Surveillance. This is Francine Lacqua in london. Tom keene is in new york. Tom, i think we have to look at a lot of macro data. The economy in europe is quite slow and that puts extra on the currency. Tom questions on banking in germany. Francine lets get first to the bloomberg first word news. Taylor Hillary Clinton said she is ready to lead and warns that donald trump cannot be trusted in the oval office. Clinton accepted the Party Nomination to be the president ial candidate. She belittled trumps claim that the countrysolve problems. It is wrong to take tax breaks with one hand and give out pink slips with the other. I believe wall street can never, ever be allowed to recommend wreck mainn street again. In japan, the central bank has buying in a bond limited way. But it is not increasing the pace of Government Bond purchases. It will assess the effectiveness of its policy in december. Economy failed to expand in the Second Quarter. The data may have been fueled by a strike of french oil refineries. 24 billion to build the First Nuclear power plant in the u. K. In more than 20 years. Is British Government casting doubt on the project. Global news 24 hours per day powered by more than 2600 journalists and analysts. Tom thanks so much. Yen front and center. Robbie feldman will join us. Oil, 30. Is it imaginable we would go into late friday with a 39 handle on oil . On to the next screen. We will have a number of charts. The two year yield. Francine, what do you have . Francine im also starting with the end. This is probably the biggest starting story of the day. Did kuroda disappoint . We just talks about brexit with the head of the banking association. Not too bad, but we will wait for the stress test. That wes show a chart have shown before, but it has a new field. Circle over on the left, they want to go to that green rectangle. They cant get there. Yen. Ger ¥100. Es right down to we are rolling over into strong yen. Francine i wanted to remind that we have complementary bloomberg terminals today. This is also a demographic problem. Inflation is tricky because it is completely different to any other country in the world. The blue line is japanese employment. Downward. Is really it is 3. 3 . Most countries would kill for unemployment at 3. 1 . Line. Ite line is the boj for more on the boj and the challenges of japan, lets bring in hans riddicker. Great to speak to you, as always. A very quick step backwards. If you look at governor kuroda and what he did come markets are and what he did, markets are saying he disappointed. Do we need to look at it on the longerterm . Hans first of all, we have to talk about, what is the transition mechanism for weaker yen . Secondly, what is happening to japanese Inflation Expectations . Curve in is the yield japan . Possibly me and became incredibly dovish in 2014. We have a situation where Inflation Expectations can fall faster than nominal rates. What we have seen the past year is the real rate differentials, we are moving in favor of the yen against the u. S. Dollar and that is new to the game. We have the deflationary increase of real yield not covered by productivity, not covered by gdp growth, it is driven by Inflation Expectations rising at a faster pace than nominal Interest Rates. Francine when i was trying to get from you is whether this is saying, i cannot do this without fiscal help desk it is the first time, as far as i can remember, that the japanese finance minister came out supporting the boj action today. It is a certain fiscal policy that is so different to the situation we were approaching six years ago. When you have so much depth in iseconomy, the fiscal bank less effective. Increasingut Inflation Expectations by structural reform. If you cannot deliver, you much be must become much more revolutionary on monetary instruments. Hans, we are thrilled you are with us this morning. When you see james gorman, thank him for us. Of what japan is doing, are those experiments and models transferable over to europe and, for that matter come over to the u. S. Or other discrete to japan . Hans we have much more challenging demographics. Have demographics that are challenging and you do not develop growth, you end up precisely what japan is. Parallels ino draw one particular area and that is the labor market. Why wages wondering are not increasing in the United States and in japan, you would be expecting wages would be picking up, but there is an overwhelming factor taking place. This factor is that globally, we have too much capacity. The deflationary pressures in the pipeline are hurting profitability. In the past, we have rarely seen that wages are rising and that sort of situation. I agree with that. Lsc is hugely big on the profitability trend. The only solution to see balance , whether that of a nation or a financial system. Hans there are two points you can make. It is very difficult to. Mplement the other is the monetization aspect. You increase the Monetary Base and you hope that it is going to develop into higher inflation rate. For that to happen, you need to be much more revolutionary. Seenr, the steps we have were obviously too small. Tom it is almost a question of scale. What an interesting friday. Hans redeker with us. It is a most interesting day within the litmus paper of the global system of Foreign Exchange. Coming up, hans redeker and robert feldman. This is bloomberg. Francine im Francine Lacqua and london. Tom keene is in new york. Lets get to the Bloomberg Business flash. Taylor barclays posted a 1. 4 billion loss. The ceos attempts to turn around the bank were dealt a blow by the u. K. Leaving the european union. The owner of British Airways is slashing targets and cutting capacity in the wake of the brexit vote. They had expected profits to grow by 40 this year before brexit and now earnings are expected to rise in the low double digits. The weaker pound will be worth less when translated into euros. A rally in steel and a boost in earnings for the luxembourg waste steelmaker. That is your Bloomberg Business flash. Tom thank you so much. Have a wonderful fret of set of guests. London with is in Morgan Stanley. From tokyo, his colleague, robert feldman. Dr. Feldman, good morning. What an interesting statement from the bank of japan. Did they simply blank . Blink . Robert i dont think so. They put out measures that were smaller than we were asked acting. Expecting. You have already gone over the eds and Something Like that. The etfs were quite important. They are going to reconsider policy in a special session, a special initiative in september. The bank stocks rallied on a view that maybe they are going to all the way from the negative Interest Rate policy. That is not what they said in the statement and they could go the other way. The notion that it is on the table is an interesting one. The second one is that they are trying to be close to the table. Government. Signal. A very big tom i believe toyota needs abenomics. It toyota speaking with the bank of japan about their urgency . Robert i cant comment on individual companies, but the corporate sector is a very diverse sector. Some of them are exportoriented. Corporations will often have a lot of production facilities around the world. Is not necessarily good for goes too far, even for large exporters. All of the authorities in fiscal policy, Monetary Policy trying to stay in very close touch with the corporate. There is not a lot of pushback on again at the level it is in right now. There is not a lot of pushback at the moment. Francine are we going to see, robbie, governor kuroda surprise governments in coming months . That seems to be what he is good at. He wants surprise on the upside with the downside. Robert it is a good thing if he surprises to the upside, but the surprise he came up with in january worked the wrong way. I think that was one issue that people have been worried about. Inside the bank of japan, there is now a view that continual large surprises are actually destabilizing for expectations. What they need now is a consistent, clear, on track policy that is understandable how they link nation with action area the boj is moving more and that direction. Rather than toward surprises. It seems they are trying to improve the forwardlookingness of expectations by calming down a little bit. Francine hans, overall, what is your grade if it was a report card . What would you give abenomics . , well a verycs we shouldg concept, have seen a little bit more structural reform that would have been more productivity enhancing and should have supported expectations. Hopefully, we are still seeing the increase in inflation. When we go through our yen analysis and think what is really the driver for the yen, it is really all about Inflation Expectations. Inflationo lift expectations and then you get a weaker yen. Without that, you have deflationary increase and yields working in favor of the japanese and not in favor of japan. Tom dr. Feldman, you talked benedict you talked about generational changes a generation ago. What is the demographic and social backdrop to this new frustration over nominal the and gdp anddp nominal animal gdp . Robert there are lots of elements in the demographics that are pushing to gdp. The upward shift of female participation is probably over and likely to be overwhelmed in the next couple years by a lot of aging of the population. In the 50, 60, 70yearold age group. It will be very difficult to raise the labor force in the face of this very large demographic, this group moving out of the 60s age rage range. That means the Unemployment Rate will be pushed down much further. Hans point about globalization is important, but when you have Something Like a Million People coming out of the labor force over the next five years, if the upward shift of the profile does not happen, that is a very large number and it should put a lot of pressure on the labor market and that would impact prices. Francine thank you so much. Robert feldman. Hans redeker also stays with us. Coming up in the next hour, we speak with the president of the Peterson Institute. Asianthrough more currency moves. This is bloomberg. Francine this is bloomberg surveillance. Im Francine Lacqua in london. Tom keene is in new york. Ubs reported secondquarter earnings. Investment banking generated less revenue. Down sat set down with ubs chief. They discussed brexit. There are always opportunities, but we need more clarity about what kind of form and brexit vote will take that people will be able to evaluate where there are opportunities. There are also a lot of challenges, not only for the u. K. , but for the entire european system. Francine still with us, hans redeker of Morgan Stanley. The bigger problem is that there is no growth and huge regulation. That the other aspect of is the Interest Rate environment. You have very negative interest you have a yield curve, which very often does not provide any return area when you see how much european banks ,ncreased Sovereign Holdings you wonder what is the earning prospect on that side. It is actually a concern in respect of what is the impact of Economic Growth when the Banking Sector is working as well . Then you have to consider what it means for the euro in this case, of european banks, and on the economy. You would have to immediately said that that would suggest a weaker euro, but it does not. You have way weak european financial a week european financial system. It becomes much more japanese. It becomes much more about differentiating between the capital risk and the Foreign Exchange risk. When you go back to japan before abenomics, these guys were investing in bonds. Europe is the same. Francine thank you so much. Hans stays with us. We will have plenty more. Also on the japanese banks. They are being crushed in the negative rate environment. Equity futures practically unchanged. This is bloomberg. Tom it is a friday bloomberg surveillance. Lets get right to our first word news. Here is taylor riggs on philadelphia. Clinton islary first woman ever to be nominated by a major party. G needle donald trump she needled Donald Trumps thin skin. You did not hear any of this from donald trump at his convention 10. He spoke for 70 odd minutes. D. Do mean od and he offered zero solutions. Taylor u. S. Intelligence and thatary Officials Say turkey is sweeping up u. S. Allies and contacts in turkey that will make coordination more difficult. Has askedng felipe the Prime Minister to end the impact. He said he will not necessarily submit himself for a confidence vote. Facebook mayohat as much as 5 billion in taxes that have to do with Global Operations transferring to ireland years ago. Facebook said the Balance Sheet could suffer if the tax bill is upheld area it plans to irs. Enge the im taylor riggs, this is bloomberg. Tom thanks so much. Cleveland is old news. The balloons need to be picked up in philadelphia. Mark halperin is spinning forward and looking forward at where trump and clinton had. Mark halperin joins us. I thought it was extraordinary last night. I would have thought Scoop Jackson or tip oneill would come out on stage. What a Different Democratic Party message. How does the secretary and the senator from virginia, how do they carry that forward . Mark in the shortterm, they go on a bus trip out of philadelphia to western pennsylvania, a battleground that trump has based his claim on. Herenow are going to leave , my guess is that clinton will be anywhere from plus seven two minus three. It will leave both parties feeling like they can win it as we head toward a very strange period in august when a lot of americans are not going to be paying attention to politics. The next time we will see the kind of engagement that could drive the race is after labor day, when there will be a big focus on the race and then when the debates occur. Tom how many undecided americans are there . I cant get a straight answer. Do you know . Mark there are millions. It depends on the pull, but there will be more undecided than we normally have because we are dealing with two candidates that are not particularly wellliked. Many people are waiting to make up their mind. The undecideds are a big deal and so was a the turnout. Ony are focused is energizing the base of the run party because the winners will be determined not by who sways more undecided, but who energizes supporters who are inclined to vote for one side or the other. Francine im a londoner. I dont believe the polls anymore. Are the u. S. Pulls different . Should we trust them . Ll. K it depends on the po the National Polls matter less and less. You do the things about quality input. What is the record of the pollsters and what kind of methodology do they use. You have to look at important states like bloomberg like ohio and virginia. There is a very clear lost in translation that hillary cannot translate her policy expertise into a vision. What she strong yesterday . Issue the new Hillary Clinton . Was it clear what she said . Mark i think the convention was a success at achieving its goals. I thought her speech last night was fine. If for goal was to revolutionize american conception of her. It is focused less on the that a lot ofaits americans like. I dont think the convention made a particular headway. That leads leaves the race largely unchanged. Tom how does mr. Trump adapt to this . Is he still going to tweet every five minutes . Mark if you are waiting for trump to change, you will be waiting a good long time. He is going to continue to do what he wants to do. Tom is there lasting damage to the last two or three days on mr. Trump, mr. Putin, or is it a general statement on russia. Mark i think it has undermined some confidence republicans have compounds not going to his errors. I said for the last couple days that there are soccer moms and millennials and voting groups you could slice and dice. Ive not met a lot of protein votersters pro putin across the United States. What is the battleground of battleground states . What is the state you care most about . Mark ohio. If you want to tell me one state that will win the white house, it will be ohio. Trump will have an uphill fight in the electoral college. Again, you want to look at ken clinton win any one of those three . If she does, she will probably be the next president. Francine we have a great article on the bloomberg terminal. Lets get back to modeling. How much do we know about . Rumps Economic Policy guest we have to think about how is it going to impact rate, rate expectations, and so forth. On the economic side, you have both sides with relatively leftleaning agenda. Trump,case of donald getting specifically aggressive, why is this important. Profitability abroad, which is 2. 2 trillion. The reason this is a broad and not in the u. S. Has to do with the high tax rate in america. So that is brought down, you could have a significant move. Tion weigh some people with a trump means volatility, and therefore higher risk premiums, and it can actually be positive for the u. S. Dollar. Halperin, thanks for joining us. Good luck. Johnhalperin with heilemann with with all due respect. They need at least a oneday rest. With all due respect, 5 00 p. M. Tonight. Halperin and heilemann. This is bloomberg. Geoffrey welcome francine welcome back. This is bloomberg surveillance. I am Francine Lacqua in london. Tom keene is in new york. I want to look at the bloomberg terminal. You have japan and white, germany and blue, the u. K. Is purple. This is the euro. Lets get back to hans redeker. People will point to this and e arewell, maybe wherw mispricing. What does this tell you . U. K. , thecase for the guilt curve, is very clear. And the economy, the economic indicators, which are weakening, you have Central Banks, which is maybeto ease, aggressively, so on the circumstances, yields can come down. , there is in the u. K. Still room to the downside. When you look at negative yields, you have germany and japan. Francine is it a bubble . Hans i dont think so. Becauset yet a bubble we are in a highly indebted row. Obligation of future savings, and it actually means we are heading for a situation where you will have savings exceeding investments, and that is actually an environment where bond yields are coming down. Think that the adjustment of books, the interest of savings have only just started. In asia,ot of Capital Financial markets. Tom hans, i think you are dead andre ethier is the bottom line help me, hans, if i am wrong. We have got an experiment in negative rates with zero transmission into society. You talk about the difficult to maneuver japan, denmark, the rest of them there is no impulse of negative rates and narrow facts on to the public. Can it that occur, or just simply politically not occur . The experimental for negative Interest Rate is on the review. Japansicates statement. I would have liked to make a different situation. If you impose native Interest Rates, you need to know about balanceal banks sheets. The difference cannot be bigger. That may explain why swedish banks have profitability. Sibley because they are wholesale driven. Liabilities by deposits, and that is making a big difference. Out of retrospect a little bit to shoot out of the highsimply because the dependency on the funding side of banks, the deposit suggests that this policy is unlikely to be successful. Tom francine touched on this earlier, bring up the dollar chart right now, this is blended dxy with a nice weighting toward the euro. It was very much in a range what is your call when i factor in zetnersnters economy, when i factor in the Morgan Stanley Interest Rate, when my factor in what we heard from your colleague, Robbie Feldman . What is your doctor on call . Hans it is likely to decline. We are quite pessimistic about the outcome of the u. S. Economy when you look at our internal which captured domestic demand very well, they are suggesting that domestic and strength is going to no cost indicators are coming down from 2. 9 to 1. 8. And the recent rise you have seen in the u. S. Dollar from the low point is 4 of u. S. Dollars to the upside. Higher u. S. Will yield on a relative perspective. I think the real yield level, basishave an rising by 18 points is not sustainable in the scenario. It is unlikely that the fed is going to put itself ahead of the curve. It could be rock required to keep real yields from here, and i think the u. S. Dollar in the next couple of months is going to lose between 4 and 5 . Hansfrancine, what mentioned, the atlanta gdp number under 2 , that was a shock to the system. I mean, going into this friday, going into the boj, no one really expected 1. 8 . Francine the bigger problem for the fed is to say we have a jobs number a week from today that is how did they deal with that . Soon mainlyels too because of the president ial election and the uncertainty that can bring. They still hold off hiking rates . It is all about inflation and Inflation Expectations. At the start, there is a wonderful start on oil. Oil is declining. The expectation is declining, are still at 2. 5 , so what you need to see to convince us that rates are going up, we are not seeing it yet, therefore, why should the fed take any risk . For what . There is no reason. Tom this is fastening. Redeker, please continue with us. He is with Morgan Stanley. In the next hour, lets call it the litmus paper of surveillance this morning, adam posen joining us as well. A bit ofon and from cooling in new york, this is bloomberg. You. We welcome all of the best of economics, international relations. Francine and london, i am tom in new york. She showed up for work for the Bloomberg Business flash. Anheuserbusch missed estimates. The world was the largest beer maker was hit by a downturn in latin america. Major shareholders of seb miller said they support the takeover offer. 32 per shareed 1 for your amazon shows it consistently makes profits while making big investments. They reported secondquarter earnings that beat estimates. At the same time, amazon is planning on bigger delivery to beat retailers like walmart. Meantime, amazons Cloud Computing services are creating a bigger share of profits. Second quarter profits plunged at barclays. 1. 4 billion loss from selling off or winding down assets. Ceo says they were dealt a blow by the u. K. Voting to leave the european union. Adjusting our legal construct in order to execute our Business Strategy is something we are brexit pretty is another that will require us to adjust the way we do business in europe. I confidence that because of the value we bring to europe, we will find a way, together with the British Government, for barclays to remain unimportant presence around europe. Barclays stock is down since staley took over. That is your Bloomberg Business flash. Francine, you are staying with banks. Francine we are. It is a very challenging environment, particularly because if you look at where we stood in october, november of last year as we were planning in the6, the consensus raise bys for 5 , 6 the fed, and now we are struggling with whether or not there will be any move at all. Francine ubs and the former italian minister have proposed rescue plans. The bank is weighted down by bad debt, one of the weakest links in europe. Eor moral modemore on all of italian banks, lets get to jacoby noted a telly jacopo ceccatelli. How week are italian banks . Jacopo obviously they are quite weak on average. There are big differences, but obviously the system has been basically weakened by a long period a very sluggish Economic Growth. Also obviously the italian banks did not manage it in the u. S. Following the enterprises of a number of occasions where they could have capitalized massively, much easily, probably. So now we are in a situation where we probably need some sort of intervention by the state, kickediously it has just in, and it is difficult in the details, especially. In thewaiting to see front line, and we expect, obviously tonight, and negative review. What is the resolution in this . Are we going to have at the end of the day, it is up to germany, i guess, are the italian banks going to be sorted, or are we going to see something other than systemic . Jacopo i think in the end animal they will find a solution theyo i think in the end, will find a solution. We will get some sort of or some sort of waiver from the state or some agency. In the end, i think they will sort out things. The problem is not huge if we european, to the economic size. Repercussionsle of a negative solution could be much, much worse. I think in the end, they will get a solution. As usual, the details will be very important. Francine all right, jacopo cec sim. Lli, ceo of marzotto tom . Tom you wonder where we come out in august. Ker, what are you looking for in august . Hans what i think is going to become is a big surprise by how much the euro sterling could appreciate. When you look at the contenders, the contenders will tell you to doaybe what they have to the upside, but people are grexitnking that the would be exported into the euro, and therefore the euro would deserve to do worse. I think to consider the slow dynamics, you have nobody who can sell euros, they call it the Balance Sheet. Tom hans, thank you so much feared hundred occurred with Morgan Stanley thank you so much. Hans read her with Morgan Stanley. This is bloomberg. Tom this morning, the yen strengthens as the bank of japan keeps the helicopters on the ground. In this hour, adam posen and Robert Sinche. It is a brutal week for Deutsche Bank and selected peripheral banks. When do the catch calls begin . Reckons as then father of a dead soldier throws the constitution at mr. Trump. We are live from our World Headquarters in new york. Good morning. Tom keene in new york, Francine Lacqua in london. Whatever your politics, democrats know how to put on a tv show. Francine yes, they certainly do. You have some great speeches. What i would say is that the end of this convention, tom, we have a lot more economists trying to figure out whether we will see Dollar Strength or weakness on the back of each candidate. Tom we have got two wonderful guests of the hour. Here is taylor ridge. Sheeor Hillary Clinton says is ready to lead and donald trump cannot be trusted in the oval office. Partysccepted the nomination to be the president ial candidate. Clinton said a man you can beat be trustedt cannot with nuclear weapons. She also took aim at the big banks. Ms. Clinton it is wrong to take tax breaks with one hand and give out pink slips with the other. And i believe wall street can rent ever be allowed to main street again. Mater clinton and running tim kaine will get on a bus today. They will visit the battleground states of pennsylvania and ohio. In japan, the bank has expanded a Stimulus Program on a limited basis. It will double the size of its dollar lending program, but it is not increasing Government Bond purchases. Development, it will assess the effectiveness of its policy in september. Monthse. 3 in the three ending in june, in line with expectations. It indicates the economy was fragile before the u. K. Voted last month to leave the european union. Regulators are putting more on wall street banks over risky corporate loans. Bankers are now being questioned about loans that just sneak in as acceptable. Regulators want to know how those loans would perform under average conditions. Global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. Im taylor riggs. This is bloomberg. Tom equities, bonds, currencies, commodities. Currencies, currencies, currencies it seems on david surveillance. Oil we are watching carefully. Tinea. He next screen, the yen is front and center, 1. 0356. Francine . Yes, tom, it is currencies, currencies, but it is also banks, banks, banks. In europe, you can see the bank stocks. No real concern about what comes up afterward. And the bank of japan, it is a little bit dead in the water because it is underwhelming, and you see the yen at 103. 56. Tom i really recommend you go back and listen to that Robbie Feldman interview. We fill in this chart a gazillion times. The box is where they want to be. Strong yen. They extrapolated out the tendency, a little bit of volume, but it we went rolling over the migration of trends down to the 100level as well. That is antiabenomics. You mentioned in a statement, francine, that is uncertainty. You will continue the theme, right . Francine i do think i will continue the theme, but i want to talk about what abenomics is about it is about demographics. The blue line, you can see the trend, 3. 3 of unemployed in the past. That is nothing, especially compare to europe. It is symptomatically something quite ugly out there. Tom very good. Robert sinche joins us now, amherst pierpont. He synthesizes like nobody else. We talk about economics, finance, investments. He hass for decades synthesized from a Foreign Exchange based, and even he opined on apple at the top. Bob sinche joins us spirit have you ever seen it like this in your library with all the old bear stearns and bank of america literature, the work you are doing at amherst pierpont . Is this an original moment . Robert i think it is. The Central Banks have a new theme song, and it is running on anti. On empty. That is what we heard from ecb president job he. There is really little if anything left for the Central Banks to do. Governor carney of england is not want to go anywhere near them. What is left for Monetary Policy to do, and i think they continue to pound the table pretty aggressively on the fiscal side. I almost wonder whether bojs kuroda said something to the ,bbe administration in advance a very strange fiscal package earlier this week because that is where we need to go now, fiscal, fiscal, fiscal. Tom Jackson Browning moving forward, the theory on the way the banks work, is it a pretender . You learn this, at brown. None of this is in your textbooks. Robert none of it is. The Financial Community is now feeding back to the Central Banks and telling them how much of stress they are under because of these negative Interest Rates. Initially, negative Interest Rates were thought to be a solution. Now i think they are starting to be perceived as a problem. I think that is why the boj did not take any action. I think that is why the ecb has been slow to move and will be slow to move. Again, i think the bank of england, maybe they go in august, but they have one rate out in front of him. They will use it when they think it is best to do that. Francine how can we be sure fiscal policy works . We were speaking to hans redeker, and we were saying there is not a horde mentality. Fiscal did not save us, and it is unclear whether it will work this time around. Robert yes, it is, and that would be a problem. But i think again come in the past, often when fiscal policy was finally implemented, it was a little bit late in the process, and the domestic economies had picked up, Credit Demand had picked up, so often when fiscal policy was was crowding out spending by the private sector. I do not think we have that risk this time around. There is funny of liquidity, plenty borrowing capacity, and we really do not have much of a choice. I think that is really all that is left for now. We tried a few things with relative Exchange Rates, but that has not helped the Global Economy in the aggregate. Francine if you look at the Global Economy, and if we break it down between u. K. , eurozone, japan, and the u. S. , can you even say centralbank policy has worked in the u. S. . Robert i think the centralbank policy in the u. S. Worked for a good part of the expansion. In fact, i think that our estimate is that the u. S. Economy has the potential growth right now of only 1. 5 when you take into account productivity and labor force growth. So to get this economy growing for over 2 for about five years now, it actually is a bit of an compliment. The economy is going above potential. We have seen unemployment come down as a result. The fedday during meeting Joe Weisenthal loves this is a. Plot. This is three years ago. All you need to know are those crazy dots. The red line is sitting on the green line. The red line, call that the vigilante line. Here we go. This is just too cool for school. Edch the red line to send then watch the red line def and descend withn a vengeance. Does the green line come down to meet the vigilantes, or do the vigilantes have this wrong . Robert i think we are somewhere in the middle. I think this is going to be a gradual process over the next three months to six months, but we are seeing signs of inflation pressures beginning to pick up. As a result, i think the central bank will begin to realize that they have rates that are just too low. Tom you guys that are cross asset, and this is the money question on a friday afternoon, when we get what you just said, are these jump conditions with instability, or can everybody glide those paths smoothly . Robert i think we can manage the glide paths. One, when the fed moves, it will be gradual. Second, there is still a large pool of assets being purchased by the ecb, by the doj. That will help. Tom that will help. Ok. Robert i do not think it will be abrupt like you saw in 1994 when the markets were not expecting anything and he said when on a 300 basis point hike in a year. Certainly markets are going to be priced off 10year, Government Bond yields. That will not be that sustainable for very much longer. Francine bob, ok, so the dot lets simple fight and say it is like the Forward Guidance here in the u. K. , how can you plots or Forward Guidance with data dependency . You need to be transparent to the market. If you are data dependent, you cannot forward guide. Imrt yes, and thankfully not on the central bank trying to square those altogether. The fed has gotten itself into a position where it is very difficult for them to get to where they want to be. I think if you said to the fed, do you think the real fed funds rate now should be about zero . Yes,ess is they would say, that is correct, it is stimulative. If it is zero, the nominal fed funds rate should be in the 1. 5 range. The problem is getting from where they are to that level. They just cannot take those steps, although if you ask them, they would probably like the fed funds rate to be one hundred basis points higher than where it is right now. Francine bob, thank you very much, bob sent from amherst pierpont, he stays with us. At 6 30 a. M. In new york, 11 30 a. M. In london, we will be talking about japanese demographics and whether europe is becoming a little more like japan. This is bloomberg. Francine this is bloomberg surveillance. Francine, in london and new york. Taylor Second Quarter sales and earnings beat estimates. Apple brought in more money from the growing base of mobile users. In newle, investing companies. Second quarter profits plunged by more than half that barclays. The bank posted a 1. 4 billion dollar loss. Staley ceo jeff staley, youo jes will hear from him later in the hour. Wealth management and Investment Banking generated less profit, still, ubs earnings beat estimates. Ermotti made it a priority. Francine, youre sticking with ubs. Francine we are. The u. K. sout decision to leave the eu, brexit, if you have a large presence in london, is not a good news. Always there are opportunities, but we need more clarity about what kind of form take, and vote will then people will be able to evaluate where there are opportunities. There are also a lot of challenges, not only for the u. K. , but for the entire european system. Is thekey thing for you past sporting passporting rights. Sergio it is a risk in terms of finding other options of how to operate. We have a high degree of flexibility. We have strong local presence in europe, so we would be able to adapt and really apply resources should they be necessary. But the outcome could really be that the u. K. Retains access to europe. Francine that is the ceo of ubs, sergio ermotti. By growing is hurting banks, trading is tough, is there any glimpse of hope . Not really except for the fact that both banks have delivered on cost cutting. They can try to respond to some of this with a more aggressive scalpel. They deserve some credit from the market, so today, ubs and barclays did show some signs of being able to manage that on the cost basis, but as you said, the outlook is really, really tough. If the stress test for italian banks are really bad, isl we see consolidation, or that head should of the Capital Buffers and new rules in place . Lionel it is interesting. I find it funny because the market very quickly discounted what was supposed to be a big european grand project into an italian question. Everyone now is seeing more capacity and working out a solution. Nobody seems to care anymore about a stress test. Countries are not even going to be included in the stress test. I think expectations have gone down a lot for the stress test. If they are not met, you might find a market reaction. Is a mystery. Bank it is real simple, the chart is an absolute train wreck. I love the ft treatment today, looking for a 7 billion cash car. Laurent, for our american viewers, including tom keene and bob sinche, what are they waiting for . Help me . Howel the real question is low can that share price go . How cheap can they get before they have to do anything . I think actually people think it could go a lot lower, and it could get a lot cheaper. The bank knows this is not the to dof valuation it wants a massive cash call on. The bank also knows if you want to the market today and said please give us money again, this is our strategy, the strategy would not really be any different. I think sadly, we may see that fair price go lower and people still speculating about the right issue at Deutsche Bank. Tom lionel, who is driving the bus . Is it john, a board, or both of them . A lot of people are just saying, lets go. Where is the lets go . Lets go. E is a i think john cryan is doing more than his predecessors did. This is a typical situation where you have a big grand strategy announced at a very bad time, which is when you are going into a slowdown. It is not the beginning of some new super cycle Investment Banking, so this is going to take time. Even judging it on the Second Quarter not really hold any water right now. So there is a lets go, but it will take a couple of years. Francine lets go, but it is going to be slow. Vinyl, thank you, bloombergs lionel, thank you, of bloombergs gadfly. This is a picture for you. It is 11 20 a. M. In london, 6 20 a. M. In new york. We look at the yen. Stocks are climbing. S p futures are pretty much unchanged. This is bloomberg. Tom tom keene in new york, Francine Lacqua in london. Both of us watching the Convention Last night in philadelphia. 5 00 p. M. This afternoon, mark and john will have a nice wrap up. The twoisited conventions this year, you would have come away thinking the democrats are the more patriotic of the two parties, and the more cautiously conservative. The extremist french that threatens to take over the Democratic Party seems less menacing than the lunatic fringe that has already taken over the republican one. Does this filter into our economics, bob sinche . Hasrt i do not think it yet, but one would expect the dollar to be stronger than it is right now based on fundamentals, so you kind of wonder what is driving the dollar a lot weaker. It seems like the Foreign Exchange markets read the fed this week a lot differently than maybe the Interest Rate markets today, so the rates markets are signaling that maybe there is some more tightening ahead. The fx markets are not. The best thing the japanese can hope for right now is that the fed does signal and deliver some rate hikes and hold it above 100. Tom do they rescue the rest of washington, including congress, the senate, and the white house . Robert no. I do not think they do. I think it is the same thing that we see around the world, that the Central Banks really are done. I think they are telling people that pretty clearly. As a result, we will have to find other sources of growth. Quickly, the surprise yesterday of the atlanta fed on the 2 gdp nobody expected the shortterm 1. 8 gdp. It goes to what you were talking about earlier, which is the sub 2 feel and the economy. Robert it does not feel good. It looks good in the on employment rate, but it does not feel good growing at roughly 2 . Certainly this is what we need to get used to. I mean, in japan, you know, francine noted earlier, we are at a 20year low in the Unemployment Rate with an economy that is barely growing. Have a 3. 1 Unemployment Rate. Tom we will be back with bob sinche. We had Robbie Feldman earlier. Adam posen of the Peterson Institute on his study of the german people. From london, from your from new york. Tom bloomberg surveillance from london and new york. Good morning, everyone. Lets get to first word news with taylor riggs. Taylor Hillary Clinton is scoffing at Donald Trumps claim that he is the only one who can fix the economy. Hillary clinton is the first female ever nominated for president by a major party. She accepted the nomination last night at the Democratic Convention in philadelphia. She said his message is based on fear. Ms. Clinton now, you did not hear anything about this, did you, from donald trump at his convention . Minutes, and70 odd i do mean odd. Above] and [cheers and applause] mrs. Clinton and he offered no solution. Taylor clinton and senator tim kaine will be on a bus visiting pennsylvania and ohio. The bank of japan will purchase more etfs and double the size of its dollar lending program, but it is not increasing the pace of Government Bond purchases. In an unexpected development, the bank will assess the effectiveness of its policy in september. Frances economy stalled in the Second Quarter. Gdp failed to expand. Economists expected an increase of. 2 . The data may have been skewed by a strike at french oil refineries. This is before the u. K. Voted to leave the european union. 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. Francine . Francine thank you so much, taylor. Peterson shares are down. Predicting as also pretty challenging second half of the year. Pearson gets almost all of its profits from education outlets like the financial times. John fallon joins us from pearson. Overall, the challenging conditions are here. We see it across the board. When will it get better . It starts to get better in the second half of the year. We have reaffirmed our guidance for the full year, so we are on for earnings per share in 2016. Through of a big Restructuring Program that we announced already, and that is on target of our 8 Million Pounds of operating profit by 2018. The important point to remember is the third and fourth quarter, the really important one for pearson, because that is when people go back to school in most of our major markets around the world. Today, you see much more of a retrospective look, tackling with a big change is that we make earlier in the year. We are confident, we are clear, we are on track and in great shape to get is growing again for 2018. Francine and you will see real growth in the u. S. In the second half . John we are expecting revenues to be broadly flat year on year around the world, but we will start to see a big pop in profits from the big restructuring cost savings that will start to come through in the second half of the year. Lets be clear the markets are still quite challenging. Growthly think with the plan that we have in place that we have created a really strong platform, and we will start to see at first modest growth but then can really build from there because i think there is still a huge opportunity for technology and makeorm education available to four more people around the world. That is what we are about. Tom john, i love the message. You are the publishers of the iconic case fair and auster economic test. Bob sinche and i are on here. Between the two of us, we spent pearsonollars on textbooks. Why are textbooks so damn expensive . John great question. Tom thank you [laughter] offers we arehe proud to be associated with is glenn hubbard, and were working on a digital textbook that combines the fantastic content with the wonderful benefits of adaptive learning and be like. The fantastic thing about that as we can make the price cheaper for students, a better value, but also provide much better value to faculty as well and help students to be more successful. Of course the benefits from a Pearson Point of view is that we get better sellthrough per student, so it is a winwin, a better value for students, better sellthrough for pearson, and that helps everybody. Tom i want to make clear, folks, textbooks today are light years superior to what we had when we were studying. John, on a financial basis, you are a very competitive business. How do you deal when youre good competitors in textbooks and the education business . How do you acquire the star talent that makes the machine go . John it is a great question, and it is one that we are really excited about the future Growth Opportunities cousin is not just growthtal opportunities because it is not just about digita it is about making the benefits of education much more widely available. For example, we just formed our first partnerships here in london with Kings College university, which means they can offer online programs that means more students around the world can benefit from them. That builds on the great work we have been doing with allers. Arizona State University that attracts talent to our company because lots of young people, lots of millennials they want to apply technology to something that matters, and there is nothing that matters in the world been giving the sort of education that you and i have benefited from available to far more people. Francine i was at kings, tom. I feel all warm and fuzzy inside. Tom i want to make this clear, folks, the gusts that we have on surveillance, francine, or people that john deals with. Mellon,t carnegie you read the thing cover to cover. Francine right. I think pearson is trying to cater for emerging markets growth. John, when you look at your Growth Strategy and the growth market, places like china, brazil, india, south africa they have been crushed. Growth has been crushed. John one number 84 . That is the lifetime economic value for someone in america that has a College Degree against someone who does not. 70 of the rising income inequality in america over the ant 20 years directly due to equality of educational opportunity. The fantastic thing about technology, the reason why so much great talent wants to go more did our company, as we can help to solve what we think is one of the great social problems that face is america but also actually create economic value for shareholders in the process. That, to your point, is exactly the same issue in china. Learne you flocking to english . Because they want to be part of a global community. They want a chance to work for a Major Company that is looking outwards to the world. So it is a great benefit all around, and back to my point, by investing in Global Platforms for the first time, we can create great products and services and share them with students wherever they are in the world. Tom john, thank you so much. The next time you come, bring 10 copies of the fabulous book lincoln economics. I mentioned it on the show yesterday. John fallon at the textbook machine, pearson. Coming up, adam posen. He is at the Peterson Institute. With bob sinche, adam posen on germany. Tom good morning, everyone. Tom keene in new york, Francine Lacqua in london. Right now, we dash to adam posen of the Peterson Institute. Did the helicopters stay on the ground in tokyo . Adam absolutely, but they were never going to take off. All of the height out there, tom, it was that this was going to be a meeting in which they did Something Big that was always overrated. I was surprised people were surprised. Tom within that is the idea of what it does to yen. We had Robbie Feldman on earlier from Morgan Stanley made clear a stronger yen really would not. Ffect exporters of japan when does the pain click in for the toyotas and hondas of the world th . E . Adam i think where you are now at 103, where they are now, i think when you get to the low 90s, the pain really kicksin. The real reason they are not acting on yen indirectly is the commitment and the hope that u. S. Will pass tpp. That is why abe restricted Exchange Rate intervention. Francine adam, why did we see governor kuroda asking for a review of the policy . He reminded us that it was three years that the boj was there, and he can do much more. Is he having doubts about what is working and what is not . Adam i feel there are three things going on with kurodas announcement that the september meeting will be a review. First is legitimately the bank of japan has to take stock. The reversal in inflation trends over the last few months is not what anyone saw coming, and there is some downward de anchoring that people need to worry about. Secondly, people talk but helicopter money, but there needs to be fiscal coordination. Assuming abes stimulus package goes through in october, having a september meeting to preempt what youre going to do monetarily is a good idea. Third, i think there is a sense that kuroda has a little more division and the board than he is used to, and he wants to get people on the same page. Francine what did you make of the fact that the finance minister for the first time came out and said we support the boj and what they are doing today . Are we really going to see fiscal and monetary go hand in hand . Adam i think so. You have artie seen that for over three years in japan, and there is nothing wrong with it. You do not need the socalled helicopter stuff it is really just propaganda. If you want to enhance the people, you need fiscal policy to do it. There is no monetary constraint. Out. Does not rule things i think the bank of japan will consider things like buying perpetual bonds if they are issued, putting a cap on Interest Rates they will start thinking about new things. Tom you know, adam, i just figured out your shirt. It is semilogged in the second quadrant. Square root of i kind of thing. Robertsons of amherst pierpont right now lets bring in Robert Sinche of amherst pierpont right now. Sky coming down here. Are these brutal moves, bob sinche, or are they controllable . Robert in a daytoday sense, they are not brutal. Today, they are pleasant. The thing to focus on, and dr. Posen just mentioned this, is the inflation in japan. The yen has been going against the dollar. The dollar is also going against the r b this year. When you talk about japan, it is really stronger against the chinese currency, and they are importing another round of inflationary pressure. Cpi up now only zero point 4 yearoveryear, and as noted, that is going in the wrong direction. I think that is really what the boj wants to reassess is what are our options left here . I think the main option on the inflation side is weakening the currency, but again the g7 has said that is something they cannot undertake, and they need pressure somewhere else to get the currency weaker. I think that could look back to the fed actually. Francine adam, when you heard governor kuroda today, the road ahead will be tough, but he will get inflation to 2 . What will be the prescription for that . Adam i think, as your guest just said, the Exchange Rate might be one method, but even they are, i would not over do that. Remember, the yen fell hugely in 2014, and you did not get a surge in inflation. The next step will be raising wages in japan. Accommodatingnk and encouraging that. There are rumors that part ofa abes stimulus package will be a raise for teachers and other Public Sector employees, and that will be a big help. The baton has to shift to physical for monetary. Tom i want to bring up a chart quickly, as bob sinche just mentioned this, this is an example of what we can do on the bloomberg. Bi, and the yenrenmi red curve is the strong renminbi. A massive sweep down there is a stronger yuan, weaker japan. We are 1 3 of the way back on that move. Robert it is a little more than 1 3. That would be an abrupt move. That is painful for their economy. Sinche, both will stay. Adam, you want to jump in . Adam real quick, i think bob is right to expand it out to china. Japan is winning the least ugly contest with the u. S. Art of the yen strength is not failures with the boj it is things like brexit, italian banks, chinese problems, so people pulled her money into japan, which is relatively better. Tom this is brilliant. Sinche and posen with us. Adam posen mentions the idea of europe. Heree do a data check right now. That was great. Where else can you get yen renminbi on a friday . Oil we are watching still cannot find a bitter and with adam posen, london, new york, this is bloomberg. Tom yen, yen, yen. An exchange for report. Dollaryen moving overnight as adam posen said. , a deterioration over the first two hours of surveillance. Dollar weaker. We will talk about that later in the segment, francine. Francine coming up shortly, it is bloomberg. Have a great guest coming on. I know you will be talking yen. Jon yes, it is the dollar yen movement, the Japanese Movement is strong. And the yield curve in japan right now slamming to the front end, selling off aggressively can we will debate what that means going forward. Of course we will have a Big Conversation with the man who knows a Little Something about centralbanks Monetary Policy. You mr. En, we give Willem Buiter from citigroup. Tom jonathan ferro, thank you very much. Right now, professor posen, with us. Sinche why cant the clear their Banking Institutions . German an expert on culture. What is the cultural strength of that allow them to clear . Adam what is interesting here is this is a way that germany is no different from anyone else. They tell everyone to clean up their banks, but they do not clear up their own. Both of them are National Champions your they do not want to give up, even though Deutsche Bank, their share in the domestic market is tiny at this point. It is all done mostly by the community and small banks. It is no different than the french looking after theirs or sadly the italiana looking after theirs. Germany is not willing to admit that there is a problem. Francine adam, you are really straight talking. When it comes to them, they made need to do something similar to what the italians want to do. Adam yeah. Of course, the italians, francine, have the threat that referendumhave this in october, probably, it could cause the government to fall, and nobody wants to see the alternative in italy. Bailout,s some kind of for at least the small investors, is likely to happen because nobody wants to see him get voted against. In germany, at what point do you say to chancellor merkel you drag this out, you put the rest of europe through the mill to make sure german banks do not take losses and always ended up with a bigger mess. Go to a chart here really quickly, then you, francine, go to adam posen. Youve got to be kidding me, the. Rend is not your friend that is an ugly chart by any definition. Francine yes, and when you look at growth, there is almost none of it in europe. Banks need growth, or is it that banks need growth to function . Varies from country to country. In italy, it is the lack of growth for several years. In germany, that is not the problem. It is Something Else going on. Ofyou are thinking in terms too big to fail leading to back discipline, then you have to look at banks like deutsche and others that just repeatedly get into crisis. I hate saying it. They are a Great Institution in many ways, but this is germany has protected its banks, and this is the result. Switch gearso here, adam posen, and go to bob sinche. Go to oil. Bring up the chart. Showing brent crude at the moving average. Wyeth and moving down, and what are the dollar dynamics why is it moving down, and what are the dollar dynamics . Robert you would expect oil to be moving hired rather than lower, so this is a critical juncture for oil. We view this 200day moving average at just around 40 a barrel on wti as being the support level it had to hold. Having that potentially give away today at the same time that the dollar is weak what suggests that there is something really fundamental going on in the oil patch here. Francine overall, the glut seems to be striking back, right, bob . Demand, orasing is it destruction us all the markets balance each other a little bit more on oil . Robert you know, i think we had some undershoot of supply here. We had not a tremendous increase of production here in the u. S. , but certainly it is turning a little here to the upside. We are coming to the end of the refining process for the driving season here in the u. S. , and i think that is starting to weaken the demand for crude also. This is an important time. We generally see weak prices late summer, and i think that is what we are seeing right now. Whatquickly, dr. Posen, is the greatest mystery you have at the Peterson Institute right out . Adam we have a study in which we really go through what donald trump could go through for day one and what the damage would be on the u. S. Economy. I am checking it over this weekend. It scares the hell out of me, but it is very well argued. We hope to release that to you in the near future. Tom adam posen, thank you so much of the Peterson Institute, and bob sinche so with amherst pierpont. We will continue this conversation on Bloomberg Radio in a bit. Francine, i believe we talked on wednesday about your love of american baloney. I hope this weekend you have a bologna sandwich. We will do that. A data check right now, the yen stronger this morning, futures negative. Jonathan japanese yen tumbles. The bank of japan continues to surprise. David earnings momentum. Amazon and alphabet flirt with record highs. Hillary clinton officially accepting the democratic nominee and accusing donald trump of generating fear and division. Jonathan to our viewers worldwide, a welcome to bloomberg. I hate to say a 20 centralbank disappoints. , a strong again. That struck meg is that we are not sure what is happening. The market is interpreting that as we might be running out to boost inflation. I looking at the big move in