Transcripts For BLOOMBERG Bloomberg Surveillance 20160721

I am tom keene in new york. Guy johnson in london. Mr. Kuroda changed the news flow. Guy this appears to come from a bbc interview that was pretty recorded. It was not done today. This is something that was a pretty recorded program. No helicopter money. You see the asset prices react. We have seen big moves over the last few days. You wonder how that will change the q a with mr. Draghi. Right now, our first word news. Taylor in cleveland, donald trump will except the republican nomination for president , one day after ted cruz was booed off the stage at the convention. The texas senator ended his speech without specifically endorsing trump. We will unite the party, unite the country, by standing together for shared values. Standing for liberty. God bless each and every one of you. God bless the United States of america. Is widely expected to run for president in 2020. President air to o imposed aerdogan state of emergency, saying the government will use its added interest the of democracy. In kuala lumpur, investigators searching for the malaysian jetliner. More than 90 of the designated search area in the indian ocean has been covered. Some scientists are considering the possibility they have been looking in the wrong place. Global news, 24hours a day, powered by our 2400 journalists, in 150 news bureaus around the world. I am taylor riggs, this is bloomberg. When data stream right now and we will get to intraday moving for the japanese yen. Futures negative two. The yield 1. 58 . Oil, again, turning. Wall, please. This is the bloomberg surveillance wall. We will show you intraday. That is not what we want. There should be a different chart, jose. I have it on my screen. Lets not do this. We will show the intraday year and in a moment. Lets go to guy johnson with his data check. Guy lets see if i can help you. We have this up on the screen to give you an idea of what has been happening with the end. We with the end. With the yen. Down is dollar yen by 8 10 of 1 . As we have been pointing out, we have seen big stimulus bets being put on. Was happeningwhat with euro dollar. Let me show you what is happening with the german 10year. It is flat to going into the ecb. Lufthansa, down heavily. Is that a lead indicator for the european economy . We will focus on that later. Tom Alberto Gallo is getting us started this morning. Let me show you 2 charts. The yen chart. That was my mistake. My thursday mistake. Theyre looking at me like, tom, please, do not make another mistake like that. Michael mckee as an important observation. There is a spike down, stronger yen off of the news. Nowhere like the recent yen weakness. Nevertheless, this shows the power of language. Sausage made in real time on bloomberg surveillance. On the surveillance wall. Where we are in america, but the scene was last night in cleveland with mr. Cruz being booed. Lets look at americas confidence. The Bloomberg Consumer comfort index in the yellow line is 10 years and 30 years ago. The green 10 to 20 years ago. The red line is recent 10 years. We have gone from good to better, and we are down to an ugliness below where we were 30 years ago. That shows the challenge of confidence that mr. Trump and secretary clinton will face in a number of weeks in philadelphia as well. To make qeing personal. Lets talk about Balance Sheets or person per region. This is a great chart. On a pergot here is capita basis the Balance Sheets of the ecb, boj, and Federal Reserve. This line is the boj, 32,000. Fed in the middle, 14. The ecb, 10,000. The ecb Balance Sheets on a per person basis out of the eurozone is lower than the fed and lower by some significant margin than the boj. Tom that is one of the best charts i have seen per Capita Assets for the three major banks and the people of those nations. Outstanding. I need to go to Caroline Hyde on the ecb meeting. Somehow, the script changes during the press conference this morning. Helicopters in the air will overar draghi make statements about helicopters, or will it come after the q a grilling . Caroline definitely after the q a grilling. He will be asked about the bank of japan moves, the italian banking crisis him being italian himself. Aboutwill be hints stimulus to come. Not one single economist feels there will be any move in terms of policy today. We need to see the pmi, the data , that comes as soon as tomorrow for germany, france, the eurozone how much has the into thebitten eurozone growth story . And they are not able to get their hands on many of the bonds they need to buy, when they are meant to be buying a billion per month. Questionsany more will they be about brexit and italian banks, or will italian banks take center stage . Stresse with the test, Everyone Wants to see the compromise. A compromise it must be covered because they need a balancing act of not creating too much tension within the politics of italy. See a bill in from the junior debt holders in the italy to recapitalize the banks, that hurts the Retail Investors who holds a lot of the debt. I think largely, it will be even stevens. The brexit is the number one headache for the ecb, because they need to inject growth, that is been dampened, and lowered buying bonds because of the brexit desire for haven. How much do we see italy be needed for government compromise . Largely fromhear mario draghi is governments standing up to the plate and starting to drive fiscal spend doing to complement monetary spending. Tom tokyo with the shock and all of no need and no possibility for mr. Kuroda. Always a possibility to speak with brian. I guess there is no prize. There is no theory of helicopter money. How theoretical are the actions of the bank of japan . Are they wedded to it orthodoxy . Or are they in the helicopter trying to land . Brain good questions. Very complicated. They are wedded to orthodoxy. Mr. Kuroda has been clear that he doesnt want to resort to helicopter money. He doesnt even think it is legally possible. His comments are consistent with what he has said. His helicopter money the same thing as perpetual bond . I guess it depends who you ask. The one thing that people are have the that we decision on friday. On the fiscal side, more details on what the stimulus pack will be. There is a possibility you could see a Double Barrel announcement next week where they try to covenant with the monetary and fiscal policy stimulus to run the economy up rev the economy up. Guy thank you. Lets bring another voice into the conversation. The head of macro strategies at algebris investments. Mr. Alberto gallo. How tightly defined is that . Alberto theres always a bluff from the bank of japan. Ive seen it from other Central Banks as well. There is a need to weaken the yen. How they do it is a different question. Helicopter money is a big concept. He said they can ease in three dimensions. 3d printing. The three arrows to reform Monetary Policy. Monetary easing and fiscal. The fiscal policy part is the most important. What we have seen is that if you just bring money, if you just lower rates or do qe by itself, it is necessary, but not sufficient. We think the boj will need to do more. There is no huge pressure to do it at this meeting, but it will happen in the coming months. Tom you talk about qb in fantasy. Infinity. K about qe i would assume currency is the asset of choice to adjust to the infinity. When do the markets give way when we understand we are in an era of qe infinity . Alberto we saw that it investors are positioning for global currency debasement. They are going into dollar and gold. They are now positioning for qe failure. Central banks doing more qe. It is not working, and they are doing more of that. We have seen better data from the u. S. Coming down. Gold a better environment, more stable. However, i think the qe failure environment will come back. Can be successful in the u. S. , but as guy was showing, it is much smaller than the Balance Sheet of the doj, ecb, altogether. The strength of the fed is not enough to lean against for other Central Banks that are still easing. Come from you. Stay with bloomberg for the ecb coverage. We will bring you a decision live at 7 45 a. M. In new york time. In the press conference at 8 30 in new york. That is coming up, this is bloomberg. Tom bloomberg surveillance from london and new york. Mr. Draghis press conference later in the london midday. Lets go to equities, bonds, currencies, and commodities. 110. 11. Futures, it is boring. To newkish lira out weakness over the last 24hours, no supplies. Guy plenty of volatility surrounding that story. Declaring adogan threemonth state of emergency. The Turkish Bureau chief joins us. What does the state of emergency mean . Parts of the constitution will be suspended. They will have the ability to pass it takes with the force of law. The oversight by the Constitutional Court will not be amicable will not be applicable unless the parliament overrules what is passed by the cabinet, which is unlikely with the party having an overwhelming majority. Does that not apply to turkey, the rule of law . Benjamin to the extent the government wants to apply it. The ministers are coming out. This willan has said be limited. This will not affect turkeys democracy. In the reaction in the markets, investors do not seem to be buying that. In that sense, the purge has been extensive. Just above 60,000 people who have been fired or detained, lost their jobs, or been suspended in some way. Strong words. You and our team in istanbul, the evening of the coup, used real courage reporting on the this. These are words from another time, purge, detainees they always to a Death Penalty and the linkage of turkey back to trying to be part of the Death Penalty free eu. Give us an update on the state of the Death Penalty discussion. Been a features of the progovernment rallies after the coup that they would go out. Ministersan and other would be speaking they which had we want the Death Penalty back. They got rid of the death the europeanin union. European union has been clear that if turkey goes that route, their membership prospects are practically finished. How many of these people are truly purged . I get the idea of clearing everyone out to bring them back in to make this large economy run. Of the 60,000, how many are truly purges or serious coup detainees . Benjamin i think the number of people detained is around 7500, above 8000 now. That is mostly people the government thinks was directly involved, including soldiers. The vast majority of these people have been suspended from their jobs, removed. I suppose part of the reason for passing the emergency law is that when you talk to turkeys officials they say that this theseacilitate getting people out of the bureaucracy, basically. Our border. On this will have a meaningful impact in terms of the political narrative, what about the economic narrative . Turkey is a Strong Partner were some of the european economies, germany and to take your. What we are going to see is a slowdown in investment in turkey, a slowdown in to is 13 of gdp. That is for turkey to solve. The response could be monetary easing. Inflation is under control. Or fiscal stimulus. You could fix the problem with stimulus today, but longerterm you are going toward an environment which is not investment friendly. Some european large banks will have a serious issue in the future, potentially. Thank you for being with us. Mr. Harvey is running the entire Turkish Operation in istanbul. Later today on bloomberg radio, Daniel Yergin on oil demand. On possibly a new market stature. This is bloomberg. H20, do you know what that is . Guy no. I dont. Tom barry goldwater. A difficult and challenging election. Lets get to our morning mustread. As we look at some of the politics of last night, which frankly, out does 1964. Conservative columnist made a ago. Impact a week or so he writes overnight, the senator from texas, this was political malpractice in multiple respects. Ted cruz has taken a big gamble in his political career. In a short run, he will pay a price. He would have paid a political price, too, if he gained a reputation as a man who shrugged off malicious attacks on his family. They give murphy joins us. The Dumpster Fire is a phrase i seen it used. We know history is being made. What history was made last night . Megan you used the word Dumpster Fire. When ted cruz did what he did, people were stunned. The phrase i hear most likely is open quote i have never seen anything like this in my political life. Knowing can remember a time when arrival nominee, given time to speak, did the ted cruz did and failing to endorse donald trump. Openly knowing what people wanted, and being rude off the stage. The stage. Oed off it was so bad his wife had to be escorted out of the Convention Center with chance of goldman sachs, where she used to work. Tom what does mr. Trump face after what we have observed for the last three days . Megan the bar has been lowered so much. Is so low he has to deliver a confident speech for anyone to take anything great away from it. He has to deliver the fact that he could be president of the United States. He has to convince people that that is what he is. That people have been seeing a credible administration. The last three days has been to marshall us has been tumultuous. Murphy, thank you to you and your team for all of your coverage. Atoverage at five of. P 5 00 p. M. Tom guy johnson in london, i am new york. Mr. Kurodas speech. Right now, we will speak with bloomberg first word news. Taylor trump spoke to the new york times. He said before he takes action, he would review if the nato country as fulfilled its obligation to the u. S. War ship will visit new zealand. Vice President Joe Biden is in new zealand where he accepted an invitation to send a ship in november. New zealand rejected a ship visit in 1985. In turkey, president erdogan browse there will be no backsliding from democracy. It comes less than one week after an attempted coup. It will give erdogans government the ability to suspend rights and decrees with the rule of law. The brexit vote may push the british economy into the first recession since 2009. Economists have been clashing forecast since last month, nac see twond they quarters of shrinkage. More than 100 20 countries, i am taylor raikes, this is bloomberg. British Prime Minister theresa may is going to paris will she will meet wrench president francois hollande. We spoke to a leading french executive about what the brexit means for his business. What im expecting is the decision made quickly, we know they could move forward. Tilde very strong relationships with the u. K. , which will remain a great partner of the eu. That the eu can have a new roadmap. Speakingice levy earlier. Independent think tank, good morning. Conversation, today, is that more to do with their own calendar than ours . More to the fact that president ollanta is playing International Politics domestically. He is using it as default national, which also wants a frexit. Theyre trying to create conditions for the u. K. To show french voters that this is what it is trying to lead you towards. This is why you must vote for the status quo. The french and the European Union have always been the most extensive will to the United Kingdom for historical reasons that rs coulterville as they are economic. Tom a look at where we are. I get the feeling we are straws. At identify, one month from brexit amazing folks getting to the one anniversary what are the straws that mark carney holds, that mario draghi holds . Phillip you have straws in the wind, but the wind is blowing in different directions. In europe, they are desperate to hold together. What draghi is trying to do is is seeinga euros that the greatest Economic Disaster since the Second World War to work properly. Credit to him, he is beginning to do that. He is pushing against german objections on sharing debt obligations, etc. In the end, i was talking to conservative mps who are remainers. We were discussing, what is the future . It might be one in which europe changes. Associatedea of membership is given to southern economies that cannot survive under the present situation. Even, greece, and yesterday, the americans said, look, europe, you need to solve greece. Look at what is happening to turkey. Geopolitical security requires it. Europe will change, which might initiate the idea of a second referendum for europe. Of stent simply looks unlikely. Is theresa may trying to secure, quite clearly, the best conditions for the brexit. No one seriously knows what the brexit means. No one knows what its character will be. Are we in the single markets or out . Tom i dont know who she is talking to. Your perspective, you have had one month to think about this. Ive set up with the defeatist attitude about london. Wells fargo buys a building in london a few days ago. What is your take on londons future out of financial europe . I think london will remain the worlds global city. I suspected that europe itself will change. I take the minority view. I think europe will change. The europe that exists cannot sustain itself. You have donald trump, unbelievably, and active almost catastrophic saying that america will not defend various european allies on the southern border. Who will defend europe . Only britain. They have the strongest military. There has to be a new settlement. The external factors are so extreme that we have to look at anew. Hing if i was theresa may, i would say we cannot talk about having talks, but we can talk about the fact that europe is not configured for the risks that it faces. If britain takes the lead, london can once more be the center. That is what i would encourage the British Government to do. The ecb, we have had a very regressive on the terry policy set up. Theas favored assets, and wealthy are getting wealthier. When do we see a shift of monetary level to a more progressive central banking set up . Is year up the place it starts . The United States . How do we get to that . Alberto the problem is that qe extent, buto some benefiting those with assets already. You buy bonds, those with bonds make money, but young people without assets dont make money. That is field populace in some countries in the eurozone, and even in the u. K. Where the brexit was voted by the poorest people. Sink,ps make the ship not but it does not benefit all the population. You have other possibilities. One is what people call helicopter money. Infrastructure projects, investments, the school and monetary stimulus. It could be done later. I do not think that central bankers are ready now. In the coming months, we passed through german and french elections. We need a plan, because europe needs to give a response to the populist wave we are saying. Guy we will carry that further. The people benefiting politically from what we are seeing at the moment, it does not seem to have a plan. They do not have a solution to fix the progressiveregressive system. Jeremy corbyn doesnt have one, im not sure donald trump does either. No one has the solution. We are creating an oligarchy economy. Were fewer people own assets. Everyone else is converted into a wage position. Mckenzie released studies showing over the last 10 years, half a billion people in the 25 most developed economies have seen their incomes stagnate or fall. These people are coalescing into political movements across the developed world. Rum trump in the United States, u. K. , alternatives to deutsche land, that is all led i wealthy, rich people who have benefited. We have oligarchs leading the peasants, if you will, but they have no policy ideas. No idea how to speak to the needs of their constituents. We are seeing people going with intuition without concept. Theyre going with i feel your i amtheyre going with angry about everything. It is leading to a breakdown of the western security order. There is no good outcome. We have to come up with new, progressive policies. The shame is that the state and market doesnt work. Where do we go tom . Gallo, can the Banking System clear to assist the politicians . Alberto what is the issue . With qe we never had a real distraction a real distraction and some economies. Without distraction you do not have creation. We have three economies in europe that have not restructured. And portugal. Ly, spain and ireland have done it and they are recovering. Losses. To accept some it cannot be a zero sum game. There are some countries with more banks than restaurants per person. You have to accept some pain today, but a better system that can give funding to start ups in the future. This is what germany, portugal, and italy need to work on. Tom it will be challenging. Thank you. Were looking forward to speaking to you the next time i am in london. In the next hour, talking about the idea of the core europe. It is an important idea he had at Morgan Stanley. He is now at pimco. Joachim fels in the next hour. This is bloomberg. Johnson in london, tom keene in new york. We are looking at European Aviation stocks, down hard. Lufthansa, easyjet, others as well. A warning on what is happening with the long haul story affected by strikes and terrorism. Longhaul is affected by what is happening in europe. Easyjet describing the operating environment as the most difficult in 10 years. Air france down hard. Also, the manufacturers of trucks are talking about a slow down. Volvo warning about this. To movef that we use stuff and people, they both slowed down. Is that a global macro concerns story . I think so. The consumer guy on air travel in America Brian was on the other day he is adamant. It has slowed down. There is no question. Guy you think about what is happening. You arent seeing as many people getting on airplanes. That is a negative factor. Some of that will be on the north atlantic route, we talked about the brexit affect. If truck manufacturers are not buying as many trucks, that is something i would Pay Attention to. Tom the debate over the extended runway in heathrow, that sounds like a first to do for Prime Minister may the jumpstart infrastructure in london. Has that changed since the brexit . Guy what might be interesting is that they are looking for the south of london. The debate between gatwick and heathrow is back on. Which airport will be the beneficiary . We will see more in the u. K. , that is a nobrainer. We will see if it happens quickly. It is not like you can build a whole tomorrow and fill it in again in keynesian style. In new york. At you should drive down 59th street. It is like a country highway, roughandtumble. Equities, bonds, commodities, futures deteriorate. Yen strongerng today. From london and new york, on a day for mario draghi press conference, this is bloomberg. Om good morning guy johnson in london, tom keene in new york. Lets get to the Bloomberg Business flash. Aylor first profits rose 7 increased demand for the roach to treat cancer. Theyre the biggest maker of cancer drugs. Mark johnson has been released on bail from the new york city jail. He was arrested on target is of manipulating the pound to take advantage of inside information. He is the global head of Foreign Exchange and house trading in london. More summer barbecues may be on the menu in the u. S. These and for production at a record high and it doesnt look like it will be slowing down. Her various, ribs, and porkchops could get even cheaper. Prices have been falling for 12 straight days. That is your Bloomberg Business flash. Guy thank you. Lou centralbank policy is back. Centralbank policy is back. Alberto gallo. Beat is the what music at right now . Ticking up the pace or slowing down . Alberto what brexit has showed us is we are in the second pace of the recovery. Central bankers introduced qe and everyone was happy. We are now in qe infinity. We know it doesnt work in some parts of the population. Central bankers need to do more. The ecb. He u k and their speculation about what the ecb will buy back. There has been speculation of corporate debt. , are they going to buy financials, are they going to buy more italian and spanish bonds . People are positioning about what to the ecb will buy. If we step back, we know the policies work in markets, but it is not stimulating investment and lending, which is what the real economy needs. If we do that, some parts of the population will be disenfranchised and vote for like thearties brexit idea here, or the alternative for germany in italy, or spain. Draghi is doing what he can. We do not expect a move today. Europe has around 12 to 18 months to react and give a response to the political crisis that we have. To signal that we are still united and that the real economy is benefiting, not just asset owners. Guy to the ecb either bonds of the guys around the corner, bib . Thinking of more creative ways, what agencies and bonds they are buying, and driving towards the investment story . Alberto europe has some instruments to make qe work. Do somethingtions for the economy, then we could have a meaningful impact. Corporate bond buying works to arepoint where corporates doing investing, but they can also just refinance or buyback stocks, like in the u. S. In that case it becomes a Financial Market again only. This school policies, you create jobs and people spend money. Fiscal policy, you create jobs and people spend money. It is algebra thursday because it is algebris. He mentioned qe infinity. The most dangerous issue with qe infinity is that it could give the wrong incentives to it pesters, resulting in over allocation of resources to sectors of the economy that do not need them. Go to the chart. The idea of negative Interest Rates. These happen to be german yields with the 10 year and twoyear. Alberto, you know the key coefficient and solving the islm function is Interest Rate sensitivity. I would suggest we dont know what the sensitivities are. If the zero bounds, we are flying blind in the classical islom model. Alberto exactly. Normally interestrate caps are. Timulated negative Interest Rates, persistent negative Interest Rates, can be deflationary rather than inflation mary. Retire in aoing to certain number of years, 10 or 20, you have to save a certain amount of money. You know your returns are lower, you save more. That is the situation where people in europe are. The demographics have changed compared to 20 to 30 years ago. If you only cut Interest Rates and lower the return for every type of savings, people save more. 85 of the wealth in europe is held by people over 35. To that is where i wanted go, high level dynamics we are talking about. Down to hiss negative Interest Rates, with all of the good intentions of policymakers, has an income and substitution effect. I would suggest the substitution effect is wealth destruction. Alberto well, yeah. Over time, you can concentrate the wealth into fewer hands. There was a lot of discussion around this. There is a link between qe and rising inequality. We highlighted it a long time ago. People care now that we have brexit. That is why the Central Bank Policy cannot solve everything. Draghi will do more, but he cannot do everything. Guy front run this trade for me. How can i position myself, and is it too early to position myself, for the shift . Forrto we are positioning what they will do. We are running a micro fun. We will be long. One thing the ecb can do, because there are no bonds to buy in germany, is to get taxable on the bonds to buy by country. Almost one third of the bonds have to be in germany. If they do that, they will have to buy more spanish, wrench, and italian bonds, corporate and sovereign debt. We think that that spread will narrow more. Tom thank you for that moment. Algebris alberto golomb. Alberto gallo. The future of the Political Economic experiment that is europe. Mario draghi, look for coverage of the ecb the statement and the press conference. Lies, worldwide. Guy johnson and tom keene from london and from a sweltering new york, this is bloomberg. A brexit adjusts. Draghis press conference. Will select tools from his qe infinity toolbox. In this hour, joachim fels on the future of europe. Erdogan declares a state of emergency. The purge continues. Chaos in cleveland. Cruz moves on to 2020. This is bloomberg surveillance. York, thursday, july 20 one, tom keene. In four francine, guy johnson. A bit of a surprise this morning. Guy this was out of a prerecorded conversation with the Financial Times on bbc radio. I think he caught people off. One of those comments that can be interpreted in a number of ways. As we all know, it is a fairly loose definition and theres plenty of policy options still open to mr. Kuroda. Tom right the conversation of first word news, here is taylor. Taylor the head of japans Central Bank Says he sees no need for socalled helicopter money. The bank of japan governor spoke to bbc radio. He also said he is determined to rid japan of its deflationary mindset and there is no significant limitations to further monetary easing if needed. In cleveland, donald trump will except the republican nomination for president. He will do so a day after ted cruz was booed off the stage. The texas senator ended his speech without specifically endorsing trump will stop trump. Mr. Cruz we will unite the party. We will unite the country by standing together for shared values, by standing for liberty. God bless each and everyone of you and god bless the United States of america. Is widely expected to run for president in 2020. For the next three months, turkey will live under a state of emergency. Says theerdogan government will use its added powers in the interest of democracy. Rights can be suspended and the government can issue decrees with the force of law. Day two of british Prime Minister theresa mays post brexit to our. After meeting Angela Merkel, she will head to paris. Angela merkel said may musty stick to rules of leaving European Union. France warhol on is likely to talk more about brexit. Mays expected to challenge on the power plant in the southwest of the country. I am taylor rates. This is bloomberg. Tom lets get to a data check. Euro, a little bit stronger off to the lab after the last two or three days. Lets go to the bloomberg on the surveillance wall. The idea of what we see in japanese yen. There is a move off the martin. Olf interview with mr. Kuroda nothing like the weak yen we have seen in the last 10 to 15 days. Guy, what do you have . King on theses charts. Other assets on the move, waiting for the ecb euro dollar in advance of the announcement. Negative. 10 year go we will be talking to southwest little bit later on, so look forward to the conversation. Lufthansa down seven point 35 . 7. 3 5 . Tom i want to take a quick snapshot of america. The drama in cleveland and what we will see in philadelphia in a week or so. This is Consumer Confidence. Of good Consumer Confidence a decade 30 years ago. The yellow line. Then the 1990s and the rollover and attention that you see tension you see. Certainly, what we witnessed last night by the red line, crisisinduced, a lower american confidence. Albeit, with the recovery in recent days. Guy we talked about qe and it being regressive rather than progressive. On a personal basis, this is a chart of Central Bank Assets of the three central main banks. Here, 32,000 dollars per person. This is the Federal Reserve at 14,000. In advance of what mario draghi is going to say, the ecb on a per capita basis has the lowest Balance Sheet per person. Maybe there is an opportunity there. Tom lets go to Caroline Hyde. How austere is the austerity at the ecb . Caroline at the moment, the driver has been for stimulus rather than from austerity. Wanting to call on governments to do the reverse of that come to start splashing the cash to support monetary stimulus with fiscal stimulus. Today, overall, we are not expecting any great moves and terms of policy change. We are expecting perhaps a little bit of pumping up of the system in terms of talks of stimulus. Every economist were spoken to, nearly everyone, things it when qe gets extended and come this summer, we might see a deposit rate cut. Think this would have happening if we had not seen the brexit . Caroline interesting, because certainly, we have seen banks lending starting to pick up to some extent. But inflation is still well below target. Way off the 2 target. I think the stimulus had already been baked in. I think all for a viewpoint from mario draghi might have been quieter in this particular meeting. Sowould not have had quite many overall arching questions coming in terms of the atoll yen banking in terms of what quantitive easing were going to see italian banking and terms of what quantitative easing were going to see. Negative yields across the board driven lower by the brexit decision. How on earth can they inject 80 billion euros in terms of bond buying when so many of it is ineligible to buy at the moment because it is below the. 4 deposit rate. Tom thank you. Theres something about Morgan Stanley economics. A cast of thousands invented. In one of those in the crucible was joachim fels, now at pimm . He needs no introduction. Wonderful to have you here. I look at your work at Morgan Stanley and your past breaking work. Not the breakup of europe, not that trauma, but the idea that to a coreld coalesce europe of germany, of the netherlands, maybe finland. Do you reassert that now that we make it a core europe with all of the tensions we see . I think the risk is still there. I worried about this for a long time. The reason is that european anetary and Economic Union is have built our. We have had a Monetary Union since 1999. We now have half a day banking union. The third pillar is still totally missing, which is fiscal union. As long as that is the case, it is a fragile institution. There is always the risk if you get Political Developments or economic divergence as weve had over the last 10 or 15 years that eventually, some members decide to leave. That risk is still there. It is not imminent, but we should keep it in the back of our minds. Tom the idea of negative rates. Llojust spoke with alberto ga about the mathematics of our equilibrium being totally messed up. If you take the Interest Rate sensitivity of any basic islm structure, it is totally distorted now. Is there a core economic theory that we are working on, or is it all messed up . I think it is all messed up. Were only discovering the consequences of negative Interest Rates. Economists always think people are rational. In economist says, it should not make a difference whether the nominal Interest Rate is positive or negative. But we are now discovering that negative Interest Rates have an impact on peoples psychology. They behaved in differently. Guy, this is so important, my book of the year, this idea of dis equilibriums you get when you financial distortions. Guy were looking at some of those events taking place that the lack of equilibrium in the political think about what is happening. Time, you talked all morning about what happened last night at the convention. Youve never seen events like this take place. Im wondering what your point of view is. Is it politics in leading Monetary Policy war is it generating these huge swings were seeing and politics . I think the main issue in europe is not Monetary Policy. The main issue is fiscal policy and the politics of europe. It is the rise of populism, which makes countries and governments more inward looking. They have to respond to the pressures that are created by inequality, by low growth, by high unemployment. Monetary policy cannot really address those issues very well. And that is why i think Monetary Policy is out there on their own. They are still only game in town. Guy in some ways, hasnt it exaggerated the problem . You take qe, drive up as it parses prices. Youre not at the punch bowl. In some ways, the monetary response to the 2007 financial crisis has been to exacerbate income inequality, which has been driving into this political narrative. That is correct. What we have learned is Monetary Policy alone cannot solve the problem. Moreed somewhat expansionary fiscal policy. We need governments to address the issue of inequality. The good news is, this has started to happen. Has an brexit also impact on european politics because european governments will realize they face similar risks so they have to start to address the problems. That is while the longerterm perspective, i am a little more positive, a little more optimistic now that governments will be shocked tom shocked into it. Joachim fels, we will address this coming up. Look for our ecb coverage. We will do that in two parts, as we always do, the statement by the ecb and then the mario press conference. This is bloomberg. I am guy johnson with tom keene. Heres a business flash. Taylor quarterly revenue fell at the british discount airline. Easy jets has volatility will affect the key Summer Travel season. Paris attacks in europe and north africa have to toward people from traveling. Easy jet will also be affected by the plunge and the pound after the u. K. Voted to leave the European Union. Swiss watchmaker swatch reported its first or first have profited years. Earnings plunged more than 50 . It was her by falling demand. The Company Makes omega watches. At 3 wall sts biggest investment banks may get a much smaller bonus this year. Goldman sachs, j. P. Morgan, and Morgan Stanley have reduce the amount of money they set aside for Employee Compensation a 17 , the most in four years. For street firms lowInterest Rates, and stiffer regulation is hurting revenues. That is sure Bloomberg Business flash. Tom megan murphy is in cleveland. What a night last night, day three of the convention. Mr. Trump to speak tonight. Has there been in the discussion of swaying undecided voters . I dont believe i have observed it. Am i wrong . We talked yesterday about are there any undecided voters in the issue is this, people feel like what theyre doing in the Trump Campaign in particular is theyre not looking at so much undecided voters but make sure they get their base out. That is why he picked mike pence ticket that solid conservative base and targeting where there is overlap with the White Working Class. His strategy is, if i can get 70 turnout in the White Working Class in america, i can win this. I dont have to focus on the groups that are maybe undecided, the middleoftheroad voters, and dont have to focus on groups like africanamerican or latino. Tom is Ronald Reagan and the quicken loans center . Megan not what ive seen. The show last night, ted cruz openly defying the nominee for the president of the United States. Ronald reagan was a new america, a new morning. Night was alast , trueintroduce array dysfunction. Whether or not donald trump can write that tonight in a single speech is going to be a very tough road for him to climb. Are people lining up not for this election, but the next election . Where does the Party Project itself forward . Cruz, positioning himself for the next election. The party is still we had a floor fight, people walking out outhe convention, tossing their credentials. This is a party that still has to figure out where it is. This is a true disruptive moment for american politics in general with the candidate like donald trump. Does this represent a fraction of the political system as we know it . The Republican Party are going to have to choose what message theyre going to unify behind. Cap behind this candidate or does the party want to reassess where it is at going into really crucial house and senate races in 2016 and 2018 . Tom megan murphy, thank you from cleveland. This is going to be difficult. We lost a good one at bloomberg surveillance. Christine pager set with me every day on the set and told me what to do. She died of cancer in the last few days. She is a huge loss to. One of the great things about christine, are slow good at surveillance is we do not plan. Christine pager planned for us. Tom bloomberg surveillance. Johnson in london. Like Sidney Crosby with the hat trick for the stanley cap, Pittsburgh Penguins Michael Mckee with three smart charts. Bonus round. 1992, you are listening to boys 2 men. In little rock arkansas, writing three words on a whiteboard that became short nearly famous. The economy, stupid. Americans talk about a lot of things but they vote on the economy. If you look at one measure of the economy, Hillary Clinton is in pretty good shape this fall. The theory is that people are affected by the implement rate and by inflation. You put the two of those things together and you get what economist is called the misery index. It has done a pretty good job of forecasting Election Outcomes will stop most notably, in 1980 when Ronald Reagan took on jimmy carter and we were in the midst of stagflation. Reagan won easily by asking the question, are you better off than you were four years ago . The 1992 election. The misery index was rising into the clinton versus bush campaign. Take a look at the righthand side. It has come up a little bit because inflation is rising. Today we think that is a good thing. It is near a historic low. Hillary clinton is a pretty good answer to the question, are you better off than you were four years ago or even eight years ago . A fascinating conundrum. Where we are right now is so different than 30 years ago. We see that in our politics. Things are different and that is why the misery index alone i think does not give you the whole idea. We have had a hollowing out of the middle classes. If you look at them medium real income of u. S. Household, it has been on a declining trend since 1999. Michael if you say Hillary Clinton should have a good case, she should be running away with it. The reason donald trump is getting some traction, it depends on what you plug into it. If you use unemployment for the people with a High School Degree or lower, 620 percent unemployment. College graduates, 2. 6 . High School Degree or lower, 6. 2 unemployment. College graduates, 2. 6 . Tom i am miserable. Guy i understand why you are miserable, tom. We share sympathy, but im working on surveillance, what is not to like . Get, put theto demographic overlay on this. The one thing that is really clear is the older generation is getting richer and the Younger Generation is not. I am wondering if we could look att from a generational point of view. Michael in terms of median income, they have not been rising for about 20 years and that is particularly true at the lower end. Emphasis has been on costcutting, particularly on wages. Yet the two tears in the Auto Industry you have the two tiers in the Auto Industry, for example. It is overall better than it was , then the advantage goes to the income a party which is in this case, the democrats and Hillary Clinton. Guy what about germany . Germany has low inflation. Germany has very low unemployment. Labor market is doing well, inflation is low. This is why Angela Merkel is still very popular in germany, despite all of the issues with immigration and so on. Tom i always turn to you, what are you going to look for at 8 30 . Suggestswhat the ecb they might do. No one is talking about any kind of rate cuts. Suggest about what it will do next, add stimulus, and people want to know how are how is the ecb going to keep buying bonds when theyre starting to run out . Of what they say is eligible. They may change the eligibility rules. Tom it is just never boring. Quickly, how big of a deal, joachim . It is getting tougher the ecb, as we have heard. I think eventually they will look for new Asset Classes to buy. I think theres a chance of probably next year they will start to buy equities, which is something the bank of japan is already tom absolutely bizarre. Of next, American Real estate, john burns will be joining us. I am guy johnson with tom keene. Here is taylor with first world news. Taylor donald trump, if elected president , the u. S. May not againstato allies russian attacks. Trump said before he took any action, he would review whether the nato country being attacked had fulfilled its obligations to the u. S. In turkey, president erdogan vow democracy,iding from even though he imposed a threemonth state of emergency after an attempted coup. It will give him the ability to suspend rights and issue decrees that would have the force of law. Besias track team will not allowed to compete in the summer olympics next month. Forcourt of arbitration sports rejected the appeal by 68 russian athletes who try to overturn the ban and post after allegations of government sponsored doping and coverup. There are still calls for all Russian Sports to be banned from the olympics. News 24 hours a day, powered by more than 2600 journalists and analysts and more than 120 countries. This is bloomberg. We did you entire hour on a American Real estate. The guy that does the best powerpoint an American Real estate is with us. John burns is at john burns real estate and he is superb. Forthe california pedigree he has the california pedigree. Can i use one of my charts . Please. Tom i am trying to outdo john burns. There is the housing boom. Extracted layout the preboom trend. We are sort of back to where we were. That chart shows it really well. Where the Housing Market is fully recovered, home prices rising 4 to 5 per year. I think Income Growth is trying to rise at that pace for workers. The market is doing fine. Tom you do best, a psychological dynamic behind this. Your book is the big shift. Is there a big shift from owning to renting . There is. I got 9000 hours of research into this book. It is not out yet. High rent. People inthe things expensive markets like new york do not get is the mortgage interest tax reduction is gone. The median home price is 240,000 at a 4 Interest Rate, property taxes, maybe i can get to 10,000 in itemized the directions. Standard deduction is 12,000. Tom a new thought i did not know that . Im sure you did. Tom it is useless. Every april 15 wes to get a kick in the pants to buy something and that is gone. Im going to make a little bit of a plug from the singleFamily Rental who took a flyer at the bottom of the market have really hit on a big trend. We have almost 12 of all households in the country right now renting a singlefamily home. They are learning, hey, that is a great way to get into the right school district. If i get laid off in six months, im not going to go through foreclosure. It is becoming popular. Johni would suggest, burns, theres no difference between guy johnsons london, my new york, or cleveland, ohio, where the convention is where there is not enough units being built. Do you see any policy to build more units to put people in . Thehe policy problem builders are having is regulation at the national and local levels. We mentioned the existing home are 240,000. The new home prices 310,000. They would rather build 250,000 homes because of demand, but they cannot buy the land and build the homes affordably. Regulation and labor costs are going through the roof. That is why were not building homes. We just cannot build them at the right price point. Guy how to innovate on that front . Here. E a similar problem prefab is starting to become a story people are seriously talking about. Is it one we will hear over there . A lot of the Building Products clients of mine, prefab has gone a little too far, but manufacturing is much of the house as they can in a factory and trotted a symbol it onsite to reduce and trying to a similar onsite to reduce the amount of labor required. Guy how much does the labor that goes into building u. S. Houses is immigrant labor . I have a great stat. 2014 data, but 570,000 fewer mexican born construction workers in the country today than in 2007. That is the problem. Tom that is because mexico did not put a wall up . Im not going to go there. I will say the arizona law had something to do with it where you could get pulled over and that is how you enter the country here. The problem that builders have had, they cannot get them to come back to the industry. They are trained, skilled, relatively locate people. Now were trying to go to retail malls and pull americanborn kids out of malls and get them to put a roof on the house. Tom i cannot hit a male straight. That is an exclusive. Joachim fels, if we get an optimistic economy, 2. 8 real gdp, maybe even higher, pantheon says we could do that, that totally changes its matt, doesnt it . I think that 2. 8 is a rebound from a weak fourth quarter. 2 growth track. The most important thing for the Housing Market is payroll growth is going to slow. We cannot keep growing jobs at a pace of 200,000. Tom you disagree . One of the big demographic shifts is 10 years ago, we at 2 Million People per year turning 65 and retiring. It is up to 3. 5 million on its way to 4 million. The absolute population of people in the u. S. Aged 20 to 64 two to three years from now is barely going to be growing. What is that going to mean . We are going to have labor shortages and people are going to start getting raises. Construction is way up, Truck Drivers are getting raises, walmart is giving raises. Tom what do they want to buy . I am fascinated by this. They dont they used to call them kansas city homes, no disrespect to those watching in kansas city, where the hallway was bigger than my apartment or guy johnsons in london . Is that still what we want . Absolutely not. There are much more focused on their time. Theyre much less willing to commute compared to prior. Tom guy, give us the london twist. Guy lets talk about around the world in terms of the story. London is obviously going to suffer because of what is happening with the brexit story, but many of the similar themes you have been discussing our once were looking at over here. I am wondering, one of the ideas being generated in london is the force developers. You hold linked banks to use land banks to use it. Use it or lose it. As at an issue . About it. Know much this whole symbol Family Rental business really matured and got started in london. Like stone went to london to find the management expertise to run it here. Tom what do our President Trump or president clinton to do about this motion of a house . What i want to hear is clarity on the mortgage policies. For the first time ever, the president of the u. S. Controls mortgage policy. They appoint the head of hud and the director of fha which oversees the gst, another new agency the cfp is appointed. All of the regulations and the little tweaks to the mortgage district under the president. Tom john, you absolutely nailed that idea of the mortgaged a doctrine at the top of the conversation. Discussion at the top of the conversation. John burns, his important book, big shifts ahead. ,erious stuff on demographic economics. Speak of economics, coming up on supply, in particular our demand for oil, Daniel Juergen about Prime Minister may and permit us to thatcher. Good morning. I am guy johnson in london and tom keene in new york. Lets get a Bloomberg Business flash. Markr ecb executive johnson has been released on bail from a new york city jail. He was arrested on charges of manipulating the pound to take advantage of inside information about a client. Johnson is hsbc global head of Foreign Exchange cash trading in london. A housing slump in a place known as wall streets be said retreat. We are talking about the hamptons. Sales of luxury homes fell 20 in the second quarter. The median price of transactions in the top 10 of the market fell slightly. Those homes still averaged about three point finally in dollars. Brokers a Global Market turmoil hurt sales. More summer barbecues may be on the menu in the u. S. Beef and pork production is at a record high. It does not look like it will be slowing down soon. The meat is piling up, which means burgers, ribs, and port chops could get cheaper. Cattle prices hit a five year low this week. Hot prices have fallen for 12 straight days. That is her Bloomberg Business flash. Tom were going to do a lot of this. This is where were going with joachim fels of pimco. Shadow rates. Im at the zero bound. Bonita zero bound, were going to come down to where the fed is supposed to be, but they are not the actual target rate is way up here. So begin the discussion of this really important concept from atlanta of shadow rates. The shuttle rate is hypothetical negative level of the fed fund rate. This is where the fed would have had to go they wanted to have the same impact on the yield curve on yields as they have from qe and from forward guidance. Qe forwarde was no guidance, but the fed wanted to depress yields. Tom go through the zero bound. And on this concept, they would have had to go all the way down to 3 to get the same impact that they got from qe and forward guidance. But we are not there. The actual rate is above zero. It is, but that shadow rate in early 2014 at 3 according to the model, and since then, the fed has started to tighten policy. Fed tightening has been going on from that hypothetical 3 level already for the last two years. So they have tightened rates by more than 300 basis points. How . They ended qe and suggested to the blue dot plots they would raise Interest Rates. Tom guy, can you bring up their brilliant chart . Guy hold on one second. I will sort that out. Tom go ahead. Guy im going to use the hands as well. France 8 00, but i can use the hands. Extend this out to the world. What would other Central Banks extend the concept of shadow rates to them, what would they look like . It is a similar. The ecb is engaging in qe. The ecb has cut its own interest into deposit rate, negative territory, but only slightly. I think it is a ferris option to believe that through the affect of qe and forward guidance, they have actually puts pushed bond yields to negative territory. The shadow rate for europe would be below the 3 and our guest the same is true for japan. Tom that is stunning. Guy, while you work on this chart and met which is crucial, this goes back to the important work on the taylor rule, which is a plugin guesstimate of where we should be. None of that works in this area. The problem is, Central Banks cannot push rates aggressively negative. We have learned about the negative consequences, so they use these other tools. This is why people have the wrong impression. When they just look at the fed funds rate and say, it has been onlynged for long time, raised 25 basis points, so policy is still very expansionary. But if you factor in these other factors, actually, policy has been tightening for the last two years. It is not surprising the economy has slowed. Not surprising core inflation is not making for the progress of the target. It should not be surprising the yields have flattened so much. We are in a mature stage of the tightening cycle. Guy tom was talking about this chart. This is a great chart. This is the boj up here. This is per capita distribution of the Balance Sheets of the major Central Banks and sober person in u. S. Dollars. This is the boj up here, and the ecb down here. On a per capita basis, the ecb has the smallest Balance Sheets out of all. Does that mean the ecb has more opportunity to actually expand that Balance Sheet or the fx are different around the world affects are different around the world . They started late for a variety of reasons. A lot of clinical resistance to qe. I think they will continue to grow. One of your former guest said it is qe infinity. I agree. The problem is, whether the assets can they buy . I think the next step might be for the ecb to venture into equities. Fischers wonderful academic, vice chairman plus phrase ultra accommodative. They are not, right . I would disagree. They are not ultra, data. The fed has become less accommodative because they gave up for guidance that rates would stay low. Qe. They stopped i think policy is not as accommodative as many people say. We can see the economy has slowed, and the yield curve is flat. We find the eib . Fund the building of d. C. Grids around europe . Better transport infrastructure . All of the things that europe desperately needs. Why dont we simply find that rather than buying equities . I am in favor, but i think you would need governments and the european institutions to agree they need to do more fiscal expansion and to issue bonds and then the ecb can buy them. The ecb has very limited tools. I agree they should by other bonds as well. And i think they will come eventually. But in the end, the money needs to get into the economy. Governments on the back of that. , fabulous. M fels look for this treatment out on all of our surveillance Digital Product through the morning. A data check list of im going to call it a quiet take. We will watch the yen and the euro. Mario draghi later this morning. Some buoyancy in the Foreign Exchange markets. Strong yen. Lets look at Foreign Exchange. At idea of yen, had been 107. Sterling under 132. Im watching that. , difficult to, three, and four days. Press conference coming up later on. Gold coming up as well. I radio colleague jon ferro. It is mario draghi day. Tom keene took you away from me. Im not happy about it. I think it is appropriate time to talk about the sustainability and the limitations of Monetary Policy. Focus andf japan and later on, the ecb as well. President draghi and his compass coming up on bloomberg. His press conference coming up on bloomberg. We will be talking crude with harold hamm. Central banks very much in focus. Thank you. Y we will be carrying on the conversation surrounding ecb. Joachim fels still with us. But think about the option alley that mario draghi has in the ates by which he is governed the moment. How far do you think mario draghi has pushed the rules . How near the edge of what was originally conceived for the ecb is draghi or as he gone further than that already . I think he is still within the rules. The ecb is conducting Monetary Policy, not fiscal policy. Of course, there is different interpretation of the rules. So let say some german economist and german lawyers may have a different view, but i think he is firmly within the rules. He is conducting open marchers ofopen market purchases bonds. He is not lending directly to the government. Perspective,legal he is firmly within the rules. I think from an economic perspective, he is doing the right thing. The ecb was a little late to the game, but that is because of the resistance that you mentioned. Tom where is the resistance right now . I look at the synnex say, lets go. What is the immediacy today . Immediacy right now because the economy is doing relatively well. I think eventually, the ecb will do more because inflation is still below target. On their own forecast, they have inflation below 2 all the way through to 2 2018. Tom i understand people are critical, but the difficult game of getting animal spirit and nominal gdp. I get that the eu is doing better, but are the people of europe, do they have an animal spirit . It depends on where you look. If you look at northern europe, germany, you could say that economy is doing well. But it is an aging economy and difficult to have animal spirit if you have a large part tom france . No animal spirits, but it is somewhere in the middle. The French Economy is still doing ok. I think the real problem is in italy, which had done had growth for a very long time where the nonperforming loans are weighing down on the Banking Sector and that is on the lending behavior. I think the real point of focus should now be italy and it is very important that the Italian Government and the eu clean up the nonperforming loan problem in the banks to restart lending. I think that is the main focus at the moment. Guy which comes first, the unwinding of the ecb Balance Sheets or exits from the eurozone . Exitshink you will see no from the eurozone. It is not my base case. I think there is risk, but i dont think you will see exits from the eurozone because i think everybody has learned from the greek experience how damaging this would be, how systemic this would be. At the same time, i do not think the ecb will unwind its Balance Sheet anytime a be over my lifetime. Tom when you talk to your team in, theyllheyll out, crammed out. How does italy solve the problem you just described . The key is to put more equity, to put more capital into the banks. At the same time, force them to clean up their Balance Sheets. That is the key. You can do that with or without a bail in tom were crammed down to the people. I think we will probably get a bailout combined with a bailin. In the retail bond owners will by they be compensated Italian Government. I think that is the compromise. Tom this has been fabulous, joachim fels. Very Generous Free to be with us. Guy johnson, thank you so much as well. We will continue, mario draghi front and center this morning. You will see that worldwide across all bloomberg platforms. The important announcement, seven 45. There will be some nuance according to Michael Mckee. From london and from new york, this is bloomberg. The ecb releases its first decision on Monetary Policy since brexit. Helicopter control. Kuroda says there is no need for all possibility of helicopter money, sending the end to its biggest gain in a month. Cruz. S his speech was not received kindly. City, i haveork Jonathan Ferro alongside david westin and alix steel. With the fx market very much in focus. Ecbd we will hear from the and announcing his latest Monetary Policy decision for the First Time Since the uks vote to leave the eu. We will take you live to frankfurt for president mario