At the same time, there was no change to the socalled balance of risk statements, thats the risk for their economic outlook, again described as roughly balanced. Their language and describing Economic Conditions was also slightly upgraded, things like Household Spending and business fixed investments were described as solid this time around. So none of these are really dramatic in and of themselves, but several subtle and important upgrades, perhaps a slightly more hawkish tone in this statement compared to december. Scarlet bloombergs chris condon at the Federal Reserve, thank you. Michael, you heard chris talk about a subtle upgrade in the feds report today, in the feds statement. What stuck out to you . Inflation,talk about and they have increased in recent months and that sort of supports the idea of this word further inserted into it. I dont think that any question the fed is going to be raising rates this your, its only a matter of how many times. So it may not be that dramatic a that jayt it does say powell is going to be raising rates. He had to have signed off on it. Ira jerseys go for a translation. Translationd increased in recent months per was that Janet Yellens trip to the Grocery Store . Talking about tips breakeven moving higher. When they talk about the marketbased one of their major measures is the fiveyear, forward tips breakeven. Those of gone up 40 basis points since the last meeting which is a lot. It attributes all of the move in interestrate markets. When you look at what is happened to tenure treasuries, how they have broken to 65 and by 271, thats mostly driven higher inflation expectations, not necessarily real rates, not a risk premium in built into the market. Scarlet Michael Mckee has to step off soon because he has an important interview. Is there anything that can derail a march rate hike from Jerome Powell . Mike probably not. There could be a very surprising we are inflation but expecting friday to see Unemployment Rates unchanged or a little lower. We are expecting, if you look at adp today, gains of about 200,00 about 200,000 or morning terms of jobs. They will look past the idea of these bonuses being given out by companies. Those are onetime things. But we are seeing Wage Inflation moving up with the employment cost index today. We are seeing Commodity Prices labor markets and Commodity Prices higher, so you should focus on inflation and the fed is going to react to that. David Michael Mckee, thank you so much. Ourhis fed day Hes International economics and policy correspondent. Mr. Jersey will stay with us but right now we bring in someone with a real handle on the American Economy and of course, always with a different view. From chicago, diane swamps swonks chief economist at Grant Thornton. Where exactly is the American Economy right now . we are seeing an acceleration of growth and i think what marty is emphasizing is getting to a sustained percent over 10 years. You need to see a major upper movement and productivity growth and another upward movement that is also commensurate, and laborforce growth. And right now we dont have either of those so that is what the sustained issue is. You can get up for a while, close to 3 come i think we will get there this year, but the question is at what price. David is the fed behind this on january 31 . Diane i dont think theyre buying. Curve is tightening in two ways. Their easing Monetary Policy tightening in two ways, one it through rate hikes, getting that and normalizing the prices, but also the are shrinking the Balance Sheet. Thats when you get more complicated. It sort of automatic pilot but a record they will allow more their Balance Sheets to roloff and that means less support for longterm rates in the fed throughout the entire year. At the same time theyre raising shortterm rates and thats something that markets so far have not reacted to at all. But as the fed steps that up we could see some reaction to that. Scarlet interesting. It could get more complicated. If the market does react do you believe the fed could then change its approach to have it reduces its Balance Sheet . Diane it certainly could. Marvin goodhings friend is very known for his thoughts on the fed Balance Sheet and how he thinks it is. A lot of people in the fed system are looking forward to what he brings to the table and his expertise in the Balance Sheet. He will be looking at a very closely and even though its on automatic pilot, it is complicated because its the same time the deficits are going to be rising in treasury needs to issue more debt. D there are president s worried about inflation in the future because of the size of the fed Balance Sheet but now that they are starting to reduce that i think some of the spheres and some of those inflation arguments have to go away a little bit. One thing that diane mentioned is that there is a fed Balance Sheet expert. Unless are any of us can really claim come anyone in the world can claim to be an expert on this. I think that that is a risk, especially if you change from what they have said they are at going to do. David Rubenstein said and i that it was a science fair experiment. I gets i guess that gets as close as we can. Wrong,that was horribly as i found out myself. Back to janeto yellen and her important Economic Club of new york speech. Good number of years ago, i cant believe its four years coming up in april. We anticipate that is labor markets like diminishes, it will less of it will exert a drag on inflation. However, during the recovery, and certainly we saw that folks with share janet yellen, very high levels of slack and seemingly not generated strong downward pressure on inflation. We must therefore watch carefully to see whether diminishing slack i think thats what we are in right now is helping return inflation to our objective. This is four years ago and remarkably prescient idea for fed chair janet yellen. We dont know the linkage of inflation in this. You have any confidence on where inflation is right now versus an almost fullyemployed america . Diane we know where the Unemployment Rate is. Its not the same Unemployment Rate has it was 17 years ago and is not where it was doing the boom of the 1990s. And i think things have changed. The boom in the 1990s, we have falling prices that were helping us to keep inflation in check and productivity growth, but there was a sense, there was this famous bet on facebook in march 2000, and we are clearly not that stage right now. We are not getting into wage pressures, we dont have productivity growth to back them up, we will see an acceleration in wages, some just for minimum wages alone that are coming through in january, that will lead to tense yearoveryear to leisure and hospitality wages which will help adjust the read on unemployment figures on wages on friday. But the real issue is, when a we really going to see firms really stop treating people like him oddities and treat them more like a diamond in the rough, and they polish them and invest in them and push them to sparkle and have been enduring impact on capital . Scarlet janet yellen broke ground in conceding that inflation was a mystery. She also broke new ground in becoming the u. S. Female central anchor. But about her biggest achievements and biggest missteps . Of heri think one biggest achievements is that this is someone who started in the fed during stagflation in the 1970s and was there during the boom chair greenspan in the 1990s. The crisis. Ough and ill of those shifts and the foundation of the economy she kept her footing. She was not an ideologue area he actually ideologue. She did not get caught in groupthink. We are increasing money supply so we are going to have a flair in inflation and lets figure this up. I think thats her greatest strength and shes been a learning curve over time. Do i think she could have pushed congress more in terms of relations with congress . I wish she had Even Stronger relations with congress. Id think she did the best she given the circumstances she was in, but that said i think we can always do better. The fed is under a lot of pressure. From grante swonk thornton in chicago. Thank you. The 13th chair of the Federal Reserve system. Specialx is a day. Chairman greenspan, thank you for joining us here today. When you look at the tenure of janet yellen, what sticks out to you . What is the most important historical note of the years of janet yellen at the fed . Tom alan when Federal Reserve chairs retire, they dont comment on the predecessor. A halflcker, for 18 and years, never once commented pro or con on the Monetary Policy i was involved with. And i think its a very important notion. Its a very important issue and id like to adhere to it. Adheringglad you are to it. I thought on this day of her final meeting we could get a comment but we will await that down the road. German greenspan, one thing we are talking about and i spoke to Martin Feldstein about it today is our expanding debt and our expanding deficit. It gives pause that we will go to 1 trillion in deficit in the near future. What are those debts and deficits mean to Alan Greenspan . Lan they mean what it means to everybody else, namely that we are dealing with a fiscallyunstable longterm outlook in which inflation will take hold. In fact, i was very much surprised that the state of the Union Message yesterday, all those new initiatives were not funded. And i think we are getting to the point now where the breakout is going to be on the inflation upside. The only question is when. We have been through it almost a and wenow of stagnation, are working our way toward stagflation, which as you know is a combination of both of those. Its a very difficult type of Monetary Policy to be in, but if but i think what we are seeing eventually here, is an issue where we have got to confront the deficit. In fact, ive been arguing for quite a long time that entitlements are eating into gross domestic savings and they have been doing that consistently dollar for dollar since 1965. You knocked down gross domestic inevitably domestic basically, every type of every type of debt tends to rise. And we have to get out of this loop. Scarlet we are in a vicious circle. You mentioned a fiscally unstable outlook and we are looking at a weaker dollar thats been weaker for a while now. The administration has talked up benefits of a further weakening dollar helping exports. What extent will that contribute to inflation . Towhat point does that start carry over and we see that subsequent price rise . Sooner, rather than later. Scarlet very well said. Sooner, rather than later. Is there a real risk of a weaker u. S. Dollar that we are not seeing just yet . What are the risks inflation is creating in the Financial System right now . Lan just remember, with the size of the International System the value of the dollar, visavis over other currencies is a critical issue with the domestic price outlook of the United States. And i suspect if we get a continued drop in the dollar, which has not been going on for a while, thats going to have some additional effect on the price level, the domestic price and thats beginning to rise for a lot of reasons which you recently mentioned, namely that productivity has been dead in the water for the last 10 years almost. Productivity growth has been half a percent year when it used to be over 2 . Thats a huge difference, and that means unit labor costs are not want to start to move but start to move up and with Profit Margins rising, that tells you the prices will rise. About dont want to speak present or future fed chairman and dont want to pontificate about Jerome Powell. But you can talk about the underlying theories of the phds at the building. Does Alan Greenspan still believe in the phillips curve . Alan i never did. [laughter] with it being is honored as it is, the phillips curve, which model should we use as we move into the rest of this decade . N well, let me just say this. There was a big dispute in the 1990s about the phillips curve. The phillips curve was basically supposed to engender inflation is the Unemployment Rate fell. While the unemployment of cap Unemployment Rate cap falling but productivity was accelerating at the time so unit labor costs didnt move, and we had a time when the phillips curve just did not work. The phillips curve presupposes a certain, fixed rate in productivity growth and that is not the way the world works. Scarlet we are missing that right now. Speaking of the 1990s, you used the term irrational exuberance that describes the bullish sentiment that was driving up investors during the. Com bubble. You see any irrational exuberance and prices today . Alan i think there were two doubles. We i think there were two bubbles. We have a stock market bubble and with the bond market bubble. At the end of the day, the bond market bubble will be the critical issue but for the short term, is not too bad. But we are working obviously toward a major entrance in longterm Interest Rates, and that has a very important impact as you know on the whole structure of the economy. Scarlet we are in a bond market bubble and you dont believe in proclamations that the bearer market has begun. The move toward 3 , we are not there obviously, if we get there, it cant sustain itself. What find that . Alan what behind the bubble . Running an we are ever larger government deficit. We are talking about deficits going to 1 trillion, but debt has been rising very significantly, and if you look the Congressional OfficeCongressional Budget Office figures at face value, we are going to run through the place iiwork were during world war of federal work to gdp, which is extraordinarily high and i think we are just not paying enough attention to that. Chairman greenspan you worked with members of the Democratic Party, the Republican Party as well, any number of administrations, youve advised any and all in washington. Different about the Republican Party today, as the majority party, from the time of your service . Where did the frugality go . Lan good question. If you find it, let me know. [laughter] image of you laying down in the office of president gerald ford. If you weree july down in the office today with President Trump would be your message to the president . Alan join me on the floor, mr. President. And what would you talk about . Then the conversation would become classified. With the go classified combination. One of the mysteries, and what are the mysteries we saw in davos, is the mystery of modern technology. You were the arch keeper of data, whether its a of airlines or whatever. A grasp of Technology Influences on our Economic Growth today . remember, you disaggregate output per hour which is the critical, longterm determinant of standards of living. There are many ways to come out of it. We now have a very large body of data which enables us to see where productivity is going. And for example, the slowdown in productivity over the last decade is very clearly the result of entitlements crowding out gross domestic savings dollar for dollar. And when gross domestic savings declines, and we cant borrow from abroad anymore, remember we toe an 8 trillion debt overseas, so the combination of gross domestic savings declining as a percent of gdp and is anements rising, inevitable result that weve seen in recent years. Scarlet is going to be a physical challenge. Alan greenspan, i want to end with Jerome Powell. The changing of the guard comes at midnight tonight when he takes over as fed chairman. What will be number one on his to do list. What does he need to do list to do first . Alan open his mail. Figure out how to open his bloomberg terminal, thats what we would hope you would say. Alan greenspan, thank you for your time today. Hanging on every word at Grant Thornton. An interesting conversation with german greenspan and i think we go back to what you see in the midwest, which is a different america than the time of german greenspan. The technology overlay today is extraordinary. How do you interpret it at grant tic, day byck by day, technology in this American Economy when you have no clue what productivity is that you have no clue where gdp is . Diane its complicated very as no question. And it makes it harder for the fiscal agencies to, believe it or not, to stay ahead of these measurements because they have to get funded to be able to get the improvements they need to measure with big data. They been doing a lot of experimentation with a. There are some improvements out there but i think chair greenspan made a couple of really good points about the concern about debt and deficits. Hes always been a deficit hawk. He was on the 1982 Social Security commission and i think he brings a very important points on that. And before i going to Technology Want to point out, the evidence on what happens to Interest Rates is not just deficits and the level of debt. Its the trajectory of debt, which he pointed out a very dire and when debt trajectory goes up countries pay. Eventually cannot escape the fact the bills have to be paid and the rest of the world is watching buried at the rest of the world is also dealing with debt, as well. This is something that will be an issue in a think he may very good points on that. The other side about technologies that chair greenspan also went into some areas where we know productivity growth has been high. Information technology thats where wages have been highest but very concentrated. It hasnt been broadbased and spread out all of the economy. Thats what were seeing is welcome and the data. He whenever even though everyone has a smart phone now that doesnt necessarily make them all more productive. And having to millennials that are in college of my own, i can happen. Scarlet i think weve all seen that in person. Its the inverse of productivity. Scarlet exactly. Talking about the trajectory of debt, when you look at the selloff in treasuries this week, and is going to be a lot of supply coming to markets this week. I think part of it as a supply stored but we have known that supply was coming. Today the Treasury Department does does Treasury Department told us how we will get it, much more threeyear notes a much less in 10 and 30 your notes. But they are still releasing issuance threat the curve. Theres 1 trillion of debt coming. We know that already ready. To dianes point, we have this push and pull. One of two things that happen in order for us to eventually pay our debts. Orher we pay more in taxes, we somehow have to inflate our way out of it and have much faster growth. And its not obvious taken to that last part. , to get is not obvious to that last part. You have a critical threshold for twoyear yields are tenyear yields were does begin to affect the American Economy . Diane i dont have an exact threshold. Said to chair greenspan, when is inflation to go up and he said, soon. When you are at 3 your back you are back in temper tantrum territory. Above 3 your talking about a major increase in longterm Interest Rates and its not just an increase in interest expense, but the interest expense on our debts as well. Ee. So you start to get those types of projection, and even though you get three and a half percent Interest Rates that are historically low, those are significant. Scarlet do we get there before the march 1 meeting . Diane no. I hope not. Wont say no for sure swonk of Grant Thornton in chicago, thanks so much for joining us. Ira jersey Bloomberg Intelligence is sticking with us. Talk about bond yields, we talk markets, we talk about the fed. This is bloomberg. We use our phones and computers the same way these days. So why do we pay to have a phone connected when were already paying for internet . Shouldnt it all just be one thing . Thats why Xfinity Mobile comes with your internet. You can get 5 lines of talk and text included at no extra cost. So all you pay for is data. Choose by the gig or unlimited. And now, get a 200 prepaid card when you buy an iphone. Its a new kind of network designed to save you money. Call, visit, or go to xfnitymobile. Com. This is the fed decides on Bloomberg Television or radio. Im scarlet fu at a bloomberg scarlet fu and our bloomberg World Headquarters in new york. Lets get first word news with mark romped in. Mark one person was killed today when a train during members of congress to a retreat collided with a garbage truck near charlottesville, virginia. Spokesperson Sarah Huckabee sanders says there are no injuries among members of congress and their staffs. The train was en route to a conference at the Greenbrier Resort in west virginia. Trey carolina congressman gowdy, chair of the House Oversight committee, is not seeking reelection. Gowdy released a statement saying he wont be seeking any other political or elected office but whether will return to the Justice System. Federal a former prosecutor. He chaired a Panel Investigating the 2012 terrorist attack in benghazi, libya. Gowdys announcement brings to 64 the total number of members of congress opting not to seek reelection. The number includes 46 republicans. Up man who swore in any is kenyas opposition literally bring a mock ceremony yesterday has been arrested. Vice president who had been blocked from being says hisas the deputy own was attacked overnight in what he calls an assassination attempt. 200 65 people have come forward to say they were victims of disgraced former sports dr. Larry nassar. Nassar is back in a michigan courtroom today to face another prison sentence for molesting gymnast. Judge has set aside several days for roughly 60 people who want to confront nassar or have their Statement Read in court. At a hearing last week nassar was sentenced to 40to175 years in prison. Global news, 24 hours a day, powered by more than 2700 journalists and analysts in over 120 countries. Im mark crumpton. This is bloomberg. Tom , thanks. It was a solid fed said statement solid fed statement, solid being the word of the day. Resetting a pullback inequities, the dow, 26 thousand 160. The s p 500s point today. Yields were higher, 2. 74 , we saw that with of the twoyear yield as well, it should be green on the screen, two basis points higher. A weaker yen, and a stronger dollar at 109. Scarlet still with us is ira jersey, Bloomberg Intelligences chief rate strategist. Jerome powell will be sworn in as the new fed chair this evening i believe, right . Ira his tenure begins soon. One of the things that has gone on with the Federal Reserve over the past couple of years has orlly been more control more, i dont want to say independence but certainly more input from other members. Governors,nd certainly they have been out there. When alan was chair, what he said, thats what the fed said. Thats what the fed it. The fed did a really wanted. In the fed chair certainly guys things but Jerome Powell will have his own style. And will he try to be like Alan Greenspan and be a little less open when it comes to other peoples ideas, or will he be conciliatory and say, if you think we should hike rates sevenmes hike rates times this year, dont say that. Thats not my view. Scarlet we want to bring in to talk about what Jerome Powell will confront this chair and one is the flattening yield curve. The what im showing on screen heres the 210 spread relative to fed hikes and we can see under the greenspan era, we got about seven hikes into the tightened cycle. That we saw a similar flatness in the yield curve and this has been a lot of discussion in the marketplace lately, that because of the flatness of the curve the fed will be constrained. And if the powell fed operates anything like the greenspan dead, greenspan blew right through that and didnt concern himself too much with the flatness or the eventual inversion of the curve. But the fed tightened at least as much thereafter as they did running up to that. What are the things is, they cant help this. If they keep on hiking they will keep on flattening. Thats the way the market is going to work unless they say theyre going to slow down there. Ike youre not likely to see a significant three steepening in the yield curve. Carl if the fed has confidence in keeping inflation low. What is normal, . We, evenrom normal are if we know where it is . We see growthif picking up in a more sustained fashion, and mighty we are not at 3 growth cap but we are heading probably toward a sustainable pace of 2. 5 to 2. 75 growth this year, maybe 3 beyond that, then you are going to see the fed finally tweaking their longerrun growth estimates of the other direction. If we have confidence we can get back to 2 gdp growth, back to 2 inflation, then i think normal, be it trend growth in the economy or the normal level of the federal funds rate, a will start to creep higher. Does the market agree with that assessment or are they still far apart from the fed . Karl i dont think we know with the powell fed is going to do but the market is anticipating continued increases in hikes. We are pricing in five or so hikes in the next two years, thats more or less the pace the 2year notes are certainly pricing in. So the question that becomes, how much does the other side, how much does the supplies died the supply side and up drifting into bond yields and pricing . I have to mention its not going to be for much steeper yield curve. Scarlet can you get to normal when you have the ecb and doj statement staying . Seen inovement we have the dollar to date this year has been more determined by doj and ecb then necessarily any reassessment of the trajectory from the fed. Thats going to be an important moving part in the background, absolutely. And whether the dollar goes up or down really influences the impact of a much normalization the fed has to pursue as well. So if we see the dollar, which is down about 10 yeartoyear to year, if that trend is continuing, its going to be inflationary, its going to be progrowth, and its going to mean the powell fed may have to do is a more rather than a little less. When introduced this chart right now. I want to introduce it with mr. Jersey right now. We quote yield, yield, yield at bloomberg surveillance all day. And scarlet is screaming out make, quote price sometime. Im sorry, if its a bear market looks like a bear market. Price down, yield up, its 3. 6 down from thanksgiving, an annualized 19 down. How do you know when you are in a bond bear market . The crisis down the prices down but you also get prices will continue to fall modestly. Over the last 30 years, weve never had a twoyear duration when we had negative returns for for treasury securities. Thats important because what tense to happen is you get these short selloffs, they wind up lasting for a couple of months and then the bond yield stabilizes. And as they stabilize you continue to get interest on that and you went up Building Back up some income. So how long with this last . It could last a long time. Im skeptical we are going to see this disaster with high high yields, 4 in 2019, i dont think that. This year has been terrible for bonds so far. Where are you with the percentage of the strategists you read, the economists you read, the think we are going to blow through bill grosss 2. 9 and enter a true highyield regime . Karl i dont think we are going into a meaningful highyield regime. Theres no evidence. We need a much more pronounced uptick in inflation. We are trending in a positive direction but that doesnt mean we are blowing the doors up to any degree that would justify a substantial backing of rate hikes. There,h that is out whether Household Debt at a floating Rate Mortgage or whatnot, little bit of backup in rates will really take a toll on interestsensitive spending in the economy, be it house bird or corporate be it household or corporate. The fedthis is decides on bloomberg. We were talking about the move higher in yields, the move down in bond prices. Our buyers going to start emerging as a spread between u. S. Treasuries and your yield gets wider and wider and we get to that 3 . Thats all we have seen in the past, consistent reaction. Saw in the passes going back to the chart i brought with me and chair agreement chair greenspan said the flattening of is not inversion. There is a global glut of capital sloshing around looking for higher returns. We talk about economic fun the mentals economic fundamentals, we also have to factor in foreign capital flowing that could be a very important driver this year, not only given the fluctuations in the currency and that surplus of capital, but one particular policy, this repatriating foreign earnings which is incentivized by the tax reforms. So we could look back to, for 20012007 cycle. The dollar was continually weakening over that time with the exception of two years, and of those two years were the time when we were incentivizing repeat creation of foreign earnings during that that incentivizing repatriation of foreign earnings at that time as well. So while that helps to grease the skids for President Trump to pursue a more expansive fiscal policy. Radiole and for bloomberg im putting up that bond price chart. Price down, yield up. Continue, while i put this up for bloomberg radio. Keep on talking about twoyear yields going up. Its important to note the structure of the economy has changed over the last 20 years, were a lot of governments within the United States and municipal governments as well as corporations have extended the amount of debt that they have. In extended their term. And they really used the last seven years or so to do quite a lot of that. So i think it might take a little longer than some people realize for higher Interest Rates to really filter into the real economy. You look at things like weighted average cost of capital for corporations. Thats not going to go up the same way did when they were funded 20 to 25 . Tom there are mergers and acquisitions now, we see it was napoli and the rest of them, dr peppersnapple in the last couple of days. Of the looking at yields as a nominal cost credit nominal cost or are they looking at as being next to nothing . Real yields matter in peoples minds but only insofar as they can pass along price increases. How much a price increases in weight pressures can be passed along to consumers . Carl did a great piece on the employment cost index and maybe if Employment Costs keep going up, one of two things has to happen. More inflationary get margin pressure. One is ok for things like up what markets and corporate debt and one is not. Certainly. I want to go back to how things pushed up because structurally the economy is different than it was before. How much time did companies and governments by with the ability to push things up further . Iraq the u. S. Government extended their average maturity from three to half years to almost six years. Maturityrms of average of their debt. So basically, they but themselves a lot of time. It essentially said, interestrates a super low. We are going to cut twoyear entry your debt. Back in 2013 they cut the amount of shortterm debt they were issuing and they issued a lot of longterm debt or its of the liabilities now are far longer. Now, they are worried about now thataturities and they are issuing more debt on the front end, this is a problem. But again make a get pushed a little further. So my question was, how much of todays hikes are going to be built into the economy in six months . These longlegs and Monetary Policy might be even longer than the fed even thanks. Scarlet how worried should we be about funding the government and the debt ceiling, carl . A earlier thist month and they kicked the can down the road for a couple of weeks and we forgot about it and we are watching the stock market rise. As we take that can closer to midterm elections, people are not going to be willing to shut down the government and face the consequences that will come in november. If we think of government funding, if you look at ira will tell you dont use traditional models but if we look at nominal gdp growth versus a 10 year yield, theres a pretty good correlation over the broad history of time. And if you look at the last five years or so you can see that 10 year yields are low relative to those economic fundamentals, and thats giving you a free pass to increase issuance. Me with jersey, help how we are distorted in these times. This is the price of apple paper three 2030, paying quarters of a percent per year in swiss francs. You have to pay a premium to own this. It was up at 110 announced anna 101. As one example of the distortions in your world. Ira sure. And when you look at other currencies you have to remember, the funding in this currency matters, for one thing. So it rates are lower than u. S. Rates, for example. So the question is, are you willing to buy swiss ranks and make that money . And if you do all the hedges you have to do to hedge of your currency risk you will realize that if you were to buy the swiss franc are only making a little bit less than you are to buy treasuries. So its not as distorted as you might think. Cam ira jersey and tom rick donna from bloomberg. Here is the legend of loomis dales area. Assuming our economy stays as strong as it seems to be, and assuming that inflation rate gradually climb and i suspect there is a slight lag in the then i wouldes expect the fed to keep going. The opening question then becomes, how far, how long . Does the 10year go to for . Does the 10year go to four . Thats a stretch. Bill gross from Janice Henderson joins us. We have seen price down, yield up. Let me cut to the chase, bill gross. Are we in a bond bear market . Bill i can we are. I can we have been there for a few months. I think there are a number of althoughor that, tom, i would suggest the bear market is probably a mild one with the 10year going to 3 . The lets put some of the puzzle. Moving higheris from 4 , which is average for the past five years, to about 5 . Inflation is moving slightly higher, as the fed noted today. And i think ultimately, you know the treasury, in terms of the budget deficit is per ups and important factor, as well. And many analysts have failed to mention it. The treasury is going to be issuing about 500 billion more, more, this year than they did last year. And thats because the deficit is moving up to close to 1 ,rillion and thats because of you know, basically the fed itself is reducing its Balance Sheet. And so i wonder who will buy, you know, the current level of bonds relative to what has happened in the past great because in the past Central Banks have bought in the future the private market is going to be forced to buy. Tom chairman greenspan is concerned about 1 trillion deficits. Do you change a you manage money because in 24 months bill gross is going to enjoy it when trillion dollar u. S. Deficit . Investor has to do that if you are a vigilante. And i would suggest the bond vigilantes are down the list in terms of control or power, relative to what they used to have. Central banks, basically, are in charge. But a winter lead our deficit, it entails a substantial supply, a new supply is i just suggested, of treasuries and if the fed is not buying, actually the fed is selling and reducing its Balance Sheet, then who will buy . And so it takes a higher Interest Rate to my way of thinking, supply and demand. It takes a higher Interest Rate for demand to meet supply going forward. Scarlet i wanted to jump in and point out that the s p 500 has now term has now turned negative, off by two tenths of 1 . Turneddaq is just negative as well so we could be looking at a Third Straight day of declines for the dow if this continues. We havent seen Something Like that since last year. Bill, i want your thoughts on what we have seen the last couple of days with regards to mark woods in regards to markets, and equity markets in particular. Dow hadhow it the its biggest twoday decline since before President Trump was elected. You take anything away from that a was this a longawaited consolidation . Bill welcome i think some of the latter, i suppose. Its a longawaited consolidation but i think what is driving the consolidation is the realization that yields will be moving higher on the 10year. Just several weeks ago they were at 2. 5 . 2. 75 . Y are at does that matter . A 4 ts say it will take tenyear treasury to affect the market. I dont think so. I think the economy significantly, offered percent 3 treasuryl a coming chilitocks prices, etc. I think its all due to the bond market. I think theres a good correlation now and of treasury yields move higher than perhaps stocks will continue to consolidate or move lower. Seen walleve also street banks, Credit Suisse to fixing, refocus assets after equities, especially after the runup we have seen in u. S. Stocks this year. Do see playing out the way they expect or are returns and bonds still though still too low . Bill i think thats the case. I think it is due to pensionfund manager would probably want to take some gains and put some of that back into bonds. But the return on bonds, just the same, is probably not attractive to Pension Managers but it helps them to basically solidify their duration or mess their duration. What does a 10yearold are of treasuries or holder of tenure treasuries expect for the next year . If it moves to 3 you are going to get 2. 75 on interest and 2. 7 5 in terms of price, so theres nothing there in terms of treasuries either. Tom cole and let me bring up this chart we showed earlier. Janusm gross of henderson is with us, along with ira jersey and michael burke. This is price, price down, bill is aware of this, its an unconstrained move down in the price of the tenure yield. Bill gross, this is all being correlated to other markets. How did you responded to the weak dollar policy of mr. Mnuchin, the president s adjustment to and ultimately strong dollar policy, and how does that fold in to what you do, unconstrained every day at Janus Henderson . Bill tom, i dont listen to much to President Trump are Steve Mnuchin in terms of what policy they want. I think they speak with forked tongue or with difference in our euros in order to please the market. I think what important in terms of the dollar, and we know the dollar has been down 10 basically over the past 12 months relative to other currencies, is the budget deficit. If we are moving to a 1 trillion budget deficit, that scares Foreign Investors in terms of holding dollars because know, thatat, you the fiscal situation is deteriorating. So i think i would pay more the success perhaps or lack of success of the Infrastructure Program advanced last night and the fact that, even without that we are headed towards when trillion dollars in terms of a deficit. And the weak dollar is probably what we should expect as opposed to a strong dollar. Tom if yields are up to a bracketed 3 yield, does bill gross just assume more responsibility for volatility for investors . Think so tom at least on the stock side. The vix got so low, data nine got so low, down to nine and now it is appreciably higher. Whennk during the time volatility hikes significantly higher, Central Banks are still in control and if things get out of control, the fed probably would increase Interest Rates by or fourcted three times. I think they are going up one or two times in 2018 and that should dampen volatility significantly. Thatet we will see how plays out. Bill gross, thank you for your time. We want to get final thoughts ira jersey from Bloomberg Intelligence. Lets start with Janet Yellens legacy. Most people rate are very highly when it comes to managing the economy in managing the transition back to normalization or however you want to define it. But there are criticisms about how janet yellen performed in the politics of a role. From an super accommodative policy and said we dont need a super accommodative policy. When she came in with us you is going to be dovish because she was which was president of the San Francisco bank, and she wasnt. But what you brought up things to Congress Like typical physical type of things like income inequality for example, she was criticized for that and i think that damage to reputation with the damage to reputation with some members of congress. Jerome how is coming in and me coming in any might have a Friendly Congress this year but maybe not after the elections next year. Tom d agree that theres a mystery in chairman powell . Even when he was just the governor he had sparse public comments. , veryis some degree regulatorybased. What we have heard from him on the economy seems very consistent with Janet Yellens view of the world, maybe a tad bit more hawkish than yellen has is aand we also know he little less a proponent of the policy of quantitative easing relative to yellen. In peacetime that you do just fine. If the economy rolls over in a bad way than that would the that would be a reason. Riccadonna and ira jersey, thank you. Coming up, a bloomberg exclusive on the ongoing negotiations of nafta and ways the future of the trade agreement will insulate the trade relationship the between the u. S. And canada. Thats coming up. This is bloomberg. It is it 00 p. M. In london. Im julia chatterley. Scarlet i am scarlet fu. Welcome to bloomberg markets. Julia we are live at bloomberg World Headquarters in new york in the next hour. Here are top stories were covering on bloomberg and around the world turn on trade, exclusive interviews. In just a few moments time. Tom perez weighs in on the state of the union and the future and the Democratic Party. Purchase in talks to the trust. We have all the details at this report. And one hour from the close of trade, lets go check on the markets with julie hyman. Julie hyman. Julie Janet Yellens last meeting, we did see a little bit bouncing around in the treasury market. There was nothing particularly and dramatically different in the commentary. Highest 2. 75 before coming back down to unchanged on the day. Nonetheless, that percent is still the highest since april of 2014. If you look at the dollar, you saw a little bouncing around in the wake of the decision. The dollar index also going unchanged. To unchanged at this point. Down 1 10 of 1 . He see the bouncing around that happened. Likewise in stocks but stocks havent reversed the initial movement. We saw the move lower and it kind of stayed there, especially the s p 500 and the nasdaq. Straight day of losses for the s p for the first time in eight weeks following on the heels of declines in the prior two sessions. Boeing. Ecause of boeing coming out with earnings at it is also one of the biggest index point contributors to what gains were remain in the s p 500. Boeing selling more thing 737. Thex point lies, one of biggest contributors is microsoft. One point today, closed a record , touched a record on the closing day. It comes out with earnings after weak today after yesterdays poor showing. If you take a look at the bloomberg, even if we have declines for the s p 500 and the nasdaq, we have a winning month for all three major averages. The dow on the s p are setting up for the best month since march 2016. And than dow and the s p on the tenmonth winning streak. We will see what happens as we get into february. Scarlet impressive. Thank you. Get you a check of bloomberg first word news with mark. Rumpton mark mark dozens of republican lawmakers to a policy retreat in west virginia. A garbage truck in rural Virginia Town today. The white house said one person was killed and local officials said others were injured. The fatality appeared to be someone in the truck. The train was headed to the resort in white sulfur springs, west virginia. Prosecutors decided not to retry new jersey democratic senator Robert Hernandez on corruption throughouter a drug this last week. Last november. Star frustrating political influences for gifts and campaign from a close friend. Directors of senators does senator from center for Disease Control have quit. Brandon fitzgerald brought shares in japan and tobacco after she was appointed. One of the cdcs stated goals is. O reduce tobacco use urging the United States to not work alone in any effort to make it between israel and the palestinians. Speaking in brussels today, the foreignpolicy chief warned that doing so would end inferior debt failure. Multilateral, and must involve all players that are essential. Without one or the other, it be mark ply not International Committee coordinating political efforts. Government ministers from israel is lows the Prime Minister at a u. S. Senior official continued the talks. Said itgement agency did not cut off food and Water Supplies to puerto rico despite to dos that it intended so. They tell the Associated Press the agency had been evaluating whether enough stores and supermarkets had reopened by january 31 to justify ending distribution of supplies. It will distribute aid to needy towns for the foreseeable future. Global news 24 hours a day powered by more than 2700 journalists and analysts in more than 120 countries. I am mark crumpton. This is bloomberg. Scarlet thank you. President trump added two new details on his vision of the state of the union address. He said once again he will work to fix bad trade deals. Discuss o Michael Mckee joins for an exclusive interview. Mike we are joined by crystal, the Canadian Foreign minister and as such, responsible for negotiating trade agreements for canada. Youll meet with secretary of state friday and wrapped up the mexican economy secretary on nafta. When you finished, you said you dont want to be overly optimistic, but you are hopeful about nafta and i wonder why given that the given the u. S. Position and the fact that you cannot even agree on what members to use in terms of the bilateral trade. Can i make a tiny correction so i do not get in trouble with cabinet colleagues . I am foreign minister and am responsible for the u. S. Economic relationship but we have an excellent trade minister who is responsible for trade. Sorry, i apologize. Dont defend his prerogative. But tommy help why you are optimistic given how far apart the countries are . Epic a set was cautiously optimistic. Similar tois quite what the secretary and ambassador said monday. I think we all felt we made some real tangible process. The most difficult issues to. Reas of the u. S. Proposal we managed to start the real conversation. Hat is progress significant differences remain. I believe it is absolutely possible. A win win win outcome can be achieved. At the same time, hope for the best and prepare for the worst. We are doing both both. Let me be clear, they intentionally did not put forward the proposal. We put forward creative new ideas on ways to update and modernize the rules of origin. For people not in the auto sector, these are fiendishly complex. Rules of origin we are working with right now are nearly a quartercentury old. Cards have changed a lot since then. Modernization and red tape cutting is essential. We only just presented these ideas now and we hope counterparties will take a little time to look at them and maybe find ways to build on them and maybe we can work collaboratively together also with the stakeholders and Car Companies and suppliers, with unions, to maybe find a way forward. Michael one of the central messages at the News Conference you held was negotiations are moving too slowly. Do agree and if so, howd do you speed them up . I think all of us would like negotiations to be finished as soon as possible. The economic relationships inside nafta are essential to all of our economies. Something americans do not always appreciate is canada is your single largest customer. The u. S. Sells more to canada than it does to china, japan, and the u. K. Combined. Is an important relationship and we would like to resolve this as quickly as we can and we are all working extremely hard. Having said that, it is a complicated deal with complicated elements. Of course, there are some areas where there is a big gap in terms of vision. Candidates working hard to find a way to bridge that gap, we will continue to do that. Their concern it is so complicated that you run up to the mexican elections july 1 and the u. S. Midterms on november 3. When i talked, after the talks, he said we are not putting a deadline on it. We could talk through those. Does he agree you could talk through those elections and this could go to late 2018 and 2019 . Canada has said we are not putting false artificial deadlines on the talks. Our objective is to work as hard as possible to we are working with goodwill in all possible states. But i agree the artificial deadlines are not helpful. Theres a lot of talk about you to getting not getting along. The ambassador said at the beginning of his remarks in montreal that one of the things that happens in these negotiations, he said the three of us will be friends and that is true. He is a tough negotiator and a lot of fun. Is au suggested the u. S. Different kind of negotiator than any you had experienced within canada. What did you mean . What i was speaking about was not the manner of negotiating. It was proposal. It is the case for some proposals we have had in this are what we describe as unconventional. They are quite different from the ones we have seen in really any that really any country has seen in trade negotiations up until now. That is why we are looking for winwin solutions. We are a little oldfashioned that way. We believe in free trade. Really believe trade benefits all parties. That is after all why we do it. Our objective in these negotiations will be to work hard, be based on facts, talk to our businesses, and find winwin outcomes were everyone can achieve their objectives. At the end of the day, we can have more jobs and more Economic Growth across america. I know you will have to get out of here. One is softwood lumber. He filed a complaint against u. S. Trading practices and it suggests you might you willing to drop if you can reach an agreement. Would you do that . The second question, are you going to go back, as my friend put it, to the boeing store, you put that on hold because of u. S. Proposed sanctions . That is a lot of questions and i will try to answer in a small space. Day one,ave said from and this conversation predates the u. S. Election, it predates the administration. That is very important for people to understand. It is a completely different thing. Familiar, even perennial, if i may make a pun, trade between canada and the United States. We are all familiar with it p are we have believed from the start a negotiated deal was the best outcome. We also said if we couldnt reach a negotiated settlement, and tariffs and duties were weosed on our lumber, which believed to be unfair, then we have all of the legal tolls in our proposal at our disposal. Having said all that, the way to to get back and do a lender to the death lumber deal. Im happy to talk about that at any time. We were pleased by the ruling of the itc. We think that is fair and had all the facts available and we are taking a look now at the results of that ruling and the reaction of different parties. It is possible you could shop with bullock with boeing . Were looking at how everyone response to that. Thank you for joining us today. And wetake my apologies will talk about mexico and canada and the u. S. With you. No problem at all. I only said it because i might get in trouble with him when i come back. We would not like that. All right. Thank you. Scarlet lets get you a quick data check. They had already been flirting around unchanged levels. The dow is extending its decline to a third day. It has had its worst twoday decline since before President Trump was elected. When it comes to bonds, the 10 year bond is falling for a fourth day here at the decline in six days, about 2. 7 monday. The next stock is currently bouncing around now. Dollar resuming its weakness. The euro back to 125. Oil, oil prices up since the start of the first quarter. Julia latest tickets suggest Republican National committee raised twice as much as democratic counterpart last year. The fundraising power of the presidency but the big question is how can the dnc catch up . We are joined by the perfect person to answer that question, tom perez, chair of the Democratic National committee. The big question is, how to you a deficit relative to republicans in the last 12 months to the kind of structure that propels the president to thepresidency here . Notion that republicans have outraised democrats is not new. In 2005, the Republican Committee outraised toone. No one took over in 2006. This year, our best year since 2013. Republicans have more wealthy donors. We are talking about ordinary americans. We raised more money than 2014. Quite simply because they got a massive tax cut that benefits and as Chris Collins said from new york state, we got this bill because our donors need help. We are on the right side of the issues. That is why i feel so confident running in 2018. Things are benefiting all americans here whether it is all jobs, so there are many reasons for all Americans Last night is smiling get the cameras turned around to democrats there. They had their arms folded and were frowning. Is that justified it justified . The reason are the reasons to be optimistic . When you play loose with the facts and are constantly divisive like this president , it is hard to be warm and funny warm and funny warm and fuzzy. There were reasons for all americans to be happy there. Why not show appreciation for that . We have to understand the context. Slowed in the obama administration. If i run the eight minute mile and you start running and im in a mile, that is great that you ran that, but you prefer to run at eight minute mile. People of thatch are struggling with access to health care. What did the president do . He made it harder through the tax bill. For everyone else, for people they are not seeing the benefits this benefit is touting. Those benefits go disproportionately to people at the top. What the figures suggest the yesterday, and it was perhaps a rounding error, but buying large things are improving. He is arguing the financial difference here . O you agree with that fact this is the most divisive president in american history. His immigration proposal will hurt the economy, is meanspirited, and is contrary to our basic American Values of inclusion. It is bad for the economy. Democrats looked meanspirited when the cameras were on them. They did not look happy about the gains that were happening. I get your point about who republicans tend to be in terms of financial rewards. They dont have a leader to unite behind p or they dont know who they are donating the money to . You need meanspirited is, every time you talk about a dreamer, you refer to them as 13 in the same sentence. Dreamers are serving the nation with with distinction now and are out there and on the frontlines after hurricanes and other natural disasters. Every time you see the use of ms 13 in the same sentence, that is this shouldle be about more than just those, surely. If you look at the course of american history, every time we have been added inflection point, whether it was a republican president or a democratic president like fdr, we got to the next level, when president s brought people together. They united us. They understood that our common values were what made america great. What we have is a president who divides us. Talk about democrats and not the president. What does the Democratic Party stand for at this minute question mark one might one line. For prosperity for everyone not just the few at the top. We believe our economy does when we give dreamers respect and give them that is a paper. We will come back to this, i know we will. Thank you so much, tom perez speaking. Scarlet coming up, Asset Management set to the latest on this bloomberg scoop from a reporter who broke the story. This is bloomberg. Scarlet it is time now for our deals report where these euro in for insight and analysis on what is going on. Ed hammond joins us now with todays big deals. One of the headlines is brokerdeals Asset Management, already involved in buying the remainder of the mall operator. Questionnaire are always involved in something. Is the latest mixeduse, worth about 6 million. Ocean, 260e billion management. Are inrstand we conversations are we reported that earlier today. What is unclear it is not usually high above so whether or not remains to be seen. This has been on the cards for a while. , they have company been going through some kind of strategic regime after two months. Because they have this weird portfolio, is it is not for anyone to swallow. It really does make sense. Carl icon has been pushing to consider some things. Classy is been around as long as xerox has been around. Seems they got together and said we need to get rid of chief executives and we need to do something about the company. The company merged with fuji. On. Ill be staying jeff jacobson, he will stay on and be chief executive. I want to know whether he will take relief out and then he would not have any of these. It is expanding but look, at least in the shortterm, you will get it off its back. The next chapter might just be blockchain. Thank you for that. , we will bring you headlines and analysis, turning negative in the afternoon. Dont move a muscle. From new york, this is bloomberg. Mark japan is praising President Trump first pledged but maximum plant pressure on north korea. The japanese cabinet secretary secretarypleased the said a powerful message to kim jongun. The president said north koreas reckless pursuit of Nuclear Missiles could very soon threaten our homeland. The American Civil Liberties union is criticizing president mps executive order the National Security project said enemies combat against the United States have been successfully tried in u. S. Federal court system multiple times. The reality is our federal criminal Justice System has far more appropriately dealt with astiple cases of terrorism opposed to indefinite detention without charge or trial or unconstitutional military proceedings that are still going