Transcripts For BLOOMBERG Bloomberg Surveillance 20171018

Letsthings first, quickly check on your markets. First of all, i wanted to have a look at the yuan, this is on the back of what we heard from china. Stocks in europe in to be drifting sideways a touch. I think investors are trying to figure out what the next catalyst is. Draghi is due to speak today. And then, the independence claim is tomorrow. N, that thats the bloomberg dollar index, up a touch. Heres nejra cehic. Reporter donald trump claims tax reforms would be worth 4000 a year for the average american household. He asked for help so he could give the country the best christmas president of all. Today are business tax rate is 50 higher than our average economic competitor. This is a giant selfinflicted economic wound. Reporter the u. S. President has said he plans to choose from amongst five finalists to be the next Federal Reserve chairman and will make his choice soon, before he leaves for his 11 day trip on november 1. With canadawound up and mexico rejecting what they see as hardline u. S. Proposals. Negotiators exchanged their strongest public barbs yet as speculation grows that the Trump Administration will walk away from the deal. Political parties have reached an agreement two weeks before american start planning up for coverage. The Trump Administration said last week it was cutting off the payment and on tuesday the president called the agreement a shortterm solution. European Union Countries are seeking to complete their own work on the future relationship with the u. K. This year. The council of the eu, which represents Member States, will start working with the European Commission as soon as this month on the key points. The move will keep hope alive for theresa mays government that brexit talks will be restored. Global news 24 hours a day, powered by 2700 journalists and analysts in more than 120 countries around the world. Im nejra cehic. This is bloomberg. Francine chinas president has warned of severe challenges. Speaking at the start of the twice a decade communist Party Congress, xi jinping said china would start opening businesses. Our china correspondent has been following the communist Party Congress. To Tom Mackenzie, did you tackle the challenges china has been facing on the International Stage . Reporter francine, as you mentioned, he talks about the domestic challenges, but also as what he describes as the International Challenges. He did not name them by name, but north korea loomed over this speech. And of course, weve got President Trump coming here on a state visit in november and of course, washington pressuring china to pressure north korea. China wanted to ensure it is able to maintain a stable relationship with the u. S. To ensure its economy is not knocked off course, to ensure the gdp gets to the moderately Prosperous Society president xi is aiming over. He also talked about hong kong and taiwan and in both of those jurisdictions there are tensions, tensions between the authorities in beijing and of course, the Independence Movement in hong kong. Its a tricky field to navigate, but we are talking about a more muscular china on the domestic stage, but also the International Stage. Francine how is xi expected to come out of this . Well, hes already very powerful, quite likely the most powerful leader we have seen in china. But on the back of this congress he could become more powerful. We are looking at whether or not he can line up some of his allies in some of the key positions. Currently, there are Seven Members of the standing committee, the most powerful men and they are all men here in china. Five of those positions could change hands. President xi jinping is almost guaranteed to stay, but we will be watching the other members. We will also be watching for the corruption, what happens to him. Is a leader of china who is incredibly powerful and will very likely come out of the back of this congress with more allies in place and a more strengthened position. Francine tom orlik, reform of the state sector is a critical piece of the reform puzzle. What are the critical messages there . I think that is absolutely right, francine. And just to pick up on some of the messages from Tom Mackenzie, its clear that xi jinping will come out of the Party Congress with his Political Party enhance d, more allies on the standing committee, maybe his name included on the Party Congress. The question is, will he use pushenhance our td power to critical advancements in the economy . The messages we heard from xi coming into the congress were much more conservative on the state sector. He talked about building a bigger, better, stronger state sector. Those are the messages we have heard repeated in his speech on the first day of the congress here in beijing. Francine tom orlik, what about the yuan . Are there sides are there signs that xi wants to make continued progress on those . If we go back to the beginning of the year, a lot of the investors we spoke to in shanghai, beijing and hong kong they had the expectation that after the Party Conference we would see a big bang on the yuan. Maybe we see that final step. The messages we are getting coming out of the congress so far suggests that is unlikely. The yuan just gets a brief mention in xis remarks. He talks about the importance of the deepening Exchange Rate reform. No repetition of the messages we heard back in 2012 or 2007. In past speeches there was a former commitment to pushing for the capital opening. This time, that commitment is omitted. Our view, we think china got pretty badly burned with that experiment in yuan liberalization back in 2015. We think chinas policymakers will be reluctant to move aggressively forward on that agenda. Francine thank you to both toms, Tom Mackenzie and tom orlik. Joining us for the rest of the hour is the equity strategist at Goldman Sachs. Sharon, when you look at the china concerns or opportunities, dictate does china Dollar Strength and weakness and some of the outflows that impact your equity world . From a european equities perspective, which is where i focus, what matters is demand generated from china. China is a huge economy and they want to increase that further, becoming the biggest economy in the world by 2050. If you look at the dax index, about 10 of the sales go to china for the dax companies. Its incredibly influential in terms of demand. Francine does it make a difference . Chinese stories cracking down on outflows. Does it make a difference to valuations, or is it more at the margin . They are probably more at the margin. Weve seen a lot of bids for equities. German 10 year bund yields are very low. We are seeing a lot of investors look at investments as a way to get growth. You are also seeing u. S. Investors move and shift into europe. You have seen european domestic investors do that as well. Im not sure if you get mark appel if you get mark appel controls from china. If you get more capital controls from china. They are providing a place, companiesr european to sell their goods. Francine coming up, senators reach across the aisle to destabilize obamacare. Plus, we talked the appetite for investing in london. Well talk to a top Venture Capitalist, especially in eretail. Thats coming up shortly. This is bloomberg. Francine this is bloomberg surveillance and im Francine Lacqua in london. Here is nejra cehic. Reporter the securities and Exchange Commission is preparing to give wall street a reprieve by telling Financial Firms they will not half to overhaul their operations. That is according to three people familiar with the matter. The sec is expected to provide formal assurances it will not object if brokerages break out the costs for their european clients, rather than bundling it together with other services. Bridgewater associates is adding to the 1 billion short against the Italian Economy. The Worlds Largest hedge fund disclosed a 300 million bet. Had wageredfirm 1. 1 billion against six Financial Institutions and two other companies. We will speak with the ceo at 7 00 u. K time. Rio tintos deal comes back to hoanunt them. U. S. Authorities have filed four charges against them, claiming they inflated the value of the coal assets acquired in 2011. Elliott is standing down due to the proceedings. To vigorouslylans defend itself against these allegations. Doom wroteboom and that the u. S. Would look like zimbabwe if it had unsettled by black people instead of white. He is known for bearish and what he calls contrarian views. Thats the Bloomberg Business flash. Reporter President Trump said his tax reforms would save the average u. S. Household 4000 a year. He said he hoped to give the country the best Christmas Present of all. Our business tax rate is 60 higher than our average economic competitor. This is a giant, selfinflicted economic wound. Francine meanwhile, senators from both Political Parties say they have reached an agreement to stabilize obamacare just two weeks before americans start signing up for 2018 coverage. For more on this, Stephanie Baker joints us now. Stephanie, what do we know about obamacare and can you break it down for us . It is a bipartisan deal tos trumpe the subsidies announced he would be cutting, just for the next two years. Its a shortterm fix sponsored by a democrat and republican. It is unclear how much support it has beyond, in the wider congress, senate, and house. We have already seen republicans voice concern, saying they do not want to be seen as bailing out obamacare and i think they lre going to have an uphil struggle to get bipartisan consensus. Francine what about tax reform . This is kind of pushing equity markets up. Will he get this before christmas . We had trump speaking yesterday bombastic late, saying this would usher in an economic boom we have not seen since the reagan era. He came out with his figures again, saying it would put 4000 into the pockets of every american household. But we still do not have are the details on what kind of tax breaks will be eliminated, what are the income bands for this individual income tax break he wants to do, the reductions. So, we are lacking in details to assess it. I think on the Corporate Tax rate, most people view his repose proposal as reducing anporate tax rates, and invitation by companies to buy back shares, which is how they responded to previous tax cuts in the past. Francine sharon, stephanie explained it well and in simple terms, basically he thinks it will have a huge boost. We will have to see and the devil is in the details, but does it mean Equity Stocks in the u. S. Are more or less attractive than europe . We do not know the detail, as you say. Also, we dont even know if it will pass this year those are crucial details. Pass, itere to a could boost next year, simply by cutting Corporate Tax rate. Om the levelfr expected next year. I think it will be a big positive for the u. S. Stock market. There is some positive for europe as well. If you get a boost in the u. S. , so again, the Corporate Tax cut would be beneficial for them, but on a relative basis. It would be more beneficial for the u. S. Stock market. As you say, we already have a rally on the back of this, so some of it must be priced. Francine yesterday it closed at 23,997. Is there a correction coming . If yes, what is the catalyst for it . We wrote the report on the potential for another bear market to happen in the next few years. Even retrospectively in hindsight, the trick is the catalysts are difficult to identify. This will make it the longest since the 1990s already, already very high valuations. Obviously, it depends on which valuation you use. Already a lot of indicators at the top of the cycle and the fed tightening Interest Rates, too. All those things put together makes it more vulnerable to the kind of shock that could cause a bear market. It is difficult to identify what that will be, but markets are not that concerned because volatility is so low. You can get these environments that extent the bear market. Francine these are charts back from 2016. It is amazing to see the slope on the other side, the progression of the trend which seems to be going up and up. The dow jones finishing at 22,997 yesterday. I do think europe has more value than the u. S. I agree it has less of an opportunity from a big, one off tax cut, though you could see more from france in the next few years. Macron has talked about Corporate Tax cuts as well. I do think europe has got some reasonably good prospects. European companies are very global, and Global Growth, not just u. S. Growth, is picking up. Also, europe does not have the concerns about Rising Interest Rates hitting growth and the economy might have in the u. S. In the next few years, given you will see a tightening of policy, where the ecb looking policy very was. Policy very loose. Francine we will get much more on the Global Equities with sharon bell. Up next, will billionaire investor add to the billion dollar short against the Italian Economy . This is bloomberg. Francine good morning, everyone. This is bloomberg surveillance im Francine Lacqua in london. Bridgewater associates is adding to the 1 billion short against the countrys economy. 300berg data shows a million bet. Bloomberg previously reported that ray dalios firm had wagered 1. 1 billion against six Financial Institutions and two other companies. We are back with sharon bell. When you look at without commenting on what dalio is doing, it seems the problem child in europe once again is italy. Elections, you still kind of worry about the political system. Are you bullish, or are you against italian equities . I am probably more bullish on the bureau area on the euro area generally. Undeniable, that there are political problems across the whole of europe. This is true of italy, too, but we do not think we are back to the old sovereign crisis level. We think the economy is growing and the key to all of this is growth. If you get growth, you can grow out of any of your problems and at the moment, italy is growing at a 1. 5 pace. Pacee is growing at a 2 at the moment. The banks are the most vulnera ble part. Francine we saw a little bit of a turning point with the two phoenician banks. We are charting here, a bigger drop. The trend has been pretty similar. How much does this have to do with ecb policy and how much does it have to do with growth . Are you bullish on industries such as the Financial Sector and europe as a whole . We would have to be bullish on the Financial Sector. We do think that will help banks. They are one of the most difficult sectors in europe. We do believe the return on equitys is improving. In some cases, they will be able to increase dividends. Already, there are rather high dividend yields. You can see from that chart that italian banks are more volatile and risky as an asset, so you would still put them on a higher risk premium. But i still think there is value there, if they can turn around some weaker assets. Francine this is another chart, spread between italian and spanish 10 year yields. We could have done it with the bunds, that we decided to do it this way to be more quirky. The ecb search is normalizing slowly. If this chart looks different, what will it incept, so to speak . It is difficult. Experimenting with qe, or in the case of the ecb, tapering very slow next year, it is difficult to know the impact. I think they will be very slow and cautious and argue they will taper completely before they consider raising Interest Rates. It would take a very long time and they come back to this Crucial Point about growth. Provided europe and italy is growing, both in real terms and nominal growth with a bit of inflation, then i think it is less of a problem. Really, their problem is a legacy of debt. If you are growing that gdp, you are generally in a much better position. Francine how do you decide what you like in european equities and what you dont like . Sometimes it is industries, it is factors come it is styles. I do like banks, because i think if growth is good, they should have an advantage of that. I also look at the valuations, versus where the history has been, and that is still true for banks. There is a lot of value in europe in some of these sectors that have been rather unloved in europe. I think these companies could start paying their dividends with cash in the future. I will be looking at those pockets in europe. The other place they will be looking for in europe is companies that can grow at a sustainable rate in the future. So, Growth Companies maybe in the tech sector or more Disruptive Companies in europe. Francine keep that thought because we are just getting some figures out of the u. K. If you look at the weekly average earnings im looking at the jobless claims count. That is pretty much in line. Unemployment, 94,000 instead of the 148,000 we were expecting. British pound moving a little sideways. This is the latest kind of picture on u. K. Employment figures. We had some inflation earlier this week. What do you do with the u. K. . You have brexit, you dont know how the negotiations are going, you just look at what mark carney says and the underlying fundamentals, or take a bit on how negotiations go . When iti agree that comes to sterling in particular. , thetse 100 companies easiest answer to that weston is it probably matters less for them because they are Huge International companies. They have assets and employees in the u. K. And outside too. That doesnt mean it doesnt matter for certain companies. Say 2 versus inflation, which came out yesterday at 3 , we are getting a squeeze on peoples real income. That type of earnings is not enough to cover inflation. That is still hitting domestic u. K. Companies. Francine another chart we want to show you, the Unemployment Rate, and in blue, the average weekly earnings. If wage growth doesnt accelerate, and inflation is going up, the retailers will take most of the brunt. Do you stay away from that industry or do you assume they make up because of the drop in pound . Sharon most of these retailers are quite domestic. I would say yes, we remain underweight retail. I think it has some big issues. Lots of disruption, lots of price pressure from discounters, from disruptors like amazon. Youve got lots of pressure on that industry. In the u. K. , you have the consumer pretty weak, and on top of the weaker sterling, generally, with the weaker sterling on a yeartoyear basis, these companies are paying more for their raw material. You pay more for energy and raw material in sterling terms and your customers are seeing a squeeze. They are suffering, but it is not just retail. A lot of industries in the u. K. , media, advertising, travel, leisure, etc. , all having a squeeze. Is thesething companies no longer trade at a premium. Francine i think of Luxury Companies and they say that because of the weaker pound, they saw more chinese buyers coming in. What is your take on what pound does from here . Sharon we think pound will fall a little more. With the size of the current account deficit in the u. K. , the political risks, we do have the to 1. 15, 1. 20. Likely to be more weakness for the pound. Francine does a hike make a difference in the world of equity . Sharon interesting question. The hike that people expect for november, which we expect as well, and the inflation data probably confirms that more, but we dont see it as the beginning of a kind of hiking trend. Them to raiset rates again until the end of next year. We dont feel there is a need for them to do so. Sterlinghat it pushed up, but does it have domestic facing equities . On one sense, it does. Sterling rising means that if you are buying Raw Materials elsewhere, they are not costing you so much. Francine worstcase scenario, and i have people on the program saying that will not be a worstcase scenario, but lets say the u. K. Crashes out of the e. U. , so if we dont get an agreement, we are under wto rules. What does that mean for equities . Is it tariffs, exporters that get squeezed . Sharon going back to what we were talking about before with ftse 100 companies, this is perception that all these exporters get hit by this. Withdrawing out of the Single Market would be bad news for some of those companies, but a lot of them are not really exporters. Facilities in the u. S. , in asia, elsewhere. It is less of an issue for them. I actually think it is the domestic u. K. Businesses that get hit by it. It will probably mean weaker sterling and weaker purchasing power, higher inflation, squeeze on incomes. More thet will be u. K. Domestic companies being hit. Francine sharon, thank you so much for joining us. Sharonville, equity strategist at Goldman Sachs. Still to come, we speak to the Felix Capital founder about where he Sees Opportunities in the start up space. Hes invested in Gwyneth Paltrows lifestyle empire goop. What is next . This is bloomberg. Associatesridgewater is adding to its billion dollars short against the Italian Economy. The Worlds Largest hedge fund disclosed a bit against oil and gas. Bloomberg previously reported that ray dalios firm wagered more than 1 billion against six italian institutions. We will be speaking exclusively to enis ceo at 7 00 p. M. U. K. Time. You dont want to miss that interview. Lets talk about sparks of our own. Felix capital announced the closing of a second fund this year. The londonbased Venture Capital firm which focuses on technology and creative startups in the u. S. And europe and demand well in excess of 200 million. The funds include food delivery, Gwyneth Paltrows lifestyle empire, goop, and farfetched. Frederic court, who was the First Investor in farfetched, joins us on set. Welcome to surveillance. I hope this is only the first of many interviews you will be giving us. You focus on cool names that a lot of us know. What do you see in eretailing . How much bigger can this industry become . Not just because they are cool. What we are interested in is new brands. We live our lives and make many andces based on emotion intelligence, but we are increasingly drawn to brands that talk to us through social networks and social media. Lives glued to applications on mobile phones. Their 30s, 40s, will now be glued to instagram. Wese are new relationships offering, whether it is for products, services, content. Francine i am actually glued to this. Many of us are. But how much shopping will i do on this . We figured out with facebook the challenge is to get clicks into money. How many clothes will i stop trying on in shops and how much will i put on here . Frederic one of our investment themes is around attention. Attention,e a lot of that tends to drive value. Transactions,just you probably spend some time shopping on your mobile phone, sometime buying things on amazon regularly. Going back further, that is action oriented. Were people spend time watching tv these days. Especially our younger customers. They are more looking at digital channels. That applies to all generations. We are interested in how you can turn that time into a relationship that can be francine i do all of my shopping, even christmas nts, but then i speak to the ceo of sainsburys or o, and they tell me only a couple people do those kind of things. How much of the industry will actually shop online . Ecommerceou look at in general, depending on categories, is anywhere from to 10 depending on categories. Luxury, is probably around 5 , 6 . When you talk to these big retailers, it is not so much about how do i protect my retail business, but how do i grow my business, and ive got an asset. That asset is the brand, the relationship with customers, the trust with customers. The question is how to build on that trust. Francine do you ever worry that theres too many eretailers out there, that amazon will take a lot of that market share, kering is now launching their own platform . Frederic commerce is all about product. Product, then price and convenience. Earlier thatsults salon would be under pressure from amazon. That is not surprising. Is likely tomazon eat into that market. You take farfetch for instance. It is a very unique product set. The best independent fashion boutiques in europe. Francine what is more important for you . I dont know if it is the market or the people behind it. They attracted or is it the Technology Behind the investments you do . Frederic we essentially look at two types of opportunities, platforms and brands. Brands are all about point of view. It is all about being able to offer something you wont find on amazon. Take goop as an example. They have a point of view and operate in digital lifestyle. Francine does it make money . Frederic content and commerce. We are like bloombergs media business, but on top of the media business, we are building a commerce layer. Increasingly, goop Branded Products like skincare,ragrances, food supplements and we will be adding more and more. These products are only available on goop or goop affiliated stores. That is our point of view. You take Companies Like farfetch, and this is a platform. They are really good at creating product and creating the willingness to spend a lot of money to buy this amazing handbag. Francine which i really dont need, which a lot of people dont need, but will still have. What is next . I dont know if there is a new trend, wearables or something that we will all be using how difficult is it to find the next trend . Frederic we have to be careful now. We have to be close to what is happening on the new trends and opportunities. We are very excited by the fact that today, because of digital, everything is up for grabs. Every relationship that was available, even those brands you mentioned, the large retailers, education, beauty, etc. , we are very interested in those entrepreneurs. Francine i think you said you are not impacted by brexit, right . Is that a concern of yours . Frederic it is a concern. Our business is all about talent. Talent is what we are backing. Brexit is going, over time, to slow down the pace of access to talent in the u. K. And in london in particular. I give the example of the etch,er of farf portuguese, opening a shop in london. Is that the kind of talent you let in the country . Possibly, possibly not. 10 years later, one of the most iconic entrepreneurs of london. It is not the talent that is here that might leave. Im much more worried about the talent that will not come. Francine we will never know. Our answer is, we will travel more. E will make more effort we might have to go and find them somewhere else. Francine thank you for joining us today, frederic court, founder of Felix Capital. Wall street catches a break. U. S. Firms wont have to alter their business i according to new reports. This is bloomberg. Francine this is bloomberg surveillance. This is what you should be watching today. In germany, Angela Merkels cdu begins exploratory talks at 7 00 p. M. The fed, and after wall street earnings, we get express. Lets get more on todays market action. Mark yesterday, the spread between treasuries fell to 75. 3 basis points. That is the white line. That is brushing up against the lowest intraday levels since 2007. In the eyes of bno capital, this is just the beginning, with the fed seemingly on track to raise rates again. Second chart, reckitt benckiser, maker of painkillers, cutting its Sales Forecast after quarterly revenue missed estimates. A Challenging Market environment. Thirdquarter sales also missed estimates. It has been hit by a triple whammy. That is reckitt benckiser. The Dutch Company akzonobel, which is exiting chemicals to focus on coatings, abandoned a profit target this year after Challenging Market, higher material prices, led to thirdquarter profit missing estimates. Akzo has had a pretty turbulent year. Rival ppg, did from the attention of an activist investor leading to departure of top management, a new executive faced with the task of rebuilding shareholder confidence. Great chart. Worries about catalonias bid for independence saw investors pulling money for a Third Straight week. Longest stretch of outflows in more than a year. That includes record redemptions in the days following the regions referendum. Spain yesterday cutting its 2018 growth outlook, citing the impact of the catalonia crisis. Thedeadline on thursday for president to disown his claims for independence. Francine mark barton with the latest on your markets. The u. S. Securities and Exchange Commission is preparing to give wall street a reprieve. The sec will tell firms they wont have to overall operations to comply with new european rules. We call it mifid ii. That is according to people familiar with the matter. Nejra cehic joins us. This is quite significant. We know the backstory. There were letters between regulators here, in brussels, and the sec going backwards and forwards. This puts u. S. Banks at an advantage. Nejra the sec has been lobbied a lot about this, not just from industry in the u. S. , but there have been conversations between european and u. S. Regulators. Anytime we mention research unbundling, anyone you talked to on wall street, theyve got an opinion on it. Mifid ii says research has to be unbundled from other services for transparency and competition reasons. The conflict with the u. S. Is that if you charge research separately, you have to register as an investment advisor. What the sec is saying, according to bloomberg reporting, is that if you send these letters to firms basically exempting them from being sued if they dont comply with regulations in order to comply with mifid ii. It is a key milestone, the most significant reaction. Francine is the jury still out on whether this will lead to Better Research . Nejra some people have said that yes, the quality of research is going up. On a daily basis, we get all these quotes. We heard from goldman today. To 10 ofor access their staff. Is it going to be all in . Will you get access to calls . That is just the sell side. From the buy side, we dont know how much they are willing to pay and whether they are going to absorb those costs. A lot of questions on whether quality of research will go up. That is something regulators are looking at. What they dont want is for Research Fees to get so low they act as an inducement. Francine nejra cehic with the latest on rules and returns. For a detailed look at what mifid ii means for banking and investments, watch Bloomberg Markets on friday, 8 00 p. M. London time. Bloomberg surveillance and wrote continues in the next hour. Tom keene joins me out of new york. We will be talking to statoils ceo. We will be asking about some of the changes that we are seeing not only in the north sea, but across the middle east, when it comes to stockpiles in the u. S. Im looking at china. Im also looking at some of these dollar rallies that we saw the last couple days. I think investors are trying to figure out what the next catalyst is. The dow yesterday closed at 23,000. Just shy of i dont know whether that is important. This is bloomberg. Francine the communist Party Congress begins with residen president xi looking for opportunities. For newer firms. Senators reaching across the isle keep obamacare on lifesupport. This is bloomberg surveillance and im Francine Lacqua in london with tom keene new n new york. It seems investors a looking at the next catalyst. Tom one of the catalysts could have been last night, john mccain think he would support the budget deal. Two stories at of washington. The Affordable Care act ballet, but also what we are seeing on the budget path to tax reform. Francine we had a great report on that from Stephanie Baker. Heres taylor riggs. Reporter starting in beijing, president xi jinping has laid out a roadmap for returning china to a leading power by the year 2050. Called for state reform and tougher regulations. European Union Countries are keeping hope alive on a trade deal with the u. K. According to eu official, they are doing prep work so trade talks can begin as soon as they have decided that the u. K. Has offered enough during brexit negotiations. The negotiations remain stalled u. S. Senators from both parties have reached a deal to prop up obamacare. The agreement whaould potentially lower insurance premiums. Last week, President Trump said he was cutting off those subsidies. The deal still faces a number of opposition from republicans. A budget bite could result in a budget shutdown. They have drafted a spending bill, that includes 12 billion for the wall on the mexican border. Global news 24 hours a day, powered by 2700 journalists and analysts in more than 120 countries around the world. Im taylor riggs. This is bloomberg. Tom a big deal on the budget deal. Kevin cirilli will join us in the next hour, as well as Stephanie Baker, ito give us perspective on that. Andties, bonds, commodities. The much stable pretty much stable in currencies. The vix is odd, 10. 30. We will see where that sets up. Theres the dollar. And the twoyear yield. We will talk to bruce castor and about that. Francine i looked up the 10 year yield in the u. S. , and the euro heading for its longest losing streak in a year. Were looking at what will happen with catalonia as the deadline looms. The dollar continues to strengthen, helped by speculation that the next fed chair could be more hawkish. Im looking at the pound on the back of the brexit talks. We also had some unemployment figures and it is all to do with china, which is why we are looking at the renminbi. President xi jinping has more on the challenges, as he looks to make the country a leading power by 2050. Looking at the start of the twice a decade Party Conference, xi jinping looked to reforms of staterun enterprises. Weve been following the conference. Tom, how much were they talking about influence on the International Stage . Tom well, that was part of the mix, absolutely. Some spoke of the International Challenges china faces. They did not angle about north korea, but i it looms large. Also, the u. S. Relationship with President Trump arriving in november. Not to mention taiwan and the political challenges there. National security was near the top of the speech as well, a key concern for president xi. Many of his comments were about what he wants to see in terms of reforms, whether it is the real estate sector or reforms around the yuan and interestrate liberalization. Edis is about a birdcag economy, an economy strongarmed e communist party. Francine what do we know about reforms . Well, there have been helps from some leading up to this congress that with president xi the most powerful leader in china in generations, with increased power that he could tackle some of these reforms, but with some of the language we have seen, it seems he will take a more conservative approach. He did not give any big bang announcements, but in terms of state run enterprises, he wants to see stronger, bigger soes, a stronger state domestically. Thats one example of where he sees the state playing a bigger role. Beinge think of mr. Abe out of touch. Who is mr. Xi in touch with . Ishe an urban leader or he in touch with the rural china . Is probably a bit of both. Leading son of a top revolutionary. He spent yerars toiling away, bt the head of shanghai. He sees both sides. Inequalityted income and that is a significant issue for policymakers, the gap between urban incomes and urban incomes is enormous and there needs to be more work to address that issue. That is what many analysts we has spoken to have said must be the key focus going forward. Francine thank you so much, Tom Mackenzie, in beijing. Joining us now is miranda carr. Thank you for coming in. When you look at some of the reforms, the state sector seems to be the critical piece in this kind of reform puzzle. They started talking about that full that what have we learned . Miranda when we look at the reforms in china, they seem to be grasping for anything that says market reform or opening up. We always look are those keywords. This is about china and about the role of the state and the party and what benefits that, not what the western markets would be looking for. If you look at two of the key reforms in the last administration, everyone latched on after the november 2013 market reforms. Markets were playing a decisive factor. Two of the biggest things for the anticorruption and the supply side reform initiative. These were dismissed, they will not have any impact, and the supply side will not have any impact. In terms of the Economic Impact, if you think of the slowdown after the Anticorruption Campaign and the massive rebound when supplyside reform kicked in, that had the biggest effect. We should be looking for what kind of reforms china wants to implement, not necessarily market reforms. Francine i dont know if it is market reform or just how the state operates. That is one of the key issues that needs to be addressed, otherwise you risk having a crisis. Miranda the interesting thing is with xi consolidating his power, emphasizing the power of the party and basically filing single party opposition, whether he can push forward quite aggressively with things like deleveraging and environmental protection. Both of those things would cut into bested interests in china, theher it is in soes or old industries. If they can tackle this head on, you could see a slowdown and a change in chinas was performance. Tom as they mentioned in new york a few years ago, they had a spectacular china show. How much red guard is in this meeting . How much of marx and lenin will be in this meeting . Not a huge amount, but in terms of the communist party gaining power is much more important. Interesting thing is there was some concern that he was promoting himself, but he is ght,ing his new thou socialism in a new era. Autonomusomi a tribute to him. Tom there have been struggles there for decades, and going back to Jonathan Spence for making a modern china. Is it a nation, or still as spence said, not like india where it is many cultures, but nonetheless, not a nation. How national will these meetings be . Miranda there is still a wide difference between the western legions, which still have some growth to come, and the shanghai and beijing set, where development has already happened. Having to address those two is a key problem. A lot of the initiative, in terms of building state enterprises, starts to beat into the western area of and agriculture, a lot of the Agriculture Sector was very strong. He mentioned that as a key area for reform over the next five years. Francine brandy clark, miranda carr, thank you for coming up. Ceo. On, we speak with the this is bloomberg. Reporter this is bloomberg surveillance and im taylor riggs. Two of the biggest players in the extended warranty business are on the verge of combining. They are close to a deal to acquire the deal, which would value Warranty Group at 2. 5 billion. U. S. Regulators have charged rio tinto with fraud. The former ceo and former cfo were also accused. The case has to do with alleged inflation of the value of assets those in elliot has stepped down as the director. Traders are prepared to adapt us wall street enters a new era. Firms are rolling out machinery that would replace stock pickers. 100,000 financial workers are not needed to keep money flowing. That is your Bloomberg Business flash. Francine thank you. The u. S. Securities and Exchange Commission is preparing to give wall street a reprieve. They will tell Financial Firms they will not have to overhaul their operations to comply with europes new regulations. Bevan joins us now to discuss this. We have many things to get through today. Still quite a lot of confusion as to whether this would lead to Better Research. U. S. Firms are at a strong vantage point. James im not necessarily going to agree with you on that point. If you were to say there were two jurisdictions and there were. Our different players areeu players absolutely going to have to do the unbundling for european buyers. There has been this issue whether or not a European Fund manager was able to take bundled research from the u. S. The eu would say absolutely not, you have to unbundle. Possible ifs it is you are an advisor to separate. I dont think this will actually put the u. S. At an advantage. Francine at the same time, we have not sorted out the plan and it is two months away. Many are trying to price it, but many are still trying to figure it out. James considerable chaos. The trend is quite clearly that the buy side will acquire cash. The customer will get a better deal than they did before. I still think there is real ambiguity. Tom i dont mean to interrupt, james. Theink youre dead on about ambiguity. Who holds the power here . The answer is, its a power play. Who holds the power in the United Kingdom . Power belongs to the asset managers. They are able to say what they are prepared to pay. The small end of the buy side will have to take what is offered. And the sell side has remarkably little room for negotiation. Tom i agree with you there, but we had been down this road five times and the answer is, the Portfolio Managers on the smartest people on the sell side. They go through this process. They dont have the sell side. Some Portfolio Manager has a total tantrum. He cant get briefed on sell side. 1800sellside and get the guy on the phone. Will that change . James no, but whether they will take the call, determines this. I understand there will be houses that predetermined whos taking the call. Tom that sounds like my marriag e. Francine well, tom, thats awkward. James you will not be competing with the big establishments and the latest models. Tom francine toms latest trick, he will negotiate brexit for us. Tom i bring this up because this is really important for everybody within the bloomberg world. We are at the point where it is now like, what are you going to do. Francine what i cannot figure out tom is why there are so many questions left. I dont know if it is because the banks are late to the game. James the banks are very late to the game. Francine im not trying to defend the banks, but you dont want to lowball. How do you agree on a price without knowing what everybody else is doing . Because you do not want to be too cheap because then you and get the regulators wrath. James you are assuming that the only side of research is the sell side. There has been a rather large number of sell side boutiques. People like myself have been purchasing research from sell side boutiques. Tom james bevan with us for the hour as well. Well continue. A lot to talk about with record highs in equities. In bloomberg surveillance radio, i really looking forward to this. The race to the end of the year in washington. The budget, and the reform. Look for that, coast to coast. This is bloomberg. Francine this is bloomberg surveillance with tom and francine from london and new york. We must talk about ray dalio and Bridgewater Associates. Bloomberg data showed the Largest Hedge Fund making a 300 million bet, the secondlargest that agains is at an italian company. Joining us is james bevan. We need to add, there is a huge bet against italian banks, which brings you over to my chart, which for regular listeners, i will put on social media. Is this the problem child of europe . James i would say the bridgewater view is that italy is in a serious mess as an economy. Thats correct. If i were to wind the top back to 2011, the time of the greece crisis, the british were adamant that greece was going to totter off the edge into the abyss. It didnt. We had draghis famous speech of 2012 to ensure that did not happen. The bet is to what extent will the politicians and the central bankers keep the party going, and to what extent will market politics prevail . And italy will definitely have a downward correction. Tom i am sure francine, i am not pronouncing this correctly. Its range bound. To me, it is a tough way to implement a short, unless you are scalping down to the bottom of that range. James whats fascinating about italy is the very Largest Companies struggle horribly. However, theres an extraordinarily competent middlemanagement and Smaller Company focused in italy. Fabulous companies, where the stock picker will make a lot of money in italy. Dalio has mr. Billions to allocate and he will not play at the small end of the market. I think he has made this recent bet, and he had three parts to it. The bet on italy, which is transparently clear. A correction sis likely. The third issue is, how much were stocks overpriced . It looks like a natural resting place and a short position. Francine james, thank you so much. James bevan stays with us. Dont miss the conversation with claudio descalzi. Im sure he will be asked more than once about ray dalio. 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. Tom bloomberg surveillance. From london new york, tom keene and Francine Lacqua. Right now, first word news, heres taylor riggs. Taylor president is using ping has gathered the communist party that is expected to hit influence for the next decade. He laid out a roadmap to turn global world power r. Are prospect is bright, but our challenges top. Called him more reform and open the door to more foreign businesses. Willing torump is compromise on a key component of the republican tax plan. According to white house officials, the administration is limitingo be open to local state taxes instead of eliminating it all to th together. A federal judge in hawaii is blocking President Trumps third try at a troubling. Travel been. An. The administration is expected to appeal. In spain, there are reports the government is preparing to keep the catalonia region from madrid. The paper is assuming the catalan president doesnt meet a deadline to step back from his but to declare independence. The government may make its move tomorrow. Global news 24 hours a day powered by more than 2700 journalists and analysts in 120 countries, im taylor riggs. This is bloomberg. Tom two roads diverged well to get tax affirme reform done,. Its always a good time to speak to woman from the green and White Mountains of northern new baker. , stephanie you wonder robert frost as a took and senator mccain road late evening last night. Stephanie he said he would back a Senate Budget proposal, which would clear the way for the tax reform legislation to be considered. That is a win for trump, but theyre still a long road ahead and a lot of obstacles ahead as well. Tom let me cut to the end of the road. What is your timeline or the people you listen to, their timeline on when we get tax reform . I heard about four different dates yesterday. Stephanie trump says he wants to get this done by christmas, which many people think is given ambitious Everything Else he is kicked to congress to resolve. We still dont have details on this tax reform package that he wants. Its very hard. We dont know the tax breaks he wants to eliminate. We dont know what the individual income tax rates he wants to reduce and what are the parameters of those. Its really hard to judge how this tax reform will impact the middle class or lower income americans. Francine what do we know about obamacare at this point . Stephanie there was a bipartisan deal basically to restore subsidies to Health Insurers to cover low income americans under obamacare. That was welcomed by many. Some republicans have rejected that, saying they dont want to be bailing out obamacare, which is what they think this deal would do. They want to repeal and replace. Its unclear how much support that deal has in the senate or the house. It remains to be seen how its going to play out. Francine how much do you look at this . How much does this impact your Investment Decisions . Taxes q to anything that will happen in the economic cycle. James absolutely. And the earnings per share for the s p 500 i suspect will be around 150 without significant tax change. Valueget tax change, the changes significantly, specifically if money goes back to the United States. Tom im lost on what would happen if senator baker from tennessee or speaker oneill of massachusetts parachuted in to this negotiation. Its relatively different than what we saw in 1986, isnt it . Stephanie yes, and i think trump likes to make comparisons to reagan, saying his tax or proposal will usher in the biggest economic boon since the reagan era. He has not often enough details offered enough details. He claims reforms will put 4000 into the pocket a ver of every household. He wants to reduce Corporate Income tax rate from 35 to 20 and repealed the estate tax. What that looks like is a massive boon to wealthy americans and could lead to Companies Using that money to buy back shares. Its what weve seen before. Tom we saw yesterday that the former secretary of treasury really went after kevin asset over what you just mentioned the 4000 or even grossed up 9,000 asset theory of growth in tax reform. Does any support dr. Hassett . Does anybody support President Trump on the belief that growth can really boost that kind of value to citizens . Stephanie i did see another estimate that was a bit close to the number that trump used, but i still think theres a lot of open question marks because he has not spelled out whether or not tax breaks for mortgage interest reduction, what kind of incentives will be offered to companies for investment. Without those details, its hard to judge the Economic Impact of his proposal. Francine where would it actually be at the margins and what do we know about where it would impact inflation or gdp . James theres a question about how fast the u. S. Economy can grow. Theres an estimation that we get 2 inflation and 2 real growth with the fed funds around 2 . Andtill have mr. Mnuchin professorl be taylor said he also thinks that its achievable. If we get enough people pushing hard on an agenda of reform and adjustment, then we will get a shortterm pickup in growth. My concern is that we can a pickup in growth that will be a slamming on of the brakes. And recession will be the cause of the major bear market. Francine what are you watching out for this week to give us an indication of how both obamacare and tax reform will be going through . Stephanie the main thing we need to watch out for is the Senate Passing the budget resolution tomorrow or friday and how that plays out, whether or not that will then allow the tax reform to proceed. Thats the main thing. Forill have to watch out other republicans coming out and saying whether or not they support this bipartisan deal on obamacare. Trump has said he welcomed it, but then signaled he wanted to go further. There are number of open questions on that. Tom Stephanie Baker, thank you so much. Greatly appreciate it. Terrific briefing to get morning started and continued on what is going on in washington. Ne will continue with mr. Beva as well. Your briefing on bloomberg surveillance on television the same thing in your car. Daybreak on your radio with karen moskow and bob. Stay with us, this is bloomberg. Francine this is bloomberg surveillance. Lets talk about oil and extended gains. Stockpiles point to a healthy depend and it comes as Goldman Sachs warns about geopolitical risk that could cause disruption to supply. Oil prices good news for the likes of stand oil, which recently made a Significant Oil discovery in the north sea. Manus cranny joins us live now. Anus we are here with the ceo of statoil and he joins me now. Oil is trading higher and lets get them inside perspective. We are a must kissing 60. The synchronize level of Global Growth and ceos giving me an upbeat message. How strong is oil demand . Very strong. We are talking about 1. 5 plus something Million Barrels a day. The estimate is stronger than you might have expected and it slightly surprising, but its a very key factor playing into the oil price. Manus the chinese are importing a lot more and we are seeing the stats coming through for them. Wheres the geography of that uplifting demand . The chinese demand seems to be very robust and a key driver. Are at the lower end of the cycle in that certainly can have an impact on the general demand. With the lower end cycle, the factors will be hedging like mad. What will it take us to get through 60 . What will take us to break a new bran bandwidth with crude . We have a solid demand and that has been stable for quite some time. Its obviously going to be important. I think we mightve been a little bit surprised at how its growing, but not to the extent that somehow might expected. T the critical factor manus this peak production in the last month. Is that my read from what we just said . Are we hitting peak share . I do not think we are hitting peak share just yet. What bottlenecks and we hitting the shale and how does the work . Does it take to kickoff those options . . Manus we are coming up to reporting season and many people are saying to me if theres a shift in the script of begins across the industry, that would indicate a paradigm shift in optimism. Would you agree with that . . S there a shift is that what we should look for in q3 . That will be a theme for many players in the industry and shareholders to see how companies are responding and to what extent that is being abolished. I think there are different responses, but i say it will be in important thing to watch in the season ahead of us. In the barents sea, 15 wells were drilled. He made one discovery. Optimisticg overly on what snap oil could deliver . Do we need to recalibrate . Its really about being patient. This will basically open up a new area in the barents sea that has not been explored before. We need to be patient. We will accumulate at a lot of data and information. In most of those, they were hydrocarbons. We will continue next year and find wealth of the very seat and digest all the Data Information that we have now and see where we are heading going forward. Manus you just had an election in your home country. In essence, you are walking sovereign wealth fund. 67 of years owned by the country. How do the people look at statoil . What more do you need to do to engage . In most countries, there is a discussion on the road of oil and gas going forward, but there is consensus abroad in support of our industry and the energy mix for decades to come. Manus just reflecting back on the opening speech, he talked about 6 billion customers and there will be 9 million customers in a number of years. You are not reinventing statoil, but you are changing the form of statoil. How much of your business will be renewable in five years time . We define ourselves as a Broad Energy Company coming from the legacy of oil and gas. We have been in renewables for quite some time. Theill grow more within renewable space that with oil and gas, but to give precise on how much is difficult. 15 of our will be within renewable or solutions by 2030. Over the chief economist at bp says electric cars will not have a huge impact on oil demand. Is this an amazon moment . Is that a complete misinterpretation of what can be the biggest shift of oil in the world . I think electric cars is definitely a hit to come and it will play a really important role. We are growing for the longer term for each year could be a mostly electric cars and plugin hybrids by 2050. Still we will need a lot of oil and gas has is more transportation. Theres heavy trucks, ships, and planes. The rest is within industries and so on. Theres a huge conflict demand picture which most people do not fully recognize. It does not change fundamentally the electric light duty vehicles, but it will impact demand going forward. Manus thank you very much and a pleasure to have you on bloomberg. Make sure to cs for the quarterly reports. We need to suppose rethink our perception every time we bandy around the concept of the electric car. You are going to need a little bit of power to keep it going. Tom, francine . Francine thank you so much, manus cranny. Thank you also to the ceo of statoil. Lets go back to james bevan. Were just hearing from the statoil ceo and being asked about whether he was sovereign wealth. I dont know how that reads across into your world. How much do you look at oil and gas to understand the investment and stability in the middle east and therefore whether theres any appetite for you to be in that region . James i look at the oil and gas sector and see a set of companies that are severely challenged on longterm view. I certainly feel that a very material underweight hydrocarbons is appropriate. Its very hard to forecast what the oil price will do dont really like investing in companies where i have no real controlled handle on the and pricing of products. Time, newe technologies are rapidly becoming much more competitive and the end used th demand is falling. That means i should be absent or very lowly weighted in the second. Tor. The real challenge of our industry for passive investors a scale. Its really hard for running trillions of dollars. Francine james, thank you so much. In the meantime, you can ask directly questions to james. Log on to tv and clicked on the video screen and we will be talking about equity valuations next. This is bloomberg. Taylor this is bloomberg surveillance. Lets get the Bloomberg Business flash. Apple supply foxconn and idg capital want to cash in on self driving car technologies. According to a presentation for investors, they want to raise 1. 5 billion for a start up. Foxconn and idg have been talking with Financial Institutions and Government Back funds for several months. The American Department store chain calls will start offering amazon products this month. That spurred speculation amazon might make a bid for the retailer. The Clothing Company ceo doesnt think so. She says coles will use a deal to capitalize on growth of the smart home devices such as amazon echo. That is your Bloomberg Business flash. Tom cannot say enough about Scott Galloways the form. Just a Brilliant Chapter on amazon. James bevan with us in london with Francine Lacqua. Let me get to a chart. This is a logarithmic chart. Right here is early 2000. The gap between the green line in the pink line is the exuberance of robert shiller, who i saw down at the New York Stock Exchange the other day. We are not there yet. But are we getting exuberant . Are beginning to see within your portfolios and your ability to deploy capital, are we seeing the silliness of february of 2000 . James i worry that we will have that way, but i certainly dont think we are there yet. I take some comfort from Janet Yellens comments in washington last weekend at the g 30 when she said it was perfectly reasonable to anticipate that investors were believing it would be stronger longterm growth and a secular depression of inflation. The socalled fed model still regards equities as cheap relative today. That those challenges to bond yields of what happens to longterm Earnings Growth. It will rise because of the nature of the Global Economy. On Earnings Growth, numbers are much market difficult. It was just under 10 . We know they got to around 12. 5 just prior to the president ial election last year. We know now that they are 13. 5 . Apparentomes those numbers are to topic, the operating margins are too strong, the markets will turn down. In the near term, there are far more risks that they built up so cash continuing to drive into the equity markets. Francine so why would that happen . Is it animal spirits being reignited when it comes to tax reform . Do you need a catalyst . Dont. No, you you need relative valuation against cash to be very important. We still have 25 of the world measured by gdp. Cash flow still huge. China sending out 600 billion to be invested into the worlds markets. I can see the markets given to 20 times in the states. Were definitely in to over exuberance. Francine what will be the catalyst for correction . James if the markets moved to fast and we get too much economic activity, they will get to close down the rates. If professor taylor is a next head of the fed, that will happen sooner rather than later. We will see the first signs of an economic slowdown and potentially a recession. That would be the driver of next bear market. Tom im calling this a grind up. I dont know what i mean by that. James its a like a real party, tom. Tom its a grind up to what we are seeing in the extraordinary bull market. James bevan, very valuable on this perspective of the language of equity markets. We will do that in the next hour. This is a timely conversation with Bruce Casimir of jpmorgan. Yes, this is bloomberg. Tom this morning, record highs for stocks. Dow, 23,000. The grind continues with a december rate hike and future inflation, we go in search of hard data. Bruce kasman of jpmorgan and john mccain supports a buzz it budget resolution, or haps finally a road to tax reform will be taken and we will find true tax reform. Good morning, everyone, this is bloomberg surveillance. With us, Francine Lacqua in london. Did you have to learn robert frost in school at gunpoint . Francine i did not, actually, but i learned a lot of french ssics which i am not sure it certainly forms the mind. Some figures we have in terms of employment figures and average Hourly Earnings in the u. K. Tom i just went down in flames and francine saved me. Rocksolid with our first word news. China, president xi jinping has kicked off a gathering of the communist party that is expected to cement his influence for the next decade. He laid out a roadmap to turn china into a leading global power by the middle of the century. The system guarantees the longterm prosperity of hong kong and macau, is necessary for chinas prosperity. Called for more reforms of state owned industries and promised to open the door to foreign businesses. You countries are keeping their hopes alive for a trade deal with the u. K. Negotiations remain stalled for now. Back in the u. S. , senators from both parties have reached a deal to prop up obamacare. The agreement would allow crucial subsidies to allow insurers to be paid out, potentially lowering insurance premiums. Last week, President Trump said he was cutting off the subsidies. Senate republicans appear to be willing to risk a budget fight that could result in a government shutdown. They dropped a Homeland Security spending bill. Democrats have said they will not go for that. 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. Data,ets get to the equities, bonds, currencies, commodities. Futures now up three. A little bit of curve steepening. Oil elevated. A great interview by manus cranny in our last hour. , 10. 20. I am in the double leverage allcash fund so i am not looking good right now. To year yield up to basis points, 1. 56. Euro heading for the longest losing streak in almost a year. It has to do with catalonias independence. Advancing butpe they were sideways earlier on. The dollar continuing to strengthen. I think this has to do with the possible pic of the next Federal Reserve. I am looking at pound extending a climb as people are questioning the bank of englands commitment to the Interest Rates following testimony yesterday from policymakers. Tom 30 years ago on black monday, we will do that tomorrow. Now, look at the chart 1987, 1988, up we go. Everything is fine here. We will take two weeks at the summer cottage. Rollover. R, textbook Michael Regan has seen this many times before. What have you got, francine . Francine i think this is quite important as it goes back because it goes back to unemployment wages. It is a very simple chart. Push it out for social media you can see weekly earning average, hourly average earning is kind of going sideways. Today we had Unemployment Holding at a 42 year low. And yet, there is just not that much wage growth. Tom important, particularly with governor carneys situation explaining 3 inflation. Regan talk to michael about where we are when times are good. We have been here so many times before. You just cannot get the big move. Everybody rationalizing, i remember this clear as a bell, i got tanked in goodyear tire. This happens. There is no way to get out in front of what happened that monday. Michael my favorite part is you do not even have it circled, but the retest of the low about a month later. If you missed the dip, you had another chance. I look at this chart and i think the traders these days, how they would love just a little taste of that, any kind of dip. We had a headline on the blog yesterday saying the problem with the by the dip strategy is there are no dips. Tom the new world, which is why it is not 1987. The new world. Asymmetric information, is there almost too much information out there for those playing the game . To efficient of a market, a kind of feels like that. We have not had a serious dip since brexit. That makes people nervous, but they have been nervous the whole time about low volatility. The vix at 10, how could it possibly be at 10 . If you look at realized volatility at half that, the vix still buy some arguments is high. You are going to keep selling vol atity with realized half the level of the vix. Much in 30changed so years it makes you wonder if this type of thing is even possible in this day and age. We saw the flash crash in 2007 and people blaming the computers on that. Tom that kept you in chips. Francine . Catalyst . What is a is there a canary in the coal mine we should be watching for either a correction or a leg up . Michael some people are looking at the Credit Trends from the banks that recorded this week and wondering if it is some sort of turn in the credit cycle. It does not look like it is. Credit trends were so positive for so long that it is not surprising to see a little bit of a giveback. Friday,ook at every when the song puts out her table of earnings forecast and i look at the 2018, 2019, i still see doubledigit Earnings Growth forecast for those years. Until they start to look too optimistic and start coming down , i would obviously still be pretty comfortable with this market. Valuations are high, but if i am looking out 2, 3 years in the future and still seeing the potential for strong Earnings Growth i would not be too worried. Francine lets bring in bruce kasman, jpmorgan chief economist. Is tax reform a game changer for inflation or gdp . Bruce if we got a big tax cut it would change the Macro Economic picture. From our point of view, it is unlikely. We think we will get a big tax cut so what is going to drive the inflation process and the markets will be the interaction between a u. S. And global economies standing on solid footing, making a transition away from a lifting they came aom drags to one that has real Capital Spending business sector led upturn. I think the interaction between that and what happens on Interest Rates, both because of the fed and inflation, that will be the key driver in a world in which i would not put much weight on getting a big tax cut. To davids talking stubbs in london the other day about the massive michael for early call on gdp, which im going to say is the way you do economics at jpmorgan. I want to take it over to reagans world. The president of the United States led a catch beach yesterday at the heritage foundation. Thank you for great coverage of that. He led with a greenspan, down 23,000, which Alan Greenspan always posited. Do you buy that idea or is the 23,000 stock market only good for Michael Regan and the rich of the world . Bruce i think the idea of what we are seeing in the u. S. Economy is a turn toward Better Business behavior, driven partly by a better global backdrop that is altogether helping to boost corporate products projects. That is the story that ultimately gets how things come up. Sitting that we are here with that policy very easy and partly seeing equity markets go up on the back of a world in which markets do not expect the fed to do very much, we still have weak underlying supplyside labor markets. Link, his world to the world of potential gdp, can you , as shift to a trump 3 view sustained morning in america 3 , 3. 2 gdp . Are you willing to make that with the micro data you see . No. Tom where are you . We think potential growth in the u. S. Is about 1. 5 . Yet where at a point the constraints for the tight labor market, the week potential growth is starting to bind in terms of wage pressures, productivity weakness hitting corporate margins, or driving a price story that pushes the fed. The issue is when will that kick in . Then the time we have to worry about equity valuations eating too high. We are not there yet being too high. We are not there yet. There is a capex spending pickup in place. Maybe we will get a productivity dividend. Late cycles when you have tight labor markets do not tend to give you big productivity dividends. Tom we are positive, yankees one. Michael regan, our markets live senior editor. We are back with bruce kasman of jpmorgan. Conversation they will be asking him about ray dalios Bridgewater Associates shorts on his stock. Is g theorgeosity , as tom would say, of hong kong. I believe it is hong kong harbor. A lot of the talk is on the tom i am looking at the Mandarin Hotel bar. Francine i know you are, and i know you know that bar pretty well. The president warning of severe the toys a decade communist Party Conference, the president said they would joining us now is Tom Mackenzie, bloombergs china correspondent. About six orve seven days left in the congress. What did we learn . The president wants to reinforce his position and power, and lay out a broadvision. Am m. it was, and it was broad, sweeping vision and a vision of a china that is more confident and more ambitious to mess the glee but on the International Stage as well. Some of the key economic stage points that he flagged, in terms of the real estate sector, saying the Housing Market is not just for speculation, it is for living in. This has been a key hot point for analysts and people, residents in cities like beijing and shanghai. They put curves in place. He said he wanted to see bigger, stronger roles for state run enterprises. A question mark for what that means for the private sector. He wants a rebalancing, greater quality growth rather than faster growth. He dropped a mention in a previous speech in 2012 to a pledged double gdp by 2020, that was not mentioned. This is an ambitious vision for the next five years under the guidance of the president , one of the strongest leaders in china that we have had in generations. Tom all of us at gunpoint have had to read mcgregors the party. Fit into the path of chinese leadership . In that book, they talk about the red phones being on the desks of the state owned enterprise offices, linked to the leadership compound. That probably has not changed. We are seeing a greater role for the party not just in state run businesses but private companies as well. Chinesecompanies and companies are told they need to set up communist Party Committees inside those joint ventures. Reports that the communist party may be looking to buy stakes in tencent or alibaba. There is a greater focus in terms of the party pushing its tentacles into the private sector and bolstering the state sector. That is a theme that many expect to continue for the next five whos under president xi, has rewritten the rules because he has gotten rid of the collective leadership. He is the sole leader and is in charge of all the crucial areas of the economy. Much. Hank you so bruce kasman of jpmorgan with us with a global perspective here i love this morning mustread. I adore lee lynn millers granular work on china this is a must read on china. I will put it out on scioscia social. That only slowed the pace of leveraging instead of reversing it. Chinas stronger 2017 performance has depended almost entirely on a revival of the old economy. There is cleveland millers cautious view. Do you share that . The economy is continuing to be weighed down by the overhangs it is facing. We think the trajectory of china is towards weaker growth. We do not think there is a crash or hard landing or something precipitous. What we think is a really positive global macro backdrop, we have china as the tempering force right now on the global scene. Have any if we do not concrete reforms on for example, thee get, is there a danger market is underestimating the challenges for china . Bruce i do not think so in the short term. We are seeing policies that are curbing leverage and unwinding the excesses we have seen in some parts of the economy, and the economy is making good progress. What i do not think we are seeing is the real jolt of reform, that can get you a big boost of growth. I think the balancing act is the economy does not do anything terrible that just kind of grinds into a weaker position as we see the next year or two go on. Francine bruce kasman of jpmorgan stays with us. , we will later today bes with the former Prime Minister of ireland. Desks we will be speaking with the former Prime Minister of ireland we will be speaking with the former Prime Minister of ireland. It is a brexit conversation. With us worldwide in the United Kingdom and United States, good morning, this is aoomberg surveillance. Morning mustread, this is a technology overlay across everything. On global wall street our team at Bloomberg News with two wonder for quotes touched it is this spirit crushing work that technology will replace so let it do it. Time, tide,s one, and technology will wait for no one. We have tippy toed around this long. Too much and for too bruce kasman knows about this and its effect on productivity in the nation. Do you really know what technology is doing to american gdp, to american productivity, and for that matter to centralbank policy . Bruce it is hard to know and tarred to measure hard to measure. The broad message we are getting from data is that technology has been adding less to growth over the last five to seven years and the previous 10 to 20. In order to get 2 or so gdp growth in the u. S. We are having to generate a lot of jobs and we are seeing the Unemployment Rate move down at a steady pace. Lou alexander wrote a brilliant essay five or six years ago, it is a technology it is a divide, technology hinders you and helps you. Is technology a bad weapon for most of the American People . Ruce i do not think that the worst thing we can do is look at technology as something that is hurting us. It is the future and the way we will expand standards of living. There are issues as you get new technology and it proves disruptive, so you manage it so the benefits are spread evenly. It would be a dangerous thing to look at the world and be against technology. The problem is we are not getting enough growth at of technology. That does not mean there are not big changes and it might kick in at some point. We have been in a lull and unfortunately that has consequences. The demand picture for the next three quarters is looking pretty good, but the supply side is this constraint constraint that we will have to deal with. Will jpmorgan be outsourced . Bruce i do not believe so. Inwill see a great world which talented people use technology and create great work out of it. You can see that all over the economy now. Tom we will continue with bruce kasman of jpmorgan, a really important project. Writing up automation on wall street. On Bloomberg Radio, your morning briefing. Look for that, bloomberg , boston, coasttocoast to the bay area in san francisco. This is bloomberg. 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. Bloomberg surveillance, with bruce kasman of jpmorgan. Francine lacqua in london, i am tom keene in new york. China, president xi jinping has kicked off a gathering of the communist party that is expected to cement his influence for the next decade. He spoke for more than three hours and laid out a roadmap to turn china into a leading global power by the middle of the century. Situation, ourat challenge is tough. Taylor he called for more reforms to state own industries and promised to open the door to foreign businesses. Willing torump is compromise on a key component of the republican tax plan, according to a white house official. They are open to limiting the deduction for state and local taxes instead of ending it. Republicans and high tax states have been pushing back. A federal judge in hawaii has blocked President Trumps third try at a travel ban and found the ban lamely discriminates based on nationality. Plainly discriminates based on nationality. In spain, reports a government does the government is planning to manage the catalonian government from madrid. Government may make its move tomorrow. 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. Tom our chief washington correspondent kevins a really is in our studios this morning. I guess the budget problem is solved. What is the battle . Kevin yesterday i interviewed Mick Mulvaney who tells me they are anticipating a vote thursday or friday. There are still some holdouts. Sayscky senator rand paul unless there is the 43 billion offset that overseas war funding, that he will not get on board. They can only lose two votes and you have got senator cochran out , senator paul as a maybe. That is why you are starting to hear rumblings of if they do not get tax reform done by the end of the year it might spill into january. Voting onudget we are now is pretax reform and preexpansion of the deficit because of tax reform, right . Kevin this is essentially political hurdle, kind of like preseason. They have to vote on the budget to get to the main event and that being tax reform. Francine will we get tax reform before christmas . The president was talking about a Christmas Present. Kevin and it is not even halloween. A do have to get done the budget, they want to have it done, but the sources i am talking with are starting to push back the timeline and saying it may not be until early next year. In terms of everything they want to get done, there is a reality check going on not only in the white house but also in congress where they are essentially like, if we do not get Something Big done, we are in a really tough spot heading into 2018. What is interesting with the Health Care Debate is that it would seemingly be like and alexandermurray deal, democrats and republicans coming together. Tom kevin cirilli, our chief washington correspondent. The budget battle heats up in washington. At the peterson institute, bruce kasman with us. Holtz eakin talks about an expansion of the deficit to 7 . Down the 5 , 6 , or is that a feasible vector of budget ugliness . Think there are some significant problems with the proposals that are coming out of. He president on tax reform i am here to talk with you about trade policy in the Trump Administration. Nafta, some moving blooming tariffs on the trump agenda, so im looking beyond budget policy to some trade war battles. Have a pulse . A i really mean this, it is a huge linkage of the budget debate. As nafta going to destroy our and ask . Nx . We just finished the fourth round of negotiations with the mexicans and canadians, and yesterday was a pessimistic outcome where they decided, we need to positive now for a month, go back to our respective corners, and think about what we want to do. The Trump Administration, to be antitradesome very proposals on the table that will be very difficult for the canadians and mexicans to have to agree to. This is really calling into question the future of the north american trade agreement. Francine who will lose the most out of it . Chad ambassador light heiser was pessimistic. He signaled he thought there was surprise at this pessimism, but i think watchers were not surprised at all. The Trump Administration is trying to roll back a lot of the trade gains that have been achieved over the last 20 plus years. They want to make it easier to slap import tariffs on canadian and mexican products, things like these jets from bombardier or softwood lumber. They want anticompetitive positions on automobiles, buy american provisions that sounds good until you realize they make the north American Economy much less competitive with the rest of the world. I think canada and mexico anticipated that this might be coming, perhaps hoped it would trump coming, and the administration actually put some text on the table to suggest they were serious about pursuing this approach. I think the mood is one of pessimism. Francine so lets say that this plays out as chad was saying, how much does it hurt gdp . Bruce we should look at this a bit more like brexit, i do not think we should overstate the immediate effect of something going wrong with nafta what should not understate the more mediumterm effect this could take. It is probably more serious for the mexican economy, but if you roll through time i think theing back nafta, implications for global trade more generally are quite significant for the u. S. Tom i gave a speech yesterday for our good sponsors to help us on Bloomberg Radio and television worldwide, and the isstion came up, what different now versus other trade agreements . If you have a washing machine in korea or a washing machine in mexico, it is made in a lot of different countries. Idea. Elong is big on that is it true . Chad absolutely. We do not really have something made in america anymore, it is north america and around the world. If you are thinking about rolling back nafta, which is what seems to be on the some other mind, and tariffs on washing machines, solar panels that are sitting on potentially could imposed ricardian import tariffs on these products. This has the ability draconian import tariffs on these products. Changes the ability to how americans access cheap energy goods and this can open the floodgates for other companies to come forward and make such demands. This is a Tipping Point for the administration to think about their longterm strategy on trade. Of the economists have been critical of what i will call ross navarro economics. The basic theme is china is the enemy. What is flawed about President Trumps trade economic theory . Bruce we have to separate two things does china operate in a Global Economy in a way that creates unfair advantages . Yes. Should be trying to roll back those things . I think that is right. What chad said is important, if you think about the way trade opens opportunities for the u. S. In a whole host of opportunities , we should not underestimate the negatives of trying to close the u. S. Off in terms of putting on protectionist measures. There is an issue around china specifically and even in nafta that the agreement can be updated and improved, but to talk about rolling back free trade turning inwards is a real potential negative for the u. S. Economy. Tom how together are mexico and canada in this discussion . They joined at the hip or will it be two separate countries against President Trump . So far they have shown a united front, which i think is important and encouraging. The other important part about canada and mexico is they look beyond the United States. They have trade agreements with dozens of other countries. If the United States leaves nafta it will be more difficult for American Country companies to compete in the freetrade market where they have deals with europeans and asian countries. It will make it more challenging for americans to compete in those markets and with the rest of the world. Bown. Hank you, chad has a weekly podcast on economics and trade. Bruce kasman continues with us. Podcasts, her five has become such a media giant at jpmorgan. I do not think the congressman ,f North Carolina has a podcast mark walker, a timely discussion on some of these themes and the battle over the nations budget. This is bloomberg. Francine this is bloomberg surveillance, with tom and francine from london and new york. In spain there is a report government is planning to govern the catalonian region from madrid, assuming the cats alone president does not catalan does not meet the deadline. We are pleased to be joining by an Education Minister from madrid, the Spanish Government spokesperson. Thank you for joining us on one of the most important topics of the year, catalonia. We seem to see a little bit less of Government Support of spain from the like of the belgium Prime Minister, who also intimated that if things do not settle he will look at having a third party intervene and intermediate. With the Spanish Government be completely against this . I think that all governments of the European Union stay behind the Spanish Government. It is a question of rule of law. European union was built up 60 years ago in order to restore democracy and freedom. The Constitutional Order of the Member States is one of the main pieces of the European Union. What the Regional Government in catalonia has done is to test the law. I am sure all Member States in the European Union will support the Spanish Government, as is the case. You may recall that article four establishes 2 i am sure they will back the Spanish Government. Francine there have been questions and possibly fair questions about the Police Operation on october 1. I do not know how you would describe that. There have been questions raised. Would it be such a disaster for spain to have a third party involved . Believe that in spain we are an established democracy, we are mature. We should solve our problems ourselves, and there is a place where this kind of political situation should be solved, the parliament in madrid. This is what we have explained to the president of the Regional Government in catalonia, supported not only by the government that also the socialist party, the liberals, which means the whole parliament of the United Kingdom, socialist, conservatives, and liberals. We have asked him, go back to the rule of law and lets go to parliament and have dialogue. It is important to go back to the rule of law. You cannot have a Regional Government in any member state outside the rule of law. From a distance, what i find so unique is the percent of catalonia that wants independence. I believe it is a relatively low number. How can you implement madrid implementw can you National Policy and do it without the violence the world saw 10 days ago . Know, when you mentioned the violence, it was a mandate by the judge to the police to avoid an illegal referendum. I do believe that we should have talks. We should have dialogue, but there is something that the Regional Government of catalonia should do first. They should explain to the people, that is important, if they have declared independence or not, because the president of the Regional Government has not been clear about this. If he goes back to the rule of law, i do not believe i believe there is a place for dialogue and compromise, and this is what the government has written to the president of the Regional Government. We are still expecting his answer. If the answer is positive and much votto says today is always forever, so we can expect today. Too believe that the place solve it politically is the Spanish Parliament or of court where of course all parties are represented. Debate fors timeless spain, what does madrid have to give up in negotiations with barcelona . I have been a member of the European Parliament for 20 years. And iotiated negotiated a lot of issues i never talked about giving up or indiscernible] i think we should talk about the future and what should be positive for catalonia and the whole of spain. There are things to talk about financing the region, special services, education, health services. There is a lot of issues that interest people and we could talk about them. We are also ready to talk about them, of course. But first step is to go back to the rule of law. You cannot declare independence. You cannot take the selfdetermination as a principal. That is not in our constitution, nor in any other constitution in the European Union. Francine just to make sure people understand what is at stake, lets say article 155 gets invoked. Does he keep his job . Answer ofnds on the the regional, the leader of the Regional Government in catalonia. The Prime Minister has sent him a letter. He wants a clear answer. He wants a clear answer of the fact, he stands for the rule of law. Of course, the answer of the government will depend on the answer of him. Francine i understand i cannot give you an answer without knowing the answer of him. Francine lets say that you invoke article 155. You take over the region. It happens to the job of mr. Put him on . Is he get replaced . Does the same happen to the Catalonian Police . Answer. Pends on the the important thing is that today in catalonia because of the action of the regional doesrs, the rule of law not protect them any longer. The importance is to restore the rule of law. That is important am a that is our position. As i told you before, this is a position supported not only by the government but by the socialists and liberals. We are telling them to go back to the rule of law and lets talk. Francine talk to me about early elections in catalonia. It seems more likely than not that this will happen. Onsthis mean the cattle catalans will elect a government . We do not know if they are going to call for elections and we do not know the result. In politics, i have known something in my long career, lets not talk about the future but the present here it the present thing is to ask the regional leader, go back to the rule of law. Tom what are you going to see from the European Commission, the European Union . They are going to start choosing sides in a minute. Francine mentioned a little bit by ministers from belgium. What will we see in one week from your colleagues . The European Union was established in order to avoid nationalism. Wall ism, prance tterand would say that is the war. We do not want to establish new frontiers. The European Union is there to avoid frontiers. We do not want to have you independent states within the European Union. I believe this idea is shared that all political leaders all over europe. I am pretty much sure it is shared by the belgian Prime Minister. Francine will the governments approach to catalonia change in tone . Will you do more to make the case that they have all the advantages to stay in spain rather than going to the court . Catalonia, as many other regions in spain, have mark confidence than any other region in europe. We started from the constitution in 1978 in a country that was centralized, but we did the most , the biggest political transition in europe. This is the fact right now. The situation and everybody who knows politically the confidences of catalonia and other regions in spain, they are very robust and big. As i said, we can talk about this, we should talk about this within the framework of the spanish comp is spanish constitution and other regions in spain. We do not want to have some regions with privileges and others that do not. The important thing right now is to go back to the rule of law. This is something everybody understands. Tom from madrid, the spanish Education Minister. We have bruce kasman of jpmorgan. Lets move over to our single best chart and the debate we have been having over the last several months, this burgeoning u. S. Deficit. They suggest we could see a 7 . Or 5 , 6 , we have shown this chart many times. And given ao gdp clumsiness in washington, the path could migrate to a real concern. Do you share that concern . Bruce we are not so optimistic we will get big tax cuts, but if we put that on the table and combine it with the fact that if you look at the deficit chart and you would align it for where a are in the cycle, to have 4 of gdp deficit is pretty unprecedented. That is the issue. We have a high structural deficit. We are considering providing stimulus to an economy at full employment. Overlarry summers livid the comments of the chairman of the council of economic advisers, it is just like it was back in the 1980s. Our deficit or debt level is nowhere near what it was with reagan or other president s. Now we have much more debt, dont we . Bruce and the tax cut we got in the early 1980s happened when the economy was in a weak position. The tax reform in 1986 was not a big tax cut, so we have to make sure we understand what we are talking about. If we want to talk about tax reform, i think that is a positive and something we should consider, but a big tax cut given where we are on debt and cyclically in the economy, does not make sense. Tom what would you like to see within the debate in washington . Clarity on money coming in . Or is it clarity on money going out . See the would like to broader conversation come along the lines of what we have been talking about. We have an economy in a Global Economy that are doing well, a week underlying supply side. What can we do to boost underlying growth to allow us to have Sustainable Growth . See those nascent policies within the Trump Administration . Sharp contrast a between some things tax reform, infrastructure spending, and things like trade policy which are going in the other direction. The question will be how much of the positive stuff do we get versus the negative . There is a big debate on where we end up on that front. On the next fed chair, what flavor do you want . You are right about this friday. I need some vision. Bruce i would like a fed chair that is basically embedded in the institution and respects the institution for what it has done and for what its role is in the economy. I would like a fed chairman who i think is independent and beyond that, among the candidates we are talking about, they basically are all pretty good candidates. Tom i agree with that. Risk as men, thank you so much. I am watching mexican peso. Thank you to our team, great show, to clearly in madrid. 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. Kicks offpresident xi the communist party in china, warning of challenges as he lays out a roadmap. Nafta negotiations reach a deadlock with canada and mexico rejecting what they call hardline u. S. Proposals. The stock market continues to grind out record after record in the United States. The s p 500 sits at an alltime high. From new york city for our audience worldwide, good morning. I am Jonathan Ferro alongside David Westin Alix steel. I am going to borrow a line from kit juckes, it is the quiet before the quiet. Stocks are positive about 1 10 of 1 on the s p 500. Treasury yields grind higher by three basis points on the u. S. 10 year, and the dollar bid is in the market for a fifth straight session stronger than everything in the g10 space. Alix welcome b