Transcripts For BLOOMBERG Bloomberg Surveillance 20161021

We have a great show lined up for you. Weis friday, which means bring you our weekly show brexit, whats next. We talk with the Aberdeen Assets Management cio for property. Of guest host for the chunk the show, the biggest chunk of the show, is an richards of mmg investments. You can see stocks pretty much unchanged. It seems this is probably my chart of the hour. Lets get straight to it. Tos brings europound back 1. 975. You can see currently where we are standing, 88. 93. We did reach 92 a little bit earlier on. We are seeing a bit of movement back to 88. Will we see parity . That is what reporters are watching out for. Market news, but first, the bloomberg first word news. Nejra chinas overheated Property Market shows signs of cooling last month as authorities stepped up homebuying. Prices read rose. Prices fell in six cities compared with four months earlier. A sewing Property Market may provide some relief for Property Markets without killing a main pillar of growth. The Hong Kong Stock Exchange has canceled trading as a typhoon grew closer. Stores have closed and airlines have warned of disrupted flights. The conservatory expect has in place fire warning for most of the day. It is tobacco has proposed buying the shares of Reynolds American that it does not already own. That will cost the maker of lucky strike cigarettes about 47 million. That said, it has been unable to have prior negotiations with the board of reynolds as u. S. Securities rules require it to announce the plan promptly. Journalists and analysts in more than 120 countries. I am nejra cehic. This is bloomberg. Francine if you are wondering why we are all wearing pink, it is for Breast Cancer awareness in the month of october. Joining us is one of the top women in u. K. Finance. One of the top people in finance in europe. She is Anne Richards, ceo of m g investments, a business with 165 billion pounds under management across mutual funds, fixed income, and real estate. She was with us on the day after the u. K. Referendum. Brightly called what we have seen play out in the markets over the last two months. At the time, actually, the market was crazy. And it was exactly two months ago, on a friday. And you told me, they will find a floor. You are absolutely right. Reallyt has been interesting. You have seen equity markets really take it in stride. It is currency markets where you have seen more turbulence than we expected. I think a lot of people thought that currency, sterling in particular, would be weak if there were a brexit vote. But the extent of the moves we have shown this morning, even for those who were expecting some degree of weakness, have been surprising. Francine what does it mean . Does it point to a weak country . Does it point to investors only playing the currency market because they do not know where to go . For exporterss who can find value in equities . Anne the reason you are seeing a different reaction from the equity and currency market is because the u. K. Stock market does not reflect the u. K. Economy. The u. K. Stock market has a great proportion of its earnings coming from under sees. The more sterling is weakened, the better the earnings like in u. K. Currency. So the stock market has reacted very rationally to the weakness in the currency market. In terms of the underlying economics, we are in a couple engagement. It is like someone asking what your married life is like when you have just gotten engaged. Nothing has changed other than a little bit of sentiment about whether instability in the political environment will reduce investment. Nothing has changed, and you saw that from theresa mays comments yesterday with the rest of the e. U. Leaders. We should not be too frightened about what is going on, nor take comfort in the fact we have not seen a direct impact yet. Francine what have you learned in the past two months . I do not know if it is something politics or a function of the market. Anne i think the thing that has been most evident over the last two or three months is, i think central bankers across the world now you heard it from draghi yesterday. They have an increasing frustration that they are doing everything they can in terms of Monetary Policy, and yet politicians are not following through. Governments are not following through with fiscal policy, with structural reform, with those things that are needed. I do think we are at the limits of what Monetary Policy can deliver. What were seeing is the endgame of this extraordinary Monetary Policy we have seen francine . What does this mean for the markets . Is it on Inflection Point . Is it an opposite Inflection Point on how many Market Participants are blaming this on Central Banks doing too much . Anne i do not think you can blame Central Banks, in the sense that Central Banks had to solve a problem and have a mandate to do that, and came in to do that. I think what is evident is that they cannot do it alone. There has been a degree of publication of responsibility on the part of government willingness to address what might be politically unpopular measures that are needed. This is the dilemma we had. I think we are approaching an Inflection Point. Frankly, Interest Rates cannot go very much lower. Ofare at the absolute bound conventional economic wisdom in terms of understanding how consumers are going to react and respond to persistently low savings returns, essentially, that they are getting. Some people think that the cash in the banks that is now burning no interest, and light are negative interest that they will take that out and spend it. But it is not sure that that is how they will react. They might get more conservative. I think we are right at the limits of this. Central bankers are right when they criticize the central governments. Educate the population that we need to take some palatable measures to get the economy on a better footing. Francine it also comes at a realtime where there is a way for populism. You see that with the rise of donald trump. This is something the markets have ignored. Either populism or the tensions in geopolitics. Anne i think that is right. I think markets have largely ignored it because they have this underlying belief that central bankers are going to continue to be able to run to the rescue. Again, we have seen overnight, with draghi saying tapering will be later. Again, it is like feeding the dragon. Markets think, we are still ok for now. Volatility is pretty low at the moment. That is the risk. Markets are right to respond like that, because every time there has been a crisis in the last eight years, central bankers have written to the rescue. Francine unless we have a recession. Ise unless everything turned upside down, and we do not have any tools to combat it with. We look at anne the disappointment in earnings numbers from corporate coming through. Perhaps the underlying economic engine might just be beginning to flow, and what is the next step on that . It is too early to say that, but there is the bit of fear in the background. If you move into recession, we cannot cut much further. Francine what is your best play . Tactically, how do you move in the markets . Anne there is still an awful lot of merit to be willing to go up the illiquidity spectrum. In terms of real assets, in terms of the less liquid parts of bond markets, of credit markets. Some of those slightly harder to access areas, you are still getting paid for the risk that you take on. I think it is a bit harder in public markets. There are still some pockets of value. But it is harder to find ways of accessing that, because Dividend Growth looks like it is slowing. You do not necessarily have the safe underpinning. I think real assets, less liquid assets that is where you are getting paid to take the risk. Francine thank you. We will get back to Anne Richards shortly. We will talk about portugal and china. Stay with surveillance. Portuguese debt gets reviewed today. We break down the consequences of a downgrade. New data out of china suggests the overheated Property Market is cooling. We will also take a look at how brexit has affected commercial and residential Property Markets in the u. K. We will bring you are special brexit show. Francine this is bloomberg surveillance. Ajra daimler has reported 10 rise in thirdquarter profits. Adjusted earnings before interest and taxes rose to just over 4 billion euros, who it by surging sales of mercedes luxury cars in china, as the brand rolls out the new class sedan. Volvo profits have been hit as a purchases inruck the u. S. A drop in truck orders in north america prompted volvo to cut production and lower for your sales expectations for the region. Ericsson has afforded a thirdquarter net loss totaling 26 million. The company surprised investors by reporting a 14 drop in thirdquarter sales. It warned that poor results will significantly trail its forecast. Francine Rating Agency dbrs is set to look at portugals investmentgrade rating today. It is so important to portugal. It is a canadian Rating Company. The rating makes the portuguese debt eligible for the bond purchasing program. In april, dbrs kept the rating at triple b, the lowest Investment Grade. It is rated junk by grade. It is rated junk by fitch, movies, and s p. Moodys and s p. Mario draghi outlined the consequences of a downgrade. Draghi debt instruments guaranteed by the republic of portugal would become ineligible as collateral for Monetary Policy operations, and for purchases under the pspp. Having said that, we should acknowledge the remarkable progress that has been achieved in portugal. There are vulnerabilities that the government knows very well. Jet blackfor more, joins us from preferred. How likely is it that we get a downgrade for portugal today . Jeff as you just heard, mario draghi gave an endorsement to the portuguese government for the efforts they have made to reform their economy, clean up their banking system, and so forth ands the Bailout Program. It does not seem there is a kind theroundswell against portuguese government, or disapproval about what they are doing. Even dbrs in recent weeks has given them a fairly positive fairly positive comments. On the face of it, it does not seem very likely. As you mentioned, because they are the only Rating Company that gives portugal and investmentgrade, and because that gives big consequences for banks and on qe, it is a bit precarious. Francine worst case, they lose the investmentgrade, and what happens . They have to take a Bailout Program . Jeff in theory, there are two channels through which this works. The first is the collateral policy. It means portuguese banks can hand in portuguese Government Bonds and collateral for refinancing operations. They get downgraded, in theory, they cannot do that anymore unless the last ditch Liquidity Position at the ecb starts to look a lot less secure. They may have to take emergency liquidity assistance, which we have seen elsewhere. The second one is qe. The ecb may decide to stop buying their violence as part of qe, and that would have an impact on yields pretty quickly, given that portuguese debt is around 30 of gdp. That is not really a situation you want to be in. That is the worst that could get, and it is pretty bad. We do not have any indication it is going there straight away. Francine thank you so much. , bloomberg news. I wanted to show you the curve for portuguese debt. It is in green. It is so much higher than anything else, at 4 for 30 year maturity, in yellow. Italy, they have a referendum. That is december 4. In blue, it is germany. Germany, the finer yield curve by far. What does this chart tell us . They are not pricing in that much risk. Anne the market thinks there is a tiny risk, but not a very high risk. You have to think it would be a completely selfinflicted wound, in the event there is a downgrade, that the ecb did not come up with some mechanism for permitting it to somehow make sure that portugal stays where it is, within the group of countries. Francine where do you put your isey if you think there likely to be a mess in these european elections . Is it treasuries . That is the milliondollar question. Nne it does push you back but sort of down to the german end. I think what this tells you is that there is not a lot of return for the risk you take on, for example, in peripheral europe. If you are going into 2017, you have the italian referendum in december, and the french elections in the first half of next year. You have the german elections in the second half of next year. There is a lot that could come out of those election campaigns which could spook the periphery in europe in particular. I think that feels too complacent, to my mind, in terms of spread. Francine i was at Imf World Bank meetings. There was not that much good news. Seeing a little bit of growth. Inflation is coming back a little bit. Are there any bright spots you see around the world . Anne i have always had the view that the problems we have seen in emerging markets in the last two or three years have been cyclical rather than structural, even through this period where if you just read the headlines, you would think the emerging markets had the most crushing recessions. In fact, the growth rate has stayed comfortably above developed markets. Much more positive on emerging markets as a group. Not necessarily every emerging market. But within that, put some of the more developed markets. I think you can see, with the increase in appetite for emerging markets that has come through the last three or four months, that is in part because of the realization i keep coming back to this. You are getting paid to take some risk. There is risk in those parts of the world, but you are Getting Compensation for exposure to that risk. I think that in a world where Asset Classes around the world have been elevated by cheap money, the absolute measure of value becomes harder and harder to find. I think that is the challenge the world faces. Francine thank you so much for that. Up next, fixed data first owsa out of china sh property prices dropped. Has china over did a ruinous housing bubble . Francine i am Francine Lacqua, right here in london. Lets continue our discussion on where to invest in a currency environment that does not look great, with the cao ceo of m g investments. Me a liquiding asset can give you some returns. How do you find them . They are always more tricky to access than straightforward markets. Sometimes you have to access on issuance if they are publicly traded. For things like loans, you need specialist help to get into those markets. Could buy parts of the Infrastructure Capital spectrum. Could be equity. Debt. Be distressed debt, you have already seen a knock down in price. Commercial loans, for example. Those areas are harder to access, but if you can get into them, you are getting some pickup for the risk you are taking. One of the other areas where we are seeing real interest is how you drive down actual investing costs. Less traded portfolios, where you effectively match your cash flow needs with the underlying maturity of the bonds that is another way of eking out a tiny bit more return for your exposure rather than trading turnover when the costs are higher. Francine you are not concerned about a complete dry up in liquidity . If you already have liquid assets, how much at risk are they . Anne i think there is a growing realization about the investor base. There is a tradeoff between instant access to your money and your ability to generate return. In a world where you get nothing for cash, it is surprising to think there is less available in the more liquid market. That is the tradeoff people have to realize. There is a price to pay for effectively treating Capital Markets like an atm. Francine Anne Richards stays with us. We took property and real estate. Up next, hard brexit also means hard negotiations. U. K. Prime minister celebrates 100 days in office at the e. U. Leader summit in brussels. We bring you our weekly brexit show. Francine welcome to our weekly brexit show, live from Bloomberg European headquarters in london. Up theriday, we round news, analysis, and conversations that will make you smarter about britain and europe. This is brexit whats next . Lets get straight to nejra cehic. Nejra divisions between the u. K. And the rest of the European Union have begun to take shape, as germany has said britain faces a difficult path. The warning came at theresa mays first use summit as Prime Minister. During a closeddoor session in brussels, task told tusk told may the remaining members will meet without britain, despite her protests. Michael gove, one of the leaders of the u. K. Campaign to leave the eu, has added his voice to criticism of bank of England Governor Mark carney. Then article, gove laid blame for economic disasters at the door of technocrats like carney. He included in this group mario draghi, and lengthen by former careers at goldman sachs. Merkels government is said to be battening down the hatches for the coming brexit talks. Officials have been instructed to avoid any backdoor contacts that could hand the u. K. An advantage. They sent merkels chancellery is receiving u. K. Diplomats, but politely refusing to grant them favors in advance of official negotiations. Brexit secretary david davis will be in scotland today as theresa mays government seeks policye on a u. K. Wide for brexit. They said failure to deliver a brexit deal that works for scotland will leave them to take another stab for independence. Nissan has signaled that early discussions with the u. K. About its prospects of future in the country have been politic. There was a meeting last week with theresa may. With the Prime Minister, we shared the fact that no matter what is going to happen, the competitiveness of nissan in the u. K. Needs to be at least preserved, if not reinforced. As long as we agree on this and everybody takes responsibility for his part of the game, we agree on the essentials. So we do not have to worry too much about what is going to happen for brexit as long as you have the assurance that the government will make sure that nissan will continue to be competitive. News 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries this is bloomberg. Francine we are all in pink because of Cancer Awareness. It was completely done on purpose. Not a coincidence. Writtens largest banks are pushing Prime Minister theresa may to lower their taxes as they ramp up concessions to offset the potential impact of brexit. Brexit secretary geoff davis says the government is looking at all possible options to protect Financial Services from disruption. Can brexit and the city ever really coexist . Anne richards, ceo of m g investments, is still with me. I know it is early days. We have had confusing messages from all sides of the government cabinet. How do you understand it and see this playing out . Anne i think it is really important to understand that the city of london is not going to cease to be a major Financial Sector as a result of brexit. I think it has got centuries of experience in adapting and changing. I do not think the issue is one we cannot cope with. That is the wrong question, in a way. I think the challenge is how we go through this period of interregnum until we are in the new model and understand what the new model is. And in particular, how that transitional poco is managed i think the thing we are all nervous about is the unexpected shock that could come if we do not have transparency on trade, and what the impact on that to the economy would be. The key thing is clarity in traditional arrangements for the city. They need reassurances. It is a left changing moment. Is there one thing or one town you need from the government that you are not getting . Anne the two messages we have been trying to push really hard as i have already said, on traditional arrangements, lets make sure there are real advantages for the rest of the e. U. To not have a cliffs edge. The second is, we all have e. U. Staff in london. We require talents that comes from all over the world. The more reassurance we can get from government about their ability to still live and work and be welcomed in the u. K. I think that is really important. The same for our u. K. Staff based in the city. Those are the key things for us. Francine in the wake of brexit, has m g had to increase you announce you are reopening Property Funds, and you have a date. We are reopening our largest property portfolio, which was about 4. 5 billion before suspension. We had to spend it in the couple of weeks after the brexit vote, just because the flows of redemptions were pretty close to a disorderly market, where there were no transactions going through. We got there was a risk to customer money, actually. We were forced to sell at fire sale prices. We will be reopening on november 4. Francine what have you learned . Or their mistakes in the past . Is this something that could happen again . Anne it is really important to understand the mechanisms in place were really effective. The suspension mechanism was an established tool. The daily liquid fund offer daily the quiddity. With the suspension mechanism was there in an unusual market environment. Situation to that prevent a disorderly market forming. We think the mechanism has really been vindicated. We have raised more cash portfolios through that period. And we have managed to do that at a discount of around 3. 5 to prebrexit prices. There were two mechanisms open to us. One was to keep the fund open, but to put a huge lets call it a fear value adjustment a big discount. Or to suspend and raise cash in. N orderly manner we think we have given our customers better value for money in doing the later approach. But i think what is clear is that perhaps the communication around these mechanisms could have been clearer. I think we have all been taking a look at the regulator, and whether clearer medication is selfsufficient or there is anything else we need to do around the mechanisms to make sure people understand what they are involved with. Francine the regulator has been they are looking into them, i imagine. Are they talking about restructuring . You were talking about daily liquidity. They moved to a weekly one . Anne that is one option. You have to step back a little bit. For individual investors, is commercial property a good investment . I think the answer is absolutely yes. Because of the way many individual investors save through isa, if the fund does not deal daily, we cannot put it in their isa, their individual savings account. If you want to change the mechanism away from daily to weekly, you need to look at some of the other things structurally in the market, because it would be a great shame if people were not allowed to invest through there i sat in Property Funds. I think it is a bigger issue than saying we need to change what is going on with individual funds. But weekly dealing would be one way. Francine what would be your favorite way of structuring them differently in a way that makes people feel safe . Anne i think moving to a weekly or monthly could work, provided we adjust the different savings to be consistent with that. I think that would allow allow more time to manage, in an unusual market circumstance. You have got to remember that the situation that we had with the brexit vote and this is something that happened very rarely in a market cycle actually, the mechanisms as they stood really worked quite well, once all the noise died down, because you see most of the funds now have reopened, and have reopened in an orderly fashion. And i think that is really important to remember. Francine for your outlook for commercial property, we have not really seeing the e. U. Hurting because of brexit. Are you expecting it to remain very subdued . Commercial property was not doing that great before brexit. Anne there has a slowdown in commercial property. When you look at Central London, given the importance of the Financial Services sector to Central London office sector, i think people look at that and think that has to be the most honorable and immediate one to three year horizon. A huge move in sterling has meant that for overseas buyers, we are looking at Bargain Basement prices on quite a lot of the sector outside of Central London. Without getting too excited about property valuations, and i would not be in that camp, you have seen the currency mitigate quite a lot of immediate impact. That looks clear to play out over the next 12 months or so. Francine it was great to have you on. Anne see you soon. Francine stay with surveillance. Plenty coming up, including postbrexit property and commercial markets. We were just talking about it to Anne Richards. We also have a special panel weigh in. Ceo will speak to us about the health of the banking industry. We will talk Deutsche Bank and the upcoming italian referendum. Then ericsson posts its first loss in almost four years. We break down the numbers with the companys ceo. Hurt demandexit has for residential and commercial property in the u. K. And london. House prices fell for the fifth month in august, worst since the death of the recession seven years ago. Purchases in commercial property fell by half in the First Six Months of the year. However, our next guests maintain there are still positives to be found. Joining us now is john obrien, managing director at balleymore. Thank you so much for joining us. Let me kick it off. Brexit in the u. K. Would potentially make it worse. How much does a falling pound help . John i think it does for international buyers, certainly. It has made property look more attractive. We have seen marginally increased volumes from international buyers. We have seen the man rise from international buyers. That jibes with the low sterling. Francine you focused mainly on commercial. How is that going . It is ok. The market is down a little bit. We are talking 4 since the referendum 12. Some sectors have been impacted more. Some of the Central London offices impacted more. Other assets, longer least assets, impacted much less. Francine Anne Richards used to be at aberdeen, now at m g. Property funds frozen, that you reopened them a little differently. We were talking about regulators last time you were on. Any insight on what they will do for commercial . Russell they are taking a hard look at the sector to see what happened. There were nine of these funds. Ended up staying open. Five of them were suspended. Towill see what is good happen with m g. We managed to maintain liquidity pretty much all the way through. I think it will be an interesting question. What was the regulator trying to solve . The daily traded Property Funds is in the liquidity that is the problem . We will what happens in the next few months. Francine you are focusing more on retail. You are focusing more on commercial. We are trying to focus on commercial. John, give me a sense who is coming into the u. K. Property market at the moment . That froms something the early 1990s we have always expected to do somewhere between 30 and 50 of our sales from emerging markets in places like hong kong, singapore, the middle east, and parts of africa. There is a broad market of people who will invest in property in london. Francine most neighborhoods in french. Have of it is you have French Family saying, none of us in our family have english passports. They are looking possibly to pack up and go back to france. John i am irish and i am certainly not looking at moving because of brexit. ,o be fair, from my experience most colleagues do not hold british passports. I do not think theyre worried about having to move away. Haveis not something i particularly noticed. To be honest, we do not see that as a fact or. We will certainly, in terms of things we are concerned about, is what is going to come from the future. Construction workers traditionally, in our business, we would have a high proportion of labor from members of the eu at work in our projects. That is probably more of a concern. Are there going to be more barriers for those people to come in . That could have an impact. Francine have you model that . John to be honest, we have not. When you understand what the deals would be and what barriers will be put up to prevent people to look at how people will enter the u. K. It is difficult to assess that. It is certainly something where we are concerned about. Francine russell, does this resonate with your analysis . You do commercial, but also residential. Russell we do a bit of residential. It is a bit different to what john is doing. We look at the private renting sector, which is a new sector for Institutional Investment in the u. K. We are developing properties, but what is going on currently it is something we do across the whole of europe. The u. K. Is a little bit behind. I remember in the depths of the greek crisis, it was only about 12 months ago, but it started three years ago, and you saw a lot of european money coming into the u. K. Are you still seeing some of that money coming into the u. K. . Russell in the commercial side, certainly we are. People that rightly took a bit of applause in the last few weeks, i have been across various parts of the world. There is still some nervousness, despite the fact that the prices are cheaper than they were based on currency movement. People are still nervous about what is going to happen. The stock price in question is at the tip of the tongues whether you are in china or australia. Done withare you commercial, or is that just dissing russell . John actually, we are residential focused, but we do some commercial development. Think from our perspective, we think clearly we need to see what happens with brexit. We believe in london we do not see london as a city that is going to lose over the longterm. I think it is too strong a city. Mediumterm,e longterm, we are very, very positive on england. Has some shortterm issues we will need to look at. I think in the longterm, we are very comfortable at the moment. Francine that is nice to hear. John and russell will both stay with us and we will talk a little bit more about residential next. We look at the london Property Markets with our special brexit mulyran and Russell Chaplin. Francine this is bloomberg surveillance. John mcafee john mulyran is at ballymore and Russell Chaplin is at aberdeen. Were talking about demand for u. K. Commercial properties. We talked on Residential Properties because people want to know what will happen to house prices, especially if they are watching us. They usually have a property in london or thereabouts. Property in the u. K. Is not limited to london, right . What happens to london prices compared to the rest of the country . The City Office Market is the key example of where you are seeing things being impacted most . Most. Acted the Financial Services sector in particular. We have seen a lot of demand from technology, media, telecoms , almost as highest Financial Services in Central London over the past few years. There is still quite Strong Demand out there in Central London. Outside of Central London francine depresses me to find a floor . Do prices francine need to find a floor . Russell there is a developer market and an investor market. You see the investor market starting to take a bit of fright as to what is happening and how things might be impacted. The next stage is to see how developers respond. I suspect they will end up scaling back on the development they have started, or not developments. The last piece in the puddle. Puzzle. That is difficult to tell until we know what is good to have him with brexit. Francine you have to take an educated guess, right . I want to buy some for, i have to think about now are waiting six months or a year. What would you do, john . John in residential, our view certainly we think we could see as much as 50 less construction starts on residential in london than we did in the same. In 2015. That is a pretty manic slowdown in development equity. The impacts will not be what you will see for another three or four years. That is how long it takes to highdensity highdensity proj. London is almost entirely highdensity, complex projects that take a while to build. I do not think that is necessarily all down to concerns over brexit. Francine it was a trend before . John that was as much to do with policy changes as with concerns over brexit. Things like stamp duty changes we have seen a number of those. That has impacted the highend market in london. That has had a serious impact on those kinds of properties. We are seeing prices increasing generally in london. Under those price raises ranges, i do not believe prices are falling. Francine what about demand for your funds . The Retail Property fund is now pretty stable, actually. Cash is sitting about 25 . I think we will see demand for these funds in a longterm basis. They offer access for an individual to the commercial and residential Property Market across the u. K. , a broad balanced portfolio that is hard to find. Talking about are this visa system which i do not understand, with london, birmingham, some of these cities. Would it give a boost to some of the Residential Properties in cities which i am sure have liked the prices in london . Lagged the have prices in london . Is hard to underestimate the brand value of london, especially internationally. Those factors are not necessarily the same for things like birmingham and manchester. I think drummond i think london has a special brand that is attractive for investors, particularly residential. That is difficult to replicate. Francine john mulyran and Russell Chaplin, thank you. Up next, we talked banks. Tom keene joins me from new york. This is bloomberg. Francine Mario Draghis qa silence. Pushes esident clinton and trump trade bars and poke fun at at each other one day after their debate. Diverging banks. U. S. Bankers are the winners. We speak to davide serra. This is bloomberg surveillance. I am Francine Lacqua in london, tom keene in new york. We are wearing pink because of Cancer Awareness october but we need to look at the markets, european stocks advancing, and Monetary Policy. Tom i think the renminbi move has been day after day, creeping in on that but we really need to see some movement. We will talk about that as well. Francine we have to keep an eye on the u. S. Politics. Taylor we are starting with politics. Donald trump and Hillary Clinton appeared together in new york just one night removed from their third and final president ial debate. It was the al Smith Memorial dinner. Some of the remarks turned biting. Hillary believes it is vital to deceive the people by having one Public Policy. [booing] and a totally different policy in private. For example, here she is tonight in public pretending not to hate catholics. [booing] donald, if at any time you do not like what im saying feel free to stand up and shout wrong while i am talking. Come to think of it, it is amazing i am up here after donald. I did not think he would be ok with a peaceful transition of power. Snake the dinners name was the namesake was the first catholic president ial candidate. Japan, a powerful earthquake with a preliminary magnitude of 6. 6 hit the western part of the country, knocking out power of thousands, but there is no risk of a synonymy. Tsunami. No word yet on possible fatalities. A typhoon is pounding the northern philippines triggering landslides and power outages. At least eight people are killed. In hong kong, trading has been canceled. Canceled andare many flights are delayed. Global news 24 hours a day, powered by our 2600 journalists and analysts in more than 120 countries. I am taylor riggs. This is bloomberg. Tom lets get to the data right now, equities, bonds, currencies, commodities, 1. 08 euro. You wonder is parity in store. On to the next screen, the vix, 14. 24 showing better. There is renminbi really getting now. Up to 676 right dollar index 98. 59. Francine this is my cross asset check. Euro is weaker on the back of what mario draghi said yesterday. , itared to the pound actually touched 92 a little bit earlier on. Crude close to 51. Tom this is an elegant chart. This is two standard deviations of volatility. If you look back ask number of days and the blue band is the volatility of this. This is renminbi, the chinese yuan. Right were that circle is, is beyond elegant, you can barely see it. This is an elegant chart showing weaker renminbi over the last number of days, if i can get this up here quickly which i will do. This leg up is a big deal. Up to here is we are riding the rail up two standard duty deviations, and that is what is known as adeviations, and that s known as a managed depreciation. Francine it is like we are swapping roles. I brought my pound chart back to 18o it looks like 18 a keene chart. Brexit, we flirted at 88 today but it looks like we are closer to parity. For more on the markets tom . Tom i just was watching. Francine we are bringing davide serra to see his response on the market, on pound, on brexit, on fed, on ecb. Thank you so much for coming on. The markets are applying all the uncertainty on currency and this is true for pound, euro. When does it switch to a more even keel . Davide i think the reason investors are using currency, that is the only nonmanipulated markets right now. The Central Banks are claiming 30 of global gdp. We are talking about 20 trillion overall and the fixed income market is on strike because they do not have a say like their vote has been taken away. What happens is everything goes through the currency market because that is the only freely traded market. Equity in a way is affected by the compression of cost of equity. Lots of corporations can borrow 1 to 2 for the next 20 years, and the average Global Corporation is making a return on investments of about 9 to 10 . When you can borrow at 2 , you have lots of room. Francine are you concerned there will be a correction . Davide i think we are in for a correction. Francine a hard correction . Davide no, a soft correction in the 10 to 15 range. We are coming out of qe sometime in the next six to 12 months. The u. S. Normalizing monetary ,olicy and the Central Banks that will have an impact. Tom what is the level of financial instability right now . I cannot figure it out. I have a lot of dampened markets, Foreign Exchange stories moving around. Anthe quiet within markets indicator of a financial instability to come . Davide i think there is no financial instability. They be you should look across Asset Classes. What you have is stability in a andfinancial institutions that is very different. You can see it through cbs, Deutsche Bank, monte paschi. Financial stability right now is very limited. Tom do you predict we will see more restructuring, we will see in the next year a more rapid pace of major restructuring . Davide yes, and the reason is because in a way, Central Banks will have to hike rates, short and, in the yield curve will steepen and go back to something which is almost normal. It is not normal for you to invest 10 trillion at a negative yield globally. As a result when that happens, financials will start making a bit more earnings and they will pay for the restructuring of the business model. European banks need to go on a massive diet. Your too big, too large, they need to shrink, and digitalization has not yet arrived. If you look at how many branches are in the u. S. , europe needs to shrink their branches. Francine we will talk more about the banks in later in the program. He saw mario draghi trying to tiptoe to make sure he gets the markets impetus that he is fighting inflation and not hurting fundamentals because of negative rates. Id he do a good job . Davide think he did an excellent job. Gdp is growing in europe, almost higher than the u. S. Francine that is germany. Davide but overall to the glover investor, global investor, well europe grow more than the u. S. I think many would say no way. In true honesty and fairness, europe is going ahead on a bumpy road but still going had faster than people expected. I think there is no scope to keep going ahead with 80 billion a month unless you are actually putting some of this money into the real economy. Yesterday i think there was the best question, how is it possible the ecb is buying glencore bonds . 1 to 2 ,ding it at the same thing with verizon issuing bonds out of luxembourg. The system is being game. I would probably spend less money but go more into smes because those account for 78 of the jobs. Tom Marvin Goodfriend at Carnegie Mellon to join us in the next hour. As well on the next hour with a cautious view on u. S. Economic growth is commercially kumar Komal Srikumar. On subpar Economic Growth in america. This is bloomberg. Francine i am Francine Lacqua in london, tom keene in new york. This is bloomberg surveillance. Taylor British American tobacco once to buy the shares of Reynolds American that it does about 47osting them billion. British american says the cash and share proposal values each share at about 56 . 27. The u. K. Company already owns about 42 of rental. A 50yearold woman who died after a car wreck in california is the 11th u. S. Victim of the defective airbag inflators. Up to five people may have been killed by the airbags in malaysia, bringing the number of deaths to as many as 16. They can inflate with too much force, causing a metal canister to rupture and spray shrapnel. Completed its acquisition of a stake in mitsubishi motors. The chairman of nissan tells Bloomberg Television that he sees the alliance helping turn around a scandal hit mitsubishi. I hope i will do everything in order to establish in a normalcy kind of way, of operation for fiscal year 2017. If everything is done and we have a clear plan, you can expect that the company is going to reestablish the health very quickly under the leadership and the support. Taylor if he is successful he will have turned around a third major automaker. That is your Bloomberg Business flash. Francine Rating Agency brs isn Rating Agency to set to rate portugal today. Kept it atil, d brs the lowest Investment Grade and outlined theoutlined consequences of downgrading for portugal. If there is a downgrade, marketable instruments that are guaranteed by the republic of portugal would become ineligible as collateral for Monetary Policy operations and purchases under the psp p e. Having said that, we should acknowledge the remarkable progress that has been achieved in portugal. There are vulnerabilities that the government knows very well. Francine as we were listening to mario draghi we are getting breaking news out of bombardier. They are planning to cut 2800 jobs. Portugal is important because moodys has a junk rating. They really are in charge of the fate of this portuguese economy. Jeff black joins us from frankfurt. How likely is it that portugal gets downgraded today . Jeff on the face of it, not very. Nobody has given any indication, imfdbrs nor the ecb or the have given any view that portugal is somehow going off the path of reform and making its economy more competitive. It would be serious but we do not have in a clear sign that is about to happen. Francine if it were, and we need to look at worstcase scenario, what happens . Lets say they get downgraded, what happens to their bond and what does it mean for the country . Jeff there are two channels with which this would take effect. The first one is that portuguese banks would no longer be able to use portuguese debt to gain liquidity at the ecb through its regular operations. To that could mean they have go on to emergency liquidity support, something we have seen in greece and ireland, but not a great state of affairs. It pushes up funding significantly. Another is qe. The ecb is buying portuguese debt right now. If it became an eligible would have to stop and that would push up yield. Tom what is the distinction between portugal and greece . What is the key difference when you talk about these two countries that are fiscally messed up . Jeff it is a good question. I think that the Prime Minister, the current government is holding it together. They have some of the same challenges. The have got a lot of bad debt at the banks, pretty slow growth, and they have got some shall we say left of Center Political forces that are gaining ground. They are in the portuguese government. But the Prime Minister is keeping them happy and International Creditors and the ecb, which is quite a balancing act. Tom jeff black in frankfurt, thank you so much. Davide serra is with us. Comments that jeffs tell me if it is not a rigged market but the idea that the ecb is buying up every piece of people they can piece of paper they can, how artificial is the european bond market . Heide if you are the ecb have to focus on helping European Base companies. When 70 of your job markets in small or medium enterprises, that is what you need to focus on. The ecb because it is constrained is buying lots of debt out of Companies Like verizon or glencore. In a way this is distorting the mission. This is at the margin. We are talking about less than 6 of the ecb bond program that we have analyzed. Ecb,think if i were in the i would probably focus at 6 where we are buying paper from Global Corporate to smes. Francine this is the yield curve from one month to 30 year in green, a portuguese sovereign. The yellow is italy and the blue one is germany. 4 for portuguese thirtyyear, that is not pricing any risk. , thee on a 30 year view real curve is one to 10, that is the liquid curve. When you go 10 to 30 you are looking at basically a few insurance companies. Francine but that is also not risky. Davide one to 10 is not priced in much risk. We typically use portugal as the european hedge. Having said so, remember in europe we have this socalled bazooka of a trillion euro with what i would call fiscal resources on a joint basis in europe call the european stability mechanism. It is run by a great policymaker , and if portugal were to be in difficulty, they have eight times the capital to deal with portugal. No panic. Tom it was wonderful to meet with mr. Raglan just before the imf meetings. Ken rogoff suggested that negative Interest Rates have a benefit. So did Marvin Goodfriend of Carnegie Mellon university. I have been dying to talk to him. In the next hour. This is bloomberg. Francine bloomberg surveillance tom and francine in new york and london. The morning mustread is something that mohammed elerian wrote. He is talking about asia. It is a major hurdle facing asian economies as the advanced world deals with unusual financial and political fluidity. Tom it is real simple, china is acting. The yuan and renminbi gets the press but the real issue is the 10 year yield is down. Year and wen the 10 blow through that long of 2008 2008. Ll of it has been an artificial construct of high adjusted rates that may be changing. Francine davide serra is still here, it may be changing but you cannot ignore china for investments so how do you play it . Davide we took a less bearish view in china over the last 12 to 18 months. The reason is because the have all the tools to manage it. It is a closed capital account. It is still an extremely rich country. Francine and you trust the numbers . Davide we trust the numbers because when you look at highfrequency data, you trust the numbers. Whether it is 6. 2 6. 5, i am not going to split the hair, it is still growing. On a 12 month view we are comfortable they are transitioning to where they want to be. Francine davide serra stays with us. Ericsson reported its first loss in four years. We speak with the eric son ceo ericsson ceo. We will be looking at shares, the industry, and overall at the market. Tom good morning, everyone. Bloomberg surveillance, Francine Lacqua in london, tom keene in new york. We are very pink today. I have an element of pink in my bloat bowtie as we support Cancer Awareness. Here is taylor riggs. Taylor donald trump and Hillary Clinton were together again in new york one night after the final president ial debate. It was the alfred e Smith Memorial foundation dinner. Both white house hopefuls took shots at one another. Mr. Trump last night i called hillary a nasty woman. Relative. Tuff is all after listening to Hillary Radel on and on and on, i do not think so badly of Rosie Odonnell anymore. Startingi am actually to like rosie a lot. Ms. Clinton i have deke respect for people like deep respect for people like kellyanne conway. Because she is a contractor he probably is not going to pay her. Taylor how smith was new yorks 42nd governor and the first catholic u. S. President ial candidate and they raised 6 million for catholic charities. The divisions between the u k and e you are taking shape as germany says britain faces a difficult task. Session,closed door they told theresa may the blocks remaining 27 members will continue to meet without written despite her protest, according to an official with knowledge of the discussion. The eu says it is too soon to russia butnctions on it is maintaining the threat of action. In brussels, you leaders say all available options are on the table. Leadersrelators e. U. Say all available options are on the table. Global news 24 hours a day, powered by our 2600 journalists and analysts in more than 120 countries. Francine erickson reported its first loss in almost four years, wrapping up a tough third quarter. It shocked markets with a profit warning that wiped 20 off their value in a single day. We are joined by jan frykhammar. Thank you for joining us. I know last week you were pointing to things outside your control, market in brazil, weak market in russia, but there are problems that are fundamentally because of the way the company is structured. What are you doing to a dress those . Address those . Jan first and foremost, our market situation is at the moment challenging. It is driven by the things he said. We have customers in emerging markets that are reducing their investment levels. As such, our Company Already in 2014 started to take corrective measures around competitiveness and Cost Reduction in order to be able to meet a more Challenging Market environment. I agree we had a challenging quarter and we had to issue profit warning. Francine what are you doing, and it is difficult to sugarcoat it. They are saying ericsson suffers from a bloated cost base and an mdc eeoc. Empty ceo seat. How is it looking and what are you doing to cost . Start the ceo position, first, the board is obviously responsible for finding a new ceo. Until the board has found one i am the ceo and im very committed to the company. I know the customers well, the Company Knows me, so i am a strong ceo. When it comes to cost, we are reducing the cost pace but we are doing that in a certain way. It is important that we sustain investments and research and development. It is balancing longterm and shortterm, and we will do that and we are continuing to do that. Francine is the company for sale . As far as i know, the company is not for sale. The company is very strongly supported by longterm owners. We are present in 181 companies, have lots of great customers. We have had a challenging quarter and have to manage that in a good way and continue to do the things which we can control, efficient and Cost Reduction. Davide will you pull back from francine we you pull back from some of the initiatives year predecessor put in place . Jan the most important agenda topics right now when we made our senior customers in north america or japan, is around the of things, internet the digitalization of our customers networks. All of those things are very relevant. All of those things are very important in terms of the investments we are making. Also at the same time we are reducing our operating expenses, and remember it is more than 1 billion compared to 2014 going into 2017. It is not like we are doing anything. We are trying to make sure we are doing the right things safeguarding our longterm position, china the customers appreciate. Francine jan frykhammar, thank you. At problem is when you look the share price, they are under significant pressure compared to their rivals. In pink is the bloomberg World Technology index. It will have to be something quite radical for erickson. Davide i think for all these technology producers, the internet of things and digitalization is a quantum step. Those that cannot adjust fast will have to reduce costs faster than they expected. This is affecting every industry from media to banks to technology producers. I think the change will be critical for europe. Europe had a massive competitive. Dge on the starting side now with digitalization it is unclear and this is affecting the old value chain from the widget maker down to the chip producer. As a result, i think only the fastest will survive. Cost is an issue. With depreciating currencies ahead they are more costconscious. Tom is there something about the scandinavian model that is flawed . I look at nokia, erickson, these are two train wrecks. Is it because they are essentially wards of a government or a culture . Davide the scandinavian model is a greatly successful model. I studied in norway 20 years ago and i kept on following. If you look at gdp innovation, productivity, employment, social cohesion, this is a fantastic model. If you look at level of education, it is a winning standard model. When it comes down to technology there has been too much complacency. Eventually they were thinking they were the king of the world, they sat on their chair rather than being challenged, and being too strong in a small country led them to complacency. Not that at some point it was the most valuable brand in the world and it failed. Tom the idea of capitalism region to region, defining capitalism of Continental Europe and compare that to what Prime Minister may is going through in the united kingdom. What does capitalism look like right now . , this i think in a way is the most challenging time for europe over the last 40 years because the political construct is being challenged. It is a loselose situation, brexit. Both sides are going to lose and i think what they will do is refocus the european in finding a model where they need to find the leadership, because the u. K. At the table has always been helpful in setting the direction of the balance between what i call stakeholder interests. This will be refined. Betweenly, the balance innovation, productivity, and social productivity it is still one of the best places to live in the world. Not everybody can live in the u. S. That asuess i will take a major complement, especially within our president ial derby. The dinner last night was without francine entertaining. Tom it was pretty sad. Francine for a nonamerican, it was entertaining. Tom Komal Srikumar with us in the next hour, one of our most popular guests. He absolutely nailed the subpar growth that trump talked about at the last debate. From new york and london, this is bloomberg. Francine this is bloomberg surveillance, Francine Lacqua in london, tom keene in your cash in new york. We need to pit the u. S. Versus europe. To davides get serra. I am going to show you a chart in a couple of seconds, to show you that european banks have not been doing so badly because they levels, to prebrexit but overall they are over banked. There are too many of them. His consolidation on the table . Moste i think it is, important way because the ecb has changed stance. If you look at the last six or seven years european banks increased capital from 600 billion to almost one. 5 trillion. Thats 1. 5 trillion. 1. 5 trillion. That means basically the system is stable and solid. It is not profitable, so sadly we were in a financial crisis, we are now stable. But between low rates and too much cost we are not making enough money so the only way is costcutting and that means less banks. Francine costcutting to a point. What will Deutsche Bank become . The shares are back to the levels before the doj amount. What does that tell us . Davide lets put it in perspective. Deutsche bank has a Balance Sheet of about 1. 6 trillion and a market cap of 17 billion so when you are worth 0. 1 of your total assets, basically the market has no confidence whatsoever in you. Having said so, i think the market is in limbo because this doj fine can be disproportionate with what the market is expecting. If you take the settlement of every u. S. Peer it should be in the range of 4 billion to 5 billion. , ultimatelytually the doj will change with the next president , the key figures. So we are looking at a twoweek settlement in our view and we expect the number in the range of 5 billion to 6 billion. But we think Deutsche Bank will do is a backtoback Capital Increase and will go on a diet come shrinking its Investment Banking operations particularly in the u. S. Were they have never made money. Tom lets look at the shortterm and put it into perspective. From the longterm, Deutsche Bank trader chart is a pretty elegant chart if you are an optimist. If you want to be bold, you may be breaking through. This resistance line is too tempting to pass up where it is actually very well contained. Kissis the most important right there. I would suggest the catalyst for mr. Cryan is corporate restructuring. Is there a new fiveyear plan, a oneyear plan . Davide i have known john for many years. I worked with him the first year of my career so a. L. Him a lot. So i oh him a lot. He is the best man for the job because Deutsche Bank has been tijane thiam. Opposite. E he will look after the interest of the company longterm, shrink it, cut costs, and ultimately Deutsche Bank is needed for german banks to do business internationally. What i think it will do is it will further shrink the Balance Sheet of the investment bank. Typically 30 to 40 . Tom this is really important, we are going to rip up the script. I would suggest that the single and iction of mr. Cryan, would give a shout out to james gorman of Morgan Stanley, is simply math acuity. These are math guys first with a c within the framework of their institution the dynamics and need for change to make those dynamics work. Within the nastiness of john cryan, how does he get others who are not like him, who are not as acute as him, to make structural changes . Davide i think first of all, Deutsche Bank, they do have capital businesses which are very profitable. Trade finance, they have a good german operation, good wealth management. They do have some pillars. The issue is that Investment Banking has been oversized. They are i think what you have to do is go into what i would call a ubs and Morgan Stanley can of diet. You shrink your assets, cut your costs. Tom i think this is really important. Give them the courage to make those decisions . Davide i do not think they have any choice. At 250 basis points above u. S. Years tells Deutsche Bank they cannot be in that business longterm. Thatare funding advances Deutsche Bank abused in the last 20 years and as a result they do not have any choice. Francine what is the incentive for retaining talent . If he starts losing talent he is in trouble. Davide this is an industry that has too many people. When i hear you are losing talent i think that is not the reality is inthe europe everybody will have to shrink operations and finance. Once of businesses from london will go back to new york and if you are happy to keep your job. These are overpaid people in absolute levels and as a result, the last thing i would be worried as compensation and talent. He just needs to keep the boat together and that is unique that i hear from Deutsche Bank, morale is very high. Have a sense of purpose. They see a ceo that plot flies not in private jets, they are aligned one interest and they are trying to save the ship. Tom exceptionally valuable, thank you. Davide serra will continue with us. For the next hour, Scott Galloway of New York University with any number of tech topics to talk about including at t and time warner mating. This is bloomberg. Surveillance, Francine Lacqua in london, tom keene in new york. We are thrilled you are with us. Right now to a business flash. Chinas overheating Property Market study last month in the face of tougher curbs on home buying. August. Down from they are trying to avert a dangerous housing bubble without killing a main cap pillar of growth. Daimlerchrysler is reporting a rise in thirdquarter profit. As they roll out the new e class sedan, adjusting adjusted earnings topped estimates. The company has reversed course on sales expectations, addicting revenue to remain flat compared with last year. That is your Bloomberg Business flash. I am taylor riggs. Italys Prime Minister has called for a constitutional referendum on december 4. He said if he wins the vote it will be easier to carry on the battle to change the io the e. U. With us still is davide serra. Were just getting the latest tom technical difficulties in london right now, it looks like our satellites are not hooked up. This italian referendum is of critical importance. This chart is really the unspoken about italy, the idea of their animal spirit. This is nominal gdp. The idea here of nominal gdp up here, and these were the good times at about a 4 level, and down we go. There is this oscillation, this meandering touches the heart of the italian risk. The december 4 referendum, that is a big deal. Lets move into a Surveillance Data check, equities, bonds, currencies, commodities. It is a churn today but the Foreign Exchange market is quite substantial. Euro, 109. 02 on euro, and crude oil has been sustained. Lets call that the back story of october. The vix again showing the dampening influence, we have been stuck here. Afterro, 1. 0902, weaker the draghi press conference. My headline today without question is yuan, 6. 76 two a weaker renminbi. This is going to be a wonderful our. Us andrikumar is with we are thrilled to bring in Marvin Goodfriend of Carnegie Mellon university. He minces no words. Negative rates used carefully can be good. It was an important and hugely at jacksonal paper hole. From london, from new york, stay with us. This is bloomberg. Tom this morning, America Needs more than 1 Economic Growth. Can clinton or trump deliver a new america dynamism . In this hour, srikumar. And jackson hole negative rates are good. In this hour, Marvin Goodfriend explains why jamie dimon can live below the zero bound. And it is not funny. And the waldorfastoria. This is bloomberg surveillance , live from our World Headquarters in new york, friday, october 21. I am tom keene in new york. Francie likewise in london. I cannot convey to you how clumsy one of the great moments in american politics was last night at the waldorf. It was remarkable to see it. To see and to hear what i heard shows how absolutely unique the selection is. Unique this election is. Francine i know that. I also saw the debate and some of the things that come out of u. S. Politics today are really bizarre. Looking at currencies, a little bit of movement on the pound. Primer onve a negative rates. It will be a wonderful hour. Right now to first word news, here is taylor riggs. Taylor donald trump and Hillary Clinton appeared together in new york, one night removed from the third and final president ial debate. It was the alfred e Smith Memorial foundation dinner. Some of the remarks turned biting. Mr. Trump hillary believes it is vital to deceive the people andaving one Public Policy a totally different policy in private. For example, here she is tonight in public, pretending not to hate catholics. [boos] mrs. Clinton donald, if at any time you do not like what i am saying, feel free to stand up and shout wrong while i am talking. Come to think of it, it is amazing i am up here after donald. I did not think he would be ok with a peaceful transition of power. [laughter] taylor the dinner plus mainstay, al smith, was a former president ial candidate. Earthquake powerful with a preliminary magnitude of 6. 6 hits the western part of the country, knocking out power to thousands of homes. But there is no risk of a tsunami. The Japans Meteorological Agency says it was 35 435 miles west of tokyo. No word on possible fatalities. A typhoon is making landfall in china after brushing past hong kong. Schools were closed and airlines were suspended twice. Global news 24 hours a day, powered by more than 2600 journalists and analysts in more i am taylorntries, riggs. This is bloomberg. Francine . Tom . Tom how about data . Equities, bonds, currencies, commodities. Foreignexchange front and center today. Oil does nothing. The 10year yield does nothing. Equities are moving south. 1. 0897. In, dollar stronger, 98. 49. The dxy does not include the chinese renminbi. Francine i like the fact that you showed that because the real story is really on currencys side. On the currencies side. Crude oil is holding up. A little bit of weakness in europe, following the draghi comment. Tom let me bring up the bloomberg. Two standard deviations. This is statistically a big jump. This is renminbi. A bigger bit of volatility, and up we go with a vengeance. All this is managed by beijing. I think i can make that statement. This is riding the rail. ,p we go to a new level of yuan of weakness. This is well contained, wellmanaged weakness. Francine this is also what i had. Im glad you brought us those currencies. To look at pound, but instead of looking at the usual dollarpound parity, i want to look at europe. It may be closer to parity, but this brings us back to 1975. This is brexit, and it has been at. 92 earlier. Currently it is at 0. 89. Tom with us right now, one of our most popular guests. Srikumar, i would suggest agrees with more of our audience on the state of america than any other guest has. He has been way out front on gdp growth. Srikumar i do not see a quick change. Again, the polls seem to suggest that Hillary Clinton has the better chance of becoming president. Moree does start out with of fiscal stimulus and structural changes, i could see things improving for 2018 onward. But what the fed does, whether it cuts or increases Interest Rates, will mean very little for Economic Growth. Tom let me start with gdp in nominal dollars. Down we go with a oneyear nominal gdp. The answer is, inflation has been taken out of the system. The great moderation over time. I am not going to take away anybodys job in the nfl. Down we go with the great moderation, but there is this rollover. Why is the animal spirit rolled over in america . Srikumar the big drop that you see for 2008, 2009, comes from all of the excess credit that we had in 2007. His subprime problems. Since then, if you look at your own curve, you have not gotten back to the old 1970s, 1980s level at all. Tom that is just the duration of the system. It is like this time is different. Francine why has it not recovered . Have we not given ourselves a chance to recover because regulation is too tough, or because we are so scarred from what happened in 2008 that it is holding consumption and ceo reinvestment act . And ceo reinvestment back . Was this i think the reason why the recovery has been so slow is because we have had no fiscal stimulus, no structural changes, and we have just doubled, quintupled now on the fed Balance Sheet, ecb and the bank of japan going to negative Interest Rates. That is about the one lever we have used. Francine how do you fix that, then . Srikumar you fix that by essentially giving up on i would say the fed should raise Interest Rates, make the federal funds rate today at 1 , 1. 5 . Have fiscal stimulus. That is going to increase Interest Rates, cause a recession, cause the market to correct. But then thereafter you will be up and going at a much faster pace. Debate . You watch the srikumar i watched a part of it. Tom my deepest sympathies. How do you respond when mr. Trump says, if i am elected, free beer. If i am elected, 3 or 4 or 5 gdp. Frame that for us as a guy who got right mr. Trumps 1 . Srikumar i would say he is correct in terms of locating the malays and exploiting it in terms of his own candidacy and realizing that a lot of people are not better off after 2008. Where i would disagree is that any policy he is talking about is going to give you 3 or 4 Economic Growth. In other words, it is a doctor that gives the correct diagnosis about your past problems and is aiding you, but he is not able to provide the proper cure going forward. Tom well, thats depressing. Come all srikumar with us cu masri kumar with us. Lots going on this morning, particularly in the currency market. This is important. Marvin goodfriend, on why you will love negative Interest Rates. Very important. This is bloomberg. Good morning. Francine this is bloomberg surveillance. Lacqua in london, with tom keene in new york. Lets get to the Bloomberg Business flash. British American Tobacco thes to buy the share of shares of Reynolds American it does not own. Britishamerican says the cash and share proposal value a premium of 20 , the last closing price. The u. K. Company already owns 42 of reynolds. The maker of transient airplanes accelerates a Restructuring Plan after taking on billions of debt, developing its marquee jetliner. It is the second major employment cut at this company in eight months. They are trying to overcome cost overruns. Senior executives at at t and time warner have met in recent weeks to discuss business strategies, including a possible merger. That is according to people familiar with the matter. The talks are set to remain in formal and focus on those coway relations rather than terms on a specific deal. Representatives that both companies declined to comment. That is your Bloomberg Business flash. Tom, you have more on at t. Tom we bring in Scott Galloway. He is a sharp student of our modern technology. Comasri kumar is with us as well. I guess what i want to say is content is king. When i see the madness of verizon buying yahoo , the idea of at t informal discussions aboutime warner, is this content and the desperation to get on board . Scott good to be with you. I think of this as sort of a millennial merger. Thatnnials want content they can consume in a nonlinear fashion. And the distribution is simple. It is on a mobile device. This merger would bring those two together. I like this a lot. I think these two companies together would be a juggernaut. Shiftk this reflects the in Media Consumption by millennials. Tom you are an expert at game theory, and as we all know, game theory dries by catalyst. Theory dries by catalyst. Drives by catalyst. How desperate is the moment, and as that play into their hands . It is not desperate yet. He would rather do this as sort of a crowning achievement. It would be an opportunity for him to declare victory and leave. Tom how does mr. Murdock spohn, and particularly his sons . Is interesting. I do not know if they tried to get into a bidding war and force at t shareholders took their way, but i think he has so much credit issue could ability with shareholders. Francine should we not worry about the fact that actually they have low the debt rating there islm carrier a hefty debt load, right . American eally scott correct. Is 120 billion reasons not to do the deal with at t. But together, this is what you have. This is what you have two Media Companies sucking the oxygen out of the room for everybody else. Facebook and out for that are slowly killing everybody else. I think there is strength and alphabetacebook and are slowly killing anybody else. I think there is strength and size here. Francine this megadeal really came out of nowhere. Scott but if the deal makes sense, i think the Capital Markets i am not a debt markets guide, but i think the Capital Markets will find a way to finance if they think it makes sense. This company together, tom, you mentioned yahoo verizon. That is georgia stanza that is George Costanza to george clooney. Tom how does verizon respond to the train wreck of the yahoo . Said we want to regurgitate you back into the market and you will end up with a worse deal. Verizon would just look so stupid. It would be another unforced error in the Bad News Bears of media, which has been yahoo and the yahoo board. They take a worse deal. Tom Scott Galloway, thank you so much. I cannot convey enough the importance of understanding scale when looking at all these things. With time warner, a very small amount, 3 billion, 4 billion. We are going to extend this conversation forward. This is wonderful. Rich greenfield and brian wieser will be on radio this morning. Surveillance. This is bloomberg. Tom bloomberg surveillance. There it is. Ol staye capit standing . Joining us on set after surviving las vegas, marty schencker is with us. Marty, you have been doing this for a million years at the wall street journal. What was your take away from las vegas . Marty it was the culmination of three rather extraordinary series, and to be a double down on the very personal nature of this campaign. It has devolved into a namecalling. Tom what was the body language i observed after the debate . Was it as clumsy as it looked . Marty it was quite awkward. In the spin room afterwards, the surrogates from each camp or scurrying around to try to spin it. Tom david brooks, on the grace of the moment brooks on what is needed within our middle ground. Know which moderate he has just defined, but they are dead and gone, arent they . Marty it is going to be very interesting to find out where they are in the republican party, that is for sure. Tom i looked at harry reids comments about mitch mcconnell. It looks like gridlock forever. I saw no ground being given way there. Marty for the senate and the house, it is questionable who can really govern in that environment. Francine i know it is something every time i ask when you come on. I actually ask it every day. As we get closer to the election, is it every day less likely that donald trump can regain ground in the polls . Marty i think that is absolutely true now. The last bloomberg poll showed him losing ground in areas where he had been ahead. As our story said at the time, it is becoming increasingly difficult to figure out how he can possibly make up that ground in the short time left. Now that he has lost his ground game manager, it is difficult for him to make up that ground. Francine what can Hillary Clinton do in the next 2. 5 weeks , focus may be on six or seven states to make she does clinch it . Marty she has adopted kind of a defensive strategy. She is not making that many public appearances, and it seems to me that is becoming very effective for her. Tom the backup for this, srikumar, is the economy through but we are not at a 3 gdp. Help marty schencker. What kind of Economic Data will he see as we go to the inauguration . Srikumar i think what you are marty, from youry own discussions in las vegas, we are going to see the jobs number, out, one more jobs number before the elections, which i think will be closely watched. But overall i think the whole thing is all set and done. I cannot see any Economic News coming out between now and november 8 that will change the election unless the fed totally unexpectedly raises Interest Rates, causes a huge Market Correction three or four days before the election, which i do not expect them to do. Like looks very much to me it is a Hillary Clinton election. Marty it certainly feels like that to me. The fed is not moving tom what about the senate and the house . Are polls have been really clear. The senate clearly looks democrat, but how much democrat . Is it like filibuster territory . Marty it would not nearly be the super majority that they would need to cut off debate. That is not going to happen. Tom will they srikumar will they take the house as well . Marty i think that is very difficult. Even with a 10 margin, it would be difficult to see that happening. Tom marty schencker, thank you for the update on the ballet that we are in. Dialogue will continue this afternoon. Mark halperin and john heilemann, with all due respect, at 5 00 p. M. Marvin goodfriend is with us next, from Carnegie Mellon. This is bloomberg. Tom good morning, everyone. General electric is out with earnings. Immelt,the new ge, jeff many who would argue the ceo of the year. Making the transition from financial to true industrial. There is a lot of talk about a looking ton, and revenue growth. A predictionersus of 26 billion. It looks to be pretty good. I do not see the organic growth. We will look to that in a bit. Heres taylor riggs. Taylor donald trump and Hillary Clinton were together again in new york one night after the third and final president ial debate. The occasion was the a foundation dinner. They took their shots at one another. Mr. Chung you know, last night i called mr. Trump you know, last night i called Hillary Clinton a nasty woman. But this stuff is all relative, after hearing Hillary Radel on and on and on. I do not think so badly of Rosie Odonnell anymore. [laughter] in fact, i am starting to like rosie a lot. Have respect for people like kellyanne conway. She is working day and night for donald, and because she is a contractor, he is probably not even going to pay her. The event raised 6 million for the catholic charities. In northern iraq, more fighting after militants armed with assault rifles and explosives attacked targets before dawn, taking hostages in and around the city of kirkuk. The attack was likely and a diverting attention from the battle to retake mosul. A powerplant was stormed north of kirk took before north of kirk took the e. U. Says it is too soon to impose sanctions on russia. It is maintaining the action if latimer does not act down. E. U. Leaders say all options are on the table. 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. Komal srikumar is with us. He is not all that big on negative rates. With us now, Marvin Goodfriend. I have been dying to do this. His important paper and controversial paper at jackson hole. Marvin goodfriend is out of union college, the university of schenectady, and also brown university, and has worked at the richmond fed in a research capacity. Wonderful to have you here, marvin. Your paper is on negative rates. You and phil about her say negative rates can work. Of negative policy rates what does that mean for the commercial banks, for jamie dimon, and for pnc in pittsburgh . Marvin thanks for having me. Twove to distinguish regimes. The current regime, in which we would have negative rates but still Central Banks offer Paper Currency on par for demand , meaning there is very limited scope for negative rates to work. The reason is tom agreed. Marvin banks know that the Central Banks cannot push rates ratesgly cannot push terribly negative because the market will does intermediate. Tom youre talking about even 3 negative interest rate. Marvin the regime i was talking about in my paper was about fully on encumbering the zero rate interest bound. Tom what does that mean for jamie dimon, brian moynihan, and a bank in des moines . Marvin if we unencumbered it fully, banks would behave as they have always behave. When rates were not encumbered, banks were reluctant to cut retail policy rates when the fed cut their policy rates because the banks are loyal and the banks want to say that we will meet you with currently higher rates until we really have to cut rates. When we know the central bank is serious. That has been the policy all along. Retail depositors are their loyal customers and they do not deserve to get rate cuts immediately. When you are at zero interest in the banks know that the Central Banks cannot cut very deeply, they are not going to cut rates below zero for the retail depositors, so bank margins get squeezed. So the current regime, which is a Halfway House, is very difficult for banks to navigate. Srikumar, you are usually skeptical about negative rates because you observed the Halfway House in the various experiments in germany and japan. Srikumar absolutely right. That is where it comes from. Justify8, ben bernanke quantitative easing because Interest Rates could not go negative. The ecb and bank of japan agreed that when Interest Rates were still above zero. Then they all went to zero. Zero was ok, but negative was not. I cannot see how any kind of negative Interest Rates could achieve it, tom. There needs to be a nonMonetary Policy alternative. Nothing to do with negative Interest Rates. Tom i want to note General Electric will boost their Share Buyback by 4 billion. Francine marvin, if we go back to negative rates, you say that theoretically it could have worked. There is a public perception, and there is also a real problem with pension funds. We had an explosive piece by a foreign a former foreign secretary. As is almost a direct effect of loose Monetary Policy but especially negative rates. He argues that everyone becomes desperate. I would makeoint about that is that the pension fund problem revolves around longerterm Interest Rates. Longerterm Interest Rates are not really under the control of Central Banks. Monetary policy is about moving the shortterm rate around the longterm rate, given where the world puts longterm Interest Rates. All kinds oft of forces throughout the macroeconomy that have little to do with Central Banks. The main point i would like to 1990s,that since the longterm real Interest Rates, which is the index bond rates, the inflationadjusted real rate of interest out 10 years, around the advanced world on average, those real returns have plunged from 4 to zero. There is nothing in my view that Central Banks can do about that twodecadeold plunge. Francine marvin, are there countries the Credit Suisse ceo said about four weeks ago that negative rates work for small countries. Of he agreed. The smallagree that open economies, especially those near larger economies with some degree of monetary easing, need to protect their Exchange Rates when theppreciation, larger economy should ease Monetary Policy more than is called for perhaps than a small economy. So you have sweden and switzerland particularly near the eurozone which have to act defensively. What do you think of ken rogoffs book, the curse of cash . He links it directly into your anvil about her and Willem Buiter and ken rogoffs world. What are your thoughts . Marvin i consider his argument to be a close cousin of mine. We have been talking about this for a while. There is a separation between whatk there is a separation about what he is saying. These are separate arguments. If you do get rid of most of currency, it would make on encumbering policy easier. Komal, you want to jump in here . Srikumar they tried Interest Rates going negative and it did not work. To say cash is being used for criminal activity and drug trading and it would reduce it is beside the point. The real issue that the ecb is worried about in terms of canceling out the 500 euro note is not drug trade or illegal activity. You can withdraw a fewer number of bills, and you can make the european banking go broke. That is the real fear. Tom where do we find the courage to find your prescription for negative rates. For negative rates . Is it the legislative branch . Where is the courage going to come from, marvin . Marvin when i wrote about this in the paper for jackson hole, what i was imagining was that something would be available in a crisis. The 10 year yields in the advanced world and around the United States is historically low. In the recovery faces from earlier recessions, the federal funds rate had to be pushed below the longterm rate by at least 2. 5 point 2. 5 percentage points. Should we get a global recession with nominal rates so low, it would be a useful policy to be able to push the federal funds rate far below the longterm bond rate as we have always done. Tom did you talk to chair yellen about this . She was sitting near me and she heard my talk. Tom she did not throw anything at you . Srikumar ben bernanke introduced quantitative easing, zero Interest Rates, a very temporary policy in january of 2009. Is shortterm with the federal reserve. They are probably going to go ahead with this for the next six to eight years. I cannot see how it is going to work. Tom this is what surveillance is all about. Marvin goodfriend and srikumar with us as well. We will continue talking about oil, on the range quickly on the terminal value. It is declining at many houses. We are really looking forward to that. Professore with Marvin Goodfriend and dr. Srikumar. This is bloomberg. Tom good morning, everyone. This is really something. , ever seen this before. General electric has come out. Ith their 2016 organic growth it has a zero figure on it, 0 to 2 . I do not believe i have ever seen that. That is absolutely remarkable. In a big year with Marvin Goodfriend and srikumar, we will talk about the tepid dynamism of america. 2 isne, 0 to remarkable. Francine coming up shortly, it is bloomberg daybreak america s. Andwill be focusing on ecb euro weakness. Jon i would send you to the times in the u. K. , with a columnist writing there is a lot of political pressure in europe on the Central Banks, and we will discuss that. There is a real story emerging. It speaks to a lack of capex, a lack of investment. When she is spending is on technology efficiency. You see that in the s. A. P. Earnings and in microsoft as well. We will explore that. Francine thank you so much, jonathan ferro. Lets get back to negative rates. There is a huge political elements of this. Lets look at japan. We are still with Marvin Goodfriend, carnegiegoodfriend,n university professor. And Komal Srikumar. You have done so much on negative rates. If you think about it, you are imagining a bank that pays negative rates, which basically means that in this upside down world, borrowers get paid and savers get penalized. Governor kuroda was the first one to try this in january and he got lambasted. Marvin it is true. I said earlier that negative rate policy when you have a current regime in place promising to exchange Paper Currency for deposits, that negative rate policy is essentially marginally effective. What the boj has done recently, in their review of policy, is they have put a floor on the 10year what they call the jgb bond rate. I think that is because what they would intend to do if things get worse in japan, is to try to push the short rate down without pulling longerterm rates down. The public is mainly concerned about the longerterm bond rates going down because it hurts their savings. What the boj is preparing to do is to tilt the yield curve upward, push short rates down relative to long rates. In the way i described a few minutes ago, that the u. S. Has had to do in every one of its recoveries from recession since 1960. Francine the problem is that there may be a situation. I asked governor kuroda this several times. They may be a situation where they have to accept that the 10 year yield is negative, otherwise the may have to be seen they may have to be seen as that they are tapering their asset purchase program. Marvin i cannot obviously speak for the boj itself, but they might guess that if push comes to shove they will do what they can to stabilize the long bond rate as well as they can. It is hard to do, but i think that is what they are attempting to do in order to tilt the yield curve upward by pushing short rates down. I am not sure that is going to work, and that is what they are after. Francine will it work . This is probably the greatest financial experiment of all times, and nothing has gone the way governor kuroda wanted it to go. Srikumar it has not worked, and i do not think it will ever work the way it will be conducted. The reason for that is because when the rates go negative, it frightens the heck out of japanese institutions. So rather than weakening the yen, as has been expected by the bank of japan, japanese students have brought cash back to japan because of the fear of what was going on. That has appreciated the currency. The second problem that we have is that to the extent that you keep going negative on the interest rate, on the short term, you are not going to be able to influence the 10year jgb yield or the japan Government Bond yield. Because what happens with it, even with Slower Growth and stagnation, the yield curve flattens. That is what is going to happen to the United States next year, that itxpectation is has already happened in japan. You cannot escape from it with more negative rates. Tom bring up the chart, if you would. We do this in Carnegie Mellon maroon. In my right that the twoyear yield is here . And then down we go right here. You are down here in your proposal at 3 . Marvin that would be the case if there was an emergency, we had a global recession, and tom what we saw seven years ago is an emergency, right . Marvin with the credit turmoil of 2007 and 2008, we started longterm on reits longterm bond rates percentage is much higher. We have not had a recession where the longterm bond rate comes down to zero. That is what i am afraid of. Tom what would you prescribe for janet yellen if she cannot get through the economics of Marvin Goodfriend . What is the best practice . Marvin policy is always about the alternatives. I want to keep Monetary Policy unencumbered so Monetary Policy can stabilize the global recession if we have one. I do not want to have Monetary Policy walk away and say we are out of ammunition, we are out of tools, we will turn it over to politicians. I am a big believer that Monetary Policy should remain uncovered so that it can take the brunt of stabilization policy in recessions. That is where my arguments are coming from. Negativeve had Interest Rates in the past. In the 1970s we had negative Interest Rates because the fed had shortterm rates at 5 and the fed was 10 . We have been here before. That ise obviousness creating the push back. Tom week ago for another hour. Francine tom we go for another hour. Francine stay with us. This is a picture overall for your Asset Classes. Dollar rising, reaching the strongest position in europe since march. S p 500 futures are down a touch. European stocks are pretty much flat. Oil is at 50. 85. This is bloomberg. Tom the forex report really quickly. Sterling turns sterling churns. Srikumar and Marvin Goodfriend are with us. Let me bring up our single best chart. We have shown this a number of times. This could be chart of the year, but i think productivity is up, on real gdp. This is the moving average, down 1. 9 . Right there. 9 , it is remarkable, this decline. Stanley fischer began his speech at the Economic Club of new york on the percentage change from 4 down to 2 . Do the math, it is a 50 reduction in real growth. What did youiend, think of his dissertation on long rates . Marvin he is right on to describe this Major Development in macroeconomics over the past two decades, that we are having a slowdown in the growth rate of the economy. It is directly related to the reduction in real longterm Interest Rates. Interest rates are a barometer of the relative optimism people have about the future. Tom where is the animal spirit, srikumar . It was like donald trump was rechanneling you the other day, but you are not the pessimist that i hear from mr. Trump. Where did the Economic Growth come from . Srikumar it has to come from real factors, not from monetary factors. Tom so it is on the i. S. Curve. Thekumar to the extent emphasis is going to be on and you deal with a one track pony we are not going to do it. Tom what about the pirates this year . What happened . Marvin i would rather not talk about it. Tom this has been a magnificent hour. Francine just loves doing this. It is just a great conversation. Francine you know what it brings home . I am getting messages saying that if you listen to our discussion, a lot of people see that Capital Needs to earn returns, but when you speak to central bankers, they just do not believe it. Tom you are off on next week . Francine i know i will be missed, tom. I will be sending things from italy. Tom you take these romantic vacations. I do not care where you are going. The whole week you are off . That is sick coming up, time warner on the chaos of media. Rich greenfield and brian wieser. Stay with us. This is bloomberg. Jon good morning. Happy friday. A warm welcome to bloomberg daybreak. Check out the market of the moment. Futures marginally negative, down 67 points on the dow. Down almost eight points on the s p 500. The story in the fx market, the euro breaks down to a very tight trading range. David here is what you need to know at this hour. A snapshot of the global economy. Honeywell and General Electric are both out with earnings this morning, ge cutting its 2016 forecast, honeywell reporting his first profit drop since 2011. And call it the draghi hangover, the euro falling to its lowest level since march. Donald trump and Hillary Clinton trading in the boxing gloves for some humor at the Al Smith Charity Dinner in new york last night. They appeared on stage together just one night after facing off for the third and final debate