Be the next one, this spread. Wti versus brent. U. S. Oil versus european oil getting more negative as we go. That means brent is seeing a nice rally. David President Trump addressed the nation to lay out plans for afghanistan saying the United States will remain committed, but not engage in nationbuilding. President Trump America will continue its support for the Afghan Government and the Afghan Military as they confront the taliban. We are a partner, a friend, but we will not dictate to the Afghan People how to live or how to govern their own complex society. We are not nationbuilding again. David joining us now is bloomberg chief washington correspondent kevin cirilli. Give us a sense of what the president was trying to accomplish last night and did he get that done . Kevin the president facing intense scrutiny following his response to charlottesville. He no made no direct mention to it, but essentially said he hoped to unify the country and then he pivoted to Foreign Policy and said he would not be tied to specifics in turns up National Foreign pollack in terms of national Foreign Policy. He is going to call for 4000 additional troops to the already 8600 boots on the ground in afghanistan. This is an about turn up for the president. On the campaign trail he said he wanted to fall out. As a result of confrontation with military officials, the president said he had a change of mind going against what he said were his initial instincts. David give us a sense of why the president chose afghanistan. There are problems with north korea, syria, Islamic State, theres a lot of possible military action throughout the world, why was it afghanistan he picked . Kevin this is something he said on the campaign trail he would make an immediate decision on. The president was at camp david with the Vice President and other military officials over the weekend. He made direct mention of pakistan, saying they could no ger be able or excepted epted to harbor terrorism or other National Security risks. Last night he garnered praise from several folks that have been critical of him in the past week, including House Speaker orion who said in a cnn town , and hepaul ryan criticized him on his charlottesville response. Lindsey graham has been very critical of President Trump and he said he was relieved by the new foreignpolicy decision. Id admiral james cerritos james street leaders James Stravridis is the author of the bestselling book sea power the history of the worlds oceans. Lets start with the experience in your new book. You served around the world in the United States navy and strategic positions in the pentagon. As you listened to what the president had to say, does this fighting terrorism and the taliban on the one hand and building a nation does that distinction hold water . Idis thetravr president had two bad options on the table. One was to completely withdraw, bad move. Number two was a surge where you really push 100,000 troops into afghanistan, no one has to stomach for that. There is enormous fatigue, so you end up with this minimalist strategy. Is there nationbuilding involved . Not much. We are going to increase the number of troops in order to bolster the afghans, who are the ones doing the fighting. When i commanded that operation as the native supreme, i had 150,000 troops, collectively we are down to about 8000 and change in the country now. To add 4000, not that big a leap, but it keeps us in the game. David explain to our audience why exactly this is vital to our National Interest and more specifically for bloomberg, how this affects business here and our Financial Markets and our economy. Admiral stavridis i dont think this is going to have a big effect on Financial Markets. Ofs is a very small lift troops up to 14,000 troops perhaps. When you look at the size of the u. S. Mark army, almost one million, we can maintain this forever if we need to. Not big impact, not trillions of dollars as we were spending years ago. The key here is to get pakistan collegially in the border area and the Vital National interest is simply not allowing afghanistan to fall space,nto an ungoverned particularly as we see the rise of the Islamic State alongside the taliban. That is a lethal mix with a relatively low cost solution. I think we can keep a cap on that. I think it was a good speech and foreignpolicy decision. More broad forit a moment, as the president has troops aroundnavy the world, he called for more defense spending. Im am going to put a chart up that i will describe from bloomberg that shows the relationship over time of defense spending to have a stock market does and it appears, in general with increased defense spending, the stock market goes up. Do you anticipate the need for increased defense spending right now . Admiral stavridis i do and here we move beyond afghanistan and look at what occurred in the last five years and that is kind of the return of great power politics. We are seeing russia at play all around the world. Ukraine, black see, baltic sea sea, we see, baltic the rise of kim jongun, tension between india and pakistan. Of these will be absolute crashers to the International Economy if the United States does not address them in a global sense. It doesnt mean we want or need to be the worlds policeman, but do we need more defense spending . Yes. If we do that, we can control global conflicts and business will prosper. Alix is the President Trump that deals with domestic issues different than the President Trump that deals with International Issues . Admiral stavridis markedly and i contribute that entirely to the team around him on Foreign Policy. In Foreign Policy, he has got the a team. Jim mattis, r kelly, h. R. John kelly, h. R. Mcmaster, its a confident, grounded, global out looking team. Idle big he has the same level of advice internally and on domestic. I think we have to watch the departure of steve bannon to see if that domestic policy attains the kind of professional outcome we saw in this debeat about afghanistan debate about afghanistan. Alix in some ways, it gave china the ability to offer north korea something if President Trump was able to back down. D you see that aggressive rhetoric from do you see that aggressive rhetoric from President Trump helping in an International Issue . Admiral stavridis i think the best set of rhetoric i saw was the defense secretary jim mattis who was less George Patton fire and fury and more Cool Hand Luke , here is what is going to happen to you if you dont get this under control. I think that kind of approach is better. The rhetoric you can make the argument it is a catalyst, but i think longerterm you need a steadiness of hand. General mattis did a terrific job in that regard. I think the real key is china and convincing them that it is in their interest to keep kim jongun like a dog on a leash and kind of people that leash back a little bit before the dog bites somebody in has to be put down. You gowe cannot let today without talking about what is going with the u. S. Fleet. Power. Ok is about sea you have sailed around the world and commanded ships. We have had the second collision at sea in two months time. What is going on there . I understand the chief of Naval Operations ordered the fleet to stand down until they figure out why they are crashing boats. Admiral stavridis we are going to start with a one day 24 hour , abal Navy Operational pause stand down, and then we will try to do a deep dive in the weeks afterwards to understand the systemic causes behind this. Ecause it is unprecedented you have to go back to the 1960s to see sailors dying 10 missing see the from the mccain, that is 17 16 days. G in six we absolutely have to address this. Time for the navy to do some soulsearching. It is a tough day for the navy. David thank you, that is admiral james stavridis. More on President Trumps address to the nation with eric fanning. Live from new york and washington, this is bloomberg. Jonathan we are going back to the 1930s according to ray dalio. Play moreill probably affecting the markets in a manner similar to 1937. He said he is reducing risk on concerns of input government impaired government efficiency. Isning us to discuss this pop michael bob might bob michele. Talkto see you put it lets about politics and how you are thinking at the moment and whether you think it it is as combative as ray dalio thinks it is and what it means for markets. Extreme ofhave as you he does. Coming into this year, there was a lot of expectation we were going to see some sort of tax reform, maybe Regulatory Reform and that would be an impulse to the u. S. And the global economy. All of that seems to have faded free to the market has shaken it all off. We are in the midst of a bull market and bond yields are at very low levels. Gdp environment looks very solid to us. Corporate earnings look great across the board and Central Banks, we hear more on friday, but it feels like they are pretty positive about what is going on. Jonathan all those things feel ok, but the politics is not ok. The consents is building about building about government paralysis and they are putting more into gold. What are your thoughts on that . Bod i think it is a bit bob i think it is a bit extreme to go to a safe haven category right now. Gold simply may be benefiting from being the antidollar. As the dollar has come off its peak at the start of the year, the things that are antidollar, largely commodities, have done very well. I attribute more the rally of gold to the dollar coming off. You cant really see people say people are going to a safe haven when you are setting equity highs and there is no prospect of recession anywhere in the world. Alix we are on track for a record. At the same time, you teslas bonds trading at like . 97 on the dollar. I know that is junk, but how do you square those two as a Risk Appetite . Bob there are a lot of things going on in the bond market and there is no doubt we would all like to buy credit at a higher yield and a wider credit spread than where it is trading, but you are not going to be able to and there are two things driving the credit market. The faults are very low. It is difficult to say you are not getting compensated for the risk and particularly the highyield market. The second thing is there is still qe in the world. I know we are talking about when the fed runs down its Balance Sheet, but they are printing money in japan and europe and that money is being exported to all of the bond markets globally. Any time anything backs up, there is that next flow of money that comes in. Jonathan the default rate is hardly forward looking at the moment. You have said time and time again over the last year that investors are too greedy. They are complaining and waiting for yields to back up and its not going to happen. Why do you keep saying that . Bob i keep saying a lot of things jonathan that is the one you keep hitting that investors are too greedy and not going to be fruitful. Pastjust look at this month. Lets see you took profits in whatever Asset Classes you were in. You have those profits, what do you do today . There is nothing wrong. We can talk about some of the political skirmishing going on, that is business as usual. There is no recession, corporate earnings look great. Commodities are doing well. Europe, china japan are all doing great. If you raise money, now you have a bigger problem because Central Banks just printed about another 150 billion lent over the past month and now a new universe of money has been created with the prophets you took. I would not chase gold, you put it act in the market. Alix explain tesla because it was oversubscribed and now at . 97 on the dollar. What does that tell you about investors Risk Appetite . Bob i think it shows everyone is getting finicky. Its the summer and there are other flagship deals out there that were well oversubscribed and holding in. I dont read too much into it to be specific. David this is what bothers me about what you just said. I was in a Building Business building up a lot of cash in the Balance Sheet and you burn a hole in your pocket. You start making decisions because you have to deploy the cash and that leads to bad asset decisions. That is what worries me about what you are saying. Bob theres a lot of me me as well. Worry the primary thing i am worried about is this Time Next Year we go from Balance Sheet expansion to Balance Sheet contraction globally with Central Banks. We are going to have to start dealing with that sooner than later. I think what companies are doing with their cash pile is also pretty interesting. Most of them are just reinvesting into the bond markets so they are raising capital in the markets, they are cost,g at it as low semipermanent capital and they are just warehousing it. There have been share buybacks by vidend increases and buybacks of each other, but it difficult to say it has gone to an extreme. Will beb michele sticking with us. Coming up later, Katie Stockton will be joining us to see where we go in stocks. This is bloomberg. Alix the s p has not had a daily close below the 200 Day Moving Average in 2017. This really shows that picture. The blue line is the 200Day Moving Average and the other line is the s p. According to steve that meyer suttmeier, stephen it could close out the year higher. He joins us now and with us is bob michele. Walk us through the potential if we do not retest or break below the 200 day . Steve i think that would be significant. The s p 500 has surprisingly been above the 200day closing average about 33 of the time going back to 1928. A lot of people find that surprising. What is more surprising is if you do not close below that moving average, it tends to be quite bullish for equities. Frankly, you could see the s p 2650 to 2700 into the end of the year and maybe even hit 2800 plus. That is what the data suggests it is this an outlier event . About 200Day Moving Averages, how often do you not close below it its about 13 times, about 14 of the time. We are already here right here right now and we have not closed below this moving average and that is where the numbers are from. I do think that if you are able in this market you are a bull in this market and he dont go below that 200Day Moving Average, the secular bull we have been in remains firmly in place and accelerates. Jonathan you are sitting here nodding your head. Alix really . Bob i think this is all about the technical. When you look at where pes and corporate earnings are, you have to throw fundamentals away. Jonathan weight wait, wait, wait. Steve i like this guy. Jonathan the guy running bonds at j. P. Morgan just throw up just said throw out the fundamentals. Bob people have rationalized that negative rates make sense. Equities gone up another 15 , why not, it is about technicals. That is what is driving and we hear that from clients all the time. They have pulls of cash and are struggling looking at where to get invested. This may be all you get. What do you do now if you raise cash . Jonathan beyond laying out the 200Day Moving Average, how strong are the technicals . Steve you have some interior rating brent studies. One of them is the percentage of stocks just think about but talk about one of these charts and above 200days moving averages. If that doesnt go below the brexit low on that chart, you will have 50 of more of myc movingabove the 200day averages. If you hold that support that goes back to the middle 2016 on that indicator, chances are you will not test the 200Day Moving Average on the s p and we will be higher in the year end than most people think we will be. David the stocks are hitting 52week highs and lows is a little more concerning. That shows in july the red line lows twoweek 52week and 52week highs on the blue line. Steve the market has become bifurcated. And if risk factor market follows through, we could follow that second scenario where you close below the 200 Day Moving Average and that is not all that bearish. Maybe the s p tests the 23 hundred handle, but it could potentially see up to that 2500 handle, even if you test the moving average. Jonathan appreciate your time. Bob says forget about the fundamentals. You are watching bloomberg tv. Track your pack. Set a curfew, or two. Make dinnertime device free. [ music stops ] [ music plays again ] a smarter way to wifi is awesome. Introducing xfinity xfi. Amazing speed, coverage and control. Change the way you wifi. Xfinity. The future of awesome. Jonathan from new york, you are. Atching bloomberg daybreak europe rallying, up by about 7 10 on the ftse. In the fx market, some Euro Weakness, german Investor Confidence capturing concerns about the euro strength. We are off by about 1 . You are seeing Dollar Strength as we pull back to 128 1. 2823. From mario draghi on friday and janet yellen as well. Lets get you some headlines outside the business world. Taylor in singapore, the remains of some u. S. Sailors have been found the board that damaged u. S. Warship. Divers discovered the remains of the flooding compartments of the uss john mccain. Malaysian authorities have found a unidentified body. Sailors for missing after after the mccain collided with an oil tanker. Aesident trump has offered new strategy for the longest war in u. S. History. An openended commitment to keep u. S. Troops in afghanistan. He says there is a primary goal. We are not nationbuilding again. We are killing terrorists. Taylor american soldiers have been in afghanistan for almost 16 years. The president says the consequences of a rapid exit would be acceptable would be acceptable. Would be unacceptable. Philadelphia, a commuter train slammed into another train parked at a station. 42 people were injured. The collision happened after midnight. Global news 24 hours a day powered by more than 2700 journalists and analysts. This is bloomberg. Days of the first 100 macrons presidency have passed and book the country are waiting for him to unveil his plans for labor reform. The french equity market has slowly declined following months and lobbyunions groups will finally be of the preview legislation this week, but some are already warning of protests. Joining us now from paris is bloombergs paris bureau chief. Good to have you with us. Lets take a look at what he has or has not achieved in the first 100 days. Tell us about the policy initiatives he really has to drive forward. 100 days is not enough when you speak about french politics. In such can be achieved a short time in france, especially if you are a newcomer to french politics and you pledge to overhaul the entire labor law system. It will involve sacrifices, but because its budget cuts, and labor laws,the it might be the end of the 35 hour week and the end of the unions importance. Jonathan what are the unions going to say about this and what can they ultimately do . We saw the markets getting very excited about what could happen in france. Is the reality of the situation starting to hit the ground in france . It could be difficult to achieve. This is the last chance and macron has knows very well he and they could find themselves with another top. Lection unions have to fear a lot and what they are planning is also a lot. Protests as soon as the 12th of september. The government has been trying to avoid that and talking a lot with the union representatives, but some have already warned. They wont go down quietly. We are bracing for street protests in september. Alix 35 hour work week . What is that like seven hours a day . This is euro gdp versus french gdp and we know that french gdp has really lagged. What is macrons best chance of closing that gap before he has to run for reelection . That is exactly it. But if they labor law reform. Alix there is nothing else aside from labor law that will help move that needle . You have to make it more flexible. A lot of companies cannot hire because they think they will be able to get jobs afterwards meaning they are not doing anything. Investment is creeping in, it is back up in france, but they really want to see flexibility in the labor markets back. Macron saw the biggest weakness of the french economy. Waiting to, we are present this labor law reform deal as soon as this week. Less protection for french workers, but it could be for the greater good. It means that the french might have to bite the bullet and stand ready for a blockade street protest and those sorts of things we are used to, unfortunately. Jonathan great to have you with us on the program. We appreciate your time. The harsh reality of business in france. David et al. Think we have seen labor come out to the streets in paris. Jonathan i have never seen that. David very unique. Jonathan i think we look forward to people voting for the greater good. Alix Health Insurance for life. Likeu are in congress for a day, dont you get Health Insurance forever . Jonathan still with us, j. P. Morgan investment. Can we talk about the fundamentals in europe . What do you think is happening in france . Bob you do need to see the structural reform come through and i think that is what the market is challenging quite a bit. There is an opportunity out there. Hits,to when the summer there was a lot of discussion about the multinational banks. Unless france make some progress on labor reform, it is hard to say they are going to benefit from that, and other countries might. At the moment, the optimism is certainly not in the price of the equity market. Yep to ms. And high just after the second round in the french election. The stoxx 600 peak back in may. There is a message in the price action. People around this table saying by europe, but it is not working out. Bob it is not working out by a large margin. There is a concern that there are issues across europe, whether you are looking at and to somealy extent, people are looking at what has happened in the u. S. , and the promise of a lot of regulatory and structural reform that has not come to pass and people are superimposing that across europe and saying it may be the best of intentions, but can you actually push it through and if you cant, you are stuck where you are. David how does that read against mario draghi going out to jackson hole and giving remarks . That is the interesting question, because in theory, he should be going out to make a statement. The last time he went, he said he we will do whatever it takes he said we will do whatever it takes. There is no need for emergency conditions, so what they are going to do is begin the qe taper and that is how they are going to lay that out. It does not sound like he is going to do that. He has made it clear he does not want to front run his own committee. I think he is going to be relatively passive and really turn the stage over to yellen. The good news is, there is nothing hawkish that is going to come from draghi and also yellen , but the bad news is you are not going to get any clary clarity on Monetary Policy. Jonathan you should probably head your thats going into any mario draghi speech. Last jackson hole, he boxed in his Committee Without really referring to them and he did it in a very elegant way. He talked about using all tools available to us to address the european economy. I would love for him to just put it out on the table that we are going to remove these emergency policies. There is no emergency. This is what the rollback of qe will look like and how we see things Going Forward and try to do it as devilishly as possible. Not to ask of overly simplistic question, but eurodollar had a run. What is the short versus longerterm trade . Bob . I still think you go with euro bob i still think you go with euro. Alix how aggressive are you . Bob corporate europe looks pretty good. Even if they begin qe, you still have a highly accommodative central bank. A big fiscal see impulse coming from the u. S. The eurodollar, you still have to go euro. It is not a surprise that it is retrenching, here. Optimism has backed off a bit because of the strength in euro. Most trap is the crowded fx trade short the dollar. At some point, that has to turn. It just does not feel like it is going to turn out turn now. It feels like there is a consensus that is building. You are drawing more people in. Everyone is taking look taking a look at the emerging markets. There is still a long way those can go. You look at what is going on in china. They are managing to support market,the commodities particularly the metals industry. All of those things are somewhat indicative of a dollar that goes down a bit further from here. Alix a perfect segue into our next segment. Michele is bob sticking with us from j. P. Morgan. Next guest, dane davis. It is all industrialized metals we are talking about. This is bloomberg. Taylor this is Bloomberg Taber daybreak. 11 30. Up at this is bloomberg. Now it is your Bloomberg Business flash. Chinas Great Wall Motors says it is interested in buying fiat chryslers jeep unit. Thet wall says it is making clarification in response to move reports about a possible deal. Goldman sachs ceo is new to twitter. He has only sent out about 13 twitter tweets but he has raised eyebrows. It is unclear what he is referring to, but he has used twitter to comment on politics and the Trump Administration. Jonathan i you dont want to assume what he is referring to, but i think most people kind of get what he is referring to. Commodities, to iron ore prices are up 50 in less than 50 days. There could be more room to go. Although some prices are a little bit higher than you think it would be, given the marginal cost of the higher cost producer, we dont see them falling back to anything like some of the laws we have seen, recently. Alix it is not just iron ore participating in this rally. Take a look at what has happened to industrialized commodities. They have seen a solid rally. Joining us as barclays commodities analyst dane davis as well as bob michele from jpmorgan. If you see equities rollover and ,isk coming off the Market Industrial metals are the first to go. Dane weve got two things going on. We know that the chinese macroeconomy has come back quite strongly beginning in the last half of 2016 and against some expectations of the slowdown, it has remained strong. When the chinese economy is booming, metals will take the hit. When you look on the supply side for key metals such as zinc, there have been challenges. Tallying up all of the disruptions we have seen this year for copper, and you are looking at about 600,000 tons. It is quite material. You have some supply dynamics and you have really supportive demand conditions. Alix on your note about copper, you did upgrade prices for the quarter, but you are still cautious on the copper price. What gives you caution on the copper . Seems to buydy this thesis that copper is going to three 3. 50. The reason why we are cautious as we look at the chinese macroeconomy and ask ourselves is what is happening now sustainable . We dont think it is. In a world where china is curtailing industrial growth and they are trying to shift over to a retail driven economy, consumer driven, this is not the same world we saw earlier this decade. As the chinese demand picture starts to slow, we will start to see copper and other metals selloff. We are not bearish, we are cautious. Alix take a look, this terminal is dealing with steel markets in china. They are really high. That is the bottom panel. Theyre going to keep buying iron ore. They will keep buying anything they can if they want to turn out those margins. What changes the margin picture for them . Dane i think margins are high. They have remained high and they will be high for some time. Steel can switch on a dime. We saw that massive selloff in the 50 a ton range. Steel inventories within china have been depleted. They are looking to restock and rebuild. Once they reach a point where they have steel inventories, i think that pushes downward pressure on prices. David a lot of this has been determined by construction real estate in china. In the mediumterm, is there a chance that copper will be handled differently because of its unique relationship to electricity . Demand for copper might shoot up, mightnt it . Dane that is true, but we must separate rhetoric from reality. When they talk about numbers and drill into details, the rhetoric does not impact us on a quarterly basis. , so far,look at China Investment in the grid has been turning off. You look at the budget for chinas alix grid, that budget is flat. We are not seeing new growth. Chinas electrical grid, that budget is flat. We are not seeing new growth. I think it is still all about china. The fact that the dollar has come off a bit provides a bit of a tailwind and stable environment for camaraderie for Commodity Prices to go up. China has tried to periodically pullback and return to an if it structure spend and until someone else, whether you see some kind of fiscal impulse come out of the u. S. Or europe until somebody else steps up and becomes the Global Investor and consumer, i think they are going to stick with it. David name alix dane davis of barclays, thanks for coming. Bob michele from jpmorgan is going to stay with us. Interact with us directly. Go to tv on the terminal. This is bloomberg. David this is bloomberg. Activists,enges from the eight people of is looking to sell some of its onshore oil and gas companies. Hp ceo Andrew Mackenzie explained the strategy that has been in the works for years. We have been working towards this, since two years ago. We made it clear to our investors that when we looked around the world, we saw very limited opportunities to expand our business in oil. Infelt that the margins shale and gas were not going to be attractive to us, relative to the other businesses we can invest in bhp. We started pivoting back towards conventional oil and gas and time,eant at the same selling the acreage in the way i described and cutting the number of wells, we significantly increased i have been able to announce some real success. Alix that was Andrew Mackenzie basically saying holsinger didnt do it, he was already doing it. Maybe these guys accelerate the process but they certainly dont want to give the activists any credit. Michele with jpmorgan is still with us. 93,000 acres is in the permian. Who is going to buy and that what price . And what price are they going to pay . Bob when i listen to him, you see something of an american ceo coming out, which is get down on businesses where there are not high margins and focus on what you are good at. I am as anxious as you to see who is going to step up and buy them because there is a big supply problem in the shale industry. Alix can we learn something . If we dont see the record high prices, can we infer that the easy money is going to be bled out of the permian . Bob i dont think that is too far of a leap. I bet that is kind of what i am expecting. Jonathan were learning that the freewheeling spending of the hb ceo, of the hps ceo, these guys are cleaning it up s ceo, these guys are cleaning it up. Bob it feels like there was over investment. Classic overproduction, oversupply and not enough demand and they are left holding the bill. I think they have no choice but to continue to tidy things up, decide on where they want to focus and then selloff the peripheral assets. Michele from jpmorgan Asset Management, we appreciate your time. Good to see you. Coming up, john bellows will be joining us and eric fanning, a former u. S. Army secretary. Futures at the moment, pretty stable and positive. You are watching bloomberg. Got you outnumbered. The dinosaurs extinction. Dont listen to them. Not appropriate. Now im mashing these potatoes with my stick of butter. Why dont you sit over here. Find your awesome with the Xfinity Stream app. Included with xfinity tv. More to stream to every screen. Jonathan another Campaign Promise. The president announces an openended commitment to afghanistan. Concerns continue to build about government paralysis. Dalia says he is tactically says he risk dalio is tactically reducing risk. And new york city worldwide, good morning, this is bloomberg daybreak alongside david westin and alix steel. Futures are positive by about 2 10 of 1 . In the fx market, a story of Dollar Strength and Euro Weakness. We pullback by 4 10 of 1 . Germany Investor Confidence slides for a Third Straight month. In the bond market, treasuries are off. I am watching two things. The first is the italian bond market, moving by a basis points. There was not a lot of supply coming on. Also i am taking a look at the the beauty i brent spread. Wti brent spread. We really want to see how that story pays out plays out. 1400 . An who is courting alix bank of america. Jonathan President Trump address the nation last night, announcing his plans reckons and, saying the u. S. Would not engage in nationbuilding. We spoke with the former nato supreme allied commander. I dont think this is going to have a big effect on Financial Markets. This is a very small list of troops, up to 14 up to 14,000 troops. When you look at the size of the u. S. Army, we can maintain this, forever if we need to. Not big impact, not chileans of dollars. Not trillions of dollars. Jonathan joining us now, john bellows. Peter cohn, i want to begin with you. I want to begin with why the president of the United States is finding it so difficult to deliver Campaign Promises in the white house. He said it last night when he said decisions become a lot harder when you sit down in the oval office and thing said in the heat of the campaign often fall off of the map. We saw this with nafta. That goes back to the obama and clinton campaigns in 2008 when they promised to get out of nafta. This is a pattern that is not unique to President Trump. This is a case where he listened to his generals and top advisers and mistreated that he does have the capacity to listen and the speech came off as polished and president ial and that is something he needed to accomplish. Jonathan we spent a lot of time talking about this tension between the premises on the campaign trail and between the establishment. If you can resolve things like this. That a Campaign Promise has wilted but it is ultimately two sides reconciling their differences, can they do that elsewhere . Peter we think so. The issue is coming up this fall or two important not to solve. The debt ceiling, funding the government beyond september. These are issues that are must do. Think they will be a will to punt their differences down the road a little bit. Adding troops to afghanistan will Pressure Congress to come up with additional funding for the troops. That will grease the wheels for a budget deal later, this year. That is something that is on its own track being driven by capitol hill. Not as much in this administration. The fact that the turmoil appeals to appears to be settling down is something that can only help the effort. We will see what happens with the president s comments tonight in phoenix and elsewhere as he takes to twitter on this and other issues. We will see if he can maintain the appearance of being president ial. David john, a lot of his Campaign Promises are having a tough time being informed enforced. Does it matter in the markets at this point . Does it matter if we get tax reform . John i think it does. The Republican Party is a Coalition Party. There are a lot of different factions and views and what we have seen with initiatives is it is hard to govern with the Coalition Party and i think trump has experience that. I think it is important to note that republicans are generally unified on the value of tax reform. That is the one issue that is in their dna. It is the one issue that they really rally behind. Cuthave seen Ronald Reagan taxes, george w. Bush, it is what republicans want to do in washington and that will be unifying and important. I think people are too quick to draw conclusions from what happened in health care and then draw implications. There was a difference between a coalition that struggles to find a voice on health care that probably will on taxes. Risk w much do you how much risk do you take on . Ray dalio is on the pessimistic side. He said we are likely to see fighting to the death more likely than reconciliation. That does not fail to me a positive risk on attitude. John with respect for ray dalio who is a great investor, on this subject, he has been a good barometer of the consensus. Right up until the election, he was very optimistic. That was obviously the consensus. Jonathan some problems there with john bellows of western Asset Management. I want to turn to peter cohn and talk about the environment, politically. If is the government paralysis we are seeing comparable to 1937 . Peter the problem is we have never seen a president like donald trump. This is an experience nobody has gone through in washington. Anybody that we talked to has not seen an operator like this, sitting behind the desk. It is completely unknown. We dont know what this president is going to say next. That makes it extremely unpredictable and increases the environment of dysfunction. You have to remember that the president is surrounded by very seasoned operatives, not necessarily with experience in washington, but they understand Financial Markets and that will be a tempering factor, Going Forward. Coming from capitol hill which has to originate all of the legislation. This is going to be on people like paul ryan and mitch mcconnell. We think they are going to come through and deliver not only on avoiding catastrophic default, but also on tax reform and we think it will be we refer to it as tax cuts with a side of reform. Mentioned, this is something that the republicans have in their dna dna and they have to root they have to deliver because the midterms do not look good if they fail. David you were explaining why everyone is for tax reform, which is true until you figure out how you are going to pay for it. Even with the Republican Party, you have very different viewpoints with how you will pay for it. Does that give you cause for concern . John that is certainly an issue. We think it is one that is surmountable. Ways to makeot of the sausage. A lot of ways to make the numbers fit. It is an issue and you are right to raise it, but i think it is one that will be surmountable and they will get it done. If i can come back to the question alix asked, i think ray dalio and others were too optimistic at the beginning. I think they might be too pessimistic, now. I think we have seen a big shift in sentiment. What that means because people are so it so pessimistic. You saw it in the s p and bond yields. Because people are so pessimistic, it means that they do get something done, people will be surprised and you can see a little bit of upside Economic Growth if they are able to overcome those challenges. You were if pessimistic this year and you expressed that pessimists pessimism in gold, then you are doing ok. You are up by about 12 . When gold is that up that much, stocks are, too. How do you explain that . John at the beginning of the Trump Administration, without the market was too optimistic and we express that by being long treasuries. Without the landscape would evolve much lower, it would be bumpier and invaluable for investors to have some treasuries in their portfolio with the idea that inflation and Growth Without accelerate as much as we thought. Would not accelerate as much as we thought. What i will never right now is that the pessimism is pretty overwhelming. People are convinced that nothing can happen in washington and that might open the door for some type of upside surprise. We are watching that very carefully. Those positions we had this year have done very well and were we are very mindful of the chance of a surprise this fall. Peter cohn from height analytics, thank you very much. John bellows from western Asset Management is staying with us. A former United States treasury secretary will be here with us, tomorrow. David this is bloomberg. Janet yellen is going to be addressing jackson hole on friday and the subject is going to be financial stability. Investors will be listening carefully to see how much emphasis she puts on asset valuations. Joining us now is mike mckee, Bloomberg International policy correspondent and still with us is john bellows of western Asset Management. Easings quantitative done to that stability . Mike that is a real question and whether she will address that, we dont know but if you take a look at what has happened to the markets since the fed began its qe program, i brought a chart that shows this. Financial markets have taken off. That is the Financial Markets financial index financial conditions index. Available, even though the fed has basically flatlined its asset purchases. The question is, do we have a bubble in the making that would be very difficult to unwind, Going Forward . David dont we have asset inflation because in essence, you have more dollars or euros or pounds chasing the same amount of goods which can be stocks or bonds. Higher we have created price for these things but have not created more things. Roads, newve new airports, things like that that wouldve been paid for that kind of money. It is sort of sloshing around and we see it in income inequality. That is another problem and the fed is aware that it may have contributed to some of that. One has to suspect you will hear from janet yellen and mario draghi as well, the idea that it is time. That we did the job, we needed to do it, but we need to get out of manipulating the economy. Jonathan i love the phrase, they may have to treated. It is pretty obvious they did. Bellows, a big tebow world at the moment a big type of world at the moment. How is it going to resolve itself . John i think it is interesting that yellen has chosen to focus on financial stability. Theyre going to adjust their Balance Sheet in september. We think they are on track to hike in december, but that is subject there is not much to say about Monetary Policy and that is why she shifted the focus to financial stability. If i could just make one point in terms of the discussion, everybody is focusing on prices and prices may or may not be high in our view. Notorate bond spreads are unreasonable. We dont necessarily think that Something Like Corporate Bond prices are too high. The point is, that is all on the price side. When you evaluate the risk, prices are one component, but leverage and credit creation is the other component and there is not that much cause for concern. Leverage has come way down. Banks are much better. Credit growth has been in line with nominal gdp. Prices may be high, they may not. We are open to the idea that they are not. On the leverage side, that is where we have more confidence. There is not a lot of vulnerability and that gives the fed some confidence. Jonathan on what basis is the Corporate Credit market not expensive right now, because it is widely held that it is. This reds ontake ig corporates over the index in treasuries the spreads on ig corporates over the index in treasuries, it is wide relative to where they have been at similar points of low volatility. I figured order to have a view that Corporate Bonds are over expensive overly expensive, you have to have a different view on the fundamentals, which we dont at the moment. We pointed that spread, still wide we point to that spread. Jonathan a couple things to push back. It duration story index, kind of masks how tight things are compared to history. Fundamentals, and just Bond Buying Programs, the ecb has a Bond Buying Program that has made a huge impact on the European Market. Many people acknowledge that has had a impact on the u. S. Market as well. Factor thatave to into what you think about corporate spreads right now. John your point on europe is fair. There are parts of the European Market that are overvalued because of the bond buying. There has been a squeeze. There is a scarcity issue which has made those overvalued and is affecting european ig. When you look at the fundamentals and look at where spreads are, relative to our expectations for what you need for a liquidity premium, we still think they are adequate. Let me address your point on duration. What do you think about Interest Rates . I think if the fed were to continue their gradual slow careful cycle, you could see up, but ittes open will not necessarily be that disruptive because back in yields are closer to value. The fed is not going to hike very far. They have a few more hikes to do, but not a lot. Bonds have a hedging property that is very valuable in portfolios that creates a bid that is sustainable. We dont see the duration components. Jonathan we appreciate your insight, john bellows, western Asset Management. Michael mckee, do you have a plane to catch . Michael tomorrow morning. Tom keene took the surveillance gulfstream. Jonathan good luck to you. Coming up litter this week, we will bring you a great line from jackson hole. We will this week, bring you a great line from jackson hole. You are watching you are watching bloomberg tv. Taylor this is bloomberg daybreak. New york city Pension Plans are on the verge of investing a billion dollars with alternative Asset Management kkr. The Worlds Largest sovereign th norway fund benefited from rising stock markets were turning 2. 6 . Its bond the real estate portfolios also rose in value and that is your Bloomberg Business flash. Alix what i found interesting it cannot be about oil, they just picked good stock. David although norway had a good had a tough time. Alix oil price moved higher and the saudis did not participate and i found that interesting. Maybe that has been to their benefit. Big,you are a fund that im not sure what exit strategy you can have. The equity markets have done very well. Alix the highlight of the morning in terms of company stories was all about bhp potentially shilling its shale at assets. The ceo spoke on that earlier, today. It is difficult to compare trades because they are dealing with different types of acreage. He ent prospect of it prospectivity. We have talked to different companies. Who is going to buy it and at what price . Those are difficult prices difficult questions. We dont have any names, yet. Tell you is that there is obviously an upside for these assets. If you look at what has been happening in the permian basin, a huge demand for acreage. Bhp sold about half the acreage that it began with. There is appetite. Now the price. Bhp spent 20 billion in 2011 buying this. I dont think there were a lot of people out there, and that is the company itself that believes that is still what it is worth. That was hundred dollars a barrel of oil and now we are sub 50. Where they already doing this on their own . The company has said it was already moving in this direction. I think most people would assume that it certainly helped and perhaps accelerated the process. Activists have come in as well and it is back to the old question about bhp. Do we want all these different kinds of assets missing mixing to give us hedges in bad times . Not perhaps as many people convinced as there were, a decade ago. Chevron, have exxon, and bhp somewhere in the middle. Remember, have to they still have an anonymous amount of oil assets after this process. These are more conventional type assets. They got rid of . It is really just shale at this point. They are still an oil and gas producer. Alix thanks so much, joining us from london. Coming up next hour, mike wilson, Morgan Stanleys chief u. S. Equity strategist. We will talk to him. Jonathan from new york, lets get to the market action. About an hour away from the cash open. A couple tenths of 1 , 3 10 of 1 on the s p 500. Over in europe, 18 head of 19 Industry Groups advancing, this morning. Around 2. 5. Up that rally in base metals helping to fuel the runup over the last couple of months. The fx market, just a story of Dollar Strength. Eurodollar on the back, as well. And thatjackson hole speech from mario draghi, tomorrow. Treasuries with yields climbing about three basis points. That is your cross as it story. Lets get some headlines outside the business world. Taylor in singapore, the remains of some u. S. Sailors have been found against the monks that damaged warship. That is according to the commander of the u. S. Pacific lee. Malaysian authorities have found a at identified body. Found an unidentified body. President trump offered eu strategy for the longest war in u. S. History. The president announced an openended commitment to keep forces in afghanistan. He says there is a primary goal. We are not nationbuilding again. We are killing terrorists. American soldiers have been in afghanistan for almost 16 years. A president said the consequences of a rapid exit would be unacceptable. In suburban philadelphia, a commuter train slammed into another train parked at the station. At least 42 people were injured. The collision happened just after midnight. News 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. Blue Chip Companies have sold more than 1 trillion worth of bonds, hitting the milestone faster than any year before. Discuss isnow to john bellows of western asset method western Asset Management. What is driving it . Lisa this year is very much Central Banks around the world, what they are doing and there was a statistic recently published that the five major Central Banks in the world on about 1 5 of all Government Debt if sovereign wealth funds need to have highgrade debt in their portfolios, there were not government bonds available for them to buy. The gross issuances one thing but need to look at why these companies are coming to the market and issuing debt. Seeing anissuance is increase but it is tepid compared to the overall increase. The market value of the investmentgrade bond has grown tremendously, looking at more than 5 trillion. It has more than doubled since 2010. This is an incredible surge. John, if lisa is right and i have no reason to think she is not, this is driving what is pumping a lot of cash into the marketplace. What is that doing to restore the Balance Sheet of corporations . A relatively makes debt cheaper than equity it relatively makes debt cheaper than equity. John it is a good question. It depends industry by industry and company by company. System has actually d. Livered delevere they have almost a 60 increase in capital. That means mess leverage in the Banking System. It is certainly a message that matters for bondholders. A d leveraged Banking System is safer, stronger and that is good news for bondholders. You are right in the aggregate, but it needs to be sector by sector. David regulators might have had something to do with that dele veraging. Alix so much going on. Lisa i think a very important question and john bellows raises an interesting point is that leverage has moved out of the Banking System into corporations, private equity funds, into hedge funds and shadow banking as a whole. The question is, are we safer . A lot of people say yes but lets go back to these companies. You can see the leverage ratios sawincreasing to levels we with the financial crises. One interesting note this year, companies are are re leveraging. This really does seem to be a central bank story of people getting pushed into the next best thing other than Government Debt which is investmentgrade corporate. Alix i want to take a look at teslas bond, trading at . 97 on the dollar. Is this rare for a new issue . Lisa it is getting less rare. It used to be every new issue got a pop. Reis became a point of i because people were saying anyone, any big investor who can get access to a new bond issuance automatically wins, automatically gets extra yield simply because of that new issue pop. You are not seeing it consistently. Some of those bonds have traded down since inch since issuance. You are seeing more money. Jonathan that was why we had an explosion in issuance anyway because corporates new it was not a secret. They carried on boosting what was on offer. Lisa this was probably the reason why pricing has gotten so tight and there has not been much of a pop because there is so much demand that companies can push the envelope and demand to pay very low yields. Ofx does your sanguine view highyield transfer . John the observation was made that we have seen some real leveraging releveraging. Hadre seeing companies that 1, 2 turns of leverage. That is fundamentally different than a company that has seven, going to eight or nine. We think that is a sign of stability in the market. The companies that are borrowing are not necessarily companies that need debt and that is important. What we are focused is call rising stars, companies that have been a lot of work to clean up their Balance Sheets. We think they had a good chance of being upgraded on the back of executive him and him and on on exactly the phenomenon you mentioned and that could be a positive, Going Forward. The last thing i would like to get in is we think it is really important to do the fundamental analysis on the credits you own for a few reasons. The first is what you mentioned in terms of premium. Not every issuance is going to pop afterwards. It is important to do the credit work ahead of time. That was a good miss. Equally important. The second is with so much issuance, it is going to be a pickers market. Will be credit view more important than just buying the market. David where is all this money going . It . E are they putting one thing that is interesting is we have seen less stock buybacks. There was a time when companies were buying back a lot of stock, which as you pointed out, it is kind of a form of releveraging. They have been doing less of that and it is a real positive that signals maybe they are more optimistic on their own business, Going Forward. We have yet to see that in Industrial Production numbers or Business Investment numbers. There is perhaps a note of optimism and we will see what happens. Agencies,the rating looking at the rising stars, a quick look at the list, is that what we are really talking about , buying into energy . John i think energy is definitely a part of this. Energy Companies Went through a brutal cycle. They had to do a lot of work to evaluate their businesses and manage their cash flows to get debt down. I dont know that Energy Companies have been evaluated correctly by the rating agencies and a current environment. We have seen more stability in oil prices and we think that is a positive, Going Forward. David john bellows, thank you very much as well as lisa abramowicz. Coming up next, more on President Trumps address to the nation on afghanistan. We will talk with eric fanning, former secretary of the u. S. Army. Taylor this is bloomberg daybreak. Markets, on bloomberg this is bloomberg. David President Trump laid out his strategy on afghanistan last night. Although he made the commitment clear, they were not specific somewhat that could mean in concrete terms. Joining us to take us through the real options is eric fanning who served under president obama as the secretary of the u. S. Army. Welcome to the program, mr. Fanning. Was new with what the president had to say and what was consistent with what has come before . Eric the only thing new less that was the president s decision. Appearstegy he laid out to be more of the same, adding some additional troops to change the momentum, but sticking with the strategy that is in place. David there has been a lot of talks of there has been a lot of talk about nation build nationbuilding. From your experience in the pentagon, is that doable . Doable, it just means a different timeline. If you are going to say that you are focusing on killing terrorists and not doing anything to stabilize the political situation, then you will be there killing terrorists for a very long time. David broaden this out just a little bit, the president said he wants to appropriate substantially greater sums for the military, saying that the Obama Administration fell behind on this. Describing this chart to you general, does as in you agree that we have been falling behind on appropriating funds we need for our military . Eric i do. I think you have to start with the question of what you wonder military to do and using them that way we have been, i have been i am concerned we have not been funding it properly and we have some holes in military and how we invest in modernization and take care of our facilities. I think it is important to put more money into the budget. I dont think i would privatize growing the force because i think there are things we need to do to support the force we have. David if it is not growing the force, how do you support it . Eric it is all of the above. We have to invest more money in training. There is a lot more to be done. There is certainly a hole in the modernization budget. We had depleted that to pay for what we are doing, today. We using equipment that is much older than we attended then we intended. Than we intended. There are installations around the world that need our attention. Jonathan we could spend a lot of money into the military. It is a issue as governments struggle with their budgets, but i struggled with what success looks like for the military in a place like afghanistan. It is a difficult question to ask, but we are still going into a country, adding more resources without understanding the fundamental question. What does success look like, and afghanistan . Eric i agree and that was what i was hoping to hear, last night, some definition of what we want. I dont know what the goal is, there. I would say at a minimum that i prefer to fight terrorist on the other side of the world then inside our borders. I think there is a responsibility that we have for our National Security here, to make sure that does not grow as a safe haven. I dont think there is a common understanding of what the goal is an quite a few people think that this is not a winnable war and that we need to be realistic about our timelines in order to keep that from growing as a terrorist safe haven. Alix we also heard increased rhetoric about india and pakistan. The same kind of aggressive rhetoric that we heard when it comes to china and north korea. Tonethat town does that , is that a good thing to have in International Policy issues . Eric this is not new. We have tried to pressure our allies around the world in different situations. Toneser more measured because i dont think other countries respond very well developed shows rhetoric. Kos forwell to the what bellacose rhetoric. Hemight be frustrated when realizes he does not have the options he thought he had as a candidate. Have heard some very Strong Language from the president about fire and fury. What is the situation in south korea . You were secretary of the army. You have Something Like 28,000 troops stationed there. What is the situation in south korea and what can be done to resolve the conflict . Issue,hat is another what to do with north korea. The president did not say anything new, just a different way of expressing it and i think it adds to the tension. I am not comfortable increasing the tension in what is already a difficult environment. What concerns me most when the president uses rhetoric like that is not bad it is changing the attitude of the north koreans. They know that if they come after us, the regime is done. What worries me is this president who care so much about appearing to be strong and winning that he might be boxing himself into corners and creating red lines for him self for himself. Alix thank you so much for joining us, eric fanning, former u. S. Army secretary. If you want to come back and look at anything you may have missed, check out the bloomberg terminal and tv. You can interact with us directly. We have mike wilson of morgan stanley, one of the most bullish man on the street, coming up. Whats to come. Lots to come. Alix bhp once to offload some of its shell assets but is elliott managements pulsing or the reason why . We spoke with Andrew Mackenzie of bhp. We made it clear, to most of our investors that when we moved around the world, we saw limited opportunities to expand our business in oil. We felt that the margins in gas, shale gas were not going to be attractive to us relative to all the other businesses we can invest in. We started putting back to work conventional oil and gas and that means as we were cutting capital in shale, selling the acreage, we significantly increased our exploration for conventional oil and is part of these results, i have been able to announce real success. David that was bhp ceo Andrew Mackenzie. It turns out golfing or get all right when that san diego utility came in to buy encore. Lets go through these activist shareholders. Lizzie he has had a busy year all around, the guy we are calling the worlds most feared investors investor right now. The last 24 hours have been a great example of that. He got into the bhp shares in april. Since then, we have seen last night, and announced a plan to divert to divest u. S. Shale and so, that certainly exhilarated the process, whether or not they were thinking about it beforehand. Of this ismuch really changing what would happened as opposed to recognizing a situation and getting in there, early enough so you can to give manage of something that would have happened anyway . Lizzie a lot of times, they will see an opportunity if companies received the takeover that they think is not value it high enough. They can get support for what they are saying, they can rally other shareholders and do what they can to push that price in. I wont ask the question, i will just say the name. Bill ackerman. Lizzie not such a great 24 hours for him. Target said he said they are rejecting the three nominees to the board, including him. He says they have not taken time to look his proposals, that they are not listening to what he wants but it looks like we are gearing up for a proper fight, there. They are essentially saying he does not know what he is talking about and that nobody he could nominate to the board knows how to run the company. This is pretty rough. Lizzie it is, but it is something he is used to. They are not afraid of a war of words. They will do it in a very public way. Alix the other question mark. Where are we in that battle . What is interesting about these is these are two of the Biggest Companies in the world. They are both worth more than 230 billion. Ms. Guys have to commit a lot of money to do it this means these guys have to commit a lot of money to do it. With png, we had the Shareholder Meeting come up in october. On s going on to a full that is going to a full on accidental. With nestle, it looks at they are making some moves but most of the reviews coming up in the next month, we will have to see. Jonathan it is interesting that these guys are trying to play in. Is it more about the actual sector they want to get stuck into . Consumer sector has these big conglomerates now companies. They would talking about cost cuts, asset sales. It gives them a lot to work with. Jonathan coming up on the program, dont miss this, Morgan Stanleys chief equity strategist with a big call for the s p. Stockton will be joining us as we count you down to the market open. Futures are positive, the open 40 minutes away. Jonathan another Campaign Promise. The president announces open ended commitment to afghanistan. Billionaire Hedge Fund Manager says he cannot reduce risk. Bhp andn accelerating plans to sell. Good morning. Counted you dont to the opening counting the you down to the opening bell. Futures are positive. The fx market, a story of Dollar Strength and some Euro Weakness as germany Consumer Confidence declines. We are down about 0. 5 . As we count you down to jackson hole, the 10 year yield climate aback by two basis points. To two basisack points. Taylor facebook is up. It is interested prevent your marketer said will see the first drop ever 14 users. It is interesting because an emarketer that it will be the first drop of teen users. They have so many users on age range,reaking by quite interesting for the future of facebook. Macys getting a pop, up by 3 premarket. It is hiring his former ebay vp. He will be their president in charge of the macys brand that has Extensive Technology background and will try to overall operations. Macys is had a terrible year, down about 45 . Ge is up. They are basically capturing more market share in engines that power planes and beat pittman whitney on the new inning germans other new engines. Pittman when you spend billions on developing the engine and a big win for ge. That will power the airbus g20. An interesting shift. Jonathan the great work, thank you. Features opening about 20 minutes away. Going back to the 1930s, the and heion from ray dalio said politics will probably play a bigger role that we have extremist anytime before but in a manner similar to 1937. He said he is reducing risk on concern of an parent efficiency and he recommended his firm place assets in gold. To reduce risk, lets ask the gest a bull, mike wilson of the biggest bull on the street, mike wilson. The target year end on the s p 500, great to have you. Lets pose the question. Why is now not at the time to reduce risk . Ine wilson we had a risk august so august did not disappoint. It is notoriously when you get higher volatility and concern about certain things. One of the things were worried about and july is volatility was so long and a bit of complacency looming in the market. The north korea conflict took care of that. We had a shock. Volatility spiked in a meaningful way. We were concerned it could turn systemic because of the low volatility in the market ways and that cannot happen and that is a win. Overd a retest charlottesville and that was a successful retest meaning we tested the previous lows and less momentum. Our review is with that we are set well for the market to move forward for we have the risks. Jonathan soon pulled back lower andshal youre not concerned about the policy paralysis like others . Mike wilson we have had power policy paralysis from an administrative standpoint but not a legislation the way people were hoping for in the first half of this year. That is price now. I think about now and people are capitulating that we will not get anything done. Anything about the progrowth agenda has been priced out and we see that the analysis on wrong around smallcap. Analysisd your surrounding north korea and in charlottesville partly in is confirmed what ray dalio was saying . What he was saying politics will play a larger role Going Forward than in the past in the market. Says . T confirming what he mike wilson i think it is a potential risk, but i do not think it is right. With all due respect to ray dalio, i do not think he is 1937 at all. I think it is the 1940s, postworld war ii to use the analogy. I am not worried about us slipping into a 1937 scenario. It was the fed and we pulled away from stimulus in of the 1930s and we are doing the opposite. Whether or not we can get it done remains to be seen. The big recognition from last years globally, we are moving in a more fiscally friendly environment. If you marry that with free money, that is an elixir that can get a nominal gdp where a point where we can sustain of the levels. I am in a different place than mr. Galliano. Obsolete coming is a lot richer than me. Alix what kind of growth do you need to see . Eric fanning i think mike wilson we have seen the day to improve over the globe. We had early call of asset is coming offnchronous the initial recovering from the financial crisis and that is important and that is why the Global Equity markets have been so broadly participating. What is important about the synchronicity is it is more sustainable. Every time we have had recovery, everybody gets excited and then it rolls over, it feels. This time, we think it is more synchronous and rates remain stable, we think we have a chance to push through to the escape velocity. Alix one, you have expectations for earnings for discretionary being revised lower for the Fourth Quarter in 2018. Topline growth, shows material to climate year on year in 2018. Talk to me about it, where is it the risk . Mike wilson the risk is not in 2017, but 2018. Typically, the market does not worry about the 18 numbers until we get to the Fourth Quarter. We will word about the numbers to hike, what changed is at the dollar weakness will be a tail wind. Record state which is we have been extremely bullish since on Global Equity rally. We are moving into the lower quality part of this move. It should never. We should start to see deterioration in their earnings number. We think the peak rate of change will be q1 at 15 and will slow were in q2. Q3 will probably be high Single Digits and q4 maybe back to double digits. Make no mistake, it will narrow from here and that is normal at the end of the cycle. A big debate about where we are in terms of participation. Where is it going . Mike wilson participation from investors . Yeah. We do not think it can be over until we read some excitement. We wrote a note asking are you ready for euphoria . We thought about the change of policy around the world, people are getting excited, animal spirits. We still see it despite the disappointment on the progress agenda. We have not seen the flows. Not seeing the participation for Retail Investors in our network or the industry. Year to date, we have met a flows into u. S. Equity funds, that isunds and etf and remarkable considering how strong the equity market has been. If we look at institutional data, the same picture. A lot of client had the risk their portfolio dderisk ther platforms. David how much is it because valuations are so high . How many are not going again because they think via wishes are too high . They think because valuations are too high . Mike wilson i think the most important hard data is earnings. I agree, first, we did not the Economic Data improve. The earnings have delivered, the harder data is there. Valuations, we have a different view than a lot of people which is located Interest Rates are pinned and credit markets are under control and financial conditions are lose, equity premiums are still too high. Jonathan one thing that is flat is buybacks. Where are we in terms of buybacks . Some are saying things are starting to turn over. Mike wilson there is no doubt that u. S. Companies have used that letter aggressively lever aggressively as they shouldve. They have done it extremely well. I agree, we are seeing a bit of the deterioration in a companys ability to continue to do that in the u. S. Now,er, nearterm, right the buybacks are back in the deal calendar is zero. This is one of the things that will drive us to new highs by september, supply demand is very retracted in the next few weeks supply and demand is very attractive in the next few weeks. Alix great stuff. Mike wilson, the biggest bull. You are sticking with us. What about the technical case . Katie will join us for the open. Does mike wilson agree . This is bloomberg. David this is bloomberg. Leaders will meet and jackson hole and investors will pay close attention to any guidance whether the fed and ecb will continue accommodative monetary policies and for how long will stump joining us now is michael how long they will do it. Joining us is Michael Mckee and still with us is mike wilson. Mike wilson is a bull, we keep saying. He is supported mario draghi and janet yellen. How have those asset values been underpinned by a massive intrusion of capital . To a great extent. You go back to the beginning of qfii and if you forced people to riskier assets, thats what helped grow the economy because of a triple down a theory from the gains you get. That works to a certain extent. It has driven asset prices up. How much has it done for income and spending . The answer is a lot more open. David you use of the magic words trickledown and we heard of those in the 1980s. Has it reflected in the underlined economy . Michael mckee it has and it hasnt. Dont delight is what wouldve happened if they had not done anything . You take a look at the chart i btvht along which is 8707. The white line is s p 500 since they began qe. The yellow line is personal income from assets, dividends, etc. , up 86 started at a higher level. The blue line is household median income. The average person is not getting a lot out of this. Maybe we would have had a zero growth but were not having any spectacular growth from the growth in assets price valuation. The rigid do not need to spend morning spend more money than they are now as opposed to those living paycheck to paycheck and their incomes are not going up. Alix financial conditions, looser in the u. S. And tighter in europe. What does it mean for equity prices . Key wilson the dollar is to Global Equity, the most important currency for global trade. One of the biggest stimulus this year has been a weaker u. S. Dollar and that was a planned exercise, go back to the g20 meeting in march of 2016. There was implicit agreement. Alix the conspiracy theory. Mike wilson i think so. The fed was told to back off and they did. Back of mr. Winning and the concern that the back tax would come back. I think it is reflection of disharmony right to know in the white house will step the fact the back has came off the table was a big deal. The dollar with this i think the globals for local trade, equity prices as long as it does not become disorderly. Jonathan using the dollar weakness remains . No Inflection Point . Mike wilson the dollars hot from a secular point and was in april market for seven or eight years. That is at the pattern, seven or eight years. He is now in a downtrend. That is not necessarily good or bad but it is a fact. It left massive implications for capital flows. It is one of the reasons china and japan and em will do better than the u. S. Jonathan in a place like japan, a few investors, the growth has been good. Why are Japanese Equities not corresponding . Mike wilson it is hard for the average Portfolio Manager to do real work in a japan. It is far away and a huge language barrier and the way that, theres no one covering those stocks anymore. It is amazing how little coverage there is a individual securities. The macro trade has been wrong. The yen has not continued to weaken in the way they typically do is to shorten the yen and buy the index. What is working in small to mid anddo not need currency doing the right thing from the government standpoint. Japanemendous activity in because of they see value from spinoffs and conglomerates will do now was into the messy work as malta Midcap Companies that can use their eggs and no small to mid Cap Companies that can use their expertise. I think thats a very long end of story. David what about emerging markets in europe . Mike wilson to be clear, our house feud, more upside potential he in japan because of they will grow arms 35 as a senior. That is a fact. They will grow 35 this year. Antieurope and em, theres also a pretty in europe and em, story. S a pretty good a not as positive on latin america because of the exposure and political angst. There is clearly pau gasol the emerging markets that will keep pace. The emerginglearly markets that will keep pace. People were nervous about the french elections and when mr. Macron one, a strong positive and people got too excited. It was everybodys favorite region. Weve now consolidated. There was a fundamental reason, the euro became stroke. On it became stroke. Became strong. Provisions rolled over. They are now turning over again and were interested in europe having a strong move even with a strong euro. Dave thank you for mike mckee for joining us and mike wilson, will keep you around. Coming up later this week a strong lineup of fed voices including robert kaplan. Live from new york, this is bloomberg. Alix small caps have been rolling over and into an interesting story. This is s p many futures, the blue line. The rest of 2000, the white line. Anything below the red line is short and above is long. Divisions very short when it comes to the rest of 2000. With us is a mike wilson of morgan stanley. How much more pacifism to be done has a missile to beat how much more pessimism to be done . Mike wilson we took off the twoyear average and i watch it. It is almost self fulfilling. As i like to say, breakdowns and breakouts are for suckers and thats where you want to take a step unless something changed. Unless something changed, it is signifying something meaningful. Weaving taxes are not on the table and that is the main reason the small caps have underperformed. The strong dollar has been a headwind for small caps. Where it will drive small caps in the second half of the year if they hold our earnings. Weaving access to capital, m a, allpending and the things tend to benefit small Cap Companies disproportionally. Jonathan you called this part of capitulation trade and that has significant how significant is it . Mike wilson it is significant because it is working. There comes a time when you have to excite the crowd. I think it is one of the times we have been fighting it all year for the most part, but were at a critical point. Another index is of the transports and they are breaking down. I got a lot of emails about transports and the small caps. It does not make me feel great in the morning but it needs to happen to set up for the next leg and that is our call and we think it will drive these indices, especially small caps, more than transports. David i want to drive out tax reform. I wanted to show chart at that is intriguing. The s p 500 against trumps Approval Ratings and it is surprising how well they correlate from the beginning of the year. They start up high and went down together. How much is it really expectations out of the administration . Mike wilson i like that chart. I might steal it. I think this tells the story perfectly. We use multiples for you high test pay multiples versus low tax paying multiples. It tells the same story. Basically the trump trade, i called them the progrowth agenda. It is not all of mr. Trump was also on republicans. Events, we saw more republicans distancing themselves from the white house to date. Some people were saying, that is bad for potential policy change and i will argue the opposite. Potentially, republicans need they meet to go at it and come up with their own agenda because of they will be running for reelection next year and not mr. Trump. Alix if we do get it, are we in small caps in the area that have seen capitulation because of the lack of policy in d. C. . Mike wilson that is our call, but we could be wrong. Alix how big of a pop . 20 , 30 , if you get Capital Spending and interest loans, all of that gets going, it will be significant especially the positioning fairly underweight. Great to mike wilson, have you with us. He is staying with us. About five minutes away, futures are up, positive on the s p 500. Positive 57 on the dow. Groups on19 industry at the stoxx 600 led by basic resorts. Alix you know it. Jonathan the rally continues and the bull market at jackson hole. We are up by two basis points. The stronger dollar story and a g10. 128. 34. You are watching bloomberg tv. Jonathan the futures are positive. Secondsing bell 25 away. Nasdaq off of by 0. 25 . Futures up about 0. 2 . On the nasdaq. Jackson hole later this week, yields are climbing higher on the 10 year treasury and back to 220 on a u. S. Tenyear. The fx market, the dollar is advancing on a nine out of 10 currencies. We are up on the dollar index and 93. 41. The ss story ahead and the asset story i had of the open. Alix steel. There we go. The dow jones is up 0. 2 . The s p up by 0. 3 . , weall the drama last week are about two Percentage Points away from the record highs in the dow and at the s p and puts it into perspective when you hear headlines like cap at small caps. A look of where we are is important. E have individual numbers earnings season is just in the final breath. 1 beatingrs hurt by thirdquarter estimates above the outlook a little sketchy on margin outlook for the next quarter were like as the average selling point lower by 6 . Coty down by 10 . Revenue doubled. Arnings did have a miss cosmetics are growing weaker and Department Stores are discounting them for the first time. In retail, dsw up a whopping 23 . Second quarter earnings beat consensus. Sales climbed into the upside. For retailersside is a good thing. When you have fundamentals taking a breath and there is still uncertainty in these see, d. C. , is it all about the technicals . Mike had resulted it yet. I think it is all about the technicals. Are you look at where pes in corporate on its, you have to throw the fundamentals away. Jonathan i never thought the guy at the jpmorgan david i want to what jamie dimon is thinking . Jonathan we did say you have to throughout the fundamentals over the last couple of years. Lets bring at the technicals, mike wilson still with us and joining us is kelly stockton. With a couple of charts. The message is the technicals remain strong. Lets start with the following. And joining us is Katie Stockton. What a couple of charts. Katie stockton it is a longterm uptrend. When the markets pulled back, it is behind of the market and you can see it and the long term moving average and i look at that 2035 period moving averages. That tends to be strong. David lets look at the daily moving averages and we have a and athat has to under 50 today above where the numbers are and down below, it is the percentage of stocks below or above those averages. Right. Tockton that is when you look at shorter term, as they have rolled over. Out the 50s p take day but has the rising 200 day and i am looking for support near the 2400. If it is not, 200 day is near 2300. It shows what could be downside risk. We have seen market ,articipation has deteriorated very normal and nothing to be concerned about what a Healthy Development within the broader trent broader of broader up trend. We look at these measures as overbought or oversold. The 10 Day Moving Average is over territory and has reached a level affiliated with lows in the s p 500 and the measure is very close. We are getting close to tradable. Alix and at the seasonality of what happens in august and september. Struck by david, he was writing in a Bloomberg View piece that last week, i think last week marcus turned, are the markets tolerate of a Trump Administration and the exiting of one of the biggest extremists. They also say it is relatively poor seasonals for stocks which is a technical matter have to do with trump. One of the more pessimistic views. Seasonality has already been a problem. It used of the corrections would materialize in september and october and that is been bumped been theaugust has biggest a downdraft for the major indices. We have seen that so far and it could get worse before it gets better. It tends to hold a lows. Trade blows tend to materialize earlier that september or october. Good to thelled fundamentals are a you pulled my attention to a chart on the bloomberg terminal and probably the most important data point for equity markets and it is the earnings, right . Mike wilson it is a hard data that markets care about. Agree with katie. The technicals tell the story about what is happening when it there is hysteria around the shortterm events, north korea or whatever. The technicals keep us kind of street to say, lets make sure the technicals are still solid. The blue line is 12 month estimates to what are the s p 500. This is the first thing i look at him it comes up every day. , it comes up every day. We are appealing away from the 12 month a lower estimate estimate, i do and for me, i do not think the blue line will roll over. Alix casey is looking at a tradable bottom. Asset manager on earlier and he said as np stays above the 200 day moving. And he says the s p stays above the 200 Day Moving Average. Katie stockton the last time i targeted 2640 in my work. The trajectory of the current projection forward and that would be a target for q4. We have an impressive upside and by not any means the stopping point, necessarily, but the natural place for it to take pause. Alix what you do about individual factors . Technically, what sectors look the most poised for a breakout . The broaderon market is really setting the tone, such a broad rally. See most sectors breakout with the Broader Market when it doesnt do that. Where should we look for outperformance on a relative basis . The sectors in longterm uptrend versus the Broader Market including technology, financials, industrials although it has not been the story during the pullback which attest to be characterized by posturing. Alix is the fundamental matchup . Yes, were also overweight on energy. At some point, you have to go the other way. We have been wrong. I am in the view, we are in the view that inventory drops are happening now. The technicals are so bond out bumped out, when it becomes at this extreme, you almost have to take a swing. Katie stockton i dont disagree with that. , counterignaled signals that 12 not seen the likes since january 2016 and often when sentiment is that a you have an opportunity and it is a matter of making sure youre not too early and capturing it i could trade below to improve momentum. We do not have that yet. Crude oil asked pretty well in my opinion. I think there is potential. Ts prettyoil ac well in my opinion. Jonathan when people start freaking out again, as they will, what is the message . To yourson stay true process and ours is based on earnings, fundamental, growth and Interest Rates. Earnings and Economic Growth look stable and some areas still accelerating. Interest rates are stable. Supply, further evaluation expansion and a Central Banks and is a fed as long as they move in a modest, predictable way, we should be in good shape. Alix Katie Stockton, thank you and mike wilson, your sticking with us. In the equity market, one thing were looking at is bhp billiton. Theyre looking to do something with their assets. Heres what the ceo said earlier. We have been working towards this two years ago, we made it clear to most of our investors when we looked to the world, we saw very limited opportunities to expand our business in oil. Andocus of the margins shall gas or not going to be attractive to us relative to the the other business we can invest in and we have started pivoting toward Traditional Oil and gas and that meant of the same time we were company cutting capital in shale and the number of wells, we increase our inspiration of Traditional Oil. I have been able to announce real successes and. Alix bhp billiton ceo Andrew Mackenzie and tina. Who is going to be the buyer . Buyer all the us the most obvious buyer are two companies. That is because if you look at the permian where they have the smallest part but probably most attractive, youre talking about shell ownsard where some and will see analysts is the possibility of a trade cells. Ng and anadarko alix which is not unusual because of the longest it goes, though more oil you can produce a you want aligned stacked up against each other, right . When you jewel, you have a better knowledge of what is in the acreage. When you drill, you have a better knowledge of what is in the egg rich and you want to add age, what is in the acrea and you want to add on. You can see acquisition vehicles and when seen james gets back in the game and will sing mark poppa do some acquisitions. That has been i think the permian. A couple of people could come into play. Outlooks Bank Interested in what will the price of the. As we get aa pop for less, do we read into anything about the flow of money and what they are willing to pay in the permian . Alix i am interested in what the price will be. Tina davis you saw yesterday that oil was way too expensive. Of what the hp is selling is not in the permian and it will be in a more gassy place and you will see downward pressure and not the sexiest place to be. Fayetteville has been seeing the rig count of the climb youll see a wide range of costs associated. In the sweet spot, you can see some exorbitant. Jonathan tina davis getting alex still excited. It does not take much. Alix just say oil. Jonathan a muted day yesterday and a day of gains at the close. Up a buy 100. Fx markets much of the day has been the story of Dollar Strength and it continues. To 128. Oving back down up by 0. 5 . From new york, you are watching bloomberg tv. Alix this is taylor this is ,bloomberg daybreak, coming up president and ceo. Alix tax reform. Treasury secretary Steven Mnuchin things that needed to be. Change in a tax loopholes heres what he had to say. We will close of the loophole for hedge funds and carried interest. Is therere focused on are many other types of funds that do create jobs. We want to make sure that we do not discourage investments. Alix joining us is Bloomberg Bureau chief. Can we say carried Interest Rate except . Carried excited about interest in such a juicy topic. When you look at this, you have to parse of the worst the treasury secretary said the words the treasury secretary said. Different from the past where we had a president obama talk about hedge funds and private equity interchangeably, he is not talking about these interchangeably. He is giving feels like very narrow definition of where it is going and a feels like throwing a bone to those who was it close. Get see private equity david it is known to happen that sometime private equity buys and does not ray jones. Jason theres a lot of research on this. Stewardsd say they are of capital and they are investing on behalf of Pension Funds and the devils but the jury is out on the job creation aspect of this. This is really a turn in this debate that has been going on from was 10 years. Jury is out on the job creation aspect of this. It has defined at the industry. David is it another Campaign Promise going by the wayside . Candidate donald trump said im going after carried interest. Jason kelly that is right. That is one of the things that candidate trump and candidate clinton seemed to agree is closing the loopholes and in doing, getting after the fatcats on wall street, as it were. Not just Steve Mnuchin a bus secretary of commerce and the there, and a tom barrack are all private equity guys it may be talking their own book. Alix Steve Mnuchin is the typical, where he met was jason kelly the spokesman for the treasury secretary said everything is on the table as it relates to private equity but it is notable that the secretary was specific about using hedge fund. David we have not heard anything but this. Jason kelly as it relates to carried interest and we were moved toward and as we move toward tax reform. Century cargo ships who carried their cargo. I looked it up one day. [laughter] david i will share it with you. Thank you. Kelly, check out tv and you go watch of online and grabbed our charts and interact with us. Scroll through and check out other charts. This is bloomberg. David still with us is mike stanley andmorgan rubber chart about how broad the stock market rally is. Mike wilson what is getting lost in the big picture is the most important call to have made a year ago and to embrace is this a Global Equity rally. It was born from the recession that happened in 2015 and people have not been able to participate because they have not been able to embrace. The first is small caps. It is up 26 since the election in the u. S. Using the election in the u. S. As a the Inflection Point that policy will work in concert globally was of the trigger point to do better because will have its they velocity. And also the hated index of late is up 18 . You look at the chart below and it will perform a got ahead of itself and consolidating. Europe is up about 20 if you hedge 50 of exposure. S p is of 18 . Embraceline is if the Global Equity rally before it is over. It will be over eventually. If you do not enjoy it while it is here, you cannot participate. And now that was then is now. We have to look forward. I think we are still in this Global Equity rally that has another three or four innings to go and thats the most important call. There are other calls that are just important. Notfact that people are able to embrace this is why it will keep Going Forward. When other guests talk about global recovery, that is when it is time to go. Alix when you say by anything when you say by anything, who will take on risk . I am saying isat get past the ideas that the markets are overvalued and there is a looming disaster happening. Go find in the companys you want to invest in invest about worrying about the macro trends will derail everything. That is not what is going to have been the next six months. Jonathan you made it this that europe aslong to the it would europe equity and not the strength of the euro at at the same time . Mike wilson no, there are always things you need to be caught present of. Once again, these are to be bought and you should be taken advantage of the dip instead of selling rallies. We are still in a bull market. David now play the red team. When does it end . How will it end and white . And why . Mike wilson we thought we would get a will and bust. We are getting a bloom in earnings. Stock markets. Well get a boom and a bust. The bust is always calls by excess. Capex, him and day, barret m a, borrowing and then you get that said has to come in f the fed has to come in. Is change, the Central Banks have decided that are going all the way. And have hike three times they will probably hike on them and will do Balance Sheets reduction and that is aggressive. My view is that they are going all the way and i do not know what the trigger point is and we will have a recession. That could be as early as next year. If we get some of the progrowth agenda. The irony is what will get people excited and the flows will come in and that will cause of exuberance to cause the fed it to tighten faster. Jonathan as a year and . Mike wilson we could get there by year end. Alwaysn mike wilson, appreciate his time. Thank you for your insight and a privilege and pleasure. 25 or 26 miss until the session is wrapping up. Over 140. Forbouncing back up by 0. 6 a Global Equity market trading in the word of mike wilson second to continue. Coverage continues right here on bloomberg tv. It is 10 00 a. M. In new york. From new york, i am vonnie quinn. Mark live from london, i am mark barton. Welcome to bloomberg markets. Vonnie here are the top stories we are covering. A warning from had fun hedge fund lean air ray dalio is not taking hold in the Broader Markets. Dalio is cutting risks and worrying about washington, stocks are rallying. In politics, trump reverses course from his Campaign Rhetoric and will now leave u. S. Troops in afghanistan. We are not nationbuilding again. We are killing terrorists. Vonnie what do the president s decisions they about his broader foreignpolicy objectives . With apple set to unveil the iphone 8, we are getting a sneak peek at some of the featur
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