Transcripts For BLOOMBERG Bloomberg Surveillance 20170620

Im Francine Lacqua in london. We have a lot to get through today. We have quite a lot of news. Mark carney and Philip Hammond, and we will get on to brexit. First, let me show you your markets. A lot of the movement we saw in the last hour reports to what we heard from the chancellor and the boe governor. I would suggest it is really what is happening in the u. K. That many to look at. 675. Can see the pound, 1. 2 when it says market matrix, it is basically the difference between the two year gilt yield and the 30 year gilt yield. That curve is kind of flat. The u. S. Dollar, pretty much unchanged at 1197. The two year u. S. Yield, 1. 36. Lets get straight to the bloomberg first word news. Fourter barclays and former executives have been charged with conspiracy to commit fraud. The u. K. Fraud office said john varley and roger jenkins, and oth faced charges, along with the bank. Barclays says it is closed considering his position in relation to the allegations. U. K. , a 47yearold man named Darren Osborne is being held on suspicion of attempted murder and alleged terror offenses. His vehicle struck pedestrians in finsbury park. A father of four was not known to Security Services and was believed to have acted alone. U. S. President donald trump has denounced north korea brutal regime after the death of otto warmbier. The university of virginia Student Spend more than one year in a north korea present after he was sentenced to 15 years of hard labor, after trying to steal a political banner. He was medically evacuated to hiohio last week. The white house is weighing whether to move sean spicer into a new senior role. Plans to reorganize the ri administrations team are pulmonary and no final decision has been made. Spicer has been the press secretary sense President Trump came to office in january and has been the subject of speculation for months that he was on the verge of being fired. Global news 24 hours a day, powered by 2700 journalists and analysts in more than 120 countries around the world. This is bloomberg. Francine thank you. Philip hammond and mark carney have been addressing leaders of the countrys Financial Services industry this morning, speaking londonse last hour at Mansion House after last weeks dinner was canceled following a devastating fire. The two covered some of the challenges facing the country as s brexit talks get underway. From my perspective, given the mixed signals on Consumer Spending and Consumer Investment and the subdued domestic inflationary pressures, and anemic wage growth, now is not yet the time to begin that adjustment. So, how do we achieve this brexit for britain . Firstly, by securing a comprehensive agreement for trade in goods and services. Secondly, by negotiating mutually beneficial transitional arrangements to avoid unnecessary disruption and dangerous cliff edges. Francine well, lets welcome mike bell, who is a Global Market strategist for jpmorgan Asset Management. What did we learn from the chancellor and the bank of england governor . Will he get a softer brexit than we previously thought . Mike i dont really take that away because if you listen, he said he wants free trade in services, but we know that idea well. He did not say anything about being willing to no longer control migration, which has been the key debate throughout this brexit discussion. If theyre not going to say, well to maintain freedom of movement and i think it will be extremely hard for them to get a free trade deal in services. Francine that would have to come from the Prime Minister. I understand the way the chancellor is positioning himself is warning about the dangers of brexit. Mike possibly. I think hes always been one of the people within the cabinet who has wanted to head for a soft brexit. What will be key is whether he influences government policy Going Forward and whether this government is still in place in the way that we see at the moment when it comes to the finalization of these break the negotiations. I think it would be very nice and it would certainly be in the best economic interest of the country if we could maintain free trade in goods and services. But from a purely economic stance, thats not what you would do. The politics is very fundamental here. The politics have been leading politicians towards wanting to control migration. As a result of that, i think it makes it unlikely that you will get a deal where you can get free trade in services and there is control of migration. One of those will have to give, is im not sure the speech enough to give the market confidence that it will be migration that gives. Francine what will the markets do in the meantime . On a daily basis, we speak about pounds. What about the yields on gilts. What is remarkable about this yield curve is despite the pickup anin inflation and the brexit uncertainty, the yield curve is still close to this year. What will it take to change it . Mike you would need to see genuine science in the inflation picking up at the core level, looking at wages. The moment, you see a lack of wage growth coming through and we have seen mark carney saying that means that he and the majority of the mpc will be unlikely to be putting Interest Rates up anytime this year. They want to see which growth under. They want to see the weakness in retail sales will not persist, and there is a good chance it may do, given that real wage growth is turning sharply negative. That suggests that the likelihood we see a dramatic curve steepening are lower, at least for now. Francine we heard from charles evans, thing the Central Bank Officials need to show a commitment to reaching their goal on u. S. Inflation. Speaking in new york yesterday, the office described eight years of low core inflation as a serious policy miss. Core inflation is generally underrun 2 . L years below ful target and this is a serious policy miss. Francine lets get more now with mike bell. Mike, is the difference between what he is saying, and what john janet yellen is saying . Mike i think janet yellen is right. Both in the bank of england and in the fed, you see a divergence of views. He falls in the dovish camp. Now that the labor market is tight, she is always been focused on the labor market, now that unemployment has fallen dramatically, now it is the low the feds estimate, it suggests to her, and to us, that will lead over the next one or two years to an increased wage pressure, and therefore, they should be putting wages up. Francine we are looking improve financial conditions in the u. S. That is to be off sitting the reason inflation growth, which brings me to my bloomberg terminal. That is pushed further above neutral. How far can this chart go and therefore, the fed tightening bias . Mike i think we have shifted to a world now where given the Unemployment Rate has gone below the estimate for full employment, tha t the fed are biased towards tightening, as long as there is not a meaningful slowdown in the data. And not the inflation data so much, as long as it remains broadly close to 2 , i think they will be wanting to put rates up. They are aware we are getting to the later stages of the Economic Cycle and they want to have ammunition to release once we get to the next recession. To do that, they have to put rates up first. Francine what does that mean for your Investment Strategy overall . Do u. S. Equities look expensive . , but that is not to say they do not have a further upside. What you tend to see is a melt up of equities, as the labor market remains pretty healthy. U. S. Equities do look quite expensive, but on a broader basis, as we look at Earnings Growth, we still forecast 10 Earnings Growth through 2018, even without tax cuts. It is just relatively constrained. Francine stick around, because we also want to hear your thoughts on facebook with Technology Replacing workers in industries from retail to manufacturing, Sheryl Sandberg says the company has a duty to help businesses create new jobs. Speaking inclusively to Caroline Hyde, she spoke about how facebook can help small and Big Companies access new c customer. What we are seeing is more adoption of the mobile platforms. There are 70 million Small Businesses that are using facebook on a monthly basis. On into graham we have 8 8d on instagram we have million advertisers. Tbusinesses are investin in mobile because that is where people are spending their time. Caroline do you feel optimistic about what these undercurrents show you about the u. S. Economy and the Global Economy in general . Are swe seeing jobs being created and brands spending money . Our goal is to make sure businesses spend money and get a return. What matters for marketers is when they spend on marketing, it rings the cap register come online and off. We also see Small Businesses playing an Important Role in the Global Economy. The majority of job creation is actually Small Businesses. And even the most offline Small Business can use the power of technology. When i was in europe i went to berlin and i got to visit a company that is a furniture manufacturer. Their manufacturing wooden furniture, a very traditional business. The son came into the business and started marketing on facebook and through mobile. Now they have open five more locations, including outside of germany, creating jobs and growing their business. So, technology can power innovation, both in th e court of the business, but can support any business out there. Francine when people worry about teech erroding jobs, do you see the other point of view . Technology is certainly replacing jobs. Technology can also be used to grow jobs. It is our responsibility to help Small Businesses and Large Businesses around the world use technology to grow their businesses, so they can grow j obs. Caroline interestingly, in our time, when we see the drive towards job growth, we also see valuations for Technology Companies go through volatile times. Does that affect the way you look at the world . My job everyday is to work on growing facebook, helping more people use facebook and instagram. More people get value from the products and services and more businesses. I feel like as a Business Leader if i focus on our business, that is where my focus needs to stay. Francine that were Sheryl Sandberg. Lets get more from michael bell. Mike, last week we saw these tech valuations. We were concerned the market had something uneasy in them. This week, they are rising again. Whats going on . Mike i think some tech stocks are fully priced. There is a big dispersion, even within the tech sector. Some Successful Companies are trading broadly in line with the market, and some are trading over 100 times earnings. We would be cautious on those expensive stocks. Francine what about european stocks, and maybe European Tech stocks . Let me bring you over to my bloomberg terminal. This is going through the cac 40. This is the white line, and you can see a little bit of a higher valuation. Maybe that is the macron effect. Mike it is. We have shifted from the start of this year, everybody being genuinely concerned friends would blow the eurozone apart, to a place now where the Political Risk is skewed to the upside. We have had a landslide victory from macron, where hes not able to push through the fundamental reforms that france needs, particularly the labor market reforms. That provides quite meaningful upside risk to french growth over the medium term. That is what you are starting to see been priced into markets because investors are still quite under allocated to european assets, particularly u. S. Investors. Flows have started to return and european investors are probably back to where they were a year and a half ago. U. S. Investors are still farley unde under allocated. Francine mike, thank you for joining us today from j. P. Morgan Asset Management. Fourxt, barclays and former executives have been charged with conspiracy to commit fraud in 2008. We have that story, next. This is bloomberg. Francine this is bloomberg surveillance. Im Francine Lacqua in london. Shing plans toa retire by next year as chairman of his flagship ck hutchinson holdings. According to the wall street journal reports, citing the people familiar with the matter, he is not set a specific date. The tycoon plans to remain a ceo advisor and keep his office at the headquarters in downtown hong kong. Tesla is said to be close to an agreement to make cars in china, avoiding import taxes. According to people familiar, the deal with shanghai authorities would lead to a production plant, and could be announced this week. Tesla did not medially respond to comment. The group is considering an initial Public Offering of land rover on the International Stock exchange. Official havepany helper luminary internal discussions over the last few months about the listing. London and new york as possible venues. Representatives for tata and tata motors denied to comment. Fourine barclays and former executives have been charged with conspiracy to commit fraud over the banks 2008 Capital Raising from qatar. The former ceo john varley, former chairman of the Investment Banking for the middle east roger jenkins, exdeputy head of Investment Banking richard boath, and Thomas Kalaris face charges, along with the bank itself. Suzy, what exactly does this relate to . Reporter this is the combination of a fiveyear probe. The context being the apocalyptic time in 2008 when a lot of banks where receiving state funds, but barclays managed to avoid that with fundraising from qatari investors. These charges relate to questions around the arrangements they entered into with qatari investors at that time, fees they agree to pay to help them avoid a bailout. Francine these are the highestranking executives charged since the financial crisis. Why now, and why barclays . Reporter really, these decisions were taken at the confessions of the bank. These guys had to sign off on these decisions that ultimately, they were going to pursue these charges, it would be these people in the frame. It was an interesting time. The tory manifesto made a pledge to get rid of some form of the International Crime agency. So,s case is interesting timing in terms of the announcement. Francine what does it mean for what happens next . Barclays has not formally responded and we have had a couple executives saying they will fight the charges. Reporter we have a hearing in the london court in a few weeks time. There is one outstanding decision based coming to make in relation to charges, charging the holding company. This is in relation to the Barclays Bank operating unit. Much, ourthank you so enforcement and investigations reporter. Now lets go to Chris Wheeler. What does this mean for barclays . It is a reputational damage more than a money damage . Chris well, yes, good morning. It is difficult to say. Isarly, reputationalwise, has been around for a long time, six or seven or eight years. Of course, it is a massive distraction. This morning, all the senior bankers were phoning corporate clients and Investment Banking clients. The individuals have been looked at, it is not Barclays Bank specifically, but something that happened a long time ago. They must find it annoying, i think. Headlines asig well, which is not helpful. Francine chris, barclays is the bank that had to be cleaned up by the current ceo. Is he implicated in this . Chris no, not at all. This happened during the middle of the crisis and the irony of this, if this Capital Raising had not occurred, certainly the government would have had to step in and put more money in. Barclays investors would have lost a great deal of money and the city would have been in more turmoil. The actual transaction was actually positive. Unfortunately, what the sfo is saying is it was not completely in line with normal Capital Markets procedures. Francine it basically said barclays failed to disclose some of the arrangements and fees it paid to the qatari investors. Are there new rules in place . Or is it something that could have happened by mistake . Chris no, this is old school. Is has been in the companys act for many years. Giving somebody assistance to purchase your shares is not legal. Paying somebody your fee, which is implied, to be involved in an Equity Offering is not. This has nothing to do with some things were occurring before the crisis. This is actually hard, oldschool corporate practice here. Francine a lot of people have said that this morning, but, chris, when do we get to the end of i dont know if you call it a scandal, but something that does not smell right . When is barclays going to get over this . Chris this could go on for a long time, especially if individuals go to court. Barclays will remain in the public eye. Obviously, Joe Mcfarland wants it to go away, so they can get on with building the business and serving the economy, but these are serious charges and i cannot remember a large commercial bank being put in this situation. We had investment banks i difficultyn, but this is pointing a finger at a large corporate raising money itself, rather than on behalf of another corporate. Francine Chris Wheeler there of atlantic equities. Up next, what did we learn from day one of the brexit negotiations . We have comments from the boe governor. This is bloomberg. Ive spent my life planting a sizesix, nonslip shoe into that door. On this side, i want my customers to relax and enjoy themselves. But these days its phones before forks. They want wifi out here. But behind that door, i need a private connection for my business. Wifi pro from comcast business. Public wifi for your customers. Private wifi for your business. Strong and secure. Good for a door. And a network. Comcast business. Built for security. Built for business. So we need tablets installed. With the menu app ready to roll. In 12 weeks. Yeah. The world of fast food is being changed by faster networks. Data, applications, customer experience. Which is why comcast business delivers Consistent Network Performance and speed across all your locations. Fast connections everywhere. Thats how you outmaneuver. The first word news. Sebastian the bank of england says they are worried about impact of brexit on the economy. They will be rushing to raise rates. Mark carney address weaknesses in the economy, saying wage growth is anemic. I would like to see the extent to which growth is offset by other components of demand. Begin to firm and more generally how the economy reacts to the prospect of tighter financial conditions and reality of brexit negotiations. Sebastian a man is being held on suspension of attempted murder and terror offenses after a van hit muslims in north london. They were struck next to a mosque, leaving one person dead. The father of four who lived in wales was not known to the Security Services and was believed it to of acted alone. Donald trump has denounced north koreas brutal regime after the death. Studentpeaking after a who spent a year and a north korean prison died. He was cents to 15 years of hard labor for trying to steal a political banner and was medically evacuated last week. The white house is weighing sean spicer into plans tonior role in reorganize his administrations Communications Team are preliminary and no final decision has been made it he has been the White House Press secretary since january and has been speculation for months of being fired. Global news 24 hours a day powered by more than 2600 journalists and analysts in more than 120 countries, this is bloomberg. Thank you so much. The u. K. Lost its first battle with the European Union on day one of the negotiations. David davis gave in to demands to discuss the terms before any considerations could begin. His counterpart had this to say after the meetings. I am not in a frame of mind to make concessions or ask for concessions. Its not about punishment or revenge. We are implementing the decision taken by the United Kingdom to leave the European Union and unravel 43 years of patiently built relations. The United Kingdom has decided to leave the European Union. It is not the other way around. The United Kingdom is going to leave the European Unions Single Market and Customs Union, not the other way around. We have to assume our responsibility and the consequences are substantial. Ourrancine lets get to Brussels Bureau chief. Where do we stand after the first day of talks . Its obvious from the lead and you have there that the eu has maintained its leverage in these talks. There was indication that the u. K. Was trying to beef itself up, those got blown out of the water by the u. K. Election. In what theng firm eu wants, how they want these talks to proceed rid they have the timetable. I havent laid out in the eu u. K. Has agreed to that. Francine one of the next steps in the timeline . I know theresa may will meet with leaders in what a proposal for dealing with eu nationals in the country. The negotiations will go on a fourweek cycle where they will meet facetoface approximately every four weeks. This eueantime, we have summit in brussels on thursday and friday and theresa may will bring a new proposal for how to deal with citizens rights. This is one of the key issues the eu wants to tackle first, before we get to any kind of trade discussion. We will have a first look at that on thursday when theresa she willnts it did flesh it out on monday for us. Francine thank you so much. He has been following this story very closely from brussels. Seniorelcome the managing director at braxton. He is the interview i have most been looking for of the week. Thank you. Im expecting a lot of breaking news. John we dont need me to be on. Weve got more breaking news than you have had in. Francine how do you see it working . Will she soften her stance on brexit . John shortterm reaction to your coverage of it this morning, this is going to be torture listening to the media talk about this every day. I have negotiated a lot of deals. You dont want have somebody reporting on whether you had a good day or bad day or you lost the first battle or one the first battle. , would rather have the media he should almost be closeddoor sessions for three or four days and then report to the media. It is going to be painful. Some days are going to provide lots of insight and sums are going to be some are going to be touring in tedious. This is uncharted water. The europeans dont want us to leave. They are in a much better frame of mind because of what happened in france. The mindset of europe right now is brexit is not the unwinding of europe. It is something they are unhappy about, but the French Election and the upcoming german elections, people see populism teen sort of tempered in favor being sort of tempered in favor of a restructured European Union. Francine you have negotiated more deals than most arid if you have to go in with a conciliatory view, we are leaving but we are friends, lets find a better deal. Do you get a better deal . John you never antagonize. Good negotiators do a lot of things. They listen. They look at everything is a package. They try to determine what are the two or three things that are priority and what is less important. Where do they match and where they complementary . Im sure thats what going on over these next couple of days, people will try to understand the variations. This number that has been set up in the media this morning, 82 100 billion euros departure costs, i would ask the press to do a better job of explaining that. Some of that is financial contractual conditions. Those are commitments that have been ongoing. Some of those are technological or transition costs. The room, youve got to painted a different color. I think the costs are going to be brought down by staggering how they leave. To manage what that number is ultimately, i think they will drive the nominal number down to a more acceptable number. Do you know what the government wants in this . Thecine we heard from chancellor and the boe governor, theyre worried about the impact of brexit on the economy. Mark carney said he wont raise rates soon. What do they want today . All, we talked about this earlier. I have a lot of time and respect for mark carney. Andakes this very seriously once the right outcome for the u. K. Economy. Something, want is the media would like to have this date out in a transparent way. Clearly, we won an orderly transition over two or three years. Francine its not only the media. Communicationsa dilemma. Theresa may is right to talk on thursday about the 3 Million People who were living in this country who have european passports. They want to stay in this country. They are doing jobs in this country. They want to have their lives preserved and protected. There are a number of british living on the continent. The things that affect real people, there are other things involving the Customs Union that will have to be worked out. Im not entirely sure what people want area to want. Im not sure what the government wants. The german chancellor is speaking at a business event in berlin. Ae said trade isolation is detrimental instrument. She said there should be free, fair, and sustainable trade benefits for everyone. We will continue this and monitoring those headlines coming out of berlin. Later today, we will speak to secretaries old and new. By2 30 p. M. , we are joined Larry Summers for an exclusive conversation. Our conversation with the facebook chief operating officer. This is bloomberg. Francine lets get a check on markets. Mark carney is moving markets this morning, he wont be in a rush to raise rates anytime soon. This is the impact on sterling. We are at 126. 92. Were up. 4 . Sterling is down for a second day. This was his first major comment in six weeks. He addressed weaknesses in the economy, saying wage growth is anemic unit he talked about exit. While sterling has been crushed somewhat, this is the 10 year gilt yield. About 99 basist points we are down. I want to show you the chart over the past year so you can get a sense of the context. You can see the earlier this year we were above 1. 5 on that 10year gilts youll. Yield. I want to show you its happening in european stocks. A are rallying for a third day. Its the best threeday ride. The dax had a record as well. Its trading at an alltime high. We are looking ahead to decision day for msci, to include chinese stocks in its global benchmark. This is the worlds secondlargest market area msci has rejected it three times already. The decision will, after the close of u. S. Markets. Mainland equities are losing value, stocks traded offshore have surged toward twoyear highs led hightech firms. Chinas offshore stocks are near their priciest relatives is shanghai relative to shanghai. Lets talk a little bit about barclays. Francine they have been charged with conspiracy to commit fraud. Thoughts and thoughts. Weve got Foreign Policy and what we saw in the middle east, on barclays, when you were in the thick of it during the financial crisis, this was a legacy of issues that led to these executives being charged. How do you look back on that . John having spent my entire life from 2008 for about 18 months dealing with the restructuring in the bailout of aig, we managed to have a lot of conversations with the other institutions. There is no question people have to make decisions, boards have to make decisions on a realtime basis. It wasnt a question planning on having 30 days to make a decision. Barclays wasnt bailed out by any regulator or by any government. Its one of the few banks that stood on its own. Boards ultimately are responsible for the decisions that were made during that time. Took decisions and made judgments based on the fact of circumstances present to them at that time. On what theent fraud office has discovered. I remember that time. It was judgment, analysis, markets, in a realtime basis with enormous fragility, where people were working 24 7 trying very hard to maintain the stability of Financial Markets. It was genuine. Barclays was right in the midst of it. Judging our markets Foreign Policy at the moment . We can talk about qatar in the middle east. This is a huge change in Foreign Policy. How would you price that into the market . How should they react . John its a good question. From 2008 until today, markets have been focused on economic recovery, which has been robust, longer than people expected. Onres a lot of focus qualitative easing Monetary Policy and people have become focused on Interest Rates. As we have seen the last couple markets are having hard time assessing risk. Once interesting is if you look at trumps position on europe, which everyone globally is very uncomfortable with him commenting about nato and people paying their fair share in criticizing the european economy in particular the German Economy , to a certain extent the macron has occurredmentum in part because of donald trump and his comments about europe. He is telling europe youre going to have to go it on your own. This sort of traditional view we saw between reagan and thatcher or bush in the u. K. , that his change. Europe is going to have to become a different entity. To an extent, thats giving it a renewed sense of selfconfidence. Francine this is a very simple chart looking at the cap warning. 40. People are expecting him to reform. He had so much influence in the senate. He can push through. What if he cant deliver . I know you were a keen observer of populism. In three years, if he doesnt deliver, what happens to your . John he is coming from outside the structured system. He is one of the beneficiaries of draining the swamp, if you will. Succeeds,if he populism will be put in to check. Clearly, you and i have to meet again in september and in december. There are threats that france will start to voice concerns in september. He is in his honeymoon right now. He is in a position. What you find is if you look carefully into france, even people who did not vote for him want to give him the benefit of the doubt. They want to see him succeed. This means people are changing their views and want to see france play a bigger role in europe. Lets revisit this. Youre going to have to give him six months and see how much momentum he has developed in january. Francine september 10, lets say two weeks before the german elections. We will also get tom keene involved in lets get on to tech giants. They are under pressure to combat extremism. Facebook announced it would increase Artificial Intelligence to remove inappropriate content. She explained the project. There is no place for any of this content on facebook, no place for hate or violence or terrorism. We take that responsibility very seriously. We announced last week weve been working on this for a long time. We are going to continue to work on it. We have some important next steps. We have ai to help us find any content that may be inappropriate and get it off even faster. We are making a big Human Resources investment. We already have terrorism experts who work at facebook and we are growing that, as well as our human review capacity. We have 4500 people around the world who review content. Thats a very significant investment. We are also working with nonprofits, governments, other companies around the world to make sure we all Work Together. This content is not on our platforms. We offer tools for brands to know where their ads can show to make sure that they know that facebook is a Safe Community for them. Working withu are not for profits. Aboutope, are you worried talk about encryption and some of the things it to been raised . We are in constant conversation with government on issues that affect all of us working together. We have worked with governments to talk about initiatives. Governments can not just make sure terrorism is prevented, but do counterterrorism work and get positive messages out there. This will stop people from doing things that hurt so many people. We also work with Law Enforcement all over the world. We want to make sure that if there is anything we can do to support their work, we are able to do it in this area. Theou launched in berlin courage initiative. They are using a counter narrative. Think you how do you can understand if you are improving . What is the end goal . Our measurements coming down . What would you count as success . From a Company Point of view, its to make sure there is no inappropriate content of any kind on our platform. We take our responsibility more broadly. We want to contribute. Over the past several years, Tech Companies have started working together, sharing information very freely when somebody identifies inappropriate content. We know we have a broad responsibility to do everything we can in the face of some of these threats. We take that very seriously. Thef course, we are in early days of the terrorism element. This is changing . Facebook isow that a safe place for them. Make surevery hard to that inappropriate content is not an facebook and they have a safe way to communicate on facebook. Francine lets get more from john. Whatis your take on companies will become . Companies such as google and facebook . John its interesting to listen to Cheryl Schaumburg talk. Longterm strategies tend to be the things that pay off both for economies and investors and have a big impact on gdp. To look at the longterm strategy of Mark Zuckerberg or longterm march to control distribution and what google is doing in terms of a range of initiatives on the r d 2020 to the extent that we do have Driverless Cars in places like Beverly Hills in singapore, thats going to be strong. Francine who will make them . I think there are people making them. These are not people who are focusing on shortterm quarterly earnings. They are not focusing on their annual earnings. They are working on vision in the future. You are going to have an interesting dynamic in the u. S. Stock market in the next six months. You have the trump bump and the market is up and continues to be very positive about what trump could accomplish in terms of tax legislation. And people feel that the timing of that is not this year or next year, there is going to be some pressure. The tech sector is going to continue to have a very high premium. Francine thank you so much. What a great treat. I will be speaking to treasury secretaries old and new today, starting with Steve Mnuchin. Were also joined by Larry Summers. We will continue in the next hour with tom keene and myself. This is bloomberg. Francine brexit battle. Round one goes to the eu as the chancellor of the exchequer and bank of england governor warned of a tough path ahead. Mark carneys dovish tones. The fed fortifies the bank. And Francine Lacqua bruised. The bank and four former executives are charged with conspiracy to commit fraud. This is bloomberg surveillance. Im Francine Lacqua in london with tom keene in new york. We have a lot of market moves. I know you are looking at the dollar and i am looking at the pound. Tom it is extraordinary. Handel. The 1. 26 we will have an important chart on that. Francine lets sister to the bloomberg first word news. Reporter prosecutors in the u. K. Have charged barclays and four former executives with conspiracy to commit fraud. The case involves millions in fees paid to investors in qatar during the financial crisis. Among those charged, john varley, roger jenkins, exdeputy head of Investment Banking richard boath, and Thomas Kalaris. The market does not seem too concerned. Shares are little unchanged. President trump is blaming north koreas brutal regime of the death of an American College student. Died after being evacuated from north korea last week. Three other americans are still jailed in north korea. The man accused in the London Mosque attack is described as his mother as disturbed. Darren osborne is being held on suspicion of terror offenses. He is nor said terrorist, but was on medication for Mental Health problems. The European Unions chief negotiator is warning the u. K. The consequences of leaving the eu will be potential. Barnier said he is not in a frame of mind to make concessions. Still, both sides want to make a fair deal. Global news 24 hours a day, powered by 2700 journalists and analysts in more than 120 countries around the world. This is bloomberg. Tom thank you. Equities, bonds, currencies, commodities. Equities and we get a fractional left in the s p 500. Curve flattening this morning, not the record flatness, but recent record flatness, i should say. Oil still cannot find a bid, settled at 44. 32. Theres that big dow jones investor average. Terling will get to 126. 89 1. 2689. Get to francine i want to hit the nail on the head with the british pound. We had commons from the bank of england governor on the impact of brexit. We also heard from the chancellor. We are also looking at u. K. 10 year yields. That is the 10 year, and that is at 1 . I want to show you the spread between the two and 30 year. The yield curve is flattening. I want to ask our guest what it will take a move that. 1196. S. Dollar tom the u. K. 10 year yield is a lower yield in a higher note price. I cannot recall when i have shown this chart. Its been around since the 1980s, when it was all the rage. This is the twin deficit, which used to be a phrase in the 1980s. You would hear it every day. The twin deficit is a trade deficit in the current account deficit. I have suspect feelings about it, but there it is, back to 1985. And you wonder where the path of the fiscal deficit, if we go back to an era of another twin deficit, if you add up those deficits, about 8 of gdp. Francine i like that, i like that you go back 30 years. I took a shorterterm snapshot. This is the yield curve between the two year and 30 year. What is remarkable about the gilt market is that despite a pick up in inflation and despite the brexit uncertainty, the yield curve is still pretty close to its flattest this year. There is a number of interpretations out there, but a lot of people say this will elongate gilts without demanding much of a premium. So, thats a good way of looking at what we see in gilts. There was market moving commentary from the fed last night. Treasuries hit session lows and the dollar rose after William Dudley said halting the tightening cycle now would cause harm to the economy. The fomc voting members that if the federal they were not to withdraw accommodations, the economy would crash to a very low Unemployment Rate and generate inflation. Joining us now isthe ceo of global investors. It is always a good time to speak to Andreas Utermann. If you look at the fed, you take the bet they need to do something for inflation, or you believe janet yellen in saying the labor market at some point will generate inflation. Where do you stand . We think the tightening is going to continue into 2018 and they are serious in terms of their intentions to balance the balance sheet. Francine what does that mean for your investment portfolio . While we think lower for longer is over, Interest Rates will remain subdued, as you mentioned. Inflation is not an issue. The fed and ecb next year as well, will try to balance, making sure they do not crush the economy and at the same time , get the yield curve where they wanted to be. Tom when i look at the equity markets right now, i want to address the negativity out there. I see article after article doubting this bull market. Explain to our audience on a global basis why equities are high in value. Is it simply because of central bank realities . It is central bank realities, but also arithmetic. The value of equities is the discounted value of future cash lets. Lon future cash loads. In addition to that, over the last 12 to 18 months, we have seen good Earnings Growth and a lot of buy backs. That excellence for equities are high. Again,look at it and this goes to bill priest. Are equities being supported by the numeral and for Share Buy Back . That is another core reason. We have said dividends will become more important in terms of how you invest. If you look at the market in terms of dividend yield in europe and the u. S. , dividend yield valuations not seem as stressed. Francine let me bring you over to my terminal. I know we will talk about brexit shortly. Is this a brexit story . This is going back to the two30 year spread on u. K. Gilts, forces an inflation story . I think it is a bit of both. Clearly, inflation all over the developed markets has a struggled to take hold, despite relatively low unemployment in the u. S. And u. K. , there is go no wage pressure to speak of. That is why the 30 year rate is still relatively low. Governments are taking advantage. Francine i will push this out on social media, for all of our regular listeners. When you look at the European Central bank, they also have this inflation problem, which mario draghi explains by not quality jobs being done in europe. If we are growing that much higher than the u. S. , when will we get the right jobs in place . Can you say that again . Francine when will we get the jobs that will create inflation . He is pointing to the fact that these jobs do not pay enough, and this explains the lack of inflation. Will we ever . If we look at macrons policies, we need to deregulate, which means less longterm jobs, less job security and more individual ownership of career aspects. That will be depressing wages for a long time. The real question is, when will corporate start to make significant investments in the capital stock. That might be triggered by an increase Political Uncertainty around the eurozone. But also, ultimately, relatively low levels of unemployment, which we have hit an 80 year low of employment in europe. If that goes lower, we could get wage pressure. Tom let me rip of the scripture and go to that. That you canp envision in europe . That would clearly be above the natural trend and above the capacity of the economy to grow. We will have to see where the economic theory pans out, and we start to see inflation pressures arise, particularly in germany. The german Unemployment Rate is well below its natural rate. Tom we spent all day on the politics of it, but the stability of growth in europe is maybe the great untold story of 2017. We will continue with Andreas Utermann. A special note. Our david gura of surveillance, in conversation with a treasury secretary. Look for that in the 7 00 hour today. Stay with us. This is bloomberg. Reporter this is bloomberg surveillance. Im taylor riggs. Private equity firm is said to be close to a deal to purchase a Drug Research firm for 4. 6 billion. The wall street journal says an agreement could be announced this morning. The prize represents a 28 premium when they closed in early may when there was a report the company was considering a sale. Tesla is close to an agreement to make its electric cars in china. According to people familiar with the matter, the deal would allow tesla to build facilities in the Development Zone in shanghai, giving elon musks Company Better access to the Worlds Largest auto market. Early tomorrow in hong kong time, msci will announce whether chinas domestic stocks will be included in the benchmark share indexes. Three previous attempts have wandered on concerns over excessive trading suspension. Even if yuan denominated shares are added, they would be blocked by overseas listed chinese stocks, which already are part of the developing nations and next. That is your Bloomberg Business flash. Francine thank you, taylor. Mark carney sent the pound lower this morning after saying it is not time for a rate hike. The boe spoke at a Mansion House event in london, which includes a keynote speech to the Financial Services industry. That was postponed last week due to grenfell towers tragedy. Philip hammond also gave his say on the brexit negotiations and the impact on Financial Services. The financial ecosystem that underpins this activity is large and complex and Critical Mass is important. So, let me be clear about this. Fragmentation of financial rervices will result in poore quality, higherpriced products for everyone concerned. Lso, with us is Andreas Utermann. How do you see brexit playing out . We are a little clueless at the moment as to what kind of brexit the government really wants. How difficult is it for an investor to navigate this environment . It is relatively challenging, but we have adopted a wait and see policy. We have taken the view that there is everything to play for and the Election Results reinforced that view. There needs to be a broader Cross Party Consensus on the terms of brexit. To give you an example, our business has grown very significantly. We had 150 employees, and now we are at 350. We are taking a constructive perspective on this and we will hope for the best. Francine what do you measure it with . Is it pound, is it gilts, is there an indicator out there that you can say what you look at . Sterling is definitely an important indicator. Ultimately, the bonds would be as well, gilts would be as well. Since Central Banks are in charge of what happens, it is not as good as an indicator as sterling. I think sterling is more turned out over the mediumterm and it should rise. Tom this is a classic chart. I have never done this before on bloomberg surveillance. This is a point and figure chart, which goes back to the way charts were done in the 19th century, back to 1880. This is an absolutely textbook sterling hipole top. Ofe is brexit in late june last year. You have a classic hipole here. I will tell you, andreas, within the mathematics of point and figure charts, it is short. Do you detect there is a one way bet on short sterling . I dont know if it is one way, but certainly, there is a significant bet out there and a lot of people are rightly concerned about the outcome of brexit, but that is a positive to some degree because clearly, politicians are more focused on this. They see the damage being done to sterling and therefore, are trying to mitigate the impact. For example, the discussions around brexit that started yesterday focusing on what happens to the millions of citizens in the u. K. , and vice versa, is an indication that it is understood that the uncertainty that is impacting people is ultimately in the shortterm damaging to the economy. Therefore, they need to fix that first. Tom you can actually see this on the bloomberg. This is a little advanced were to be and way this is a little advanced for tv, and way advanced for radio. There is the one way bet for sterling. The answer here, and to be clear here, youre going against the bein and saying there can stability, which will allow for sterling stability, and do i understand, Even Stronger sterling . I think in the mediumterm, sterling will be stronger against the dollar and the euro. I am surprised that the relatively positive turn of events following the election has not been reflected in sterling, or very little. It is where it was before the election, pretty much, when they were looking at going for a hard brexit. That is now off the table, in my opinion. The chances of a long accommodation period have risen significantly. Francine we sometimes forget this also will have a negative impact on europeans. Especially german exporters. How much of a hit will they take if there is no brexit deal or a messy bresxixit . I think not too much. The german experts have dealt with strong currencies and uncertainty towards their export markets. They will be much more concern about what happens to the u. S. Or china than the u. K. As i said, ultimately i think reason will prevail and we look at a reasonable deal, and that is why we have adopted this wait and see attitude. Francine interesting, Andreas Utermann stays with us. Coming up later today, we hear from Larry Summers, the former u. S. Treasury secretary at 11 00 a. M. In new york and 4 00 p. M. In new york. Before that, we speak to Steve Mnuchin. This is bloomberg. Francine bloomberg surveillance. With francine and tom. We need to talk about barclays shares trading marginally lower, despite the announcement that four former executives have been charged with committing fraud. The u. K. Serious fraud office said john varley is among those facing charges. Joining us now is bloombergs enforcement and investigations reporter. Suzy, great to have you again. Basically, barclays did not get money from the government because they went down this route, but they did not disclose it properly . Those are the allegations, yes. This refers to the apocalyptic time in 2008 when other banks are getting state bailouts, but barclays managed to avoid that by fundraising from investors in qatar and abu dhabi. There are regulations that barclays entered into as part of that fundraising and they were deemed improper. Francine the background, so we understand. This is the highest profile case of executives actually being charged in the financial crisis. Reporter we have not seen anything like it. We have had hedge funds and others that have been caught in the fray, but nothing like this in terms of the former ceo fo a of a bank such as barclays being charged with Something Like this that happened around 2008. This will have a huge impact to the reputation of barclays. Francine what we know is the sfo these allegations came qatar the sfo, but these deals were being reviewed bas well . Reporter yes, from a regulatory run in a criminal perspective. This investigation went a little longer than the sfo. They brought a fight against barclays a few years ago, that were stayed. Now that these allegations have been filed, we should see that brought back. Francine this is something we kind of knew was happening. We spoke to chris beeler earlier on and he said it is not touching the bank because the executives were not there at the time. Reporter i would say there has been a lot of investigations that have come out that the bank is now having to deal with. Woess had more recent around the whistleblowing investigation. None of this can be welcome news, even if it relates to people were no longer in the investigation. Francine tom . Tom very good. T thank you, suzy. On the economy of america, one of americas great optimists, drew matus, will join us. Stay with us. From london, from new york, this is bloomberg. So new touch screens. And biometrics. In 574 branches. All done by. Yesterday. Banks arent just undergoing a face lift. Theyre undergoing a transformation. A data fueled, security driven shift in applications and customer experience. Which is why comcast business delivers Consistent Network Performance and speed across all your locations. Hello, mr. Deets. Every Branch Running like headquarters. Thats how you outmaneuver. Tthats why at comcast,t to be connected 24 7. Were always working to make our services more reliable. With technology that can update itself. And advanced Fiber Network infrastructure. New, more Reliable Equipment for your home. And a new culture built around customer service. It all adds up to our most Reliable Network ever. One that keeps you connected to what matters most. Francine this is bloomberg surveillance with tom and francine. Sheryl sandberg says the company has a duty to help businesses create new jobs. She spoke specific exclusively with the brick with bloomberg. Her takets she gave on a range of issues including one which gained more than a few headlines in the last few months, cybersecurity. We are making a big Human Resource investment. We already have researchers and Law Enforcement act arts and terrorism experts that work in facebook. We are growing that. We have about 4500 people around the world who review content to remove inappropriate content. We are also working with nonprofits, governments, other companies around the world to make sure we all Work Together to make sure that this content is not on our platforms. We offer a lot of tools for brands to know where their ads can show to make sure that they knew the they know that facebook is a Safe Community for them. You say you are working for not for profits. How have you been talking with governments, for example in europe. How you worried it are you worried about the talk about encryption and the fines that have been raised . We are in constant conversation in government on issues of security and issues that affect all of us working together. We have worked with governments to talk about initiatives. We call the occ i, the online content initiative where governments can make sure terrorism is prevented and do counterterrorism work and try to get positive messages out there that stop people from doing things that obviously hurt so many evil. We also work with law and first Law Enforcement officials all over the world to make sure if there is anything we can do to support their work, we are able to do it in this area. Francine stay tuned for more sherylcebook coos sandberg in the next hour in corning including her thoughts on at content. Taylor in georgia it may turn out to be the must most expensive race ever. Voters will decide today between the democrat and republican in a race i could be a preview of the 2018 midterm election. The campaign could end up costing more than 50 million. The European Union says it is extremely worried about a u. S. Threat to curb steel. It could lead to protectionist measures around the world. The u. S. Commerce secretary says. Resident trump could adjust democrats are trying to revive the fight over the republican plan to repeal obamacare. According to a person familiar with the matter, Republican Senate leaders may try to hold a vote next week. Ocrats plan to slow down and draw attention to the secrecy in which the health bill was drafted. Global news 24 hours a day, powered by more 2600 journalists and analysts in more than 120 countries. I am taylor riggs. This is bloomberg. Francine thank you so much. Jpmorgan released a new report that shows japanese m a volume was strong amounting to almost 200 billion 200 million. The report says a key driver now is japans declining population and slowing economy which created a sense of urgency among japanese corporations to pursue outbound acquisitions. Joining us to discuss is jpmorgans global head of mergers and acquisitions. Talk to me about what is unusual about japan. What we just described in the findings of the report seems to be pretty basic. Hernan this is one of the different trends we are tracking around a different m a business. The japanese economy has been no growth since the 1990s. It has one of the most vibrant economies, gradually has been declining and there has been essentially no gdp growth since 1995. I think it is consistent with this lack of growth in the economy. What we are seeing is a gradual increase in m a activity. When you get to the year 2005 reflecting on that lack of growth we saw a step up in transaction activity going to approximately 100 billion dollars level. As time moves on, you look at 2005, there is still not much Economic Activity or a step up in m a activity. We have seen a healthy dose of activity around the 200 billion what 200 billion mark is also interesting is although that level of activity has been flat for the last 10 years or so, the percentage of outbound activity continue to increase and that is about close to two thirds of the overall activity. One of the features we are keeping a close eye on is what is going to be the next step up change in activity and we anticipate were going to see more and more japanese outbound activity as Japanese Corporate look outside of japan to find growth. M acine how much of global is due to animal spirit . People thinking better about the future. How much does it smell of desperation saying i am struggling to grow my market and this will give me something i need for my business . Say think it is fair to that when i speak to my clients, there is concern that when you look around the quarter, the next 1, 2, 3 quarters does not look growth in terms of organic growth. A lot of companies are trading at high valuations. I think m a is a mechanism to bridge the two and find impetus to really trigger growth. Tom help me with the internal rate of return over these m a and future transactions of japan. If we assume disinflation and almost a this the flechette area environment you mentioned the real gdp and nominal gdp, what does that mean for m a . Does that mean the rates are lower to get a deal done . Hernan i think the hurdle rates are lower in the case of japan by virtue of the cost of funding being essentially zero and beyond that, the fact that there are any number of Government Agencies that are very much proactively supporting activity. I think if you combine local funding with all kinds of support of Government Agencies like the Development Bank of , there is a lot of impetus and Government Support to find growth via outbound activity and that is driving rates down. Tom that is where i wanted to go. If we assume it is always not a communistic system, but uniquely structured government and private support, is the government going to continue to affect transactional transactions simply because of the structure of japan . Hernan i think fundamentally the japanese government is in a situation where there has been just no growth in that economy and no sense of inflation historically that we can anticipate. I think the government i think they are doing everything they can to generate growth in their economy and one of the ways of generating growth is to encourage worldclass companies to become more international, to be more active abroad. When we put together this report that francine made reference to. What is extraordinary is we looked at the top 50 Companies Top 50y in 1990 and the Global Companies today. Back in 1990, half of that list was comprised of japanese companies. Today there is only 1, toyota. This shows the extent of the decadence in japanese corporations where it used to be the second largest economy in the world and the most vibrant economy and right now, japan continues to struggle to find growth and inflation. Francine i know the last time you were on we were talking about m a. We also probably touched your industry in Asset Management. Do you look at m a activity and try to figure what industries will be next because that is where you can create value in your portfolio . I very much agree with the point hernan makes about topline growth being lacking and wanted that is one of the key triggers for Asset Management transactions. I also wonder whether hernan can comment on the hurdle rate for thomas point eating brought down. Down. Ng brought i am wondering whether that is a broader point as well because what i see is that the hurdle rates for m a activity or even Capital Investment really have not responded significantly to the compression of the u curve anywhere in the markets and once that realization builds and we might be facing a gigantic wave of m a. Hernan i think it is a good point and one that we discussed with client over time. Youd be surprised how many of our clients have a fundamental view of what the cost of capital is and we constantly challenge them in terms of how can the cost of b the same today as it was 10 years ago . Is the current cost of capital is it sustainable, how flat is the curve . We have a discussion on how long this is going to last. I do think there is a discussion we have with our clients on what is your cost of capital and surely it will be lower than 10 years ago. Nomics for need abe m a to work in japan . When i speak about Foreign Exchange i have never seen any company do a deal purely based on Foreign Exchange. What is true is there has been substantial changes in forex. Is ank that currency consideration although it is a popular topic. I have yet to find one ceo that has been willing to do a deal purely based on fx. They will stay us through the hour. Coming up in the 7 00 hour, arguably the interview of the day. David gura in conversation with the treasury secretary of the United States, Steven Mnuchin across all of our platforms. This is bloomberg. Surveillanceomberg , tom and francine from london and new york. We looked at china. Decision time as they announce today whether to include domestic chinese shares in the global indices for the first time. This is their fourth attempt at cracking into the msci emergingmarket. Offshore stocks are surging towards a twoyear high. Still with us is hernan germanna and andres with andrea scooter munn Andreas Utermann. As an investor, what does it mean for you, is it is is it a stamp of approval for china . Andreas not really. The index providers and the passive players are going to struggle with that, but that is not the way we look at it. Francine we talked about a lot of the Chinese Company going after companies in the u. S. Because it is security. Is there an appetite from Chinese Companies to buy a broad . Secondly europe because of cheaper evaluations or the u. S. Andreas fundamentally, china will continue with the policy of expanding abroad. I think china has in issue. By virtue of their success they created a massive and growing middle class and they have to provide services and products to the rising middle class and i think fundamentally china has entities to go out and get those services and get the value added products. Even though there has been some technical reasons why m a activity out of china has been more subdued this year, our expectation is china will continue to be a very active feature in the market and we will see entities being very market in active in the market Going Forward and that is not going to change. Tom is janet yellen the central Bank Catalyst for m a . I say that with thin in a set jpmorgan looks at the ability to affect transactions with billions and trillions of money. Is it simply about Central Banks being the catalyst for m a . Hernan i get a lot of questions regarding we are presumably finally in an environment where Interest Rates are going up, gradually going up and the question is will a higher cost of funding affect m a and my answer is no because to me, it is more important the signal of terms ofrate hikes in an indication the Global Economy is alive and well and recovering and the confidence of that gives to engage in transactions. Even though Interest Rates are going up, it is such a gradual rate that it is not affecting the cost of funding. The current environment of gradual rate increasing is good for m a because it gives dealmakers confidence that they are investing at the right point in the cycle. Tom what is a better that what does a better m a environment me for portfolios mean for portfolios . Andreas it all depends on the capacity of the management teams to execute. It is very much a casebycase and sector by sector situation. If you look at the asset as a sector,dustry i am not sure the m a activity will add a lot of value. This is a game of consolidation, just like the Banking Sector needs to shrink in terms of its overall impact on the economy and the Financial Markets. Francine that is probably not the way your industry presently not the way your industry is going. I hear there is going to be more consolidation of asset managers. Andreas exactly. Francine so it will be consolidated, but you do not think it is a good thing . Andreas it will be consolidating amid the backdrop of difficult earnings. Can you give us two or three industries where we are going to see a lot more consolidation and its Asset Management one of them . Hernan i think we have already seen a lot of consolidation in Asset Management. We have seen a lot of m a activity over the last 24 months. I think the one sector that continues to be somewhat underrepresented is anything to do with Natural Resources and we havent see that seeing that because somebody has a strong point of view of what anyone commodity is worth and where it is going. As we see more of a consensus around the price of any number of commodities, i think one of theses is we should see more m a catching up in the Natural Resource space. Francine you can also ask some direct questions to andreas by going onto tv and ask the guest a question. This is bloomberg. This is bloomberg surveillance. I am taylor riggs. Lets get the Bloomberg Business flash. Yancol agreed to pay almost 2. 5 billion for a mine. Rio says shareholders should vote for the offer. That as a report billionaire plans to retire by next year as chairman of c. K. Hutchinson holdings. According to the wall street journal, a date has not been specified, but is likely to quit by his 90th birthday. He is the richest person in hong kong and number two in asia. He is worth almost 33 billion. That is your Bloomberg Business flash. Tom thank you so much. Lets talk about active passive management. It looks like a twist on it. Andreas utermann is a chief Investment Officer of allianz global investment. What is new ground is the continued predominance of investment. It may be facebook, netflix, amazon as well. How do these hugely successful Tech Companies like apple affect the asset activepassive debate . Andreas it is in a very significant manner. If you look at the challenge that presents, it is significant because as they grow their is they it represent an ever bigger part of the indices and that means you will have a significant concentration risk. It pushes an active manager to either take significant bets on these very Large Companies or to deviate very vividly from the index by buying midcap stocks that are smaller and that can lead to short and midterm volatility, which is something i think investors who invest with active managers will have to get used to. Tom if you take apple, microsoft, amazon, and facebook, it is about 10 of the s p 500. Bring up a chart. Jason demanded this chart because he ordered that throw things from amazon last night. Here is amazon back in 1997. For those on radio, it is the easiest chart, just a Straight Line from the lower left to the upper right. The persistency here is extraordinary. The you get on that trend in overweight you do you get on that trend with overweight . How do you play that governing doug are not known as the is us how do you play that juggernaut known as the bezos affect . Andreas you have to be very close to Companies Like amazon to determine whether it is right to be with them. So far, i think we have taken a longterm positive view on amazon and as a consequence, we have not suffered from being overweight. All the the we assume carmakers do we assume all the carmakers will be taken over by Technology Stocks . Andreas i think that is going a bit too far in our analysis. People have talked about google disrupting the Financial Services sector, but people were not thinking about the regulation is severe. As a more likely scenario is these companies will compete on the margin and the impact on the margin of these companies, they do not want to take over the whole sector. Than one of Service Rather owning the whole value chain. Om Andreas Utermann we got that interview with the treasury secretary in the 7 00 hour. David gura will do that in washington. Drew matus in the next hour with metlife. He is an optimist on the American Economic experiment. This is going to be really good. If you are part of the doom crew, you need to listen to mr. Matus of metlife. There is no doom and gloom on washington, just silence. We will talk to our kevin cirilli. This is bloomberg. Tom when the banks change, i change. Governor carney looks for a brexit that works for all. Sterling weakens political support. Obamacare could become trumpcare. Maybe we call it mcconnellcare. We just dont know. Gop secrecy causes a slowdown. In this hour we consider the religion of Dividend Growth and share buybacks. This is a count of 8 year bull market and you still dont love it. This is bloomberg surveillance this is bloomberg surveillance from our World Headquarters in new york and london. I was really taken by the governors comments and that abrupt move to sterling. It is right. Francine i think there are two things i learned today from that speech at Mansion House. We heard from mark carney, the governor of the boe and the chancellor. The chancellor saying he wants to prioritize Financial Services in the negotiations and mark carney saying that he is not ready to raise rates because brexit will have an impact on the economy. Tom and a clearly lose clearly moved the market. Right now with your tuesday first word news, here is taylor riggs. Taylor prosecutors in the u. K. Have charged barclays and four former executives with conspiracy to commit fraud. The case involves millions in paid paid to investors in cutter qatar. John barley, the former x wealth t chief, chief. It shares of barclays are little changed. In the u. S. , President Trump is blaming what he calls north koreas brutal regime for the death of the College Student. Beingarmbier died after released from north korea last week. Three other americans are still jailed in north korea. The man accused in the London Mosque attack is being described by his mother as disturbed. His mother told his told the and her son is no terrorist that he had been on medication for Mental Health problems. Theonsequences of leaving block will be substantial. After day 1 of brexit talks, reporters were told emphasized their desire to reach a fair deal. Global news 24 hours a day, powered by more 2600 journalists and analysts in more than 120 countries. Riggs. Ylor this is bloomberg. Lets go cross asset and look at the data. Very steep valuations on equities. We have a continued list in equities. This morning. Ng crude oil cannot find a bit this morning. Really watching oil this week. Only 47 down at the bottom. I will let francine talk about sterling. This is what i am looking at. You are right, that deal is all about the chancellor and mark carney from the bank of england. They really gave a little bit of an impact on the pound. It was dropping because of what mark carney said that he cannot raise rates anytime soon. You can see the pound at 1. 2698. I am looking at gilts and what the treasury market is doing. Tom we are going to do this with drew matus in just a bit, but lets go through it. This is the twin deficit. 1980s heredreaded with a massive combination of a budget deficit and a trade deficit through to the world is going to come to an end and the budget deficit, down we go and we get down to a shocking 12 during a crisis. The world is going to end and we will wer here again and be speaking about the twin deficit in the coming months as well . Francine i have a very keen eesque chart. What this basically shows you is financial conditions and falling unemployment in the u. S. Are offsetting the recent moderation in inflation growth. If you are a regular listener, tracksows a very simple and in the last couple of weeks it went further above neutral preto something to keep an eye on. Tom let me bring in the chief Market Strategist for metlife, drew matus. For years, an optimist on the american economy. Are you still an optimist with all the political turmoil in washington . Drew i am still an optimist. It is hard not to be optimistic. We are moving toward the longest had. Ery the u. S. Has ever when people talk negatively about the u. S. , i dont know what they are looking at that i am missing. Tom for those of you on radio, this is a twin deficit chart. A combination of the budget deficit along with the trade deficit. I would suggest all the economists would suggest this is malarkey. Is this going to be a story discussion in the next two or five years . Drew i think it will be. I think the budget will be back in focus in the next 25 years. If we get tax cuts, the question is how big and what that will do and then, of course, everyone is paying attention to trade because there has been a lot of noise, but not a lot of movement in terms of the Different Things that have to happen on the trade front. Francine if or when. When are we going to see this . If it gets pushed if tax reform gets pushed into 2018, are cfos going to be disappointed and will we see a correction in the meantime . Drew i think you will see some people disappointed, but from my point of view, we dont need them now. We might need them into two dozen 18 so that might actually be a preferred time to get tax cuts and tax reform rather than getting them through now and 2017g them it impact when we have a low Unemployment Rate and probably do not need them. Signs thatre there we can read to know when the Trump Administration will focus on it . Does he get distracted because of all this political noise or as an investor or a ceo, do you just kind of think it will be at the end of this year . Iew i think from everything have been reading and the experts i have been talking to, it is looking like a later this year story. As a get if it gets pushed into 2018, that might actually be better. Tom within your work as a Market Strategist, what does curve flattening signal to you . ,e are nowhere near recession but the curve flattening we are seeing, what does it signal . Drew i think it signals a lot of people have not bought into the reflation idea and if they do, they are underestimating the amount of inflation that could occur from a reflation trade. I think that is why you see things flatten. The fed is continuing to hike rates. Inflation. Een when no one expected it to an they are responding in a way that their Life Experience dictates whereas i think a lot of the people trading nominals maybe have not seen high levels of inflation in their lifetime. Tom this is an incredibly important observation. Bring up the chart here, spin on 10r here and look at the 2 spread through to blue circle is the trump election the day after the yellow circle. Enthusiasm and we flatten out to a yield curve. When i look at that, drew matus, it signals to me idea of a market completely disassociated from the fed and you say you just dont see the inflation coming. Drew what i am saying is i dont think people see inflation or inflation risk coming. Tom people are the fed . Drew people. I think the fed sees it. Why did they hike rates . We dont see a lot of inflation. Why would they do that when we see things slowing down . Do that because they having worked there, there is a lot of Institutional Knowledge that exists. They are seeing unemployment dropping into a right that is typically inflationary. Francine what if they are wrong. . I know they have a lot of knowledge and dozens of economists, but what if we are measuring things differently that the economy has shifted and we cannot really grasp it . Drew if they are wrong, we have rates returning to a more normal environment which would actually be a positive and stimulus for growth. In some ways, if they are wrong, they are going to be wrong for the right reason and it is still going to have a positive impact. Higher rates at this point in the u. S. Economic cycle are better than lower rates. People will act more normally, people will save potential he a little bit less because when they look out of retirement, they understand they are not always going to be reinvesting is just a better environment for everyone if economicually reflect activity and that includes the policy rate. Tom we will come back with drew matus hear from metlife. Charton, our single best this morning. Coming up, david gura in conversation with the secretary treasury of the United States. Looking forward to that across all of our platforms. This is bloomberg. Taylor this is bloomberg surveillance. Private equity firm cap loma capital is supposed to be close to a deal to buy rexall for 4. 6 billion dollars. The wall street journal says an agreement could be announced this morning. It represents a 28 premium to where rexall closed in may per rexall closed in may. According to people familiar with the matter, the deal would allow tesla to buy facilities in a developing zone in shanghai. That would give the Company Better access to the Worlds Largest auto market. Early tomorrow hong kong time, msci will announce whether chinas domestic shock shares will be added. Dominated shares are at it, they will be dwarfed by other stocks already part of the msci developing nation index. Tom thanks so much. It has come down to this. They sent an island nation in a Congressional District in georgia. How about the quote you are no gentleman and you, miss, arnaud lady. Are no lets start with a why for our global audience. Why is the president tweeted about the district just east of the mansion of scarlet ohara . John word to win this race, it would give democrats momentum into the midterm election. This is the seat that is vacant as a result of the president appointing tom price to be dhhs secretary. This is the most expensive congressional race in history already costing more than 50 million. Tom within this is the idea of who is going to win. Who is expected to win or is it that close . Heaven it is a nail biter, but republicans have had this as a stronghold. Karen is the state former attorney general. Someone who has really been a republican mainstay. Newt gingrich used to hold this seat. This is a republican seat that has been republican for decades so should democrats win this, democrats are going to use this as essentially they are going to use this as momentum for midterms. Tom lets go to something serious, health care rich legislation. A democrat idea of slowing down senatorial business . It they want. N do last night they made a big display on the floor in terms of Health Care Policy trying to say this is all being done in secret. The publicans, some of them, are frustrated who the republicans who are brokering this dear deal are doing so behind closed doors. No hearing, nothing in the scores. No cbo you are seeing frustration from the left and factions in the right. Mcconnell wants to have some sort of deal out there within the next couple of weeks. Rushing this through really does set the stage for midterm elections. Francine talk to me a little bit about north korea. We had this horrible death of a 22yearold College Student from ohio and it puts donald trump in a tricky situation in how to deal with that regime. Kevin absolutely. He said he wants to put pressure on the chinese economic pressure on the chinese to help them do this. This is a terrible tragedy. We all saw the headlines of him coming home, but now he has passed away. This, of course, just a new layer to this dynamic and we should also note that the president has also been working not only with the chinese, but the japanese as well to take on north korea. Francine do we know where china stands on this . Are they willing to take up the challenge the Trump Administration is giving them . Kevin yes. Yesterday the wall street journal, commerce secretary wilbur ross gave an interview and said they are speaking daily with the chinese in terms of economic ties on a host of issues, not just agriculture. In the next round of things between these between the chinese and the u. S. , that is expected to be announced in the next couple of weeks. It is unclear to us how much pressure the chinese are putting on north korea. As of now, the word coming out of the white house suggests they are doing what the u. S. Wants. Kevin cirilli, our chief washington correspondent. Let me bring up the chart. Oil has just moved through 44. Back to june 6, those of you on radio it is three legs down of the no bid on oil. Here is the latest, 44 down to 43. How do you fit in a consistent grinding decline in west texas intermediate into the welfare of the nation . Drew there are standard ways of looking at it. Oil prices go down, usually it helps the consumer. Consumers have been the mainstay. Anhurts investment, which is unusual thing and something we had to start thinking about recently. Metlife has a Commodities Team that looks at oil every day. Our range on oil is just above where it is right now. This isnt an overall surprise for us. The recent move probably is a little more than we were anticipating. Have toless, we dont do a giant rethink of our thought process around the complex. Francine what does it mean for Inflation Forecasts . To the extent it actually stimulates the consumer, i would be thinking more in terms of what it might do for consumption and what that might do for employment rather than looking at what it might do to the total inflation. I think core inflation, when you look at how that has behaved, is much more stable obviously because that is what it is designed to be. That is what the fed is also looking for and i dont think we should get hung up too much on looking at oil prices as a reason for the fed to conduct policy. Tom where is nominal gdp . Add intake real gdp and this inflation, can nominal get out over 4 . Drew i think it is over 4 and i think it will stay over 4 . The tricky thing than is if you have nominal gdp they that being there, where should 10year yields be . The answer is they should probably also be 4 or higher and they were not. This is very important insight, maybe we will come back on top on that. Nominal here and the 10year has got to be here or there as well. Coming up, lauren summers. We talked to one treasury secretary in the 7 00 hour, how about a former secretary in the 11 00 hour . That is bloomberg. Francine bloomberg surveillance with tom and francine from london and new york. Chiefke with facebooks operating officer Sheryl Sandberg. She spoke exclusively with bloomberg on a trip to the islands the Alliance Advertising conference. The coo gave first give us her take on a range of issues, including the future for ad sales growth. Our biggest message is the small screen is big. People have moved to mobile and businesses are catching up. It is now the case of the average u. S. Consumer and these numbers are duplicated all over the world, is spending about four hours a day on tv and hours on digital, which is mobile. It is an exciting time to be a marketer because people are carrying around this device that lets you reach them all the time and brands, product services, they have always been part of our daily life from the toothpaste we brush our teeth with to the shampoo we use, to the car services are the cars we drive. All of this is part of our daily lives, the now marketers can reach us hopefully with messages we want to hear as part of our daily experience. That is Pretty Amazing and the explosion of creativity, the con advertising festival is about the creative community. Its about creating messages that resonate with people and that want them to be part of their daily lives. This is almost playing into the discussion Mark Zuckerberg himself started of community building. Offline and online. How are brands like to be able to plan to that . Communities are so important and we are very focused on of usok from mark and all on how we build communities that provide support for people offline and online. Brands are huge part of that. Is sherylthat sandberg, facebook coo. Lets bring back drew matus from metlife. Last week we had a huge correction in tech stocks. This week, they are rebounding. What were investors nervous about . Drew i think what investments are nervous about our valuations. Everyone is interested in valuations. Everything looks expensive and it looks expensive because we , a very very long cycle long expansion and we have had very little volatility in the , with lowd so Interest Rates, people keep looking for risk and looking for risk and it is driving valuations to places where people are not that comfortable with them. Francine thank you so much drew matus of metlife staying with us. Coming up, bloomberg daybreak alixcas alex sack sacks. This is boomer. This is bloomberg. Todays beautiful weather, around 30 degrees celsius, but we need to keep an eye on the pound after we heard from mark carney, saying he is worried about the impact brexit will have on the economy, so we are on london weather and follow on currency. Lets get to the first word news. Georgia, it may turn out to be the most expensive brace for the house of representatives. Voters will decide between jon ossoff and carry handle in the ace that could be preview. The campaign could end up costing more than 50 million. The European Union says it is worried about the u. S. Threat to curb imports. It could lead to protectionist measures around the world. U. S. Commerce secretary says President Trump could adjust steel imports if there is a Security Threat from foreign shipment. Democrats are trying to revise the fight over the republican repeal appeal obamacare. They tried t will try to hold a vote next week. News 24 hours a day, powered by analysts and journalists. I am taylor riggs. This is bloomberg. Market,you are in the it is another interview. If you are not in this bull market, this is the most important interview of the year. William changed how wall street things about Dividend Growth and share buybacks. Joins us from metlife b bill joins us from metlife. Yearbook changed the dialogue of the use of cash, will it persist into the future with new valuations . I think it is still going on. At the end of the day, cash generates the value of any business. What has been unusual is the valuation of that cash flow has been hugely expansionary. At the end of the day, if you cannot generate free cash flow, you are not generate business. Which has toa read do with health care, Nursing Homes and that kind of thing, do you want to make their 2 a Straight Line . Iss is how you do it, this priest 101, what do these guys due to generate cash flowing this to be did to shareholders . Cash flow and distribute it to shareholders . Taxes andll cash planned expenditures, when you get to that point, there are five things you can do it that dollar, pay cash dividend, payback stock, pay down debt, make an acquisition or reinvest in your business. Tom we just talked about this. This is winning inactive management. It follows with a great chapter in cash flow. Highdefinition, i cannot take advantage of by definition, i cannot take advantage abusive cash . It is in that location of companies, some of which made great allocators and some of which may not be. Tom why is passive outperforming . It is outperforming impart because when you compare it to an actively managed fund, usually, managers have a little cash. Through the end of 2016, it was up 98 percent. Most active managers tend to equal weight their portfolios. If you did that, you lost. Some active managers will invest outside the benchmark. Maybe you are in the russell 1000. If you did that, you lost. For the last five years, it was an amazing. It it was an amazing period. Was multiple expansion. If you want another strange thing, if you look at the msdi index, it was up and earnings were down for the msei. So you had this weird situation i was a company, the earning levels of 2016 was below 2012 but the index was higher. How was that possible . It is because of qe and the discount rate was dropped through that time. That is over, by the way. Said if you ever are sitting on all of this cash, how do you get to reinvest . If we are going to have it Sustainable Company that grows, you need to be able to reinvest that money. Isliam my favorite question how do you allocate capital . If they tell me, we reinvest every dime internally, that is a bad answer. Youd like them to say our cost of capital is whatever they want at 5000to that, we basis points to come up with a hurdle rates, and we will invest internally or require at that rate or better and below that, we will give the excess cash back. You have to decide if they are good at it. That is what do analysis is all about. Can reinvest the incremental dollar capital, the best thing to do is reinvest or inquire. Francine can reinvest the do you need incentives for that . William no. If you are running a company in the interest of shareholders and this is a debate sometimes i think it is an optimization problem. As long as you are doing the right things, i think you are trying to maximize the company. Tom william priest is with us. He owns a shareholder yield in free cash flow. Toent to bring in i want bring in jack. Othersllenge is many in thenancial crisis and finance recovery, what is your verdict on the use of cash Capital Allocation . It gets to be confusing because under the jack welsh regime, you had a stock that got up to almost 50 times earning and two thirds are coming out of the finance operation, and they have no competitive advantage there. When he came in, he had a tough pass. He had to recreate or reinvent that company. When he did, which doesnt look like it worked for him, but i think the jury is out still, sold businesses for nine times cash flow and bought them at 13 times cash flow. In that process, that explains part of the slope of the charts, i think he had a tough time but he did rebuild or reshape the company. Or four businesses actually have real expertise, so i think the jury will be out with respect to his legacy. Tom william priest with us today. Two wonderful books on shareholder yield and active and passive debate. We will come back and we have a great chart for your. In this 7 00 hour, david gura in secretaryon with u. S. Of treasury of the United States. There is an awakening in washington, d. C. This is bloomberg. Taylor lets get to Bloomberg Business flash. There is a report li plans to retire next year as chairman. According to the wall street journal, he is likely to quit by his 90th birthday next year. Ps the richest person in hong kong and number two in asia. He is worth almost 33 billion. Stanley fischer is morning not to forget the lessons of the house in crisis. A long period of low Interest Rates may have consumed it to home rising prices. On the other hand, he said the worst lending practices have been curtailed. The future and it doesnt include the 747. They have dropped a category from its annual twentyyear Market Forecast trade instead, boeing predicts airlines will use twinengine jets for longrange flights. The company does not see much of a future for airbus is a380. Mbo eight 380 francine mark carney sent the pound lower after he said it is in time for a rate hike. Blacktieed annual gathering, which includes a keynote speech. Chancellor Philip Hammond spoke to delegates this morning and gave his saying on the brexit negotiations and the impact on Financial Services. The financial ecosystem that underpins this activity is large and complex and Critical Mass is important. Let me be clear about this, fragmentation of Financial Services will result in poorer quality, higher price products for everyone concerned. Francine joining us from bloombergs u. K. Government team rob in newin york. Rob, great to have you in the london studios. Thanks for joining us. What do we know about what kind of brexit we will get or what kind of government once . Rob two questions that are up in the air. Two weeks ago, the government had been agreed position and the priority was controlling borders and the priority was immigration. Hang on ae saying, second, but they were silenced. Then we had the election and that you have Philip Hammond coming out, mark carney coming out and saying, we need to talk about jobs and the economy. Question to what British Government wants is a difficult question to answer. Francine what does that mean for negotiations . Rob [laughter] let me knowrst, what you want and then we start talking. Rob that would be tempting. At the moment, negotiations are though nothing has changed. Yesterday, david davis went to kick them off. There is a concession on timing, aich britain denies there is concession on sequencing of the talks. What all of this means if i were a european leader, you have to look at theresa may and say, how long has she got . That is another question. Tom do you presume the United Kingdom lid really writes a check to europe . Do they do it through a bond transaction . . S the money in an account how does this happen . Rob [laughter] i do not know the mechanics, but the assumption is that you care a will pay money. Theresa may had this phrase that we will not pay last sums. Pay vast sums. The u. K. Is conceding a bit of ground on that. We will be paying what is owed, even steve baker o even namerdline saying so. Tom do you care about any of this . Does this fall into Market Strategy . People are fixated on a wide set of politics like brexit, the president , does it matter here or do you move forward, blinders on . If you look at it it does matter. There are two main events in the uncertainty chart, brexit and the u. S. Election. Since then, this uncertainty has been coming down, but a days a persistent theme, which is people are concerned about politics, policy, be it central bank or fiscal. That is not a great environment. Know you do not have a crystal ball, but how long can this government last . Rob i do not think it will last five years. I do not think theresa may will be Prime Minister when the government fights its next election. Is a strong case they will have to have another election within the next two years because they will not get a majority but they do not want to do that. Those are the dynamics. May less time in the government but i do not know how much time. Tom two are for the update. I am certainly will see you again on brexit. We have a really Great American chart coming up. If you are at a trading desk, where ever you are, tv , you can watch drew matus and click on the past episode and steel that chart. Steal that chart. This is bloomberg. Francine this is bloomberg surveillance. I am Francine Lacqua in london. Tom keene in new york. What are you most looking forward to . David we have not one, but two u. S. Treasury secretarys. We are joined live by Steve Mnuchin, the present secretary, and Larry Summers, who served under president clinton. We should get a rounded you about what is going on with tax andcy, the budget, fiscal Monetary Policy and more, so we should get a good view. Tom that is going to be wonderful. Secretary Larry Summers writing oped in the washington post. It is an important one. With drew best chart matus, this is a profound chart. Years, the glory days of investment in america with a solid 5 gdp investment and it is down over the next 20 years, yellow line in the recent decade, we are down 64 in investment in america from the glory years. How do we get this back . Do we need government policy to get investment back in america . Needed,u do not always but it helps. You can see the spikes in productivity 10 years after a u. S. Government program to reach a new goal, whether the space race are fighting the cold war, massive investment leads to better productivity. Tom drew matus is doing this perfectly for us. All you need to know is the end of the glory years, a 5 gdp, rocketingctivity went and it is not anymore. Does the tax credit get it going or is it globalization abroad . Drew to be honest, what will get it going more quickly is higher Interest Rates. If rates go higher, people extend the duration of their thinking. What they want to do then is invest in Companies Investing for the future. If you are going to put your money where people are investing, people will invest. Tom this goes back to the years ago, if you go to the zero bound, where we have been, the animal spirit gets sucked out of the system. Francine i wonder whether the difference in the economy now compared to 20 years ago into can make parallels. And what research you look into to look at that today. When you think of the financial crisis, are we measuring things are looking at things correctly . Drew i think there is a lot of mismeasurement. Areas is they productivity story. When people talk about productivity means structural he week, they are saying Interest Rates are permanently lower. The evidence and the psycho productivity, it is clear we are on the low end of the cyclical cycle productivity rather than a change in the structural dynamics. Thisvery quickly, within is the idea of where gdp will be. We have secretary Larry Summers andsecretary Steve Mnuchin, talking to percent gdp, what did secretary summers get wrong . Drew he is missing that productivity is moving out of the tiny fraction sector into the Service Sector. That is not something we have seen. Most economists believe the majority of the improvement comes from manufacturing and now it is coming from the Service Sector or toward the Service Sector. Francine i met you need to go for radio, tom. , when you look at your ideal portfolio, what is your best investment . Drew do you want to be closer on the duration side. We are in a rising rate environment. When you want to make sure you have money to invest Going Forward, you want to be shorter duration. Depending on whether or not how important liquidity is too, sometimes giving up liquidity is not the worst. Francine overall, the fed says three hikes. When needs to happen for that to be adjusted . Drew you need to see a rethinking of how and when inflation can develop. I am not sure you will see that in terms of the Market Pricing in the fed. That doesnt mean the fed cannot surprise. Tohas become the fashion talk about the fed surprising markets, but we should bear in mind the fed seems consistent they are moving forward on the break type cycle. In the past, they have done that and pulled back in the past and not moved forward. That is something to watch. They beat this time they will go through with it. Francine does the biggest risk come from the United States or outside the United States . Drew i think inside the United States. I think the biggest risk to the economic recovery is the behavior of Financial Markets. If Financial Markets become too volatile, it might cause ceos to pull back on investment and hiring plans. And because consumers drive the economy, we have to be careful in how that might impact consumer behavior. Francine great to have you today. Thank you for coming in. That is drew matus of metlife. We are looking at pictures of , organized by the Business Group in berlin. You can see him giving a speech in front of a background that is blue. Later today, Steve Mnuchin sits down with david gura. That will be on radio and on tv at 7 00 a. M. In new york, 12 00 p. M. In london, and then we have new secretary of state and past secretary of state. We also speak to Larry Summers. This is bloomberg. David making brexit work, britains top economic leader should stick growth as the focus of brexit negotiations. The fed speaks and the dollar listens after a second inflation is coming and more hikes are coming, also. There may be conflict in washington, but Global Equities continue to move up. Welcome to bloomberg daybreak on this tuesday, june 20. I am david westin in new york. And steel is on assignment Jonathan Ferro is off, but Caroline Hyde is with us. Welcome to the program. Caroline great to be here. We will be digging into not only the Facebook Chat but i am keeping it home, a storyboard foriotism, a story patriotism. Check out the pound. We