Transcripts For BLOOMBERG Bloomberg Surveillance 20171226

It. Publish bitcoin we immediately gets the top of the readership roles at bloomberg. There is a fascination, maybe a bit of schadenfreude with investors being roiled backandforth on what this is, an asset class or a bubble. What is it and where is it going . No one has the answer, greeting us. Including us. Lets get to the bloomberg first word news. A spokesperson for the russian president says the kremlin is concerned about the possibility the u. S. May further expand sanctions on russia. A rule that took effect in august calls for the treasuries to compile a list of tycoons and Companies Close to the kremlin as potential targets for more sanctions. The u. S. Added the names of several companies of prominent russians to the list last week. Almost a year into the donald trump presidency, passionately promoted through all of his Campaign Announced eight prototypes no more than 30 feet long walls. No funding has been appropriated by congress to advance the project beyond the testing phase and despite the president s rallying cry that mexico would pay, the country has not contravene its a peso. It will capnounced the population of shanghai as policymakers seek to limit the people who use megacities as home as shanghai is home to more than 24 million people. Mode,n is back in rally from friday, they plunged as much as 30 and traded below 11,000 and a tumble coincided with several warnings from financial authorities about elevated risk in holding digital coins. It is bouncing back today and trading about 15,000. Global news 24 hours a day, powered by more than 2700 journalist and analysts in more than 120 countries. This is bloomberg. Lets get a check on the markets. A bit of a quiet trade. S p 500 futures unchanged. Taking a look at the treasury market, fixed income market, on the treasury market, a little bit lower. As for the euro, 1. 18. Barrel,l, 50. 42 a slightly lower. 58. 42 a barrel, slightly lower. To be oneems everybodys mind with a tremendous run out in 2017 and starting beer off at 1000 and that way above that, now above 11. 5 . A quiet trade. Bitcoin Wild Holidays we can ride, it is bouncing back after suffering a selloff that kicked off on friday. The tumble coming as bitcoin fell short of breaking about 20,000 and the fellow coincided with warnings from analysts about regulators about elevated risks in cryptocurrencies. Again, on the move to the upside. Good morning, yes, quite a roller coaster to use the clicee in bitcoin at the moment. At the end of last week, we saw the kleins that looked like to some of us the kleins, that look like some of the the kleins, that look like some of the bears, 30000 and 12,000, the 11,000 in a matter of minutes. Declines, days of they were moderated in the ends, the drops, we are in a bounce today, up at last count 11 . Trading back through the 15,000 mark. Has managed to regain a foothold, despite the proclamations of doom a few days ago. It is worth remembering that this is an asset that has managed to have moves of this size before and it remains to be prove ather this will tangible move that will hold, or a temporary bounce. Exactly, down 26 and five days. The introduction of futures trading in chicago was not to smooth out these highs and lows, but that was not the case this weekend. Now that we are bouncing back, our people institutions tried to short this and tried to make it more stable asset class . Is that working . The truth is it is not working, yet, but it does not mean it will. In the futures market, the volumes we are talking about are anyoneir to suggest that or any of the big names are having a meaningful influence on the bitcoin price. I think that this remains such a nascent asset class, which is only recently breaking out into the mainstream. A lot of the skepticism we see come from the big institutions, the kind of people you would expect to be shorting it. One can only assume on some level they are not yet engaged with bitcoin. Future hasent, the made a nice new story but in terms of applications to price, has relatively low impact in the end. Bloomberg news broke the story last week that Goldman Sachs was setting up a trading desk for bitcoin. Kind of seat we will see more of an terms of the Major Players on wall street kind of thing we will see more in terms of the Major Players on wall street . Warning about bitcoin and called it the big desk biggest speculative bubble in history and described it as fueled by the fear of missing out. When you see these big institutions talking about setting up ways for their clients to trade, that is ,omething that springs to mind perhaps it is just jumping on the bandwagon. , what we need to see, if it will prove sustained, if it will continue this momentum and hit the levels some of the bulls are talking about, 40,000, 60,000, 100,000, it has to become more accepted in a transactional sphere. We need to see amazon saying like you can pay in bitcoin or in cryptocurrency. If that happens, i see it as more sustainable. Then we will see more institutions, more big institutions get on board but many think that it could be a bit of a flash in the pan. One last question, we focus somewhat on bitcoin is the largest cryptocurrency but what about others . What about moves overnight and into this morning . Gainsare seeing games in the biggest rivals of bitcoin. There is the moves are not pronounced in bitcoin, but then bitcoin is much more high profile went when it goes up, it has outside jobs. Ither cryptocurrencies is more a story of stabilization that a decisive move. We are in holiday trading mode and it is hard to know exactly how much trading has been affected because we have no historical precedent. If you look at every other asset , trading is pretty thin at the moment. Thank you very much, sam potter, our Cross Asset Team leader for the emerging markets. We will switch gears and bring in our guest host, neil braddock, head of u. S. Economics. Hope you had a good holiday. Conversationoin was around the dinner table . Thankfully, not much. When your family is talking about, that is when people short it. My parents are not that attuned to the Financial Markets and if they were asking me about bitcoin, i would get nervous. And they did not. Did they instead talk about the benefits of the tax bill that has now become law . They did ask me about it. We do not really talk about that. Bill, bitcoin for the tax but you focus on the Housing Market which is important in the terms of the overall economy for the big large for just and for the trickledown. You see strength in the Housing Market . Housing market. Is getting the stride, if you look at the recent data over the last couple of months, we are out the year with pretty good momentum, particularly in the new home sales which is important to look at because they represent signed contracts. They are considered by most to be a leading indicator for Housing Market activity. If you are signing contracts on new homes, that means at some point you will be breaking ground on the new homes, the housing start, and then people filled the house with something and that is durable goods spending. It is a good sign . For the u. S. Signs economy are good, 2017 has been the year the bears has gotten shot. It is sort of embarrassing. The u. S. Economy looks pretty good. The Housing Market in particular looks very good. I think that momentum will be an important it will carry through to 2018. Lets talk more about housing and the broader economy in the United States later on, you will stay with us. Coming up in the next hour of bloomberg surveillance, we will speak with the Nyu Stern School of business professor at 6 00 a. M. In new york and 11 00 a. M. And london. This is bloomberg. Lets get to the Bloomberg Business flash. Covering apple have lowered iphone x shipment projections for the First Quarter, fighting we demand at the end of the holiday season. A Security Company says 10 million siri units will be sold and quarter 12018 to dustin it is Current Quarter blaming the phones high price and lack of interesting animation. Japanese inflation unexpectedly picked up in november, prices are still rising in less than half the rates targeted by the central bank and core consumer pricing which exclude fresh food increased 9 10 of 1 in november from a year earlier and the Unemployment Rate l to 2. 7 , the lowest since 1993. The force is still with star wars as the last jedi led the 100 milliontopping dollars in revenues for the second weekend in a row but revenues dropped the 4 from the previous weekend crop 54 dropped 54 over the previous weekend. We want to talk more about the apple story, not often that we have a downgrade in apple last week and now analysts are cutting iphone x forecasts, thinking that maybe the first wave has already happened. Possible that is true but i point out that apple is still near its record high in premarket trading, down four dollars. If it was really a hair on fire moment, you would see a much bigger drop in apple shares and you are not seeing it. Those who have been against apple in the past have been disappointed. They have a tendency to not worry about fluctuations but are in for the long haul. That said, it is somewhat disturbing to see the shipments apparently the so much left less than forecast. Market value in apple close to 4 trillion and they have hope the flow will is, some of the competitors like samsung are eating into their innovation play. I think that is a factor in restraining demand for the appleton. Apple x. Lets talk about japanese inflation, unexpectedly picking up in november with core consumer pricing increasing 9 10 of 1 from a year earlier, that is still less than half the rate targeted by the central bank. Todayf japan governor admitting there is still a long way to go and says he will continue to use powerful using. Easing. Ful lets get back to neil dutta. Japan, losingat inflation better but not where they wanted to be. The japanese economy has been another upside surprise for the Global Economy this year. Inflation is not where the central bank wants it to be but also through it is moving in the right direction. I think, for the Global Fixed Income market, i think japan is the canary in the coal mine. If you can get inflation in inan, you can get inflation the u. S. And the rest of the developed world. For Global Fixed Income is the fact inflation is low everywhere. , atation picks up in japan all signs point in the direction of firmer inflation in japan with low unemployment and strengthening economic output. The regional economy around japan is doing a little bit better outside of china. To me, japan is something to watch, particularly for the inflation outlook as it starts picking up, then the bond market globally will lose its anchor, particularly in the long end of the risk or. What implications does that half of the new fed chair coming in next year . Good, firmer inflation in the u. S. Present relief for the central bank. The fed has only been able to talk the yield curve higher so far. The only time the yield curve the long end has gone up in any sustained way was in 2013 and that was basically a communication error with the taper tantrum. Now, if you have from her inflation pushing up the yield, it will give the fed an opportunity to chase the curve higher and that is probably a position they would rather be in. We exploit expect inflation around the world to go higher, we talk about synchronized Global Growth and with that we should anticipate higher inflation, should we not . We should, then again, you would expect inflation to be firmer in the u. S. That it is now given how low the Unemployment Rate and how strong the Economic Performance has been this year. There is some indication the u. S. Output gap may be closed but inflation is still running short of the fed target. It has not shown that much momentum over the last couple of months. Part of this is expectations. Been experiencing very low inflation for a long time. That is beginning to feed into the expectations of people of longer on the inflation. The fact that no one expects it is a powerful reason for why inflation has been so sluggish in the first place. Us. Eil dutta staying with in the next hour, we will speak to a Bipartisan Policy Center Senior Advisor at 6 30 a. M. In new york and 11 of 30 in london 11 30 and london. This is bloomberg. Bloomberg. The kremlin is concerned about the possibility of the United States further expanding sanctions on russia. A spokesman for the president of would only relations be eroded by such a move and last week the u. S. Added the names of several prominent russians to its sanctions list. This coming as the Russian Central Election Commission refuses to register Opposition Leader as a candidate in the 2018 president ial election, citing a criminal conviction. The Opposition Leader has called for voters strike in protest. Joining us to talk about this is our henry meyer. And talk us speed through the mood we are seeing their there. The issue of sanctions is becoming increasingly important because under legislation passed in the u. S. In august, a list will be compiled by the end of february of russian oligarchs who may face potential sanctions. Therefore, the russian leadership is trying to make use of this for political purposes. There is a report that the u. S. Will finally provide some offensive weapons to the ukrainian resistance. Is that complicating matters in moscow as well . Definitely, it is another issue which is causing friction between russia and the United States. There are a lot of problems at the moment, but sanctions i would say is something that could really complicate life for president gruden. Putin. A lot of rich russians could be cut up the mess. Thank you. Neil dutta is staying with us and more from him in a moment. 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. Carol good morning. I am carol massar. Lets get to bloombergs first word news. Ed good morning. A bullish report on the chinese economy. The center for Business Research is trying to overtake the u. S. Says the worlds biggest economy by 2022. It says three of the four largest economies will be asian. China hosted top diplomats from afghanistan and pakistan a long simmering conflicts between the neighboring countries. The first dialogue in beijing comes as china expanded economic interest in pakistan. Another difference in how President Donald Trump runs the white house, he is said to be the first chief executive in newly a century not to host one state dinner during his first eight his first day not this. He says to expect on early in the new year. Global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. Carol thank you. Profound differences between house and Senate Republicans may role as gop fights with democrats on how the legislative agenda plays that when Congress Returns in january. House republicans have energized by their abilities to rally around the tax overhaul and limit demands from democrats on the stopgap spending measure that goes out at the end of the year. ,oining us is Sharyn Ohalloran a professor of political science. Lets kick it off with you. When you look at this tax legislation, what is the first thing that comes to mind . Sharyn what you know is that itt you note, is that one, does give a lot to many of the different demographics. Tax cutse individual and you do see what was really important and what wasnt agreed to very early on in the administration was the corporate tax, which put the United States talk with their peers. The other thing you note is it is aggressive when you look at the tax rates and that is new in our tax system. Carol is it a good change to the tax system . Sharyn it depends where you are sitting. Carol it is good for corporations. Sharyn yes, it is good for corporations. It will have a sense in which you are going to be competitive with the other countries, so there will be less arbitrary that way. Does in some way reduce some of the loopholes within the tax bracket that are inefficient, and that is good. Thater, you see over time some of the biggest return are going to go to the top income brackets. Not wheres perhaps the most dollar to dollar, where the most impact on the economy is going to have. If you want to have the biggest impact in the economy, it goes down to people who will spend the quickest the dollars and that depends on what you wanted to with the money and that is what is going on. Marty one of the biggest controversies is the reduction in state and local taxes. Is that, in your view, a significant change and will have an impact on the National Economy . Is it a redistribution of National Wealth . Sharyn i think it does have an impact on the way people manage where they are, state, local, and i think it might make micro individual decisions different. Will it have a big impact on the aggregate economy . Not clear. I think it might have a difference in the suburbs from there and those types of movements might have a difference between help homeownership and that distribution it is not clear in thehave an overall, next 10 years, aggregate effect on the overall economy, which is not the same as when we look at the tax brackets and changes in that, which may because over that tenured period, a lot of those 10 year period, a lot of those gains go away. Marty that speaks to the nonpermanent seat of some of the individual rates. I am interested in why do you havinghe paul ryan bu of a view of having a border tax was dismissed so early . Is this really tax reform or a form . X cut a different sharyn border tax as a u. S. To mexico . Marty correct. Sharyn first of all, many believe it is in violation so it is not an effective way to manage that. That makes it some ways a nonstarter. And the other thing is just a straight out border tax, when really what you want is a mitigating has differential influences on different sectors. It is not clear you werent to add the lower that you want to add the lower tax that way. That is not the way to protect your industry if you want to have a level playing field. Carol i know you did not talk about tax with relatives over the weekend, but when you look at the tax reform overhaul, the president has made projections about the impact on the economy. Do you see that this is going to provide some kind of cake to Economic Growth in the United States . I do. I think most economists do. It is a matter of degree. If you look at the fed, they raise their Economic Growth outlook by point for next year, and a couple of tenths the year after that. While people will debate whether this bill will do anything to raise the long run level of growth in the country, clearly it is providing a nearterm theh to the economy went Unemployment Rate is low. Debate about whether the stimulus is illtimed. Carol there is a great conversation on surveillance last week and they talked about, things are going fairly well. We see revenues growing, corporate profits growing, the economy maybe not as strong as we like it to be, but growing. By doing eight stimulus package in terms of tax cuts . Does it make sense . Will we run into trouble when the economy slows down later on . Neil neil i think the notion we did not have fiscal space, i do not agree with that. Market. T the bond the yields on 10 year treasuries are less than 2. 5 . If anything, the bond market is begging for more stimulus out of the government. I do not buy this notion the u. S. Lacks fiscal space. We may be lack of Monetary Policy space, but if the government wanted to come in and withhold less for people, that probably in the event of a recession, we could get away with it in the bond market would not punish us for that primarily because it is driven by weaker growth and inflation expectations. I think this notion we dont have fiscal space in the u. S. , i do not buy it. Sharyn so if we were in debt, this is a good time. Carol this is a deficit question. Sharyn at the same time, the question is, if you do that, you need to make sure you have a stronger dollar that will offset the rise. That is the key for that to maintain. That is what we will have to look out over time. That is what we will see to maintain that statement. Marty one of the things, narratives out of the tax bills is the law of unintended consequences in the previous. Tax reform, there were 30 public hearings. Experts fed into the narrative and effective legislation. If you were to think outside the you what are the things think may actually be the unintended consequences of this tax bill . What are you worried about . Sharyn i am worried very much that this becomes the basis on which we start undermining the social security, the social net, and we Start Talking about dismantling medicaid, social security, the things that are very important for us to actually allow for Economic Growth to continue. And that would mitigate some of the income inequalities that are some ways built into this tax reform. And it is not because it is not good to have the deduction in the tax, the stimulus that is guaranteed, but because that in itself limits the impact or the longterm increase in productivity and economic gains that any stimulus will have if you have this growing inequality. It becomes unattainable. Marty and paul ryan has talked about going after medicare and other safety net issues as part of his agenda for next year, and that would raise the concern, i assume. Sharyn rights, and education, which was tax many ways. If you want to invest in any part of the infrastructure in the United States in this economy and the new one, investing in that capital is one of the most important things. Trains are great, but that is the old economy. It is not the new economy. I think we have to think about what is new. Carol especially when you have employers saying they have open jobs but not skilled employers to fill them. Sharyn ohalloran of Columbia University and neil dutta both staying with us. Tune in on radio. Number daybreak can be heard in new york, washington, d c, boston, this is surveillance. This is bloomberg. Carol very good morning. I am carol massar along with marty shanker. 10 years since the start of the financial crisis, u. S. Banks are better capitalized but that does not mean it is stronger because there are new sources of risk. That is the view from Columbia University professor Sharyn Ohalloran, along with neil dutta. Those major Financial Firms and big banks have gotten bigger and there are fewer. Tell us something you shifted at columbia in your assessment of the Financial System. Sharyn we had a conference 10 years after the financial crisis, and we had many different people from all sides of the spectrum. Frank, and glenn hubbard, so it was a wellbalanced discussion. Even members of the this is community. Business community, and a large range of academics to discuss this issue. The real notion is to understand look at havenow, we really attack the underlying causes . And when we are thinking about Going Forward, how the reforms we are thinking about now are the right way to approach. Yes, is a real sense that the bank somewhere capitalized now, so they have more shock absorbing capital, so if there is another financial crisis like previously, they would be able to a stand that shock better. But it is not clear the whole system is better off in the sense that a lot of those more risky activities have been takes t of those banks. Carol what activities in particular . Sharyn the things that take more extreme bets, the more risky it was not the banks, per se, but what was happening within the Investment Banking industry have been pushed out into the shadow banking of a nonregulated sector. Also, we have seen there was a move within the regulations to move all derivatives and tradings onto clearinghouses. What has happened is that is standardizing the different contracts, which i think you which i guess you would think is good but that makes a Central Point of failure and you are concentrating this. Moreover, it is not that everybody is doing that but most of the small players are not but a lot of the big players are continuing to do these exotic contracts. But they are being able to write down more and said initial and variation marginals margins in complex ways. That is hard to do, but that means they are advantaged compared to the smaller. Marty at bloomberg, we wrote a story that got leadership last week about subprime car loans and how private equity, which thousand to some of these securitized loans, are going to get difficult to get out of those. Is that what you are talking about . Sharyn that would be the kind of risk. This kind of stuff we saw previously in the previous price crisis is emerging. It is interesting we are forgetting that is exactly what we saw before been the crunching thehow we are bundling risk. This time, it is not in the and shadowectors, banking, sometimes they are online banks unregulated. Is a growing source of risk. Nei if you think backl, to 2008, neil, if you think back to 2008, this environment doesnt feel like that but that is the dot in 2007 that got us into concern. How complacent are you about the risk . Neil i do not think the broader consensus is complacent. If you look at investor euphoria, investors do not appear that euphoric. Carol except for bitcoin. [laughter] neil except for bitcoin. In terms of systemically important areas of the Financial Markets, you do not sense of Broad Investor optimism over equities. People keep saying this is a cliche but people keep saying this is the most hated rally ever. That is still true. If you look at allocation in terms of stocks versus bonds, most people are with underlying equities in a portfolio. I do not think there is excess in the Financial Markets and enthusiasm. Enthusiasm translated into a broader mania in the economy. That is what i look for. We do not have that. We have not had too many financial blowups in the cycle. The first, the energy debt market. Huge view on triple c credit spreads relative, so the markets reeling this willingness in the energy space. We had a huge blow in the spreads in 2014, 2015, an early part of 2016. It came in when you mentioned subprime autos, that has been in the market a while. Does nothing complacency about that. We had big selloffs and companies, and those stocks have rallied and auto sales have come back. Had told argue we have deal with the couple of Financial Issues in the real economy already and we have dealt with it. Nothing clearly on the scale of the Housing Market. The Financial System is never going to be perfect for humans, but it is in a better place than it has been in a long time. A lot of what happened in 20072008 was the function of a bad forecast. People thought the forecast would never go down. I do not think people are talking about that. If anything, people are talking about levels. Bubbles. Theres not that level of inking there was that defined into a dozen seven level of inking that defined to thinking that defined 20072008. Sharyn what we are observing is this is outside of the regulated aspects and you are seeing these different types of areas and this is regulators and so forth observing these with money market signs. Those are important areas that are humongous. It was never the equity markets that was the problem. It is the other markets. Carol and those not regulated. Neil dutta is staying with us. If you have a bloomberg terminal, watch us on tv. Click on charts and data to help you throughout the day. We love hearing from you. This is bloomberg. Ed this is bloomberg surveillance. Lets get the Bloomberg Business flash. Backed by billionaire, a stake for hollywood production how studio eight. People say that includes a sale. A pharmaceutical conglomerate values the studio at as much as one billion u. S. Dollars. Holiday shortened week begins with the sale of the 134 billion worth of treasury bills, with a light batch of u. S. Economic data. It is shaping up at the key event. That is your bloomberg is a splash. Carol thank you. The median fourthquarter gdp growth forecast for north america sitting unchanged at 2. 6 , according to bloomberg surveys. Neal dunn other says neil dutta a sane the u. S. Is heading into the new year with solid momentum. Lets get back to Renaissance Macro research, and also with this Columbia University professor Sharyn Ohalloran. Talk about your outlook. Neil we have our date had solid growth we have already had solid growth this year. Nobody anticipated that. It is sort of interesting. You go back to this time last year and there was a widely held view the market would correct 10 to 15 . Given the election outcome, there was 2 growth. Here we are with markets 3 growth. It was indictment of convention listen, which is amusing. Goingk what is important forward, and none of that had to do with the election outcome in said, i that being think Going Forward, there are two things imported. First, the Housing Market. Housing is a leading indicator of the broader economy. Number two is u. S. Inventory levels are too low relative to the growth and final demand. Healthy good news for u. S. Factories. They will have to look over drive in the next several quarters to boost inventories to meet final demand. Inventories grow in final sales. That has not been happening the last quarters. Business investment is another area. Acceleratorging effect for capital spending. Capital spending are strong. We have seen solid growth and that is what you would typically expect to see that close to full employment. Companies need to find different ways in meeting demands. Outside consumer spending, which is a neutral story the next year, i think the rest of the economy will be firing on all cylinders. Carol our thanks to boast of you. Sharyn ohalloran and neil dutta will join us later on radio. Coming up, we will speak to leonard stern school of business professor Kermit Schoenholtz. This is bloomberg. Carol bitcoin fights back. It seeks to drop a line under a five day flop. Russias Election Commission refusing to register the Opposition Leader as a president ial candidate, while the kremlin says it is concerned the United States might expand sanctions. Not so merry at apple. They cited signs of lackluster demand. Welcome to bloomberg surveillance. I am carol massar, along with marty schenker. Tom keene and Francine Lacqua had the day off. Lets get to your markets on this tuesday. Actually, a look at news. Lets kick it up with first word news. Ed ludlow, what have you got . Vladimirkesperson for putin says the kremlin is concerned the u. S. Might further expand sanctions on russia, in order that took effect in august calls for the parliament calls for leaders to be potential sanctions of targets of sanctions. Almost one year into Donald Trumps presidency. Prototypes were announced sitting in a desert outside of san diego and no funding has been appropriated to advance the border wall project beyond the space. Despite trumps rallying cry mexico repays the country has not constituted a pay stub. China has announced plans to cap the population of shanghai yet 25 million as they seek to limit the number of people who called the nations megacity home. It it is already home to more than 24 million people. Bitcoin is back in rally merge. At one point friday, it plunged as much as 30 and traded below 11,000. The coincided with several warnings from financial authorities about elevated risk and holding digital coins. It is trading above 15,000 and bouncing back today. Global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. Carol thank you. Lets get a check on the markets. Lets start with s p 500 futures. Unchanged , 26. 86 2686. Right now, the 10year note with 245. Ld of as for the euro, 1. 18. Crude oil , 58. 43 a barrel. Just a little lower. We are just below that mark. 1278, up. Bitcoin is up. We have seen a fiveday slump, up about 10. 5 . Lets stay with the top story, bitcoins wild Holiday Weekend ride. The cryptocurrency bouncing back this morning after suffering a selloff that kicked off friday. Became just as bitcoin fell shy 20,000, withove warns about elevated risk and cryptocurrencies. We are joined by kermit professor for economics. Bitcoin seems to be the topic to sure. We have seen a little of the bounceback. When you look at bitcoin, what is the conversation you think we need to be having . Kermit bubble. Hallmarks of a bubble. Bitcoin does not have earnings, it is not clear whose liability it is. If anything, the fundamentals associated with it have deteriorated over the last year. People do not seem to know it, but trading is down 95 from a year ago because most trading in bitcoin in 2016 was in china. The chinese authorities have shut down exchanges there. My own guess is that the real worried that bitcoin is people by on momentum. Heyb hereu in the news buy on momentum they hear about it in the news and they respond to that. I do not think it will have a large impact in the economy. It is too small to matter for that but i worry about investors who buy, thinking it will be someone knows who will buy it from them. There is a north korean elements, trying to avoid sanctions. I want to bring up one thing we read on the terminal from mohamed elerian, writing that of the experienced one biggest roller coaster weeks in its young history. The most important question facing it is whether the recent price correction will prove to be what Market Participants referred to as healthy, specifically, when that serves to shake out excessive irrational exuberance. It is also in the hands of a few. Neil i think it is kermit i think it is worse than that. Who really uses this . If use is the meaning of exchange in currency, most people do not go to the stores with bitcoin. There are a number of institutions that used to accept bitcoin and have with drawn from doing that withdrawn from doing that. Most transactions were in parts of the world where people used it to avoid regulation and legal control. For example, in china, the worry authorities may have had is it was. Used to evade capital controls the lesson over the last year is that when the use of was used to evade capital controls. The lesson over the last year is that one to use bitcoin, the crackdown. The fundamental value of Something Like this is limited in the long run. I am not sure investors understand that. Marty to your point, regulators in the u. S. Seem to be behind the curve. They do not have the tools or inclination to climb down on this kind of risk to regular investors. They are cutting back on this. Kermit i do not blame regulators. The law is what it is. It provides some authority and not other, and that is healthy in our society. We do not want the system overregulated. At the moment, this does not threaten the Financial System or macroeconomy. Are seeing some u. S. Regulators speak openly about the need for investors to be more sophisticated and learn more about the risk they are taking. Do not want to encourage people to get in where the water will turn out to be unpleasant. At itsfundamentally core, is there a use for bitcoin that makes economic sense . Kermit unfortunately, the primary use according to advocates is the ability to conceal activity. Who is concealing activity . People engaged in to conceal activity. He was concealing activity . People engaged in illegal business. Eventually, i expect government to crack down. We see more warnings coming from vicecb, the fed, then you chair of supervision at the Federal Reserve spoke up in the about the dangers of bitcoin. And the cryptocurrency, generally. Carol is there no place in the world for some kind of cryptocurrency . Look at uber, it totally disrupted the way we get a ride, and it has turned out to be transparent. Not perfect, but is there something within the digital cryptocurrency world that could be productive . Kermit i think governments are trying to export the idea of their own cryptocurrencies. You can imagine a way that is more sustainable. Government won the benefit of this to be currency. It cost the u. S. Government a one15 cents to print dollar bill, so you can see why they would want to issue their own cryptocurrency but there are risks. Ultimately, the Digital Currency issued a central bank could replace intermediation what the function of our Private Banking system. Eventually, you were would worry if most of the you would get to a point to worry that if most of the currency, who would provide the loans . Would it be the government . That would be an attractive outcome. It isnt easy to for seeing easy way in which this will work. We havent worked that out yet. Marty in your view in a years time, where we be talking about bitcoin . Read will it be on most on the bloomberg . Kermit i do not not to answer that because it is driven by psychology and it isnt tied to fundamentals or something that can analyze and forecast. Carol Kermit Schoenholtz will stay with us. Coming up on bloomberg daybreak, the conversation with michael purves. He will be talking about the global markets, coming up at 7 00 a. M. In new york, 12 00 p. M. In london. You are watching bloomberg surveillance. This is bloomberg. Ed this is bloomberg surveillance. There are the word iphone x shipment projections, citing weak demand. They say 10 million a few units will be sold in q1 2018 compared to the Current Quarter. They warned to shipments falling 5 million, explaining lack of interesting innovation. E is filled with star wars, topping revenues for a second weekend in the row. It did drop because of fiveyea five new releases over the Holiday Weekend, including jumanji. Carol thank you. Japanese inflation unexpectedly picking up in november, with core Consumer Prices increasing. 9 from a earlier, still less than half the rate targeted by the central bank. Bank of japan governor has admitted there is a long way to go, and to a continued to use power easing. Japan,u look at bank of they are doing better and there is progress. Kermit absolutely. The country is growing quite well. Is remarkablyet tight, tighter than the 1970s. Has said,the governor they have not achieved their inflation target and wages are growing slowly, despite the tight labor market. Carol that is a global story. Interesting in japan because they went through 20 years of falling prices. Indebted inflationary expectations to the population and it takes a long time to undo that. People are continuing to learn from the lessons of japan. It isnt a good idea to let inflation take root because it is hard to end. Marty when you look at abenomics, has it also helped the japanese economy grow . Is it ultimately going to be deemed a success . Kermit kermit i think it is a mixed bag. There are some aspects working. I think we are seeing a significant increase in labor force participation, many more people coming back into the workforce, women and elderly. It is necessary given the lack of population growth and the limits on immigration. On the other hand, the structural supplyside demands have turned out to be meager. I think the bank of japan is caring the largest burden and theyre doing their job as well as any central bank. They will have difficulties down the road and when they have to exit from the policies they have put in place, that will be a sign of success. Carol you do not perceive that anytime soon . Kermit i think they may want to start informing people about it in the next year. I do not think they need to rush. It has taken a long time just to get out of deflation. It would be surprising if they suddenly experienced a big pickup in inflation given the weight of the past, but i think theyre prepared to handle that. Central banks have conventional tolls to deal with rising inflation that they do not have for deflation. Marty when you talk about the lessons of japan, one is tied immigration policies, or lack of that kind of workforce to increase that activity and growth. Is that a lesson for the rest of the world . Kermit i think it is. In the United States, we learned that lesson a long time ago and have forgotten it. This country has been built by immigrants and immigration has our a major contributor to Economic Growth, in terms of the labor force and productivity. The willingness of immigrants to invest in new businesses and take risk that others might not the willing to take. Frankly, i think we are hurting ourselves if we limit Legal Immigration in this country, and there are people who would like to do that. Carol is that conversation not happening in the Nations Capital . Have got to be several individuals giving economic advice to the president. They have to understand the ,mportance to improve growth increase the labor force and make everybody reductive. Kermit and encourage those was productive to come to the United States and take advantage of their skills and knowledge and willingness to take risk. Carol do you think the conversation is happening . Kermit i am not a politician and i do not want to be, but i would hope so because this is fundamental, economics 101. This shouldnt be complex. It is unfortunate we need to have that conversation. The 2018 we move into election cycle, the question is, will that conversation take place . I know it sounds simple but people tend not to focus on those issues and more and personalities. Kermit i do not know if it will take place next year. There is one important hopeful sign and are unable labor market has the lowest Unemployment Rates in more than a decade. Next year, we may have the lowest Unemployment Rate we have seen since the 1960s. As the labor market tightens, workers will worry less about competition from others, want to provide services. I think that is helpful. Running the labor market tight for a while could be the hopeful way to improve our attitudes toward immigration and competition. Marty you and other guests earlier had suggested an optimistic outlook for the u. S. Economy in the coming year. How does that affect the fed in terms of rate increases in 2018 . Kermit my guess is they will continue on a path they are on. They may raise rates more than projected. They are anticipating three rate hikes next year, at least the median of the committee. My guess is it will be that or more because the economy is running stronger than it can over the long run. Having said that, that is good news. The fed has tools to deal with, upside risk to inflation. My greater worry is what will we do when we have the next recession . Because it isnt clear there are conventional tools to deal with that or sufficient. Carol what you mean . Is it the case we will not be high enough we have room to come back down . Kermit the bottom line, if you look at the bottom line forecast for where they think the federal funds rate will become a they expected to be less than 3 . In a recession, we may need to lower rates by five Percentage Points to stimulate the economy. We need to look for other ways to do that. There are people, one of the candidates for the Federal Reserve board, have advocated that. I think it is something we should explore and there are problems with negative Interest Rates. It is not as simple as it may sound. My own guess if push comes to shove, the next time around we have a recession, assuming in the next few years, which is likely, we will see unconventional monetary policies. Large expansions of the Federal Reserves asset possessions, so the Balance Sheet. I do not think that is the optimal thing. Over the long run, that creates threats to Federal Reserve independence, just valuable for us. It isnt clear to me we have alternatives. Carol we will continue that conversation a little later. Kim show halt will stay with us Kermit Schoenholtz will stay with us. , you are watching surveillance this tuesday. This is bloomberg. Carol we are back, everybody. Profound differences between have the Senate Republicans may play as big a role less gop touts with them across and the legislative agenda plays out when Congress Returns in january. Joining us for more is bloombergs curtis more. First, lets talk about the week. Etsave not seen any twe from President Trump this morning. He is down in maralago and he does not have anything planned for today. We will be watching his twitter feed for sure. I understand he is scheduled to meet with the house and senate to set the agenda for 2018. Do you have any sense of what those agenda items are . They have got a lot to do. They have to figure out how to fund the government through january 19. And democrats want a lot of things. They want immigration reform, there are some controversy divides between republicans and the house and senate over what to do on immigration, as well, and obamacare, and moving forward, so they will have to figure out a lot of things. Asty january 19 shaping up a difficult day, unless Congress Punts again for a few weeks. Is that the date investors should look at . Laura i think so. Putaw the republicans together with the tax plan, so anything can happen. January 19 could get down to the wire, especially after House Republicans canceled their first look back. Carol it would be nice to run the government beyond month to month. Laura curtis in washington, d. C. We will be right back with Kermit Schoenholtz. Read the latest issue of Bloomberg Businessweek, on the stands and online. The cover story, microsofts chief officer. This is bloomberg. Carol im carol massar along with marty schenker. Tom keene and Francine Lacqua have the day off. Lets get the bloomberg first word. Putin will have one less deponent in march election. N marchs the Opposition Leader has been barred from running against him. He could have run if his conviction was canceled. A bullish report on the chinese economy. The center for economics and Business Research says china will overtake the u. S. As the worlds biggest economy by 2032. Three of the worlds four largest economies will be asian. China hosted diplomats from afghanistan and pakistan in a bid to mediate a longstanding conflict between the countries. The first bilateral minister level dialogue in beijing comes as china expands its economic interest in pakistan. Another difference in how President Donald Trump runs the white house. He will be the first chief executive in nearly a century not to host at least one state dinner during his first year in office. The white house offers no heticular region reason has yet to extend the visit. Global news 24 hours a day powered by more than 2700 journalists and analysts in over 120 countries. Carol the tax change President Donald Trump signed into law will reduce federal revenue by more than 1 trillion over the next decade even after accounting for the beneficial effects on the u. S. Economy. Run counter to arguments advanced by the Trump Administration that the package of tax cuts would stimulate and Economic Growth to pay for itself. Joining us to talk about it is steve bell, Bipartisan Policy Center senior adviser. Deficit, youlion think that might happen sooner rather than later. Oh yes i do. Going to occur by january 19. We are looking about a 1 trillion deficit i fiscal year 2019. The Congressional Budget Office said 2020. We are saying 2019. Carol why do you say that . What they havet to do between now and getting the government up and running on january 19. They have to pass all the appropriation bills. They were not able to pass the emergency supplemental for the fires and the hurricanes. Thats another 80 billion to 100 billion just in the first year. They have not had any real advance on what is called chip, the Childrens Health insurance program. Thats an additional 4 billion to 5 billion. It looks like we will be 200 billion to 300 billion higher in fiscal year 19 than the Congressional Budget Office and omb projects. What are the policy implications if you are right . What happens when that reality hits . Lets step back and take a look at what we are looking at. We want them to increase spending while deficits are going up. Both parties are split. The conservative wing in the republican party, no more deficits. The democrats are split because they want progress on immigration and they want spending on domestic programs so here are the three things were asking them to do. Increase spending. Enough moneyhave for all the emergencies that have occurred and vote to extend the debt ceiling sometime in march or april. Those things are really very difficult to put together politically. Im going to vote for more spending but im going to vote or vicethe debt will versa. I think theyve got themselves in a very difficult situation. Marty what are the implications for 2018 . Is election cycle has begun with alabama. How does that play out in the political spectrum . Democrats have some momentum. If you take a look at how the elections turned out in a couple of places. Usually down ballot anything below Lieutenant Governor people dont care that much. The democratsa went from a 32 seat disadvantage to virtually even where a toss of the coin this week is going to determine who controls the house of delegates. That shows me the democrats have sort of grassroots momentum. Its going to put a lot of pressure on republicans next year to come up with their theme. Are they going to have Something Like infrastructure . Thats more spending. Kim. i want to bring in i think about the long run and im concerned that our debt half was already unsustainable before the latest tax bill and it looks like that will make it a bit worse over time. We could be hitting 100 of gdp in federal debt a decade from now. 1980s we had a way of getting consensus among the parties and reforming taxes and revenue plans. We did pretty well even though parties and reformingthere was. Why cant we do that today and what can we do to get back there . The reasons we cant do it today or this. Leaderships are really not doing what their basic caucus wants them to do. Chuck schumer is kind of being wishywashy on things like immigration so his caucus is not happy with him and you know Mitch Mcconnells problems. Take a look at nancy pelosi who says lets settle down and see if we can get something done and paul ryan has four or five factions was trying to deal with. If you dont have coherent leadership as you did under senator maker or senator byrd you cant get anything does just done and thats where we are. Absent fromicuously this conversation is a guy named donald trump who happens to be president and he by all accounts did have an impact on the tax bill and did helping get through. What is his role and what role could he play in bringing these sides together . He has two big challenges. One, his budget. Last year it was not at all instrumental in the final determination of spending or taxes. What is he going to do about immigration . We have the dreamers act out there. We know that people are going to really pump up against some problems. Having to be deported or have to leave. What is he going to do . What deal will he make on immigration . Is he willing to make a lot of conservatives in his own party angry at him . If he is willing to make a deal on daca than i think other things fall into line. If he is going to hold to i want the wall and nothing else and i think we have a good shot at a closedown of the government in january 19. Carol if we hit the 1 trillion deficit sooner rather than later what are the implications for social safety net programs . Thats where paul ryan wants to go. He wants to go to cutting back on these socalled entitlements or the safety net. Thats not going to go anywhere. There are no votes i think for that in the house and there are virtually no votes even the republican side of the caucus in the senate. , allnk that infrastructure sorts of things are going to be bottled up because of the debt. I would remind everybody last week and bloomberg has been covering the story very well, last week on the front page of the Financial Times there was a big story saying central bankers now worried about global debt. Happening while tightening is occurring. Take a look at that. Interest rates going up to tightening in the Central Banks with this huge overhang of debt and i think we have some economic problems over the next two years that are going to be difficult to deal with. Carol the cost to service that debt gets more expensive as rates go up. Steve bell, thank you. Kim is going to stick around with us. On your commute, tune in to bloomberg on radio. Check it out across the United States on sirius xm channel 119. This is bloomberg surveillance and this is bloomberg. This is bloomberg surveillance. Lets get the Bloomberg Business flash. Has export options for its stake in hollywood production house studio eight. People say that includes a sale. Studio at as much as 1 billion. Gas sales to china are booming. The country snatched up a record volume of the fuel to meet surging demand for heating and industrial use. Chinas natural gas used could almost tripled from last year to about 600 billion cubic meters. The u. S. Isvertake the Worlds Largest consumer by 2050. A holiday shortened week begins with the sale of 134 billion worth of treasury bills. Carol talk about some Corporate News this morning. We command at the end of the holiday season. 10 million fewer units will be sold in the First Quarter of 2018 compared to the Current Quarter. A lot of folks weighing in on this. We are joined by paul sweeney on the phone. Analysts cutting their iphone x forecast. Should we be worried as investors in apple . On the margin you have to be a little bit concerned. The companys efforts to diversify away from the iphone this still is a phone company with over 60 of revenue coming from the iphone. Thats clearly the business line to watch for this company. There is tremendous demand right out of the gate for the iphone x. It came at a very high price point. Once the initial wave of consumers ordered their iphones what areion really is the legs for this product over the next 12 to 18 months given its high price point and what we are seeing here is probably a little bit of the frontloading of demand for the iphone and people need to bring expectations down. Carol weve got apple shares down about 1. 9 in the premarket. How important is the success of the iphone x to apples growth Going Forward . Do we see other products coming down the pike . Other phones with a lower price point . This is an issue that apple has been wrestling with for years. To what degree to go down market. The apple products at the very high end of the market premium anduct at a premium price that worked in the established markets around the world but as the growth slows globally and where we are seeing growth for the phone shipments in general is emerging markets and that means lower price points. They didnt their toe with the they have never really gone down market. For apple this has been the story of trying to build up its noniphone businesses to kind of aroundthe fluctuations product upgrades. Marty im interested in what apple tells about the market for smartphones generally. Is there some implication for the rest of the industry in apples experience . Absolutely. When you think about the emerging markets which is where we look at global phone shipments were there is still some growth is the emerging markets. In china there a local manufacturers that have satisfied that market and apple has had some issues trying to go down market. India is another area of growth. Despite slowing the mature markets around the world apple has generally held to a high price highmargin high functionality phones to preserve their margins in their phone business. I suspect theres not going to be much of a change. The real challenge for apple is to continue to invest in Services Businesses which is about 12 or 13 of sales. 20 of sales over the next few years is very highmargin. Thats their music business and apple pay and all those of other all of those other services. Do you see any acquisitions on the horizon for apple that make sense . Generally, no. This is a company that has not been big on the acquisition front. Generally, no. They just made a recent small acquisition of a Company Called shazam which goes into their apple music portfolio of products. This is despite the tremendous amounts of cash on the Balance Sheet and Capital Markets prowess. They have not been big acquirers. Big media property comes up for sale whether its a time warner for a 21st century fox investors always step back and say are we ever going to see athey just Big Tech Company likr google or facebook really jump in and buy into the Media Business . We have not seen that. Carol we had variety reporting last week that three amazon studio executives are going to apple. If we are tempering back expectations for iphone x sales is at the cost of disappointment in sales in the United States or is it outside the United States and does that make it different . Apple has been trying to push sales outside the u. S. As well. Fairlys probably spread evenly across the mature markets for apple. Is real challenge for them to figure out a way to bring some of the functionality introduced to the iphone x and to some of their midrange products to improve the functionality of those products and help them drive the price and margin. Up iphone x was a fairly big cycle for them. It looks like the demand longerterm isnt what most investors were thinking. Carol paul sweeney, thank you. Apple shares down about 2 in the premarket and i want to mention a headline crossing. Mellow product to buy is a campo coming up, well get more from jim kim. On tv. Atch us watchingistening and bloomberg surveillance and this is bloomberg. Carol we are back. Im carol massar along with marty schenker. It is time for the single best chart and we are taking a look at diverging centralbank policy. Several lines indicating what we are seeing that Central Banks along the world. Top line here at the far end of the chart is the Federal Reserve. Theyre certain to raise Interest Rates and expectations for that policy movement to continue in 2018. European central bank and the actually the bank of japan and the European Central bank pretty much unchanged and keeping out a very low policy. We are seeing some changes although as marty pointed out to me in the break we are starting to see centralbank starting to think about moving up. Marty in europe especially the foris starting to prepare retrenchment of their stimulus. Carol backing off the easy Monetary Policy. Diverging policy a little bit. That has been a theme for the years because the fed started hiking rates long before the others were even contemplating the idea. They accelerated their expansionary policies when the fed was hiking. The biggest divergence is already behind us. If you look only at conventional Interest Rates its probably true that over the next years u. S. Rates will rise by more than they will in the euro area and almost certainly more than they will in japan. Thats probably misleading. The bottom line is this is the first time we have had a global pickup in the economy that is more or less simultaneous since the financial crisis. Eventuallywe are seeing a turnaround in Monetary Policy elsewhere. This synchronized growth globally is also probably going to lead to synchronized Monetary Policy which will feed on itself. This debton is overhang globally and what the implication is for rising Interest Rates in unprecedented debt levels in the world. One of the things we expect is rates probably wont get as high as they used to and there are multiple reasons for that. Theuse of the higher Debt Debt Service burden would rise faster and that would be a constraining impact on the economy. It looks reason is like the neutral Interest Rate is lower than it used to be and there are a lot of potential reasons for that. Apparently are related to the fact that Economic Growth is just slower than it was. Innovation is slower than it was. Pace at which we are boosting productivity is significantly slower than it was. I wish it were otherwise but it doesnt seem to be that way. Carol productivity after a decade of seeing no gains, were starting to see that in the United States. A good sign and do you anticipate it continue and picking up . Companies may be start to invest. I think we are going through and up cycle. We have been through very depressed period of productivity growth because of investment being so low. We will see a pickup in the next few years. Five years orer 10 years productivity growth has been so dismal that even a pickup will barely get us back to about 1 over the long run. Carol its all relative. Exactly. We are starting from a low base. Carol thank you, kim schoenholtz. He will be joining us on surveillance radio. I will be coanchor and with pimm fox this morning. Thank you for being here this morning. This is bloomberg surveillance and this is bloomberg. Retail. Under pressure like never before. And its connected technology thats moving companies forward fast. Ecommerce. Real time inventory. Virtual changing rooms. Thats why retailers rely on comcast business to deliver consistent Network Speed across multiple locations. Every corporate office, warehouse and store near or far covered. Leaving every competitor, threat and challenge outmaneuvered. Comcast business outmaneuver. Alix bitcoin is back. The cryptocurrency rallies past 15,000 after falling 26 over the last five days. The volatility may not be over. Tax reform check now what . North korea ramps up hostile rhetoric towards the u. S. And analysts cut the iphone forecasts citing lukewarm demand. Warm welcome on tuesday, december 26. Im alix steel. David westin is off today. Heres where we stack up. S p futures flat. Zero dollar a little bit weaker. 10 year yield right around the highest level we have seen since march at 249 and crude a little bit softer. Volume is not going to be that intense and because of that watch out for any flash crashes. My chart of the morning is eurodollar. Out of nowhere down