Transcripts For BLOOMBERG Bloomberg Surveillance 20160720

It is that we have a broken political system we are trying to understand. How did it get to this situation you have with the divided party and what are the repercussions in europe . We are just trying to figure out where it goes and what it means for us here in europe. Tom i totally agree and particularly nation to nation as may makes a visit to merkel today. Now to our first word news, heres taylor riggs. Taylor Donald Trumps son announced that he had the number of votes needed to win the republican nomination. His son says that as president , trump will not take no for an answer. I know that when people tell him and cannot be done, that is when he guarantees it can be done. When someone tells him something is impossible, that is what triggers him into action. Taylor the convention also nominated mike pence. There will not be any hard targeting when theresa may meets with Angela Merkel. Merkel has said there will be no concrete negotiations until the u. K. Triggers the clause. May and merkel will talk with reporters later today. The crackdown is widening in turkey. The government has dismissed 15,000 teachers and demanded that all University Deans resign. Some religious moment resort minorities wary they are being targeted. There is word the u. S. Government is on its way to launching one of the largest asset seizures ever. The papers says they will try to seize more than 1 billion worth of assets but with money allegedly misappropriated from the firm known as one and be one mdb. The president of taiwan is urging a structural overhaul to fix their slowing economy. He says the conventional policies have had limited impact. Has contractedy now for three quarters in a row. Global news 24 hours a day, powered by our 2600 journalists and analysts in more than 120 countries. I am taylor riggs. This is bloomberg. Hans,ets go to equities, currencies, commodities bonds, currencies, commodities. It is endless with yields stable, yen was 1. 09 when i walked in the door and you can see the weakness. Oil most interesting will do that. Vix, 11. 71 is extraordinary showing the good news and the dow and 18,600. Sterling was a 1. 30 handle earlier. We have some dow strength. Guy it is because we have seen agents report, this is the equivalent of the beige book. Sharp slowdown in Economic Activity following the brexit vote. May use this a little bit more this time around in setting policy. Policy. As you can see the euro is [no audio] going to run pimco. He is going to run pimco in california. Tom when i noticed yesterday was wells fargo of america buying that building at 33 central down by our new art office we are building. What an extraordinary statement on the future of london to see wells fargo, in. Lets go to the surveillance wall. Guy johnson has got this tattooed on his left side. This is sterling zurich. Strength,gterm swiss the green line is the remain thrust before brexit. There is the vote circled. Sterling, andek we are into this entirely incredibly tight tenant trading range. Guy it is going to be interesting. Does it break on the upside of that wedge you have on the chart . Are talking about a bounce and whether or not the bank is limiting that at the moment as we await policy from the boe. Let me show you another chart we have here. Got, this is the Turkish Stock Exchange and what we are expecting according to guys, what we are looking at is a potential 18 decline in stocks. When the close goes below 200, that is what you tend to see and that is negative news for the turkish market. Lets get a broader approach. Lets bring in gilles moec. Up,ave the ecb coming brexit conversations happening today and tomorrow. Set the scene for me. European economy and how much of this political noise as frustrating where the economy is going . Gilles the economy was doing ok before the votes and will probably continue to do kind of ok. If you look at all indicators pertaining to domestic demand the eurozone is doing all right, surprisingly given the fact that the nation environment is not utterly supported. The euro has weakened a bit but not enough to change the picture. What is central i think to understand what is going on it innow is a lot of domestic demand can be traced back to fiscal relaxation. Upset the lack of traction we are getting from the outside. It is set to continue but as a dition, we need mustreadas a morning a little bit later in the program. It is true that at the moment when you look at the response of the private sector to the stimulus in europe, not much happening. If you look at the Financial Behavior of the corporate sector what is striking is that they continue to say more and invest less. Less. E more and invest i think the reason why they are doing that is because they are still traumatized by two episodes of credit crunch in 2008 and 2011. We are in a situation where Monetary Policy can help by making the fiscal relaxation acts on as it directly corporate behavior. Tom in the years of bloomberg surveillance, that subtlety of yours was absolutely brilliant. Lets go back and review. I guess i am mccains he and but then i am french. That is absolutely classic. Lets bring up a chart for the canzian from paris. That blue circle is were going to parity, everybody is on board. What happened . Why did we not go to parity months ago . Gilles it is hard to take a currency significantly weaker when you have an increasingly structural current account surplus. This is the situation we have in europe. We are not dependent on the rest of the world to fund ourselves. As long as you are not dependent on the rest of the world you can actually maintain a fairly stable or even a strong currency. Another issue i think is we kind of knew anyway where the ecb was going. There is no big news there. We know the ecb wanted to be accommodative and has given us formal proof. What has changed is the fed. Fed has happened is the been notoriously less hawkish than everyone expected so from a european point of view, not much has really changed. Tom gilles moec with us for the hour, thrilled to have him with us. Breaking news right now, vw with all the turmoil including the articles yesterday about senior officials being involved, vw with a little bit higher profit than what a lot of people were expecting. Many German Companies reporting half statistics. From new york and from london, this is bloomberg. Guy i am guy johnson with tom keene. Tom was mentioning before the break what is happening with vw, out with some news. Vw says profits higher than analysts had expected. They are guiding the stock higher and as you can see, vw in frankfurt trading up by 5. 71 . Tom guy johnson, thank you so much. Day two of the Republican National convention is over. Democrats when after it, republicans went after it. I like what the New York Times said about it. She is our presumptive person with no sleep, or tall of joins lev joins margaret ta us now. What does trump need to accomplish today . In its to build on the gains that he tentatively made yesterday and moving the bond the Melania Trump controversy. He will be introducing mike pence. I should say mike pence will be introducing himself but there will be this high of some loose ends. Ted cruz and marco rubio among those speaking and the question is, how far they willing to go . Tom i want to get a civics lesson for me right now. I with thunderstruck at how empty the arena wasi with thundw empty the arena was last [no audio] margaret it is really not, this is only been my third year of coverage and veterans were saying what is the deal . They were thunderstruck as well. It should not be in prime time there are empty seats and this is an organizational problem as well as a unity problem. Tom tell me about the attention of mr. Trump and mr. Pence. They are going to raise their arms way up in the air, high like i am doing right now. They really getting along . Margaret mike pence is trying to tread carefully and figure out what his role and his case is. As long as they continue to attack Hillary Clinton they are fine. As they get into the policy this has the potential to break down. Guy just talk a little bit about where this goes from here. ,nce all of the delegates exit go out into the world and try to figure out how they formulate policy,ow does the message change before to after . Margaret two things will happen. The Convention Action moves to the democrats and a few days and it will be Hillary Clintons week. Also we saw governor Chris Christie last night leaving the crowd in chance of guilty, helty, insinuating that committed criminal activity. The republicans need to calibrate how much is enough and how much is too much, and this will be a big challenge as they continue to grapple with their own unity before they can get to the policy questions. What is their attack, what is their approach . Tom margaret, i think you are dead on. That was viral last night, the idea of how much is enough. Thank you for staying up into the wee hours of cleveland. For more perspective, with all due respect, John Heilemann and Mark Halperin tonight. From london and from new york, this is bloomberg surveillance. Guy i am guy johnson in london with tom keene in new york. Lets talk about what is happening in europe. Theresa may takes brexit to berlin today. She travels to meet Angela Merkel for the first time after taking office. Merkel has said she will not begin any negotiations until the u. K. Has triggered article 50. Alan crawford covers the european government for Bloomberg News and joins us from berlin. He quite literally wrote the book on Angela Merkel. Onse two women should get absolutely spectacularly. They seem to share the same approach to life, i have similar background. How do you think it will go . Alan i think definitely the are both extremely experienced politicians, daughters of church ministers, they are both from the conservative wing in european terms. Merkel has a history of getting along fine with various political leaders. She was friends with george w. Bush, nicolas sarkozy. She gets along with Hillary Clinton and even managed to make friends with alexis tsipras. On a personal level i think that is not really the issue. The political substance could be a different matter. Guy lets talk about that. Brexit the umbrella under which everything happens. How much will we learn today about where the red lines are for both sides . Think we will essentially learn an awful lot today. I think this is very much about sizing each other up. Theresa may has a lot of explaining to do to Angela Merkel and the German Government who really do not understand what direction britain is going in. I think that they will agree to hold off in terms of any detailed discussion on policy. Tom this is a generational thing i would suggest. Conrad andg way from margaret thatcher. The sense that generational change . Is this a moment in International Relations or business as usual . Alan i think it is the latter. Merkel famously had a very Good Relationship with David Cameron who arguably is the next generation from theresa may, but as i said, i think they come from the same political family so they should in theory get along. There are fundamental differences in their outlook toward europe that i find it hard to see them reconciling that easily. Tom Alan Crawford from berlin this morning, thank you so much. Gilles moec with us in london. The distance between london and germany, there is a lot of different nations in between. How on the same page is chancellor merkel with the rest of her europe . Gilles it is hard to say because we do not know what kind of opening we have from the u. K. , we do not know what the strategy they are going to push through. It is tough for the europeans to forge their own strategy. If you look at what has been said by the various leaders, my guess is eastern europeans are going to be focused on free circulation of labor. They want to guarantee the rights are there. My guess is that germany is going to be interested in securing ok access to the they arearket and probably ok with a lenient treatment on the trade relationship. At the moment it is clearly trying to be on the offensive on ofing to get some chunks london towards paris. There are also the tactics that will play a big role. France is going to have an election in may. Brexit is actually a big issue now for france. We do not get a resolution on the french election, my guess is that harris will be very tough. Paris will be very tough. Important,is more the meeting with Angela Merkel or Francois Hollande . Gilles theres not much to say because as long as we do not exactly know what it is the british side wants guy does she take a different message to those leaders . Gilles with france, there are issues to discuss. France and the u. K. Are very close Strategic Partners and something that does not play a big role in the relationship with germany. If you look at military spending in europe, france and the u. K. Are the top spenders and are engaged in corporation in cooperation on military issues. Security council members, etc. We are going to talk about the surveillance. Up next, Simon Derrick joins us. The pound is on the move. We will talk about that story, and the chinese currency as well. Tom good morning, everyone. We are watching Foreign Exchange with stronger dollar, weaker euro. Fx is where the Market Action is. To our first word news. Taylor almost no one gave them a chance gave him a chance more than a year ago when he announced was running for president but donald trump is officially the nominee. His son made it official speaking from the convention floor. To be able to throw donald trump over the top in the delegate count tonight with 89 six fors, and another john kasich. Taylor the convention also nominated mike pence for governor vice president. Francois hollande has cautioned the france france do not give into panic. Growing criticism of his Counterterrorism Measures following the attack last week and nice. More fell out firm reports of widespread doping regarding russian athletes. The Olympic Committee will not admit any russian officials into next month plus games and will rule on whether any russian athletes can take part. Is headed for a constitutional crisis. The National Assembly has llenged the party of the the power of the party. The assembly is studying whether to appoint its own judges. President obama is promising to do more to protect police after a rash of fatal shootings. He published an open letter to law enforcement, trying to counter criticism he is to in different to the plight indifferent to the plight of police. Global news 24 hours a day, powered by our 2600 journalists and analysts in more than 120 countries. I am taylor riggs. This is bloomberg. Guy thank you very much. President erdogan is meeting with his top officials since the failed coup last week. He has said he will make an important announcement afterwards. Joining us now from istanbul, how far will he go in this potential crackdown . That is the question that everybody is asking and i think these meetings today, it is the National Security council that he is meeting [no audio] announce. Hat he will all that we have from a source within his office saying it will be a good announcement to improve social cohesion in the country. At the same time, the purges are going on. A lot of people are losing their jobs and there have been a lot of arrest. Tom in the comparisons with mr. Putin, help us with this. How close is a comparison of mr. Erdogan with mr. Putin . Are making of people that comparison because president erdogan has made it clear he wants to move to a more president ial system. They switched jobs, Prime Minister, president , but in turkey, we are not there yet. Formally his position is still a ceremonial post but it is very clear, he is the dominant political power and people are wondering whether he is going to use this to push through those changes to turn it into a president ial system. Fascinating isd the speed of change over the last 72 hours. I know your head is spinning. What are you focused on this morning . Attributee turkish that you are most curious about . I am totally focused on these meetings today. We are really keen to know what is going to come out of it. Historically when the National Security council has met it has taken hours and hours so we could be in for a long night of waiting for that announcement. I think what comes out today will set the tone for this country in the years to come. Guy thank you very much indeed. We will watch the news later as it come. Lets focus on the fx now. What happens next with the turkish lira. We are joined by Simon Derrick, and gilles moec still with us. A wide dispersion of views of what is going on in turkey and the market. Simon the first thing you have to say is the Market Reaction within turkey and outside have been relatively mild. Move down and a turkish stock market on monday and further weakness yesterday but still near levels of june. I think the first thing you can say is the Market Reaction has been surprisingly modest. Is it simply about the fact that Central Banks globally are preparing to keep rates at relatively low levels . The interesting bit is perhaps some things are being disguised. What in particular i am interested in is the nature of the announcement that is about to come out. Are we going to see something that makes the relationship between turkey and the European Union more . If that starts to break down, you have suddenly got a referendum taking place the second of october in hungary which is on precisely the issue of movement of migrants through europe. You have the rise of populist holland,aking place in marine le pen, and the Freedom Party in austria, all across europe. You will see an increase in migration is fading into that. Down,f that deal breaks an article on has indicated he and heard a gun has indicated he is not gilles the implication for the capacity of the europeans to cooperate is massive. If you look at germany, it was clearly unwilling to engage too much as long as they were dealing with the emergency of the immigrant inflow. This has stopped. At a moment it is a trickle into germany. Votingsame time intentions started to fall. Refugees start germany, then to you will have the leader of europe is going to be engulfed in domestic issues to the detriment of dealing with our european problems. At the moment, i would like the europeans to focus on what is key, the italian banks. Anything that would make europeans focus more on domestic Security Issues and less on how to bring the eurozone on solid footing i think is negative. Simon, you have the date calendar of elections lined up. I love the hungary idea. If you take the idea of fixed italian banking now, we heard that the other day, is there enough urgency within the elite of europe given the idea that everybody takes august off, are they going to have that luxury this year . Simon they probably should not have the luxury. I suspect it will be the case. The problem is that time and ease, whenever pressures the tendency to slow down the pace of change, of problems to being dealt with. If you look at what is happening with greece. Negotiations, you get the feeling there has been this low down. I am worried about it and i think it is a big year. We have not just got the hungarian referendum, we have the italian referendum as well. Even so, it is going to give an opportunity [no audio] dealing with the fundamental economic issues, it starts to come back to real populist stuff is going to make it extremely difficult for europe to deal with the big issues. Tom bring up the chart we have shown already. A dumb wednesday question. What is fair value right now on a euro at 1. 10 that came in 1999 at 1. 16, where is it supposed to be . Simon i think it is probably the market hast decided over the course of the last year and half that 1. 10 is about right. We have the fed at some point will announce a rate hike. We have the fundamental issues of the political side, and i think that rise of populism, that increasing euro and eu skepticism will way. Do we start to see downward pressure come down on the euro is in with the current account surplus . I do think we start to see that and we start to get down to 1. 05 and 1. 06. Guy the beige book this morning, a raid on the u. K. Economy, would you have thought that . Simon bank of england is getting ready to do something on Monetary Policy next month and any of the data will be skewed by other issues. We already have political uncertainty. I think sterling has lower from here. Tom Simon Derrick, thank you very much. Gilles moec, we will continue with him. Comericawith a bombshell yesterday at 90 of bodies out the door, it is a good time to speak with brad hintz of new york university. This is bloomberg. Guy i am guy johnson in london with tom keene in new york. Lets take you to the morning mustread from our gadfly columnist. Talking about bing. We say we are going to google but bank is turning out bing is turning out to be a quiet success. For microsoft, it is intriguing to think of it as a model for the companys red ink pushing smartphone business. At the very least, it is an example of microsoft turning an ugly business into a nice one that plugs some revenue holes and proves the company can win in a very, very long game. Microsoft, everyone has always been so down on apple in a world where apple has dominated. You are wondering if apple is moving toward a microsoft model and microsoft is innovating in the longterm and you will reap your reward. , microsoftbe clear is still failing in the consumer arena but if you go to the stock ,hart, lets do that right now the idea of apple rolling over in white. This is back from the lehman low , and google outperforming everyone on the planet, microsoft died four years. Think most of us do not realize how [no audio] in a world where the investor looks for bond like equities, microsoft has been a cash machine, produced a huge amount of money. Why do you want the volatility you get with apple when you can invest in microsoft and say, these guys are going to keep kicking out money . The coupon is going to keep coming and that is great if im looking for alternatives. Microsoftyears ago off the bloomberg was 77 million billion dollars in cash. There is that cash build you talked about and you wonder if they are going to be a bluechip stock someday with that dividend and big dividend growth. Guy johnson from london on microsoft. We are going to come back with gilles moec to talk about the ecb. Euro was a data check, a 1. 09 handle early earlier. Lets look at london. Tom good morning, everyone. Good wednesday morning, a most interesting day. Guy johnson in london, i am tom keene in new york. Here is taylor riggs. The head of fox is said harassmentmid sexual allegations. Built fox into the mostwatched Cable Network into debt in the u. S. Critics of the ron have taken deal could ask of the ron have taken aim at a deal with boeing. Interview, the economy minister did not seem concerned. Maybe we are not that sensitive about this contract. Us asnot as important to it is perhaps for the americans because other companies in the world can meet our requirements. E have higher priorities it does not have the status it has been given in the media. The american side has more of a need to close this deal with iran. Kong, a mansion has sold for 81 million, the third villa sold in the new mount necklace project. It went for a lower price than the third then the first two. That is your Bloomberg Business flash. Today, they are meeting and will give us the announcement tomorrow. Little chance of new stimulus for mario draghi. Lynchf America Merrill chief economist gilles moec is still with us. Draghi is going to make another move, right . Gilles the june meeting was already very dovish and the forecast inconsistent with the possibility on the 2018 horizon so in any case they would have to do more. I think the right time is september. The question is more, how . How do you continue qe when you ,tart lacking bonds to buy especially in germany . And thetion is how ability for the central bank to take Interest Rates down. It is going to be interesting. I think there will be hands from draghi. Hits from draghi. You can buy a bit less german bunds while still respecting you have calculated a different set of set assets. If one of the big countries starts facing a scarcity issue, there are lots of technical tweaks they can make qe continue without renewing a massive policy. Tweaksthin the technical , is the idea of further negative right, further compression, will the shift be that they will transmit the effect of those negative rights onto individuals or will it stay and institutional effect . Gilles i really think that we are stretched to the limit on that, on the capacity to take Interest Rates further into negative territory. I think there has been an acknowledgment in central banking circles that negative interest ranks banks are detrimental. I think when you take german yields in severely negative territory you start getting into possible backlash and making life more complicated for a lot of Institutional Investors so i think they need to start stop start inking outofthebox. If your question would get us into something close to helicopter money, i think it is very far away from this in the eurozone for both economic and institutional. Tom i do not know how to say helicopter money in german. Somehow i think it will come up tomorrow. Tell us about the relationship of the bundesbank to the ecb in frankfurt. Gilles i think that relationship is better now. Paradoxically i think when the by thee under criticism german minister the bundesbank fell under. Theyhas changed is that are is still an agreement on the instruments that should be used but at least there is an agreement on the fact that the ecb needs to do more, and that is a big change from where we were just a few years ago. I think we should look at the relationship, where the relationship continues to be. Central is on how you design the issues. On the stance itself, there is not much of a difference between the two Central Banks a frankfurt. Banks agent say there has been no slow down since the brexit. They should be hiking rates, shouldnt they . Gilles i do not think we should necessarily focus on the very latest point. Tight but ity be has not generated guy it is not working. Gilles clearly there is a case where a preventive move. They will make the point that there is more to discuss and that is in line with the fed. Mosttold us last time that nbc tom bring up the chart. It is about unit labor costs country to country. Italy is nowhere as efficient as germany. Does italy have any chance of ringing their unit labor cost down . Gilles at the risk of being horribly arcane, [no audio] normally what you are going to do is that your exports will grow in line with Strong Demand and that will be enough i think for a country to be ok. Costroblem is, what this differential says about gains in that activity gains in italy, that is the problem. Productivity has been stagnant. Productivity in europe and for that matter, in the united states. It is a perfect time to speak to brad hintz as, erik a 9 layoff bombshell. Tom this morning, currency markets tell all as sterling weakens. The euro, too. Lower for much longer it means any and all things. They are challenged in this hour. Brad hintz of new york university. And mr. Trump takes a trophy and dissent. Mid this is bloomberg surveillance , live from our World Headquarters in new york on wednesday. Where is the world going . Im tom keene. With me in london, guy johnson. The Prime Minister crosses the English Channel today. It is a big deal. Guy the relationship with europe gets going with a conversation with Angela Merkel later on. Theresa may and Angela Merkel, similar backgrounds. How will that meeting go . A lot of people are waiting to see. It could set the tone for brexit today. Tom absolutely, and this with pound weakness, sterling weakness. Right now, first word news. Here is taylor riggs. Taylor Donald Trumps campaign has paid off. Votes the number of needed to win the president ial nomination. He will be at the convention in cleveland to accept. His son said he will not take no for an answer. When people tell him it cannot be done, that guarantees he gets it done. When someone tells him something is impossible, that is what triggered him into action. Taylor the convention nominated his price president ial candidate, mike pence. There will not be any hard bargaining today when theresa may meets with Angela Merkel. Angela merkel has said there will be no concrete negotiations until the u. K. Triggers the closet starts the process of exiting the eu. It is her first trip out there since becoming Prime Minister. Widening inn is turkey following last weeks attempted to. President erdogan has government religious minorities are religious minorities are being targeted by erdogans islamic supporters. Global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries, i am taylor riggs. This is bloomberg. Tom lets get to the data right now. Equities, bonds, currencies, commodities and get to brad hintz as quickly as we can. Will call churning. The currency market is most interesting. Ato as that euro was 1. 09. Extraordinary, under 12, 11. 62. Sterling is a bit weaker over the last few days. Today picking up a little bit of speed, and that is interesting. It is up versus the euro, eurosterling Trading Software today. There was no sharp slowdown post brexit in the british economy. European stocks are higher. That is a good lead indicator. The new bossncy at pimco, many roman. Manny roman. Tom lets go to the bloomberg right now. The official surveillance wall. Euroswisse today. A strong swiss franc, the green line the remain excitement before the vote. In the circle, in the massive , it is moste interesting to see how we play out. Do we play out with strong sterling or strong swisse in the coming days . Guy those formations are always interesting to see where we breakout from. Let me look at my terminal. This is turkish the stock exchange. You can check this out. This is chart 9968. Potentially an 18 drop. America is saying thank of melon is saying bank of mellon saying the market is quite calm. Wind changes. The it is like in merry poppins when the weathervane changed early in the movie, when mary poppins showed up. Yesterday, massive restructuring showed up in the Regional Banks. We will speak net interest tomorrow with brad hintz, for years with bernstein. Now with new york university. Comerica, a lot of pressure from mike mayo, clsa, and others, big institutional shareholders. Lets get it going. Vengeance yesterday, comerica said 9 of bodies out the door. They sugarcoated it, but it is about cost reduction. Is that the canary in the bank mind . Ifd what choice do you have you are the ceo of the major bank. You Interest Rates that are lower longer. You are seeing a rolloff of your higher return investments that you put on earlier. So new is under pressure. You can make up for it by increasing your Loan Portfolio more rapidly. That only goes for so long. In an economy that is not moving, and uncertain going forward, what choice . Tom you have been out front of this for years. Another person has as well Meredith Whitney got beat up like a pinata about where headcounts are going at banks. Can you extrapolate comerica to all the banks . The too big to fail banks . The super regionals down to regionals . Brad that is a depressing thought. Tom you were way out front of this and meredith was, too. Mike mayo is leading the charge about lets get going with the new utility regime we are under. What does it mean for our viewers and listeners . You are absolutely right. We have been seeing banks cutting back. We have seen the large banks who were at the forefront of all of this. On regionals are behind this, but you are right, the industry is restructuring. The entire Financial Services industry relative to the gdp is not going to be as large as it was. It will be healthier. Tom every Regional Bank has to look at comerica in dallas and say, do we need to do this . 2 , 1000 people trading in banking, isnt it . Brad the challenge is, how does the market react . If the market reacts well, this is what you are going to get is a lot of boards asking the question. The problem you have is you cannot cut your way to superior performance. Tom guy, you really wanted the european application, the United Kingdom application of what we saw from comerica dallas yesterday. Guy you guys have at least a resolution mechanism to deal with banks that fail. That is something europe is in desperate need of. Up isnt thisthis just a process that we have to go through . We need smarter people in this business and we need to keep the smart people in. But technology is changing things. That is an inevitable evolution. For we have seen that years. Technology does change it. The industry has evolved over time. Business, at least clients are sticky. The institutional businesses, it is a more difficult situation because the clients move back and forth on those. The retail side, you get your banks in the right position, you provide the support. The clients are not going to stickiness,th that you get the stickiness of deposits, of the fees going through. Guy do you think that the evaluations that are being applied at the moment are correct . You would think a bank like barclays, which has a great franchise on the retail side of heavily insted technology, yet it has his eye bank thing that skews the valuation. You have hit on a key one. Barclays faces a real challenge. Business, autional banking business that is too large. The Retail Business cannot support barclays. There you have a Management Team that has to focus on the institutional business to get performance up. It is a large fixed income house. They are trying to deemphasize the fixed income side to get profitability up. That is a tough story because we know all the regulatory changes over the last eight years have hurt the Large Capital intensive parts of the business. Tom we saw wells fargo take wenion that union saw wells fargo take that unit. Uniqueve governmentsponsored structures there that we exited years ago, even if we ever had an rbs equivalent. Stayu believe that one can in major banking capital . Brad what choice . There is no alternative. Are you going to move to zurich . It is to bank small. Are you going to it is too small. Paris i do not want to sound trite how many schools are there in paris for the kids . Tom guy, i will say this every issue of schools for the kids is londons trump card. Bankingook at the industry, you are thumbs on london and on new york, but all of it means consolidation given lower for much longer rather than that interest. Brad there will be fewer banks, cannot large ones consolidate, can they . The regulators will not let them. The single best chart up. We do not have it right now. We will get this chart to you later and have brad hintz dissect the too big to fail banks. We will bring back brad hintz on american finance. Tomorrow on bloomberg surveillance, one of the first thinkers on a smaller, more coalesced europe. Think journey and the netherlands. Els. Guest, joachim f this is bloomberg. Guy i am guy johnson with tom keene in new york. Lets get to the Bloomberg Business flash with taylor. Taylor better than expected earnings for the first effort of the year the first half of the year for volkswagen. Improvederformance was for its namesake car brand. There will be a new ceo for pimco, the bond fund manager. Replace douglas hydes. High presided over hodge presided over a tumult to us time. Lost 25 3, pimco has of its asset. The british jobless rate fell to 4. 9 in the three months ending in may, the lowest of the Third Quarter of 2005. The number of people working rose to a record almost 32 million. That is your Bloomberg Business flash. Guy interesting that that number is so low, and immigration and unemployment is so big an issue surrounding the brexit debate. Theresa may takes that debate to berlin today when she travels to meet Angela Merkel for the First Time Since taking office a week ago. Said she will not begin with any negotiations until the you has triggered article 50. Anna edwards joins us now. These two women, the most powerful people in europe right now, what will they get out of it . Or is it a meet and greet . Full meete will be a angry when she arrives. Thereby a joint will be a full meet and greet when she arrives. Followed by a joint press conference. Details. T expecting remember, no negotiations are set to take place until article 50 is triggered. But they can talk. These two talking might get to answering those key questions about how much both parties will give up, how much Financial Services britain can do in the eurozone in exchange for germany selling machinery. In many wayss about personality, about approaching things slowly, trying to figure out a way to make things work for all people. The backgrounds of these two women are so similar. They grew up in a similar environment, a religious father, a similar background. May is creating more of a christian democratic story in the u. K. Na it is interesting, the german media greeted her with the question, is may the u. K. s Angela Merkel. But i wonder if that is to downplay the differences. Yes, there are similarities in upbringing and temperament, but these two women operated in a very maledominated environment. We will see if that brings out the similarities. What are the differences we will learn about . Very quickly, and then i want to get to my morning mustread. How is secretary johnson doing jack of what is the early report card on Boris Johnson . Anna it might depend on who you ask. There are so many theories. It is certainly not letting him crawl under a rock. It is making him take a front in seat in u. K. Politics, the u. K. Feature right now. Yesterday people were suggesting that maybe john kerry had to help him out a little bit at the News Conference yesterday. Questions, there were questions, he was interrogated by u. S. Journalists. Subtle, annaso edwards. This is the morning mustread. Skidelskyrd saville tom this will be the unmentioned today, wont it . Anna yes, indeed. He is focusing on immigration. Theresa may comes from the background of the home office. She is very steeped in the story around u. K. Integration, and the challenges that she faced trying to get immigration down in an environment where there was not full control. Now the u. K. Has taken back control. You will see we will see what they can do to take back that control. Many in the new u. K. Government have been keen to point out that the right custody immigration need to happen. Even Boris Johnson said yesterday that the new home secretary is right not to be pinned down on a number around migration. We will see where this story goes. Tom let me get back to data and we will get back to brad hintz of nyu in a moment on our Financial System. On our markets system, futures up 8. 1. 1007. Kets weaker, from london and new york, this is bloomberg. Tom good morning. The financial ballet continues. Morgan stanley out not at 7. I do not know why they do this 6. 52, 6. 55, 6. 57. James gorman has to get the memo. 7. 00, orot easier at whatever. Guy johnson will tell you about the time zone shift here. Lets talk about a single best chart now. We are with brad hintz of nyu. Of too big to fail sets. Negative america and citigroup. This is from the beginning of the crisis. , and the greatte unspoken has been wells fargos outperformance. Remind us how wells fargo is not john things but it is what stumpf did not do. Wrote thember, he mortgage refinance. That was very good. The mortgage refinance. That was very good. He has a tightly run machine, right . A retail machine that is generating reasonable returns. Expand used that to slightly into the Capital Markets business. So he has picked up profitable parts of the business. In yourn you were classroom and one of the hardest things to teach in the business is scale. To teach scale is so difficult. What did ken lewis get wrong in his wellintentioned effort to create scale at nationsbank, bank of america, whatever that conglomerate is . Why did that why did they have trouble with scale . Brad it is pretty easy. The integration is the tom integration is tough. Brad not only do you have technological integration, but also cultural integration. To get a common culture across a company, very difficult. Tom why does jamie dimon have good culture . Brad he focuses on the bottom line and his Management Team focuses on the bottom line. You will notice how his Management Team operates almost like a family. What are you delivering to meac a understand the numbers and tell me how you are going to do it better next time. Family,eyword is which i have observed over the years, with jpmorgan management. York,t is 6 26 in new 11 26 in london. S is a picture skirting sterling getting a pick up this morning. Maybe the u. K. Economy is not slowing down as much as we thought. Mannynew boss at pimco, roman, is taking over. 3. 06 stock down 6. 3 . Guy i am guy johnson in london, tom keene in new york. Lets get to bloomberg first word news with taylor. Taylor no one gave him a chance more than he year ago when donald trump announced he was running for president , and now he is officially the republican nominee. His older son made it official in cleveland, speaking from the convention floor. Throw donald to trump over the top in the delegate count tonight, with 89 egates and another congratulations, dad. We love you the convention also nominated mike pence for rice president. Meetingt erdogan is with top officials since last weeks attempted coup, promising to make an important announcement. In the last five days, turkey or stopped the credentials of 60,000 people. The opposition controlled national us has challenged the power of the Supreme Court of president nicolas maduro. The assembly is studying whether to appoint its own judges. Global news 24 hours a day, powered by more than 2600 journalists and analysts in more i am taylorntries, riggs. This is bloomberg. Tom . Tom greatly appreciated. We are going to stop the show and talk about something that no one is focused on. That is simply oil. Groupest is with eurasia and joins us now on the structure of microeconomics and the macro view on oil. We talk interview after interview, themes are all of the site and everybody in oil is talking about demand and the mystery of whether demand growth will be there. A lot of people saying oil could a lackower because not of demand, but just the marginal shift in demand. Do you agree . We are expecting we are calling for a moderation of demand. We are not calling for a recession. We are factoring even a lower europerate coming out of as a result of brexit. By the way, it is worth noting werexit will have a only see demand being affected by 2050 barrels a day, based on a lower gdp assumption. We are calling for a moderation of demand growth. To incrementally increase production. Tom i got that. What is interesting here, with the great work you do, you all know the technological dynamics, the first and second derivatives of supply change have changed because of technology. Can you use the old assumptions, or are you working with a whole new calculus of supply dynamics . Working with an entirely new calculus. That is the reason a lot of people got it wrong. This is the first time we have seen shale. We have bounced off the lows, and we have a better idea as to how production response to different price points. Having said that, we have seen rigs as welready in have settled between 40 and 50 a barrel. As a result of the data coming we are pushing out the price recovery modestly. It will take a little longer than expected to clean the market up. Want to join a few dots here, tom. We were talking about comerica in dallas, a funder of the shale industry. Talk me through what is happening on the ground with these guys. We talked at the beginning of the year about problems with financing. Talk about what is happening between the oil industry and the Regional Banks. How is the financing of the shale industry working . Bruno i put a piece out about four months ago on this topic. At the end of the day, there is a tale of two cities going on. You have the larger Money Center Banks that really tended to stick with the higherquality names think devon energy, anadarko. Those companies let money those companies lent money on the financial ratios. They were very well collateralized against companies that were not wildcat in that were not wildcatting, but they had recourse to the oil and gas wells. Then you saw the Regional Banks, and they try to muscle in two, where is the money at . Where can we differentiate . Qualityt to the lesser names, the higher risk names. That is the basis of the situation for comerica and couple of other regionals. Guy where does that story end . Bruno the overall bankruptcies and what it means for a bank like comerica will probably not be as dramatic as the market expects. At the end of the day, they still have first lien on most of these assets, so they will probably have to wait it out. The overall percentage of their own portfolio to the oil and gas patch is uncomfortably high at some level, but i do not think it is enough to have as dramatic and impact as people think. Link the world of iale with brad hintz. That is a good chart, brent moving through the 200day moving average and rolling over. Now would you go to the wall, please . Lets look at the bloomberg. , adjustedudi light for inflation, also adjusted for rising incomes. It is an approximation, not a guarantee. Brad hintz, this shows how cheap the commodity is, and the mystery is the finance change around it. You see it on my it just so happens i was at northern trust. Tom so you enjoyed the fun. Brad i spent a lot of time talking to moodys about how did you actually lend for deep gas loans. With the interesting thing is that the collateral value dropped. Question, what are we lending against . Are we lending against fracking equipment, which may not have an aftermarket anymore . These are things that only happen you find it out a little bit later. Bruno if you are lending against her oil and gas production, 70 to 80 of that inicipated pdp will be financial markets. Your recourse is credit risk against some aarated bank. To theare Lending Service providers and you are lending against hard assets, that is a different story. That does not make me feel comfortable. Tom this is a vignette of what we love that bloomberg surveillance. What we love at bloomberg surveillance. Question topiercing bruno. Im sure you can do it. Into this ties very much your pricing, right . Ini have to keep fracking order to keep production going, at some point the price no longer it does not make sense. You let the wells close. We are not there yet. We are still playing last man standing. Bruno we are. But this is the reason why everyone is really bad at calling a top, even the producers. Producers are much better at calling a bottom, historically. The variable here is, how much does cost reduce in relation to price . At the end of the day, there is the revenue side and the cost side. We cannot forget about cost. The one thing that to people by surprise is how precipitously costs fell. Can i service debt . Those costs have gotten battered. If there is one sector within this whole genre that really got beaten up, it was the service providers. That was the subset. Producers are enjoying this ofhoric period right now cost deflation. That is going to change. When it changes, able change quickly. I am not worried about price inflating. I am worried about, our costs going to now, on the flip side, inflate faster . Tom guy, jump in here. Guy let me talk about that in a different dirtion. If we start to see wage growth in america going up, how does that change the demand picture for oil . In some ways, it is elastic. You cannot drive halfway to work. Walk me through how the demand story will develop. Bruno at the end of the day and we saw this with gasoline demand, which has been stellar. If there is one thing that has supported the barrel globally, it is the explosive growth in gasoline demand. If we just go higher globally, you will see demand start to incrementally pick up not just for gasoline, but consumers will start buying other things, which means diesel demand will probably go higher because more goods and services will have to be shipped. Predominantly, oil is a transportation fuel. 70 of oil is for transportation. In short, you will have demand increase for Refined Products as wages go higher. Having said that, you also have to sympathize with the fact that as wages go higher, costs at the field level are probably going to go higher, too. And the interesting thing is, the oil and gas service industry, the real issue is intellectual capital. Ou lost 250,000 jobs those jobs are not going to come back that easy. Tom this has been fabulous. Very good. So much, bruno, with eurasia group. Later today, a guest from bank of america. From new york and from london, always, this is bloomberg. Guy i am guy johnson in london, tom keene is in new york. Here is the Bloomberg Business flash. Reportedicrosoft Quarterly Sales and profits that beat estimates. The ceo has been reorienting the companys business around cloud computing. Traditional Software Sales for microsoft had been shrieking. Volkswagen posted have been shrinking. Volkswagen profit does not take into account the 2 billion in charges from the emissions scandal. That is your Bloomberg Business flash. Tom in newtonian math, it is similar called plug and chug. You plug in a couple of numbers and chug through the math, and maybe you have a clue what is on the other side. Andael mckee is plugged chugged this morning. Mike here is the reason why they are trying so hard to stimulate the economy, keeping the foot on the gas. Capral banks aim for an out aim for an output gap of zero. You can see how far below zero they are. Toative one. 3 , according bloomberg intelligence. That is why they are pushing. Let me add something to this chart. Two countries germany and italy. You can see the difference. Germany growing faster than zero. Belowok at italy way the eurozone average. So for whom is the ecb making policy . This is a dilemma. Tom is grease off the chart . Mike greece is off the charts there. I have one more for you. Is experiencing the same stagnation secular stagnation Larry Summers things we have here, the white line is the current output gap. Researchers have looked at this. If the potential growth rate for europe is lower, the output gap could be six times that, 6 . Helicoptertalk about money. Is that in the dialogue for tomorrow . Mike it is not in the dialogue at all. It is a little bit with the bank of japan, but people do not think they are going to go that far. You have to marry fiscal stimulus with Monetary Policy. We know that nobody in the eurozone, none of the fiscal authorities are anxious to get into this mess. They do not want to stimulate their economies, let alone bring the ecb into it. Ecb rules would prohibit it. Guy two words for you gray economy. Is that why the italian numbers are so different than the german nubbers . Mike that is probably one reason. The germans are much more terms of in productivity, and the fact that they have made some of the labor market reforms that italy is just starting to consider now. Tom what a wonderful dissertation by professor mckee. Many would say that is an age of oversupply. Are we in a position weather is too much money, too much corporations, too much finance, given the stagnation . Brad we have Central Banks around the world opening up the cash faucets. We are trying to push things down, and unfortunately the only people who seem to be profiting from that are the Government Bond traders and the Foreign Exchange traders. Because you cannot stimulate everybody and get them tom guy, what is critical here is clearing the market. America,d it in essentially, but not perfectly. Guy johnson, do you see any indication of the clearing of the european Financial System . Guy no. I think you have to be very clear in what youre talking about here. In certain cases, you have seen a clearing of the situation. The nordics have been very good about carrying out their Balance Sheets and dealing with it, but germany has a skewed Financial System, which is a story we have not fully resolved. The big story is you do not have a Single Market to finance. I go over the border into germany and i get different numbers in terms of the numbers i will be charged for any kind of debt. That is the difference. Tom wonderful, mike. Thanks for another great set of charts. Michael mckee and i will continue the dialogue on bloomberg surveillance through the morning. Morgan stanley, they will be out, out. I will call it seven or eight minutes. Equities, bonds, currencies, commodities. The dow 20,000, within reach. This is bloomberg. Tom good morning, everyone. Bloomberg surveillance. Morgan stanley in four minutes, really one of the toobigtofails. Watching for exchange with hans atord at hans redeker Morgan Stanley. Euroswisse is an important currency, to see that break down, the strong swiss as well. Guy . Guy we were kicking around the oil story. The next team will be doing that as well. Westinrg with david and jonathan ferro. David we have francisco blotch from bank of america nche. Isco bla we are in the middle of tech earnings. We are looking forward to amazon as well as health of that, and we have mark mahaney from rbc capital. We are going to begin in the u. K. With theresa may going to parliament for her first session of Prime Minister. Tom, i know you will want to watch that carefully on bloomberg. About twoem to be minutes away from Morgan Stanley. Brad hintz is with us. Morgan stanley and Goldman Sachs are they actually banks . I do not buy it for a minute. Brad the culture is, but as you know, once you have gone through that transition in 2009, you cannot get out of it. They are a bank in the sense that the fed is going to be their father forever. From the european perspective, when we see how oniant the u. S. Economy is the banking sector, we are quite jealous in some ways. They are too big to fail, but how should we view them now . Brad there is a reason why the governments of the world saved the Capital Markets banks. The Capital Markets are necessary. Perhaps they are too large. There is certainly an argument to be made that the Capital Markets business, that the banks got too large, and we got to be in the process of shrinking them. It is not going on at the speed that is fast enough. Is it important . I spent my life, or at least half of my Business Life in treasury. In a sense, i was financing corporations. You needed the investment banks, you needed a Large Capital markets banks to facilitate what you are financing. You needed to issue that bond in europe, that bond in the united states. They do a show so good they do a social good. But there has been a price that has been bathed that has been paid by some of the creativity. He knows his numbers. He manages to the numbers, and he does not he does not stand lack of performance. So you have seen him turn over people when he does not get his performance. That is really what you want to see. Come out ondlines Morgan Stanley, and they are very predicable headlines. Very predictable headlines. Wealth management, pretax margin , a whopping 22. 5 , which speaks to the cost side as well. The return on common equity, 8. 3 . How critical is it to get that common equity up to doubledigit . Isd their cost of equity over 10 . If you look at the beta on Morgan Stanley, the cost of equity is much higher for Morgan Stanley. They are still not doing it. You can see the banks are still operating below. You have a jpm that has done it. You can see that their price book is roughly they are running right at their price book. Goldman sachs at. 9. We are not there quite yet. Tom brad hintz is with us, and we will talk judicious expense control on bloomberg , and we will continue with bloomberg surveillance on radio. Jon Morgan Stanley tops estimates on the top and bottom line. Two shares underperforming in premarket trading. Manager turnset to the hedge fund world. Donald trump is formally the republican nominee, we will recap a second night in the Republican National convention in cleveland. David welcome to bloomberg. Live from the bloomberg headquarters in new york city. A lot of news to cover. , includingings numbers from Morgan Stanley that broke moments ago. Stocks surging almost 2 . Jon a british Prime Minister, her first question time, lets listen. Employment at a record