the dax is down some 1%. a little bit of pressure on the stoxx 600, i guess a little bit of concern over the tax overhaul. there is a little bit of pressure on miners. the bloomberg dollar index -- again, the dollar seems to be pretty steady. i am looking at the pound because of theresa may and there could be some kind of rebellion brewing. we will get our political correspondent on that. we talk economics and monetary policy with larry hathaway. he is the head of investment solutions. then, we discuss as it presses -- we discuss asset prices. overhaul. the tax we are also just getting some breaking news out of india's central bank. it is maintaining its neutral monetary policy stance. i know we will get the chart of for you and i will bring you any breaking news that we have from the rbi of india. let's get straight to the bloomberg first word news. nejra: donald trump will formally declare jerusalem to be israel's capital and direct the state department to start the process of moving the american embassy there from tel aviv, a historic shift of policy that could inflame key allies. the white house has warned and the actual moves will take years, and the specific subject toourare european policies. the target of an assassination attempt by islamic militants that was broken up last week by the arrests of two men. to kill was intended theresa may. meanwhile, theresa may is facing a revolt from inside her cabinet over a plan to keep you.k. regulations aligned with the brexit. an embarrassing breakdown on monday prompted fresh divisions. that is after brexit backers challenged the prime minister. bitcoin has passed $12,000 for the first time. the largest cryptocurrency has soared from less than $1000 at the start of the year as optimism climbs. the surge has been accompanied by growing warnings that it is an asset bubble going to burst. asset ons leading climate change spoke exclusively to bloomberg. other nations can step in. china should step in and place of the united states. nejra: global news 24 hours a day, powered by 2700 journalists and analysts in more than 120 countries around the world. .'m nejra cehic this is bloomberg. francine: theresa may is once again facing a revolt from inside her cabinet over brexit negotiations. the prime minister is said to come under pressure by the senior ministers. they plan to keep regulations in line with the european union. may is struggling to unblock the brexit talks that broke down over the irish border. the eu has given her until the end of the week to present proposals it finds satisfactory. joining us now for the hour is larry hatheway. larry, welcome to the program and to our new headquarters. david, it seems like every week we hear about another possible rebellion. how should we view this one? david: we just saw that news of an assassination attempt against the prime minister is the least of her worries. she had got to juggle the demands of the hard brexiteers. boris johnson is now speaking out against his concerns about the possible deal. she has got this deadline of deadlines and most of all, she has got the aussi unionists. relations seem to have soured. over the last couple days. without the d.u.p. she cannot govern. francine: so, what happens next? who did she go to talk to first? boris johnson or arlene foster? david: they have got to come to some sort of wording that is acceptable to all five. there is some news out of ireland this morning that they are willing to change the wording a bit to insert something in there which guarantees the integrity of the united kingdom. that is the problem the d.u.p. had initially. if they could come to an agreement, mrs. may will be off to brussels this week, ahead of the deadline on friday. we are keeping close tabs on that. francine: was it unfair for michel barnier to say he was expecting something concrete to happen on monday? david: everyone thought that ons was going to be struck monday. nobody expected the d.u.p. would torpedo the agreement. it was all set there was going to be an announcement and things were going to move on. this came out of nowhere. obviously, mrs. may will not make that mistake again. she will make sure the d.u.p. are in full agreement before they go to brussels. francine: larry, what does this mean for investment? how can you possibly figure out what comes next politically to make your investment decisions? larry: we have just heard the challenges, which are enormous. right now we are focusing on the challenges at the level of the u.k., but there are similar issues across the eu, in terms of what they expect to see out of this, not in the least of terms, ireland. we will probably make progress and find an agreement step-by-step. that each step we are likely to see volatility within asset classes because of the uncertainty is endemic to this story. francine: but how high are the stakes? we are talking about the d.u.p. taking out their support, and that would mean a general election, would it not? and then we model a jeremy corbyn prime minister. larry: there is a level of fresh elections here and a change in government. let's step back to the more modern types of market risk we are seeing. for investors, problems are there in the sense that it is difficult to find an equilibrium level for the pound. what is probably more certain is all of this uncertainty continues to weigh on the economy. as a result, interest rates should be rising -- that should not be the case in the u.k. therefore, the opportunity resides within the gilt markets. francine: is the d.u.p. really thinking about pulling support? if they pull support, they don't get the money the government promised them. david: they have got 10 mp's in westminster. they are holding a huge amount of sway over the u.k.'s policy. there are huge amounts of extra infrastructure, money pouring into northern island. the horror for them is jeremy corbyn at number 10 downing street. he is much more of a sympathetic partner with the republican cause. there are huge reasons they want to keep mrs. make in power. but they do have these strong red lines. francine: what would you buy in the u.k. in terms of assets? >> we are looking for the weakness of the curve to move back into the gilts. overall, i would tend to fade in the long run. francine: if you look at david's world, does this simply have an impact on pound? >> i think the pound is the barometer for the brexit negotiations. the gilts reflect things going on globally. francine: larry and david, thank you so much. larry hatheway stays with us for the hour. up next, we take a look at the legacy for janet yellen and the challenges ahead for her designated successor. this is bloomberg. ♪ francine: this is "bloomberg 'mrveillance," and i francine lacqua in london. nejra: shares in steinhoff international holdings have slumped after the ceo resigned with immediate effect after the global furniture and clothing retailer reported irregularities in the account that requires further investigation. the owner of the france-based has ordered a probe in the matter. retail companyhe at 3.4 billion pounds. the proposed offer would create a real estate investment trust with 21 billion pounds of assets. the companies expect to sell 200 billion pounds of property if the deal goes ahead. mark schneider has made his biggest acquisition yet, agreeing to buy aetrium innovations for $2.3 billion. the company is acquiring aetrium with that investor group ina bid beyond segmenting mainstream brands. that is the bloomberg business flash. francine: jeffrey goodlatte says janet yellen's legacy is looking pretty good. that is thanks to the fact that she started raising industries and reducing the balance sheet. jay powell might face a challenge getting members of the fed to agree on the future for the rate hike. larry hatheway is still with us. larry, i don't know what is janet yellen's legacy. is it the yield curve? she has done a pretty good job so far. y with it is too earl our views on the legacy. thus far, we give her very high marks. she and others navigated the most difficult of circumstances financially and economically and pulled it all off, i would say, very effectively against a number of other challenges, amidst the political backdrop. it is hard to find fault with their policies, but of course, it is possible that they could have underestimated the currency inflation. it is a little bit early to judge. francine: right, and also i guess we have to wait to see what the legacy is, depending on the yield curve and the two-10 year spread. does that mean something ugly is up there, or things are different this year? larry: there has been a lot of pressure on that yield curve and is predictive power in the past. but it's also been a false predictor. we have seen it move in this fashion before without signaling much about the future growth of the economy. i think that is true. short rates are being lifted by the fed's policy. there is low inflation and of course, bond buying by the central banks, changing in the liquidity preferences as well. as a result, there is a structural shift in the demand for long and securities up there. -- long-end securities out there. francine: does that mean something is distorted? larry: it is. francine: what does that mean for the future? where does it go next? isry: my sense is the fed ready to move at the next meeting in december. we will see a tendency for the curve to flateten. if the tax bill flattens, there will be a tendency -- if the tax bill passes, there will be a tendency for the curve to f latten. with further employment and a further acceleration, we will see that process and the long-e nd will have to adjust. francine: are these wage increases, or is it the lagging inflation we have not seen so far strengthening. larry: it is the latter. we are beginning to see a few signs that inflation is picking up not only in the united states. japan is the best example of that so far these days. longer for aags a variety of reasons, including the fact that expectations are that inflation will remain low. francine: as president trump fills the federal reserve board with his nominations, what do you worry about in 2018? are there too many new people on the board? larry: there is a board management issue that has to be resolved. bernanke made it more collegial with every sign that they pursued the same policy. there is a sense here a board management that is important. there is then, of course the fundamental backdrop. francine: larry, thanks so much. the transforming of the market structure for non-equities. that story. there is a lot of reading on the bloomberg terminal. we will discuss that next. this is bloomberg. ♪ francine: good morning, everyone. this is "bloomberg surveillance ," where we focus on economics, finance and policy. we expect a rapid shifting from over the counter trading to electronics. that is according to a survey that found the new rules, which come to force in january, would transform the market structure economically. we are now joined by larry hatheway, head of investment solutions. larry, thank you for joining us. what do we actually know about the winners and losers at this point. we are three weeks from implementation. >> i think it will take a little while for us to figure out what happens. people are still adjusting to all the rules. this survey shows that they are expecting a change in trading and where trades happen from over the counter markets to trading venues. and this has been a change long coming over the years, but it will probably excel or because of mifid. francine: do we understand all of the unintended consequences? or does it take six months to a year to figure out what those are? >> i think it will take a little while longer. people are expecting changes on how and where they trade. but these rules come staggered over many months. they all start in january, but the effects roll forward. francine: how much time, larry, do you spend talking about mifid? larry: quite a bit. for us, the focal point initially is, on the investment side, it has been to organize the research activities. asundling is part of mifid well. the discussions have rapidly moved towards the trading platforms consolidation. francine: so, what do we know? we spoke a couple of weeks ago about the impact from u.s. banks and the u.s. regulators. armie a lot wiser about how they will be affected? -- are we a lot wiser about how they will be affected? larry: the sec put out some guidance essentially shielding wall street brokerages from having to directly comply with mifid for a period of 30 months. i think it is still a little bit of an open question how asset managers decide, you know, how to comply with this law on a global basis anyway. that will take a little while longer to figure out and there is the potential for these changes to have a ripple effect across borders. francine: ok, what does that mean, larry? is there an opportunity for you guys in mifid? or again, do you want to get your house in order and see how it goes? how are people treating it? >> there is a certain amount of taking on board the regulatory changes and then optimizing around them. they are focusing on how research is shared with an the firm. i think the successful firms will be those who can leverage what they have to pay for. passing it on to the ultimate client. but to be able to leverage it across the firm, i think that is the key. i think research was inefficiently distributed across the firm's before and the focus is now on the identification of the cost. francine: but the consumers, are they really that winners? >> it is very hard to say. i think it is like janet yellen's legacy. it is early in the process to say. the demand for research will go down because it is being priced in a much more transparent fashion. the question is whether that will over time affect the investment performance for the clients, and then how that becomes part of the trade-off for this part of the structure. regulation imposes certain costs borneose two have to be by those who use the financial services. so, it is hard to say whether it is going to be from a financial perspective better for the user, but it is law, and it is a question of now getting on with it. brushne: thank you, silla and larry hatheway stays with us. coming up, mark mobius talks emerging markets. i am also looking at your market check. there is quite a lot going on. i know there is one stock we have to keep an ey eon, and that is steinhoffe. but european shares are down. this is bloomberg. ♪ francine: good morning, everyone. i'm francine lacqua in london. we are getting some breaking news out of the brexit s secretary. he's answering questions on the house of commons brexit committee. mr. davis is answering questions as we speak. he says progress has been made, but the government hasn't assessed the brexit impact sector by sector. a lot of the conversation will be on what it means economically for the u.k. as soon as i see them, we will get more on that and we will see if it has any impact on pound. with get to the bloomberg first word news. nejra: u.s. president donald trump formally declared jerusalem to be israel's capital. he will direct the state department to start the process of moving the american embassy there from tel aviv, a historic shift that could inflame allies. the announcement could be more symbolic than substantive. the white house has warned that any actual move would take years and the boundaries are still subject to peace talks. the u.k. prime minister was reportedly the target of an assassination attempt that was broken up last week. according to u.k. reports, police believe they planned to detonate a device at downing street and kill theresa may in the chaos. the director general of mi5 is said to have briefed cabinet members on the plot. may is facing a revolt from inside her cabinet over a fight to keep in mind after brexit. efforts to rescue the breakdown prompted brexit backers challenging the prime minister just days before a key deadline in talks. bitcoin has past $12,000 for the first time amid speculation that the widespread use of futures will lead to digital currencies being used as an asset class. the largest cryptocurrency has soared from less than $1000 at the start of the year as optimism climbed. the surge has been accompanied by a growing chorus of warnings that it is a bubble poised to burst. the pope's leading advisor on climate issues has called for others to fill the void after donald trump's decision to pull the u.s. after the paris climate agreement. >> yes. other nations can step in. a whole lot of other nations can step in. [indiscernible] nejra: global news 24 hours a day powered by more than 2700 journalists and analysts in more than 120 countries. chaim nejra cehic. this is bloomberg. francine: the executive chairman of franklin templeton says a rally in developing countries is likely to continue. mark mobius said he put money in china and vietnam. >> it is sustainable. we had three years of really bad performance in the u.s. market. now with the u.s. market leveling off, emerging markets are back. people realized that is where the growth is. i expect we're going to see at least 20% growth in emerging markets going forward. that has got to happen. in,o not too late to get and what would make you sit up? frisks do you see -- what risks do you see? >> the macro point of view, north korea. i believe the u.s. is going to take some action. maybe shooting down a missile. the other risk is the internet. the global internet community. you have these hackers who are going into systems, and with more and more cloud services bitcoin, and, these interlinking systems, the possibility of a hacker disrupting the entire system on a global basis is there. this is something we have to look at. market that you would bet on, name three markets to put your money into. >> china of course. there's more opportunity there. india would be next. among the smaller markets, vietnam. that is where a big change takes place. >> china has managed to rein in financial risks without compromising growth. with xi jinping consolidating his power, do you expect the fallout to be greater? >> he is making very big changes. it is having a beneficial effect. one of the reasons why growth is continuing in china is the crackdown of corruption. remember all the money that has been wasted slowing down systems. this is going to have a big impact. china continues to grow. francine: that was mark mobius speaking to bloomberg's haslinda amin. let's bring back larry hatheway, gam group chief economist. of 2017.bdued reruns ; i think that is right. i think it is a consensus view that there's going to be more subdued returns, stay the course, because local growth and earnings are supportive. it is hard to argue against that. one can also be complacent. construction is probably the key here to marry that view. larry, your biggest concern, last time you wore on bloomberg tv, inflation in china. is that still the case. larry: i would say the most probable disturbance for markets early next year is a decline in global growth. they are peaking. they are likely to come down. beyond that, and china is tightening credit in the economy, and historically that will mean the economy will slow. is what industrial metals are beginning to tell us. the biggest risk to portfolios must be inflation. it is not at all expected. it is not something you see many people talking about. record in thelio sins that it will undermine the case for duration fixed income, as well as for equities. francine: could inflation come from china? larry: doubtful. not in the u.s. or europe. china is too small in terms of its contributions. francine: we hear from the pboc governor, he's leaving, so can talk maybe more openly. how messy can it get? do you worry about policy? larry: transitions can be difficult. has language changes, people are trying to decide what are the preferences, and people have to become accustomed to different ways of addressing these issues. in the medium-term, consolidation of power is taking place. the government wants to crystallize those sorts of political steps into something that works for the economy. china has an opportunity over the next one to two years courtesy of global growth itsing up to reduce reliance on credit, on property, and i think that is going to be the story that unfolds over the next one to two years. francine: i have a chart which i'm going to try to bring up. chinese holdings of u.s. treasuries. treasuries holdings by chinese treasuries have gone up. is that a dollar move? the dollar hasn't moved very much. we've seen the dollar depreciated against the renminbi. i think what is really happening is you've seen some further contribution both for the current account reserves, but also the capital account has experienced less stress and strain. combination of those things is keeping the reserve position intact. francine: larry hatheway stays with us. the euro area expansion helping the continents largest economy take its momentum into 2018. this is bloomberg. ♪ good morning. this is "bloomberg surveillance. " german factory orders rose in october, a sign that it will carry strong momentum into 2018. by the underpinned fastest expansion in a decade. german companies tapping into trade and domestic consumption. still with us, larry hatheway. the concern on germany is that , a grand coalition, or a government is taking longer than expected to form. the politicsook at of things, or just focus on inflation and jobs? tom: -- larry: i'm sure they will focus on inflation. it is not as though people want to be overly complacent in germany. it is a constitution that really does force compromise. a lot of this is gamesmanship between new: attention -- new potential coalition partners. there willrocess probably force us into either grand coalition or stable minority government. i think the central bank can focus on fundamentals. francine: it seems they're going to take their time. end date.'t give an what does that tell you about the horse trading in the background? there are vacuums on the vice president leaving. is that what you want to focus on more than the actual bond buying? larry: central bankers tend to adapt to their institutions. i'm a little bit less concerned about some of the changes there. the roadmap is pretty well set. the ecb will be exiting from its bond buying program. i don't think personnel changes will make that much difference. there can be a bit of volatility. the fundamental thing is whether core inflation can rise up from here and whether headline inflation is boosted by oil prices. firmlye: mario draghi believes that inflation is just around the corner. do you believe it as well? larry: he also represents a rather dovish voice. i do think there's a confidence that is not yet entirely spoken by the ecb in the evolution of economic activity within europe that will allow them to exit this policy, setting the stage in 2019 probably for zero interest rates. i think we are in train. take a fairly interesting shock. the ecb is a single target central bank. would tend too dampen inflation. the pace of tightening dictates where the euro goes, which dictates the pace of tightening. it is a bit of a feedback loop. francine: are we now underestimating political risk? the italian elections coming up. what are the chances of having -- what are the chances that another country wants to leave the eurozone? larry: italy has attracted attention with things like bank reform and earlier election outcomes. people tend to forget that by may we will have elections there. five-star is an italian exit type of party. i think some of that complacency arises from the outcome in france, which produced a pro-european outcome. germany probably is more european friendly there's a grand coalition. the kind of european spirit i think thrives in that. it is clearest in the case of italy. the 10-year btp's have rallied the most over the last three months. the fact that people are neither concern over the about political issues, but are also confident that stronger growth improves the credit quality. there's a lot of good news. francine: are we underestimating the impact that a difficult brexit would have on german economics? larry: that is probably slightly overdone. the e u a much bigger trading partner for the u.k. than the other way around. european growth is moving beyond export dependency. we've seen that in rising real incomes. think the more domestic demand oriented economy is a bit more resilient. 's thank you so much. larry hatheway stays with us. we will have powerful roundup of your asset check. this is bloomberg. ♪ francine: this is "bloomberg surveillance." shares in steinhoff international holdings have slumped after ceo quit. markus jooste resigned with immediate effect after the retailer reported irregularities in his account that required further investigation. the owner of the furniture ore chain has appointed an auditor to probe the matter. share price is down on the back of that. janice is in johannesburg. the shares dropping 57% following the announcement. this was unexpected. >> certainly. the company was supposed to report this morning. were going to be hearing from the ceo. -- no one several expected this. the shareote that price had fallen 18% prior to today. on monday, the company released an announcement saying they weren't going to release audited results today. that was because of investigations in germany. that probe has been going on for a number of years. certainly unexpected. the results were not released today. francine: thank you so much. just to make everything clear, it is rocking the company, but this is rapidly expanding into an empire spanning australia and the u.s. in the u.s., congress is working to recognize a -- reconcile tax bills to avoid a federal shutdown on saturday. the investigation by robert mueller appears to be entering a new phase. michael flynn leader guilty to lying to fbi agents. joining us now is stephanie baker. larry hatheway is still with us. stephanie, what are we expecting? stephanie: the senate needs to pick the senators that will go to conference to reconcile the senate and house bills. there's several key differences between the two. places to watch what they do with the alternative minimum tax. the house bill repealed that. the senate bill kept it. , again, thee repeal house and senate versions differ on that. then you had trump introducing the notion that they could raise the corporate tax rate to 22% to pay for some of these provisions. when that corporate tax cut takes effect, the senate wants 2019, the house wants immediately. you cut pulling saying this tax bill is extremely unpopular. i don't think that is going to derail everything. it is just the noise around it. the majority of americans believe this is a tax cut for the wealthy. francine: this is probably the most important story out there. what do we know about any updates, where does the investigation go next? an attorney for rick gates, who worked with paul manafort, is expecting further charges. that was not expected when that indictment came down. clearly there is more to come. yesterday, the subpoena to deutsche bank for bank records related to their financial dealings with trump, that is showing that the investigation is widening and looking at trump's financial dealings. francine: larry, how do you model this? do you ignore it? larry: i don't think we can't ignore it. it had pretty big impact on daily movements in asset prices. it is hard to see how this is going to play out with respect to investment policy. there are a number of things that are beginning to cause jitters in markets. we've seen it again overnight. that reflects the kind of positioning in the marketplace. previously we were not seeing materialize, i think there's going to be a sense that a lot of investors are going to do risk a little bit. francine: to they need to model president pence? larry: i think that is a long way out. the implication of that, impeachment is a political process and you probably have to get through the 2018 midterm elections, change the house and senate, to think about that. scenario, a majority in the senate is unlikely to be achieved. francine: what does it mean for president trump? please a lame-duck, does it not been -- how much of an impact does it have? history suggest they do nothing washington is nuts japan thing. if you get through the tax legislation, which may have impacts on the economy, and you leave that as the primary legacy, i think the markets will turn their attention elsewhere. they will be looking at china. francine: thank you so much. stephanie baker and larry hatheway. in the nextntinues hour. tom keene joins me out of new york. blackrock'soined by vice-chairman. this is bloomberg. ♪ francine: market selloff. european stocks follow asian equities lower. investors consider taxes and a possible government shutdown. we will digest all of this as the vice-chairman of blackrock speaks with us this hour. a possible rebellion as theresa may vows to keep u.k. rules close to the eu ones. catches a bit above $12,000 for the first time ever. this is "bloomberg surveillance" and i'm francine lacqua in london. tom keene is in new york. i am looking forward to talking monetary policy and the flattening yield curve with philipp hildebrand. is: the policy for the u.s. always a big story, but i agree, the yield curve dynamics are absolutely original. we look at the perspective from the former leader of the swiss national bank. francine: first, let's get straight to the bloomberg first word news with taylor riggs. taylor: british security forces have broken up a plot to kill theresa may. police believe that the plan was thexplode a bomb at downing street offices. may is now facing a new revolt of her brexit plans, this time from her own cabinet. according to people familiar with the matter, boris johnson environmental secretary have a plan. they believe the proposal will dilute brexit. itsident trump makes official today. he will formally declare jerusalem to be israel's capital and will order the u.s. embassy be moved there from tel aviv. it is a historic shift in policy. the white house has warned the actual move would take years. and he was known as the elvis presley of france and became the country's they just are. the star has dined at the age of 74. he made rock 'n roll popular in france. he had more than 100 million records. global news 24 hours a day, powered by 2700 journalists and analysts in more than 120 countries around the world. i'm taylor riggs. this is bloomberg. tom: thank you, taylor. let's get to this quickly. futures are negative a little bit. that's extraordinary number, 52.85. the acceleration is nine basis points. that is narrowing the distance between the 10 year and the two year spread. that is the vanilla spread, the standard one on wall street. oil is churning as well. next screen. equities, 11.62. that is the five year-seven year spread. below it is the three months-30 year spread. points.141 basis that's in nine basis points in the last two weeks. we have flattening, flattening, flattening. francine: tom, this is but i am looking at. it is definitely a risk off kind of mood. bonds are advancing and treasuries are climbing. a lot of folks in the u.s. are worried over the government shutdown. that is on saturday. my them also looking at pound because we are looking at a possible rebellion -- yes, another one. bitcoin, over $12,000 as well. this is the belly of the curve. the five to seven year spread. the difference in yield between the seven year in the u.s. and the five year -- this is extraordinary, the stability here. this examination on this long chart is extraordinary. francine, i have never seen this. francine: i really like your chart. we need to ask philipp hildebrand about that. onare looking to agree concerns over a partial shutdown over the u.s. government. that means we are looking at the longest losing streak in two years. that is what we will talk about with philipp hildebrand, the vice chairman of blackrock. he served as the chairman of the swiss national bank and was the man behind the 2011 o move of te franc to the euro. thank you for giving us your time. we are looking at market distortion. when you look at what the market is focusing on, how do you interpret the flattening yield curve? it is either distortion, or there is something ugly happening. philipp: we still have the overall regime of a sustained expansion. it is no longer accelerating, so it is at a different stage than the last time we spoke, but i think the flattening yield curve is primarily a function of short yields rising in anticipation of the federal reserve and in anticipation of a strong u.s. economy. in the long-end, i see this primarily as a function of enormous savings in the world. in 2018, the fund expects there $21 trillion of savings worldwide. that is the force pressing down on interest rates, rather than a fear of a rapid slowdown. francine: tom wants to talk to about the s&p. coming,k inflation is or that there is something a little more sinister and inflation will be very slow to go off of. philipp: i think central banking will be largely as it should be, very boring. i kind of see not much news on that front for the short to midterm horizon. and that's a good thing. again, the long-end of the yield curve, i think we have to look at this in context with the global liquidity out there. the savings numbers are in enormous. if you look at the last couple years, what has been invested globally, it has been roughly $5 trillion per year. if you assume the economy has exhilarated, that number will go up, but it is still very likely going to be short, significantly short of the $22 trillion of new savings coming into the system in 2018. 2018 on theoring monetary policy front. what does this mean for the markets? philipp: i think the regime will be one where the fundamentals will carry the day to a strong recovery. the difference to 2017 will be that valuations are in a different place. the upside is, people will be more cautious and will pay a lot of attention. certainly expect that you will see the markets getting agitated, excited about events, or anticipating events. but fundamentally, i think the strong, sustained and consistent recovery worldwide. francine: here is they never boring tom keene. -- here is the never boring tom keene. tom: i have never done this on a banner, folks. i have jay powell's name here. there is got to be a draghi -powell he said. you have lived this as a central banker and you have lived is through dealing with the many challenges of the world as they relate to switzerland. how does blackrock be look at every day? the fixed income market seems so odd. philipp: on the monetary policy front, i think we will see a continuation of the current regime. where there are a lot of question marks for me is around regulation and banks. this is coming at a time when we are at a relatively late cycle in the u.s. we have largely unfunded tax cuts coming into this late cycle. on top of that, there are many discussions about rolling back or at least softening regulations. to me, that is the most critical question as to what will happen with the new leadership. not so much around monetary policy, but much more so about the approach to regulation. if we were to see banks starting to behave much more in an big super and fashion again over -- fashion againt over the next couple years, that would be the indicator of risk that would be important. i think we need to look at the new fed leadership primarily through the lens of what will affect the regulatory side. tom: with the lessons learned over the 10 years of which he lived in this mess, we have gotten this message, the natural inclination to increase leverage, are we doing a better job to contain that? philipp: i think we are in a better place, both in terms of quality and quantity of capital. i think we do worry that there is the moment you start to deregulate, that would be a mistake -- certainly on capital. for the moment, this is certainly talk. we have not seen any action yet. sense ofem to sense an optimism. there could be many things that could be readdressed on the regulatory fund. but if this were to be about rolling back capital, i think that would be the wrong policy at this stage in the cycle. francine: the ceo's you speak to, are they confident enough to start investing, or do they still focus on shareholders, buybacks, and dividends? is there a concern that in five to 10 years, we will not have enough investments? philipp: i think they have investment plans in place. i don't think you see any policy changes that change these policy plans. we still have these huge savings, the number i mentioned coming from the imf. that is the indication that there is still a sort of uncertainty regime that prevails. there is still a shortfall of investments relative to savings. i think that has to do with a broad sense of uncertainty. it is around technology. it is around retirement. it is around aging populations. it is around the debt level. there are many factors that play into this what i would call cautiousness that prevailed, despite the strong economic numbers we have seen during the last 18 months. tom: philipp hildebrand with us for the entire hour. philippoy, hildebrand with us for the next hour. the nation's deficit, and tax cuts. with us, martin feldstein. stay with us. ♪ taylor: this is "bloomberg surveillance" an di'm taylor riggs. -- and i am taylor riggs. steinhoff international plunged after a ceo quit. the french furniture change controls mattress firm in the u.s. in the u.k. consolidation in the shopping mall business. hammerson has agreed to buy intu. nintendo video games will be playable on hardware that the japanese company did not make for the first time. for now, the new initiative is limited to china. they are distributing games of the super mario run brothers on the tablet shield. tax policy center says there are some complications. you would expect that with any large legislation and particularly one running through a 48 hour news cycle in the dead of night. what is the complication within our tax legislation right now that gets your attention? >> well, i think, the big question is how they will reconcile these towo bills between the senate and house. they are flashpoints on specific issues -- when do they introduced the corporate tax cut, and how low will it go? and then the obamacare repeal provision. those are the areas where the two bills differ, and how do they reconcile those? on top of this, you have this -- the government set to run out of money on friday. i think that adds additional drama to this week. tom: within this -- and i looked at this last night. the "new york times" had a fabulous chart on the state and local taxes discussion. what i noticed is not only blue states, red states, the beautiful detail, but how purple the screen was. there are many congressional districts that are purple on state and local tax, aren't there? stephanie: yeah, i think there has been a lot of good analysis on how this tax bill will fit sort of, you know, blue states, particularly those earning $200,000 and above, where they pay higher state and local taxes. and how it will benefit those voters in red states. i think it just adds to the drama about how this will play out particularly in the november midterms. the big picture here is this tax bill is not popular. we had polling yesterday that show the majority of americans think this is a tax giveaway to the wealthy. it has actually opened up a lead for the democrats -- you know, people saying they think the democrats would be better at handling taxes. this could have a huge impact on those november midterms. tom: for our global audience, i would like to discuss the idea that we have never seen this before -- literally, ever. there has never been a legislation so unpopular. francine: yeah, to be fair, tom, there are many things in 2017 that we have never seen before. what is the level of angst for the government shutdown on saturday? they need to find a deal before then. stephanie: i think they are trying to come up with a stopgap measure that will keep them open through december 22. but they need democrats. they need at least eight backrats in the senate to whatever spending bill they come up with and the democrats want something in return. in particular, something for the dreamers, these young immigrants. i think that will be a flashpoint. francine: i have questions for philipp, the first, you have to answer briefly on russia. what comes next? stephanie: the significant thing i read overnight was that a lawyer for rick gates -- the close associate of paul manafort that she said he expects further indictments, two proceeding indictments. everyone had thought that the indictments against paul manafort and rick gates, that was it. well, there are more to come. francine: if you have a washington, d.c. that is not really workable, is it really that bad for the economy -- we have seen it in the past where if you have a lame-duck president, the economy is getting higher by itself. the trend is your friend and things should be ok. philipp: that is generally true. it is the same for germany at the moment. it is easier to have a difficult political situation when you have a robust economy. these robust environments never last forever. we should not lose sight of the importance of sorting through these political difficulties. tom: within these political difficulties, is a look back to a year of elections -- will we have the same political electoral turmoil in 2018? philipp: i would expect not, tom. i think the fact that we will see the continued growth hopefully in 2018 helping this environment. now, you know, we would want to see a resolution of the german coalition discussions, or at least clarity on the minority government, whichever way this would go. german is the most important economy in europe. by the way, it is the furthest advanced economy in the world, in terms of the cycle. this happens within the context of the eurozone. but i think it is very important that these things do get result and to the extent that we do have a political issue in europe at least it will be the question in germany. but by and large, i don't expect we would see a replay of 2017 on the political front. francine: thank you so much, philipp and stephanie. now, as the house of commons brexit committee questions day today brexit talks and negotiations, some comments from the irish finance minister. this is what he said. the deal can be reached on brexit. they see a ruling for the u.k., and the irish finance minister said the government is not looking to change the status quo. let me just remind you, especially if you are a global viewer, the concern was there was a dropped agreement between ireland and the u.k. government. and when you have the d.u.p. saying, guys, i am not ok with this, we have to focus on arlene foster. this is bloomberg. ♪ francine: good morning, everyone. this is "bloomberg surveillance" with tom and francine. let's talk about bitcoin. it has surpassed $12,000 for the first time, with the hope that it will be viewed as a legitimate asset. investors warn that bitcoin is a bubble poised to burst. let's get back to philipp hildebrand. how should we view bitcoin? is it a folly, or will it become an asset class? philipp: a couple things. there are a number of signs of exuberance. we are starting to see these pop up. i think that is the first thing to say. secondly, it is innovation. now, if you look at the history of money, the history of the central bank and the history of money, what you find is every time -- and ken rove has written about this in his latest book extensively -- every time something new comes in around money it tends to come from the private sector. banknotes originally came from the private sector. a lot of these innovative things come from the private sector. this is no different. however, what we have also seen in history every single time and this is what many people ignore here. ultimately governments either regulate or they in a sense, co-opt it and take it over. this is the part that is lost in this discussion and when that happens, then at the very latest, that will be the moment this folly crumbles. so, i think the notion that this can be perpetually done outside of the hands of government is a great fallacy. if you study history, it is clear that is not how things work. innovation comes from the private sector always historically, but it always gets co-opted by the government. tom: very good. philipp hildebrand with us on bitcoin, launching over $12,000. later, dianne blackburn. look for that in the 1:00 hour. from london with philippe hildebrandt, this is bloomberg. ♪ tom: the chart of the moment. not my chart of the year but the chart of the bitcoin. there it is. i've never seen a chart like that. that green arc is a sense of what is called log convexity. a log chart, bitcoin is accelerating to an ever higher price. it will be 15,000 before philip hildebrand walks off the set in london. the leader to have swiss national bank and of course with blackrock. like bitcoin, there are all sorts of charts now and there seem to be real distortions not only with fixed income but with other assets. is this because of the various asset bubbles, the quantitative easing that we have done for 10 years? >> i think it is a number of things that are playing into this. but i would not put bitcoin into any kind of other category. this is a classic case of a bubble in the making. idiosyncratic in space. by the way, if you looked at other historic especially 10eds, for such cases, -- ed episodes for such cases you would find a similar chart that would end in a similar way to these other cases. in terms of market distortions, we still have excess savings relative to investments worldwide. we have had extreme monetary policy. if you look at q.e. , about 10 trillion assets have been purchased. $10 trillion worth of securities have been purchased. that's a big number. but again, you know, put that in context, in 2018 alone, we're going to have $22 trillion of savings worldwide twice as much as of total amount of purchases done by the central bank. tom: there is a little bit of savorings out there. this is the normal bitcoin chart. not all the mathematical fansiness we looked a. here is 8,000, 10,000, which i think was two shows ago. here we are this morning, $12,000. with our bloomberg first word news here is taylor riggs. taylor: according to the u.s. ambassador to china terry branstad. he said the push for nuclear weapons is the biggest threat to human kind now. in china, canada's prime minister justin trudeau's attempts for trade talks apeer o be doomed. both sides are scrambling to find the right message to bridge the gap. in southern california, a giant wild fire has spread and forced new evacuations. almost 30,000 people have fled their homes. at least 150 buildings have been destroyed. and alabama republican roy moore is elected to the senate next week, he can expect to face an ethics investigation. moore has been accused of having inappropriate relations with teenage girls. global news 24 hours a day powered by more than 2700 journalists and analysts. i'm taylor riggs. this is bloomberg. tom? francine? tom: the future of investing, something we're going to look at here as we go into the end of the year and frankly into 2018. i want to bring up the bloomberg era. this is a chart that philip looks at every single day. this is the equity report. more important for blackrock to look at fixed information in short paper. this is the single digit markets we're in. sarcastic.'m being the s&p down. we can slam this thing into swiss fraungs. delothse that now. you can see it up in the corner. moves from 17% down to 13%. do you just assume dr. hildebrand regression to the mean, reversion to the mean rather, just assume like every other series we come back to normal in 2018? >> what matters for investors is the long-term. and if you look at that question, what is key is where interest rates will ultimately settle. i think most reasonable observers assume today still and i would put myself in that camp, we will be in a longer environment for sometime. i don't think we'll see any extreme formor secular stagnation the way larry summers put it out initially. it is likely interest rate also not -- at the previous levels before the crisis. mean the discount rate will be lower and that means long-term your capital market assumptions, what the market will yield will be less than hat we're used to. if you look at those, what they will tell you the sort of four, five years forward, we're looking at sort of 60/40 portfolio. generating somewhere between 4% and 5% returns. we remain in a lower return environment and these numbers that we're seeing this year and last year should not deflect from that. now, if you know, again, the key question will be where will the risk-free rate be? tom: exactly. do we know? >> i think we don't know. this is not observeable. but i think there are lots of reasons to expect the rates to remain lower for longer. this has to do with demographics. first and foremost. it has to do with high debt levels. the high savings numbers i put out at the beginning is important in this context. this sort of shows there are a number of structural forces likely to keep rates lower. tom: this is an extremely important discussion. francine, here is the 20-year swiss piece yielding next to nothing. it was negative for a while and the success of this year, we ve a positive yield on the 20-year swiss frank.t know what free rate is when i look at the swiss 20-year chart. francine: you're probably not wrong. where do you find the normal market would be my question to you and philip. first of all, when you look at the rise, what does that mean for the markets in the future? >> well, it means people want to have market exposure rather than security exposure. i think so we need to put things in context. the reason we at blackrock want to be in all markets is because we want to be the leader for our clients regardless of what their preference is. if they want to be passive we want to be able to offer them pass i ever exposure. it is growing because clients want to have pass i ever exposure. at the same time, we need to keep things in perspective. right now if you look at every dollar traded, for every dollar traded in the world in equity markets in passive, there is something like $22 traded in the overall markets. this is still a relatively small segment. the total amount of pass i ever instruments in equity markets -- passive instruments. when i read these stories, it is important to get the facts right. people like blockrock and other firms are offering this. francine: in five years, how different will it be? how different will people invest? the mechanics of investing change in the next five years? >> i think it depends a great deal on whether confidence comes back. the active management can ustainbly extract value. if act i ever performance and y the way, in the last sorts months, active performance has significantly improved. speaking for ourselves, and it may well be that as clients see this, they may opt to choose a form of investment that offers the possibility, the option of having some extra performance, from alpha. if alpha were to continue to be very difficult to extract by and large in industry i think we would then expect to see more focus and preference for passive. it really is a dynamic interaction between the credibility of alpha being extracted sustainbly versus people saying you know what? i don't want to pay these extra fees. i just want to be exposed to the market. francine: will that lead to more distortions? >> no. i think it leads to challenges for asset managers in terms of what i would call stewardship. how do asset owners exercise the vote on pass i ever exposure. is that treated differently than on active exposure? i think we're going to have a very important stewardship debate going forward. i think this will be one of the big themes over the next couple of years. to the exneant passive continues to grow, which i would expect to continue to happen, how you exercise your vote and rights as a shareholderer in a pass i ever world that is rapidly growing will be a topic that you and i will come back to many, many times over the next couple of years. this is a very important question, rather than sort of thinking of it in terms of market distortions. you i'm going to interrupt for this entire hour. we're going to continue here. we'll continue with dr. hildebrand. on radio, i'll continue, maybe with john ferro, with pimm fox. i learned yesterday, it is not a.c. milan. it is milan. francine taught me this. milan. radio. ferro, fox. francine: good morning, everyone. this is bloomberg "surveillance." theresa may is facing another revolt this time coming from inside her cabinet. the foreign secretary and environment secretary are raising concerns over may's plans to keep regulation in line with the e.u. after brexit. we also understand from sky news that theresa may may be talking on the phone with arlene foster. i don't know whether this is later or happening now. let's get straight to jim ross who covers u.k. politics for bloomberg and also the co-author of the book "betting the house" the inside story over the 2016 election." he wants to write the inside story of how we got through the negotiations. what do we know? boris johnson has been very quiet. he is a staunch pro brexit. they were going to have issues with what theresa may has put on the table. >> what seems to have happened is theresa went to brussels monday although not having scared off everybody in her own cabinet about exactly what she was looking to do in terms of a deal. she is in trouble on two fronts. francine: who should she worry more about? arlene foster? if they take away the votes they don't get any money. how important is it opposed to boris johnson, who may want to become prime minister? >> there are competing demands. she needs to vote. she can't afford the lose the support of boris johnson. he is too big a figure. that would bring her premiereship crashing down i would imagine. if she loses, they will lose the money from the central government but she potentially will lose power in the house of commons. there won't be a freesea may government anymore. francine: how much do we know if she was mad and said we're going to get an agreement and said it looks very bad like she has failed. >> i got a sense on the day that may's office, her team were not very happy with the fact that the details of that deal began to leak out before she had even sat down to have lunch at the dining table in the commission headquarters in brussels. i also feel that it is quite possible this deal was close to being done and there is a degree of political management ing on that is more for show than substance. tom: to an outsider, it looks like they are still fighting the election. i get the idea that it was a close referendum and that the british are still fighting the election day by day. how should europe respond? how should hildebrand respond? how should brussels respond? mr. uecker and the rest of it? don't they just stand outside and wait for these clowns to fix this? >> there was a headline, "stuck in the middle with e.u." and there were clowns and jokers in that headline too. i think they have to wait. there will have to be some kind of proposal put toward. the time is running out period of time the end of the week is deadlines of the deadlines the european union has set for the u.k. francine: the deadline of the deadline of the deadline and then you negotiate and start from square one. what does it mean for financial services? there seems to me there is a timeline problem. if this gets dragged on which it has been so far, you need to make finds. >> this is the key question. there is a lot of noise here. the critical thing to remember for british people and the government and for us as financial services here, there will be no deal. it is really important. it needs to be said. it is not said enough in my view. there will be two potential outcomes. only two. one is the sort of canada plus or canada agreement frankly. which means you retain or you regain full control over the border. you don't have the europe yuanian court of justices as a problem. you will not have financial services and you will hopefully have the free trade agreement. i frankly think the canada plus is questionable. i don't see much potential for a financial services agreement in that first scenario. the second one is a sort of call it the model e.e.a. a lot of what we have today continues but the red lines will not work on immigration in the courtor justice. there is no third way here. this whole kind of imagination and fantasy of there being a third way is a fallacy. it is either or. the consequences of the first case is the brexit. the hard brexit so to speak will mean no financial services agreement. will mean that the city will have to completely reorient itself to a different role because it will not have access to europe. it is important to recognize there will be no fudge. that is very clear. frankly europe is just going to wait. whether or not you go into the first or the second scenario is really up to the u.k. from a european perspective, there is not that much to do other than wait and see what they decide to go for. tom: can switzerland get jobs from this? i know everybody is going to mover to frankfurt or dublin. you name the city. zurich has the best airport. that's all it comes down to. can zurich win jobs out of this uproar? >> zurich is doing fine. we have a very low unemployment rate. a good economy. the financial sector is focused on wealth management. so i think one needs to be realistic here. the ability to absorb thousands of jobs and take on some of this. i think it is limited. remember, switzerland does not have a financial services agreement with the european union. in many ways, there is a very similar story there. this is precisely my point. you cannot have the cake and eat it. this will not happen. francine: what do we understand about the government? do they have financial services as a priority or not? if you're right, you prioritize financial services or focus on the rest. >> to me there is a lack of clarity, understanding or honesty in this entire debate. there will be no fudge. presumably, the brexitters or the hard brexitters are very much aware of the fact that there will be no fudge. therefore brexit means no financial services agreement. i think they know that. it seems to me they are very intelligent, politicians and individuals. i will be shocked if they had idea somehow they could get both. to answer your question, it seems that the brexitters are prepared to sacrifice access to financial service taking control of the border and not have the court of justice meddling in the u.k. affairs which is fair enough. that is the position you can take. it is very important to recognize, i guarantee you there will be no fudge from the european perspective. francine: thank you. philip stays with us. thank you tim ross. we'll be talking about maybe china next. maybe about pay. whatever you want. you can log on to tv go if you're a bloomberg customer and we hope you are. you look underneath the video screen and then you can ask tom and i to put dwose our guests next. this is bloomberg. ♪ taylor: this is bloomberg "surveillance." c.v.s. deal doesn't go through, they would have to pay the same amount as the company opposed to the deal. in south korea, a reminder of the bleak outlook for the global shipbuilding industry. samsung plunged after forecasting unexpected losses nd share sales plan. and that's your bloomberg. tom? francine? francine: thank you so much. still with us to discuss the future of europe. phil hildebrand and bloomberg's tim ross. i want to go back to something you said about brexit. what does it mean for the city of london and financial services. you basically say there is no nuance or gray shadows. it is either a kind of terrible deal for the finance or a good deal when negotiating brexit. >> yes, i think so that is essentially right. it looks like the government with few exceptions in the cabinet from what i gather and hear, wants to go the hard route. the brexit route which means no financial services access for the city. that means the city will have to re-invent itself. the city is not going to disappear. this is a great historic financial center. it has gone through many different versions and has always re-invent itself. i have no doubt you will see a very active city 15, 20 years from now but it will be a totally new model because the european piece will not be there. how this is going to evolve, innovation is hard to predict. i'm not pessimistic in the long-term but i see no circumstances in which you can have both control over immigration, no court of justice meding in the u.k. and at the same time access to the city in europe. tom: the blackrock challenges, we mentioned investing in dr. hildebrand, what is the number one strategic test you have for blackrock this year? >> i think technology for us at the firm and for the industry as a whole is the greatest challenge as it is frankly for most industries and most firms. you know, we think we're very well positioned. it is a very exciting venture for us. we are already in many ways a technology company. and luckily have early on invested in technology. this will continue to be the greatest challenge for us. tom: thank you. dr. hildebrand, greatly appreciate it. vice chairman at black this rock. tim ross, thank you to the travels from parliament. in the next hour, the nation's deficit. martin feldstein. ♪ is this a phone? or a little internet machine? [ phone rings ] it makes you wonder. shouldn't we get our phones and internet from the same company? that's why xfinity mobile comes with your internet. you get up to 5 lines of talk and text at no extra cost. so all you pay for is data. choose by the gig or unlimited. and ask how to get a $200 prepaid card when you buy any new samsung device with xfinity mobile. a new kind of network designed to save you money. click, call or visit today. tom: this morning, francine is locking in her capital gain on her successful saying trades -- are successful fang trades. maybe it is brexit. back-to-school air one. boris and michael have had it with soft brexit. prime minister may and the state for exiting the european union. brexitcks would like just right. donald invades a jerusalem. good morning. this is "bloomberg surveillance." i am tom keene. with me, francine lacqua. listen to tim ross in the brexit debate. is this the worst since 2016? aancine: theresa may has had couple of rough months. the election, she lost the majority. we saw a rebellion's, she has had to sack ministers. she is sliding on two fronts. and boris going against her. she needs to figure out what to do with ireland. it is not great. to our first word news. here is taylor riggs. taylor: theresa may is facing a revolt to her brexit plans. according to people familiar with the matter, boris johnson and michael go have raised ribs -- raise concerns about her plans. johnson believes the proposal threatens to -- brexit. this comes as david davis says trade decisions will be made on economics, not ideology. [indiscernible] we will look at that in quantitative rounds, as and when necessary. you will be pleased to know the chancellor accused me of being an extreme pragmatist. i have not decided whether to sue. taylor: trump makes it official. he will declare jerusalem to be israel's capital and will order the u.s. embassy be moved there. it is a historic shift in policy that will anchor key allies such as turkey. the move house says will take years. global news, 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. i am taylor riggs. this is bloomberg. a turn to the markets, that huge trade she did this year. current flattening, we have seen it with new adjustments to the curve. let's go to the second screen. the vix elevated. i put spreads in there. across the board, flat yield curves. it is a distorted world of fixed income. looking at home depot with share buybacks, i did not buy amazon stock. it is illegal to buy any kind of thought. i did i so many presents for my kids i may have moved amazon's stock price. investors trying to continue to lock in gains. treasuries climbing. it is not only about the tax reform, they are trying to avoid a government shutdown. it is a different story, the deployment of cash. of 2018s to the debate and 2019. how will corporations do financial engineering to the end of the decade? it has to do with tax legislation and incentives from that. from ae: we did hear couple of companies saying if , theyet the tax rebate will give back to shareholders. with a $15 billion buyback plan. it is a lot of debate. from the white house, one of our reporters with their perspective on many white houses. margaret joins us. it will be a long day for the president on many fronts. with jerusalem. this is a crusade. who is it a crusade for that we will move the embassy from tel aviv to jerusalem? a campaignhis is promise he is attempting to fulfill or tell supporters he is working to fulfill it. he is inflaming tensions in the middle east and testing the possibility of prospects of a peace deal between israel and the palestinians. plan.d this was his that it was a matter of when, not if. he tapped an ambassador to israel who has been a proponent of this and pro-israel. he has done two things at the same time. one is to signal to his supporters and the world that he will sign a waiver that keeps the the in tel aviv -- keeps the embassy in tel aviv through the end of the term. he is coupling it with the state department with a plan for the move. that is what is controversial. todoesn't want to have explain why he signed the waiver when he said it was time to end that. there are so many questions about what this means. the location the state department will settle on? what about the palestinians? jordan,rs seem to be the palestinians, and possibly jared kushner. tom: we have seen the turmoil in the middle east. we have a framework of israel that is a little dated. what does israel want the president to do with the location of our embassy? margaret: they have stayed quiet in this area between the plans that began moving forward for this announcement and this announcement that will come in a few hours. we will hear more from the israelis. more important, the dynamic between the israelis and the saudi's. trump is testing the idea that , the situation is not nearly as important of a situation as it used to be. in many ways, this is a test of that. and of this under the radar relationship that is tentatively building between the saudis and the israelis. next stepwhat's the in this russia investigation? the russia investigation is moving forward on many different fronts. from the white house perspective, it is reconciling how to address what does trump , when did heknow know it? how isolated and how widespread is the knowledge of michael flynn discussions and interactions with the fbi were? francine: what about tax? this is unpopular, to say the least. what happens next? is the nextiday shutdown cliff. the leadership in congress and avoidmp working hard to that. leadership will be back at the white house tomorrow and this should come as a surprise to nobody. that freedom house caucus is added again. folks who paved the way for this to get the conference are lot of questions about deficits, long-term spending, long-term implications. of -- whileions leadership hopes to decouple the fiscal cliff, the shutdown prospects with the tax vote, they are intertwined in terms of jockeying for how to fend off a shutdown. tom: thank you. an eventful december in washington. martin feldstein of harvard university. students, a really weird kid and microeconomics -- in microeconomics. l -- there was glenn hubbard as well. teaching social analysis claims 10, what is the leading principle of the tumult we are in now? what would you teach entry freshman? >> markets work. markets work. we have central bankers. they are doing quantitative easing for ever and ever. martin: it is not my fault. i have been saying they should have started a few years ago to start normalizing, to start raising interest rates. the price we are paying for their not doing that is a financial -- a fragile financial sector. prices are out of line with historic norms. tom: what are the singles -- the signals of the fixed income market? kids? pin that on your do you pin that on the central bankers? martin: i do. in central washington, frankfurt, elsewhere. central banks have driven down rates to strengthen the economy. they should have stopped, backed off of a few years ago. there is a college southwest of harvard. they did well in football this year. they have a guy who talks about exuberance. are we in a time of exuberance, like 1999 and 2006? martin: bob schiller has an index of what is happening to share prices. his adjusts for inflation. with historic experience. ratiop 500 price earnings is higher than its historic average because interest rates are super low. tom: we have so much to talk about. we want to talk to you on the deficit. let's get organized, come back with martin feldstein on the deficit deficit and the growth, and this tax legislation. there is a press conference from the president of the united states. in thement on jerusalem 1:00 hour. we will bring that to you. ♪ taylor: let's get the bloomberg business flash. depot hasing, home announced a $15 billion share buyback plan. they confirmed four-year sales and earnings. shale -- sales are ripening. a ceo quit in the midst of accounting irregularities. steinhoff owns a french furniture chain and mattress firm. that is your bloomberg business flash. tom: thank you. with martin feldstein, we will do the deficit here in the tax basel. a little bit of central bank. original central banking. -- is that acipate harbinger of a rules-based fed and do you support a tilt towards more rigor? martin: it is a good thing he has been appointed. there will be turnover at the fed. marvin is a good economist. he has concern about inflation and financial stability. asis not a matter of rules it is a shift in focus to include financial stability as a key determinant of what the fed is trying to do with monetary policy. studied -- wesher went to pick a vice chairman, like mr. fisher. to fit the mold. would you serve as a vice-chairman if called upon? martin: that is not an issue i about.ent time thinking they need a strong vice-chairman. they need a vice-chairman who is an economist and who will work well with jay powell. stanley fischer was exceptional. will the next vice-chairman be as strong? do we need someone with a voice as strong as dr. fisher? someonewe need the fed. in stanley fischer is a remarkable person in that role. he had been the head of the central bank of israel. it is hard to believe we can find somebody with the same credentials, but we can expect them to find somebody who is a strong economist who can move the fed towards thinking more about financial stability rather than trying to tweak the inflation rate up from 1.6% to 2%. look at theen you tax overhaul, will it impact inflation expectations at the margin? may, a little bit. that is not the serious part of what it is doing. there are important things this tax bill will do. the impact on inflation will not be a significant thing. --ncine: where do you think how would you quantify and qualify this tax overhaul? --tin: having a lower tax corporate tax rate than we have , lower than the average rate among other industrial countries, it will make the u.s. the place to invest capital. we will see american firms not sending as much of their funds to invest abroad. they will bring back funds from foreign subsidiaries and we will see foreign companies choosing to invest in the united states. that will have a powerful impact on investment, productivity, and real wages. thank you. martin feldstein of harvard university stays with us. coming up later, a conversation with carson block. that is at 10:00 a.m. in new york. that is usually a fun and a spirited conversation. ♪ withphilipp hildebrand francine and london. with me in new york, professor feldstein. two charts on our fiscal state with martin feldstein. the first one, the deficit to gdp. go out further than the agony of the 1980's? i don't like the deficits we have, even at 3.5%. to see these deficits and the deficits during the coming decade. you have to see them in the context of what is being achieved by the corporate tax reduction and the inflow of capital from the rest of the world. growth from get that that will make it less painful? martin: a little. if you ask why deficits are bad, they crowd out private investment. we will have so much inflow from the rest of the world and from u.s. firms bringing back capital that that will outweigh the effect of the crowding out. tom: does that mean a strong dollar? is the worst nightmare a plaza of core dollar strength? martin: i think we will see a strong dollar. chart, this is the debt to gdp stock and flow. the green circle is martin feldstein at the white house a few years ago. then. not where we were now we are up here. grouphe president and his understand that? martin: i don't know what they understand. i don't know where this 100% comes from. is that now or in the future? tom: it is a summation of the dead. whether you look at 70% as you as pure debt. it is a lot of debt. martin: the growth in the debt we can expect over the next 10 years, $1.5 trillion, about 5% of gdp. it would add about 5% to the debt to gdp ratio. the capital inflow will out balance that in terms of crowding out and taxes. brilliant on fiscal policy. we will return. later today, the congresswoman from tennessee. this is bloomberg. ♪ francine: bloomberg surveillance in our new studio with a look out across the city. --renovated a new museum to but this is just underneath our building. you can see it there with the beautiful architecture. theresa may was said to be on the phone with the leader of northern ireland, arlene foster about an hour ago. workeaders said there is to be done. foster has claimed ireland blocked the u.k. from showing her details on a proposed deal on the irish border. that is the key issue holding up the brexit agreement. the u.s. is ready to talk to north korea as long as they stop testing nuclear devices and missiles. nuclearrea's push for weapons is the biggest threat to humankind right now. has spread and forced new evacuations. almost 30,000 people have fled their homes. at least 150 buildings have been destroyed. moore is elected to be senate next week, he is expected to face an epic investigation. moore has been accused of having inappropriate relations with teenage girls. global news, 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. i am taylor riggs. this is bloomberg. tom: this is what we like to do. you have martin feldstein with us. definitive on fiscal analysis and the greater in. the founder, inventor of the nver. marketxcellent in economics. what will we see? are we a fully employed america? to 100,000. is 80 looks set.hing i don't know where we are going to find them. falling quickly. .elow the idea bring up the chart. i showed this chart three years ago. this is people unemployed. when things are ugly, they are ugly. what a recovery. ian: labor participation rate is lower than it was. we have a drop in unemployment from 10% to 4.1. it is still lower than it was below -- before the crash. my guess is a lot of these people who have left the labor force will not be coming back. they don't have the skills nor will they be in the place -- said you have to look at it as a macro single economy. i said john edwards is right. there are two americas. those employed in those hopeless. how do you look at it? do you look at it as one or is it a bimodal aquatic -- economy. >> the decline in the labor force participation rate has turned around the little bit, but it is still down. a lot of that is demographics. the population is aging. people are retiring. it is not a bad thing. i would not make so much of the decline in the labor force participation rate. i don't think there is hope for continuing to increase .mployment we can get some increases in labor force participation. maybe the labor market is tight enough. francine: let me bring you to my chart. does it tell us that we could be looking at a recession or is this something different? it is different. we are seeing the effects of federal reserve policy and the policy of the other central banks. about movingoncern into recession so much as it is the result of the buying of the short-term and long-term by the federal reserve. an, do you agree? i am not sure the ideas going to last longer. there is an upside risk. over the next six to nine months, we will see longer rates rising. of the ecb, because and the bank of england and everybody, there is no way we will see long rate rising. it cannot happen. there is too much liquidity. impacte: do tax reforms inflation expectations at the margins? >> they will add a little fuel to the fire that is getting hot. we don't have the final bill yet. we can't be sure with the impact will be. to an implying tax economy with a 4.1% unemployment rate. tom: in cambridge, all the sitting down, eating kale and reading the harvard crimson and then they got their tax bill. they all ran into the charles river they were in such shock. not popular in cambridge, new haven, up and down the eastern seaboard. how can we get this through if it is unloved? martin: congress believes once it happens people will like it. i think that is true. i think the press -- tom: you are going to blame me? no, in general. the press has been saying what a terrible bill this is because we are focused on someone earning $75,000, what will happen to his tax rate? more important is what will happen to capital inflow and real wages. that will be part of the medium and long run effects. in the short run, we will see reductions and withholdings. people will be happier because there paychecks -- because their paychecks will rise. arecine: a lot of people saying they will reinvested to keep shareholders happy. how can the president prevent that? martin: he doesn't have to. ceos don't take the reduced taxes and say i'm going to give more money to my workers. -- wages will rise because there is competition for workers, there will be competitions for workers as firms invest. they need more workers. that will bid up wages. rising productivity will make that possible. companies are going to respond. are going overe the next several years. in the short run, people will see we are withholding because of the changes in tax rates. does it impact gdp at all? i am talking about at the margins? does the tax proposal help? martin: absolutely. >> could it have done more? more.: you can always do the impact over the next several years, as capital comes in and we get more investment, that will raise productivity and raise gdp. i don't think there is much doubt about the fact that if you place tou.s. the invest because of lower corporate tax rates, if that happens, we are going to see an increase in gdp. tom: you are killing me. but spring up this chart. -- let's bring up this chart. wet is the screen messaging use, tv . there is the bloomberg dollar index. it only goes back 12 years. martin feldstein suggesting we are going to see flows in, which is french for stronger dollar. how much stronger dollar? a year from now, 3% to 4% higher. can you give me a bigger number? ian: it probably won't happen. other central banks not raising rates. the dollars going to be stronger. i would not want to be an export. tom: this block was a failure. wouldn't give me an estimate and martin feldstein told me the president is useless on tax cuts. this is terrible. who book these people? -- who booked these people? we are honored to have them with us. how about bloomberg radio? two for the price of one. jonathan ferro and pimm fox helping me on surveillance hang." -- "bloomberg surveillance." this is bloomberg. ♪ taylor: this is "bloomberg surveillance." ofbs -- if the cvs takeover at no does not go through, there could be a breakup fee. shareholders -- they will have -- cbsthe same amount has agreed to buy and a $467.5 billion. a bleak outlook for the shipbuilding industry. world's third-largest ship expects shipbuilder projects to keep shrinking. the economy will keep up the momentum going into the new year. german factory orders on next actively rose. they were driven by a jump in demand in investment goods outside japan. francine: theresa may is facing a revolt from inside her cabinet. michael groveand are raising concerns of keeping regulations in line. we also had a short conversation with theresa may. there is still work to be done. with the irish border. let's get to david with more on the situation. you are theresa may, facing a revolt in your cabinet, but you -- is happy.sure who do you focus on first? you heard the reports in the last hour. they have ruled out any sort of deal. the eu has said the next weekine by the end of this to come to an agreement between brussels and london. like that will happen. the chances of progress being made, they are fading as we speak. on the having an impact markets. she is pessimistic she will find her way through this. if you are an if theyional investor, don't have an agreement, do they not talk trade? david: they cannot. that conversation gets kicked into next year. need tos are saying we start trade talks now, work out if there will be a transition agreement. if it does not happen, there is more uncertainty. deal if: is it a big they wait until january or february? is it difficult because they have to make a deal? david: they have to come to a solution to this irish question. thing happened. david davis was talking in parliament. he admitted the government made no specific analysis of the decision to leave the customs union. that decision is blowing up the negotiation. government does not seem to be prepared for these outcomes. many different outcomes across the board. the government seems to be on the back foot. explain to your global audience. this is politics as usual. we are pumped up for the crown coming out on netflix. is this normal? prettyit is abnormal, extraordinary. world are fallhe -- are finding this competitive. the tougheing negotiating stances of the gdp. arlene foster talked about how shocked she was to see that between london and dublin. mp's in westminster are holding the government to ransom. the queen of england is doing great. she cannot get in on this. how does this result with the society in england? >> the country is split down the middle. it is not like there is an enormous mandate. she may have to call the bluff and say -- you can bring my government down, but the next prime minister will be jeremy korten, how much do you want that? standing in the way of the only way forward for the whole country. a mind blowing shambles. tom: we are going to come back. ian shepherdson is with us. tv , you can look at ian shepherdson out there. you can pull up the charts and go back. you can click on an old segment, and drag it over and take that chart to your 10:00 a.m. meeting. this is bloomberg. ♪ francine: coming up, bloomberg daybreak: americas with david westin and alix steel. alix: we are looking at the risk off tone in the market. we are going to look at the 210 curve. 52 basis points. we are talking to matthew horne bok. he sees the curve flattening by the third quarter. tom: we greatly appreciate it. martin feldstein, let's do that near. it is an historic chart. this is the work of michael moussa. professor feldstein, here is the history. the plaza accord over on the left and the reuben dollar of the 1990's. put this in perspective. the parkrry we go to hyatt accord? i don't think that will happen. as centralhas moved banks have changed interest rate policies. it is a big move. the dollar versus the euro as the european central bank decided the only way they would stimulate the economy was to drive down the value of the euro on a trade-rated basis. it came down in that gave them a big boost. that was not because of general market pressures. it was because the central bank reduced interest rates to make the euro less attractive than the dollar. francine: will a higher euro hurt the recovery in europe? looks domestic rather than international. if the euro appreciates more, i'd don't worry it will push them off track. francine: what could push them off track? something ugly and china hurt europe? i would worry about what is happening domestically in europe. emmanuel macron seems to have lost his popularity. toon't know what will happen the reform policies. they don't look as substantial in practice as rhetoric suggests. uncertainacing an election, which could change things significantly. what larry has said, the obvious thing, i did agree with him. i was worried the economy was not coming back fast. that has changed. of 8%,unemployment rates now we have 4%. tom: maybe we can get feldstein and summers onset together. we can go to the tasty in harvard square. this is bloomberg. ♪ ♪ alix: risk off tone takes hold, global stocks drop, and the 2-10 curve flattens. china'subble up over a slowdown. brexit meltdown. analysis was never done. david davis to resign and theresa may faces a result in her cabinet. david: welcome to "bloomberg daybreak: americas." i am david westin alongside alix steel. alix: i cannot keep track of what is happening with brexit, another headline and not good. david: we have not had anything good yet. alix: across asset check this morning, i mentioned the risk off tone. you are seeing that in currencies, euro-dollar down 1/10 of 1%. sterling a little weaker, down 6/10 of 1%. the 2-10 spread continues to flatten. crude oil ge

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