Transcripts For BLOOMBERG Bloomberg Surveillance 20170817

Going on. Afteran stocks slipping we had a mixed session over in asia. Government bonds followed treasuries higher. Investors trying to figure out what the reduced odds of another Interest Rate hike mean for them. Euro drifting lower before the ecb releases minutes of its latest policy meeting. Zinc trading near a 10year high. That is a very quick snapshot of the markets. Now lets get to the bloomberg first word news. Sebastian south koreas president says donald trump has agreed to ask for consent before taking any military action against north korea. Gameirst News Conference and he said only his country could greenlight a strike. He warned that kim jonguns regime is approaching a red line. White house chief strategist steve bannon has gone public with his long simmering feud with some of trumps top economic advisers. Prospecthe american that he often battles with Steven Mnuchin and gary cohn. Benin did not immediately respond to request for comment on the interview. Minutes from the fomcs july meetings shall policymakers scratching their heads about why inflation remains low. Officials still see a gradually rising to their 2 target, but many saw some likelihood that inflation might remain lower for longer than expected. Britain is considering allowing European Union citizens to travel freely to the country after brexit. E. U. Nationals would be free to visit, but working, studying, or settling their would require permission. Global news 24 hours a day powered by more than 2700 journalists and analysts in more than 120 countries. Im Sebastian Salek and this is bloomberg. Ceocine americas first president is being abandoned by big business. Two of Donald Trumps Advisory Councils have been scrapped after chief executives left. Blackrock Ceo Larry Fink said events in charlottesville were nothing short of domestic terrorism which needed to be condemned unequivocally. Jpmorgan boss jamie dimon said it was a leaders role to bring people together, not tear them apart. It marks a stunning rebuke for the man who pitched himself as a savvy business leader. The former treasury secretary Larry Summers also says those plans are probably out of the window. Taxaybe there will be some cutting, but i think the reform,s for structural which was the aspiration the president laid out, are minimal at this stage. Francine lets get more with our Global Business correspondent, stephanie baker. We are also joined for the hour by bob janjuah and Ralf Preusser. Thank you both for joining us. Stephanie, what happens today . Yesterday we had the councils being dissolved, a lot of ceos saying, we dont agree with the response of President Trump. Does he regroup and refocus . Stephanie we started off with a trickle of ceos leaving, then it turned into a torrent. He tried to get out ahead of it by disbanding the council. We are seeing an unprecedented rift between Corporate America and the u. S. President. Obama of course was not perceived as a probusiness president , but this is a president who pitched himself as the ceo in the white house, isolated from the top titans of Corporate America. I dont know how he moves on from here in terms of trying to get his agenda through. I think i agree with Larry Summers that many of them probably decided to jump ship because they realized the councils werent getting much done anyway. It looked like it was going to be hard to get tax reform or infrastructure through. So why continue . Francine what i cant get my head around is, in times of controversy, he could focus on tax reform. He could focus on infrastructure. Trouble get him out of a little bit. Why not focus on that . Stephanie i think that is what his advisers are telling him to do, stay on message. As weve seen time and time again, he cannot stay on message. Adingnnot help himself w into these other controversies. Tax reform is the kind of thing you have to stay on message constantly. Put pressure on members of congress. Without, it is unlikely to get through. Francine how are the republicans dealing with this . Stephanie youve seen the republicans come out, not naming him in many cases, but come out with very strong statements about what happened in charlottesville as a contrast to what he said on tuesday. He does look isolated from republicans on the hill, which will make it harder to get his agenda through. They havent come out on tv, criticizing him by name, so they havent gone that one last step. Francine bob, we will talk about the fed and fomc, but does this impact fed policy or dollar and treasuries . Bob i think it does. In the context of fed policy, the fed would have to allow for some kind of fiscal policy taking effect. The more likely that is, probably the more likely the fed is to hike. The less likely that is, the fan can sit back and look at the data. I also think it affects this kind of on shoring thing. Investment into the u. S. I think all of this stuff really arms that. Francine do you agree . It is difficult to see the real impact. You have an america divided in turmoil. For investors, what does it mean when councils dismantle . Ralf to stephanies point, given those councils havent done very much, i dont think it is that big a deal. Where tax reform is concerned, to me, it is down to congress more than the white house. I guess the risk we face is at some point the Republican Party will have to decide whether they want to go into the midterm elections with the white house or against the white house, and that is going to determine the success and likelihood of tax reform this year. Carefulso far been very to emphasize that their forecasts are independent of any hypothetical fiscal push, possibly taking a more realistic view of the chances. At this point, it is not like the rates market is pricing in anything. Francine what is priced in . Let me bring you to the outlook. You can see that economists are not quite as optimistic about growth in the u. S. As the president is. You can see that yellow line taking off. You have the median forecast. Does this go back to divisions in the country or reality that is not quite taking fruit, or do you just ignore this as noise . I guess my answer would be the same as about the feds dots. You ignore the forecast and look at what the market is pricing in , and structure your views around the risks relative to those forecasts. Despite all the negative news out of the u. S. Over recent days and weeks, i would argue that the rates market is poised to go higher rather than lower, because we can only really go lower if we start pricing in cuts. That would take a massive change in outlook. Francine do the markets look at what is priced in in terms of this division that stephanie was talking about, also in congress, and the dot plots . Bob i think markets are one thing and i think markets are functioning off a whole bunch of different metrics. Primarily the fed. The point i was trying to make is about the real economy. That actually matters in the context of what is going on. I think that is where the longerterm damage is. The longer we have this uncertainty in the white house, this almost bipolar kind of behavior, the longer that persists, the bigger the problem will be. For markets in the near term, it is all about the ecb, the fed, those kind of things. They are slightly different things. Francine wonderful. Thank you so much. We will get back to the fed. Thank you to our Global Business correspondent. Stay with surveillance. Plenty coming up, including data versus theory. You fed officials need to rip up the script . The latest fomc minutes next. Plus, the British Government considering visa free travel for e. U. Nationals. This is bloomberg. Francine this is bloomberg surveillance. Lets get straight to the Bloomberg Business flash. Sebastian companies behind the most popular u. S. Credit cards say they are severing ties with extremist organizations that incite violence. Discover is ending agreements with hate groups. These and mastercard said they are coming off a number of sites. The moves come after they saw pressure in the wake of the violent protests in charlottesville. Tencent shares have risen after it posted record profits. The chinese internet giant is billion,ord 2. 7 topping analyst estimates. The companies benefiting from its smartphone game. Shares in Cisco Systems have fallen after it predicted another revenue decline as the business tries to remake itself. The Company Whose machines form the backbone of the internet said revenue in the current period may decline as much as 3 from a year earlier. Ceo Chuck Robbins joins us at 2 30 p. M. U. K. Time. That is your Bloomberg Business flash. Francine now lets talk about the fed. The battle between data and theory. That is how one analyst described the situation. Minutes from the fomc july meeting showed officials scratching their heads about why their models arent working. Us, bob janjuah, client advisor at nomura international, and Ralf Preusser, global head of rate strategy at merrill lynch. Range weves the seen. What will happen to them from now on . Ralf we think theyre going to go higher. It is a question about whether or not the market is willing to go the extra step and price in the end of the hiking cycle for the u. S. It is a question of what impact you believe the fed Balance Sheet will have. I dont believe transferring 685 billion worth of treasuries into the private sector by 2020 isnt going to have an impact on prices. I think rates will move higher. Last night didnt really tell me anything new. We all know the phillips curve models are challenged in the current environment. At the end of the day, the noise the fed is making about financial conditions can only be squared if they believe the Balance Sheet will actually impact 10year rates. If it wont, they will hike more, not less. Bob rates do need to head higher. I think the fed is going to be i think oneive and thing we dont talk about today, but we were talking about a few weeks ago, this issue of financial conditions. We have this inflation gig. Becomes astability bigger and bigger theme in public, certainly behind the scenes, so im with ralf. I think were going to see higher rates. I think terminal 10year yields are probably three and something. We are definitely heading that way. Francine talking about the Balance Sheet, we have a nice little breakdown between securities, treasury bills, notes, how messy is it going to be for the market . Ralf it cant not have an impact. What we also have to take into account is what is going on at the ecb, the other big liquidity providers globally. I think if were going to get some kind of coordinated maybe japan is to one side, but coordinated tightening, either rates or scaling back on qe, it must have an effect. Francine but we keep on being told not. Let me bring you over to the financial conditions easing despite rate hikes. We brought it back to 2015. Is this something the fed will start looking at more . Ralf i think they already are. This isnt the first time the fed brought up financial conditions. Dudley did his postmortem on what went wrong in the 20042006 cycle based on the fact that the fed was ignoring conditions and helped create the subprime bubble. That is why the Balance Sheet discussion came back onto the agenda sooner than originally benchmarked, because they are looking for tools to tighten financial conditions. If the market is right, and the Balance Sheet unwind will leave treasuries unaffected, that will force the fed to do more elsewhere. Ism both sides, the argument for steeper curves and higher 10year rates. Francine thank you so much, Ralf Preusser and bob janjuah. The fed isnt the only central bank with an inflation situation. We will talk about ecb. We also have some minutes being unveiled later on. This is bloomberg. Francine this is bloomberg surveillance. The euro area economy is in focus with julys inflation data out in just over half an hour. It is expected to come in at 1. 3 , below that target. A few hours later, we will get insight into mario draghi inking. Still with us, bob janjuah, client advisor at numeral international, and Ralf Preusser, global head of rate strategy at merrill lynch. Bob, how much more difficult is it, or how much more likely is it to have a policy mistake from the ecb than it is from fed . Bob entirely possible. The onege here is im focused on, which is probably different from what ralf is focused on, is the risk in the eurozone. We must talk about the italian election. Francine it could be next year. Why worry now . Bob if we start scaling back on the Balance Sheet, and lets say you get a five Star Northern League type of alliance which is pushing for a referendum on italian exit, yields arent going to be where they are now. At the same time the ecb has pulled back its Balance Sheet tool, are they going to go back in three months later . They need to focus on the rate side of things. I think the focus on the Balance Sheet . Rancine ralf ralf i didnt think i would expect to the more bearish than bob. I think the policy mistake is already baked in the cake. Since december of last year, when the ecb reduced qe meaningfully. Weve always seen a massive tapering of the support the ecb expends to the bond market. It has brought with it a very substantial tightening of monetary conditions. If you look at the move in real rates in europe, the entire effect of qe has already been unwound. Monetary conditions today are tighter than they were before qe was launched. Yet we are talking about inflation at 1. 3 and the ecb forecasting exercise where if they apply their own sensitivities mechanically, they might have to revise their 2018 number. Francine where do bunds go from here, and where does eurodollar . We have a chart which shows a spread between treasury and bund between u. S. And euro inverted. This kind of tells us the challenges ahead. Ralf toomey it has been a dollar trade. Weve seen dollar weakness across all majors since the beginning of the year. The euro area is suffering from the unwind of the trump optimism more than any specific expectation of ecb policy. That total correlation between rates and fx, i dont think we will see the correlated anytime soon. Francine Ralf Preusser and bob janjuah stay with us. We will break the latest u. K. Retail sales data. We will have talk on brexit negotiations. This is bloomberg. Francine you are watching bloomberg surveillance. Lets get straight to the bloomberg first word news. Sebastian President Trumps business forums have been disbanded after ceos quit. Former treasury secretary Larry Summers says the administration is unlikely to be able to enact significant tax reform. Maybe there will be some tax cutting, but i think the reform,s for structural which was the aspiration the president laid out, are minimal. Sebastian south koreas president says donald trump has beforeto ask for consent taking any military action against north korea. He said only his country can green light a strike. He warned that kim jonguns regime is approaching a redline as it seeks to weaponize missiles with nuclear warheads. Minutes from the fomcs july meeting show the majority of officials still see it gradually rising to their 2 target, but many saw some likelihood that inflation might remain lower for longer. Global news 24 hours a day powered by more than 2700 journalists and analysts in more than 120 countries. Im Sebastian Salek and this is bloomberg. Francine thank you so much. We are just getting some retail sales out of the u. K. If you leave the fuel from autozone, month on month is 0. 5 . It is for the month of july. It is 1. 5 . Joining us now is shanker singham, director of Economic Policy and prosperity studies. Hes a leading expert on International Trade and has served as trade advisor to the United States government. Still with us, bob janjuah and Ralf Preusser. Thank you so much for coming in. Talk to me about how the brexit negotiations are going. Parts whato grade would you give brexit negotiations . Shanker you certainly need to parties. Weve done a very good job in the u. K. Of negotiating with ourselves, and we need to engage with europe and negotiate the ultimate trade relationship. That is in the interest of u. K. And european companies. Francine do you understand the blueprint the u. K. Government wants to get out of it . What is the u. K. Position . Shanker you need a starting position. It is not always a good idea to telegraph your starting position to the other side at an early stage. The u. K. Government starting position is fairly clear. They want a comprehensive Free Trade Agreement with the European Union. The european position is the same. That should not be so difficult to negotiate given the starting point. We are in the customs union. We are in the euro economic area. All these things should be possible. But we need to start that process. It is very important that we do everything in our power to start the negotiation on the trade relationship. You cant figure out what the interim arrangement is going to be until you know what the ultimate trade agreement in broad terms is going to be. Francine bob, what do you make of the sterling trade has impacts on the boe. Do they stick to the fundamentals . Bob they need to keep it simple, otherwise they risk confusing themselves. This,i do want to make on there is this kind of painting a picture that the u. K. Is full of incompetent people who couldnt negotiate out of a paper bag, in europe is full of highly competent people. That is clearly not right. If you are the u. K. , you have a private kind of idea of where you want to get to. Likewise, europeans have this idea. You Work Together to figure out a solution. Francine you need a framework, right . Bob but i think the idea that framework, inaud think we need to be a little careful about that. Clearly the media agenda is that, that the u. K. Is incompetent. Francine objectively, there was inviting in the cabinet. I dont know whether that makes it difficult for the u. K. To negotiate with a united voice. Bob you have infighting amongst 27 countries in europe. Infighting is part of the process. You have these discussions. You form a consensus of where you want to get to, then you move forward. My only point is that to paint one side as completely incompetent and sacrificial lambs doesnt sit that comfortably with me. Francine i dont know if bob to your original point with the bank of england, they need to let that run. Francine what happens to pound . Ralf personally, im still bearish. I think we go lower from here. Weve seen a meaningful bounce into the 1. 30 levels in cable. Part of the reason that is going to be around is the data is starting to show the negative consequences of brexit. Sterling is a big part of that. Ultimately, if the bank of england forecasts are going to be right, you need to see sterling, the impact of sterling, on personal disposable income, which requires sterling to stay up here. Francine who should they send to negotiate with the e. U. . Bob in the u. K. . I have no idea. Shanker i think the team they have is fine. There is this perception that europe is this masterful negotiator. That is not the way the rest of the world sees this. The rest of the world tends to look to the u. K. When they are negotiating with europe to get sensible proposals moving. I think you are also going to see the actors of the u. S. , japan, korea, the managers of Global Supply chains, have a huge interest in this being a successful result, leaning on brussels, on barnier and others, saying, dont let politics get in the way. But youve got to get into the straightforward process. The european negotiating mandate, which they determined, deliberately sets of a process in which the danger is that neither look at what they want. That mandate should not be something that gets in the way of actual good result. Once we know what that result will be, zero tariffs between the two entities, sensor role sensible liberal roles, there is an opportunity for Early Harvest measures. Obviously were going to have Early Harvest measures on citizens. Then you can say, this is what these interim measures are going to look like. Business will then have more confidence. Positionhe government was pretty clear in february and march. Were going to be out on march 2019, negotiating a freetrade agreement with europe, and if we are not able to do that, there will be interim measures on the way. That is still the government position, notwithstanding all the noise. Francine thank you so much. Shanker singham, Ralf Preusser, and bob janjuah all stay with us. We will discuss the first day of nafta talks next. This is bloomberg. Francine this is bloomberg surveillance. Lets check in on your markets. Heres nejra cehic. Nejra the stoxx 600 snapping three days of gains, its longest run of gains in a month. If we look across to the industry groups, financials are very much underperforming, perhaps pull down by the lower bond yields in europe. Utilities and materials some of the best performers. Strong metals prices. Zinc at a decade high in this session. Dollar, dollar weakness is the theme following the fed minutes. We are seeing the dollar weaker against the yen, the dollar index below 94. This is the bloomberg dollar index. Candlestick technicals show information of a bearish engulfing line. Weakness is what people are watching. We are seeing that slightly higher in this session after dropping five basis points overnight. Treasuries in general have been range bound. This is showing the 10year treasury yields in their tightest range in three years. The only other time the range has been tighter was in 2014. We are talking about quite a range bound time for treasuries, and the fed having a lot to do with what happens next. Speaking of the euro, mario draghi front and center. We saw the euro a little choppy in yesterdays session on the report that draghi wouldnt announce any new policy at jackson hole. We are seeing the euro weaker against the dollar. The aussie is gaining. Euroaussie, not one i often look at, but some commentary about it, saying it has perhaps hit a top here, and a suitable target for this trade might be the 200day average. Francine. Francine thank you so much. President trump is seeking a Major Overhaul to the north american Free Trade Agreement, which he believes has failed many americans. That was the main takeaway on the first day of talks with mexico and canada. Some analysts had been expecting a modest revision. U. S. Trade representative rob light singer has made it clear that trump is seeking more than a tpp clone. The views of the president about nafta, which i completely share, are well known. I want to be clear that he is not interested in a mere tweaking of a few provisions and couple of updated chapters. Francine still with us, shanker singham. Do the markets care about nafta, or is it just another way of seeing whether the u. S. Is protectionist or not, bob . Bob pay some attention to it, but probably not i think the market has got to a place where anything trump has talked about, what do we know . What can we believe . The early news in korea that the u. S. Want do anything, how do you change his mind tomorrow . You pay some attention to it. It is a real economy issue. The market is kind of day today, week to week trading. Francine do you agree with that . Ralf the chart about the trading range, theres always a surprise that with all this uncertainty bonds are not more volatile, but this might be the reason why bonds are not more volatile. You dont know what to do. Uncertainty can leave investors sidelined and that results in very trite very tight trading. Francine ive been trying to read up on nafta and how you define some of the products, but is there a broad brush approach where you can say donald trump went into his presidency arguing that hes going to talk about border tariffs with mexico and canada, and this seems to be a softer administration . Is that fair . Shanker one of the reasons trump had his approach to nafta and the Transpacific Partnership was because he was essentially communicating a sense that a lot of his voter base felt like the game was rigged against them and trade was somehow unfair, not competitive, and this is all part of this process. What you should look for is, either we know, notwithstanding what robert said, that a lot of the tpp provisions are going to come into nafta, with the canadians and mexicans. Board and mexicans full support. All of that is going to be fine. What you should look for is, are there going to be Additional Mechanisms to deal with distortions in other countries . If that is where hes going, that is good for the International Trading system, because we dont deal well with behind the border barriers and distortions. If we are talking about strengthened antidumping measures, withdrawing disciplines on trade remedy actions, that is a different thing. That suggests a more protectionist approach. That is something the mexicans and canadians will not be able to tolerate. Francine do you look at mexico as investment . Do you, bob . Not something that really comes into your radar. What do we know about trade relationships between the u. S. And china . This is the concern, right . Who does the market listen to . How do you cut out the noise . Shanker certainly the real economy, the job you do is much more difficult. In markets, theres all this noise, so i can either follow every bit of noise, or just ignore it. Mosting range investors are saying, i dont know what to respond to. Im just going to ignore it. That means that hedging opportunities exist. Trade that is a great heading into these chinau. S. Negotiations. Being long soft spreads in europe is a way to protect against risk off moves. Hedges are there. They neednt be expensive. Francine do you assume that a lot of these geopolitics or trade negotiations only play out in the markets on currencies . I think that would be the primary source of volatility in markets. Francine what are we looking out for in the next days and weeks . Shanker if you look at the u. S. Private sector input into nafta, you actually saw a lot of fairly reasonable things, upgrading the agreement. One of the things i think the Trump Administration want to do is, they do actually want to create some mechanism to deal with chinese distortion. Overcapacity got because of chinese distortions. That targets his voter base. They are going to be looking, and china is the great game here. Nafta renegotiation is part of it, but the china negotiation is much bigger. If they find some way of crafting a mechanism to deal with chinas Stateowned Enterprises and distortions, they will try to do that where it is easiest. It is going to be easiest in the nafta process first. Francine thank you for joining us, bob janjuah, Ralf Preusser, and shanker singham, director of Economic Policy. Up next, after tencent reported record profits, alibaba gets set to release its results, but can and match the high bar . This is bloomberg. Francine this is bloomberg surveillance. Lets get straight to the Bloomberg Business flash. Sebastian companies behind the most popular u. S. Credit cards say they are severing ties with extremist organizations that incite violence. Discover is ending merchant agreements with hate groups. Theyand mastercard said were cutting off a number of sites. The moves come after they saw pressure to stop after the wake of violent protests in charlottesville. Shares in Cisco Systems have fallen after it predicted another revenue decline as the business tries to remake itself. The Company Whose machines form the backbone of the internet said revenue may decline as much as 3 . The ceo joins us at 2 30 p. M. U. K. Time. Elliott management has bought debt in the Parent Company of Oncor Electric Delivery in its latest bid to block Berkshire Hathaways offer. According to a person familiar with the matter, the firm has acquired about 60 million in leverage. Elliott and Sunrise Partners own the majority of every class of impaired credit in the holding company. That is the Bloomberg Business flash. Francine . 10 shares have risen after the chinese internet giant posted record profits in the fastest sales growth in years. Alibaba gets set to report earnings. Analysts expect the company to show Strong Revenue growth against user base of more than 500 million people. Joining us from hong kong is our reporter, lulu chen. On tencent, what were the highlights in the earnings . Lulu you could always say that tencent almost is defying the laws of large numbers. They are still growing in terms of revenue. It is 59 growth. Net income was partially boosted by a markup. Other portfolio companies. For the revenue, the highlights were that the mobile Gaming Business really boosted the base of the company, and that is surpassing pc gaming revenue for the first time in history. Francine what drives the fast increase in mobile revenue is to mark mobile revenue . Lulu honor of kings was the highlight for this quarter. They have 200 million users on this gaming platform. This is becoming such a phenomenon that state media is saying they are tapping into peoples addiction and telling the company to cut down playing time for users under 18. The company is trying to cope with that. Also trying to address the regulatory crackdowns in social media as well. Francine very quickly, what are people expecting from results today . Lulu because tencent sets the bar really high and people compare these companies backandforth, they are always trading backandforth, that is why people are also expecting very high Revenue Growth for alibaba at 49 . People will be looking at what they are doing with their retail strategy and how traditional retailers will pan out. Francine lulu chen, our bloomberg reporter from hong kong. Bloomberg surveillance continues in the next hour. Tom keene joins me out of new york and we have those alibaba figures. We would be talking to hsbcs steven major. He has some good calls on treasuries. We will talk about the fed, President Trump, and everything that is moving your markets, including the metals and miners. This is bloomberg. Francine abandoned by business. Two of Donald Trumps Advisory Councils are scrapped after ceos jump ship. A battle between data and theory. Whethercials wondering their inflation model still works. Theresa mays government is considering visafree travel to the u. K. After brexit. Tom keene is in new york, im Francine Lacqua. It is a big day. We talk about market movement. Retail sales in the u. S. We must talk about the president in washington. Tom i know Kevin Cirilli and martin will join us later. What i suggest is we take a waitred path on this as we on the news flow of this thursday. Francine first, lets get straight to the bloomberg first word news. Taylor in south korea, the president is trying to ease concerns over potential war. That kim jong un is approaching a redline. Trump is disbanding his manufacturing counsel and his strategy in policy forum. Ceos were dropping off the panel to protest the violent white supremacist rally. Trump said he was getting rid of them to not put pressure on business leaders. Federal reserve leaders are wondering if their cornerstone policies regarding inflation are working. Of feda majority policymakers want more Interest Rate hikes. For the second month in a row, japan has posted a trade surplus. Imports rose, a sign that domestic demand is recovering. Japans trade surplus was a betterthanexpected 3. 8 billion. Global news 24 hours per day. Im taylor riggs, this is bloomberg. Tom thanks so much. A jumble today. Am august jumble off the minutes move yesterday and then onto the korea move today. It just makes for a data soup. A little bit of curve steepening over the last 2448 hours. On to the next screen. The vix showing the stable equity markets. Yen nails it. 10, whiche gold up may be is almost removed over to the base metals, Industrial Metals move. It is just a mess today. Francine mess is a technical way of putting it. I wish i put zinc. Falling against all of its major peers. European shares drifting lower. We did have a little bit of a mixed asian session. Technology stocks were up, now they are down. Tom over to the metals. I have not done this chart in ages. This is inflationadjusted copper. This is the longterm deflation of an important industrial metal. Back up we go. This is actually pretty elegant as a form of resistance. Nibear market on copper and we have broken nicely through that. See that curve i made on the chart. I could not do that a year ago. Im on the edge of john madden. This is the 10year yield. This is the threemonth range for that yield. A sharp rally into the afternoon. Ession tom very good, francine. Someone asked me last night, is that a constitutional crisis . My immediate answer is no, but the news flow out of washingtons original and extraordinary. Does it have to do with economics, finance, and investment . Stan colander with us in the next hour. Right now, Kevin Cirilli with his head spinning on the state of his washington. With you expect resignations at the white house into the weekend . Kevin put simply, yes. It is looking increasingly like that to say the least, particularly with steve bannon speaking to a leftwing publication, he did not know what was on the record. This is something we have seen play out with Anthony Scaramucci the other week. I think the followup from charlottesville is only continuing, the pressure mounting, not just coming from republicans,. Just from ceos, this is widespread from virtually all americans. Tom speak to our global audience about a government running business as usual. Do you look at this mess as a political thing with the president separate from government running as usual or can we State Government is not running as usual . Kevin welcome of the u. S. Government institutions are always stronger than any person. Vice president mike pence cut short his international trip. He will be home in the United States. He hadeled an event scheduled in virginia later this weekend, a political event. In terms of lawmakers, they are still back home. We have not heard much from republican lawmakers who are in office on television or through other means other than written statements do not think some of the president. I think we have to take a step back here this morning, tom, and just note the abnormality of the events of the past week. Francine ok, is anyone talking about anything else in washington . That in the corridors of congress, i know they are in a recess now, that everyone is trying to figure out what they need to do next . Kevin political firestorm ahead in the month of september. They have 12 legislative days to raise the debt limit. They need to pass a funding bill to avoid a partial Government Shutdown. The president said he will be in phoenix. The mayor of phoenix saying he does not want the president there. There are rallies planned. There are racist rallies planned for this weekend. The country is very divided. In terms of policy issues, the border adjustment wall could be wrapped up into the budget battle in september. I was a nafta yesterday reporting from nafta and i spoke with a politician from mexico who essentially said that not only is mexico not going to pay for the wall, they are vehemently against the wall in any form. Francine Corporate Executives seem to be abandoning the president in some regard. Maybe they think this president is too toxic in the debate they have with their stakeholders. How does the president regroup and refocus . Kevin anyones guess. This is a president who has consistently had his political back shoved up against the wall. He thought bulldozing through it would get him out of it. It is hard to see how resignations dont play into that. This is a very divided, divided country now. Francine thank you so much. Kevin, thank you so much. Joining us is the Chatham House o give me a sense of where this ends. Week for the president and the Republican Party. How do people put differences aside and come together . It is going to be a key challenge going forward. President trump faces multiple challenges, created by himself. Others are divisions in the Republican Party. Bringing all of that together is be the challenge going forward. Who is going to be the want to do that . Marianne it is going to have to be the president , but that is going to be the challenge. Nobody talks about policy anymore. Tax reform is going to be pushed in september, but the timeline is challenging. You are going to have to address the debt ceiling and putting a budget together first. Tom wonderful to have you with us. Your work out of maine and tufts and kennedy, you have a very u. S. Skew to the background, where does this president fit within the International Community right now . We have been washington focused. As he destroyed his relationship with his International Allies . Marianne that was one of the key concerns going into his presidency, that he would put america first, which he has very much promised to do. Parts that we have seen delivered on that front, we have seen the United States pull out of the paris climate accord, which really strained relationships. The nafta renegotiations kicking off this week, it will be a key challenge to bring that piece together and move some of that forward. Tom a basic question here, does Chatham House believe there will be nafta negotiations or is this just a three act play we are going to . Chatham house does not have a particular position, but my personal view would be that nafta negotiations are in opportunity to a ecommerce questions, intellectual property questionsd to bring regarding the environment into the agreement. Depending on how far the United States pushes, they might also be the ones willing to walk away from the negotiation table. Tom thank you so much. Arianne, the economics fellow from Chatham House. Wonderful to have you with us. This is important discussion. The democrat from maryland, Benjamin Cardin, with all the turmoil on washington. Stay with us. From new york and london, this is bloomberg. Kevin this is bloomberg surveillance. According to people familiar with the matter, elliott has bought impaired debt s credit. Oil drillers apparently dont care too much about President Trumps pitch to invest in federal waters. A government option of offshore drew just 120 million. That is your Bloomberg Business flash. Thank you so much. A battle between data and theory , how one analyst has described the situation facing the fed. Officials scratching their heads about why inflation models are not working. The dollar and 10year treasury yields dipped. Joining us is steven major. What a treat to have you for the whole hour. Thank you for coming in. What did you learn from the fomc yesterday . They are confused, but at least they have been honest to admit they are not sure. Maybe that is one step toward change. Until now, we have seen no real evidence of any humility around this on inflation. So some things are moving. Francine which means what . That everything will be delayed or that the Balance Sheet papering is a guest. Half of them recognize that tightening too soon by too much could be dangerous. This supports the idea that they are not going to do very much on goes and they are going to easy on the Balance Sheet they do not know exactly what the Balance Sheet means. It supports a benign outlook to keep edging lower. Tom on an august morning, let us look at the good news of what mr. Major has wrought. This is the outlier call of steve major back in 2016. The lower rates did not occur with the political mix. He abruptly changed to a higher rate and absolutely nailed it. 2. 40 . Ed the move to now you have this call lower. Is this about fed policy, as fresh francine mentioned, or is this about more tepid Economic Growth . Steven last year, we were looking for lower yields until the election happened. The election result changed everything. We published a few papers at the start of the year. , thes called sugar rush other was called trump premium, which i think speak for themselves. A shot that there would be shortterm rush of blood, but no sustained growth. I think it is gradually playing out. The economy cant take higher rates and the fed knows that. Followthroughlicy is also supporting the idea that the fed needs to stay cautiously loose. So, im still quite happy with the idea that the 10year treasury should be moving by yearend. Tom we like to compare and contrast on bloomberg surveillance. Im going to use the official surveillance calipers. Deutsche bank believes in better real growth where real gdp does better, but a lower inflation with it. Do you come at hsbc, do you see the optimism of better real growth with your low rate, less inflation call or does real growth stay tepid . Steven i will tell you this. The real yield is something that drops out of a calculation of nominal minus inflation. The real yield is like a residual. You cant really control for it. I wonder with the real gdp and the economy, if they are the same. , inflation is lower. Talkinghere are others about the move toward nominal gdp forecasting. This is a long, drawn out, slow process that is not going to happen anytime soon. It is not going to affect our immediate investment horizon. I suspect this low inflation is betting in. Tom francine, i cant convey enough the importance of what mr. Major said on the real yield , the inflationadjusted yield being a so called residual. That is the arch mathematic debate that chair yellen and mr. Draghi face at jackson hole. Francine i know. Smart, smart, smart that is why we have steven major on. Talk to me about the fed. Where will you see the most market pressures on the start unwinding . Steven first of all, we know it is small and gradual and it will be over a long period of time. They have been talking about it virtually all year. Just about everyone, including my mother, knows it is coming. It will not have any kind of market impact. For the rates market and the mortgage market, im really comfortable that they will replace the bonds with bills. The treasury will issue bills to replace the bonds. I dont think there is any question of who is going to buy the bonds. That is an overly simplistic view of the world. For treasuries and mortgages, we are quite relaxed. We dont know about the reduced liquidity on risky assets writing on the back of low rates. That refers to credit. Maybe it gets into equities and other risky assets. Tom lets come back. Steve major with us from hsbc. Coming up, we will switch to equity markets in our next hour. Brian levitt joins us from oppenheimer. Much more to come, including reporting from washington. Francine it is time for our morning mustread. Elerian from mohamed writing for bloomberg view. Majorget back to steven from hsbc. You believe an external shock could come from something happening in the markets. Steven i think that is very eloquently put, very elegantly. We would break it down into three categories. There are macroeconomic shocks, data surprises. It could be inflation, Central Banks and their guidance, their policies. Then there are more micro and marketbased and these are things that we really dont know. We cant see them, so we dont know. Thinking about the amount of leverage in the system, some of the derivative products that are out there, others have spoken about etfs. I dont know that is the source of volatility. We are talking about a possible source of volatility coming from the products in the market, rather than the more macro Economic Growth. Everyone knows volatility is low. Everyone know there is lots of liquidity and there are he bunch septembercoming up in and october. It is unlikely that those events are going to do anything because they have been so welltelegraphed. If you cant see it coming you dont know it, but you need to be prepared for. Maybe starting to derisk now makes sense. Francine could it come from china . Steven it could do to read would be on the list of usual suspects. It could do. China would be on the list of usual suspects. It could be anywhere. Identify the potential sources. As we have seen in the last 10 years, there have been a number of shocks that have given us these volatility spikes. Of them have had to do with the u. S. , china, or greece. Francine so get ready for them . Steven major stays with us. There is a new edition of Bloomberg Markets magazine out. Agriculture and infrastructure. Investing outside africa starting in 2020. We also talked about the arsenal football club. This is bloomberg. Track your pack. Set a curfew, or two. Make dinnertime device free. [ music stops ] [ music plays again ] a smarter way to wifi is awesome. Introducing xfinity xfi. Amazing speed, coverage and control. Change the way you wifi. Xfinity. The future of awesome. We have st. Pauls, feed the birds london. Then we have ugly london. Francine and i disagree on this. Im sorry. It looks like whos afraid of roger rabbit . I just dont get it. Francine loves the architecture. That is the cheese grater in the middle . Francine yes, it does look like a cheese grater. Think of a walkietalkie. I think it is refreshing. Tom i will give you refreshing. I dont know. Heres taylor riggs without refreshing first word news. Taylor steve bannon has gone public with his views over china in a conversation with a liberal leaning magazine. He told the american prospect he battled treasury secretary Steve Mnuchin and Economic Advisor gary cohn. He wants a tougher stance with china on trade. War with north korea would be horrific, but the chairman of the joint chiefs of staff says that letting north korea develop the ability to launch a Nuclear Attack on the u. S. Is unimaginable. He told reporters that President Trump asked the pentagon to develop viable military options. Young activist joshua wong is being sent to prison. Two other leaders of the democracy protests will also serve severalmonth sentences. Rosee u. K. , retail sales more than forecast in july, driven by the biggest jump in food purchases in almost two years. The volume of goods increased 0. 3 . British shoppers are changing habits because of faster inflation. Global news powered by more than 2700 journalists and analysts. Im taylor riggs, this is bloomberg. Tom, francine. Francine thank you so much. Britain is considering allowing eu citizens of traveling freely to the country even after brexit. Tonationals would be free visit, but working or studying or staying would require permission. Plans have yet to be finalized. We are joined by charles lichfield. Steven major is still with us. Charles, welcome to the program. Stephen, thank you for sticking around. What do we know about what brexit will look like at this point on august 18 . Charles if only we could tell. It is looking like the government is starting to agree on the principle of a transition , but does not agree on how long it will last or the contents of the transition. The comments from the home office are not particularly surprising. We already allow japanese citizens and u. S. Citizens to visit without a visa. A big question about what sort of transition we are looking like, how long it will last, and whether we offer allow to continue to access to the single market. Once that is clarified, we need to get the europeans to agree with us. Francine all right, no easy task or is it an easy task . Charles first of all, the u. K. Government has to sort out what it wants. I think the europeans do want to smooth the transition. There is not much talk of a brexit punishment. The political turmoil in the u. K. Since the vote seems to be chaos enough and the europeans are not too concerned about other countries leaving. Having a smooth transition is also in their interest and i think they would like to offer that. They have to maintain the internal logic of the eu. They will be looking for a fairly big set of concessions. Incentiveis their to do that . If negotiations are about power, what is the eu incentive to cooperate . Charles simply that the u. K. Is. Huge partner of the eu we have a huge trade deficit of the eu. Sometimes in a slightly excessive fashion they talk about it, but it is true the European Union would gain from avoiding a huge disruption in their trade with us. It is also the case that their economies are recovering, that they are still slightly fragile. I think some of the Medium Enterprises could do with having access to the wide pool of financing they could access in london. Those are fairly large incentives. Tom you and ian bremmer dont sit on your bloomberg terminals and look at foreign exchange, but lets go there, charles. His currency the litmus paper of political economics now and does it suggest stronger euro in the future . Charles it is certainly the case that there is a lot of optimism about the euro, not simply because the politics seeing slightly smoother and coherent, but because the eurozone, after a long slump, is starting to do much better and employment is up, unemployment is down, investment is up. If you compare it to the pound, they are trending toward parity and that tells you something about the political instability in the u. K. Currency does seem to be a fairly good litmus test, its true. You over let me bring to my chart. This is the europound parity call we saw from a couple of banks, including hsbc. When exactly does that happen and what happens when we get parity . Steven it is my colleague that has forecast this. They fear that any tendency toward a hard brexit is bad for sterling. Maybe the currency is the best barometer of hardness of brexit. It is probably the least corruptible of any measure. Francine i like the way you put that. Steven it is just the number. Moving toward parity reflects the state of affairs. Softer brexit means better sterling. Francine do traders listen to brexit negotiations blowbyblow what do they just look at currency . Steven that is a very good question. Im wondering how much of our interest in all of these negotiations and details his personal and how much of it is actually investment. People fascinated from a personal point of view are this isg how valuable an trying to figure out the valuation of gilt. Islation staying low surprising. Inflation is not going up in this country. The policy rate is going nowhere. Combine those things and gilts hang around the low 1 . Tom an unfair question, but we will go with it because you are such a pro, what are the real rate differentials of the many countries of europe . Name the country, are they real rated or is it a system within europe . Steven they are absolutely not homogenized. So, youve got very high negative real rate in core countries. Much to get the real rate even more negative because you have to take the inflation rate off the nominal. You have deeply negative rates at the core. You have less negative rates on the periphery. Maybe a cleaner way of looking at it is the theoretical taylor rule. Not that i believe it is appropriate in every country, but it does say germany should have rates nearer to 4 and italy nearer to 2 . Tom Michael Mckee will be there. Steve major. What will mario draghi say about european real rates about his speech, even if it is indirect comments on it . Idea key id for mr. For mr. Draghi. My guess is that he would not say that much. Going outside the Council Meetings could be quite disruptive. , ityear ago at jackson hole was more interesting that there was quite a bit of debate about centralbank Balance Sheets and the need to keep it large for a long amount of time. There were negative rates a year ago. Honestly, i dont know, nobody knows what is going to come out of this jackson hole. There are supposed to be more structural debates, but i dont know if they will take the opportunity. Francine charles, do you worry about italian politics . Going back to Central Banks, maybe we are underestimating something coming out of it . Charles i think that is the main concern. Italy remains in focus point for political risk. There will be an election in the near future, probably may 2018. That is a real possibility the majority, that the parliament that emerges will be in favor of at least radically renegotiation italys relationship with the euro. Dont think it is plausible that italians would vote to leave the euro, but the disruption every negotiation would be extremely disruptive for a country that remains one of the more fragile economies of the eurozone. Tom very good. Thank you so much. On Bloomberg Television and radio, charles robbins. The interesting calculus for cisco. Charles robbins coming up. Look for that in the 9 00 hour. From new york, from london, from aaron judges new york. This is bloomberg. Francine this is bloomberg surveillance with francine and tom from london and new york. Zinc has broken through the 3000 per metric ton level for the first time in a decade. Lets get plenty more on this. Aluminum and shanghai has hit a sixyear high. Copper reached a threeyear peak in london. Today. O have you on set what does this boil down to . Strength in china or is this something more industrybased . I think a lot of it is strength in china. I think china was thrilled ands to this rally. Weeks, an the past two lot of people are seeing it is running on steam or getting quite frothy. A lot of speculative bets are coming in and i think we are starting to see the question, have we moved too far, too fast . Francine we are seeing chinese capacity curves on aluminum. You dont look at the alumina market the same way as zinc. Lynn exactly. I think think is a different story in that you see big zinc is a different story and that is the big deficits in the coming years. Overall with metals, there is a decreased supply, which really stands out among the commodity spaces as a whole. In oil and agriculture, you still have big supply problems. Tom is the bear market broken in commodities . This is the bloomberg commodity base metals index. It is really gorgeous. We showed inflationadjusted copper earlier. This is just a vanilla chart. Longterm regression, the bear market, what is the zeitgeist . Did they say about breaking the bear market . Lynn yes, i think a lot of people are saying we are in a bull market, but with commodities, you can see things turnaround quite fast and a lot of people are saying it is quite speculative. We could go easily back to being in a bear market again. Tom i look at this. You mentioned china. Gdp, isst off chinas it that simple . Lynn yes, china gdp, but also china on aluminum capacity, glencore zinc cutbacks, you have the china demand story, mining problems in chile, strikes, labor issues. You are seeing supply problems across the board. At the same time, there is a lot of speculative fever, as well. Francine think of a joining us. Lynn will be back with steven major. Some pretty bold calls at treasuries, but at the 10year treasury call from steven major. You can go on to tv and ask stephen difficult questions. You do that by clicking underneath the video screen. This is bloomberg. Taylor this is bloomberg surveillance. Walgreens will give u. S. Antitrust officials more time to review its plans to buy more than 2000 rite aid stores. The two sides have tried to arrange the deal for almost two years. Regulators were unhappy with walgreens original takeover proposal. The company said it would spend less to buy fewer stores. The turnaround still has not taken hold at cisco. The company predicted that revenue in the quarter may fall as much as 3 . The ceo was trying to transition cisco into a company less dependent on hardware. Stay with us on bloomberg. We will bring you that conversation with ceo chuck atbins later today beginning 9 30 a. M. In new york, 2 30 p. M. In london. Shares of the parent of victorias secret fell after it delivered a weak forecast. Sales of victorias secret fell more than expected in the second quarter. Tom, francine. Tom thanks so much. It is theoretical bond thursday here at bloomberg surveillance. It is a good time to speak to steven major, brilliant on lower for longer on Interest Rates. Let me bring up the german spread. Two separate lines, folks. The 10year yield positive in white. Yield at a negative Interest Rate. At the last jackson hole, worldwide news about negative Interest Rates, lower for longer, redefined. What is the chronic outcome of forever negative Interest Rates . What does that mean for a society and its Financial System . You could argue that negative rates are a good way of dissolving the debt overhang, because you turn 100 and 299 if haveave into 99 if you 1 every year. I believe there are not that many of these centralbank leaders out there who want to keep the negative rates for much longer than they have to. There is a worry that is some stage it becomes quite disruptive. Interestingly, in the eurozone, it has not had such a negative impact on bank profits. From what we can see. One of theve been areas that the ecb was looking at as a reason for removing the negative rate at some point, but as it stands, the Forward Guidance says we keep negative rates in the eurozone until 2019. Tom exactly. The chronic nature and the societal effects have to be tangible. You see something about the amount of Apple Computer shares that the Swiss National bank owns, do you believe when they unwind this that we will unwind with instability or do we need 2018,pare ourselves for 2019 jump conditions and great instability . Steven i think for the bonds the Central Banks hold, it is not going to be a problem. And it will take a long time anyway. It could take decades for the stocks and shares. That is a slightly different prospect. In proportion of holdings Balance Sheets is very low. It should not be so disruptive. I think that when we look at central bank Balance Sheets, we should not worry about the unwind. What we might need to worry about is if there is somewhere lnerableorld that is vu with excess leverage and whether or not the withdrawal of dollar liquidity could be a problem. Im not that worried about the Balance Sheet, tom. Francine steven, let me show you a chart. This is the spread between the u. S. Twoyear compared to bund. You have eurodollar in white. What does this tell us . Steven it is a good chart. I look at the 10year. It shows that the treasury yield has fallen while the bund yield has risen. Eurore showing the strong with that white line that is going down. Francine this is the chart that you were asking for. The 10year peak after the u. S. Election, so the treasury sold off relative to everything else. This year, ive spent my time defending both forecast. People did not understand why we were calling for lower treasury yields, but people were equally challenging the higher bund yields. The latter has been harder for me to defend the higher bund yields, but we had a day in the sun because bang, we were at 60 basis points for bunds all in one go. When you make the forecast at the yearend, you need to be thinking about all of the information, all of the possible scenarios that might happen between now and the forecast date. By the end of the year, we should have clarity about what the next few years will look like and i think bund yields will be higher. Tom will we have clarity about what the fed will do. The rough move. Do we have clarity about the fed is going to do . Steven for me, it is clear they cant do very much. The most potentially disruptive challenge we face with regard to the fed is who is going to lead it and we are not going to know about that until later this year or next year. , i think thaticy they are stuck now. They know they cant put rates up very much. The Balance Sheet unwind is going to be very slow. Who help our Michael Mckee hangs on every surveillance word. What is your number one question for mario draghi . Steven what is my number one question . Tom what would you ask president draghi right now . Steven i would like to know what he is thinking in terms of common issuance and the outlook for some kind of eurozone bond supply. Obviously, it is not his to decide because ultimately it is down to governments, but the ecb has a role in all of this and i think it would be interesting to see what the vision is on a multiyour basis as we gradually progress toward the full monetary and fiscal union. He might want to discuss that in a private forum. Francine there are going to be a lot of changes that the ecb. When does germany start negotiating . Straight after the elections . Elections, wethe may get more clarity, which is why we are looking at higher bund yields because there is a leftsided tail risk that overhangs the eurozone which has kept bund yields low. We went through the french elections and brexit and solve record lows. You start to look toward the right. Tom think is so much, steven major from hsbc. Coming up, washington, kevin and deficit. E debt this is bloomberg. Tom it is a dovish fed. Markets react to the minutes amid the august churn, lower yields separate Industrial Metals and gold steep search higher. See you in september, congress yields for a contentious september. Stanley collender on the budget battles to come. The statute of statutes of the confederacy come down. Resignation our resignations next . Good morning, everyone. This is bloomberg surveillance. London, Francine Lacqua. The focus on washington i would suggest has become global, but nevertheless, brexit except. What is the new on brexit in london . Francine actually, you are right. Its all anyone is talking about in london and you see a lot of political pressure on theresa may to Say Something stronger than what she said on your president. That is something we need to keep an eye on. On brexit, you hear there may be an new kind of visa system if you want to visit from the e. U. And there are rumors negotiations may be delayed. For the moment, its quite a lot of noise. Tom lets get started from washington with first word news in new york city, rather. Taylor in south korea, president moon jaein is trying to ease concerns over a potential war. Moon says the President Trump would ask for consensus before launching an attack on north korea. Kim jonguns regime is approaching what he calls south koreas redline. More backlash from President Trumps remarks on charlottesville. He is disbanding his counsel. Ceos were dropping off the panel to protest of the response to the violent white supremacist rally. The president said he was getting rid of the panel to avoid putting pressure on business leaders. Federal reserve policymakers are starting to wonder if their cornerstone model on inflation works. There is a debate over why the economy is not producing more inflation in a time of easy financial conditions and tight labor markets. The majority of policymakers want more Interest Rate hikes. For the second month in a row, japan posted a trade surplus. Exports rose more than 14 in july. Imports also rose, assigned domestic demand is recovering. Global news 24 hours a day, powered by more 2700 journalists and analysts in more than 120 countries. I am taylor riggs. This is bloomberg. Tom thank you so much. A quick data check before we get to Kevin Cirilli this morning. Equities, bonds, currencies, commodities, oil is lower on west texas intermediate. Now 12. 02. 000 , 1. 1010. Metals have a life of their own this point. Francine they do, especially think zinc. You are also falling against its peers. European shares drifted lower gold good lower gold. Right now we go to washington and our chief washington curis fondant, correspondent, Kevin Cirilli. He is glued to his phone with the sources on the hill and at the white house. Esther bannon came mr. Bannon came front and center 4 00 or 5 00 p. M. Last night. I thought he and the president were on the same page. Why are there discussions that mr. Pan mr. Bannon heads out the door . Kevin giving it mr. Bannon giving an interview to a leftleaning publication last night and it was made public. This is eerily reminiscent of the interview Anthony Scaramucci gave to the new yorker although there are no curse words in this story. There is increased pressure on the white house to have some given how tone deaf they were to charlottesville this week. Many people are speaking out, large portions of the american public. This is really just coming to a head. Tom an exceptionally delegate delicate question, and i say this after the review of of theitism for atlantic in the last 48 hours, there are so many pressures on these people at the white house now. How does antisemitism fold into what we have seen since charlottesville . Kevin i am an american. There is no room for this. You have got to speak out against racism, antisemitism, this is ive got nothing for you. It is hatred. It is hatred and it needs to be called hatred. Ncine how do ceos distance themselves to the president . Are we going to see more ceos step down from anything . Kevin over the past couple of years we get used to the world in which political world in which we live in, but we have to take a step back and note the caliber of ceos who have decided that they need to distance themselves from the president of the United States. The ceos top ceos on wall street from silica and from wall street to Silicon Valley deciding they have to distance them selves from the president of the United States, that speaks for itself. What comes next, lobbying, political consulting, i know Stan Collender will speak to that. There is always back channels and lobbying efforts of congress in terms of their ability to pass an agenda republicans in california yesterday as well talking about tax reform. Is a domestic terror attack in charlottesville and i think the nation is still being gripped by that. Francine does this tarnish President Trumps credential as a business president as a ceo and forever . Kevin the president tweeted that more ceos will be able to join and he attacked the ceos that left saying they are shipping jobs overseas and having high drug prices in the , but i mark merck think there is a calculus made yesterday by the white house after the drip, drip, drip of ,eos abandoning his counsel whether or not he can still have anecdotally speaking, they would go in the back door of the white house so as not to be photographed going in there. Tom one final question, where is Mitch Mcconnell . Kevin they are on recess. Tom guess what . We are not. The nation is not on recess. Where is the Senate Majority leader . Heaven he is back in his state of kentucky kevin he is back in his state of kentucky. When we will hear from the Vice President next remains to be seen. Weeka terrific horrific for the american consciousness. Tom reporting thank you for your reporting from charlottesville to the nafta yesterday. We see Stan Collender this august, thursday, he is an expert on the dynamics of the Economic Committee and the budget of the nation. Stan, what is the number one thing we need to know about september in this fractious washington . Stan first of all, good to see you, tom. What was already going to be a problem and unpredictable will be even more unpredictable. The phrase i was using is that unimaginable has become the implausible and that is everything from a debt ceiling that might the might not be done in time to a Government Shutdown and abandoning tax reform. Additionald about white house resignations. It will be even more chaotic than it was going to be. Tom you are an expert on the minutia of this. What is that dialogue in september between the executive branch and the legislative branch or are they more separate than we imagine . Stan now youve got to separate the white house from the rest of the executive branch. I think you are going to see the secretary of the treasury, gary cohn, probably trying to cut their own deals because they are not sure the white house connection will help them very much. This is particular particularly true on debt ceiling. It will become the biggest problem we are going to have an has to get done within three weeks. Francine what are you saying, that the republicans will not forgive and forget . Taylor stan say one more time. Francine are the republicans not going to forgive and forget . You automatically assume everything is frozen debt ceiling, tax reform, possibly even infrastructure. Stan you had an interview earlier with Larry Summers and you said he said tax reform is almost certainly gone. I think that is right. Functioningve a residency at all in the moment and you cannot do comprehensive tax reform without a president willing to get heavily involved with the influence to be able to twist some arms. Francine i keep asking the same question is it possible President Trump realizes this is a big mess and actually refocuses on tax reform . s first of all stan first of all, it certainly is possible but he has already gone back and forth several times and now anything he considered he said is considered to be highly politically motivated and designed to get through a particular moment in time. This is a president that has not apologized very much. We are not really talking about moving on for the president. If anything, he may be doubling down rather than backtracking. Tom Stan Collender with us, really the first indepth conversation about what we do come september in washington. We continue with Stan Collender as well. On bloomberg radio, a conversation with the senator from maryland, Benjamin Cardin on all of washington as well. In new york, it is august. This is bloomberg. Taylor this is bloomberg surveillance. I am taylor riggs. Activist investor Elliott Management has made another move to keep Berkshire Hathaway from buying encore. According to people familiar with the matter, elliott bought impaired debt in encores Parent Company. That means elliott and son right block ownrtners the credit and could block the Berkshire Hathaway offer. Oil drillers dont kill about President Trumps dont care about President Trumps pitch 56 drop in, a revenue from a march auction that offered less acreage. That is your Bloomberg Business flash. Tom we look at the equity markets, brian levitt is at Oppenheimer Funds looking in a global sense of what equities can or should do. Stan collender with us as well on the idea of budget in washington. Wonderful to have you back, brian. It congratulations on the consistency of being in the markets given all the gloom out there. Can you still be enthusiastic about equities in america and worldwide . Brian you can still be optimistic about equities in the United States and worldwide given we do not have a major policy mistake somewhere in the world. When we look at the usual trappings of the end of a cycle, they are simply not here in the United States. We dont see stocks trading significantly overvalued bonds, massive credit, massive animal spirit. We are still wellpositioned for equities to push harder higher. To there has been a Pop International investment, is it too late to get on the board the cliche, has the boat left the proverbial international dock . Brian its not too late. The problem investors seem to have is they shift one way or another. We advise having a global perspective. The Global Economy is improving Major Regions and blocks of the world, we really have not seen this. This is a synchronized expansion and policy is generally accommodative. Inflation is down in emerging markets, credit growth up in europe. Its a reasonably good equities given that equities are more attractive than just about every other asset class. Brian brian colin what did you learn yesterday because it seems the market was saying one thing and the fed was learning another thing and the market was right from the start. Brian inflation pressure continues to remain benign and we can debate whether or not that is the case. If you watch the shape of the yield curve in the 10year treasury rate, the bond market does not believe in a significant improvement in real Economic Activity or a significant jump in inflation. When you have a 10year at 2. 20, the Federal Reserve cannot interest that tight on rates without running the prospect of flattening the yield curve and leading the u. S. Into a recession. The other point with the federal zone is that the Federal Reserve will be scaling down the Balance Sheet. This is unprecedented and we will be learning how this works. As they do so, its very unlikely they will be significantly tighter on fed fund rates as they go through these modest gradual decline in the Balance Sheet. Francine what do you make of inflation . Will it pick up or is it some thing more sticky than that . Stan i am sorry, i am having a little trouble hearing you. Brian inflation. Francine inflation, go. Stan ok. Anything that was likely to create Economic Activity legislatively create Economic Activity are probably not going to happen this year and may not happen next year either. Infrastructure, tax reform, any of those types of things are not want to happen. As a result, youve got to believe the fed is going to have to reexamine some of its assumptions about what will happen policy wise. Certainly in terms of Economic Activity and inflation thats one of the things that has got to be different than what they were assuming three months ago. U. S. How bipartisan is the market . There are stocks like amazon and apple that go, go, go. There are a lot of laggards. Brian there really is and a lot of it some of it could be a value trap. In the aftermath of the election, everybody wanted to buy value because of lower tax rates and because of stimulus. Since the beginning of the year where it has become far more about the inability to get this package passed through washington, d. C. Weather on the fiscal side or the lower tax rates, everybody shifted towards growth. You buy growth in slow growth world. Its a classic supply and demand argument. Socalledews is those bank stocks, you look at the performance and the valuations and they pale in comparison to what we saw from microsoft, intel, oracle, that we had in the late 1990s. This is not a 1990s tech bubble. For value names to do well, you need a catalyst an improvement in Economic Activity and you need to see the 10year go from 2 to 3 and it seems increasingly unlikely. Tom brian levitt with us of pop at higher Oppenheimer Funds and Stan Collender as well. We will look at the technology stands. Wes robbins of cisco consider cisco and the many challenges of the cloud. It is a beautiful new york above jfk, the sunrise. Tom bloomberg surveillance from london and new york. Two different worlds, Stan Collender in washington and brian levitt of Oppenheimer Funds with a view of investment and global wall street. Stan collender, the distractions of washington. I am assuming you have never seen it like this, maybe watergate of a few years ago. He does it seep into the Financial System . Does your world seep into brian levitts world question mark stan absolutely. We were just talking on offcamera, what are you assuming with growth rates . Is three present remotely doable and you said brian not likely. For taxw do you pay reform or do any of the things you said you wanted to do . Tom is the answer here what we have seen from American Companies i cant believe they can do more costcutting because they have been doing it for ages. Does Oppenheimer Funds assume lean and mean corporations because they are getting no help from washington . Brian i think that is right, but the good news is we see revenues pick up as gdp picks up around the world. What you are seeing in the bottom line in earnings is not just costcutting. We are seeing good improvements in revenue as you would expect in a synchronized global expansion. When it comes to washington, d. C. , you know we have had a line at Oppenheimer Funds that hating the government is not an investment strategy. Investors should not be trying to shift their portfolio because they dont like what is coming out of washington, d. C. The reality is the market does better over time when the president s Approval Rating is below 50 . The one caveat that stan and i keep discussing is one thing that can derail the cycle is a major policy mistake somewhere in the world. We saw that at the end of 2015 when the market had a correction to the fed raising Interest Rates. The debt ceiling, these are things investors should be watching because a policy the state could be disruptive. It is in my opinion, hopefully not the base case and investors should not be swinging portfolios wildly to try to overcome fears in washington. Stan but you have got to at this point. Youve got to put in something you werefactor, things not expecting sibley because the president decides he is angry at congress and he is going to veto a debt ceiling budget that he that he may not have vetoed before. Francine its not necessarily policy related, so how do you protect yourself as an investor . Brian a shock will always happen in the market. One of the things i laugh about is people say to me, i have money on the sideline and i am waiting for the market correction, we havent had one in so long and i feel like i was the only one of us here in late 2015 into early 2016 and we had a market correction. The markets were down somewhere around 50 to 60 and we had 15 to 60 of we had something 16 and we had something akin to a recession. We dont swing our portfolios wildly. Treatise willdent be extraordinary to see. Lets look at the data, swiss stronger. Track your pack. Set a curfew, or two. Make dinnertime device free. [ music stops ] [ music plays again ] a smarter way to wifi is awesome. Introducing xfinity xfi. Amazing speed, coverage and control. Change the way you wifi. Xfinity. The future of awesome. Our Kevin Cirilli says it will be an eventful thursday, friday, and into the white house as the white house is under renovation and maybe this administration under renovation as well. Good morning, everyone. This is bloomberg surveillance. We thank all of our Washington Team for their assistance. Marty schenker will join us in a moment. Right now with a briefing, your first word news, here is taylor riggs. Taylor white house chief strategist steve bannon has gone public with his speech over china with a in a conversation with a leftleaning magazine. Bannon once a tougher stance on trade with china. In beijing, americas top general says war with north korea would be horrific. General Joseph Dunford said letting north korea develop the ability to launch a Nuclear Attack on the u. S. Is unimaginable. He told reporters President Trump asked the pentagon to develop a viable military option. In new york, five people face charges in what was a 5 billion scheme by a bank of america ploy e. Employee. Fired by the alleged scheme came to light. In the u k, retail sales rose more than forecast in july driven by the biggest jump in food purchases in almost two years. Increased of goods. 3 . The data shows british offers are changing their habit week has of faster inflation. Global news 24 hours a day, powered by more 2700 journalists and analysts in more than 120 countries. I am taylor riggs, this is bloomberg. You so much. Nk wall street is hearing from a number of different retail giants this week. This comes as u. S. Retail sales advanced in july by the most this year. This follows target yesterday which showed improvement in online sales and customer traffic. For more on this, bloombergs executive editor for global traffic, jackie joins us. Trump was kind of mired in this risk because of charlottesville, how is he going to respond to it . Walmart is significant. The ceo of walmart is in a red state and battling a red and blue problem, as it were, in a sense that he got caught on both sides for not stepping down enough and when he did a sickly, out and in when he did i thinkome out people are going to want a little bit of clarity to get his stance in the aftermath of everything that has happened this week. Francine for our global viewers , 140 million americans shop at walmart every week. What does he say that so that he does not aggravate any customers . Mcmillan basically has to say walmart is for all shoppers. It is a business, people of all walks of life shop at their stores. They are going to continue to serve the american public. He has to basically play the business line by maintaining sort of the moral stance and try not to get too much on either side. Tom you run a large team looking at the juggernaut of amazon. We had two guest yesterday guests yesterday saying walmart is the real drug are not in terms of social retail change in america. Is walmart still moving forward in terms of damaging traditional brickandmortar . I think it depends on which side of the fence you sleep on. I think amazon, for sure, has the cloud, the money, the weight i think a lot of it will come down to this new Spike Brewing over how thirdparty sellers are being taxed on amazon online, thats the next new battle. The enemy . Is amazon the enemy . I think we will see in courts basically when it comes down to the tax issue. Tom i look at what we have seen certainly from brian levitt a lot, a rising nominal gdp. Are we just assuming across all sectors including retail, better revenues into the end of the year . I think walmart is going to be particularly interesting. I think you will probably see they have had 11 consecutive quarters of growth. We will probably head to the straight growth so we will be looking at the bottom line and thats where you may see interesting movements around the investments they are making into internet retail and basically eating up with the joneses, as it were. Crummy across the board generally for retail. Walmart and target have been the standouts. Francine are they able to compete online with amazon . They are making a concerted effort and it seems to be paying off. Areet the results starting to show the fruits of their labor. They have all their cards stacked up, but amazon is obviously a big giant. Tom thank you so much, our executive editor for all of Global Business in london. With me, Stan Collender and brian levitt of Oppenheimer Funds. Brian levitt, where are you now at Oppenheimer Funds on retail . Its like the group you want to run from, is that what you of done . Brian the valuations are certainly compelling tom ill say. Brian but i think you have to be careful. There are certain Business Models that are increasingly looking passe and the markets are taking them to task. I think that investors should not assume, to your point, that chief valuations necessarily mean good entry point. Tom i want to get out in front of our next box, Marty Schenker will join us from washington as the president tweets what i was against our heated tweets this morning. Ask ceos has just published trumps friend several months of selfdestruction. Will we see action or do we drag this into the end of august . Stan i dont know what you mean by action. Tom resignations. Stan not resignations, yet, but you will see movement away from the president. Thats a big story with the ceo movement the last couple of days. I had to be close to the president early on and now they are saying its important to have distance. Others will take their cue, but it will not be immediate. It will be more policy driven. I expect Steven Mnuchin say until there is a debt ceiling issue and when that is finished, weve got no problem, he can leave. I think gary cohn will stay il it is clear there is tax reform is not going anyplace. There will be changes and i dont think the president is going to be able to get this back. He is pushing people away from them not trying to include them in the administration. Francine going back to retail, is there any industry that is not disrupted . Every walk of life is being disrupted by walmart, amazon, media, by twitter and the likes, is there one industry you think will become more valuable because at the moment it has complete kind of control . Brian it is a natural progression. If we dont see industries being disrupted, we are not advancing as a society. We see this across time and history, a natural progression and if you are not keeping up, then the markets you are going to be adversely affected in the markets. I think there are some parts of the market where valuations look compelling and investors could continue to do well if policy continues to remain accommodative and the yield remain steep. Financials in particular could be a place where you see value. Steep yield curve, perhaps regulation of industry which might be easier for the president to do than a wholesale package on tax reform or fiscal stimulus. Stan doesnt the president s trade program hurt retailers eventually . If the president gets what he wants, dont they end up having to have their margins squeezed . Brian it is possible. We have benefited as consumers and business to business from lowcost products around the world. If we have more of a protectionist stance or take a tough line on that, it certainly can hurt some retailers. Tom lets come back, brian levitt with us and Stan Collender. Francine we will continue the conversation on geopolitics across industries and theres a new edition of Bloomberg Markets magazine featuring my an interest in agriculture, infrastructure, now he is looking to invest 60 of his Business Empire outside africa starting in 2020. We had a good conversation on that and we also spoke about soccer. This is bloomberg. Taylor this is bloomberg surveillance. I am taylor riggs. Lets get the Bloomberg Business flash. Walgreens will give u. S. Antitrust officials more time to approve the plan to buy more stores. 0 rite aids regulators were unhappy with original 7. 4 billion dollars takeover proposal, so the company said they would spend less and by fewer rite aid stores. Cisco predicted revenue in the Current Quarter may fall as much as 3 . The ceo is trying to transition cisco into a company that is less dependent on hardware. Stay with us on bloomberg and we will bring you a conversation with ceo Chuck Robbins later today beginning at 9 30 a. M. In new york. 2 30 p. M. In london on radio and television. Shares of the parent of Victoria Secret victorias secret fell. The company also said sales of victorias secret spell fell more than expected in the second quarter. That is your Bloomberg Business flash. Tom thank you so much. Tweets. Ident with Marty Schenker in washington who has been so valuable in giving us perspective, bring up the tweets. This is on the senator from South Carolina publicity speaking senator graham falsely stated i believe the woman who died, but it may be her mother, such a disgusting lie, he just cannot forget this election trouncing. There is really not much to say here. I might point out that the great divide here is a president who grew up on third base going after the senator that came out of a bar pool hall liquor store in a small town. The difference here is the ruin relationships forever when you do this stuff, dont you . Marty you can. It feels like donald trump can still senator sunday stand by him. Lindsey graham has been one of his more outspoken critics, but he has supported donald trump on some policy initiatives, so the question is, is there any longlasting effect that hasnt already happened . I doubt it. That, in yournge experience, to the polls . We had telling us yesterday the president could migrate below 30 . Do you link senatorial support to the gallup polls as an example . That the only polls matter are the polls among the legislators back home. If they feel that aligning themselves with this president is a vulnerability in their reelections, that is when the poll numbers become significant. They have already distanced themselves from donald trump in a pretty substantive way. It really matters to their reelections come midterms in just 18 months. That is what matters. Francine will that be the big test . We are looking at polls for the president , but midterm elections will actually make a difference . Marty that is correct. They obviously understand the donald trump makes controversial comments and they understand attacks people people, people who criticize him, it comes down to the midterms, are they vulnerable . Tom we greatly appreciate the perspective and working with our Bloomberg News team in washington. We have breaking news on alibaba, the stock has been extraordinary. A lot of alibaba doubters have been quieted as we saw the 10 said yesterday tenset. This is just one aspect of the bull market that is so unloved. Francine the First Quarter revenue seems to be beating analyst expectations a touch. We want to see the relationship alibaba will have with amazon. They also have a Cloud Business. I know you were mentioning this is so much bigger than a retailer. That Cloud Business revenue up 96 . I will delve a little deeper and bring you any updates. Tom weve got an important interview with Chuck Robbins of cisco coming up later this morning. Stan collender with us on the politics of the moment. I was talking to marty shanker about the senator from South Carolina, you have got to explain to me how people dont take this personally when we have the legislation that you are expert in, when we have the debates that you are expert in. This kind of tweeting doesnt affect to that debate . Does anddefinitely senators have long memories. The president continues to treat the senate in particular as it is a subsidiary of the white house. It is not. At best, it is an equal partner and it may be a competitor. Tom bring up the must read. This goes to the heart of the matter where you got a politician such as senator graham, whatever his politics is , dealing with washington and the idea of a dealmaking swashbuckling entrepreneur. Here is a great mmr, a morning mustread from the epidemic, i confess to minimal private academic. The stan you need to have a reservoir of good feelings you can call on. He needs to be able to go to Lindsey Graham or any other senator and say i know you were not with me in the past, but i need you with me now and have them go with the white house. Its not clear to me he has that kind of clout any longer. Tom we will continue to monitor what we see out of washington and fold it into all the coverage. Had you do that . You show up to the office and everybody using your Vacation Days and you sit there unloved and you go to tv and you see Francine Lacqua and the rest of it. There it is through the day. Way more important over here is a rolling news feed of what we have got and we you can come down here to various and sundry. Here is a trend seen the clock chart on the Francine Lacqua chart on the treasury under bund. You can crush that manager you have that is on vacation right now, you can steal that chart. Its a beautiful london, the right shot of london. This is bloomberg. Lacqua in london and i am tom keene in new york and our team in washington working on a fractious and busy washington. How about a single best chart . Lets go bigger and broader. We have shown this many times before, but really always needs to be said and particularly brian levitt with Oppenheimer Funds had the courage to be patient in international stocks. They were underperformers for a number of years and they come right in with this u. S. Chart we see here and there is that massive inpatients to go to cash. How do you fight to that . Brian you fight it by using a Historical Perspective to remind investors tom if you dont know the history, you cannot play this game. Brian you cannot play this game. If you look at any 15year period come equities are positive 99 98 of the time. Stocks beat bonds 95 of the time, yet investors remember the big drawdowns and they want to not experience of them, so they avoid the upside. Tom what is the linkage correlation touch at the hip of International Blue chips and u. S. Bluechip multinatural multinationals if france goes up, does exxon mobil go up as well . Brian not necessarily, you have seen correlations regionally increase over the years as they and asme more investable investors have swung in and out of portfolio. If you look at the last eight years, you had a significant outperformance from the United States for good reason. The u. S. Had better policy out of the financial crisis than the developed world, particularly europe and the emerging markets suffered from higher inflation rates and tighter policy in the u. S. That is now reversed. Inflation down in the emerging market and the u. S. Taking a more gradual stance and the emerging market is doing quite well. Forcine you need to leave surveillance radio, i will join you shortly. Where is the biggest distortion . Brian i would say the biggest distortion is probably the amount of money that sits on the sidelines or that continues to go into a low yielding bond funds. If you look at the last eight years, you have seen over 1 trillion into bond funds and etfs and several hundred dollars out of equities. It is famously, more americans played the lottery last year than household equities. That continues to be the biggest distortion. We are in a secular bull market and it is generally unloved. The signs of the end of the cycle are not here, but investors still francine do you worry about the mechanics . You mentioned etf and this goes back to best passive versus active investment. Most i think what i worry about would be the big with the big influx into etf and more into market weighted strategies is that a lot of money continues to go into the same name. To the extent there is a distortion, if you look at the s p 500 for example, every dollar that goes into the s p 500, 20 is going into the top 10 names and the weighted average price of sales of those 10 names are double that of the rest of the broad market. What we talked about, obviously i am representing a firm that does active management or alternative waiting methodologies weighting methodologies. Poised tothose are outperform. Over the longer term, as we have an economic cycle, as rates gottenmove, people have used to know move in Interest Rates, no real economic cycle, that is generally good for passive. My opinion is the next cycle will favor active and different weighting methodologies than market cap. Francine think you so much, brian levitt their of oppenheim or funds joins tom and me on radio. Bloomberg radio coming up, a conversation with Chuck Robbins, cisco ceo at 9 30 a. M. In new york. That is 2 30 p. M. In london. This is bloomberg. Taylor the president jonathan the president pass pro business president s probusiness images tarnished. Steve bannon comes out fighting in a rare magazine interview, he says the u. S. Is that economic war with china and a confused Federal Reserve, the majority of officials still committed to gradual heights, but lose conviction in their inflation forecast. From new york city, good morning, good morning. This is bloomberg daybreak. Alongside me, david westin and assignment. S on futures are a little bit softer, down three points on the s p 500 up by a 10th of 1 and the fx market standing out front and center is euro we weakness and some dollar strength. Off by. 6 and what a choppy week it has been for treasuries. On offer on the back of it this decent retail sales bid. Yields are higher by about two basis points at 2. 24 on the