We are looking at industrial metals, the first down day in nine sessions. The emerging markets index climbed for the highest and about three weeks. Euro strengthening against the u. S. Dollar despite the likely passage of the tax reform plan. Gold gaining. 1 . David lets find out whats going on outside the Business World and for that we turn to emma chandra. Emma today, Congress Begins the final step toward the biggest inrite of u. S. Tax laws three decades. House republicans are expected to easily pass the tax bill and the senate is likely to follow later today or tomorrow. The measure permanently slashes the top rate of tax for business to 20 1 . O 31 35 in washington state, federal investigators say an amtrak train was speeding before a fatal the realm and. According to the data, it was going 80 Miles Per Hour in a 30 mile per hour zone. At least 30 people three people were killed and several others treated at the hospital. The train was making its first run along a new route. A tougher stance. Michel barnier said there would be carveouts. In an interview, he also warned that once it leaves the block some of the u. K. Would have to by the e. U. Ules during a transition period. Global news 24 hours a day, powered by more 2700 journalists and analysts in more than 120 countries. I am emma chandra, this is bloomberg. Ourd its time for daybreak first take where we discussed the top three stories of the morning. It looks like the republicans finally have the vote they need to pass the tax overhaul tonight or tomorrow morning. Big elections in south africa and chile point to fundamental change in those countries and the imf is warning about overcrowding in emergingmarket bond funds. We welcome our allstar panel of megan murphy and Michael Mckee. We talked about taxes lisa i am excited. David first of all, is there any chance democrats could sidetrack them because they are trying really hard. There is no way democrats are been a be able to sidetrack the bill at this point. They have the votes and they will pass eight. We have to do the next step and go through this bill and explain to people what it doing. And look at what republicans are promising and the realities. This bill has gone through a break to get to where we are at and it will pass and it is a copperheads of reform comprehensive reform of the tax system. Is it actually democrats that are portraying it as a massive wealth transfer to the wealthiest parts of society to but to corporations and thirdly, will it have the economic stimulus that republicans are promising which and 2020cial into 2018 with the upsets we have seen and the political drama. That is the key question. We will start to see people get more money in their paychecks and the question is how much and when. Probably not until february because the irs has to do you withholding tables. What happened to my flowchart . My postcards . Michael theres a lot of stories about what companies are going to do and whether they will do anything and that is the key question. Also a lot of people saying they will take this money and give it back to shareholders because they are the owners of the company and if they wanted to invest, they could invest now. With the companies that have most of their cash outside the u. S. Thinking big tech, they could see their tax rate go up. I want to be careful about this because yes, they could see their rate go up, but thats depending on them decreasing what they do now tax avoidance. They have structure their companies around our tax code, which incentivizes them to profit the park profit a broad. Taxhe american corporate system has become less competitive and that is why they park their cash abroad. To think companies are going to take that cash abroad and invest in jobs and manufacturing and growth is different to what we have seen them do, which is to park it back in incentives and distribution to shareholders. This is not a oneforone. It will not trade back into the American Economy. Inid michael but it is the American Economy because most of it is here part of National Savings that could be used for investment. The important thing to realize is what they are doing is maybe creating incentives not to move things are brought in the future, but the tax differential will be so small it doesnt necessarily mean anybody any anybody will bring anything back. They may not bring it back because the Tax Advantages that great. David after speculating for so much time, we will find out. We will actually know a few years later. A real reformer and a handpicked protege of nelson elected. As in chile, we had a right of center very wealthy individual elected. You can see some reactions in the marketplace in the stock market and the currency. What is going on here because it seems to be over several find where both of these turn to the right . Megan turn to the right in a way we see this polarized across democracy now. People really going for the fundamentals in south africa. We saw this as a shift toward job creation and reducing corruption. A jacob zumas administration have been plagued by that for years and redistribution of wealth and giving up a africanamericans a bigger stake in the company. In chile, a billionaire elected with control of the dom economy. Those of the common themes and across the left and the right, that is the fascinating case we see playing out is giving people stake i can their economic future. Lisa its fascinating if you contrast with what is going on in the developed world. In the u. S. And europe and you see moving toward a more worldst in that polarized you try to create. I will go back to that polarized world. Im wondering what this does for an investor seeing there is more focus on the economy, on reducing debt, on job creation in emerging markets while developed nations struggle with trade in these basic questions. Michael thats a very broad question because a lot will be happening in the next year in terms of emerging markets. I want to push back against davids seem that this is a turn to the right. In south africa, you had a corrupt regime, but a regime that was sort of off the rails. Some very strange beliefs from jacob zuma and not a focus on jobs, not a focus on the economy. That is sort of a unique situation in south africa. In chile, what youve got is a separation to farther right, farther left, but not necessarily a turn to the right. The president is centerrightish. A very far left party gained a lot of seats in the parliament so it isnt like he will be able to come in and do a whole lot to change the economic outlook. David we all spent sometimes in chile at various times and we spend a lot of time in venezuela and chile is actually a success story. Michael what has happened and i have a chart here, it shows the growth rate. Success storyg for a long time and you can see the growth rate they had and coming out of the great recession, they came back as everybody did, but the growth rate has been declining every year and that is part of the problem. A lot of people in chile blame the incumbent president for focusing too much on social issues and not enough on the economy. That helped Sebastian Pinera because he campaigned on the idea of lowering taxes. David that sounds familiar. A businessman lowering taxes, whoever heard that . Michael there was a far left candidate in the race who suggested building a wall between chile and peru. Lisa come on, really . I just think it is unfair he brought a chart. Thats like allstar panel. Have actuallycks gained almost 35 and it almost goes to this theme of money going into developing markets and we have seen this on the bond side as well. You are looking at a chart that shows flows into emerging markets bond funds. Nearly 80 billion of inflows the most in at least 8 years and this has raised a lot of questions, which really are how long can this last . The imf coming out overnight with a report saying there is a possibility this is an overcrowded trade and it will end. Certainly. We have been talking a lot about this, but we are headed into a global tightening cycle. We expect that to happen throughout the developed world, which is the theme this morning. Heres the key question. Is Global Growth going to continue to trend the way we think its going to trend . Putting aside the politics that we get immersed with, the outlook is fairly good for the developed world. There,re black slugs out which is what i spend a lot of time talking about that will disrupt this . Yes, this is a crowded trade. Are there things we are not thinking about back to happen over the next year in particular . Yes, one of those things being north korea, the middle east, china development. And we look across the world we think, what is this next year for will 2018 hold investors, executives, shareholders. It looks pretty good, but it could be knee capped kneecapped fundamentally by something we are not predicting. David the black swan. To megan murphy and Michael Mckee. Michael will join us with an exclusive interview with Robert Kaplan, Federal Reserve president in dallas. Later, we will get more insight from the fed when we hear from Neel Kashkari, the Federal Reserve bank of minneapolis president at 8 00 p. M. 8 00 a. M. In new york up next, markets. Lots of different opinions about what the tax overhaul may mean for markets. We will hear from bml chief bmo chief investment strategist, brian belski. This is bloomberg. Emma this is bloomberg daybreak. Talks tois in advanced buy dole foods. They secured appropriate financing, but no assurance there will be a deal. Dole may be valued at 2. 3 billion including debt. Two major engineering and Construction Companies will combine. Mcdermott in eventual international both companies focused on the energy industry. Facebook is rejecting a finding by german antitrust investigators that it is dominant. It will not allow it to create products and force people to use them. David thank you so much. Taxes may be the big news in washington, but to the markets agree its a big deal in the end . At least two measures raise doubts. The dollar has weakened as the tax overhaul has become more likely and the 10 year yield curve has flattened as bond traders dont seem to believe robust growth and higher inflation are on the way. To get into the investor perspective, we welcome brian belski, bmo Capital Markets chief investment strategist. Brian it is an honor, it really is. Present. s a Christmas Brian i am wearing a jacket today because normally i come on here and i just have my shirt, but it is christmas time, the last day of hanukkah, lets celebrate. David how much different as the tax bill really mean . Brian we continue to think it doesnt mean that much because we take a look at markets and try to look at the forest through the trees. What are the trees question mark what are the trees . Gdp, valuations that with Earnings Growth expanding will flatten out its a attendgood environment 2017 as we look at 2018, its pretty much the same thing. The primary theme for investing to put perspective on it is rinse and repeat. It will be great about the tax cut because we need an overhaul with respect to Corporate Taxes. This is about confidence and restoring confidence in the art of equity investing, but america. The u. S. Has been down really since 2000, 2001. Its a whole plethora of things that have been going on since then and we are so focused on the now, we have forgotten where we come from. Lisa ok. I feel like i want to push back a little bit on that. Brian i love it. Lisa i feel like if you look at the confidence surveys, confidence has come back. I would argue a lot of people say we might see shares do well, yes, because these companies will get a tax break. That doesnt mean growth will be so much better, but we will get turbocharged last next year and you are going to have a faster crash. A sugar high and then a faster brian sugar high. This is where perspective and experience come through. 28yearher time in my career are investors saying one thing and saying another or saying one thing and doing another. Companies are doing the same thing. My wifes grandma taught me this cool word bunk. Whatys are bunk, its investors actually do. In a meeting, i just published my overhead piece november 2017 and i have had meetings with investors around the world and they are saying one thing and doing another. I can tell by my interactions and the relationships i have with them for over 20 years. Surveys dont matter. Its what people do. Do i think Corporate America needs kickstart and this is part of confidence . Two i believe but america tomorrow will start spending more money . No. The past 20 years they have been cutting cash, building up money come it will take several quarters before they want to add capacity and they will feel less taxes on their businesses. That is why the second half of next year at the earliest, probably 2019 before you really start seeing the more consistent growth. The whole thing with america in terms of fundamentals is they begin earnings cash flow and can seemingly seemingly consistent. If you are an investor, you start to feel better about that versus 90s when it was high beta go, go, go and we have seen a fundamental concert transformation of Corporate America. David there you go, bring it. Brian remember the word bunk. David brian belski will stay with us. , butonia hit the polls questions remain about which Political Party will take the lead. We have the latest from barcelona. This is bloomberg. David spanish Prime Minister the spanish Prime Minister win the spanish Prime Minister forced a vote, are things likely to settle down after the election on thursday . Lets go to parse alone with barcelona with maria. That is the big question. We are entering the final hours of campaign and its a crucial battle because it could determine the fate of the independent movement. It has created a lot of tension and now thursday could make a difference. Will be here in barcelona. The point is they are trying to get as many people to get out and vote. Turnout will be the key strategy. They are expecting a Record Number of people to go out and vote can make a difference. The polls look very tight and heres the risk for investors. You might be running into youency if you think need to be able to form of government. Getting results doesnt mean you are able to form a government. Best Case Scenario clinging to the majority or potentially a new election. David great reporting, maria, thank you so much. Still with us is brian belski of bmo. We had this catalonia election and we just had the one in south africa and the chilean investor. Which one are you most interested in as an investor . Brian i just like saying chile. Probably spain because in the past few years so much talk about pigs and european banks and a lot of investors want to buy the european banks. Gdp a Growth Perspective growth on a relative basis in spain will be faster than switzerland. The switzerland issue is wealth management. I would say Spanish Banks will be the most interesting play on this. Overall, you are starting to see emerging markets mature and develop part of that process. Lisa Spanish Banks dont exactly strong sound the strongest to me. Im wondering how much of what we are seeing is just a play on European Central banks and we are looking at a chart if you want to flip it up in the bloomberg looking at the european periphery spread. The white line is italian yields on 10 year notes am a french yield in blue, and spanish yield in yellow. You can see they have been compressing. This is largely because of the ecb. How much real growth is there . Brian thats the problem and as of last year, think about how investors in general were so distressed about President Trump, right . And you had assets leave the u. S. And go to europe and you had assets leave canada from the u. S. Because canadians typically holdings withian u. S. Holdings. The problem we have had is where is the evenings earnings book value coming from . Thats what we worry about, not growth. Lisa are you excited about Spanish Banks as well . Brian the question was which area do like the best. No, i am not. Maybe from a trade perspective, but a longterm Holding Perspective i think banks in north america are a much better position than any bank in north america. David u. S. , europe, brian u. S. It can go up a lot higher and the second half of 18 2018, but really 2019 and 2020 is where we will see the growth in the u. S. From an overall rate of change, em in terms of Earnings Growth. David brian belski, its always great to have you. Its always christmas when brian comes. Coming up, we have that exclusive interview with Robert Kaplan, the president of the dallas said. That conversation with mike mckee will be coming up. Exactly the right time and we are looking forward to that conversation with Robert Kaplan. Lisa right now we are looking at dow jones futures, s p both heading toward new record highs today. Stocks here up little change and the dax down. 1 . This is bloomberg. Cannot live without it. So if you cant live without it. Why arent you using this guy . It makes your wifi awesomely fast. No. Still nope. Now were talking it gets you wifi here, here, and here. It even lets you take a time out. No no yes yes, indeed. Amazing speed, coverage and control. All with an xfi gateway. Find your awesome, and change the way you wifi. Lisa this is bloomberg daybreak. We want to get you caught up on what is going on in market action. Industrial metals index down for the first time in nine sessions. The euro strengthening against thelar and the dollar gold spot gaining about 1 10 of 1 2 10 of 1 . German yields rising. Gold gaining a bit. David now for some headlines for outside of the Business World. Emma Senate Republicans appear to have the votes they need to pass the tax reform bill. The missing put the missing piece selling the place when senator Susan Collins said she would vote for the bill. The house is expected to approve the tax bill today. Senate leaders say they will take it up soon afterwards. House republicans have reposed their biggest standalone a bill in years. They want to spend 81 billion on Disaster Relief for areas hit by hurricanes and wildfires. The measure would be part of the spending bill meant to keep the government opened as friday. The u. S. Is planning north korea crythe socalled wana na ransomware attack. That attack infected hundreds of thousands of computers around the world back in may. Global news, 24 hours a day, powered by over 2700 journalists and analysts in over 120 countries. This is bloomberg. David the fed spent the past year gradually raising rates and beginning to wind down its Balance Sheet but what comes next . Whos turn to Michael Mckee is sitting down with Robert Kaplan, the dallas fed president. Michael thank you, president kaplan are coming in. You,t to start by asking the same question i asked janet yellen, where is your. For 2018 where is your dot for 2018 . Would you say three rate increases is justified . Robert gradual and patient removal is justified. Will it turn out to be three . I think time will tell but i think we should be removing accommodation in a gradual patient way. Michael how much of your forecast is based on tax cuts . Robert modest. I have been saying up until a few weeks ago it did not have any effect and then the last couple of weeks, we modestly 20182019, it created a little bit of firming for our gdp forecast and a little overshoot. Margin,ct was on the the modest impact over the next three years. Michael it does not seem to have any effect on longterm potential growth. Robert there were two parts of this tax bill. One of them i have been very positive about witches is to the extent you do Corporate Tax reform and improve incentives to locate your business in the united states. I think that can be positive on a sustainable basis. The part of the bill that is a tax cut by increasing the deficit will give us a shortterm bump, then we will tailback down to trend growth and we will be more highly leveraged by the end of it and i think the u. S. Government debt to gdp is unsustainable. Michael already a lot of talk about what companies will do with the tax cut they get. What are corporate ceos telling you about whether theyre going to invest more . Robert there is not a ceo who did not want the tax bill passed , personal reasons and it is going to improve their earningspershare. The bigger question is, will it cause them to change their investment and you have to emphasize corporate profits are at record levels. The cost of capital, cost of debt is historically low and so i would say most ceos i talked to me not have any explicit impact on their investment. On the margin, it may be positive. For those who were thinking about moving facilities offshore, it may cause them to be more likely to stay but i think the impact of it, understanding we are already at record full employment, profits and capital is relatively inexpensive. Kevin brady, chairman of the ways and means committee, who put all this together is from texas. Did he consult with you . Robert there was a lot of consultation and we make our research widely available. Over the longterm, the Corporate Tax reform is a positive. The part of the bill that is challenge is the tax cut that is financed by increasing debt to gdp. Michael we were talking about the disaster plan, additional cash, infrastructure plans, additional spending for defends. All of that goes on the countrys credit card. Will we see an Immediate Impact in 2018 on Interest Rates . Robert we may not. Debt held by us is the u. S. Government is about 5 of gdp. We are going to start to see over the next five to 10 years, that 49 trillion work its way into bigger and bigger budget deficits. Deficits as a percentage of gdp are gradually rising. Those issues have to be addressed. It makes those issues even more difficult. My concern is not about not about the short run, it is in the longer run. Michael lets talk about the fed going forward. A lot of questions being raised about the economic projections. In 2017, the consensus is 2. 5 growth and the Unemployment Rate goes down 2 10. How do they square . My own unemployment forecast is probably more aggressive than the median of the sep. Expect willshould happen even though we are going to have solid rates of growth in 2018 and 2019, as we approach full employment and you have unemployed plus discouraged workers plus people working parttime, that measures 8 . The problem is, that is at its free recession low. People should expect as we get at or near or overshoot full employment, job growth will slow, somewhat and the degree of reduction may also slow the come a somewhat. That may explain what you are seeing a slower rate of reduction. Downel unemployment goes more aggressively, nothing happens with inflation. Why not . Robert youve got competing forces. One is cyclical pressures. Shortagesmore wage and at the low end of wages, there is wage pressure. If you make 20 or more, i am not as sure. Cyclical forces are building and that will build more. You have a headwind which is Technology Enabled disruption which means people being replaced by technology and it means consumers able to shop aggressively for the lowest price. Businesses power of is limited and it means new models for selling and distribute in good, that is causing businesses to be very challenged in passing on wage increases into prices and i think that Structural Force is intensifying. I think that is creating a muting effect on inflation and that is why at the dallas fed, we are doing a lot to try to study this phenomenon and trying to encourage the system and academia to do much more to study this. Michael one. A Charlie Evans approach and wait until you see inflation accelerate . Robert i believe we should take a balanced approach. We have a dual mandate, full employment and price stability. We are already at or near full employment. I believe we are going to overshoot employment in the next year. I balance that against the fact that we are undershooting our inflation target. The degree of the overshoot is such, my concern is if we wait too long to remove accommodation, were going to be playing catchup. The history of playing catchup in the fed is not a happy one. That tends to lead to a recession because the fed has to play catchup in balances and i think mo or graduate i think a more gradual approach will serve us better. I think we need to watch it. High 2. 30s. Ury, this time may be different, but i would not count on it. With the thing for the fed funds rate, i will be watching very carefully the 10 year treasury as we go in to 2018 because it limits the operating flexibility in my judgment for the fed in terms of how fast we can raise rates. Michael you are the mexico expert on the fed. Aat do you think the odds of nafta cancellation are . What would that do to the countrys economy . Robert i am hopeful because i think it is in the u. S. s interest that we renegotiate relationship trade is very important. 70 of the goods we import from mexico are intermediate goods. That means they are goods that are going back and forth across the border as part of integrated supply chains and logistical relationships that our Research Shows makes u. S. Companies more competitive and as u. S. Jobs. It is in the interest of the united states, not just mexico, that we keep this relation. I am hoping that nafta will give modernized, but these integrated supply chains allow us to add jobs. If we did not have those relationships, it is our research that those jobs may be lost to somewhere else in the world. We need to think of the Northern Hemisphere as a competitive block where we are competing with europe, asia. The trading relationship with mexico allows us to be more competitive. Michael we will have a lot to talk about in 2018. Robert kaplan, the president of the dallas fed. David thank you very much, Michael Mckee. Be sure to keep watching because we will be speaking with Neel Kashkari later in the program, coming up at 8 00. Coming up, we will cover the wall street beat. If you cannot watch tv, you want to tune in to radio. Tom keene and jonathan ferro. Tim fox joins the conversation from 9 00 to 10 00. Bloomberg surveillance can be heard in new york and washington and all across the united states. This is bloomberg. Emma this is bloomberg daybreak. Coming up, we will speak with Neel Kashkari, the minneapolis Federal Reserve president. This is bloomberg. Now to your Bloomberg Business flash. Shares of apple have risen more than 50 this year. Apple was cut to neutral. Iphone x sales and other positives for the company are already baked into the stock price. Chaos so far, bernie made object a victim have received more than 11 billion. Half of those who submitted approved claims the struggling global retailers the South African Company promoted chief operating offices. Also adding two directors to a fourperson board in charge of overcoming an accounting crisis. Shares plunged 88 this year. David we turn to wall street beat you we cover things wall street is going to be buzzing about this morning. First is a story that has been on the bloomberg overnight with hedge Fund Professionals expecting big increases in their bonuses. The second story we cannot get enough. Us now is jason kelly, bloombergs new york bureau chief. Lets start with this survey of the hedge fund. They are expecting some really big raises. Jason we knew less night that this was going to be the most read story of the book. Some interesting numbers. Hedge fund managers, we have talked so much this year about longlived hedge funds, the death of hedge funds, we have talked about people going out of business yet here is the survey saying Hedge Fund Managers expect 39 bonus. Lisa that does not mean they are going to get it. Of the things that is interesting and the bar chart breaks this down is the difference between hedge funds and private equity which we often get completed in washington and elsewhere. People note that Hedge Fund People usually get their bonuses. This is against the backdrop of hedge funds having a pretty crummy year. Lisa private equity has seen a huge flood of cash. They have had really good returns, if you look over the past decade. Hedge funds are trying to stave off this wave of outflows and i am struck by what some of the professionals said in this , saying in some ways, the Hedge Fund Industry killed itself in a low yield low return environment. David if you are an investor getting into a hedge fund, you look up and see the bonuses are up by 40 . Jason when you look at the way , we arehas been going reminded every day of the new record highs that the dow is setting, the nasdaq is setting and it Hedge Fund Hedge funds are meant to make you outsize returns. David is this music to the ears of the passive guys . If you are playing along game, yes but if you are a passive guy looking at this, this morning, you are thinking this is insane. Maybe when you go on the road next year to make your pitch, you are sort of waiving this around. Lisa if an 81yearold who has gotten banned from running for public office. Jason that is what we call a pivot. Lisa wants to run for office again and miraculously, the man who said he was really beaten up has seen his wealth surge. Richest the biggest gains of any billionaire in italy and he has seen his net worth rise 36. 9 from november 28 2016. One year, he made that much. Jason this is one of the most read stories in the bloomberg. Abject fascination with this guy. Trumpiansort of a element to this guy. , all of the association with berlusconi. I want to read a quote i found so fascinating by a professor of local history. We have been arguing that this is his last time so many times that we must be careful. I assume this is his last election but he is very resilient. David people love a winner and he comes across as a winner. Largerthanlife. Jason and people love a comeback story. Lisa he is appealing. We may yet see him again. David i would not bet against him. Jason kelly, thank you very much. A great wall street be. Lisa coming beat. Lisa coming up, the world ticket biggest Mining Company says enough is enough. Why they say they could cut ties with coal. This is bloomberg. David the world today largest Mining Company is putting his foot down. The hp out a few organizations including the World Coal Association and the u. S. Chamber of commerce their stance on Climate Change. They say they dont sufficiently support policies that mitigate the effect of Climate Change and it could cut ties with the organization. This is a real watershed when the largest Mining Company in the world says we dont want to associate with you the good you are not properly concerned about the environment. Lisa it seems an odd move. Billiton is being smart in some ways. Which think about lithium has been on fire because of electric vehicles, you want to transfer to what the future is. David we should show they are putting their money where their mouth is. Admissions, this is the bar chart, it is pretty stark. They are taking this seriously and you wonder whether this is really a signal of a course to come when the private sector really serves to embrace this. Lisa you have to wonder if they see them as being less profitable as much as anything else. They may be positioning themselves in assets that do better because they are worrying about the future of higher emissions. Lisa a big challenge for some of the trade organizations. David are you wondering what other Coal Mining Companies are going to be doing . Lisa coal miners have a pretty clear incentive not to do it. David coming up, we will be talking with Neel Kashkari, the minneapolis Federal Reserve president. We are asking for his reaction to what some of mr. Kaplan had to say what is your kaplan had to say. What mr. Kaplan had to say. 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. David are we there yet . Congress rushes to pass a massive tax overhaul with the bill likely to pass in the next 24 hours while democrats scramble to find lastminute roadblocks. Bitcoin comes of age. Can further regulation be far behind . South africa makes a turn. Leader,picks a new liking it likely making it likely that Nelson Mandelas choice for president may finally get that job. We want to get you caught up on what is going on across the markets. Looking at another record day in the u. S. Changed. Is little the ftse changed touched little highs. Up,nasdaq and s p vote building on those gains from yesterday. David now for some headlines. We turn to emma chandra with first word news. Congress begins the final steps today to the biggest rewrite of u. S. Tax law in decades. House republicans are expected to easily pass the tax bill. The senate is likely to follow with its approval later today or tomorrow. The measure permanently slashes Corporation Taxes and businesses from 35 to 21 . It also doubles the standard induction used by about two thirds of american households standard deduction used by about two thirds of american households. Amtrak, a train was going 80 Miles Per Hour in a 30 well for our zone. At least three people were killed and more than 70 others treated at hospitals when the train hurtled off a overcast off a overpass. Coalitionled military is fighting rebels in yemen. A loud explosion was heard in the city. A column of white smoke was seen. Rebels fired a missile at a palace in the saudi capital. Global news, 24 hours a day, powered by over 2700 journalists and analysts in over 120 countries. Im emma chandra, this is bloomberg. David for years, the fed has carried the laboring now the tax overall is about to shifts to, the focus fiscal policy. We spoke to Robert Kaplan who expressed his concern. Robert my concern is not about the short run, it is the longer run, do we need to create do we need to take actions that create headwind in gdp . David joining us now from many appellees from minneapolis is Neel Kashkari. Michael mckee is also here with us. You heard what Michael Kaplan just said. Do you share that concern about the National Debt . Neel i agree with rob over the longterm. We need to get our fiscal house in order. Me, i wouldp to prefer something revenue neutral. It is a longterm issue. Lisa this leads to Consumer Debt because we have seen Consumer Debt rise substantially in this era. Mortgagesarily with but with credit cards and auto loans and student loans. Especially a shortterm rates rise, how concerned are you about this and is holding rates low for longer only going to exacerbated exacerbate it . We try to look for signs of stability. We are not seeking a huge buildup of debt, overall. Obviously for individuals, it can be challenging. We keep coming back to our dual mandate goal. Congress has assigned us a goal of stable prices. We define that as 2 inflation. Continue to come up short in our inflation mandate. Inflation has been falling this year and their films there still seems to be slack in the labor market. We need to allow that Inflationary Pressure to come to us instead of getting ahead of it. Michael kaplan suggested we have a longterm problem but with the debt we have now and the tax cuts adding to that, do you believe in the crowding out theory or are we going to see Interest Rates rise . Eventually, that has to be true. Eventually, we do have to pay our bills but that could be over many years and over the near term, i dont see a problem. We have been raising Interest Rates. Congress has announced they are about to a next a tax cut and the long end of the bond market is not moving. Right now, it seems like this Inflationary Pressures are a bigger concern than Inflationary Pressures but over the longterm, there has to be a crowding out effect because we eventually have to pay for the bills that come due. Michael is the bond market telling the president he is wrong about the potential for increasing the growth rate . Neel i think the bond market is saying a couple things. One thing is Inflation Expectations are drifting lower. That is in large part because of the fed because we have been sending these hawkish signals by raising Interest Rates. Second, i think the markets are pricing in a lower neutral interest rate. Broader macroeconomic forces have been trending down over the last few decades. Markets are embracing the concept and pricing in a lower rstar. They can exclude explain some of the equity markets. Those are the signals i take away from the bond market right now. David i want to go into the long end of the yield curve. We understand why the short end is coming up, given what the fed has been saying. If you had your way and went from what the fed is predicting, to one or maybe none, what would happen to the long end of the yield curve . Neel that would take off some of the this Inflationary Pressure but i think the committee is putting on the long end of the curve. By raising Interest Rates in a lowinflation environment, we are sending a signal that our target is not a target. We are sending a signal that it is a ceiling that we will not allow inflation to creep above 2 and that is putting pressure on the long end of the curve. We say it is a target. If you look at how we behaved over the last five years, we have been treating 2 as a ceiling. To me, the fed is pushing up the front end with rate increases and pushing down the long end by sending this hawkish signal. David if it was not sending out a hawkish signal, could you give us some directional guidance on a 10 year treasury . If it is now at 2. 4, where will it be . I think it is normal to expect some flattening when the fed is in a tightening cycle. I do think it would be higher than it is and i dont think i would have expected with the tax reform package coming together, i would have expected some movement in the long end. The fact that the long end is not moving in response to either our hikes or the package, that tells me that expectations must be drifting lower. That is what is concerning me. If we continue down this path of pushing at the front end, i think we are going to see a stronger flattening take place and that is a concerning sign. Lisa based on the Economic Situation we have, how many rate hikes do you think we should have next year . Neel i dont like the forecast because that just adds to the noise when you have all the president s out there giving their own forecast. I said i think we should allow core inflation to move back toward our 2 target and at that point, evaluate whether or not we should continue raising rates. I did not predict falling inflation, i simply said i dont see much evidence that inflation is climbing. Fallenhen, inflation has and weight growth is not accelerated. I would like to see more evidence that we are moving back towards our target. Michael the tax bill is going to pass. What are ceos in your district telling you they are going to do with the extra cash they have . Other going to invest it . Are they going to invest it . Neel very few ceos i have talked to say that the tax package is going to lead to dramatic changes in their behavior. They are happy to have lower taxes and if you look at the behavior of firms over the last two years, it has been more about buybacks and dividends. Certainly the large firms that have large cash piles abroad, they can borrow exceptionally cheaply in the u. S. The idea that this cash is what is holding back investment, i dont think that is credible. I think it is going to lead to more buybacks and dividends. That is not necessarily a bad thing, but that is not going to hold lead to dramatic investment or hiring. Campaign to lead a work on Bank Regulations and talking about income inequality. You ran for governor of california. Do you want to go back into politics . Neel no. I am very happy at the fed. I care deeply about public andcy and Economic Policy one of the things a lot about the fed is we have a nonpartisan Public Policy mission. I simply want us to take on the biggest Economic Issues we face as a region or the country and make as big a contribution as we can. Whether that is trying to get policy right, making sure taxpayers are protected from too big to fail, i think those are in or mislead important issues i think those are enormously important issues. Michael one of your predecessors went on to become the president of the new york fed, a job that is open. Is that something youre interested in . Neel no. I cannot imagine going anywhere else. David a growing disparity in income. I will put up a chart that compares median to mean. You have said that Monetary Policy might actually play an Important Role in this. Most of us dont think of Monetary Policy as addressing this. Neel when i traveled around my amazing what a Strong Economy and a tightening labor market is doing. It is forcing businesses to work hard to find workers. You hear anecdotes of businesses oring exconvicts a chance they are busing in workers to overcome housing issues or they are saying we will go train these workers to give them the skills they need. The tight labor market is sending a price signal all across the economy that is motivating millions of private sector actors to do these things to try to bring people back into the labor force. That is more powerful than any Fiscal Policy Program i have seen in terms of worker retraining or trade adjustment assistance. We need to recognize that allowing the economy to continue to grow, dont cap the brakes before we just start to rise. It has profound benefits to workers and communities all across our country. David Neel Kashkari with the minneapolis fed, thank you for being with us. Also thanks to Michael Mckee. Coming up next, with column support, the gop seems to have its votes. We will discuss the tax bill next with Darrell Cronk, he is the wells fargo president and ceo cio. This is bloomberg. David it has taken almost a year, but President Trump is slated to take a major victory with the republican tax reform bill. The house is scheduled to vote on tuesday and Senate Members are set to bring it up as soon as they get it. Joining us now is kevin cirilli, our chief washington correspondent. It seems to be a done deal but i understand that senator wyden is making a lastminute attempt to put some roadblocks up. Kevin he is trying to use a rule to delay this but i am told by several votes several reform is pretty much a done deal. The house of representatives will take up this vote early this afternoon and then all eyes are going to turn to whether or not theyre going to have a continuing resolution by the end of the week in order to keep the government open. David it always ends up kicking the can down the road. Kevin i am told that what , keeping the to do government funded through january 20. Assuming that tax reform gets done, when we had into next calendar year, President Trump wants to focus on infrastructure. He is going to raise a lot of concerns with deficit hawks that were silent during the tax reform. That means she is going to potentially have to deal with democrats, particularly on the issue of immigration. I spoke with two democratic aides who said they are all fired up and feel they have much more leverage this go around. David we will stay posted. Lisa i want to bring you some breaking news. Kindred healthcare is going to be bought by humana and others for nine dollars per share. It could potentially district disappoint. Kindred healthcare to be bought by Humana Health care and others. David now back to tax overhaul. What is it going to mean for investors and markets . We are joined by Darrell Cronk, Wells Fargo Investment Institute president and cio. Darrell when we saw the tax bill, we were surprised of the size and magnitude of it. It is almost twice what we expected. If you took the house bill alone and the senate bill alone, this combined bill is greater than either of them. Almost a 100 billion impact for fiscal year 2018. Now looks like it is going to be a 200 billion impact. Lisa if it is twice the magnitude, what does that mean . Does that Mean Companies will have twice the purchasing power for new plants or buying back shares or Something Else . Darrell it does have a upward bias to gdp and domestic earnings. I would tell you what was unique in this that i thought really matters is the 100 spending expenditures, being able to duck that. In 2003, when we passed that legislation, we can only do 50 . Now you can do 100 , that is a big deal. I think we are looking at earnings estimates because we are running of the s p about 132 on earningspershare. This could put earnings back up around or north of 150. Real how much is this longterm Sustainable Growth . That is for five years. Darrell you are exactly right. This tax bill was very front and loaded. If you dont get expenditure right now with 100 expensing and a fiveyear window, i am not sure what is going to drive that. We know that we need capital expenditures. The Capital Stock in the u. S. Is as old as it has been since 1947. We know we need this. You put the runway in place to do this. It is important that Companies Pay attention to this. Plus they will have repatriation money to use. Lisa are you up in your returns expectations next year upping your returns expectations next year . Darrell yes. We dont know for sure exactly, but it looks like it is somewhere around 7 to 9 . 6 to 7 for next year. This is a big deal for the u. S. Everybody is getting a tax cut or about 90 of people. You the corporate rate by 1400 basis points. 100 expenditure. Those elements combined are a relatively powerful cocktail for this next year, fiscal 18 and 19. David Darrell Cronk of wells fargo will be staying with us. Lisa breaking news. Kindred healthcare is being bought by humana for nine dollars a share. Shares are down in pretrading. Definitely below the expectations people already builtin. Humana shares little changed. Breaking news on steinhoff. Conglomerate based in south africa we have been watching because its shares plunged 80 in two days. The South African version of enron after some accounting scandals have broke. Facilities are increasingly being withdrawn. They are meeting with predators that include some of the biggest banks in the world that are left wondering are they going to get paid back what will be left of steinhoff which is the Parent Company of the company formally known as sleep these in the sleepys in the u. S. David still with us is Darrell Cronk, Wells Fargo Investment Institute president. We talked a little bit about overall earningspershare. What sectors do you think will be benefiting by this tax overhaul . Stay closeu have to to industrials with a high degree of exposure. We really like financials. Financials have paid 25 of all of the tax in the s p 1500 over the last year. They benefit largely. Consumer discretionary, consumers with more money in their pocket, they will get a tailwind. The Multiplier Effect may not be as big, but they will still spend. Lisa one of the interesting forecasts you call for was longshore long short equity. Credit has not done that well. Why now . Darrell credit has done well as spreads continue to tighten. We know that spreads are at cycle tights. Volatility, itno has been benign, anemic, whatever you want to call it. Spreads do start to blowout and they can be short that as well as just long. Lisa are you advising retail clients to find a way in some of these hedge funds trilogies . Darrell yes. We think the Hedge Fund Community does better in 2018. You have to think about risk adjustment. Asked absolute returns and longterm equity. 4, that is ar great adjusted return. David Darrell Cronk, Wells Fargo Investment Institute president and cio. Coming up, a read on the Housing Market in the united states. 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. Welcome back to bloomberg daybreak. I want to get you back to where markets are trading. You are looking at the stoxx 600 0. 02 percent. The nasdaq has actually reversed. It had been gaining ahead of the session. S p futures have been up 0. 1 . That is where we stack up for the day. David we have some breaking news. We have housing numbers. They have surprised to the upside. 1297. The median was 1250. October was quite robust. November comes in better than expected. Octobermainly in multiple family dwellings, apartments. This is a robust number. It is better than predicted. It is improving month over month 3. 3 , and it was projected to go down 3. 1 . That thises to show surprise index again rises. A lot of these Economic Indicators have been coming out stronger than expected. David lets get a professional, an expert on this. We go to mark zandi, moodys analytics chief economist. You are the expert on this. How do you take these numbers . Mark they are good. I think the underlying rate of housing starting around 1. 2 5 million, 1. 3 million is a steady improvement. If you go back to the bottom back in 2009 and 2010, we were at 600,000. We are more than double than that. Our benchmark should be higher. The underlying rate of demand or new housing is probably between 1. 5 and 1. 6 million. We have been talking a lot about the gop tax plan, which is poised to pass within the next few days. We have been wondering what the potential impact might be on housing prices and housing demand. Where do you lineup on that . Mark it will be negative for house prices, particularly in the northeast, parts of florida, urban centers in the midwest like chicago. These are areas where homeowners rely on the mortgage Interest Deduction and deductions for property taxes. Has prices will weaken. I dont think this will result in price declines nationwide, but it will certainly slow price growth next year. David we actually got up the map you included in your house that shows all that read around new york, new jersey, connecticut and southern california. It is exactly what you were saying. Showing the deeper the red means price declines of more than 6 in some of the homes there. Fascinating. What about from the demand side . Do you expect that to lower demand in those regions . Mark let me just clarify. That shows the impact on house prices compared to what they would have been with no change. It doesnt necessarily mean prices will decline, but they will be 5 or 6 lower than what they would have been. You might get no price growth and some of those areas. Tell me where your houses, and i will let you know what the market will do. David im not sure i want to know. Lower house prices might need more people can afford to buy houses. What will the effect on the economy overall be on this tax plan when it comes to houses . Mark initially as the market adjusts in 2018 and 2019, all else being equal, it will be a negative for the economy. It means less housing wealth. That means people will spend less, and that will put a weight on the economy. There are a lot of moving parts here. Stock prices are up, so that is a positive wealth effect. You have to consider it altogether. If you just focus on the housing, it will be a negative. Lets talk about new jersey. You were quoted as saying that no one get screened more gets creamed more than new jersey by this tax plan. Do you still think that is the case . Can you explain some of the boys new jersey is going to get targeted . Mark new jersey and connecticut are two states that suffer the most under the tax plan, and that is largely because of the reduction or scaling back of these state and local tax did options. Residents in the states rely heavily on those did options, so that are going to get hit harder. Areas, newthese jersey, connecticut, new york arestate fiscal situations pretty bad already, and this is going to make that much worse. These states and localities have a lot of adjusting to do. That is going to weigh on the economy. It makes these areas less competitive. If you are trying to decide where to live or locate a business, it is going to be less competitive to be in places like new jersey. You are going to move your operations to other parts of the country that benefit. The state that benefits the most from the tax plan is alabama. Alabama is the winner. Connecticut and new jersey are the losers. Expandi want to beyond housing. Bill,ou look at this tax which looks like it will become law. What effects will that have on the economy overall . Mark in the long run, nothing. I dont think this will have any meaningful impact. There are some positives for businesses, but there are negatives. You will have higher Interest Rates. When you take it altogether, it washes out. It is pretty costly. This will raise the deficit and the debt load pretty expensively to go nowhere long run. In the near term, it will provide juice for the economy, which is a problem because the economy is already arguably beyond full employment. The Federal Reserve is going to have to normalize Interest Rates more quickly. Next year, we will get more growth and higher Interest Rates. We would be remiss if we did not ask about the yield curve. We were speaking about the flattening yield curve as possible indicator that we are heading closer to a recession. Do you agree . Mark we should watch the yield curve. It is one of the best leading indicators of recession. I have been through a lot of business cycles, and every time the curve in verse, economists say dont worry, this time is different. Dont believe us. , we have curve inverts got a problem. We are not there yet, but the curve is going to flatten. With this fiscal stimulus and deficit and tax cut, shortterm rates are going to rise quickly and much faster than long rates. Long rates are pinned down by what is going on globally. If this curve gets inverted, that would be a bad sign. The curve inverts 12 to 18 months prior to recession. David square two things for me that i cannot reconcile. You have the stock market going up and up. That should be anticipating future earnings. On the other hand, you have the long end of the yield curve going nowhere. Why dont they sink up . Sync up . Mark they will. The reason the stock market is rising is arithmetic. Earnings are going to rise. You attach the same priceearnings multiple to that, you get higher stock market. This is just. Arithmetic. This is just arithmetic. Eventually the market will focus on what bond market buyers are looking at. The fed president said he was not concerned about the buildup in Consumer Debt. That does not seem to be that much of a problem in terms of systemic risk. Do you agree . Mark i totally agree. I dont think Consumer Debt is our problem. That was our problem last go around. It was leverage in the household sector. The household sector has delivered. Delevered. It is as low as it has been since the early 2000s. The proportion of income households are spending to service their debt is the lowest in decades. The problem is probably going to come from the nonfinancial corporate sector. If i was looking at anything, that is where i would be looking going forward. David mark zandi of moodys analytics, good to have you. The largest cryptocurrencies have all seen eyepopping rallies this year. It is also a volatile market. Coming up, we speak with dano Gallagher Daniel gallagher. Bloomberg surveillance can be heard in new york, boston, the bay area, washington, d. C. And across the u. S. On sirius xm radio. This is bloomberg. Is bloomberg daybreak. Coming up later today, rockefeller capital managements ceo. This is bloomberg. Now to your Bloomberg Business flash. A big transaction and the Health Care Industry today. Welsh haveppg and agreed to buy kindred healthcare. The price is about 4. 9 billion cash. A private equity firm will take over the hospitals and rehab facilities. Grignard is in advanced talks to buy dole foods. There is no assurance there will be a deal. The deal is about 2. 3 billion including debt. Getting into the mexican food agreeds, apollo has struggling to go but qdoba chain. Emily chang earlier this month on regular. Sec is really on watch. There have been a few warning shots fired. We recently saw the sec pursued prosecution against another which is their way of showing they are serious. They are under pressure to show significant regulation in place and a real framework for how they begin to approach it. I think that is 2018. I think the rest of the world will follow. David we welcome dan gallagher, former sec commissioner and from my old law firm. Great to have you. I did not know that. David i was there a long time, before your time. Pressure doesulic this create on things like ats and sec regulation . Daniel from a pr perspective, there will be a lot of pressure brought to bear getting these up and running. We have party seen the regulation of etfs holding these futures contracts. The substance of some of the concerns the sec has will remain. I dont expect this to be an area where the sec moves precipitously because you have futures trading. In other words we might not see a Bitcoin Futures etf as soon as next year. Daniel thats correct. It is great to have a futures contract. The margin level was 47 on the cbo, which is extremely high on the futures market. It is great to have that liquidity and transparency, but we are still talking about a product with bitcoin that is unregulated and has features and after a six that are still unknown and characteristics that are unknown to investors. The sec has shown a willingness to allow etfs of other products. Do you expect them to continue their path of loosening up . Do you think they are doing it in a disciplined way . Pleasedim really not with the pace at which etf approvals have been happening in the last 10 years. We were on track of bringing great new Innovative Products to market, and after the financial crisis, the market was shot. Shut. The shutdown of the etf approval process was not a great thing. I applaud the commission for getting back to it in bringing new etf approvals at a pretty fast pace. Contrast that with bitcoin, and you are talking about etfs Holding Assets that are more wellknown even if they are somewhat esoteric compared to equity securities. David well known is one way of putting it, but whether they exist is a different thing. Secderstand how the regulates how you trade in something, but how do you regulate when there is no asset to check out. Assets you can at least in theory check out. Daniel you think about the whole. Sec regulation when it comes to these types whole theory when it comes to these types of products and what investors need to make smart choices, it is really hard. I am not want to advocate regulation. Anyone that knows my body of work when i was a commissioner knows that im a free market got, but i think the commission is being appropriately cautious. When i was on the commission, there were a lot of pressures from a lot of corners for us to regulate bitcoin qua bitocoin. The sec did a tremendous job of meeting with interested parties in making a recommendation at that time that it was not appropriate to regulate bitcoin. Bitcoin is one thing. Block chain is another. I know you spent a lot of time focusing on market structure. You are director at a block chain company. Can you give us a sense of what role you see block chain playing in future market structure. Daniel i am so glad you asked me. Beyond being a director, as a policy maker, former policymaker, i believe block chain will be for the Securities Markets the most disruptive Beneficial Technology that has occurred in decades. I think it is going to be really transformative in terms of settlement, corporate actions across the board. I think it is actually an area where i wish the government had done a little more to accommodate this type of 80yearoldnder regulations. David broaden it out a little bit with respect to block chain. A lot of people are afraid of missing out when it comes to bitcoin. What are some smart ways to invest in block chain without buying it when bitcoin . Daniel it is a great question. Folks are looking for these opportunities and seeing itos being offered. Lets buy some tokens from them. It was mentioned earlier, we are seeing a lot of fraud. It is reminiscent of the wolf of wall street pump and dump scheme s. That is marring what are otherwise potentially good opportunities. There are good block Chain Companies in this space. Unfortunately, most of them are private for now, so they are harder to invest in. I think the opportunities are going to increase exponentially and soon whether through direct equity offerings or pooled investment vehicles. Lisa can you give us one example of how you see block chain transforming an aspect of Financial Markets . Daniel the clearest one to me is the clearance and settlement process. You saw earlier this year with the sec, they moved the settlement cycle from t3 to t2. This was a massive change in the industry. You have a today settlement a twoday settlement cycle. With block chain, this would be instantaneous. You would not just have the clearance and settlement, you could also build in the corporate deliveries. As you know, there are a lot of entrenched interests in that space. They will have to be dealt with as we move this technology into that space. David dan, good to have you with us. That is dan gallagher, former sec commissioner. Trump is trying out a new campaign slogan. That is coming up. If you have a bloomberg terminal, you can check out tv and watch us online and interact with us directly. York, this is bloomberg. As markets enter record highs under President Trump, hes going with a new campaign slogan, how is your 401 k doing . According to the Government Accountability office, only 45 of privatesector workers participate in any employersponsored retirement plan. Not only that, only 14 of americans actually buy stocks directly. If you take a look at this chart, there has been a healthy growth in retirement funds. 6040 balances on for polio portfolios. You see healthy again throughout the year and only a few red bars going through to the beginning of 2013. The question remains, what proportion of americans actually have exposure to this and are putting aside money for their savings in this type of fund . David entitlement programs are really coming under increasing pressure, so we cannot count on the government to bail you out. It is all defined contribution. You wonder as people get older and older, how they will live. Lisa this raises the question of the political power of talking about the stock market when a lot of people do not have exposure to that, and it comes down to the wealthiest people benefiting the most. David are they getting a notice every month about how their 401 k is doing or not, because if they are they will feel good, and if they are not, it is lost on them. Lisa a lot of people say what . What are you talking about . David nothing i can spend. Coming up on bloomberg markets, a conversation with michael companyhe is weeden and chief global strategist. Live from new york, this is bloomberg. Jonathan from new york city, im jonathan ferro. 30 minutes until we start trading. This is the countdown to the open. Jonathan coming up, House Republicans prepared to vote on the tax plan. The senate gop appears to have the support for a contentious bill. Markets theres nothing contentious about it. The bulls embrace stimulus. Reserve aeral divided Federal Reserve. In markets known seemingly slowing down. 30 minutes away from the opening bell with futures positive almost. 1 . Around two points on the s p 500. Eurodollar at 11824. The dollar struggling to catch a bid in g10. Treasuries on offer, yields grind higher by three basis points to 2. 4 2
comparemela.com © 2020. All Rights Reserved.