Transcripts For BLOOMBERG Bloomberg Surveillance 20140522

Well and it is the Bloomberg Consumer comfort index at 10 00. Fed had had, so apple of days ago. We also had the Kansas City Manufacturing number. Why do they do regional numbers . If you add them up, you get it picture of the country as a whole. We are federalists. Before the bell, best buy, scarlet fu will break that. Hewlette bell, the gap, and packard and obama is speaking in cooperstown today. Thats because the orioles are in first place. Lets do a data check. Equities, bonds, currencies, and commodities. The equity markets have a surge. Weaker and nymex crude is elevated bigtime. Vxx shows under 12. The euro dollar is so important. There is iron ore. In shanghai. I have no idea what the number means but iron ore is cheap. This is the volatility in the market. It is gone. This is the 25 year average. Over the lastgst five years and down we go bearing down to a new complacency. This is the conundrum. Thank you Central Banks and janet yellen yesterday saying considerable . We are moving to our focus on the front page. The news broke yesterday that we got more color on the natural gas deal between russia and china. Its all over the cover of the washington journal. Gazprom sold a deal to china to supply natural gas. I was tweeting about this last night. President obama to japan without a trade deal but Vladimir Putin goes to china and comes home with a deal. I was being a little snarky. This has been in the works for a while. Just across the terminal, you see it is now formal thailand has another military coup. Adamant thatas this is business as usual. They have had a lot of political trauma in thailand. Spreadse is whether it beyond their borders and whether uc unrest through the rest of asia. They had imposed martial law and now the coup has happened. This is 24 hours after the army said it was not a coup. Stephen roach will be coming up in the next hour. We need to talk about one specific company, a Chinese Ecommerce Company begins trading on the nasdaq today. D. Com posted an ipo and raised 1. 8 ilium dollars and their Business Model is similar to amazon. Sales versus amazon which is a higher value than amazon. Carefully to Bloomberg Television. All my radar is up. I just dont get it. It is valued more than amazon . I dont know, i just dont know. Its the promise and the potential. We are in frothy times. Lets get to where third front page. Banks are backing away from marketmaking activities. Goldman sachs is selling his rights to operate as a market maker in more than 600 New York Stock Exchange listed stocks. Bank of america is dismantling an electronic market that was only set up last year. Increased scrutiny from regulators and scaling back on list like Morgan Stanley said. One by one, they are following suit. It is a new era. Dont you feel we go into summer with the banks trying to figure out . The banks are utilities. We are at a critical juncture. Those are the front page stories. It is an International Day today. Lets be a little bit of mastech. Begin with Michael Spence as one of our guests. You live in italy and you are focused on china. You are the authority on risk. How distorted is our Central Bank System at this time . Its quite distorted. Europe willk recover unless there is a significant weakening of the euro. Very reluctantly, the ecb is about to move into that territory. Japan is a question mark. Growth in europe is low and the fragile five are recovering as i expected. They were put off balance by the spill over from abnormal Monetary Policy. Its a very unbalanced world. We think about foreignexchange can a central bank push the currency weaker or stronger . Yes, it can, absolutely. Draghi intendst to do that. He will probably buy assets like sovereign debt. He signaled clearly the ecb would be ready to movein jim. Given that he has signaled that, will have much effect . Its hard to know how fast it gets priced in. There is still uncertainty because there is a couplet in the relationship between the ecb and the germans. There is not a certainty about what he will do and how aggressive it will be. I think youll see a movement once he actually does something. Professor, we have john taylor on the show from time to time. He makes the point that when you dont have inflation, its pretty hard to push the currency down. With no inflation in europe, you cannot push it down, so how do you do it . Thats a good point. I think we are in uncharted territory. The problem for europe is that notwithstanding the previous bout of systemic risk, this is a place where money is going. People look at the United States and say that does not look good and the emerging markets are not understood. Where does it go . It piles into europe. Its a little ironic that the money is flowing into the economic basket case of the Global Economy but thats what it is. I dont have a job. I get to talk to steve roach in the next hour and yesterday scarlet spoke to mark mobius. On a structural and permanent optimism on emerging market shares . Should our viewers in america be investing in those countries . Yes butasic answer is needing to invest with a knowledgeable advisor. You need someone like mark who knows what he is doing who has experience and can assess the environment. That is the particular companies or securities. The growth story is right and i think it is, the longterm growth story with the downward reset of the asset prices, i think there is a real opportunity here. Michael spence is with us for the hour. Me, 30 mobius floored is the emerging markets. We have reports of a deal that could shake up the tobacco industry. Reynolds american is in talks to buy lorillard. Combined company would be number two in the industry that is led by altria. Largestne group is the landlord of singlefamily homes and now a starting a company to buy apartment buildings. The properties were valued at 2 billion in the head of the units as blackstone is constituting an urban areas where there is not much new construction. Carnival cruise ships are going greener. They will spend up to 400 million on new exhaust Heating Systems that will allow carnival to meet air pollution standards for u. S. Coastal waters. This is thailand and the military coup that we are following now. You see some of the emotion. Its frightening. Coming up, mcdonalds is planning to hold a Shareholder Meeting today. Protesters are causing some trouble outside Company Headquarters and we will talk about the fight for higher wages in the fast food industry. That brings us to our twitter question of the day this is bloomberg surveillance, on Bloomberg Television, streaming on your phone, your tablet, and bloomberg. Com and now available on apple tv and amazon fire. Good morning, everyone bloomberg surveillance. Coming up, the former America Online ceo stephen case. He had that big transaction a decade ago and he is live in the loop. We have an incredibly busy morning. I am with scarlet fu and adam johnson. This is a fascinating domestic story. Thets a busy morning for executives at mcdonalds because they are holding their annual Shareholders Meeting in illinois this morning. They have been dealing with protests from fast food workers rid their own workers as well as others, about 2000 protesters demanded wages of 15 per hour and the right to form a union. It is very specific. These guys want 15 per hour and the right to form a union and were joined by the president of the Service Employees International Union and an official from the naacp which is the countrys oldest civil rights organization. Coming your spence did you were awarded the nobel prize in 2001 the link between Higher Education not because it makes you smarter but what it says about your worth to employee or an employer help us understand how fast food workers presumably dont have as much education try to justify their worth. We haveeneral situation is becoming increasingly well understood. We have a combination of technology and globalization stripping out routine jobs, low value added jobs. The nonroutine jobs in Nursing Homes and fast food restaurants and so on is a buyers market. There is lots of people who cannot get jobs elsewhere. Isis a world in which there a huge premium to Higher Education because it moves you up into a different segments of the labor market. Forces have put workers in a situation where the Median Income has not gone up for two decades and there is a kind of stagnation. The minimum wage is not gone up for almost two decades now. I think you will see more of this. This is grassroots objection to the distribution characteristics of this economy. The composition of the fast food workers is different and now its older adults as opposed to teenagers. The numbers are staggering 1619yearold made up 16 of the workforce versus 1 4 back in 2000. People are trying to make a living off these chosen they cannot do this. Thats absolutely right. Its a combination of a longterm trend and the hit we took in 2008. The combination of the two has put lots of people in trouble and thats where they get work and they dont like it but it is a buyers market. Going back to your work at stanford years ago as a means to capital and labor, i would suggest if you look at the share price of mcdonalds, the capitalists have been winning. Within the broader american, i the american economy, what is labor get their fair share . Thats a good question. Let me modify what you said. Can the Nobel Laureate modify what i just said . I think so. You have the floor. The return to capital however you measure it profits people who own stocks and the return to Human Capital is where the shift in income is flowing. If you throw in Human Capital its dramatic. Its flowing away from lower skilled and lower education parts of the labor force. Where in that spectrum do you strike the balance between Market Forces and Public Policy . That is the single hardest problem we are wrestling with. This is not going to stop. First we had globalization and then we have automation of things and now we have robots. Becausey is celebrating robots will bring manufacturing back. They will go back to the market and china but at the expense of jobs. To the profound simple question, doesnt it stop at the voting booth . Of americae a lot that is not enjoying these games will go in and they will vote and turn out the capitalists at some point. Yes, thats a good observation. A legitimate concern is that you what europeans call social cohesion, the thing we think we share, in terms of values. If you go on this path too long, you dont know where it will break up. It will break down. Can the plutocrats get 20142016 before the greater tensions take over . Yes, probably. I agree. The tensions will remain. Weve got more coming up on surveillance. Stephen roach will be with us in the next hour. Asia we will talk about the chinarussia gas deal. This is bloomberg surveillance, on Bloomberg Television, streaming on your phone, your tablet, and bloomberg. Com and now available on apple tv and amazon fire. Good morning, everyone. Scarlet fu and adam johnson have joined me this morning and futures are up2. Adam johnson has top headlines. In western china, a series of explosions in a market killed 31 people and wounded 90 more. China blamed wieger separatists. There was some horrific violence about two months ago. The ukraine prorussian militants attacked a checkpoint. At least 11 people were killed in fighting and witnesses say about the ukrainian troops were you wounded. In the nhl playoffs, the Los Angeles Clippers scored the los angeles kings, forgive me, beat the chicago back the chicago blackhawks. Row at a at the front kings game has btotox. The series night and is tied. How many goals . Five goals in the third. Period. We go to the rangers expert scarlet fu. They are at the garden tonight at 8 00 for it lets let the series go to seven games because the rangers will clean it up. I might be getting ahead of myself. Isthe New York Post pushing spirit and wear blue. It has been 20 years since we won the stanley cup so the timing is perfect. Lets get to the morning must read. Littleose one thats a touchyfeely but it jumped out at me. Its from Thomas Friedman in the New York Times what are we left with . The nails it sometimes. I think he does. Everything is focused on bigger urban areas. Think of the conversation this morning like deals with china and russia were violence in china and the coup in thailand. Michael spence is with those who went from the urban landscape of palo alto to new york city. What was it like moving from stamford to nyu . Youve got a very different feel about what life is like in a city like new york. It is alive and has life on the street. In palo alto, you have to get in a car to get a loaf of bread. Its an exciting place but if you drive through it, you cannot see it. Probably moving in the direction of more urban and america. From one big city to another, we are going live to st. Petersburg next. Good morning, everyone. Let me do a data check. Two, the yield moves higher and europe is a headline number. A backstory into a threeday weekend in the United States, oil is moving higher. That is american oil. He has been busy with two outstanding interviews recently in russia. Saint it is bird. The biggest meeting of russian leaders is happening and Ryan Chilcote is with us. The story is who was not there which are American Financial leaders. How much have they messed . Missed . Missed moremore than they have missed. Among the noshows youve got everybody from the ceos from Goldman Sachs to visa and mastercard and everybody that was supposed to come from the u. S. The white house told caterpillar to stay away and they have. A lot of the european ceos have stayed away as well and some of the International Organizations like the ifc. A clear message being sent to president Vladimir Putin that if he goes further in ukraine there will be isolation and this is what it looks like. What is the goal of the meeting . I think president Vladimir Putin wants to come here tomorrow to say that the ceos that have not come to this meeting, we are not going to penalize you are punish you. We dont think what your governments have done by rightting you not come is but we would like you to do business in russia. He will try to reassure them there will not be any retaliation. Some people who are familiar with American Business interests here and they say they are concerned that they will lose market share. He will probably make a reference to china and that just deal, 400 billion come a that russia has options. Its kind of a limited option, really. Between russia and china and Vladimir Putin is probably taking a victory lap of what kind of conversation are you picking up on this deal . Today isg thing everyone is asking what price russia will sell the gas for. That was identified as a commercial secret yesterday. Its not that common that information is kept secret. Everyone is talking about maybe the prices lower then they are selling to the europeans. The only thing they have kept it secret, this is speculation, is because the russians are embarrassed about the price. They needed the deal because they have been pursuing it so long and they wanted to send a message to western europe but if you want to diversify away from russian supplies, we can diversify as well. Do you sense a pivot from the russian ceos given the fact that so Many American and european ceos are not present . Thats a good question. Yes, when president outin went to china, he brought a big delegation with them. When it comes to the far east of the country, china is their neighbor so there has been a little active visitation or a little bit more initiative on Russian Companies to engage with the chinese. As we talked about yesterday, the russians are still anxious about letting the chinese too far into the economy. They dont really trust china and the not that Many Russians and the parties and their concerned about the far east of their country being overwhelmed by china which has hundreds of millions of people right across the border. Chilcote joining us from st. Petersburg this morning and he will interview the ceo ofseversol, the biggest russian steelmaker. From st. Petersburg, lets move south to kiev. Ukraine will hold an election in four days and confusion and violence reign with no apparent leadership. Marks as the latest on the ground but he has recent travels to Eastern Ukraine. Its a pretty chaotic part of the country. There is this new peoples republic that is being formed a few weeks ago. The guys running that arent interesting bunch of people and one of them is a moscow resident. He has been announced as the new Prime Minister there. There is a lot of military activity outside the main city. We heard this morning there are 11 Ukrainian Army soldiers found dead. Quite a few of the checkpoints around the city and it was not there as to who is in charge of the city. What is the military might of the separatists . What do you see in terms of military armament . There is the odd guy standing on a Street Corner with an ak47 or another kind of rifle and over the last few days, there have been more Armored Vehicles traveling around the city. To be honest, they are not very well organized. We spent some time and one of the checkpoints and the guys there have a very interesting range of backgrounds. One guy was a former it worker. Was representative of a lot of these guys who are professionals and have taken up arms and the separatist agenda. I would not say they are welltrained and there is not a huge amount of heavy weaponry but outside the city, that seems to be a different story. Weve got Russian Helicopters invading ukraine in the last 24 hours. Things seem to be staying relatively hot. Im curious what the agenda of the militants actually is. With russia or independence from gf or is there Something Else . I would not say there is a unifying message. It depends on who you talk to. Some guys said we really want russia to come in and help us out and support the Ukrainian Government and kiev but some said this is about their city. There was no unifying message. Its difficult to discern what the longterm game plan is. Marx joining us from ukraine. Coming up, we will talk about our single best chart indian stocks are soaring and may need it may mean bad news for chinese stocks. This is bloomberg surveillance. Good morning, everyone. Lets get to our top headlines. The u. S. Is sending 80 troops to help in the search for the kidnapped schoolgirls in nigeria. Most of them will be involved with operating unmanned drones. Almost 300 of these schoolgirls of being held by an islamist military group called boka ha ram. In thailand, there was a military coup. Lawarmy declared martial two days ago in thailand has been embroiled in a political crisis that has spent the past six months. Billionaire Donald Sterling is fighting to hold onto the Los Angeles Clippers, he is adding to his real estate portfolio at the same time. Year, he and his estranged wife have bought 59 million worth of residential property. Futures are up one and dow futures are up 16. Scarlet fu has a wonderful international report. Some analysts call it the moti effect after his sweeping election in india. Indian stocks have outperformed chinese stocks over the past decade by the most in 20 years. It has come at the expense of china because there index has climbed 400 . Is that theus economy in india has lagged behind china. If you look at gdp, it is the inverse. China is outperforming india. There is a recovery from the recession but the white line has consistently done better than india. Michael spence is with us with his focus on china. Bahave spoken to professor gwhati. What is the new prescription for india . They have to restore reform momentum and start investing in infrastructure and things like that at a much higher rate. This is what got bogged down and discourage investors. Modi hasnews is that come in with enough credibility any of and enough of a mandate that people think it is happening and you are seeing an uptick in the markets. If you go back to nehru, there is always a debate over foreign direct investment. Is that the single immediate value you can add . Can you say to General Electric or nestles come a, then. . It would be nice if he went in that direction. Big bang solution overnight but when he was campaigning, he went in the other direction and pulled back on some of the retail openness which is a sensitive area in india. I think he is a more fundamental problem. He has to restore a sense that this is a good place to invest. In the markets and businesses and Public Private partnerships and he does that right, and starts to open various sectors that have been closed off, they will do fine. I think india will go above seven percent growth again. Thats an exclusive, Michael Spence says go long india. You look at how indian stocks have done well at the expense of chinese stocks. Is money that goes to india simply come out of china . Its not a zerosum game. The problem with chinese stocks as it does not really track the economy. There are some in a peculiar characteristics. The stockots of market because they dont have other things to invest in. The shadow Banking System is giving them other options. The correlation between Economic Performance in the stock market in china which will become higher has been very low. The Indian Markets are more marketd and so the stock is coming closer to reflecting the economic reality. Two, does beijing know where to bet is on the map . Certainly. Within the border tensions between the two nations this is a huge issue for india. Yes, it is. The territorial issues are by far the most dangerous thing in east and south asia. There is the indiachina tension , there are these islands and chinas tension and the asians are very worried. Stephen roach will join us the next hour. Right now joining us are three killer photos. Jeremy picks these photos every morning and we have three. Fast food workers from mcdonalds are protesting at the corporate campus in oak brook, illinois at the annual Shareholders Meeting today and they are demanding higher wages. They want to be paid 15 per hour. Mcdonalds closed down there corporate headquarters. They told some employees not to go to work because of the protests. It is very real. Its a question for all of us would you rather pay more for a big mac and simple pay more money or not . They had very specific demands. They do, 15 per hour. And the right to form a union . Mcdonald says they do not have a corporate policy but 80 of the restaurants or franchiseeowned. The number two photo this is not darth vader this is the kiev mayoral candidate for the internet artie. Internet party. He is pledging antigravity tripods for journalists. I have no idea what that means. How many people were killed in the Eastern Ukraine overnight . 11. Campiness and its great except its not campy. There is nothing funny about this. Why would you dress up as darth vader. Maybe there is a subtlety we dont understand. Our number one photo of the day the september 11 memorial and museum opens to the public yesterday. The firemen hold the Night National 9 11 flag before was put in the Permanent Collection and the flight was found buried in the wreckage of ground zero. Its quite a photo. Thats a terrific job. I have to mention Michael Mckee who was directly involved with 9 11. He was at the bottom of the towers. He was one of many of thousands covered from head to toe in soot, like he was spray painted white. He had terrific perspective on the opening of the museum. It. Everybody can see its open to the public so maybe one day we will make it there. I cannot do it now. Give me one year. The emotions are still raw. Many people say they cannot bring themselves to get there. Coming up, Global Growth stalls should the u. S. Fear inflation risks . We will discuss that with Michael Spence next on surveillance. Whether republican or democrat tom a this is eric twitter question of the day thats enough to keep a barbecue going memorial day weekend. Areore and more adults using fast food jobs as their primary income. It space to parttime america as well. Speaks to parttime america as well. This is bloomberg surveillance. Lets get you company news vendi is selling half of its stake in activision. The price tag is more than 850 million. It used to be there Controlling Shareholder and it had most and it sold most of its stake last year. More cost cuts at some night the ceo will cut expenses in the Electronics Unit the sales unit by 20 . Sony plans to start a new Television Business on the company has lost more than 9 billion in the past six years. Chinese online retailer jd. Com begins trading on the nasdaq today. Point 8 billion in his Public Offering yesterday. The shares were priced above the market range. That is todays company news. Did they have a Conference Call . Yes, you have to. I would love to be on that. We have all been talking about alibaba and suddenly jd. Com slips in there and it is much more like amazon. Ellie babbitt is much more like ebay. Jd. Com wasation of pretty high compared to amazon. It is getting a richer valuation. I want to get on their Conference Call. Your first question will be who is your auditor. Lets switch gears what you wish for be careful what you wish for. Bill gross suggests all economies will trend toward lower chair director ray. With a new neutral, will or be more risk in gyrations in the market . The worlds expert on this is Michael Spence for years at Stanford University and now with New York University and an esteemed laureate on these matters of risk. There is this assumption of a dampening of a lower animal spirit. What does it mean for markets in how we assess prices everyday . Are two big influences on markets one is the Monetary Policy and the other is whats going on in the real economy. Looks to be economy pretty stable but growing at the low potential. It might be 2. 5 at most. That is actually quite comfortable for the markets with accommodative Monetary Policy. When does it become uncomfortable . Suggestionre is a that this is somehow a defective pattern. There is social unrest, a break in the policy structure something disrupts this sort lmness. Paul krugman would suggest we need to do more. To jumpstart us out of these challenges. Do you agree . I agree with a general statement but i think what he ought to be done are different things. The main problem in america is on multiple dimensions, we are under investing. I think paul thinks if you inject enough aggregate amount in the system you will achieve something frequently called escape velocity. I think its a more fundamental problem. Its just flatout underinvestment in the public sector. He would argue the government argueng and you would private investment . Investment is important but is theson its subdued government below where it needs to be. This is too much, we need this to be algebrafreight. Let me explain most people think investment means private investment. There is a hugely important publicsector investment component. Partition between private and public is key in the goes to the angst we get when we talk about infrastructure. Meth . Escape velocity of no, but you dont want to pick one model or another. Animal spirit matters. Rejecting confident injecting confidence into the system and getting a sense the trajectories different is important. So is creating the rockbottom foundation on which an economy generates growth. That is Human Capital, infrastructure, and then followon private sector investment. Water banks doing . Getting out of certain market activities but does debt but does that reduce risk . It probably does not change the risk profile. Business is a response to an unstable Financial System that we had before. I dont think that will increase the risk in the system, to be honest with you. Its just an adjustment in the way the Financial System is configured. You have less of these entities that do everything with embedded conflicts of interest and so on. Spence, thank you so much on this International Day. You spend the summer in italy . Part of it in the United States and part of it in italy. The forex report today i am looking at the euro Stephen Roach, senior fellow be joining us in the next hour of surveillance. This is bloomberg surveillance. Beijing calls the act antihuman and antisociety. Stock markets advanced higher as janet yellen considers a considerable time. Est buy reports at this moment we look at their firstquarter gloom. Good morning, everyone. This is bloomberg surveillance. I am tom keene. Joining me, scarlet fu and adam johnson. How does this hour, perfect timing, Stephen Roach from el university. Yale university. Best buy earnings are crossing as we speak and it looks like a mixed bag. Scarlet, can you help us make sense of them . Earningspershare coming in at . 33 a share. Analysts were looking at . 19. Comparableok at sales, samestore sales, down one point nine percent. Analysts were expecting a drop of. 9 . Revenue is coming in later than anticipated as well. Piper jaffray said that the First Quarter is more important than you think. There are issues of smartphone maturation of the smartphone cycle. In other words, no new products. In addition to the weather challenges the retailers have told us about. The overlay of international, sales down over 5 . Juxtapose best buy versus what we saw yesterday from tiffany, which was a home run. Best buy gets 85 of its revenue from the u. S. It will not get that much of a boost from the overseas numbers. As mr. Jolie told me a couple months ago, it was sales. Trying to get the sales and the fact that he has got to compete with amazon on price come that is the real problem. Davids strasser with us here in the little bit. We will talk to Stephen Roach about American Consumerism. Overnight we got some positive Economic Data from around the world. A 5multi, sending asian stocks higher. He why part while we were up yesterday. 8 30, we get the chicago fed activity as well as initial jobless claims. The Bloomberg Consumer confidence index. 10 00. G home sales at i think the fed is looking at housing. You just really wonder what is going on. A few other items to note. Kansas city fed Manufacturing Activity comes out. And we discussed best buy. We will have someone from hewlettpackard on gamestop. And the president will be speaking at the Baseball Hall of fame. Out ofe are some reports a deal that would shake up the tobacco industry. A quote into the wall street journal, arnolds american is Reynolds American is in talks to buy lorillard. The combined company would be number two. Blackstone has created a new company to buy up apartment buildings. Last year they bought up Apartment Properties valued at more than 2 billion. The head of the unit says that blackstone is concentrating on suburban areas where there is not as much new construction. Carnivals cruise ships are going greener. They will spend up to 400 million on new exhaust winning systems for ships that would allow carnival to meet new air pollution standards for u. S. Coastal waters. What a wonderful set of tests today. Today. Ts terrorism in china. Present tension. Han chinese have become more than a distraction. Stephen roach, you are thinking about the sprawling cultural and he joinshina, us now. Is western china unbalanced . A little bit, tom. Ethnic violence is much more of an issue in challenging the fabric of social stability in china then is, say, the rise and fall of employment, which many in the west tend to focus on. The government is certainly nervous about what is going on in sheen john province. You and i have talked about arbitrage. Labor is that labor arbitrage going to go in land to the west or doesnt migrate to other countries does it migrate to other countries . Coastal China Remains much more competitive than we tend to think because the wage gains are being offset largely but not completely by rising productivity, so the unit labor costs are up a little. There is a migration of production platforms to central china. But not to the far west . Not yet. And not nearly exiting to other countries, as many surmise. Give us a sense of how important xinjiang is to the chinese economy. Very little, but it is a concern to the beijing readership, and they clearly indicated through a security alert that this is something they are focused on a lot. Do they have the potential to contribute more . They have the resources and potential to contribute more from that point of view, but it turns out my production, the dental is relatively limited. Potential is relatively limited. There is a massive question about Stephen Roach on china optimism. I met with mark mobius yesterday and spoke with him at length. He is a china bowl. Bull. Do you reaffirm that . I am still constructive. I will leave the markets to mark. They have underperformed the last two 6, 7 years. The economies at a critical transition point. Much bettermuch, than is widely surmised in the west. Serviceslead, consumerlet, taking over from the exportled. This is not widely appreciated in our markets are by the western critics in china, of which there are so many. As the economy. From the economy pivots infrastructure to the middle class, what is the longterm trajectory for gdp . Consumerled economies grow more slowly. I think that right now china is 77. 5 , probably bottoming out a little bit. But over the next 10 to 15 years , the growth rate will slow well below that. See for china is to they grow rapidly enough to continue to absorb surplus labor bodies employed. The answer is they do. It is far more laborintensive than manufacturingled growth. Absorption with seven percent growth that used to take 10 growth. The president wants to give to asia. Ts to pivot we are working on a trade agreement with 12 other nations, but not china. Is that a mistake not to include china in our debate on transpacific trade . It is a mistake for the u. S. China has a comparable , regional rcep cooperative economic plan, that excludes the u. S. Both of these multilateral agreements are exclusionary and run the risk of diverting trade from either the u. S. Or china. Best in everyones interests to fold these 2 together and have one pan panpacific agreement. That should be much more important than excluding one or the other. International day for bloomberg surveillance. Much more with Stephen Roach of Yale University on china. We did best buy earnings earlier but this is an m a deal. Retail buying the hess operations. 2. 87 billion. Trillion to the 1. 7 have seen in global deals this year. What this speaks to is hess wanting to be an exploration company. It got rid of its refineries and now it is spinning off retail. Marathon splits from being a major into a refining company. You will go your hands like this, i will do my hands like this. Vertical versus horizontal, i dont know which is right. What a mess this is. Stephen roach, you have the oil dynamics between russia and china as well. What was your reaction to yesterdays headline announcement . 400 billion over 30 years. Look, i think the guy who moved was putin. There is a growing sense of desperation, being cut off from europe and the west. He needs an ongoing source of revenue. China is a huge bonanza out there and the chinese struck at a moment when putin was willing to concede on the terms and this is good news for them. It also reflects the fact that china is diversifying away from the u. S. Probably Morgan Stanley was the lead underwriter. Great firm. Our twitter question of the day we want to hear from you. We will be right back. Good morning, everyone. I am tom keene. Stephen roach of the yale looking at individual stocks and china. You know alibaba and all that. Whateconomist things that is going on in china is more than just a stock story. Tell us about this right now. Why are you focused on alibaba . China is focusing on a developing consumer society. Had to build stores and malls. They dont have to do it. This is a shortcut from the emergence of the middle class to ebay shopping. Ecommerce volume right now in china is exploding. That is what alibaba and these other internet platforms is all about. There is a huge aversion to shopping in a limited bricks and mortar type establishment. Itsmmerce, in terms of offering comments its delivery system, its cash Payment System , is a very powerful catalytic force. Of Morgan Stanley asia for years, do you have confidence in their accounting system, theyre auditing system, and how they bring that over . To ali baba. D no can the New York Stock Exchange or nasdaq say yes . Hong kong said no because of the partnership agreement, not because of the transparency of accounting. Most importantly, tom, chinese consumers are saying yes to ali baba, yes to a whole variety of ecommerce choices that they are using now to build this consumer society. We talk about a slow transformation of china to consumerled growth. The internet is catalytic and excel earnings development. Conversationin my with mark mobius, he put forth the rule of law. What is the state of rule of law and china as we look at their markets . It is weak, but this is a point of focus. There were additional reforms that were ratified in the meeting of last november, taking the judiciary out of the party structure. They have a long way to go in this regard and they need to certainly focus on that as they work on developing a better framework for Property Rights and Consumer Rights protection in a legal system which is only partially developed. What do you look for from their government as we go through 2014 . What is the message we will see from beijing . The message will be, number one, focus on the structural transformation from manufacturing to services, from exports to consumption. Number two, focus on a more disciplined approach to limiting reforms. They are putting in place a new system of governance right now. Has aing up, best buy struggling firstquarter. It is bloomberg surveillance good morning. This is bloomberg surveillance. I am tom keene. With me, scarlet fu and adam johnson. Here is adam johnson. We will start in western china, where a series of explosions in a market killed 31 people and wounded 90. China has blamed uyghur separatists for similar attacks in the xinjiang region. In ukraine, per russian militants attacked ukrainians at a military checkpoint. Witnesses say about 30 ukrainian troops were wounded. In thailand yes, we are completely international here the military has staged a coup. Thai army chief took control of the government pulled up the army declared martial law 2 days ago. Thailand has been embroiled in a political crisis for the last 6 months. Amazing how there is so much happening around the world. Theres some serious over the oil the chinese putting an offshore oil rig effectively and what the vietnamese are claiming as their territory. All of this as markets drive ever higher. Isnt it incredible . 44 directions this year in emerging markets. This year inns emerging markets. A wall offore it worry. When you talk to scarlet fu there is a wall of joy. Best buy sales fall short of analyst estimates and the stock is falling this morning. Joining us is the managing and i widely followed retail analyst. What is the problem with best buy . There is a lot more fear out there than the published number. I dont think this is that at a number. The issue im sure they will talk about it on the call is that there is nothing exciting in ce right now. Theyre doing all the right things as a company but it is a tough category right now. 6point landthis that the ceo put in place and it boils down to 2 bullet points. They have got to lower costs and they have got to integrate the internet into the brick and mortar how are they doing on both of those . Wecosts were far better than thought and growth on the internet was 25 , a tad under 30 . Those are both good numbers. Those are the real structural issues at best buy, the underpinnings of what will drive the future for the company. When there is no product out there, these guys are going to struggle. You look at their competitors, a lot of Smaller Companies closing out there and a lot of guys like , they arend sears doing a lot worse than best buy. It sounds like best buy is vulnerable to the smartphone and housing cycle. Withinhe ceo dude the ceo what can the ceo do . As relates to the housing slowdown, theres not much you can do about it. We are seeing that all across retail with slower numbers. As far as product cyclewise, theres always the strategy of hope for a better product cycle in wireless, but i think what they are doing is trying to figure out opportunities in the store they announced deals with samsung and sony to put Stores Within stores. I think you will see more of those types of partnerships maybe a google, and expended or upgraded partnership with apple as the year progresses. They are not sitting still and playing the game of hope. They are really out there trying to figure it out. Staples was a great example of an attempt to really drive Consumer Products in the store to drive traffic in the store. I think they are really searching and trying to figure that out. The real story at best buy is going to be the holiday. Last fourth quarter, the gross margin was the problem. Walmart crushed everybody. My sense is that the stock stays in some sort of trading range until we get real clarity around q4. By there also joined former head of Morgan Stanley asia, now a professor at yale. There is a deeper issue here. The American Consumer is stock in a Balance Sheet recession. We have had 6 years were consumption growth in real terms has averaged 1. 25 . This is the weakest period of consumption postworld war ii. All we have got is qe for wealthy people. This is critical come on Michael Spence spoke about this in the previous hour. The real economy here is a steve roach economy. You have mailed subpar growth nailed subpar growth on the backs of the subpar consumer. And we see that in best buy. When does labor get their fair share . The consumer Balance Sheet repair by my calculation is looking at debt and savings ratios and is at best halfway there. Consumptionum growth could limit brilliant. David, how does your retail world adapt to steve roachs world . I have to tell you, we have written you have done it in much more detail than we have done it, but it is our biggest fear out there. We are worried about student loan debt, worried about those things. The reality is you are seeing Companies Really look to cut back square footage, really try to optimize the assets of they have. It seeing real estate is one of the best things you can do in that respect. Last night you saw William Sonoma have very good numbers will stop why . Have very good numbers. . Why . It is the highend. David strasser, thank you as always. Just absolutely critical. Fannie mae underscoring this yesterday, 2 americas. This is bloomberg surveillance. I am scarlet fu, along with tom keene and adam johnson. Bank of america is getting rid of an electronic Market Making unit just last year. The decision comes as regulators increase the scrutiny of whether trading in the stockmarket is fair. More than 100 mcdonalds workers were among those arrested at a protest at the Company Headquarters in chicago. They are demonstrating in favor pay5 dolly 15 an hour and the right to form a union. And the twitter ceo wants to reassure stockholders, saying that top executives are holding onto their shares and are committed to the business. Twitter held its first Shareholder Meeting. The stock prices have fallen 50 this year. Even though a lot of the insiders do not sell their stakes, you saw the stock react as they did. What is the minimum wage for San Francisco . 40 an hour . That as president obamas whole point, you need a federal minimum wage that is higher because theres is so much fragmentation around the country. Ok. Cyber security is a big headline these days. Both the u. S. And chinese engage in cyber spying. According to the u. S. , the goal of our spying is due, terrorism. My morningis read is how china does not make that distinction. It is from ian bremmer. China doesnt seem to recognize that distinction. What kind of had a response has washington opened up what kind of pandoras box has washington opened up your . Complex cultural issue. Stephen roach, what is your take on this . Scarlet,of all, criminal activity from anyone needs to be prosecuted to the full extent of the law. But number one, these charges that are in the indictment you brought the indictment with you. Such a nerd. Has nothing new in it. It was all in a report the leading service agreed from published at 17 months at the leading Cyber Security firm publish it 17 months ago. Absolutely nothing new in the indictment. National line between security and competitive packing is a blurred line, to be certain. Who are we to call pop callin pot calling the kettle black, given the egregious violations by the nsa. On formulators, for negotiators, and our own population. How important that there be other announcements from other nations on us . They are all in these various Cyber Security ports. Whether it is a verizon report issued annually or even in this report. The leading hackers around the world are, number one, china. Number two, i believe, romania. Number three, the United States. The thing that worries me particularly about this u. S. China issues that it comes 6 weeks before the scheduled strategic and economic ballot between the u. S. And china slated for early july no, this is slated for early july in beijing. It is a big meeting between senior delegations of both countries. Discussthe forum to these issues intensely behind closed doors rather than go public with most wanted posters and other sensationalist documents that were leveled in the political arena for these charges. This is politically motivated, then what should chinas response be . Chinas response needs to be more measured and mature. I read some of the state press responses yesterday. They were not along those lines. We need much more collaboration on Cyber Security between our military, their military. We were making progress there. Those issues have been temporarily canceled and hopefully they can go back together. Feel free to take me through this . Yeah, please do. When i heard about these charges against these chinese officials with the nsa, we just dont have the credit to go criticize someone else for kind of doing am i way off base and saying that . You are not. We make the distinction because it serves our purpose is that it is fine for us to do it because we are just protecting our people from some type of foreign incursion or invasion of our rights, but they are going after our companies. Whos to say who is right or wrong in this context . Again, we have really pushed the envelope. We have also gone into Companies Like petrobras in brazil, theanies in china, under guise of National Security. Is that truly National Security . I mean, come on. What is your real prescription for president obama . If you need to provide leadership on this issue, what is Stephen Roachs test outcome for the president . Collaboration and cooperation, building means of communication, at the military and civilian level, on all of these issues, whether trade or Cyber Security. We need to share information and come together to a more sustainable resolution. I think were making some progress in that regard, before we blew this thing wide open with this doj indictment. Who do you fault . Was overlythe doj aggressive in bringing out evidence that was really in the Public Domain 17 months ago with this report. Steve roach with us on china and others have the security. Another Cyber Security. More and more it looks like workers to buy stocks are likely to be independent. The number of independent advisors has risen by almost a third over the last several years. Superb article. You and i know this well. People may switch firms or may just exit the big firm business. That is the basic thrust of the article. Steve roach with us, decade at Morgan Stanley. Inventedly the guy who Morgan Stanley economics, is the retail model broken for wall street . You have lower yields, cant make money on bonds. Will you see the institutional on the retail world split apart . I sure hope not, top, because my former firm has made a big bet james gorman has made ia huge bet on this. I think what most would concede, if retail is going to add value, it will be through strategic advice rather than plain vanillatype transactions. I think Financial Advisors are definitely moving in the direction of offering far more than just the ability to execute a trade at the lowest possible price. It is a different creating trust, etc. Trust, or follow management, planning, longerterm help i recommend anybody on global wall street review this article. Superb article about the actual decision tree of how people leave a Morgan Stanley part of it is the technology that has made possible because smaller firms have access to the same platforms as the big wall street banks and they are not as disadvantaged as they were before. You are getting tired of all the red tape that they have to jump they dont have the advice from Morgan Stanley european economics. People dont understand, steve roach invented what we are talking about about economic advice it is out there for everybody. The internet allows connectivity and advisers to analytics all over the world. It is pretty easy to do. Roachback to 1995, invented this before the internet. Oh, i invented the internet, tom. I never knew that. I was before al gore. [laughter] great article today in the journal. I wonder if it makes james gorman nervous at any level. Although he has pivoted to equities, leblanc fine, jamie dimon have got to be looking at this with a very weary i. Eye. Ary strategicde a strong that postcrisis, and Morgan Stanley is turning out good numbers in its private manager business. Contrary to the rest of this treat, the latest report was very strong. Our Erik Schatzker had a number of interviews with mr. Gorman. Hought he was the exact executive of the year, the way he has turned Morgan Stanley around. What about any given firm, with china right now Morgan Stanley billboards would greet you. Does american backing still project to china . Look, china has a huge opportunity for the world and for Global Financial services. The key for nonchinese Financial Services is access to those markets, tom. Morgan stanley had first joint venture and is now a new platform and everybody else is trying to get into that market. Steve roach on wall street and china. Coming up, this is leaders gather for an annual conference and Ryan Chilcote is there for us and will be ringing is a conversation with a billionaire. You do not want to miss this one. Good morning. This is bloomberg surveillance. I am tom keene. Futures up 7. Dow Business Leaders and billionaires are gathering in st. Petersburg, russia, for an annual economic forum. Ryan chilcote is there and is joined by billionaire Alexei Mordashov of severstal. He is worth some 12 billion. Take it away. I would say one other thing about Alexei Mordashov that you may not know that she is a big player in the American Steel market. Buyingt 10 years American Steel plants. That is one reason it is nice you could join us today. I want to ask you about the steel plants you have in dearborn and columbus. You have said, severstal, recently that you are considering options for those 2 plants. What are the options . Basically, there are 2 options. It. Ave it or dispose , it is a very good set of assets very profitable. Standards. Ountry howourse, it is small for, say four big potential consolidation in the United States. Anyway, but we dont have any pressure to dispose it. You got an offer from u. S. Steel . We have different options they did make an offer . Genuine and strong interest from all interested players. May do an offer and how much. Clearly, they have offered you enough yet. Well, it is a process. We are quite optimistic about interests, which we see. But we will see. A good possibility and good opportunities and options. I know you were weighing your options with the steel plants before this geopolitical crisis developed. Nonetheless, resumable or something that you have to Pay Attention to it presumably something he that you have to Pay Attention to. Russia is the big bogeyman and you are an oligarch, a russian billionaire. A few years back you apply for government loads for your plant to provide lightweight steel and you do not get the loans. How much does politics figure into the equation of whether you sell these assets these plants . Not at all. Graphically comfortable doing business in the United States . Absolutely. Toont feel any inquiries us from any authorities in the United States, in the United States or in russia. We are doing normal business to contribute to the wealth and posterity of stakeholders and shareholders wil. In general, what is the consequence for severstal and your businesses, the sanctions we have seen so far . You are not sanctioned, obviously. Severstal is not either. Nonetheless, the ratings have gone down, presumably borrowing costs have gone up. We dont feel it yet. On specific sites, we dont have any shortterm consequences, at least yet. More generala political type nature. T is really remarkable this is really important and might have longterm consequences. I hope there are no fundamentals for these functions to stay forever and the genuine interest between europe, United States, russia, to collaborate. You have a very small, 5 stake, if im not mistaken, in the First Russian Bank ever to be sanctioned by the United States. As that caused any problems for you . Treasury called you up and said that you want to divest that stake . Not at all. It is an issue if you own more than 50 . I was just one of your plants, the one in dearborn, supplies still to specific carmakers. Ford is making truck out of aluminum. Are you concerned about the demand for steel from the carmakers now that they are having a lot of success with the aluminum trucks . Yes, it is a concern for the Steel Industry in the United States and russia. It is a very legitimate question for us because we should stay competitive and it should be sustainable. This change of substitutes is [indiscernible] the Steel Industry was always able to revamp itself and you have a quality cap of product to satisfy our customers. I hope we can continue with this but there is definitely shortterm and longterm yields. The last time we spoke , steelei mordashov billionaire of russia, speaking with Ryan Chilcote. You can catch the rest of the interview with him on bloomberg. Com tv. Fascinating insights here. Very different meeting without american executives, the sanctions this guy was hit by the sanctions as well. He sees no pressure to dispose of assets in the u. S. And doesnt feel consequences from the sanctions. Fascinating. Tom . Good morning, everyone. Bloomberg surveillance on Bloomberg Television on Bloomberg Radio and all products on Digital Media as well. I am tom keene. With me, scarlet fu and adam johnson. We are pleased to bring you Stephen Roach of Yale University. Here is scarlet fu. This is from the files of bloomberg west. Vivendi is selling half of its stake in a Videogame Company activision blizzard, the maker of the popular call of duty series. Activisionsto be Controlling Shareholder. It sold most of its stake last year. More cost cuts at sony. They will cut expenses and Electronics Sales unit right 20 . They plan to start a new tv business as well. The company lost more than 9 billion in the past 6 years. Jd. Com begins trading today on the nasdaq. The company, whose Business Model is similar to amazons, raise 1. 8 billion in its ipo. Thees were priced about marketed range. That is the company news from the files of bloomberg west. Adam, alibaba . Alibaba in theory is going to be in the fall. It is the one that got all the headlines. With us,n roach formerly with Morgan Stanley, now with the alien university. When you look at the state of the chinese middle class, it is it growing fast enough to support these hopes and dreams . The middle class is growing fast enough through urbanization. Jobs ands to provide real income and, finally, sense of Social Security and health care to underpin the safety net to convert the labor income and purchasing power. It is going slowly, but definitely in the right direction. The cant believe, scarlet, number of people bringing up pollution in china. They have a real hard time attracting expats and their families. Look, pollution is horrible. In my last trip a month ago, the air quality was awful. Something very important is happening in china right now. April 24 they amended their illusion theyre pollution therol act to change penalties they assessed for polluters from a basically a miniscule amount to an openended amount based on key militant admissions. In terms of getting a handle on this problem, time and and has taken a big step under this government the people dont get. People are skeptical because they say they have done that in hong kong as well but they always doubt to the contrast in the end. I i grew up in los angeles so know about pollution. It took them about 20 years to get a handle on it. This is a huge issue at the grassroots level. Whether it of life, is food safety, environmental degradation or pollution, and the government is moving with new revelations to put teeth into their commitment. Backinging the discussion to the United States as well, what you have seen is a resilient set of equity markets. This is the bond market, what many suggests a strange signals. Ever lower Interest Rates in the United States. Ever higher bond prices. What is the bid up in bonds signaling . It is a raging debate, of which Stephen Roach frequents. I have never seen this before. A mystery of why lower yields. You have seen it before, you just over member. Think japan, tom. In the 1990s, the sure gdp trade was in the trade for all yes, everybody was wrong. The lesson in japan, a course theach at yale, is in Balance Sheet recession, the postbubble economies, longterm Interest Rates can stay lower for a lot longer than people think. We are in the early stages of our own japanese this is very important. Awill call Stephen Roach Balance Sheet economist versus an income statement economist. With the bill dudley comments from 2 days ago, the fed, the slack economy that yellen speaks of, what is that timeline that you see given this sluggishness . Isthe fed believes that qe the answer to the Balance Sheet recession, and it is not. The answer to the Balance Sheet recession is in dealing with the problems that are still competing on the streets, like excesshousehold that Household Debt and inadequate saving. Balanceumer recovery sheet repair would accelerate. What does he we what does qe do . It makes a few wealthy people a lot happier. Victory for burial peruvian he victory for nouriel roub ubini i cant do the ro accent. Qe5. 3, qe4, nouriel roubini. Theyre supposed to help the banks, for one, and the rest of us repair Balance Sheets. If that is not the savior, what is . Debt forgiveness. This has been talked about for a politically unpopular, rise of the tea party. President obama, to his credit, did announce at the state of the Union Address a small incentive for low and middleincome families, but much more needs to be done. These are the types of initiatives that politically are impossible to discuss in our congress. The fed, by doing qe, really provides a foil for congress, thinking that they dont have to do anything, the fed will fix it all. There is no fix. Theinancial statement of quarter came from jpmorgan, where they said the first 30 days of the quarter one of their statements, one of their filings, bloomberg reported this the new Banking System, is that part and parcel of this dampening that we are seeing, whether it is the new neutral or remodeled the way you put it . Are the banks in this as well . The banks are certainly being constrained as never before from getting into risky activity that used to be protected by taxpayer backstops. That does curtail excessive risktaking and leveraging, which was part but by no means all of the problem. But i think the real problem is still on the demand side, the lack of demand for new credit by Balance Sheetconstrained consumers. I feel like a broken record here, but that is the problem, not necessarily on the supply it is a direct challenge to the bernanke view that the Banking System has been the problem from the start and needs to be the focus of all the cures in the future. I think that he was dead wrong. A very critical Stephen Roach on the fed. Lets look at our agenda and the stories of the day. We have some company news here. We got through bloomberg surveillance this morning without talking about pfizerastrazeneca. As we go into the weekend, the shareholders of astrazeneca, schroders of london, are saying wait a minute, no one is talking to us. I think this is a huge backstory with this merger frenzy. Shareholders have power and they are beginning to speak for astrazeneca. Why,u can understand because in. He deal is about 53. 5 pounds astrazeneca is trading at 43 pounds. Shareholders are unhappy. The Economic Data we have coming out today, initial jobless claims coming out as they do every thursday at 8 30. ,000, almost as good as fewer people filing claims. Double back with new home sales tomorrow. There is no caution out there about this huge skew to rental building for family billings unless mcdonalds is on my agenda. The annual Shareholders Meeting takes place this morning. Workers are protesting they began protesting yesterday. They wanted a wage increase to 15 an hour and the right to form a union. That brings us to our twitter question of the day. Some of the answers. You can already order mcdonalds items on a little touchscreen imagine a mcdonalds atm. How about this one, the flipside . Is that true, steve roach, that if you give the poor more money, they go out and spend it all . They dont save a lot. But who makes the decision here, the employer or the regulator . This is the essence of our system here all stop. It is what it is. One more. Fabulous. Steve roach, thank you so much. With the Yale University. Onbloomberg surveillance radio continues. In the loop is up next with betty liu. Thank you again, steve roach. Good morning. You are in the loop. I am betty betty liu. Why he tried to make the midwest and what he thinks about raising the minimum wage. Heres a look at our top headlines. Sales keep tricking at best buy. Fell moreter revenue than three percent, and i frequently you drop. Dd. Com starts trading at the nasdaq. An activist wants to boot the entire board it has agreed to sell its red lobster chain. Him over in russia, missing Petersburg Forum is underway. This is overshadowed by the conflict in ukraine and clinical tensions with the u. S. For more, i want to bring in ryan