Transcripts For BLOOMBERG Bloomberg Daybreak Americas 20171009

U. S. And turkey continues to heat up and its having an impact across all markets in turkey. Dollarlira is up by 2. 4 . We saw a 6 rally earlier during the thin liquidity trading but now we are well off the highs of that session. The stock market continues to get hit come off by 3 and airlines are really week in turkey. You wind up having a monster selloff happening in the bond market. Are seeingt, you some buying an outperformance in spain. David it is time for the morning brief. We have a big week ahead starting with a Parliament Meeting today. Tomorrow is the meeting with the imf and world bank. We will get Bank Earnings from jpmorgan and wells fargo thursday and on friday, we will get u. S. Economic data including cpi and retail sales. On top of all that, markets will continue to watch the growing tension between the united turkey. Nd over the weekend, both countries suspended granting of these is for one anothers us citizen to visit and the lira and turkish stock market took a hit. What caused all this . Betweenating tensions two nato allies late sunday evening, the u. S. Says they are suspending Nonimmigrant Visa Services across turkey effective immediately. Turkey a few hours later released a similar statement saying it was doing the same for american citizens. The reason behind this move is because last week, turkey arrested a Turkish National who worked for the u. S. Consul in his temple. Turkey says he is allegedly involved in the failedcoup attempt last year. When this took lace, washington reacted saying this was a Disturbing Development and said this could damage bilateral ties. Expecting the turkish president to hold a press conference before he left the ukraine but that press conference was canceled. We expect him to speak from kiev later today. Can either escalate or deescalate the situation. Its worth remembering that just a few weeks ago, u. S. President john trump donald trump said he praises the turkish leader and their and they are becoming good friends. Time will tell if they can sort this out sooner rather than later. Have anhe headlines crossing saying that the turkish justice ministers are refusing a request from the u. S. Minister and there will be a new arrest warrant for u. S. Employees who doesnt look now that turkey is trying to deescalate this. Yes, thats right. That does seem like the case. President erdogan speaks, we can get a feel of what turkey will be saying and how turkey will react. Over the past few years, tensions have been simmering between the u. S. And turkey. One of the main Sticking Points is the situation in syria. The u. S. Sees the militants as an ally the turkey says they are a terrorist group. Another Sticking Point is the extradition of u. S. Based clerics. Turkey wants them to be extradited. That pennsylvania clerics keeps coming back up. Thank you so much. Jonathan i dont know if you saw the statement from the u. S. And turkish government but they are almost i tentacle, they just change the countries around they are almost identical, they just change the names. We do this every 12 months it feels like with turkey and then it drifts away again. Are you surprised by this . Even beyond turkey, lets think about the euro with the ongoing Corruption Scandal in brazil, the tensions on the Korean Peninsula come emerging markets are up about 30 year to date in dollars. The message from the market is they know the geopolitical risks but a long as the Global Economy keeps expanding, Monetary Policy remains accommodative and people are willing to step in and by these countries. Jonathan there is something about turkey. Hascan see that largely, em outperformed against the u. S. Dollar. Down at the bottom is the turkish lira. Why turkey specifically . Think heart of his politics but part of it is also the question of which country will be the guest beneficiaries from some of the macro developments . You think about the expansion of trade, the acceleration of the Global Economy. Part of the question is where does turkey fit into that narrative . Also have the highyield high volatile currencies under risk on the macro in terms of when the rates rise. The lira will be right in that. Absolutely, anything approaching the taper tantrum of 2013, people start to get concerned about a stronger dollar. Turkey is one of those countries where you can expect some vulnerability. Alix what is the vulnerability and how fragile is the rally in emerging markets when it comes to bonds and equities . Turkey is a bit of an outlier because in many countries, we have seen an improvement in fundamentals. E in mostm of the, brazil, russia, you have seen steady falling inflation. Actuallynflation is over 10 so the Macro Economic improvement we have seen in em over the past few years in other countries, we have not seen that same improvement in turkey. David to what extent does that take a right back into politics with the relation with erdogan and the central bank . Think thats completely fair. There is the question of emerging markets not all the same, there are differences between commodity producers and importers. This aspect you touch on is important. Economiceing macro reforms that investors expect that will power the longterm convergence with developed markets . Turkey is not made the same progress is other e markets. Mdavid what is the poster child for emerging markets . You have seen a lot out of asia because of the nature of the recovery. We have seen a strange confluence of both the rebound in Industrial Metals which has benefited countries who are producers but also a rebounding global trade. Stories the global trade was stagnating in 2014 and that started to improve stop countries in asia the not only benefit from trade but also technology have been some of the biggest beneficiaries. Jonathan i want to get your thoughts on the price action over the last 24 hours. About beenmething trading in asia. The affects market in asia is a mass. What are you thinking . As you said, what is liquidity in that part of the trading day. It starts to narrow the gap as you get more liquidity but is there any contagion . We did not see the same price action affect other emerging markets. Most of the em marks this morning working green so its telling you this is an issue limited to turkey for the reasons we were discussing. Alix we are seeing the peso and the rand as well as the ruble today. Does it mean for the highe yieldrs there is contagion or its just a buying opportunity . Final this particular event with turkey signals contagion. Will he continue to see the rebound in the dollar . 3 over thes up past 46 weeks. In some respects, thats to be expected, it was a massive decline but as we get to an area where the fed is withdrawing liquidity, if we have fiscal stimulus with might also cause the fed to accelerate the pace of tightening, does that cause resumption in the dollar rally . As you remember, it was a time when em was underperforming. Alix you will be sticking with us and coming up this week, we have a great lineup of guests including Olivier Blanchard and john allison and mike mayo. What props will he bring with us . Also liz and saunders. This is bloomberg. Jonathan another weekend of protests in spain with hundreds of thousands of catalan demonstrators calling for spanish unity. The weekend events help send spanish bonds high. Independence coming tomorrow, the ctalan president will address parliament tomorrow. Inform us what happened over the weekend and how its playing into the beginning of the week. Tomorrow, the Catalan Parliament reconvenes and we some kind ofo make announcement. The truth is, there is a lot of tension within the coalition. When we broke the story, the more moderate side of the coalition is terrified of the world unilateral and the route more radical sites is lets do it. We dont really know what to expect. We dont know if it will be symbolic or unilateral. We know the government in madrid is ready to implement article 155 as soon as the word unilateral is dropped. It will be presented to the parliament tomorrow. Jonathan they are calling for talks. Government is not showing any inclination that they want talks. Spainf the big banks in that are headquartered in catalonia are looking to headquarter elsewhere. Is that putting the squeeze on the separatists . Do they feel that . Absolutely, we know they met saturday and the request was crystal clear. We are begging you to drop this unilateral word. It is creating tension in the about 15 company said let catalonia and the past week so thats having an impact. Some say its business as usual but we are talking to the business can and what we get is they are saying this is a mess and i have to solve it. The unilateral word is terrifying for the community. They dont want to see this announcement tomorrow but the pressure is piling up. Weakoalition is incredibly and the leader was never elected into office so he has been pulled from all sides and we dont know what to expect. We know that madrid is ready to implement this article as soon as the word unilateral and the declaration of independence. We know that for sure. Jonathan the ibex has snapped back so what do we need to look out for over the next 24 hours . Hours,next twitterverse the thing that will matter the most is unilateral. That word is in any kind of document or we see any kind of intention on the catalan Regional Administration that they will produce pronounce independence, the the deputy promised are made it clear that its their move. He will wait and see what he gets tomorrow but we know for sure that madrid is ready to act. Its a lot of pressure on both sides. Jonathan thank you. Alix if you take a look at the Market Reaction is like the has the yield him a spanish 10 year by 12 basis points just in the last week. It did spike at one point but now youre seeing a lot of lying come in. Spanish bank stocks are up on the week as well. Been jpmorgan said you should be buying the dip . This has been the trade for years now. Decided that this is not an existential risk and they are going back to the playbook that works so well in every european geopolitical crisis the last five years. You cant on europe to muddle through. Alix it does highlight the risk that you take when you buy the peripheral debt, by peripheral equities, you have to start to linear how you buy europe now. Absolutely and thats not just true in europe but a number of markets. We tend to group these countries and bonds together. There is a big difference between buying spain and buying germany. I think there are some idiosyncratic risks posed with spain and thats reflected in the bond yields relative to other parts of the periphery but it suggests that the market is not putting a lot of weight behind geopolitical risk rising either in europe, asia or the United States. Jonathan whats the value opening up in spain . Is it in bank credits are the companies headquartered in catalonia who are moving . Is it in the sovereign debt . If you believe that spain will work through this and in general, i think this is true, the Overall Economic environment in europe is really improving which we have not seen since before the crisis, it is obvious the the european banks because thats where you get the most leverage for recovery but also also is the ecb starting to withdrawal liquidity . The banks of the biggest beneficiary of that. Jonathan the financials were not part of the corporate buying debt problem. Can you assume this lifts all boats . It make what you are heading on is the fact that you will improve the fundamental health of the banks of a more normal rate environment which is reasonable if you believe that europe will not trip on a geopolitical crisis but also that the fundamental economic improvement remains at pace. Point at what point does the geopolitical risk creep in . As the banks move out and is capital flees, at some point, that has to affect growth. Absolutely but the market has taken the position that this will not be as bad as market figures. Its not just catalonia, there is in a tight election coming up in the next year and nobody is talking about that. Theres a strong sentiment in italy that you do not get a market jump from there. There just isnt a lot of geopolitical risk discounted in any asset class. For staying you with us and coming up, well talk with Glenn Hubbard, Columbia Business School dean. Hes got a lot to say and tax reform as well as asset evaluations. This is bloomberg. Oscar winning movie studio weinstein cup and he has fired its cofounder, harvey weinstein. He has taken a leave of absence over allegations of Sexual Harassment that dates back decades. It is reported he reached settlements with at least eight women who claim they were harassed. He said the report was unfair. Has reportedly selected its next ceo. The bank is asked the bank of england for permission to appoint john flint ahead of the hsbc Retail Banking and wealth management. The present ceo said he would retire next year. The noble prize in economics has been awarded to Richard Thaler from the university of chicago. He was honored for his understanding of how humans make economic decisions and the Nobel Committee says his work shows how human traits affect market decisions as well as individual ones. As a result, the Committee Says he has made economics more human. Thats your Bloomberg Business flash. On that nobele laureate for economics, we are joined by Simon Kennedy will. More human but also more understandable for those of us mathematicians. You can read his work and take it to dinner parties and share his knowledge. He looks at things like how to make people pay taxes earlier by writing to them and saying everyone in your area has paid taxes and that nudges people to pay taxes. To nfl teams why they shouldnt go for that star quarterback and he also talks about 401 k pensions. Its relative is relevant to modern day. David this is not like redoing the entire science of economics. This is really practical tips. Absolutely but its getting into the long debate you see in economics about home much how important is this that makes his psychology with economics. Basically, the Nobel Laureates are bringing this into the mainstream. Previously snobbish elements. Now its very much part of the mainstream and being used by in government. They set up units to find ways to budget for deficits and spending is low, you can find ways to incentivize voters to doing things to increase the budgets. Jonathan what does this say about the market . It says the field of economics is broad and people can be incentivized and not this is not the best way to make money or decisions and that people can be nudged into making decisions and improving society that way. Jonathan doesnt make you think about markets more differently . Had the privilege of meeting professor thaler years ago and it makes us all question our assumptions. There is talking these text books about everyone being rational and math is applicable and these are flesh and blood humans who behave differently in expense why we have crashes and tobles it also the potential use some of these techniques to improve policy. We have this partisan divide right now. Is that the opportunity to have the middleoftheroad commonsense approach that dr. Thaler has advocated . You see that in great britain. About 60 Civil Service are assigned to look into things. They looked into attic insulation for your house and they discovered rather than subsidizing the insulating, what they would subsidizes the removing of things. People did not want to go into their ethics to improve the heating because they had all this stuff from years of moving. If someone volunteers to clear that, they signed up. Alix thats really surprising. You can get diametrically different answers to polls depending a frame the question. Professori introduced thaler last year. You will know who he is now. Thank you both for being with us. Program, thethe director of global macro will be joining us as we kickoff off a new trading week in new york city, counting down to the opening bell about two hours away. Futures are positive you are watching bloomberg. Jonathan about two hours away from the opening bell this morning. Futures are positive on the dow and s p 500. Following four straight weeks of gains. Europe outsidehe of the dax. Stoxx 600 trading positive so far. Onrth straight week of gains the s p 500. Declines on the cable rate. Sterling is positive, snapping back 0. 8 . Prime minister may says she has full confidence in the chancellor of exchequer and boris johnson. That is a position you never want to find yourself in when you have to be saying those things. Yields on bunds are a little lower. Because of columbus day, the treasury market is closed. That is your cross asset store. Lets get headlines outside the business world. Taylor senator bob corker warns that President Trump could set the nation on a path to world war iii. Theold the New York Times present is treating his job like a reality show. President trump accused bob corker of being gutless for not running for reelection. Senator corker said it is a shame the white house has become an Adult Day Care Center. President trump is making tough demands on immigration in exchange for letting socalled dreamers stay in the country. He wants congress to provide money for his border wall with mexico. Top democrats rejected the demands. Dreamers are young people brought illegally to the u. S. As children. Angela merkel has cleared an obstacle on talks for forming her next government. She has exceeded to demands by allies in the very. The antiimmigration party alternative for germany won almost 13 of the vote last month. Global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. I am taylor riggs. This is bloomberg. David thank you so much. We thought tax reform would be difficult before President Trump decided to take on tennessee senator bob corker. There was a war of words yesterday, almost two months to go through. This is an influential chairman in the senate. This could affect tax form, kevin cirilli. There is too much to go through. I want to read one from the present, bob corker gave us the iran deal, and that is about it. We need tax reform and people that can get the job done. Does the president think he can get it done without bob corker . Think that, but the reality is he needs people like bob corker because the math in the senate is too tight. They were back and forth all weekend. I could barely keep up. That has severe implications for the president s ability to get things done like tax reform. Bob corker is signaling he is not necessarily going to fall in line behind the administration. We saw the same type of issue on health care with people like senator rand paul, michalski, and collins. As we inch forward into this, i think it is going to be remarkable to see because what does senator corker have to lose . David he is also a member of the budget committee. Of his relation to other republicans on the hill. How could he influence others . Kevin he has a strong reputation amongst the republican establishment in the senate. You mentioned the committees he is on, and he also worked on the Senate Banking committee. Onis in influential person capitol hill, similar to senator john mccain. I think we have seen in the past that there is a group of republican senators from including senator corker have pushed back who have pushed back against this administration. David thank you so much. Alix this is what i want, trevor noah, what his take is on all of the tweets and what kind of visuals they will come up with to encompass it. No one wants to talk about that. David he has lost one of them. He has one left to go. Politicians, when idea, the only care about getting elected. This man doesnt have to care about getting elected anymore. He is retiring. We are finding out what happens when you dont have to worry about getting reelected. Help me with the narrative. Three months ago, tax reform looked dead in the water. People were saying Earnings Growth is so amazing, we dont need tax reform. Now it seems it is inching forward. We are seeing months of revisions of downwards for Earnings Growth. What is it . Revisions are double what we normally see. It is. Tax reform completely came out of the market by august. Now it is creeping back a little bit, but there is still not complete faith in it. We have seen a marked a change in the last few weeks. The dollar is up. Gold is down. Stocks are up. The price of higher tech stocks are even more. The market is thinking a little bit this is not dead in the water. What is the reaction to things like this . Alix fair point. If you look at the s p versus downward revisions can we have never had this kind of rally for the s p going into an earnings season with downward revisions. The total return is the white car, and the revisions is the orange bar. What is going to make a selloff in the s p happened . His Earnings Growth going to be enough to support the equity market . It needs to be. You are losing that prop. If the economy softens, it is ok we will get monetary stimulus. That story is ending. If we dont see Earnings Growth, it is much harder to sustain the type of gains we have had, which is not down just in terms of the magnitude of the gains from but how they come with almost no volatility. See that in a market that only goes up 13 or 14 with no volatility. Jonathan we have characterized this market bull market as the most hated bull market ever. Are the bears slowly capitulating . G . The melts up comin i think it is possible. I think you could see a Fourth Quarter melt up. If you get tax reform done, improvement in the Global Economy continues to that is probably an ingredient for a melt up. We are at a higher probability than we were two or three months ago. It is looking like a higher chance of tax reform in some improvement in the Global Economy in places like europe and japan. David are we worried about the pricetoearnings ratio . We are not as high as the tech bubble, but we are getting there. I think this is a longterm concern. You have to be concerned about this. The question is one of timing. I think it is a very different answer if youre talking about six to 10 weeks versus the next five to 12 years. This typeo continue of nevada where nirvana where this growth is staying. On the longer horizon, five to 10 years, your return expectations have to be much lower because of the starting point you have today, but that only matters over the longer term. David you need that continued growth with less quantitative easing around the world. Chances are we will not have as much as we have had in the past. The question is where do you get productivity or increased workforce . That is the question. You need growth, but the question becomes what is the growth limit in a world where graphics are working against you relative to 20 years ago and by most traditional measures productivity is down . Some will say productivity is miss measured, and there is some truth to that. If you see some increase in capital spending, that story gains more credibility. Alix drill down for me. What sectors do you like in earnings season . We think energy is undervalued. Oil prices are probably in this range, and that is the range were Oil Companies can start to ask for earnings. We are seeing concern in staples consumer companies. Rates have been low. You are seeing very little if any organic Earnings Growth in that sector. David ok. He will be staying with us. As you commute today, you can go over to radio and tune into our colleagues tom keene and david gura. Thecan hear them all across United States on sirius xm radio. This is bloomberg. Taylor this is bloomberg daybreak. I am taylor riggs. ,n the next hour, Glenn Hubbard Columbia School of business dean. This is bloomberg. Now to your Bloomberg Business flash. General electric is adding t riton cio. They have been pushing John Flannery cut billions in costs. Says their ceo will meet with their biggest investor. According to reports, he has been avoiding meeting the top investor. For the first time, google has discovered russian agents purchased ads on its platform to interfere with the u. S. Election. That is according to the Washington Post. Google discovered tens of thousands of dollars were spent. That is your business flash. Jonathan thank you. We will try to cover more on that story later in the program. For thekers gathered semiannual meeting of the imf. One question looms, who will lead the Federal Reserve when expiresllens term this january. List, former fed Economic National Council chair gary cohn. Are you talking about this a lot at blackrock at the moment . Russ we are. At this point it is a lot of speculation. At this point no one knows. Based on earlier tweets in the year, i would think the administration would still see the benefits of easy money and not too strong of a dollar. That suggests some candidates we might feeling towards. Jonathan if you have a holistic there, if the regulation is the number one thing, that is janet yellen off the list. Russ she would not be the obvious choice. Not in favorout of deregulation. Im not sure that is the number one thing. If im going to deliver on my agenda of growth and 3 , do i need relatively easy Monetary Policy and the dollar that is not hire than it is today . David it is not just your personal position, but can you bring along the rest of the fed because it is a committee . Russ that is a good point. It is a broader institution. It is not just the 12 members of the fomc, it is also the entire staff. It is not just someone who can lead the organization, but someone can be comfortable there. That favors some people who already were there. David you need a phd in economics, but not just for the ders fiction, but in or to command respect from the staff. Russ clearly there have been chairman in the past who have not come from that background. Chairmen have had strong Economic Education backgrounds. Alix when you are structuring your view of the equity market. Likeu factor in the fed what we have seen, or do you factor in an entirely different direction . Russ are based case is we will have a fed like what we have seen. If we were to see someone like professor thaler getting the nod, that would be very different. Alix he is very different, but hn, does that a co change the direction of the fed . Russ it creates uncertainty, but it is not just the chair. And the vice chair spot other governors that need to be appointed. When we talk about the fed, the obvious point is the fed will look very different in 18 months than it does today. How much of that difference in staff leads to a difference in policy . We dont know yet. Jonathan which of the names does the s p 500 selloff on . Russ i think if you had john taylor, there would be a reaction. I have huge respect for him, but he is talking about the systematic approach which would have the fed funds rate much higher than it is today and much more than the market has discounted. That would have an impact on the dollar. Alix do you want to buy that when it sells off or be a little scared . Russ i think there would be a little reaction in the bond market. I dont know if you would expect as much of a change under warsh as you would under john taylor. Alix what about powell . Russ i think he represents continuity. Alix does he . He disagreed in 2013 with ben bernanke. There is some thought that he may not be as the regulatory unfriendly as deregulatory unfriendly as yellen. Russ that is a fair point. This is Like Supreme Court justices. Over the years, they can go in their own direction. We dont know what a fed chair is going to do five or 10 years hence. I think howe would be viewed as continuity and probably market friendly. David you said over time. Whoever goes in there will not want to disrupt the markets. Isnt this more of a matter of gradual change over five to 10 years rather than the next year . Russ i think it is gradual change, but the market has become so attuned to the fed that even subtle shifts in language could disrupt the market. Markets are trading at elevated levels, not much volatility, so it would not take much from the fed to introduce volatility back into the markets. Russ koesterich, great to see you. You will be sticking with us. If you have a bloomberg terminal, click on tv. You can interact with us directly. You can go through every watch anything you may have missed. This is bloomberg. Tensions simmering between Deutsche Bank and their chineseshareholder, group hna. There have been questions as to why this ceo has not met with hna and if he will. And ceos the chairman against each other. Joining us, our chief economic correspondent in new york and ever bloomberg german banks correspondent who broke this story. Talk to us about what happened between the chairman and ceo butting heads between this hna shareholder issue. It seems he said that if you hna, the topwith shareholders in the bank, and they have been in that position since february, the question is there coulde met, be a diary conflict, at eight months should be enough time to meet with investors. The rumor is he does not want to meet with them, which would be a problem. They needvestor says to meet in the first eight months, and this kind of behavior is not doing him a behavior this point. Alix what is hna . It is a sprawling conglomerate. The reason they came under scrutiny is because of the record surge in m a in china last year. They were worried about capital outflows. Tors is why regula came down hard. Alix is this a problem she has ith hna or the chairman who courted them . I think it is the former. It is not entirely clear. Chairman however does not like this behavior. Contentionsert some between the two as well. We are in a position where the chief executive officer needs as much support as he can to turn around the bank. Jonathan i wonder what it says about the current position Deutsche Bank is in. A year ago i doubt the chairman and ceo would have been arguing about the major shareholder in the company. It seems they are in a different place. Certainly financially they are much more stable. There were concerns about their financial strength last year, one year ago. They raised 8 billion euros in capital in march and april, and that has allayed those fears for now. Investors want to see revenue growth. There has been little evidence of that. People are becoming impatient. The ceo maybe it is that is a little more confident that he was year ago. That patients, how critical impatience, how critical is it . Were becoming fed up with the ceo and how long it is taking to see fruits of the work he has done since coming in. He presented a strategic update in march, but that is not shown any progress for the bank in growth, and now reports are mentioning as people become impatient about their concerns and seeking avenues to vent their frustration, especially if the ceo does not want to talk to them in the first place. David i want to come back to china. To what extent could this become unwound or modified . Are under significant scrutiny. Numerals are new rules are coming under significant scrutiny. We have to get to next weeks congress. The roadmap has been rewritten. Well have to wait and see. Jonathan hopefully we can catch up with you later in the week. Steve. Koran and coming up, Glenn Hubbard will be joining us in just a moment. We are about one hour and 34 minutes away from the open. We are up about 0. 2 . This is bloomberg. Retail. Under pressure like never before. And its connected technology thats moving companies forward fast. Ecommerce. Real time inventory. Virtual changing rooms. Thats why retailers rely on comcast business to deliver consistent Network Speed across multiple locations. Every corporate office, warehouse and store near or far covered. Leaving every competitor, threat and challenge outmaneuvered. Comcast business outmaneuver. Jonathan President Trump takes on one of his own, republican senator bob corker snaps back. The white house has become an Adult Day Care Center. Escalation between the u. S. And turkey as the turkish lira heads to a ninemonth low. Spain and catalonia, economic chaos as the region continues to move for independence. Good morning. A warm welcome to bloomberg daybreak. I am Jonathan Ferro alongside david westin and alix steel. A brandnew trading week. Futures are positive, up 0. 2 . Four straight weekly gains on the s p 500. For anyone following the bond market, the treasury market is closed for columbus day. Yields just a little lower, one basis point, 0. 15 . A touch of dollar weakness, eurodollar at 1. 1745. Upx we see dollar there a 2 . You also see turkish indexes down 3 . Turkish Airlines Getting hit. A selloff in the bond market really changing. It was up 25 basis points before, now it is up 4. Spanish 10year begins to outperform in europe. David we have a big week ahead of us. Tomorrow it is Imf World Bank meetings. Get Bank Earnings from j. P. Morgan and wells fargo thursday. Friday, we get u. S. Economic data, including cpi and retail sales. Today we are focused on tax reform. The president of the United States made an interesting choice over the weekend to go after influential republican senator bob corker of tennessee. He blamed the senator for the iran deal, and that he wanted the secretary of state job but did not get it. Senator corker compared the president to a reality show and said the white house was an Adult Day Care Center and the president was sitting the nation on the path to world war iii. On capitol hill, our chief washington correspondent kevin cirilli. It does not sound like these two people are headed in the same direction. [laughter] kevin i dont think they are getting along well right now. I just spoke with a republican consultant in the conservative faction of the republican party, not necessarily aligned with senator corker. What they told me is that senator corker tried to give President Trump a chance, and when you look at what this could signal, when you have the chairman of the Foreign Relations committee saying this could be putting us on a path to world war iii, that is significant and should not be underestimated. I would add to that you also have a situation that senator corker is outspoken recently, it also you have senator rand paul and senator susan collins. It gets interesting when we Start Talking about tax form and he frustration that reform tax reform and the frustration on capitol hill among republicans. David he is very concerned about the deficit and concerned that this white house will run up a very big bill. It is a substance issue. Kevin that is a good point. It is also the sense that they have not consistently put out details on how they are going to pay for any of this. Corker, int senator all the years i have covered him, i have viewed him as a bit more centered then senator rand paul. If senator corker is saying this, in the weeks ahead, look for senator rand paul and where he falls on this. I have heard he is not happy. We will hear a lot more in the weeks ahead. David there are only two votes they can afford to lose in the senate. Alix one is gone. Now you have to get it from somewhere else. Joining us is Jurrien Timmer of Fidelity Investments. We are seeing the biggest slowdown of productivity since 2011 and Earnings Growth down, double the average. There is a question about tax reform now. Work that out for me. Jurrien there is no question that Earnings Growth that has been robust for the last six quarters or so is starting to come down. It is still positive, but it is moderating its rate of change. Q2 up 11 , q3 on pace for 7 . Now we are only looking at pluse 3. 5 . It will be interesting to see how much of the normal bounds we get once earnings season starts this week. Normally the numbers bounce about 300 basis points or so. Normally we would be looking at 6 or 8 . Those are not bad numbers. Historically the trend growth rate is 6 . Inflation, the rate will always come down. I did not make much of the fact that the earnings numbers have come down. It would be nice to see them hold steady around these levels. The Bigger Picture is that since the First Quarter of 2016, we have had these double tailwinds of Earnings Growth and easing financial conditions, which is ironic considering the fed has been tightening, and we have had easier liquidity conditions. Those drive valuations higher. When valuations go up at the same time earnings go up, it creates a big price game. That is what we have seen. My guess is we will moderate that Going Forward as the fed titans more in december and Earnings Growth starts to slow. Earningsair point, growth is going to moderate. Now intentionally we need Earnings Growth tax reform to justify these levels in the s p . Jurrien i dont think so. Very little in the earnings estimates really represents the likelihood of tax cuts. Earlier in the year, maybe that was the case. From the spring until a month ago, all of the potential tax cut gains were basically priced out of the market. It has really been a moving target. The odds have always been around 5050. It is a matter of what the market expects. Now we are maybe at 70 or so. I dont think those numbers are in the earnings, so we would likely get an actual boost to earnings if we do get some sort of tax reform on the Corporate Tax side. I dont think the market is out over its keys on that front. Jonathan you said in the earnings it is in the multiple. Are we not seeing it in the multiple at the moment . Russ my best jurrien my understanding is the potential earnings gains are not priced in. Maybe in financials a little bit because financials would get the triple benefit of lower taxes equals higher earnings, and lets earnings equals higher valuations. The market has never completely priced in everything and is at the risk of disappointment. I think the market is fairly set up to handle both outcomes. We are in a global synchronized expansion led largely by china. That is a separate story that continues to unfold in a relatively positive way, but at slower rates of change, which is inevitable after any cyclical inflection point. Jonathan i wonder where the valuation gap has opened up outside of financials. What sector are you looking at going into earnings . Jurrien the market i look at has three themes, the bond markets that were the big leaders until several years ago. Growers, the fan trade. Then you have the cyclicals, energy, industrials, materials. We have seen ongoing rotation among those three. It is interesting that over the last month or so it has been the structural growth plus these energy, russell 2000, industrial materials, and it is only the area that has lagged are the bondproxies, utilities, real estate, telecom, staples. There is less demand for those. An interesting juxtaposition is a large part of growth and value are outperforming at the same time. That is low structural growth and a cyclical boost. David if the pace of growth and earnings is slowing down, there could be two causes, the numerator, the denominator. Is it the top line . Jurrien stock buybacks have come down. They are still positive. Years, that was running at a 500 billion a year rate of change. Thatding to the epfr data aggregates fund flows on active and passive dont since march 2009, the market is up fourfold, and yet u. S. Equity funds and etfs have been in redemption almost 300 billion. How can the market be up . The markets have bought back 3. 6 trillion of shares. Share buybacks remain a huge prop under the market. If that goes away, we will need other buyers to step in. Jurrien timmer will stay with us. Later this hour, Glenn Hubbard will be with us to talk about tax reform. He is a believer in the president s plan. We will ask him why. This is bloomberg. Taylor this is bloomberg daybreak. Im taylor riggs. The nobel prize for economics has been awarded to Richard Thaler of the university of chicago. Committee says his work shows how human traits affects market decisions as well as the vigil individual ones. General electric is adding a board member. Ge andhas been pushing John Flannery to cut billions in costs. Jonathan tensions between the u. S. And turkey rising. Both sides suspending Visa Services for citizens looking to visit the countries. Just over an hour ago according to a report from a turkish organization, a new arrest warrant has been issued for a u. S. Employee. The dispute taking a toll on the lira and turkish stocks and bonds. Still with us is Jurrien Timmer. Let us begin with the news in turkey. What is the lesson you take away . The lesson as an investor is if youre going into emerging markets, which i suggest most investors would consider, be diversified and actively managed to this is why managed. This is why em has yields of 12 and the u. S. Has 18, it is because of these factors that will occasionally, and cause a lot of damage. A diversified, active portfolio for e. M. Is always a good idea. Specific is there a set of characteristics from the assets you are looking at . Be more specific if you can. Jurrien since the First Quarter of 2016, this has been a china m. Rally. M. Rally e. China remains at the forefront of it. Everything that derives from china, russia, brazil, other southeast countries that trade with china. Rally. The e. M. China is a large part of the index. When you think about them is like alibaba and waidu that is part of the global fan trade. I focus on china and how are they managing the aftermath of their massive credit impulse from 18 months ago. So far they seem to be doing a really good job. We have the congress coming up now, so well have to see how things evolve after that. So far they have kept it together pretty well. Alix i know you are looking at china, you could say a lot of the sellouts we have seen could be triggered by the lira. Volume,high risk, high losses elsewhere, and it is this vicious circle of selling. Why would you not expect that this time . Jurrien i would for the particular countries in question. E. M. Has always been a story about currencies and capital flows. When capital leaves the country, yields will rise, Central Banks will have to tighten to defend the currency, and that causes recession. There is a predictable playbook for a lot of e. M. Currencies. That may well happen in turkey, but my point is on the whole that does not seem to be the story because the dollar has been weakening, and that eases pressure in terms of liquidity conditions because a lot of e. M. Countries are net in dollars. I would expect any incidents like we are seeing today will be limited to individual countries that have individual stories like we are seeing in turkey, and they broadly diversified, actively managed portfolio should withstand those types of problems. David im curious that you think china has handled their credit situation so well because they are still expanding credit faster than the underlying rate of Economic Growth. Can we really say they have come off of that sugar high until they get that credit growth to the same level or below Economic Growth . Jurrien i dont know if that is going to happen anytime soon. The big structural issue in china is credit growth has been going at astronomical rates. Whenever they reflate by pumping in more credit, it takes more credit relative to gdp to do that, so the multiplier of how much reflation they need to get growth going keeps coming down and down. Is yearoveryear basis, it taking them 22 trillion rmb to gdp. Rate 8 trillion rmb in because they and limited capital controls on the currencies, which you would think would be the ultimate way to manifest credit pressures, even that they control. When you look at the credit impulse, it was 31 of gdp in early 2016. It is still running at a 30 . Alix thank you. Jurrien timmer of fidelity will stay with us. Allison, mikejohn mayo of wells fargo, and liz on sanders of charles schwab. This is bloomberg. Jonathan another weekend of protests in spain. Hundreds of thousands protested for unity. The weekend event sent spanish bonds climbing higher with yields lower. The potential for a declaration of independence possible tomorrow when the president of cattle and will address congress. Walk us through the weekend and what the next 24 hours may look like. That is the crucial question. We know the Catalan Parliament will reconvene tomorrow. ,e know the regional president we broke the story about the serious tensions within the yes coalition. This is a coalition that was put together in a very weak way. You have a kind of moderate upperclass and former communist , the only thing binding them together is the idea of independence. We know there are serious tensions over the word unilateral. The moderate side is saying this market, whichhe means about 15 countries party left since the referendum last sunday. The more radical side says lets do it now. We know the dreaded is about to interfere if they played anything such as a unilateral declaration of independence. We could be heading into the final hours of the catalan challenge. Jonathan thank you. Alix still with us is Jurrien Timmer of Fidelity Investments. Do you like to buy the debt in spain dip in spain . Jurrien if the Spanish Government does article 155, i think this will go on the back burner. The question is what is systemic . To me a systemic issue in europe, and i dont think it is particularly different at this point, at what rate will ecb start to withdraw policy easing . My guess is it will be gradual. This notion of going from global Monetary Policy of easing to a less easy cycle and what that does to the term premium in government bonds and nominal yields and what that does to valuation for Corporate Bonds and equities, that is really the big question, and i continue to focus on that. These individual issues, especially in spain where they have the wherewithal to shut this down, if you will, i am not too worried about that disrupting the markets over the medium term. Alix do you worry about italy . Jurrien italy is always going to be out there. At this point, it seems to be somewhat contained. We now this new Franco German alliance with marco getting elected and macron getting merkel getting elected and macron getting elected. There will always be countries making noise. Even in the german election, afd got 13 . Expansiondoes german remains an elusive story picks of the things we discussed . Jurrien probably. Forward pe has not moved. Price is really just moving in line with earnings, therefore pe stays the same. Probably that will be a headwind. Pe. Will always have a headwind. Turkey will probably always have that because you have a question aout the currency and Monetary Union and fiscal union and what that will do to structural possibilities. I think around the world there valuations, including the u. S. , which has headwinds. And debt i think valuations are about a stretched as they will get for a while. Jonathan Jurrien Timmer of Fidelity Investments will stick with us. Coming up Glenn Hubbard, Columbia Graduate School of business dean. We will be right here in new york. Counting you down to a nutritionally, one hour and four minutes away. Futures positive 47 points on the doubt, four points on the s p 500. Just below an alltime high. This is bloomberg. Jonathan it is the longest weekly winning streak on the s p we are in the open with pictures positive by 2 10 of 1 , by five points on the s p 500, now positive by 2 10 of 1 . The dollar a touch of weakness against the euro. Rebounding from the worst week of the year so far. The United States, the treasury any sign ofok for movement in the bond market and you will find nothing. Lets get you an update on the business world, shelley . Here is taylor riggs. Jonathan, it is open war between President Trump and the senior senator of his own party. Senator bob corker says that he is leading the United States to world war iii. Meanwhile, President Trump making tough demands on immigration in exchange for letting the socalled dreamers stay in the country. The president wants congress to provide money for his border wall and make dramatic changes to immigration policy. Top democrats rejected the demand. Dreamers are immigrants brought to the u. S. As children. And Prime Minister theresa may may have a shakeup in her cabinet. Senior conservative Party Officials made a deal with foreign secretary boris johnson. He has angered alex by forging his own path on brexit. Global news 24 hours a day powered by more than 2700 journalists and analysts in more than 120 countries. Im taylor riggs i am taylor riggs. David . So much,ank you taylor. Gary cohn laid out for us on tax reformhow the plan would generate Economic Growth. Will make ourselves more competitive. We make businesses want to locate in the United States. When they locate in the United States, they have to hire labor. They have to hire people. David but this morning, his predecessor and former treasury secretary Lawrence Summers writes in the Washington Post there is no way the plan will do what he says. He says joining us now to sort all of this outcome of the dean of the Columbia Graduate School of business dr. Hubbard. He has frequently been mentioned as a possible successor to fed chair janet yellen when her term expires in february. T is why understandably welcome back to the program, dr. Hubbard. Lets go back to tax reform and the relationship to growth. You have said with the tax the lineskage along of what the president has said we could get near 2 or 3 growth. How does that work . Many economists have said you cannot do that. The real channel is the corporate side. Cuts in the corporate rate will increase investment and productivity and wages. The tax cut will not pay for itself though. Growth will pay for part of it. Not all of it. The two sides are talking past each other here. The center of the debate needs to be growth and wages. Lower Corporate Tax, higher wages. If productivity is key and thats driven by capital investment, how can it be the case that corporations are waiting for tax cuts to make that investment . The cost of capital for companies has been approaching zero for a long time. If they wanted to invest, why are they not investing right now . Lots of companies are concerned about the future state of growth in the economy. Tell me about growth and i can tell you everything. I think businesses are afraid the economy is stuck in slow growth mode. Tax reform is one of the few things that can change the climate for Business Investment as well as the location of that investment inside the United States as well as abroad. David doesnt that bring us back to the personal the duction question mark if you are waiting for demand to come along, without demand not come from the consumer side, people spending money . I think the business tax cuts will be more important, but personal tax reform is a very good idea. Big six plan would involve cuts in marginal tax rates were households with whether they are middle income or upper income households. That will be there. The politically tough part is how do you pay for cuts and marginal rates . They do not pay for themselves. That is, im afraid, where the disagreement is. Act dr. Hubbard, i want to about the effective tax rate. The tax rate for most Industries Point 2 on9 average for the whole s p. Its really energy and utilities and Consumer Staples that have the higher tax rate. So, why do we even need it . The margin, the incremental investment versus the marginal tax rate, the average tax rate is not what drives decisions. It is the marginal tax rate. We should not have a tax code so riddled with provisions that Different Industries face different tax rates. That is a good reason for tax reform. Jonathan is your message that this will help the Smaller Companies . Smaller and Mediumsized Enterprises really move the dial on the productivity story in the wider economy here in the United States . Are aboutte rate cuts very large businesses. Small businesses would generally benefit from cuts in individual rates and, yes, they would help the productivity needle move through dynamism and entry into industry. The key to tax reform really is the business tax reform. Of july, politics have gotten out of sorts. Atathan if we look demographics, demographic story is not looking great. Your message is productivity. Their message imd see is we can get up to 2. 9 their message in d. C. Is we can get up to 2. 9 in 10 years. That is how it is going to pay for itself. You say it is not going to pay for itself. Gdpwe get to 2. 9 sustainably when we have difficulty forecasting the next six months . I think its possible but it would require more than tax reform. The bureau of labor statistics forecasting 2006, only a modest decline in Labor Force Participation over the next decade. They certainly knew what demography was. And thateen a collapse is about more than this tax bill. David you have mentioned more than once the need to pay for this. The way things are on capitol hill, i would not be wildly optimistic. A stark choice you, dr. Hubbard. If you had to choose between tax cuts not reform, cuts, which will run up the deficit and not doing anything, which would you pick . Important it is very to have this bill paid for. The nation cannot keep adding and adding lots of debt. Having said that, tax cuts matter and the tax changes on the business side will have more clinch. So the Congress Needs to do something smaller to make everything fit. That is where i put my attention. David in history in the United States, dr. Hubbard, have we ever had a substantial tax cut when we have unemployment at this level . And we are seeing wage growth as well. Have we ever done that . Of a time,think although history is providing not a great guide for a lot of what we are seeing right now. Question is, can we get our tax code in a way that supports growth . The answer to that is yes, and i hope our political system is up to the task. 1986 you mentioned the tax reform. It was very different than this in two respects. It was bipartisan. There does not seem to be a move bipartisanship. And Corporate Taxes increased. Rates came down, but Corporate Taxes increased and it paid for the personal deductions. It was a very unique situation, wasnt it . Is the rub. Ut there we have learned some things since 1986. Corporate capital is the most mobile in the World Economy. Anything increasing the tax rate for companies will make the nation worse off. We dont live in 19 86. We live in 2017. We have to do realistic about the world we favor. What i like about the structure is a tax package that is pure reform. Revenue neutral. That is still the right idea. David Glenn Hubbard of columbia will be staying with us. Can go overin, you to the radio and listen to tom keene and david gura on the radio. Can beerg surveillance heard all across United States on sirius xm radio. Alix they began at 8 40. Coast,live from the west this is bloomberg. Alix taylor this is bloomberg daybreak, coming up, a Deutsche Bank executive board member. One of the questions asked most is whether we are seeing undo inflation and asset valuation in part because of centralbank accommodation around the world. The historic high of asset prices soon because of concern according to this guest. The danger is, as that unwinds, it could bring down consumer spending, it could bring down Economic Activity in the economy as a whole. Hubbard, the Columbia Business School dean, still with us in new york. Address this question. ,e had the substantial unprecedented infusion of capital around the world from centralbank spirit has it helped drive Economic Growth or is it merely sustaining asset values . Dr. Hubbard the evidence suggests it has more of an effect on asset rices been on growth, though some effect on growth. I think there is some positive prices. N when people ask me if stock prices are high, i say relative to what . It depends on your forecast for bond yields. What Marty Feldstein said on your program, when prices are at this level, they have a risk of snapping. If theres a break in confidence about future growth or a disorderly Monetary Policy that is what we need to be focused on. David with the fed and the ecb and boe indicating they are going to start pulling off on quantitative easing, will that correct itself over time, even if it is gradually done . Dr. Hubbard i think it is gradually done and well articulated the path can be ok. The question is specifying what normal is. Whenever i your anybody talk about normalization of Monetary Policy, i asked the question, what does normal mean . How the world looked into thousand six. It cant be the dream world a generation ago. They need to conduct Monetary Policy. How are we going to get there . Alix it has been normal in the hubbard, ifrs, dr. Wages went up, inflation went up, and we are not saying that. Look at this chart, the white line is cpi, the yellow line Hourly Earnings wire white not seeing wages to inflation why are we not seeing wages to inflation . Thinkbbard i think i the fed leadership would agree with this we see very important supply shocks in the World Economy that have restrained inflation as wage growth has risen. Over time as wages continue to rise, inflation will pick up. In ank most forecasts years time, core cpe would be 2 or a little above. I dont think we will see it above inflation, but im not one of those who was worried we will see a collapse. Alix we talk about asset howles, the main concern is to burst of them. If we get no spike, is that enough to burst and asset bubble . Dr. Hubbard whenever we say burst a bubble, i get nervous. That requires our knowing exactly when to take action and realworld economists, central bankers, we dont. We gradually have to get conditions to reflect market reality for Capital Allocation and prices will sort themselves out. The real fear, of course is if increase indden asset prices it can have the correlation with investment that professor feldstein referred to. Jonathan prof. Richard thaler just won the nobel prize in economics. Your reflection on his work . Bridgedard he has psychology and economics. I think he is a great nobel. I think it is the core of what we need to do. For markets, i think understanding behavioral sectors is important whether you run a hedge fund or a central bank. We know we have made mistakes in withast by overly relying rational models in finance, and i think there is more to be done. Aler prize is a great but one that. Jonathan how can we expect companies to respond to things like a taxcut . Maybe they will not respond the way we expect them to. I think companies are optimistic about tax upon passing. If it werent, that may have an effect. Process the Global Economy, stay tuned for that. David at the same time, i wonder if the message to corporations is, its all going to be ok because we are backstopping you. We will take care of you down the road. We have a low level of volatility. The cost of capital is almost nonexistent to corpus. Bewhat extent may we encouraging bad decisions at the corporate level . Dr. Hubbard i worry we are. Central banking is not a put option on the stock market. We need to get Business People making Investment Decisions on the facts on the ground that there he wouldas suggest, not on what they think the central bank will do to backstop them. David is that you without a hard landing . We have almost a generation of Corporate Executives who have not seen a substantial downturn. You can, but its difficult. I think it requires not only a Monetary Policy that explains itself in that regard, but a fiscal policy that is prepared to be supportive. The difficulty is Monetary Policy can act premuch on its own. The policy is a political discussion and that, of course, is difficult. David finally, one of the things Larry Summers said in his oped was this tax plan will increase inequality, whether it is Monetary Policy because of asset prices or on the fiscal side. To what extent does growing wealth and income inequality really affect growth and a term,old growth back and deter hold growth back . Accept itd i dont would increase inequality. Thedistribution analysis of better way plan was the opposite. On growth, i think the real up tois getting growth fight inequality. There is the expression of a rising tide lifting all boats. The Obama Administration council of economic advisers said that faster growth would have three times the punch of better distribution. Gross first. Glenn hubbard, thank you for joining us, sir. To bloomberg go and interact with us directly. Go to tv on your terminal. If you missed anything from dr. Hubbard fell interview can scroll back and rewatch. This is bloomberg. Taylor this is your Bloomberg Business flash. Riggs. Ylor once im company has. Harvey weinstein. He had taken a leave of absence after Sexual Harassment complaints that stretch back decades. Hsbc has reportedly selected is next ceo. According to the sunday times they have selected fluent who will take over next year. U. S. Regulators have given google the green light to bring emergency Cell Phone Service to puerto rico. That is your Bloomberg Business flash. Alix . Alix apparently you have to have your cell phone with potentially the most updated software how do you do that . Telefonica was on it. So they had to partner with at t and verizon in puerto rico. David its really a cool idea. If it works, it will be great. Alix absolutely. And you look at tesla, always be go to these guys. Staying with google, the search giant has discovered that agents bought ads on the platform to interfere with the president ial election according to the Washington Post. Of millions were paid. How do they find this out . Apparently they looked at data twitter had on their accounts that was potentially linked to russia and they looked and saw the overlap with their own stuff and that is where they found it, up to 100,000 in spending. It is not clearly linked to the russian state or even in the u. S. Using u. S. Vpns trying to computersok like the are in the u. S. , but using russian language setting. That is the big news of the day. Alix and they say, look, cracking down on this is not as easy as you think. Once you start boring through certain ads, that will go downhill pretty fast. We will see what google for response is. Facebook closest to this he led facebook security efforts there. Out,d the way in finding you know the russian linked accounts. Using, look, we cant just have a technical solution where we say, no political ads. He says facebook and Mark Zuckerberg do not feel comfortable being the ministry of truth. David i dont feel that much better when we have these huge tech company saying we will have all of your data, know everything about you, but we cant find what is in there. We are not responsible for. Couple weeks ago, google was saying obviously they were looking at that and they were not able to find this until they were able to match other tech company data with their own. Jonathan coming up next on bloomberg daybreak, the wells joiningad of strategy us at the table in new york as we count down to the opening bell beginning the new trading week. Touch positive on the s p 500. Positive about 2 10 of 1 on the dow. From new york, this is bloomberg. Jonathan President Trump takes on one of his own. Senator bob corker saying that the white house has become an Adult Day Care Center. With stocks close to a record high, companies are earnings focused with big u. S. Banks due to report thursday and friday. From new york city, for our viewers worldwide, good morning, good morning. This is bloomberg daybreak. Alongside alixro steel and david westin. We are following the longest weekly winning streak this year, closing friday just short of an alltime high for the fourth straight week. In the fx market, a touch of weakness. And with the treasury market closed for columbus day, the bund your guide to the bond market, the yield down 35 basis points on the 10year yield. Lets get to the stock movers, shall we . Here is alix. Alix interesting stories today one from viacom. From cellts ratings to neutral. Here is why. There could be a cord cutting frenzy, saying Cable Operators in general be lowering cost if cord cutting continues and without the charter affiliate fees, viacom could be worth just 19 a share. And this is the broader industry context they say the era of automatic renewals is over. A really interesting veltman today. Approved this osteoarthritis knee pain drug. Its injected and its a nod opioid painkiller and wells fargo says look, that will be a game changer. It could be available by the end of the month. With winningup holdings. The wall street journal reported it may be up for sale. 54 s now controlled by a owner and they are looking for a buyer. We are interested to see what the Market Opportunity is, especially for pe in this unit and how much they would be willing to pay for it. David . David President Trump made an decision over the weekend. He decided to pick a fight with a senator. Said that bob corker was not running for reelection because the president would not endorse him. Part, senator corker said the white house was an Adult Day Care Center and the president s threats against other countries could put country on the path to world war iii. Here to discuss what this means for the present fell agenda, kevin cirilli. Explain it to us. Have reached out to five republican aides and consultants, both with the white house and capitol hill and the reaction has run the gamut, david from confusion to amusement, but the bottom line is they feel this is not helpful for President Trump fell political agenda President Trumps political agenda. Corker, theyator view him as someone with Great Respect in the Upper Chamber and they are not really sure why the president decided to go after him. I spoke with one political consultant who frequently works with the white house who said this is someone who has really gone after the president for quite some time, but at the end of the day it is not helpful for them to get things done like tax reform. David yeah, that seems fair. Jonathan . Straight,in friday stocks were at an eightday rally but looking of the street are morning, futures positive with more room to run. Stocks may beng the Trump Administration ability to affect tax reform. Our guest joining us one major thing that we have discussed is the ability of administration to pass tax cuts. One senator is a big number the will room is that big. How significant is the war of words . We are not sure that this thing will get done in 2017. We think it gets done in 2018. In summertime, it looks like financials were underperformed, value stocks were working very well. We have seen a snap back since that time. We think we are in the seventh or eighth inning of the turnaround, but theres more to go. Positive,his is not a as you would say, and we are starting to get concerned. We are late pricing this end. Jonathan we are late pricing this in. I know this is not an exact science, but where are you at . Anothere think theres month to go in the new start getting bad news. Once that occurs, we think things will top out. We have had a big run in small caps, financials, and a big run in value. You can get more, but i dont think much more in the news flow will alix be around the negatives Going Forward. We also talked to dr. Glenn hubbard. Here is what he had to say. Dr. Hubbard it is quite positive it is quite possible gdp growth can get to that level but it would require more than tax reform. You said tomography was destiny. I dont agree with that. The bureau of labor statistics forecasts only a modest decline in Labor Force Participation over the next decade. They certainly knew what tomography was. Thats about more than this tax bill. Alix what else could help the Sustainable Growth . Theres a number of things. Ill briefly, technology can always help and it is helping to a certain degree. The other thing is productivity. We have not seen productivity happen in a while. The job picture is starting to turn around. We have been in a low growth environment for some time. 3 gdp, its going to be difficult to sustain. It is possible and i think its really possible through improvements in technology and that application. David chris, talk about the demographics for moment. We had alan cooper on from princeton, and he said the in the Participation Rate has come because of age, people hitting retirement age. Which basically is the hope for growth in the United States to get old people working . [laughter] chris no, i dont think so. My dad would not be very excited. David but the Participation Rate. Chris the Participation Rate on the younger and is not that attractive as well. You need the younger people to come back into the labor force. The other thing that has made this country great is immigration. We need more people. It has always been a bit of a subsidy where you get people who are wellqualified into positions that are above where they are. In it the rest best innovation is going to happen and theres a lot occurring in the Technology Place at this time. Alix what about deregulation . Chris thats a great point. Deregulation is going to hell. Its not just the regulation, but enforcement. People are saying the more business friendly environment and the more business friendly environment is good for growth. Its less of a tax on the system. That is a great point, alix. Alix so, your base game for the s p what is it . What is your best case . Over as we look forward the next three years, we are looking at midsingle digits. We have two separate what is happening in the economy and capital markets. In capital markets, the 10year is at 2. 3 . Times. , 18, 20 that is not what you consider cheap or value oriented. It will be difficult to have large gains. We think the economy will move along. But it is already priced in. Does that mean the u. S. Has tapped out . You will not get a good bargain in the United States . Chris that is true. Youre not getting a good bargain. I think you are getting a reasonable return. Thats not what i consider a good bargain. I think emerging markets and international, some of the value factors we are looking at are working quite well. That is where we look to put our focus. David what is your time rising . Six months, five months, five years what is your time horizon . Dois in three months, we not want significant risk, but 12 and 24month, international markets. Alix coming up this week we have a great lineup of guests for you including the former imf chief economist, john allison, mike mayo, of wells fargo securities. And liz and saunders from charles schwab. This is bloomberg. Alix the hunt for the next fed chair is online. Here are some details Bloomberg News learned over the next few has learned. R news they are looking for consensus building skills to run a Large Organization according to people familiar with the process at the white house. , chris us for more harvey of wells fargo is still here. When you look at the short list of the five names we have gotten, that reflects how they whittled down to these five names. On one hand you have people like gary cohn, who is part of the administration already and is will import with their agenda. Tory growth john taylor. At the same time you have janet yellen and jay powell on the list as well. Both of them have talked about revisiting some of these regulations now that we are 8, 9 years into this and certain things can be done like relaxing regulations on community banks, may be taking another look at the list really looks at that. Alix i was struck that they said that they want a team with various experiences, large and small ranking systems, politics. Is that an insight into how the fed board will be structured . Is this an insight into that . Yeah, we certainly have not heard gary cohn specifically his name come into the consideration for the very as governor spots they have to fill, but its an interesting idea, right . When you look at the list of qualifications, they are looking for people who can bring a different aspect of the job to the table and when you think about the fed board of governors, they have been shortstaffed for a number of years now because of their appointmentsget and that is something that the fed has been lacking. They may be getting back to the fed that we used to know. Jonathan i am not sure that janet yellen could have been more emphatic about where she stands on financial regulation. That is fair. We have not gotten a big speech from the white house on regulations. Jay powell is kind of youd as the candidate who would fit that mold. I think that would be in line janet yellen has expressed. I think theres a willingness at the fed to move on the fed to move on this stuff, but they have been waiting for the new regime. Jonathan do we have to factor driver on recruitment this is as well . I know that powell is Steve Mnuchins guy. I guess we are waiting to see who wins out in the battle. We have various constituencies, and these candidates reflect the preferences all those constituencies. We will have to see how it shakes out. The markets do not get a vote to rid if they did, what would they be looking for . Chris they want consistency. They want stability. To a certain extent, we are not going to get that. We had greenspan, bernanke, yellen. Unless yellen is appointed, this will be a new era. I do not expect anything unusual if we have someone new, but there will be a familiarity. And theres also a learning process. Even when janet yellen first started, she had miscues. The market was familiarity. Was stability, familiarity. Wont the next fed chair know that and go out of their way to convey that . No matter what they want to do down the road. They do not want to ruffle feathers badly, do they . You look at fed chair is, the first six months, they have to gain the respect of the market and investors and the rest of the committee. Whoever comes in will probably be in a similar situation have to do that. What does this mean . Thisbly when you are at point in the tightening cycle, there is an element of conveying continuity and certainly that will be aided by the fact that onre will be several people the committee this year and that continuity is built into the process out of the gates. The last nominee was fed chair janet yellen, but in the race, i will never forget turn out the way we thought it was going to go, did it . Everyoneason why thought that Larry Summers was so hawkish in 2013 was he was very critical of quantitative easing in particular. When you look at one of the is presented, he be hawkish, he has not spoken much about Interest Rates but he is been critical of Balance Sheet policy. It underscores the notion that we have all of these different candidates but we are not sure what they would do. Said markets do not get to say who the fed chair is going to be. That would be the case in the olden days. Do markets have a say in what kind of fed chair do we have . If we see a john taylor nominee and theres a market selloff . A good question, to your well. It remains to be seen how much of a market bump you would get from an announcement like that. All of this stuff, investors know this and they can look ahead and game out how is this going to go. Even if you had an initial then, you would have people even before that saying, not a move i would see because he would realistically not be able to change the game that much. Bozeman. Tt thank you. Chris will be staying with us. We will be joined by our guest and Deutsche Bank bundesbank. Live from new york, this is bloomberg. This is bloomberg. I am david westin. We will look at Bank Earnings this week. Jpmorgan will report on thursday in bank of america and wells fargo come up on friday. Joining us with more on that we can expect, bloombergs senior u. S. Bank analyst and still with us, chris harvey. So, what will we see in your point of view . Trading willing is be down a lot, and that is disappointing, but you have to keep in mind, Third Quarter was the best quarter of the year last year. Its a little bit tougher. I do not think we will count out the recoveries off the lows. Equity outperforming on that front. That is sort of in the numbers. What has been interesting the last few weeks, asset prices were very strong in the quarter. Its good for the Asset Management business. Goldmans estimates are moving a little bit higher because even though people will focus on what is happening, really the results are across the board. Had downward driven revenue estimates. We have had increases from around the time of the election to the first half flattening out and declining, so that brings us back to the four. Not a source of as a growth. Wage growth could be. What could that mean for lending money . Basic bankinge business the focus will be loan growth and theres a couple things happening there. We have seen loan growth slowing all year. Some of the banks heading out of the Second Quarter were more optimistic. What we saw was there was still uncertainty around tax reform and things going on there. A little volume for m a. A little bit of a slow down there. Companiesthing is tapping the capital markets. So we have asset prices, equities, but also this is what we are seeing with corporate spreads tightening and lower yields. You are still seeing probably some good debt fees, especially with the bigger banks. Alix headline numbers you will hear our financials have been downgraded and you look at thirdquarter earnings revisions. The blue line is the bank. The yellow line is diversified financials. Its the insurers who have 140ly been hit, attracting basis points for the overall financial sector. Chris, how are you playing the overall sector with these revisions. Chris we like the financials space overall. Picture. T the bigger the capital give back for banks is very impressive. Over theooking at 6 next 12 months. Our opinion is that is what you will get from capital markets. That is pretty attractive. With regard to earnings this quarter, we have seen time and time again a negative reaction. We tell investors to buy that underperformance, because often it is a shortterm move. Jonathan it will get harder, not easier. Basically drive the volatility. Third quarter was the best quarter last year. A decent quarter, but if you look at the transition from q2 q2 to q3. Had brexit going into q3. I think these are tougher cops, better cops for asset managers, especially global asset managers. And going into the fourth to be less tends important. I think people will be looking ahead to next year and looking at what we can have with these regulatory developments. We have the election catalyst last year which we will not have this year. I wonder if earnings will take a backseat to the tax cuts story, the tax plan story in d. C. . Chris you have to differentiate. Theres a real inflation trade and a tax rate. They are helping. If the reinflation trade continues, there should be legs for the financial trade. Hopefully that will continue. Sticking chris harvey with us. Alison, thank you for joining us. From new york, this is bloomberg. Who knew that phones would start doing everything . Entertaining us, getting us back on track, and finding us dates. Phones really have changed. So why hasnt the way we pay for them . Introducing Xfinity Mobile. You only pay for data and can easily switch between pay per gig and unlimited. No one else lets you do that. See how much you can save. Choose by the gig or unlimited. Xfinity mobile. A new kind of network designed to save you money. Call, visit or go to xfinitymobile. Com. Weeks of gains and futures are positive. We are just ahead of the cash open. Futures are up 6 10 of 1 on the dow and the s p 500. We close out slightly negative. A little softer in the red. Will we recline reclaim that alltime i . There we go, we are back up to 10 up, four points on the day so far. And the story is the dollar index. 1 . Wpi is up seven hits of lets get you to the open. Here is alix steel. What do you know . The dow has a record high. Just rarely up. Is a point away, but the fervor and the momentum, watch out for this potentially in trading. Individual names that we want to highlight for you, j nj, the upgrade over wells fargo. The sector. Gged ge is down by 1 10 of 1 . On tryon, the ceo will be on its board. We have had a lot of changes. The question is always, what does ge do with that nice, juicy dividend . Procter gamble up 1 10 of 1 , a different story they want to keep nelson tells out. Million for one board feet. It is the most spent in a proxy fight ever. Shareholders,ith up 4 10 of 1 . That is the drama in the market. Is the writ. The white parts are the onemonth return on the s p and the orange bars are the earnings revisions and percentage points. Earnings you have seen revisions lower by 4. 9 , double the average that you see. On the flipside though, the s p has had a onemonth return of almost 4 . So, what kind of Earnings Growth we need to see to support that, or does it all come from d. C. . Jon . Jonathan interesting. Chris harvey from wells fargo still with us. . Your thoughts the year. S late in usually we see earnings season revisions. We are not sure that tax reform is going to happen. And mynings numbers, opinion, were very high. This is not a surprise. A need a beat and we need raise. We are up 15 . Thats a banner year. We are happy with it. However, it will take earnings to get much, much higher. Jonathan we are at a 5 correction. I believe that could happen tomorrow to the end of the close . If that is the case, what does that tell you about the current situation. Vix isothers leave the low. It has been low for some time. We do not know who the fed chair is, but earnings have been good. The feds have been very accommodative for a long time. Theres a not a whole lot more they can do, so we will wait and changes. Many others are doing the same thing. Its hard to predict the changes at this time. The expansion story over the last 12 months topped out . Chris here is the interesting thing. There seems to be a seller strike rid we had a great year, a banner year. We want the year two and right here, right now. In addition, every year we have sellers remorse. Every time we have sold our positions, over 3, 6 months, we have come to regret that. So, we are waiting. We are waiting for the markets to roll over or two over perform. . 25 of every dollar is going into tech. If those sellers are not willing to sell, what happens . We are seeing this move higher because of dynamics in the market. As we look at Market Reaction to this earnings season, what matters more the earnings are up the rate of increase has slowed down a lot or how much they are down . Is it more important that it is positive or positive within shooting range of where it has been . Isis i would say it something different. Guidance. How much confidence to the companies have in 2018 . If they are really positive, if guidance goes higher, we can see the market move higher. If it is, well, we think rings are ok, but we are going to wait and we are not sure about is policy, and we have seen some of eat, that is starting to into decisionmaking. If that continues, that is a worry. What about cut top line expectation versus we are going to buy more stock . Chris what the market needs to see is organic growth. With multiples this high, organic growth is going to drive stocks higher. I think it is ok, but its not really going to push multiples expansion. Alix where do you see the sectors . Chris we are not looking at sectors per se. We are saying, everything is expensive this quarter. We Want Companies with higher profit margins. Its more a style, if you will. Alix fair enough. Look at what has been revised lower. Looking at the bloomberg, energy and materials revised much lower. Those earnings estimates revised down by 7 . You can make the argument that expectations are so low and there is probably value there, but you are not willing to take that risk for earnings . Chris we are looking at all of the sectors. We are looking at companies we want to own, not just for the quarter, but the longer term. I think if you look at health care and banks, yes, there is a bounce. We have been able to buy that bounds. But what matters is quality. If we see that go higher, we want to follow that substantially higher. Jonathan Quality Companies also headwinds, andl one of those would be the d. C. Headwind. It seems to be the base case now. What are your thoughts on that . The Technology Space is having a little push back. Free pass for a long time. People are beginning to be concerned maybe they have to much power and are starting to question it. Is much more if it aggressive, but we are starting to see the bloom off the rose after all this time and not everything is good surrounding tech, so it is a concern. Jonathan does that hurt valuation . Chris it does. The other thing for valuation is the reinflation trade. That is difficult for technology especially if the 10year goes about two point 5 . You expect financials to do better and you would expect some funding from the tech space. About eight minutes into the session. Up to tenths of 1 on the doubt. 5 on the s p 500. Up to 10 of 1 on the doubt. From new york, this is bloomberg. Taylor this is bloomberg daybreak. Whatd yoomorrow on u miss, paul krugman. This is bloomberg. The annual nobel awardeds prize has been to Richard Thaler of the university of chicago. He was awarded for his understanding of how humans make economic decisions. For more on his accomplishments, we are joined by a colleague of dr. Thalers. Randy, thank you for joining us. Give us a sense of what Richard Thalers effect will likely be on economics . It has already happened. He has really helped to transform the way many economists think about economic behavior. He really wants to try to introduce humanity into the way people think about humans. Humans have many flaws and foibles. He takes that seriously and applies that to the way that people make their savings behaviors, the way that they buy or do not buy in the equity markets, and it has profound impact on the way many younger researchers think about the way economic markets work. David i wonder if this is a reaction against machines. As out rhythms become more and more sophisticated, more highspeed trading, it may break down because it does not take account of humans . Not necessarily that it will break down, but there are other things that can be integrated in. The machines themselves can take into account behavioral thaler andtics that his students and colleagues have written about. But there is something beyond the traditional, rational maximizing man that can be captured by machines that thaler said should be there. Thishan randy, what does mean for the Chicago School of economics. This guy just won the nobel prize for the behavior of economics. Is this a challenge to the efficient market hypothesis which, of course, was born out of the Chicago School. How are you guys thinking about the work of thaler and the work of the previous 100 years at the school . We have had jean has been here for 50 years, and in 1995. Er joined us they are colleagues. They certainly do not agree on everything. But this is one of the wonderful things about the university of chicago, chicagobooth, its not just one approach. They have been here battling for students, battling for ideas, trying to do papers to show their approaches are correct, and i think that has sharpened each of them because they have had such a smart person to challenge them. Whose textbook would you be using and which school would you teach your own students . Ah. Im going to give you a diplomats answer because i think is valuable to get both perspectives. Not this is right and that is wrong. I think we have to take a broader perspective that includes both. I would want to see them work through it themselves rather than this is right and that is wrong. Could character let characterize it this way, it leads to a good discussion. David lets look at the real world as we see at bloomberg. Like whenly at a time the fed is admitting that many of its models it is not so sure of, was the effect of professor thaler . One thing thaler and his colleagues have looked at is the ways optimism or pessimism can affect the pricing of securities. There is the socalled puzzle of closed in mutual funds, so not evs, but funds with a certain. Mount of money in them sometimes what happens is the value of those shares is higher than the value of securities. Sometimes it is lower. Beetimes that deviation can a measure of market exuberance. Bit frothy or are they not to frothy . Is takenay in which it into effect our socalled nudge it affects. On, you arepends giving people a night, pushing them a particular direction and i can have an impact on consumer finance. How they think about credit card spending and some of that has affected how the fed has regulated credit card disclosures, for example. Jonathan you have a deep knowledge of economics and you works at the Federal Reserve. Experience, is it helpful, necessary to have a phd run the fed . To you will get of bias you from me. I have a phd. I certainly think that that is very valuable. Certainly there are people around the world who are fine Central Bank Governors you do not have a ph the in economics. I think the key is having a traditional sense of economics, having a good sense of financial economics and being able to listen carefully to an analytic approach. That is the most important thing. Given that many central bankers around the world now do have phd s, it has become more technocratic. Its valuable to go toe to toe with them, but thats just a credentialed. Do they understand the ideas . Can they articulate them . Can they understand when criticisms, in . Thats not exclusive to people with phds. What is clear, this administration, with the fed chair, they want consensus polling. I have not been around that table. But you have, at the fomc. Is that the kind of deep economic knowledge that you need, that deep economic definitely. If you think more probably in terms of international telex, there are a lot of colleagues internationally who have phds who have phds in economics, so you have to be comfortable and provide critiques in a systematic way, and i think its easier when you have a phd, but someone who has a good feel for foromics, good feel Financial Markets can also be successful in this. I think its helpful, but not necessary. David randy, but this altogether finally. Does the thaler school of behavioral economics argue against a rulebased approach to Monetary Policy . Interesting interesting thing. I think you could argue it either way, that discretionary policy is one that might be consistent with changing underlying behaviors and respond to that. But also on the other side we would have clear rules that would make it easier for people to make decisions. When you do take into account humanoral economics and foibles and difficulties making decisions, you have a very clear, symbol framework that can be articulated the can make it easier for people to make decisions. I think there are both aspects. A clear role can be helpful given the federal issues. You might say that you want the flexibility given the behavioral issues. But you have to have a little bit of both. Thank you so much for joining us by telephone. Much more coming up. This is bloomberg. Aboutnew information russia fell influence on the u. S. President ial election. Google says it found evidence that russian agents bought ads on his platform to interfere with the election according to. Theyshington post found that tens of thousands of dollars were spent in a disinformation campaign. We are joined i our guests, including our Senior Research agent who has a cell rating on sell rating on facebook. Googlenews is that joined this group including facebook and twitter that included social Network Groups that were used by russian link accounts to spread disinformation or pump up divisive forces in the u. S. Election. Alix has the market begun to the potential Regulatory Oversight we will see for the likes of google and facebook because of the skies of things . Because of these kinds of things . Absolutely not. They are looking past a lot of risks. Investors are responding to what they are seeing when seen when the numbers in the numbers have been, friendly, fantastic, and the absolute amount of revenue associated with all things russia is really negligible. Political advertising is a relatively small number. On one hand, you can say even if political advertising got regulated which by the way, there is a good chance that might happen maybe it takes a little revenue. The biggest risk that investors are not looking at, in my view, is regulators have gone from a not particularly trustworthy attitude towards google and facebook to outright hostility as we are seeing in europe and i think we could see here and that has implications we cannot process yet. Alix how does this play out . We heard from facebooks cfo over the weekend. Look, look, look, there was rant. Ong twitter dont meddle with the algorithms. They are very difficult and complicated. Its not as easy as saying, no russia, no political ads, and that kind of thing. You are going for the bigger risk for these companies where youre saying you can and cannot do these things with your internal things. Facebook has hired 1000 new people to vet these as one by one instead of doing something technical with the algorithm. Alix what Tech Companies are most vulnerable . Choosing between facebook and google, facebook probably is relatively more exposed to these and so much of what they do is about being viral and almost everybody uses it. With google, youtube is important, but i think that is really a less less of an issue. Twitter is similar. It is relatively small. Obviously influential, but facebook, i think they have the bigger problem here. Jonathan great to have you with us. Thank you. Brian weiser of pivotal research. That does it for bloomberg daybreak. Brandnew trading week, slightly negative, down for the second straight day, closing right here, right now at. 06 . Up next is bloomberg markets. This was bloomberg daybreak. Enjoy your day. Is this a phone . Or a little internet machine . It makes you wonder shouldnt we get our phones and internet from the same company . Thats why Xfinity Mobile comes with your internet. You get up to 5 lines of talk and text at no extra cost. So all you pay for is data. See how much you can save. Choose by the gig or unlimited. Xfinity mobile. A new kind of network designed to save you money. Call, visit, or go to xfinitymobile. Com. Vonnie it is 10 00 a. M. In new york, and 10 00 p. M. In hong kong. From new york, im vonnie quinn. Mark and live from london, im mark barton. Welcome to bloomberg markets. Vonnie here are the top stories we are covering from around the world. Remainst trumps agenda in question as he takes aim at gop senators, like tennessees bob corker. How high is the mountain getting when it comes to passing tax reform . Is a diplomatic impasse growing with turkish stocks tumbling. Will President Trump and president erdogan come to a consensus after they meet . Live board member joins us in the studio in new york. What he says about the status of Bank Regulations and frankfurts role and a postbrexit banking la