese Investor from buying a semiconductor manufacturer. Specified which Software Flaw was exploited to steal data on hundred and 43 million 143 million. It issued a patch for the flaw in march. Apple is playing the role of kingmaker in toshibas sale of its memory chip business. Apple is in talks to provide about 3 billion of capital for the unit. That support led toshiba to sign a memorandum of understanding and work toward a final agreement. Alix thank you. A delay in the saudi aramco ipo. The biggest share sale of history may be pushed a few months of the 2019. In 2016 the Saudi Crown Prince said that the object this is to diversify income, therefore transferring shares to Public Investment funds the source andhe government revenue not oil. They are aiming to have extra nonoil revenue risk of 100 billion. Joining us from london, the bloomberg executive editor for energy and commodities and bloombergs middle east and africa executive editor. This chart shows saudi arabias reliance on oil. Crude, white is line is saudi arabias revenue of oil, will align is the budget backing out oil. Obviously the yellow line has been increasing, but what is the delay meaning for this ability to generate revenue that is not oil . Sale of the ipo of aramco is at the heart of what the crown prince is trying to do. Is he going to diversify, there will have to be massive investment in new industries, from entertainment to mining, military, theres a huge project tied to this to invest that money in saudi arabia and international. It might push back a lot of the plans but our story is Contingency Planning in case they do need to push back. Alix facebook skeptical. Walk us through the reason as to why they might push back. Part of the problem is that no one has ever had to deal with something this complex. It is the biggest in the world, the way it is structured and some of the royalty issues you still have some pretty Big Questions like where will it live. Depending on which one may choose that will have a knock on effect in terms of that kind if investors they are going after in the really important question of who will own oil and ground. But if the investors in you remco wont have the oil, what value do they put on it . Alix and look at russia, huge reserves. I want to touch on something that Bloomberg News reported a week ago, saying that they are reach resting the National Transportation program that the same time vision 2030 should still be on track. What is the delay in those reform and what does that do to the consolidation of power . When he talked to us a year us evenlf ago he told if they achieve 20 like they are trying to do it is a success. Drafting is necessary because the initial draft is such a major undertaking, they are really trying to turn 80 years of doing business on the way saudi arabia functions on its the, get people to think of private sector not just being driven by the government sector. They came up with 2030, which has some targets, and what they seem to be doing now is going in again and tightening it up, clarifying some of those targets from the past year. It is a tough undertaking and we have written several stories about how hard implementation is and has been and selling it to their own population. Alix thank you very much. It reminds me a Central Banks. If you have a bloomberg terminal, checkout tv to look at our charts and graphics. This is bloomberg. Alix blackrock announced today that it will not pass on Investment Research on clients when european regulations begin in january. The service joining a growing list of Asset Managers planning to absorb the expense, and yesterday the president sat down with an exclusive interview with derek schatzker, discussing the potential impact on the bank. The problem is that as i sit here in september i think everybody has run scenarios but i dont think anyone will tell you i have it all figured out. And all my providers know it and realize it. By definition there will be some adjustments for the beginning of next year. Us, you arewith really passionate about this. It is supposed to make up for competition, help transparency. What do you think it will do . Of firms dont want to pay because the current model is not quite the way regulators are consenting. If you likemodel is the research you pay for the transaction and if you dont you walk away and dont pay for it. You may not be able to get the but it isn the future guaranteed you will get something for what you are paying. In the future you will have to pay in advance and research can be repetitious but nobody is willing to pay for it in advance. The result will be you will go with the sure thing, and the sure thing will be a much smaller market. Alix what do you do . You get your own research capability. You look for firms that are more flexible. Jonathan what does it mean for ideas . Will we have one massive echo chamber because people will be too scared to go outside . I wont think they have to go outside because the top five researchers in the area will still be in demand but if you are a young guy, good luck trying to break in. Jonathan how will it play out for you guys that fidelity . I think for very large firm Like Fidelity that is focused on active management and with a very large internal research ability, it will probably help us because i do think it will drive more consolidation. I do agree with the other guests that some of the weaker links it will rewardnd large active managers that do their own research. But you also mentioned contrarian ideas those generally dont come from the south side. We subscribe to a lot of boutique independent Research Firms where we pay for their research and that tends to be a little more outside the box. We may see more of that. We may see Research Teams breaking off from sell side firms and becoming boutiques on their own. Youris a Good Business if research is good and i dont think there will be any difference on that side, on that smaller, independent site. But overall it is a very competitive industry. There is compression across the board and i think larger firms with their own capabilities will probably be rewarded. Its a matter of who wins renmimbi loses if you doesnt it make it cheaper . I hope that is what the regulators are actually measuring because its the combination of transactions, cost, and research cost. Welle regulations are guided it should be lower. If it turns out that firms end up paying more for the combination of research and transaction than i think there has been a real mistake. David it sounds like you will spend less money. Alix entirely true. Jonathan thats another story. Great to have you on the program, coming up next, we will be joined to break into that inflation data in just a moment. The dollar got a bid for the best time in five minutes, futures softer. Heres the story the dollar was stronger and now it is looking weaker. Cable rate is much higher, the euro back. You are watching bloomberg tv. So new touch screens. And biometrics. In 574 branches. All done by. Yesterday. Banks arent just undergoing a face lift. Theyre undergoing a transformation. A data fueled, security driven shift in applications and customer experience. Which is why comcast business delivers Consistent Network Performance and speed across all your locations. Hello, mr. Deets. Every Branch Running like headquarters. Thats how you outmaneuver. Jonathan President Trump reaches out to Democratic Leaders over dinner. North korea response to fresh sanctions threatening to sink japan and turning the United States into ashes in darkness. Streak ofmonth weaker than expected readings ends. Good morning. This is bloomberg daybreak. The opening down to bell. Three Straight Days of alltime highs on the s p 500. A little bit softer looking at futures, down five or six points. Eurodollar on the front foot. On the back foot on the back of the cpi data. Treasury yields grind higher. 2. 01 cent just leslie through to 2. 19 for today. As get stock movers. Alix Tenet Healthcare getting a nice pop, up over 7 . It is reported that they may be seeking a buyer. Yesterday, the largest holder said they were going to shake up the board. The company has a market value of about 1. 6 billion in the operate about 500 hospitals and Outpatient Centers in the u. S. , but they are losing patients and looking for a buyer. Look at rental companies. Hertz and davis getting hit hard. Credit suisse saying storm related rallies away ever done way underdone. Evaluations way too high. A pop, ofeaf getting 10 . They make seatbelts and airbags and are thinking about separating passive restraint systems from electronic units. Theyre trying to boost returns from driverless technology. The board has not approved it. In stockholm, shares have the best day in eight years. Jonathan thank you. Is sentiment versus fundamentals paired cpi data early this morning indicating inflation may finally be getting back to track to reach the feds target. Treasury yields initially spiked, but it was shortlived, possibly due to the threats and missile tests headlines from north korea. That left investors with a dilemma. Another safends havens due to the threat or do you sell bonds and buy the dollar because of cpi . We have jim a corgan, Principal Global Investors ceo, and one of our bloomberg colleagues. Need to do told you this to three decimal places, because what was. 2 it was very close to. 3 . It was like. 2482 . If mcdonalds that raise the price of coffee by a nickel, we may have had. 3 , which would have generated a few more fireworks. It was a Welcome Change from the recent tone of the inflation data to get a moderate upside surprise on headline weird year on year was a little bit of a surprise. It takes a little wind out of the sails of the deflationary or disinflationary theme. What is your read on inflation rate in the United States . Probably really zero. We only put the figure after the decibel point after the decimal point to show we have a sense of humor. I think inflation is actually were less than the reported numbers. There are some other things, how rental properties are taken into the inflation numbers. And they moved to Online Retailing takes down prices but is not factored into the cpi numbers. So there are a lot of things going on here. Technologydriven but deflationary, and they do not actually appear in those numbers. Whether at 2. 48 or 2. 52 , i think it is really zero. It may even be negative. Furthermore, i do not expect inflation to pick up for a much in the near future. You can look at fluctuations monthtomonth. But i do not think there is a positive trend emerging. Alix jim is bumming me out. Cameron, you wrote Something Different from what jim says. It is a question of magnitude , how much importance you ascribe to the improvements in quality. It is indisputable that things have gotten better over the years. An example i use is the engine in a toyota highlander, you know, suv, these days has about 40 more horsepower than a ago,ri 308 40 years clearly a sinus stuff is getting better. But can we really be as precise as the statisticians would claim in terms of measuring the magnitude of these adjustments . I would argue that they probably overstate the importance of the technological advances. I will use a personal history example. 20 years ago, i moved to london and bought a mobile phone for 10 pounds, which is about 16. If you look at the price indices from before telephones in the United States, over the past years they have gone down under 2 . So the price of a phone has gone down 92 . It reflects improvement in technology pretty used to be a break him and now it is the sexiest thing you can do all sorts of stuff on. S7 edge Samsung Galaxy 600. Tever it is, costs than the phoner about 20 years ago, can you say that . No. It is definitely better. Is it 468 times better . I am not sure. If we ascribe a utility function one uses a phone more to a similar magnitude of improvement, that would suggest that for every minute a used the phone 20 years ago, i have used it seven hours and 48 minutes today. I can tell you i use my phone a lot but not that much. For that, but i would like to know why this all matters in the real world. We sort of rely on inflation to give us an expectation we are paying more for goods in the future than we did in the past, and that allows companies to have pricing power, pay their workers more money, things like that. What is your analysis, jim, of what is going on with technology in inflation and what it means for workers and companies charging for the goods . We pricinggy takes power because it eases the supplyside of the economy. So businesses do not have pricing power. It is very hard to grow in that environment. That would be one point, which is one of the reasons like genuine growth starts have done well. A real Growth Business model is very valuable. This also suggests, if i am right, that inflation is not going to come anytime soon, that rents will stay low. Or take, 10year might be normal for the next few years. I think Technology Makes it quite likely. If that is true, then Central Banks looking for inflation as their signal to raise rates are playing a futile game. If inflation is low, you still the something positive in economy. Maybe rates should go up even without inflation. I think there are a lot of these kinds of things. David what does it mean for a wage earner . Should i not look forward to raises . What about for someone on fixed incomes who needs to warn interest in whatever money they have saved . For the wage earner, you better make sure that the skills are relevant and developing. That is the answer to a rapid technological change. The old nineyearold jobs that were highly paid do not exist anymore. Those jobs are done by machines. What happened is they are now done by robots. That means that people have to have different skills which enable them to stay relevant to the economy. If you are retired, here is the central problem for Retirement Planning right now, if rates stay low for a long time am a providing an income is very expensive and very difficult, and that is the challenge for retirement providers and Asset Managers, and i think we need to be on top of that one. David that is a larger growing part of the problem, not just the United States but global. Exactly. I think those that are looking forward to looking after their Retirement Plan customers had better be finding ways of creating good incomes, superior income without taking too much risk. Stretching for yields is been a topic in the market. It is a dangerous thing to do. But i think if it is still with appropriate diversification, if you create a yield with appropriate diversification, you can build a world of good for your clients. Jonathan a 100 year bond may be . Where can i sign up . Hey have issued a couple europe, in particular, with negative rates, any duration for Pension Funds in europe is manna from heaven. Jonathan may be low rates of been a problem and not the solution. On the inflation front, i think you can make an argument that the artificially low cost an excess has enabled of supply, on the one hand, but also it has enabled amazons, for example, to really blow out its business to the extent that they may not have been able to if capital had been higher and perhaps they faced more competition from other sorts of investment income. That is my substitution point. One of the reasons people use amazon is it is quite a lot cheaper than going to a retail store. Amazon is essentially like a public good now. If you are in the shop, what do you do . You see the price, check amazon for a crossreference. I have to go back to your point about your cell phone though, cameron. The cell phone, it is not just that you use it more now, which you do a bit, but it does so many things. Obviously, part of that analog was because of those things, i would use it more. There have been some lovely examples of that, like there was one of the research guys that came out with a report showing the radioshack catalog from 1980, pointing out that every single item you can now do on your phone. Exactly are deck to your point about wage earners, we should not forget that even though the official cost of this stuff is going down, the actual alleys by household have gone up. So that is really the issue here. Wireless, Cell Phone Service has been a big source of disinflation in the economy this year. If you look, it has doubled in terms of Household Spending on cell phones over the last 15 years. The inflation rate has gone down, yet he bore spending more on it. That is the problem. Wage income is not very high. You are still feeling it. David careful, we have the kill bill. Thank you so much for being with us, cameron. Jim mccaughan will be staying with us. Alix tomorrow, we have an allstar lineup of guests for you. That is a friday for you. This is bloomberg. Spring up again this week in washington with renewed optimism tax reform could be implemented sooner than expected. We get response this morning. I have become more optimistic about tax cuts during this congress, just by some of the actions of the past week. I think we should be optimistic, if that is the right word, or that something will be done on tax reform and tax cuts. I think democrats will be favorable toward the tax reform because it will be improving the prospects for middleclass families in ohio and around the country. The financials actually are something we can see some bipartisan agreement on. The question is, how would you look at that, and would you insist that it be done on a steady basis . Meaning that the tax cuts really would not be an effect, or would you be willing to have tax relief in addition to tax reform, knowing that that will grow the economy . At this point, with some potential momentum coming out of washington and the trade completely on priced, i think there is the finale some room to get priced back in. Is burnsining us mckinney. Till with us is Jim Mccaughan it is not the first time we have had expectation or hope of tax reform, the socalled trump trade. To strengthens, bonds go down, then it gets discouraged. Is this another false up . It appears we have had a handful of head fakes, so to speak. The difference today is this tax the form, despite the fact we have seen a lot of people talking about it happening, really is not priced into the market. The markets rally last year and continue to go up, so folks say the trump trade must be a life. What if you look at the different buckets within the market, companies and hightechs industries that would benefit from tax cuts, they have given a lot of that back. Companies that have a lot of tax overseas, they have given back a lot of those gains. These tax cuts really are not priced into the markets. As far as how that would affect investors, emmys a couple sectors that would benefit from these tax cuts would be health care and technology. They probably have a little bit of room to run as a result. David what does that tell an investor to do . None of us can quite figure out what is going on in washington. You have something that is a wildcard take north korea suddenly wanting to destroy japan today. How does an investor invest with that range of possibilities in front of them . Trying to make any Investment Decisions based on what the government is going to do in the age of trump is something i would be super careful about. From our perspective, we are value investors, so given that there is so much uncertainty and, as a result, the likelihood of a pickup and volatility, one way to manage that or navigate that is to focus on things like dividendpaying stocks, types of things in which Capital Gains can be positive or negative but the dividend component of your return is always positive. That is one way, maybe a cowardly way, of avoiding some of the volatility. Alix i want to show you my chart of the day. This shows the trump trades. White line is domestic versus international. The blue is the reflation play. Purple is the dollar index. We know the story. Bid up after the election. They have all rolled over. Is there one that you would be more apt to invest in if you believe the d. C. Conversation right now . I think it is difficult to believe the d. C. Conversation. Alix so no, either way. Would said that, i i do think that the fact that they could get it together, even if you have a fairly low threshold of belief that between congress and the administration they can get it through anytime soon, they could get it together, but one reason for not being short on u. S. Equities as you know, i have been buy the dips on u. S. Equities for several years now. I still am, and this is one of the reasons. I am more nervous than i used to be. Got to almostwe 2 on the 10year last week. Pretty aggressive, getting back to 221 2. 21 back on 10year treasuries. We do not know what this plant looks like. What about for treasuries . It could go back up to 2. 50 or 2. 60 . It is not what i think that it is possible. I think it will stay where it is. I think the next big move is quite likely to be when we begin to see the fines of the recession. There will be a recession. In maybe three or four years appeared when the recession begins to show signs, you will see treasuries go down. That is almost inevitable. Alix Burns Mckinney and Jim Mccaughan stay with us. Debbie to yeah above 50 per barrel for the for some sense a beginning of august. Branch getting tighter, as well as well. Will opec have to extend cuts . We will discuss that after the break. Also coming up, a look at amazon. We will talk to the analyst who just gave the company 4 its2nd buy the company its 42nd rating. Why did it take so long . This is bloomberg. Alix crude getting a bit today, topping 50 for the First Time Since the beginning of august. Brent staging a rally, as well. This chart looks at the short and longterm brent prices. Zero ather you get from positive territory, the tighter the market gets. This all means higher oil prices. We have Burns Mckinney of allianz principal investors and Jim Mccaughan. Talk about an ipo and a jump in oil prices recently. What they need for the saudi aramco issuance is plenty of liquidity in the ipo market, because it is so big. They also need a good undertone to the oil price. There needs to be clarity about the ownership of the oil preserves. Is being presented as the owners, but the subtext is that it is the kingdoms asset. I think the clarification will be very important to help people understand and analyze aramco. I am not surprised of the apparent delay. Alix sure, but this is not the first delay. You had the crown prince wanting it in 2017. Then 2018. Then we heard the ceo of saudi aramco say it was the back half of 2018. Eventually investors say forget it, too much trouble and they do not have the value anyway. The policycan get right, it will be an immensely valuable company. I do think that they will not lose interest. I think that they will have to theighten doubt out by things like the definition of the company. There are a lot of stories. It is crucial to get this done. Even at 60 a barrel oil, they are still squeezed on their budget. They need the investment in other parts of the economy. Solvent funda based on aramco is important for their future development. I think they want to get it right. 2020, i am18, 2019, not sure they will see that as a portent. I think what is important is eventually getting it into a position where it helps them Fund Development of the economy. David the challenge has been there all along. It is not a new issue. Theres another problem, which is once you are a small minority owner and his company, the kingdom decides about buybacks and things like that. Is it necessarily going to go out as a discount and a differently trading system . A story wereght, bp, becauseut is i was stateowned at one time and a privatized in the early 1980s. It has ended up as if fully Public Company with arguably no discount to what it is worth in the market. Aramco may be headed in that direction. All aboutbp was global, including in the u. S. , oil reserves, which the governments do not need to own. They can tax this. Jonathan Burns Mckinney and Jim Mccaughan staying with us. Counting you down to the opening bell. Three Straight Days, three straight records. You just this morning just a little softer. This is bloomberg. For the markets, it is sentiment versus the fundamentals. Features just a little bit softer on the s p 500. Three Straight Days of gains, three Straight Days of record highs on the benchmark in the United States. Down about nine points on the dow. A story and the bond market, cpi showing reflation is not dead. Inflation in the United States popping a little bit higher. Put that against the risk of another Missile Launch and north korea. In the bond market, yields just a little bit higher, 2. 21 . The dollar is softer, down. 1 . , 50 athe headline barrel on wti for the First Time Since early august, up by one percentage point. 30 seconds into the opening bell. Alix that push and pull with inflation versus a risk off trade because the potential of north korea launching another missile playing out in the markets. The dow not going anywhere. The s p just down about. 2 . Nasdaq down. 3 . Not a huge risk off feel, but maybe not what you were expecting if inflation started picking up in a good way. Watch oil and watch those Energy Stocks over the next few hours. In individual stocks, you have rio getting smacked. Copper is off and Industrial Metals are off. Weaker data overnight in china. Nickel, zinc, copper all had a huge run, but when they take a beating, they take a hard eating. Thesent story here are both slated to be purchased firms. Abased now doubts arising of the deals will go through on National Security grounds. A political fear rippling through the market. What is interesting is when we talk about tech and fang stocks. There was a note out that highlighted the cluster issue in the market. The white line is the fang stocks, facebook, apple, amazon, netflix, and google, their correlations with the s p. Higher, so the s p can go higher, as well, and vice versa. The orange line is how correlated the faang stocks are with each other. The blue line deals with the s p realized correlation. The s p is not very correlated. That is pretty low. It is really about the correlation of the faang. Thesete says to get clusters, you have to limit positions. If you do not, you have a blind spot and could endanger your portfolio. That is an interesting take on the faang names. You cannot be without them, but within them, you have that risk. Jonathan we are here with Burns Mckinney and Jim Mccaughan. What you think about that chart about the faang stocks . Anytime you have the correlations start to ramp up like that, i think what that often indicates is the fact that as investors are buying these, you have index funds that as these get larger within, their market caps get larger. You have to buy more and more. It starts feeding on itself. This is what you saw in the late 1990s with a lot of the dot com stocks. You can also feed on itself on the downside. I will never, forget an analyst who referred to amazon as a haven away from a disruption down in d. C. , the politics in chaos around the world. It is a secular growth story for so many stocks. And then off the back of the weak dollar, as well. Is that how you look at the faang stocks . I dont think so. I think that what is going on is that this is a company that still does not make money, that is a very longterm prospect. It is in many ways likely to be the future of retailing, but it is a lot of risk. The Business Model and how it monetizes is still not totally clear. I do not think it is necessarily expensive, but i do not see it as a safe haven. I think it has a lot of risk. Jonathan they actually deliberately do not make money. Dominatingl end up the industry, they believe, and they may be right. Jonathan you do not believe that . I do. I think they are formidable company. On the correlation with faang stocks, this is largely because of etf trading. Of tech stockss and nasdaq stocks, that is worthy trading history of and from. Alix that is not entirely true, because amazon and netflix are considered Consumer Discretionary stocks. If you say faangs that is somewhat counterintuitive. It is not necessarily the buying of tech etfs. I think they do benefit from just the fact that if you buy they haverket etfs, some of the largest market capitalization. Can be positive, but likewise, we do believe that amazon probably really is the future of retailing in many ways. That said, a lot of that positive news is already very much priced in. As a value investor, you presume that the good news does not turn out to be quite as good as people expect. Often times the bad news does not turn out to be as bad either. David jim says amazon does not make money. Ify can make a lot of money they wanted to. But they are conscious that they want to invest in new ventures all the time. They have a lot of revenue coming in to but they are investing in their future business, business as we have not even heard of yet. To be true. That and other businesses, maybe it is the cloud, if it becomes an i. T. Services company, maybe it will dominate the growth series. Frantic. E is the tradeoff you get in business between a media profits and growth, and they are choosing growth in a big way. Good luck to them. But from an investors point of view, i think it is still a hopeful story. Growth, it isan disruption. Everywhere they turn, they disrupt a new industry, it feels like. But every industry is being disrupted now, and i think that is one of the deflationary points about technology, going back to our earlier conversation. Everything is cheaper now. Hotel rooms through sharing networks, cabs. It is not just retail or the cloud. All of these are leading to Price Reductions of important services, and i think that is one of the key points about the time we are in. It is happening at an unprecedented pace. Amazon can make money anytime they want, but i think theyre rightly judging that their interest is continuing to grow. Alix thanks very much, Burns Mckinney of allianz and gemma coggin of principle global investors. When it comes to aqua faqs, tough times for the company. They are not over. The Company Revealed which software hackers exploited to access Sensitive Data of 143 million americans and the company that produced that Software Offered a patch in april, but at what effect did not do it. Shares are down 30 since friday. Wall streetd for a analyst to tell you to sell your shares, you are out of luck. You want to Pay Attention to this. You liked it before, you have to really like it now. Alix yellow line is the stock price and the white line is analyst ratings. Anning us on the phone is analyst with an outperform rating on equal offense on equifax. Did reduce our price target within his first came out, but it is our view that this remains an attractive business and an attractive industry, and the market has taken about 5. 5 billion of market cap off the stock. In our view, that is an over discounting what we feel is the to look at way potential outcomes. Alix at wind end, you have a pr issue. At one end, you have a pr issue. You have the optics, executives selling some shares when they maybe already knew about the news. Class action lawsuits. And now you have the fact that they did not fix it when they could have. When do you say enough is enough . There is a lot of shortterm noise, but the stock has obviously already had a severe reaction, as well. No matter what they did in terms of response, it was going to amplify the negatives of the response, as they should. They deserve some blame and are owning up to some blame. In terms of some of the other developments, the classaction suits are not surprising for this type of event. , i Credit Suisse share sales think you said if they knew, and i think that is the right way. We do not have data that shows they did. We know how it looks, but i think it is plausible the executives did not know, given the timing and that it appears that the breach was first discovered at a much smaller level without to be a smaller deal initially. Jonathan we have to go through the range of possibilities. If they did know, they have denied that, of course, but if they did know, what would that mean for you . Sure, it come for is a negative for the executives. I do not think that if they knew that it is a Material Change village of do our view on the stock, given how much it has already pulled back, but i think the bigger deal, as you pointed out, that the specific Software Full ability that was the source of entry was publicly known as of march and they did not discover this breach until late july, that could potentially raise some legal liabilities, i would think. I am not an attorney, but i think that would be a bigger risk than the executive suite share sales. Broadly, how confident are you that there is not and other shoe to drop . Too often, when we see Something Like this, once you find other problems. Have you had conversations with the company to give you confidence . It would be tough for them to tell me something that would give me confidence. Of, iwere some reports guess yesterday, about what cybersecurityck practices at some of their argentinian operations. So it is always possible that they are under a lot of spotlight right now from the press, from the Information Security crowd, from consumers, as they should be. So people are certainly digging. But our general view is that consumers and industry benefit from having innovative and competitive private sector credit bureaus. We think they will continue to, and we do not think the market would be betterserved by restricting their access to data or the use cases for the data or reducing competition in the industry. Jeff, great having you on the program. Thank you. The stock trading at 92. The return potential of almost 62 . Alix this reminds you of bp. In the beginning, analysts said it would be fine. But all you needed to see was in video of the well leaking the water, and boom, stock prices cannot recover. A the way to think about quick facts is either the company cleans it up, survives, in which case it might be worth 140 dollars. Alternatively, if it is not managed to clean itself up, it could waste away. David is this a symptom of a larger issue . That is the question. Exactly. Alix thanks very much. This is bloomberg. This is bloomberg daybreak. Tomorrow, an exclusive conversation with jack ma of alibaba. David and the song received its amazony rating received its 42nd buy rating. A guest is joining us from the phone. He has a 1200 price target for the stock. Was this a nobrainer for you . On the list, almost everybody has a buy on the stock. Day, justend of the because it is the consensus does not mean it is wrong. The way we think about amazon is that they are but a fitting from two secular trends. One is more Consumer Shopping online, and they have the best mousetrap through amazon. Com, which is further supplemented through the prime membership program. Continue to expect that amazon will gain market shares is more Consumer Shop online. The second is amazon web searches with a first mover in terms of providing cloud services, and theyre still the most innovative. Between the north American Business and amazons web services, we see years and years of robust growth ahead for amazon. Anthony, i do not run across many people who take issue with anything you just said. Company. Ery successful but there is a question of how much it costs with the value. Why hasnt the market priced it into the price of the stock right now . I think the way you have to think about amazon, when you look at a p e multiple bases, 115 times, multiples of the level of google or apple or microsoft. The way you have to think about the company is it is a company that is growing very fast, but it is also in a constant investment mode, constantly investing in new capabilities, new technology. So you will not release it a payoff from all of that until years into the future. We use the discounted cash flow analysis. We get a conservative consumption, and that is how we came up with the 1200 price target. Using p ebased methodology, it is tough to see this at current levels. Alix everything that amazon does room involves getting more amazon prime users. What kind of growth do you need to see from them in that area to make your case about 1200 . Just, wei think it is just need to see more of the same, see prime users continue to grow. One thing i will say is we do not have a lot of visibility on that because amazon does not break that out. But what we do know is they continue to add more and more features to the prime program, so it is not just about the free twoday shipping. Theirave prime music and own version of netflix with prime video. They have prime reading or you get access to a lot of free books and magazines. They continue to add functionality and benefits through the prime program which we think will allow them to garner more users in the u. S. And internationally. They are rolling out prime to different countries. Target,200 price anthony chukumba, thank you very much. To can check out tv watch us online and check out our charts and graphics and interact us with us directly. This is bloomberg. Lets get you up to speed on the Market Action in the United States. Three Straight Days of gains, three days of records on the s p 500. Today, after all of that, we pulled back by. 2 on the s p 500. The dow dead flat. In europe, price action driven by basic resources stocks. The ftse done about. 9 . Copper getting slapped around. The story also for the ftse is the sterling. Big price action of the day. By over ate, up that is the fx market. In the United States, treasuries, yields higher by a basis point, two point 20 , after an inflation rebound this morning that may put the fed back on track to hit its reserved target. September empire, manufacturing, and retail sales. Industrial production to do university of Michigan Consumer sentiment. Michael mckee joins us around the table. The data so far, the , looking at story that again after the doomsday guys came out the last couple months. Michael cell phone prices, by the way, and airfares both fell in this last month. You have gasoline prices going up, so there is a oneoff theree. Ismay affect the rituals report, because that is reported in dollar terms. In that circle is the week that Hurricane Harvey hit. People were not buying gasoline the prices were going up. If prices are higher, we could seen increase in retail sales. It will be interesting to see how that affects the overall retail sales report. David those prices do not go down as quickly as they went up for some reason. Michael i am not sure why. Alix when do we get a clean read . Michael maybe november, but december is probably your best bet. Things will be distorted for quite a while. I found an interesting chart this morning, g btv 9406. This Service Retailers and texas every month. 25,icane harvey hit august but the trend has been lower. Retail sales were big last month. This month they are not forecast to be up as high. We took the real harvey contribution to the september numbers, and then we will get the irma numbers, as well. We will have changes because people bought a lot of stuff at the beginning of a hurricane, and then they will not buy anything for quite a while. They will buy more clothing and of course cars after the storm. Alix what will we learn about auto sales . Michael retail sales report reports them in dollar terms, and it is not just cars but they also record service. Take the card to get the oil changed or whatever. So those numbers may not be as distorted as the car sales. We will look of the sales reports for the big three automakers this month, for august, and they all said it was too early to quantify the harvey affect, but they expected that dealers were not able to sell as many cars because the dealers and texas were closed. David on the other hand, there are some are between 500,000 to one million cars that are disappearing or have to be replaced. The price of cars will soak a lot of that up. Michael and with hurricanes, and scrupulous will take those cars and clean them up and try to sell them elsewhere, which will bring down prices even more. Theone bright spot is hurricane hit texas, and they buy pickup trucks and texas, which are higher margins. Mckee, thankhael you for joining us. 26 minutes into the session. Futures were a little bit softer through the morning and a bit softer. Down about. 2 on the s p 500 here at the dow positive by about 13 points. Treasury yields higher. 10year yields around 2. 22 . 2. 20 person at the moke it at the moment. Amorrow, were joined by member of Avenue Capital and others. What they have in common, they are coknow coowners of a group. York,is 10 00 a. M. In new 3 00 p. M. In london. From new york, im vonnie quinn. Live from london to my mark barton. Welcome to bloomberg markets. Vonnie here are the top stories were covering from the bloomberg and around the world. President trump says a deal is fairly close. The president making new comments in florida. President trump so we met last night with schumer, pelosi, and a whole group, and i think we are fairly close, but we have to get border secured. Vonnie u. S. Economic inflation picks up, beating estimates for the first time in five months. Enough to ease concerns . In the u. K. , the bank of england keeps rates on hold to lay the groundwork for an Interest Rate increase. In commodities, oil prices are gaining again. Wti topping 50 a barrel. 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