Transcripts For BLOOMBERG Bloomberg Surveillance 20151015

Days. Francine it is all about the fed, and those odds about them hiking just got that much lower. Tom but i would also suggest it is about the real economy. John norman joins us from bank of America Merrill lynch. This is a real economy discussion filtering in. Francine lets get to bloombergs first world news in new york. Isnie president obama pushing back his timetable to bring americans home from afghanistan. The white house is expected to announce today that they will keep at least 5000 troops there 2016. 2016 according the taliban and has stepped up attacks since the u. S. Ended combat operations in afghanistan left december. More problems for volkswagen. They see some they face a mandatory recall in germany after cheating on omissions tests. Regulators rejected their proposal for a voluntary callback. At majore delays airports across the u. S. Last night because of a computer used for terror watch lists. The outage lasted 90 minutes. Authorities dont think it was intentional. Donald trump has a new target Bernie Sanders. After the debate, the republican frontrunner says that he is a socialist communist pushing clinton to the left. I watched her to the s he has to give everything away because this maniac that was standing on her right is giving everything away so she is following. That is what is happening. They do share certain positions they both rail against the influence of money in politics. Report says that the london skyscraper rose 11 in the First Six Months of the year. London is now the third most expensive state to rent office space, tied with tokyo. The most expensive is hong kong, 67 more than the second place of new york. You might have to move down a lever. Tom we are sleeping in the park under the theater pan monument. It makes central park look cheap. Good morning. Francine good morning, tom. Tom i will be here to order is this is great. We finally got a day to check that works. Francine we love data checks lets have a look at currencies. Tom futures are up 15, equity markets disassociated. A lot of company news with burberry. I would go right to the bond market a 10 year yield right now is now under 2 . The bloomberg terminal you can see it in currency markets, the dollaryen i would go to more than anything. Omics, and he will be visiting our headquarters in new york and a week ago he was talking it up. You cant do abenomics with a 118. 39 yen. Will be joined by mitsubishi in a while to give its perspective. Francine great data check. Tom my data check is real simple, folks. Bloomberg is great in london. Francine there you go. Joining widely blocking thank you for coming on. We will talk about the data checks in a second, but carson, you put a note out 50 minutes ago saying that the stock prices down why are you shorting it . Arson we are shorting it because it is known at this company, as well as the stands, centrally asia, that it has some problems. But the problems are actually far worse that investors seemed understand. This relates to widespread corruption that has occurred in pretty much every single one of its markets, which was operating in central asia. Francine do you have evidence to back that up . We have spoken to the spokesperson he says they are trying to be as open and transparent as they can on all issues. Carson i take issue with that. That is part of the thesis here. Has muchpresume, better information about what has transpired then it is given the markets. Francine you have evidence for this . Carson we have a list of payments that were made in numerous countries, that in many ways make no commercial sense. The is totaled about 2 billion u. S. Dollars. We think there is a good chance that these are corrupt payments. It is impossible to say which ones are corrupt, but we think telia needs to provide a lot more information to investors in order for them to make decisions. Francine carson, so that all of our viewers are hearing it fell 3. 3 . If the price decreases, you make money off this. Carson yes. Sure. Tom you make a lot of money on do you take positions shorting before you announce the Securities Research . Are you in the shorts as you come on that set this morning . Carson yes. We are always very clear that we research companies, take positions, and communicate our views. Tom but you took the position before you disseminate the research. Do you think that is fair trading . Is just a most doing that . Is jim stables doing that . Carson we are activist investors. Tom fair. Carson shortsellers given a much harder time for what they are trading tom you are going to hell, that is what the world banks. The wolrd things. Carson people blame shorts. Tom you are speaking to two other major auditors. It has been deloitte tom are you saying on the Balance Sheets there are issues of good and bad well . Carson we think that writedowns could approach. If the company were going to be intical as an accounting the past it could approach to . 5 billion usd. Francine there is also an investigation going on. Tom is this fair play . I think it is great, the research you have done, you have worldwide acclaim, but is the process of what he is doing appropriate to come out with the disseminated research somewhat after taking the short position . He is putting his money where his mouth is, and i think that is totally fair. What he is saying to the public at large is there is a problem, we think there is a problem, we are battling our view by trading in the marketplace it being very transparent. I see nothing wrong with that. Do you have to stay outside the United States because you are worried about regulation . Carson not at all. Wet to explain the bar that have to clear with every single sentence that i write in a report, i assume every time a release a report that i could be looking at civil litigation from the target company and that i will be dealing with the hostile regulator. I have dealt with regulators numerous times, usually my approaching them. I would never characterize anyone of those interactions as hostile. I havent been too bad. It is a very high bar. Have never met anybody doing Equity Research for charitable purposes. My model has a lot of turbulence. There are the legal issues that come up when companies sue not takingn sachs is positions, they are doing Security Research look, golden for the privilege of sitting in between, the public and the market, they have to segregate research from sales and trading. Tom but you are not segregated. Carson no. Francine thats clear. James we should also talk about what is not moral, the corruption the public are or conversely, he says you should buy these shares be ould francine i want to try and understand know how many shares you have short right now among you and the clients you have. Carson first of all, we dont have clients. This is internal capital. We dont talk about our actual size. Drancine do you hold woul you look at shorting it because carson is here telling us that we should . Carson i find the short james i find the short selling process difficult anyway because there is a risk that you can buy a Company Going down in price and be taken out. New management can have a whole different outcome. Tom are you going to have a field day in the commodities space . If you see commodity Balance Sheets, the next six months, will that be fun . Carson i think we should differentiate from other commodity traders. The way that our Research Process works, we are not taking macro views. I am not directional on commodities. I focus on companies that are not being transparent, or that are misleading, if not defrauding, shareholders. Francine and you have done a lot of work with china, in these chinese companies, that had questionable results trying to reverse. We will talk about china next. Tom we will talk about the challenges that china is facing. Later today, David Blanchard will join us, formally with the blank of england. The markets havent moved to a lot to talk about, but particularly the real economy. Stay with us. Tom good morning, everyone. Tom keene and Francine Lacqua. Vonnie is in new york and she gets us started with a business flash. Vonnie netflix hit a speed bump, reporting thirdquarter u. S. Subscriber growth missing estimates. Netflix is making the introduction of the new chip taste debit cards. They can collect from customers who hadnt updated their account information, which led to a bigger than expected turnover in subscribers. Tesla begins distributing Autopilot Software for its model s electric car. It would help drivers stay in their lanes or change lanes for them. It would also allow them to park themselves. Drivers will still have to grabbed the Steering Wheel every 10 seconds to keep it from slowing down. Luxury goods maker burberry is forecasting profit lows to drop for the second straight year. Falling sales in asia. They get more than 30 of its revenue from chinese consumers. That is your bloomberg . Your bloomberg flash. Francine we are back with james you cannot with the news that you are shorting a stock and talking about corruption. We knew that there were some challenges after a law firm took a look at corruption accusations but this isught not enough. You say this goes further. We havent been able to independently verify it they are selling it off, so why do we care. Result basically, as a of how widespread the problems are, they are not going to get that much money for these businesses they are divesting. Backing up, distant vestige or seems to be a kneejerk reaction. It was announced the same day that a swedish journalist announced she was publishing a ia. K on telly a so even if they did do something wrong, they are now getting rid of it. And they have new managers in charge. Carson its an interesting point. They have announced that they will continue to make Dividend Payments to certain highly questionable parties and altered by john in oz or by john. I think they could end up paying settlements in excess of 1 billion. Tom those are very important allegations, and if you look at allegations those are serious allegations. How will the Company Address your allegations question mark what will they look for . Carson these allegations are not new. There is a investigative journalist who published on this starting in 2014, and now tom you had it didnt view on the company. Carson do i expect them to react . Hopefully they will. We are calling on the company to be significantly more transparent, and the fact is if there are problems in the financial statements, and we believe there are, the genuine to publish accounts that have not really tom this is important. On financial statements, which line item are you most concerned about. Is it a question of revenue recognition or a Balance Sheet . Takere looking for them to major writedowns against what appears to be very constructive potential. Carson most of it is coming from these eurasian businesses. Are going to be able to receive when they sell these eurasian businesses is a fraction of what is implied. In addition to the fact that because of its structure it is consolidating it as though it owned 100 of it, but the actual number is much smaller. They will probably get about 2. 3 billion for this, a fraction of the value implied. An ongoing business or is it Lump Sum Payments that are coming out of these nations . Carson they have to repatriate the cash in order for it to be real. They have had problems both in the pol and is pakistan getting cash out, and that, we would argue, is a function of a business relationship. Francine we spoke to the spokesperson in the last 10 minutes, and we need to make sure we give their side of the story. They say they are trying to be open and transparent them all issues. We will talk china next. Up, the head of rate strategy joining us. Francine this is bloomberg surveillance. We are looking at live pictures from hong kong, where it is cloudy but hot. We are back with the muddy seller,ounder, a short is it more difficult to make money for selling in this environment . Carson yeah. I mean, a lot of times, people are leeward in by valuation charts. When you have an environment where there is lots of money ,lowing into get these bubbles they can be very enticing that is very difficult. With china specifically, it has been difficult to short china because you ask yourself where do i short equities related to china . Isg kong, the problem there there has been a lot of stock manipulation. I have called this the biggest pump and dump in the history of humanity in aggregate terms. A lot of the stocks have very small floats and have been pushed well above the billion. Mainland china are putting people in prison for shorting their so we probably dont want to do that. Francine you have made a lot of enemies in china, but also a lot of money by going after chinese companies. Are you now more welcome now that there is a 90 from campaign . Carson i see this Anticorruption Campaign is being cosmetic. I think it is a ploy to consolidate power and i dont think things have changed. Bloomberg has done stories on the wealth of the president s immediate family and it seems to me that this guy is the cleanest liver. James when i look at chinese economy, i find it difficult to get Economic Growth the official numbers, 6. 5 comes in percent, where are you . Just a field are you at my level around 2 , or normal level . It is different. Son i would the thing the headline number, i would be more in line with 2 of 3 , but it is the quality of growth. A long time, 20 , 25 has been going into what i call excess waste or inflation in a bubble. Inflation growth is probably flat. Tom thank you so much. Next, we will speak with the bank of tokyo mitsubishi on a stronger yen. Stay with us. Francine this is surveillance. Lets get to bloombergs first word news. Vonnie quinn is in new york. Vonnie americas longest war will now last beyond president obamas term in office. The administration has pushed back the timetable for a withdrawal. U. S. Troops will stay there after 2016. The white house will make the announcement today. The reason is stepped up attacks in the taliban. The residents had hoped for all the 1000 troops to come home by 2017. The u. S. Will send 300 u. S. Troops to cameron to fight the militant group boko hoar aam. They have killed thousands of people in neighboring countries over the past few years. Investors want they wont have a combat mission, they will conduct intelligence and surveillance. In israel, hundreds of soldiers are on the streets to settle a monthlong outbreak of palestinian attacks. Eight have been killed this month and 31. Palestinians. That the newd security step will make matters worse. Isnt as bearish as someone it comes to oil. We were told that there is less than a 50 chance of it falling to 20 per barrel. He sees it rising to 60 by the middle of next year. I think it is important to look at the nearterm to mediumterm. Think about the more nearterm issues facing the market has demand out of the emerging markets that have been substantially weaker than what we initially anticipated. Turn to supply from lowcost , evens all surprising against our aggressive assumptions. Vonnie those are your headlines. Tom as you can see, 20 per no misses the idea of one is on that but certainly here at west texas intermediate, crude is 49. Its a good time to speak with derek on Foreign Exchange and particularly on the linkages. Did they do they have soap operas in england . Francine they do. Am the drama gives me to stronger yen. You are with bank of tokyo mitsubishi wheres the brightpoint for mr. Abe . Where does abenomics begin to unravel . Derek first of all, you can just pick a number you also have to talk about the speed and the general volatility. If we that into context, were to see a rapid move toward the 110 level, i definitely think that certainly rhetoric and some uncomfortable feelings. Tom eyewitness the wall street journal emergingmarket spread the basic idea of speed of movement. Are you seeing first and second derivatives right now to get you going toward instability or is it just annoys . Derek if you look at dollar yen it has been incredibly stable where broader markets have. Points i am highlighting to my customers is the potential risk that the , itsese yen could take on old characteristics of being a safe haven currency. It is interesting to see that. Francine and we also have this great story one of the best analysts whose foresaw the bond markets, saying that the yen could go to 100 in the First Quarter of 2016. That would be quite wrong. Derek i dont agree on a level that far, but i think the offset if it does take on safe haven characteristics because of a huge expansion of the japanese surplus this year compared to we stillyears, but have substantial capital outflows in japan and since the beginning of 2014, it has been 21 trillion. Tom can you be a Global Investor right now with the dynamics that you have . James i think you have to be. You dont understand where deflation is coming from or where it will go. Norman suggested that the United States is the big domino are they immune from the discussion . James i certainly see a bifurcation, with the relatively strong domestic economy. Abenomics, i would argue, the significant evaluation is essentially tempting to take business from other players in the region. Francine right, but on that basis, they arent going to work. James we have never had adequate closure on the third area. We have not seen Companies Come to the table and say we want more shares. Francine of all the great financial experiment work, yes or no . I know we are waiting for time, but at the end the day, we have had it for enough time to be able to make a call. Worry is that the whole reason behind it is to tackle the size of japans debt to gdp. There hasnt been in my opinion much of a focus on tackling the longterm fiscal structural deficit and by that i means tackling Social Security payments which will continue to widen significantly in the coming years difficult decisions. Tom can you still do and fx carry trade where you buy one short the other . Or is the shell game of a couple years ago over . Carson the differentials are not as they were so i think one of the reasons the euro has performed so well is that in the first half of this year it was a very attractive currency. It was a Great Attraction and youre using the euro in using the euro. Now that is reversing. Tom what is so important is the idea that the yen reverts to being the litmus paper for this. Francine we also go back to the idea that there is a danger in europe if it continues going higher, that we will be the next japan and get stuck so it doesnt go anywhere. That is not your scenario. James i do think one of the interesting features is very much of volatility adjusted carry trade. Volatility has come down again i think it will back off. Is there someplace where the bank of tokyo can help me make money so i can get cap fair . B fare . Fai james well i would go long japanese yen at the moment. Carson we could easily get to the lows tom i think that is a good enough call. But dont expect the taxi driver to take yen. Francine we can try. Tom where will he be in five years with this experience of domestic risk . Are in aell, if we situation where there is failure at that point i imagine it would be difficult to last beyond that. Thatnteresting thing on point is that his Approval Rating very recently had just turned negative. If we see continued failure on it could certainly be difficult for him to last. I wish we had more time. Lets come back and talk about it. Francine derek help any stays with us. Next, the president talking german yields and the fed. This is bloomberg surveillance, streaming on your tablet and phone. Francine this is surveillance. Rose, and this is, as the market speculative, the stimulus boost from the European Central bank. Lets bring in hans verno. It seems like we are in a risky situation where the fed doesnt hike this year and we are stimulus,more simila but we are seeing a filter through the real economy. Hans well, the ecb has hopes moreits qe Program Gives inflation that it actually did. I would not be so pessimistic because the core inflation rate, which takes away the influence this isprice, what the ecb alternately wants. Francine are you concerned about negative yields in europe . Hans yes, of course. World. Somewhat strange i think we have already gone beyond the point where the zero low interest policy is useful because it artificially drives that asset prices and keeps them to high. Even in america the earnings ratio is very much above the longterm average. The world has to learn to operate with normal interest byes one cannot postpone simply putting the Interest Rates to zero. Give us an update on what intellectual leaders in germany deal about the will to keep europe together. Adamant thatn there is a reason of politics to go through the monetary exercise you really push against that. Update. An more germany of course has incense and moving toward the euro as a a united longterm goal. For the time being that means the same thing and that is the difficulty, so all these bailout programs that have been done in the last few years, through the and the rescue programs and now we have the refugee accepts where germany every two days as many refugees as britain promised to accept until 2020. Germany has difficulties to ask for solidarity in europe, and there is very little solidarity at the moment. Tension quite a bit of between the fiscal demands on the one side and the unwillingness to participate in the refugee crisis. Tom thank you so much. A great skeptic on the future. Let me go to u. S. The ugly american here. I look at the front covers of the british newspaper and you see in immense tension between the u. K. And europe, but the same tensions are within europe as well. This will this be after for mr. Draghi. Carson there are clear economys the running has a ragged difference to each other and yet not a single Fiscal Authority. The real european agenda ultimately has to be a single Fiscal Authority and therefore tom are we anywhere near their question mare . I think i am inclined to read the fragmentation that currently exists. There is a narrowing of the differential versus the court, so you could argue that there has been some improvement, but overall you are still looking at a lot of difficulties. Francine i want to pick up on something that he said. He said that because Interest Rates are so low that means it is difficult to have a controlling function to differentiate between possible be askingshouldnt Central Banks to play the part for government and that is what happening. They dont have the policy francine right. They kept us together so far. James i would say italy has surprised very positively. They hunt reveled a lot of red tape that strangles the entrepreneurial vigor of the italian people. And there is good news coming out of spain. It is not a gospel of desperation. Tom you both see relatively good news coming out of the United States. The walmart shock yesterday, the challenges of the fed, disrupting great work. Carson the retail sales figure it was weaker than expected, but the reaction of the market was exaggerated. Report yesterday, we already knew that personal consumption fell so far. Goods back in the september, perhaps it is 2. 5 . You have to look at the four quarters on average, average person consumption to 3. 3 quarter on quarter, the strongest since 2005. The consumer in the u. S. Is doing well. Tom but we are buffeted by the news and the walmart bombshell hold that thought, we will talk with james bevan. Derek will talk rugby as well. John norman will join us. Stay with us. Tom good morning, everyone. Francine makua and tom keene. Francine has advised me to stay away from Vivian Westwood. It will lighten my wallet. I am watching that carefully. She looks great in Vivian Westwood lets go to vonnie quinn in new york. Vnonnie it would look good with the platinum blonde. Today of began trading after the biggest ipo of the year in the u. S. The Company Raised less than it wanted. First datas owner didnt sell any of its stock. 27had taken ftc private in 12,007. Plans a 67 increase over the last fiscal year. That moreloomberg sales to women are the key. It says that the womens business will more than double in five years. Is claiming the high ground in the airline rate hike. It says it will be the first carrier to offer free highspeed Internet Access on all of its planes. All planes will be wifi capable by this time next year. So you cant work on the plane home this time tom but maybe next time. Tom anywhere you go now you have wifi. You do it better here than we do. Francine lets talk luxury fashion. Andl with us is james bevan derek helalpenny. Burberry is disappointing but this has nothing to do with the brand. They have huge exposure to china and not enough in japan. James the other issue is that they have tried to diversify their books. Not a word on other goods whatsoever. Francine we have a chart we like a burberry chart. You will give us the Mark Francine this is when he left the company. She was succeeded by the creative director. The share price hasnt done so badly. There are issues about whether he is creative enough or if he takes enough risk. If you grab burglary burberry and looking at that charge, what do you do . I the key plus points think the share price will rally hard. We need to know what the company is a strategy will be. 20 times earnings doesnt leave a lot of room for error, and i think we will see a significant markdown. Tom you know whether it is london or new york, it is about asian tourists they are feeling poor. There is a demonstrable view that the asian consumer is less consuming. That filters into the world. Carson i was in tokyo earlier this year, the monumental numbers of Chinese Tourists in these top brands right. Theese at home dont have means to purchase the genuine products. Going somewhere like tokyo, where it is a lot more attractive tom anecdotal here, i was no onean acquisition in the store spoke english except me. Francine Burberry Stores here one of their big selling point is they have a lot of chinese leakers and they will do it on the ipad, and they are digital. Tom have you been in walmart . Francine i have. Tom have you seen a blue light special . Francine they need to become more ecommerce friendly. Tom we will cover this in the next hour. James bevan, what a shock to see the extent border confront amazon. Walmartthe news from mor we knew for a while there was going to be a big shakeup. I do think that walmart will be a winner. I worry about target now because that is in the copout. The commitment to raise wages and have bigger store openings i think ultimately is a sign of the times. I think it will succeed. Tom we were talking with carson earlier about the income statement if you look at walmarts income statement, amazon is all about unit growth. Can they take elements of that style . James walmart is indicating that it is not intended focus on floor format anymore. I think that will ultimately drive a better consumer experience. Francine what is your favorite retailer . Luxury, highend . Cheaper . And, where top margins can be sustained, where there is not an overly aggressive expansion program. Francine top end. That is where we are. Tom scarlet fu good morning, scarlet. She is costco. I heard the walmart news i thought it was stunning. We need to say thank you for james bevan and derek for a wonderful conversation. James norman will join us in the next hour, and gilles moes as well. Thank you. We will be back. Another hour of london. Tom it is the new normal for walmart. Bentonville enjoys higher wages. A failed strategy against amazon. The market vigilantes tell janet yellen to look well into 2016. The yen is stronger. The dominoes are following. Big domino may be the United States economy. Good morning, everybody. This is bloomberg surveillance from london. I think it is the world headquarters. Dont let everyone know. With me is Francine Lacqua. Francine we are watching bond yields. Tom i was watching aberdeen. Aberdeen. Francine we are talking a lot about yields. We are talking about the ecb and stimulus. She doesurgeon says not rule out another referendum on the independence of scotland. When David Cameron has no opposition, it seems like risky business. Tom im reading about queen and of 17 anne of 1703. Francine perfect. Tom nicola sturgeon. We need to go to vonnie quinn in new york. She has the first word on news. Vonnie thank you so much. President obama is saying that troops will stay in afghanistan past 2016. A white house announcement is planned today. Afghan troops and police are having trouble controlling the taliban and al qaeda. Vws have thed 2016 cheat software. Recall is ordering vw to nearly 2. 5 million cars. For the second time this week, a computer glitch delays flights. Checkseral program that passengers names against a terrorist watch list crashed. Donald trump is Bernie Sanders a maniac, even though they share some political positions. He slammed the president ial candidate yesterday. I watched hillary. The poor woman, shes got to give everything away. This maniac standing on her right is giving everything away. She is following. Among other things, they both rail against the influence of money in politics. We will see whether the mets are the dodgers will face the chicago cubs. The blue jays were the first team to win a fivegame series after winning the first two games at home. They will play for the American League title. Mets thatg to be the are going to win. Talk about is the back to the future prediction. Tom it is great for baseball. Baseball has gotten boring and to see some new teams, the shock of the Kansas City Royals and the chicago cubs, lots of new teams and faces. Fors plus, plus, plus baseball. Let me do a plus, plus data check. Futures are up. Many other markets are soggy with the weak real economy news around the world. Exactly. 2 turning over the last few days. The german 10year with a negative statistic. It never goes away. Francine it doesnt. Hans werner sinn was saying this will have an impact on Balance Sheets. Startt has been a soggy to the week. John norman fell asleep at the desk at jpmorgan. [laughter] tom we have had terrific fun this week talking to some of londons best smart minds on economics. Withntinue that this hour j. P. Morgan chases head of norman. Mmodities, john ethan harris is that bank of America Merrill lynch. These are two bright minds to lead the discussion for us. You both agree on a new terminal value. There is this grinding down to the newnew. In the european and u. S. Economy , is that a single digit world for investment returns when you look at the new lower single digit world of economics . Well, i hope not. What i still hope in my side of the equation is that we will get enough support from the central bank to upset the fact that the economys real signals are getting on the soft side. If you believe that qe is a bubble making machine and that is how it works, if we get qe2, then you could continue to have another slight disconnect between where the real economy is going and markets which would continue to be supported by ,om within the disconnect john, you see so much of the linkages and correlations of the market. How tight is the correlation of the market . Within currencies, a lot of the correlations are breaking down. Are also breaking down somewhat in commodities because you have different supply development. We are seeing quite a bit of d correlation across markets de correlation across markets. Francine gilles, how much do you look at politics . Tom we just heard from donald trump. Francine oh yes. Certainly, there is political risk. How do you model it . Those risks have changed a lot. What we had six months ago was about the backlash from years and years of low growth. Things have changed. What happened in greece was a very interesting experiment, in a way. I think it has dented the narrative that the left was offering throughout europe in greece, spain, also in portugal. When we have radical left movements making inroads, the threat to the eurozone is becoming less existential because they are changing their views. They are focusing less and less on the economy. Of a nationalmore nature. You are mentioning catalonia and scotland, but it is not so much about how the system works, how capitalism should work in europe, that was more of a conversation six months ago. Tom i look at the domino theory that you have. How much is janet yellen central banker to the world . Frontys have been way out with ellen zentner. Of the newdea terminal rate, that is a big domino in the United States. It is a huge one in terms of currency markets, for sure. You think about what has been driving the dollar. It is the prospect of Interest Rates going up. The more dovishness we hear from yellen, the more distant that prospect of rate hikes seems. It is a big deal whether they are going up and three months, six months, 12 months, or never. Francine this is about the south korean yuan, everything every trader does every hour. Are we putting too much focus on it . Not over the short term. This is the big issue for q4. If you think out six months, 12 months, if the fed is on hold, what kind of world is making the fed so dovish . You could still get movements up in the dollar, down another currencies even if the fed is not part of the picture. There is stuff going on mediumterm. Tom what is your confidence level if you look at an equation of all of this . Here is just noise what is your confidence in your call right now . It is low. Tom thank you. When we look at different drivers of markets, there is very little visibility on some of the issues. You are getting an inconsistent message from various fed officials. When you think about china, there is very little visibility on the rebalancing process. My confidence level is low. Francine what about you, gilles . We look like we are in the binary markets. That is the issue. The market needs to decide and it has very few data points to decide that. If whether or not what we have is an air pocket, mainly due what is going on in the em. Maybe we could have some technical delay from the fed, we could have the ecb giving us a small form of qe2 and the market can be happy with this sort of environment. Or what we have is not an air pocket and it is headwinds. This is why the market was so hit last week. We had the first signs that it was not just about manufacturing. Tom i want to get on a house call very importantly as we go to the notoriety of citigroup global. Is there a sense of global recession out there . I would say the risks are rising. You are starting from a perspective of imbalanced growth across economies. There is not a lot of cushion for shock. Tom what is the official bank of america called . We are not there. We think there is definitely a softening of the data, especially in em. We have been building consensus for a while. , we think it is a number of headwinds. We are resigning into a sense of the fact that we are losing momentum. At the very least, for europe, it is clear to me that what i was hoping is that we would have this sort of acceleration or momentum that we are losing. Tom very good. Later today, i will speak with david blanche of dartmouth college. Look for that. We will talk to mr. Blancheflower about rugby and austerity. Bloomberg surveillance. Francine this is bloomberg surveillance. Im Francine Lacqua with tom keene in london. Heres vonnie quinn in new york. Vonnie thank you so much. Netflix has hit a speed bump. It says many subscribers did not update their accounts and the company could not collect on them. Tesla is starting to distribute Autopilot Software for model s cars. It keeps drivers on course and helps them change lanes and helps the car park themselves. Burberry predicts profit will drop for the second year in a row. Falling sales in asia is the problem. They get more than 30 of revenue from china. I didnt know if either of you knew, but Ernest Shackleton wore burberry when he went to antarctica. Tom i did not know that. Thank you so much. Burberry struggling as well. What are we going to do now . Francine this is the main issue. The slowdown in the worlds secondlargest economy. Joining us now is our chief International Economics correspondent. Hike areof a rate going lower and lower by the day. Ofwe saw comments this week real angst intention within the heart of the fed. Francine we have a chart for you for the odds of the fed rate hike. Tom a surprise chart. There is the probability of the december meeting. We were sitting in the saint ago how years close are we to sweat within these International Institutions over the decline in the real economy . I certainly think there is some concern about what is next. There is not a crisis situation, but there is a feeling that they dont have a complete grasp on what is next. The other worry is do you make the mistakes of hiking and coming back . Every Major Central Bank that has hike its the crisis. Hiked since the crisis. Francine if you are the fed, are you concerned about credibility . Is reversing the end of the world . If you have to do it, you have to do it. You have lost a bit of credibility. Your Communications Power is undermined. Yellen wants to go when they feel they can go and carry on through. Increasingly, you are talking ewert a later move and fw hikes following. Tom i will put this on social media. Bring in this killer quote from simon. Bond traders are betting on the weakest outlook with Inflation Expectations lower than where they were before the fed and its major counterparts began their last round. 52 of bonds yield less than 1 and 15 kerry rates of zero or less. Rates of zero or less. This was not in the textbooks, was it . No. Tom what has been the impact of steve majors call . Thatthink it maintained consensus quite a bit over a long period of time. Agoou had said five years to look at the size of the fed Balance Sheet and look at whether Interest Rates are, a lot of people would be panicking about inflation and high yields, but they never got that traction. Tom Deutsche Bank had a killer chart out on twitter yesterday. Francine yeah, that is the reality. Tom we are getting this a lot in america. Yield curves. Francine i like it. I like it. Simon kennedy. Tom the article is great. Look for it at bloomberg business. Com. Francine coming up tomorrow, we are joined by barclays head of fx strategies. This is bloomberg surveillance. Tom good morning, everyone. Bloomberg surveillance. We are thrilled you are with us. Many different views here. Francine lacqua and tom keene in london. A different angle of hong kong. We will get there about 9 00 a. M. New york time. For the morning mustread, we go to new york and vonnie quinn. Tom. E yes, i picked an oped from the financial times. We know that institutions dont have to look at the federal reserve. With the mosts recent declining relative influence of the world bank and bank hashape of the changed. It needs more money less than it needs a new mission. Tom absolutely. This brings up the dartmouth connection. , this is theflower big headache at the world bank. Francine i was actually talking with the head of the aiib and this is a bank that the u. S. Was for a long time and now they say, we thoroughly welcome it. China wants to be accepted. Easier make it possibly to see how we should deal with china. It seems that china wants to be closer to the world. They want to be taken seriously. Do we need to give them a hand in welcoming them so that we also get what we need from china . Which is a countrys skewed toward consuming. Definitely. The ecb was on a Factfinding Mission to assess what the chinese were about. It is all about this transition. Whether or not this transition can be done without going through an air pocket tom we have a new trade agreement here. I go back to stiglitzs globalization and discontent. What is the view on globalization . Your bank is hitting on all cylinders right now. It is an international bank. What is the new globalization that you see . I think we would proba globa, what might sport growth for growth going forward. It might be a Global Version of immigration. These things might lift growth on a structural basis. We are not seeing it very quickly. We are not very optimistic on how globalization plays out. The things that would be important and helpful are not really evolving. Francine you also need regulation to handle any kind of systemic crisis across the world. When we look at the u. K. Banks being under pressure, whatever we do, there is more globalization, you need a common voice. Tom you are exactly right, francine. It seems like we are getting back to every nation, every bloc for itself mentality. Idle think we are coming back to that, but that we never really left that. It is just the case that for some years, between 20082012, we were so synchronized with our interests, that we managed to have economic policies that were remarkably similar. This is changing quite a bit. Tom i need to play dominoes with john normand. Coming up, delta on the american economy. It is surveillance and. It is bloomberg surveillance. Tom we say good morning. Bloomberg surveillance. Our first word news from the first word desk. Vonnie thanks, tom. Americas longest war will last beyond president obamas term. At least 5000 troops will stay in afghanistan until 2017. Afghan troops and police are having trouble controlling the taliban and al qaeda. About 300 u. S. Troops will be sent to cameroon to help fight islamic militants. Boko haram has killed tens of thousands of people in nigeria and neighboring countries in the last few years. U. S. Troops will help with surveillance and intelligence, but not go into battle. Secretary of state john kerry is headed to the middle east, hoping to diffuse violence. Violence between israel and palestinians have taken 40 lives in recent days. Rentsstestgrowing office in london are around the highest in the world. London is now the third most expensive place to rent office space, tied with tokyo. The most expensive is hong kong. Which costs 67 more than new york. Ft yesterday. Congratulations on them for the memo yesterday. The amount of money coming into francine, there is no equivalent in the United States. Francine i will give you the spirit of london right now. There are not going to be higher rent prices for skyscrapers if the u. K. Leaves the eu. Tom it is very different here. Certainly since the beginning of the crisis. We did not talk dominoes in 2007 or 2008, we talked survival. Of now it is the linkages the global economy. John normand joins us. John, i love your allusion to dominoes. Do they tip over in linear sequence or is it going to be an ugly domino fall . They have been moving in a linear sequence since 2011 when chinese growth peaked. Was followed by the peaking of a lot of asset prices. Now, global equities. It is not a foregone conclusion that they all fall over, but it is certainly the case that a lot of them are wobbling and the gwens and the most important one wobbling right now is u. S. Economy. Tom what is your thinking in the research on how they follow her stand up . Fall were stand up . It is all about the underlying leverage issues and imbalances in the economy. The u. S. Is pretty good odds of remaining upright simply because the household sector has deleverage and the corporate sector has large cash positions. You do not have the underlying fragility you had in 2007. I think it is way too extreme to bet on u. S. Recession. You can bet on weaker growth or delay to the fed hikes. ,hat is a big market event certainly for bonds and for the dollar. S, do you worry more about this domino effect or external shocks . This could be a china hard landing, bad loans, or another credit crunch . We have two separate brands of risk right now. One clearly comes from the outside, at least from the european point of view we are looking at the signals we are getting from em, from the u. S. Demand, as well. Those are well quantified and identified and we can see how they are materializing in the data. The other form of risk is how our domestic machine is operating. I would say that we dont really have a problem with real growth in europe. We have been doing ok for the last two or three quarters. We have a problem creating this transmission from real growth to coinflation. That is what is missing. If you are at the ecb, you are looking at the external shocks and you are looking at the domestic economy and you are thinking, growth is ok, but we are not at the point where we gentrified generate Interest Rates. Tom that fiction of negative Interest Rates friction of negative Interest Rates, can it be solved . I dont see the point of raising rates simply to get off the zero bound. Tom ken rogoff of harvard agrees with you. Are we just in an indefinite period of centralbank delays in the states and what does that mean for asset prices . Francine do you worry about bad loans . Lagardeand christine have said that the fed needs to wait. The reason the fed would wait is because of the absence of inflation and managing the external risks. Francine are you worried about bad loans in emerging economies . Yes, that is certainly the forced by with which growth is going to be lowered. As a globalties price went to the dollar to some extent. Commodities, stability up or the breakdown that some predict fuld in commodities into the dominoes standing right now. , im going tohand give you conclusions. On the one hand, it should be neutral. We are seeing that quite nicely. We have a very good propensity to spend this commodity price. The problem is that when you are so close to the situation of zero or negative inflation, any kind of additional negative risk. Ecomes a big issue , there is the qe sentiment that if we allow asset prices to adjust themselves to where the fundamentals seem to be, we are going to get into trouble. We need to generate a situation where asset prices are going to be above where the perception of fundamentals what happened to be. If you are a struggling country with a lot of debt and inflation falls and the dropping prices feeds into longterm inflation, then the problem you have is that the erosion of real debt falls. That is why you need to give us some extra. Tom we will continue this conversation. Also, john normand with us from jpmorgan. Tomorrow, a great supporter through the financial crisis desk Carl Weinberg will join us on highfrequency economics. Look at that on 11 00 a. M. In london. This is bloomberg surveillance. Good morning. Tom good morning, everyone. Bloomberg surveillance. From london. Time for a single best chart. I havent looked at this in a while. This is iron ore. Down it goes. In london this week. Everybody from new zealand is here talking about the collapse you see in commodities. In irhan an iron o on ore. Which weight is iron or break way does iron ore break . I think it goes lower. Tom what is the correlation of copper and other us other Industrial Metals . Probably 75 . Tom that tells me we are going to have a lot more angst. I knew you cannot comment on glencore per se, but it comes over to a regional Balance Sheet toustment of anything having do with minerals and hydrocarbons, right . We are seeing that already in the news flow from australia. We are seeing that from latin america. The question at this stage is who is the most exposed to the lack of demand . Job isancisco blotchs most exposed. It is a joke. [laughter] i think it is it it is an interesting discussion. E. M. ,have a problem in the thought was that it would be a problem for europe, but if you look at the metrics, the u. S. Is quite exposed. If you think about the dependence of Companies Like canada and mexico, this makes it a real issue on the trade links for the u. S. Germany traits quite a bit with china, but the rest of the e. M. World matters slightly less to us. Francine when you look at commodities and we go full circle back to inflation, how much do we know about what is driving inflation lower . We say this is Energy Prices, but is it only Energy Prices . We know a lot about what is driving headline inflation. The Core Measures we dont fully understand. This is partly a function of understanding with the relationship is between unemployment and wages and inflation. When will it go back up . We dont know if we dont understand the correlation. We can expect them to go up a percentage point next year because of the basic facts of commodities. Tom did you guys, within your academics, youre in for a time where we move away from a core analysis and look at all inflation from topline and patient . This rationalization that i dont need to worry about commodities in japan, set or a etc. , are we going to drift away from that back to a topline analysis . In terms of central bank targets, they vary across countries in terms of what they explicitly look at. When they are trying to decide what to do with policy, i think they are looking at a dashboard and not just the one explicitly in the mandate. It is just that all the ones on the dashboard are quite depressed. Tom what is the behavior of the ecb right now . It is a new institution within the scope of the Central Banks we speak of. Do they have confidence in their path . I think they are increasingly concerned. In the beginning of the summer, they were quite happy with qe and the way it was Generating Positive effects on the economy. I think they are clearly more concerned and the issue is not so much about whether or not we need to do more qe. Increasinglyng central. There is an issue of timing. There is an issue of what they would put in additional programs. The speakers from the ecb we have had lately are, in general, voicing a higher level of can earn. Francine because of what . Because they are not managing to get euro lower . Growth is weak. It is a combination of different things. I think that if you look at asset prices, qe has worked. If you look at growth, qe has worked to a large extent. It has helped rekindle credit creation in the eurozone. It is on this transmission from better Economic Situation to any kind of proper Inflationary Pressure that they have a problem. If you add to the mix some concerns about an acceleration in growth from where we are today, this is where the company is. Tom then the euro gets in the way of that. The euro really gets in the way. Certainly, a euro closer to parity would be a lot more helpful to meet the inflation. Tom can you effect or impulse a euro to that level . Not if the fed is on hold. If the fed is on hold indefinitely, the euro is not going to parity. Tom that is a big deal. Six months ago, they were telling us parity, parity, parity. Francine no parity. Tom parity. Lets go to photos. Vonnie quinn is in new york. What do you have . Vonnie photo number three, we start with baseball. The Kansas City Royals celebrated a their win against the houston astros. Next up, they face the toronto blue jays. The last time the royals won the world series was 1985. Im telling you, it is such an underdog series this year. Tom it is wonderful. A lot of new teams. Vonnie they got off to a slow start. There they go. Moving on. Leaders may hit theaters in december, but r2d2 is going to hit skies next week. Airlines released three star wars themed jets. Im not seeing too much r2d2 echo there. We are sending tom to japan on his way to new york just the you can get on that plane. Tom get the confidence builder. Next. Vonnie you will recognize this face. The london mayor travel to japan for a trade mission. Not quite sure what he traveled on. He did not pass up the chance to have a little fun. He went to a tea house and tried on shoes. He wants to secure olympic contacts from japan for london. That, is he al lameduck mayor right now . Is he on a victory lap . Francine we saw a picture when he was knocking over a 10 euro child while playing touch rugby. He is an ambitious man. If i were David Cameron, i would be looking over my shoulder. He wants a top job. I dont know if he will get it. We understand it. Tom do i understand that james is going tois son run for mayor . Francine yes, he got the top ticket. Tom it just all comes around again. Francine im agreeing. It does. Should we talk about rugby . Tom goldsmith was in prison. Francine how do you actually model rugby or a Boris Johnson win . A brexit . It is one of those things that is impossible to incorporate in a normal model. Was at theing we did time of the general elections, the actual proof, the actual conclusion of the elections will be on the brexit. Tom what you just saw there was an economist that does not want to talk about brexit. That is what we saw. David blanch flour will talk about brexit and breakfast. I need some more espresso. Bloomberg surveillance from london. Tom a touch of rain yesterday in london, but it has been beautiful in october. We say good morning to you. Francine lacqua and tom keene in london. I will be back in new york on monday. How about a forex report . We need to go only as far as dollaryen. A real interesting conundrum of a stronger yen. You see that 1. 17. We break through to new, stronger yen. I go on to sterling, as well, karen, if we could come approving i cant shop at harris today. Harrods today. Francine you are on air, tom. No time for shopping. Tom lets go to new york to vonnie quinn. Vonnie i think you need a burberry bowtie. Offering wasublic the biggest in the u. S. For first data. A Revenue Target of 50 billion by the year 2020. That will be 67 in its last fiscal year. Theyre counting on women to buy more sporting goods. Jetblue says it will be the first u. S. Carrier to offer free highspeed Internet Access on all of its flights. It will make its entire fleet wifi capable by this time next year. Tom. Tom vonnie quinn, thanks a much. Ive got to run off to radio, francine. What is the exposure, the leverage of derivatives off of notional value . Is it anything like 2006 or 2007 . Or is it a more cautious or on leverage Derivatives Market . It has been reduced substantially. That is not where the fault line is in the global economy. It is much more in the bank lending channels as opposed to derivatives. Francine tom is going to radio, gilles, what do you worry about the most . You talked about china, inflation, risk, political shock if there is one thing that is actually in your control and that you can model, it is inflation, the lack of . The lack of. Tot is the biggest threat the credibility of the Central Banks. We are in a situation where we used all the conventional tools and we moved to the unconventional tools and if we cannot demonstrate that those unconventional tools can do the shift toen it may finding the limits of Monetary Policy and the conversation has to be on fiscal policy. In europe, talking about fiscal is always much more complicated than the u. S. Francine this is the warning from the g 30. We cannot expect too much of the fiscal policy. ,he u. K. The pound is strong too strong for exports. The bank of england is stuck between lowinflation and not about labor market. The big issue for the pound is the extent to which the labor market will push up wages to the extent that the bank of england starts the normalization process. It is almost analogous to the situation with the fed and the dollar in the United States. Tom an Interest Rate hike here is going to come eight months after the fed moves . I think it is probably six months after. That is because there is a lower level of headline inflation for the next year in the u. K. We are in may, actually. It is conditional. With everything going to plan in the u. S. The domestict problems, if there is a country where you could they, this is really working, the relationship between the economy is normal, it is the u. K. There is a strong case for normalizing here. Francine guys, thank you so much. Gilles and john. , this ister bloomberg surveillance. Your tablet, your phone, and bloomberg. Com. It is all about risktaking on the markets. The fed will not be able to raise Interest Rates this year. Stephanie a bailout for perjury go . Puerto rico . U. S. Officials say no way. Stephanie welcome to bloomberg ,go. David you had a parentteacher conference. Stephanie those little desks, that notetaking. Ask the questions on your own time. We are going to be asking and answering questions. Who is going to help us do it . Are bloomberg contributing editor