Had a slight beat on revenue. But they did better on earnings per share, 1. 24 as opposed to 1. 19. Thats the first of several to come. Now we want to go to our morning brief. Were going to continue with retail sales reports, as we have macys out at about 8 00 this morning eastern time. 30 minutes later, its weekly initial jobless claims in the United States, plus Producer Prices coming up for the last month. And at 10 00, as alix mentioned, bill dudley holds an economic briefing on Regional Wage inequality. Finally at 1 00 this afternoon, the u. S. Treasury is going to auction 15 billion of 30year bonds. Throughout the day, people on both sides of the pacific are following developments in the potential conflict between the United States and north korea. To take us through the perspective from asia, were joined from hong kong by our chief asia economics correspondent. Give us a sense of how it looks over there. What are the possible effects that people are expecting of a possible conflict . Theyre nervous generally here at the moment, i must say, and there would be quite a significant Global Economic impact if we were to reach a conflict. Analysts are starting to run the numbers. If you take south korea alone, it makes up 2 of the Global Economy. It is home to some of the worlds biggest electronics companies, some of the worlds biggest carmakers and ship builders. Theres a feeling that if there was conflict, it would be rip into the Global Supply chain and drive a shortage of products. And then we have impact on shipping lanes in northeast asia, and this part of the world is am home of the Global Trading scene. And without even getting into the cost of reconstruction, some of which probably will be borne by the likes of u. S. And others, which already have significant debt so. Theres a feeling that if we were to reach the point of conflict, it would be quite a setback for Global Economy, and thats why so many people feel its so important to avoid that scenario. David to what extent of the markets are reacting . Whats going on with the stock markets over there . Enda i dont think the reaction has been especially excessive. On the one hand, theres a sense of deja vu with sabre rattling, but the change of tone coming from the u. S. , especially the warning from president trump. I think theres now a feeling that people are sitting up and listening to whats going on, and theres a feeling this negative sentiment hanging over some of the worlds biggest economies here is not just south korea, its a potential risk to japan as well, potential impact on trading lanes with china, that people are now starting to get concerned about if these latest round of sanctions arent seen to be effective, then theres the concern where does it go next . If it gts the military route, people would be very concerned, and thats where you would see a significant reaction. Alix thank you so much, enda, joining us there. And the question becomes, how do you price an event . The latest call for caution comes from t. Rowe price. The head of Asset Allocations said everything is expensive, and we are late in the Business Cycle. Doesnt leave a lot of room for error. Its cutting its firms allocation to the lowest level since 2,000, plus reducing emerging market debt. Sebastian joins us from altimore, and guys, great to see you. Sebastian, lets start with you. What is your call for caution based on . Well, the context is were in a lowgrowth environment, but equity valuations in the u. S. , with the ratio at 17 right now, are high. This is the 95th percentile in history for the last 20 years, so theres little room, theres little valuation buffer should some of the risks out there materialize and impact growth Going Forward. Alix there is a story in the market that what weve seen in the last few weeks has just been repositioning, so getting out of the some of the crowded trades, not a fundamental shift in the grew of the growing economy. What do you think about that . Well, first of all, lets just put the geopolitical risk out of the equation for the moment. I think thats absolutely right. Theres been no significant change in fundamental developments in both the eurozone, as well as the u. S. And what youre seeing right now is this momentum that the euro upside had developed as well as the dollar, the downside in the dollar, is probably losing some steam, and i think given how quickly things move, it makes sense that the market is going to stop a bit, reassess, and see some consolidation at current levels from. A pure fundamental perspective, however, id like to highlight something. Weve been saying that the dollar should correct lower, because it diverged. Right now the dollar has moved a lot, and we are reaching a point at which the fundamental case for the dollar to go lower will still be there, but not to the same extent as before. I suspect that the market is going to be driven a lot by momentum, and that is why i expect some further downside to the dollar. Geopolitical risk is definitely something thats unforecastable, basically, and its something that we should start factoring into the equation. David so sebastian, to what extent is it not a matter of the fundamentals deteriorating, just not moving as forward and fast as we thought there would . The question of momentum is not as much as we expected on both sides of the atlantic. Sebastian and also whats priced in. There are good things happening out there year over year, Earnings Growth in the u. S. , 10 , 13 in europe. But we go back to the question, whats priced in . Volatility is so low, its ticking up with recent events. But its all about the expectations that are already reflected in evaluations. I think you have a difference if you look at u. S. Equities, for example. U. S. Equities, we are late in the cycle with high valuations, with the Central Bank Going towards the paper route. In europe, were earlier in the Business Cycle, and theres potentially room for further Earnings Growth there. I think you have to go back in to wheres the buff when her youre growing at 2 . David what is the potential feedback of f. X. , particularly the stronger euro, thaw predicted may keep going . What might that do to things in europe . Right, i think this is a fascinating subject, and i say this because we started spending a lot of time thinking about this and trying to model it. If i was to summarize, our results would be as follows. The relationship is not linear, and at the end of the day, what is in the world, right . In the following sense, it is intuitive to make an argument that a higher eurodollar is going to put a profit margin that are under pressure, is going to tighten financial conditions, and therefore, its going to have an effect in the equity market and potentially on the economy. But one thing that this analysis fails to capture is the fact that where is the euro relative to its fair valuation. So let me put it differently, if euro is undervalue and had rises, does it deliver the same amount of tighteninger or the same amount, as opposed to when its overvalue and had rising . The answer is no. Weve done some preliminary work on this, and i think its fair to say that eurodollar would have to rise between 1. 25 to 1. 30, and it starts delivering meaningful and Lasting Impact on equity prices. Alix at the same time, we got sort of some hiring, some of the data coming from germany, not so great. So whats the downside troisk areas like germany, even though you have to wait a while for the euro to rise, some of the fundamentals are rolling over . Right, well, first of all, we have to bear in mind, alix, nothing goes up in a Straight Line or nothing goes down in a Straight Line. Im pretty sure the data will always be contaminated by monthly volatility and there will be fluctuations here and there. But looking at the big picture, i think whats really important about the eurozone, its not just that the aggregate growth has surprised on the upside, dispersion of he growth rate is actually at the lowest its been for a number of years. And that tells me that this is a recovery, although not fantastic by any stretch of the imagination, it does have robustness and seems to be lasting for quite some time. So i wouldnt be that much worried about a drop of one, two, three three drops here and there in a number of surveys or monthly volatility. Alix now you sound like the fed. Seb sebastian, to wrap it up with you, ive heard a lot from different individuals about theres no catalyst for the markets to really move lower, but nonetheless, the upside is limited. Whats the risk, though, in your risk aversion call coming too early . Theres always a risk of being too early with risk aversion or derisking your portfolio. But you have to look at where youre starting from, and youre starting from a point where, again, valuations are fairly high, were late in the cycle, the political sphere has been very volatile, and on the other hand, markets have been quiet. Its been very quiet in the markets. Last two days aside. So you have all these conditions that introduce overall, that introduce fragility. I should say, we still believe role of stocks in the long run when saving for retirement. But right now, there are lots of catalysts that could introduce a pullback, so we have a modest underway to stocks underweight to stocks. David both will be staying with us. Coming up, more on our top story, with a former assistant secretary of state, as tensions with north korea rise. Live from new york, this is bloomberg. I think theyre surprised by inflation coming into the downside during the spring here. And not by tiny amounts, really by a large amount compared to the progress that we made through 2015 and 2016. David that was jim bullard saying the fed is perplexed as the rest of us. Still with us, our two analysts. Sebastian, i want to start with you, because this is all connected with the cautionary tale youve written in this sense. If the inflation is headed down, and were getting c. P. I. Numbers tomorrow, that might indicate the fed is less inclined to raise rates. What will that do to your prescription . Sebastian the question is, is inflation late to the party, or is it just not showing up . Think about Central Banks locally and liquidity pumped into the system. Were talking about 9 trillion in global stimulus. At the pace, even though the of 200 ling back, billion a month being inject globally, and primarily b. O. J. And e. C. B. , so you have all this q. E. And this liquidity injection and very little inflation. Meanwhile, employment is coming up, especially in the u. S. , now down to 4. 3 . So people talk about the phillips curve and what is the fed really focused on, and reducing macro volatility has been a side effect of all this stimulus. So is the fed ok with lower inflation and employment continuing to tick down . Theyre going to be very careful about how they implement the unwind of the q. E. But i will say, last thing, this remains an open question. How all this q. E. Globally, what will the unwind of all that policy action do to the markets . And i think all Central Banks, fed included, will be very careful about how they unwind all of this. David so i think all of us can agree theres uncertainty about the unwind. Does that mean were better off putting it off for a while . That means if inflation royals are lower, that allows for a pause, and that means we dont know whats going to happen, but maybe we want to put it off a bit. Yeah, and just well, i think it largely depends on how the west of the data pans out. Look, the reason here, is i suspect somewhere along the line theres been a structural change in the phillips curve, and thats a conjecture. I cant prove that, and i think no one can really prove that right now. But there has to be a structural change in the relationship between wage growth, price growth, and employment, unemployment rate. To the extent there has been one and growth keeps on going along nicely, although with the rise of 1, 1 1 2 years, i think its probably the right time to start a very gradual unwinding of the Balance Sheet stimulus that weve seen all these past years. However, if the lower inflation that we started seeing in the u. S. , start suggesting that there is a general deterioration in economics, theres something going wrong with aggregate demand, and that is going to put Central Banks into a very difficult spot, and its going to be very, very difficult this time, because they dont have the ammunition to fight back, really. Alix which is really what we heard from bullard yesterday. Were also going to hear from bill dudley later on today n. June, his comments were seen as hawkish, and nothing has really changed. Inflation is still low. The economy and labor market is Still Holding up really well. Do we finally get some real support for the dollar here on that . I think support from the dollar is largely going to come from positioning, squaring of positioning and potentially some technical correction rather than purely on the fundamental front. Of course it will get a massive upside surprise in c. P. I. Numbers and given where the market is currently sitting, having priced in just barely 125 basis point hike over the next 12 months or so, we are likely to get support for the dollar, even on the fundamental front. But i think right now, numbers close to consensus are likely to provide a fundamental support for the dollar. Alix so sebyastian, from your end, if the dollar isnt vulnerable necessaryly to any kind of real upside or shakeout, what is the biggest asset class that is most vulnerable if we start to see inflation wind up pick up, and if the market has to start rerating the fed . So lets look across Asset Classes. Everything looks expensive right now. Weve talked about equity, valuationless in the u. S. Being in the 95th percentile. Global bonds are in the 95th percentile as well. If you look back 20 years. If you look at credit spreads, high yield or Investment Grade, theyre in the 75th, 80th percentile. So you have these elevated valuations that have come from this sustained stimulus of the Central Banks mainly, which makes the relative allocation between those Asset Classes somewhat difficult, but also more important. And reemphasizes the need for the portfolio across the board. So if you ask me which asset class is the most vulnerable, i would say were always, despite a low v. I. X. , which is usually good for risk assets, were always facing some fragility which were late in the Business Cycle and evaluations are so hay. So you have triggers that can push this. We could have a slowdown in china, and you start with that evaluation buffer. Remember, Energy Prices are a huge factor. Theyve been a factor in depressing Earnings Growth globally, especially in the u. S. , and in other areas of emerging markets, significantly a year and a half ago, and now were seeing recovery in earnings, and a lot is coming from Energy Prices. So no clear answer there. Alix bumming us out. Both of are you sticking with us. Coming up, calls for caution are mounting, as we just heard. You got futures pointing to a third day of losses. Were going to debate whether up to the buy the dips. Joining us, we hear about that. He likes the energy stock that i cant wait to talk to him about. This is bloomberg. This is your Bloomberg Business flash. A billionaire is considering a bid for cable operator, Charter Communications. Thats according to people familiar with the matter. He may have some andation, though. Soft bank wants to merge chart we are its struggling u. S. Wireless company, sprint. And thats your Bloomberg Business flash. David thanks so much. As the brexit drama continues, the u. K. Was out with disappointing numbers on its economy today. Perhaps most surprising of all was the fact that exports were actually down, surprise the lower pound. In fact, the trade deficit widened out. So let me turn to you. Given the fact that weve got a widening trade deficit now, does that mean the pound is going to decline even further to make up the difference . Yeah, i think thats about right. First let me say a couple of things about this discrepancy that we may be seeing, i. E. , were not really seeing a lot of improvement in the trade balance. While we have had a considerable decline in the tradeweighted sterling. I think one explanation could be that it takes some time for these declines, these depression in sterling to filter through and start seeing some improvement in the current account balance. But at the same time, i think there are number of forces that we may see further downside in sterling, especially against the euro. Im not that much inclined to call for a higher or lower cable, largely because i think this will be, to a certain extent, influenced by whats happening with the weak dollar factor. But as far as euro sterling is concerned, i think the answer to that sque yes, i expect the euro sterling is going to increase, is going to appreciate from here. Alix by how much, and is that based more on the weak innocents u. K. Or still the story of a stronger euro, better economy, and the e. C. B. . I think its both, and that is why eurosterling aat a sweet spot right now, even though it has appreciated so far, largely because were seeing a divergence. Were seeing a divergence in Economy Dynamics between the eurozone and u. K. , and were also seeing a diverge next political dynamics between the eurozone and the u. K. And lets not forget this, theres still quite meaningful amount of flows in the u. K. That need to be reversed. Well, not need, but they can potentially reverse. These flows were accumulated during the periods of the eurozone debt crisis. There were portfolio flows. Flows are a bit more sticky, of course, but as the mixture of favorable economic and political die natural nicks the eurozone improves further, these flows have further room to run outside of the u. K. David finally and briefly, given your warning about caution for investors, the situation in the u. K. , is it limited to the u. K. Or could it spread beyond what were sneeg britain . Sebastian i think theres always risk of contagion in financial markets. But going back to the euro, you have stronger deprothe than youve had over the last four, five years, the strongest in two years. You have valuation support on a relative basis, being at 15. So you have things that are aligning with the e. C. B. Being still stimulative on the economy. So on a relative basis, i wouldnt be too worried about direct contagion here. David thank you so much, sebastian. Vasileios will stay with us. Coming up, tensions with north korea continue to rise. Former assistant secretary of state will join us. Live from new york, 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. Alix this is where we trade two hours before the open. The risk continues. But reminder, we bought the dip yesterday in the s p, and the spp ended flat. Will that be the theme today . A weakness all throughout youre. The ftse down by over 1 some. Buying coming into the treasury market. Yield down one basis point. 15 billion worth of 30year supply coming online today. Eurodollar weaker as well, went below 1. 17 yesterday. Off that have low level now. Nonetheless, a stronger dollar, the theme when it comes to the euro. Not when it comes to the yen. Dollaryen down. 2 . Ironically, the yen, as a safe haven, even though all the drama happening with north korea. And gold continues to get a bid up for three days, and crude up. 7 . Now we have parts of the curve in backwards. You had opec trimming back its production estimates for the u. S. For next year, and ramping up some demand. So really interesting things happening along the curve in the oil market. Lets get an update on whats making headlines outside the business world. Emma is here with that. Emma south korea and japan are warning north korea not to fire missiles toward the u. S. Territory of guam. South korea says that would lead to a strong response from the u. S. South korea alliance. Japan says it would be legal for them to intercept the missile. North korea has warned it may fire four missiles that could land as close as 19 miles from guam. Opec has boosted estimates for demand of its crude oil this year and next. The countdown projects it needs to supply an additional 200,000 barrels a day. Opec says thats because of stronger than expected fuel consumption and a weaker outlook for rival suppliers. In kenya, hacking and ford claims are threatening to spark an election crisis. The opposition claims that hackers interfered with provisional vote tallies. The Election Commission released initial results with the current president has a big lead. Global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. Im emma chandra. This is bloomberg. Alix . Alix thank you so much. Tesla is making its debut in the primary Corporate Bond market, planning to sell 1. 5 billion of bonds to support spending on its new electric car. The sale is also going to help its Balance Sheet. Joining us now is Bloomberg News Senior Writer for Corporate Finance and the person by to whenever i have a stupid, dorky credit question. So nice of you. Ok, so first of all, whats the demand for this bond so far . Reporter the demand, weve seen a few hours that already sold about a third of it as of last night. We were hearing that theyre overoversubscribed by three times, 2 1 2 to three times. I mean, look alix what kind of yield are we talking about . Rumors are under 5 , right . Reporter absolutely. They went to market saying 5. 25 , around that. However, the interest is such theyll probably be able to do it just under five. Which is amazing. I cant believe that six levels below Investment Grade. Kevin and its already been a billion dollars in the last quarter, by the way. David explain this to me, why this is not deeply disturbing, more broadly whats going on. As we said, theyve never made a dollar in profit, right . Theyre burning through cash, most recently as 1. 2 pillion. They only have enough cash as it is to last three quarters or so, and people are willing to take under 5 interest on this risk . Why does that make sense . Is that saying something more fundamental about the credit market . Reporter absolutely. To you and i it doesnt make sense, but there are people are so much cash, and they need to put it to work. All the investors weve been speaking to are saying youre exactly right, we shouldnt be accepting this yield for this company. However, everyone is going to jump in, and we dont want to miss out. Theres this Massive Movement happening in the market that people who dont want to miss out on the new issues, and you know that theyll profit such that they can process under five. Theyll probably do it around five so you get the pop day one. If you bought it, you feel good about yourself. Alix exactly. What kind of covenants are attached to this bond . Reporter interestingly, the covenants protect tesla in a way that an Investment Grade company would be protected. However, for investors, its worse than a typical junk bond company. So again, its a borrowers market. One of the covenants is about carving out their massive their crown jewel, which is the big fact ritual its the biggest factory in the world, and what theyre going to do is tchaverb out so they can borrow more money against it, using that as collateral. What that means is the bond holders who are going to buy now can be pushed down the rankings to something bad happens later on, because they can layer on more debt on top of that. David now im even more baffled. Normally when you go into a market, there are certain constraints, because there are certain ratios you have to maintain. What youre saying is there are essentially no restrictions on what he lone musk can do Going Forward in these covenants . Reporter weve been seeing covenants for ages in the market, and there are a couple of covenants here that people are typically worried about. Alix is it going to be included in the index . Do we know yet . Reporter i dont know yet. Ill find out for you. Alix ok, good, shell be back in an hour, because then they have to buy it no matter what. Keeping on that point, there is a growing chorus of skeptics when it comes to valuations, and strategists at Morgan Stanley are the late toast add their names to the list, saying a correction in the u. S. Junk bond prices may already be underway. No note yesterday, the bank said valuations are high and investors underestimate how much interest the fed will put on junk bonds when they remain quantitative easing. Joining us now is managing director and credit strategist. And still with us, sebastian page of t. Rowe price. When you hear the warning from Morgan Stanley, and then you talk about a tesla bond that could be about 5 yield, what do you think about the bond market . Reporter i think this is classic late cycle behavior, and whats really interesting to me is that you see investors paying for growth and the Equity Investors are definitely behaving that way, and Bond Investors are surprisingly enough are behaving that way as well. Alix are they looking at the corporate debt as an equity proxy then or separate . Reporter not necessarily, because as you well know, theres only so far credit spreads can go, and Bond Investors dont exactly benefit from equity value going up. But i think its a sense of Asset Coverage and a sense of security that is prompting a lot of Bond Investors to receive lower and lower yield for every dollar that they put to work. David fear of missing out, is there also another phenomenon here, which is, i havent no where else to go with my cash. And are investors right . Are there places they should be looking at that theyre not . Reporter i think they are. However, keep in mind, there are a lot of investors, they are con strand by regulatory pressures. There are pockets of capital out there, big pockets of capital that are restricted to investing in certain ratings categories, for example, in those investors have really nowhere to go. David i want to bring you back in here. I suspect that youre going say this exactly confirms your thesis that people are getting more cautious. As a practical matter, what does it mean to be more cautious . Where do you put your money instead of places like a tesla bond if you decide thats not worth it . Sebastian from a longterm perspective, theres a role for risk assets in investors portfolios. So were talking about tactical adjustment that is we make in our Asset Allocation committee with a six to 18month horizon. So we look at markets relative to the other. And for a while, we were overweight credit, overweight Investment Grade credit, overweight highyield credit. And now were become to neutral. In the equities market, weve been looking at outside the u. S. , because fundamentally were earlier in the cycle. And we have recently added a little bit of cash to our positions to build in some dry powder. Alix talking about the u. S. Versus europe, thats an interesting call. Take a look at the bloomberg here. Highyield sprelleds here in the u. S. , to give an idea of how tight weve become. Sure, theyve widened, but were still at 360 basis points above treasury yield. If you have sort of the undervalued trade in europe when comes to equities, does the same go for the credit markets . Versus the u. S. Reporter oh, absolutely. A lot of that, if you look at the spread between european credit and, say, comparable to u. S. Treasury, that spread has gotten really tight in some cases right on top of each other, and it makes very little sense. But thats where the markets been. The question is, in the past, support by the Bond Buying Program supported buying in europe, and it impact over Corporate Credit there. The question is, as that slows down or gets tapered off even, where is that market going to go . Alix so what do you do . Do you want to sell here . Reporter my position on u. S. Credit is a hold, and i would be a cautious seller on european credit. Alix and how does this meld into what investors are doing at the same time . So we have calls like sebastian saying, look, paire back. But then you have people wanting to buy the tesla bond. What kind of shakeout that we see that youre hearing from your sources . Reporter everybody is saying they are going more into cash and a lot of people have downsized to high yield. However, as i said, theres a new issue thing, and the new issuance this year has been going gangbusters. And even away from high yields, this has been a record month for investor grade. You saw the British American tobacco deal earlier this week so. Where does it all go . I think these are the signs. Its the signs of the top of the market, and maybe this is certainly peak credit market. Alix so if it is, what happens to spreads . Reporter spreads will likely widen. Alix how much, how fast . Reporter thats hard to say. Thats the 64 billion question. If you look at the u. S. High yield year to date, its up 6 , way better than what i would have predicted coming into the year. Its incredibly tight. David lets go back to where we started with alix, which is, were looking at, is there a danger in the Balance Sheet in the fed or a change in Monetary Policy in the e. C. B. That could really bring some of this to greece . Which is the bigger risk, that the markets are underestimating the effect of the unwind of the Balance Sheet here in the United States, or theyre underestimating the chance of a rate hike or backing off, i should say, of stimulus over the e. C. B. . Reporter well, keep in mind, the e. C. B. s hands are somewhat tied by what the fed does. A lot of that is through the relationship with the euro, because of the nature of germanys economy thats export driven. And keep in mind that drag heat to walk back his comments. The fed has been incredibly mood. The word gradual and predictable, those two words have been repeated by chairperson yellen over and over again in terms of unwinding, and it seems that recently the market has been expecting a very slow pace of tightening, and expecting that the fed will choose to tighten via Balance Sheet unwind rather than outright rate hike, which is the more dovish pace. But the one risk that we need to take about is as chairperson yellens term expires, you know, next february, what happens if the fed chair gets more hawkish if appointed, and b, has a very Different Communications skill and is not as perhaps willing to telegraph their thinking to the markets. David many thanks to our analysts. Coming up on friday, libby, pimco head of Public Policy, will be russ with us. Live from new york, this is bloomberg. Emma here in the hewlettpackard enterprise greenroom. Coming up in the next hour, the c. I. O. At fed rated investors. This is bloomberg. David the president , backed by his secretary of defense and some world leaders, has said he will take action if north korea doesnt back down. But what are his real options if it comes to taking military action . Rob levinson is now Senior Defense analyst for bloomberg government. But in a life, he was a Lieutenant Colonel in air force, and he served in south korea. He joins us now to explain the options the president has when it comes to north korea. So, welcome. Good to have you. What are the options as a practical matter . Reporter well, the options, if youre talking about the military options, i think what the president is going to be looking for is options that hopefully are limited in nature and dont provoke a wider conflict on the korean peninsula, should we have to take that kind of action. David and are these air options in your opinion . Rob oh, yeah, i think everything is a variety of air options. You could see like tomahawk missiles launch from a submarine or navy ship. But basically were not going to put troops or even probably special forces on the ground in north korea. David would the objective be to actually take out their nuclear capability, and is that doable . Rob well, you know, i think it would be to take out the infrastructure, the production facilities of uranium, taking out the missile things is a little more difficult, because, again, like we saw this latest launch on the fourth of july was from a chinese truck. These are mobile launchers. So they move around, and theyre kind of hard to find. Weve had tremendous difficulty finding mobile targets from the air like that. So that could be difficult. David this is something our audience and i may not have focused on. You can launch a Intercontinental Ballistic Missile from a mobile launcher . Rob well, thats what the North Koreans have shown their capable to do, and i know the russians have this capable as well. And we developed that capability. We dont mount our launchers mobilely, the icbms, but its not a highly technical, too difficult a thing to do. David so finally, rob, will this be an early indication, if were actually moving toward this option to preserve it . Will we see the seventh fleet move . Will we see troop movements in south korea, other things going on . Rob i actually think probably not, because we wouldnt want to necessarily telegraph that we were doing this. I think this would be sort of a more of a bolt from the blue. If you start mobilizing forces, that gives the North Koreans time to prepare, and i dont think thats something we want. David many thanks to our colleague, rob levinson, of bloomberg government. Retired Brigadier General has spent his career in military planning and strategy. He was the Deputy Director follow Central Command at the height of the snurge iraq, was Deputy Assistant secretary of defense for the middle east, and was assistant secretary of state for political military effects under president george w. Bush. He joins from us washington. Welcome, general. Good to have you with us. The question that i was asking was, what are the options being put before the president right now . Presumably he has an entire team of people that would give him options, if he were to decide to act militarily, what does that list look like . Reporter as your earlier guest suggested, there are a number of military option that is can be taken. I dont think Nuclear Weapons would be used in this case, simply because of the fallout risk to south korea. But if you remember a few months ago, when the so named mother of all bombs was used in afghanistan, that would be a fairly practical method of going against some of the deep and hardened targets that they have inside of north korea. But i think were spending too much time on the military aspects. Frankly, i think this is going to end up a Diplomatic Options being pursued more than anything else. At the end of the day, these messages are also to china as well, to try to get china to do what weve always said they need to do, which is take care f the situation. David diplomacy hasnt been very successful in the past. Why do we believe this time it might work . Mark the diplomacy the last 15 years has been, as some people, such as senator mccain says, speak softly and carry a big stick. Thats not the kind of diplomacy that somebody like kim jong un is going to respond to. So i think what youve seen is actually some amped up rhetoric that is being used against the North Koreans that simply say, look, we know your major goal is to keep the regime alive. So lets make sure do you that, because we are willing and able to use our capabilities to take out your capabilities. Because to speak solvet fundamentally hasnt worked. He has continued to pursue a Weapons Program in excess of anyone else in this world, and now thats a threat. David so finally, general, as you say, military is not a preferred option by any means, but as i recall, when you got out of west point, your first assignment was to south korea and the artillery over there, so you know the world over there very well. Give us some sense of what it would mean, if we had any attack on north korea and they retaliated against south korea. I remember 1994 when this came up, there were enormous casualty estimates. General when i was there in 1978, there was absolutely nothing between seoul and 30 miles to the north, which was the demilitarized zone. Since then, seouls outskirts now go almost to the demilitarized zone. The North Koreans smartly have put most of their 30,000 artillery units right along the border, and so lets be very clear that a conventional attack by the North Koreans into the south korean city of seoul would be millions of casualties simplely from conventional weapons alone. Thats another reason why weve got to tread carefully before we start doing any unnecessarily provocative options. Nonetheless, deterrence, both militarily and diplomatically, has to be the way to go to solve this current crisis. David a voice of reason and authority, its exactly what we needed. Thank you so much for joining us. Alix thank you so much. If you have a bloomberg terminal, check out tv go. You can watch us online, click on our charts and graphics, interact with us directly. Just go to tv go on your terminal. On it, ask the guest a request, and we will try to do so in a segment. This is bloomberg. Alix headlines about Sexual Harassment at uber and a general gender diversity email at google have called practices into question. Facebook c. O. O. Sheryl sandberg is the late toast weigh in, posting on facebook, inequality in tech isnt due to gender differences. Its due to cultural stereotype that is we are cyst. We all need to do more. In an exclusive interview with bloomberg, sandberg reiterated that companies and employees must step up to the plate. Our numbers are still low. Theyre low for women. Theyre low for underrepresented minorities. And thats something thats a problem. Because its hurting us. Diverse teams make better decisions. We are having some success on the business side of the company. Our company is more than half women on the business side, and im proud of that. On the tech side, it remains a struggle. And there are 16 of Computer Science graduates today that are women, compared to 35 in the 1980s, when the field was smaller. Blacks and hispanics are not represented in Computer Science. In order to hire computer scientists, we have to persuade more women and underrepresented minorities to go into Computer Science. We take that really seriously at facebook. We have a large facebook internship program. And we hire people who are computer scientists of all backgrounds. We started going earlier in the program. We created facebook university, tried to find women and underrepresented minorities who we thought could be great in Computer Science, but werent yet in the field or just starting in the field, so we could get them earlier and invest in them and try to keep them in. We have a very large Computer Science and engineering leanin circle program. Alix that was Sheryl Sandberg speaking to Bloomberg Television exclusively. This is like the perfect question, right . The google memo was the icing on the cake to this conversation. David its a big problem. By the way, its not just in Silicon Valley. The business side in a lot of big companies, it was a problem we struggled with at abc news all the time. So this is not unique. I dont know that this memorandum from this young nowfired engineer has advanced the ball. Alix good question. And you have the former Google Engineer actually did to spoo bloomberg yesterday. Heres what today say. The point of my memo was actually to improve google and googles culture. And they just punished me and shamed me for doing it. Alix we can all try to marginalize him, but there are people that say, look, firing him didnt do any good. The latest comes from bloomberg view. She did work in the tech industry. She was an engineer. Heres what she had to say if there were guys at google wondering women around them really deserved their jobs, did anyone wake up the morning after his firing with the revelation, good god, how could i have been so blind . The conversation around damores memo hasnt made the world a better place, as they say in Silicon Valley, it has just made a lot of people angry. David what makes it even worse, its all becoming political. Its that Silicon Valley is too left wing. Theyre change ago way from gender diversity to the right wing, left discussion. Alix you mentioned it, no one came to talk to him after the memo. All right, coming up, citi groups Global Markets managing director will join us, his view on the Global Economy and is the risk junction is justified. This is bloomberg. We check our phones 85 times a day. So it only made sense to create a network that keeps up. Introducing Xfinity Mobile. It combines americas largest, most reliable 4g lte with the most wifi hotspots nationwide. Saving you money wherever you check your phone. Yeah, even there. See how much you can save when you choose by the gig or unlimited. Call, or go to xfinitymobile. Com. Xfinity mobile. Its a new kind of network designed to save you money. Alix saber rattling. North korea has a plan to attack guam and japan and south korea threaten a strong response. Price for fragility and risk assets as credit spreads widen. New york fed president bill dudley to speak on market inflation rates in the u. S. Welcome to bloomberg daybreak on this thursday. I am alix steel alongside david westin. Jonathan ferro is off. An hour and a half before the cash open, futures down by eight points. A little bit of risk off but the investors bought the risks yesterday. Will we see the same reversal today . Eurodollar a little bit weaker, down 3 10 of 1 although above that 117 level. In the treasury market we have a supply coming online for the 30 year at one of rock. Daysup for three straight now by four dollars an ounce. Breaking news earnings this morning coming from macys. Earnings at . 48 a share. The company reaffirmed its Earnings Guidance for the full year and Gross Margins pressed justr and sales were down 2. 5 . The estimate was 1. 3 . For retailers like coals and macys today, it is not as bad as you thought. David a little bit of light choices. Alix maybe its not dark. David we have fixed on. Time for your morning brief. This morning, we get the jobless claims in the United States and we also get prices for last month. 10 00, the new york fed president bill dudley holds an economic briefing on Regional Wage inequality and finally, 1 00 this afternoon, the u. S. Treasury will be auctioning 15 billion of 30 year bonds. We are following tensions between the United States and north korea. South korea and japan have warned north korea it would face a strong response if a carry through with its threat to launch a missile towards guam. Running is with more from washington, d. C. Is our washington correspondent, kevin cirilli. Give us the temperature in washington. Of course, senior Officials Say publicly, including secretary of state rex tillerson, that they believe there is no imminent threat from north korea at this time. President trump, himself, has been saying aggressive rhetoric and drawing criticism from several republicans. There are reports that yesterday as well as this morning that his cabinet level officials as well as military generals were unaware that he was going to make a comment saying that north korea would receive a response of fire and fury. That has sparked criticism from some who feel his rhetoric was too aggressive but to his isporters, they feel this the type of unpredictable rhetoric he campaigned on. He did campaign on unpredictable rhetoric. David somebody who doesnt like unpredictable it is the markets. Im going to put up here a comparison of the major stock exchanges in asia. Japan, south korea and hong kong , you can see what happened to them. They have not liked this rhetoric. Does the of ministration understand the reallife consequences of this unpredictability . Kevin i think from a market perspective, you are seeing these tensions have a direct impact on this and i think that from the administration standpoint, they feel that china, in particular, because of its ties to north korea, does have the best ability, right now, to help address the dictator, kim jongun. They also feel the International Coalition they would be able to put together from an economic sanctions standpoint is still there best route. As best evidenced by the sanctions by the united nations. As they look ahead, the administrations relationship directly with china is something that could be tangled into north korea, especially on the issue of terrorists and trade of arrifs in trade. We spoke to a few investors earlier this week. I noticed there comes a point in most investment cycles where you start thinking that the return on capital is rather less important than the return of capital, just keeping your money, not losing anything becomes more important. I think anyone who is fully invested now is taking on great risk. We raised cash reserves, it has been a great ride in the stock market. We have a layer of gold, stoxx gpx captures the gold miners and you take precautions. You change. Because we dont know how this plays. And the dysfunctional, chaotic washington gives us no comfort. There is little room, little valuation buffer should some of the risks out there materialize and impact growth Going Forward. Joining us now is alex dryden, strategist at j. P. Morgan and Ebrahim Rahbari. Where do you said, alex . Going into risk off mode. Like goldenhings treasuries, but for us we go back to the fundamentals and look at last month. Of countries5 around the world, registering above 50 indicating an economic expansion. For us, that suggests risk on in the long term. Where we would take that risk has changed. We are pivoting back towards europe and the u. S. And taking a bit of shelter in emerging markets. Alix is that a risk call . It is also a call about commodities as well. Ahim, where do you stand . Are the fundamentals still there . Through evaluations in some ways, through the Political Tension . On the fundamental side, they are higher than they have been for a long time. We do buy the argument that risks have proceeded and the trend has become more positive and there isnt a turning point in sight so there is fundamental backing for some of these developments but that being said, the market, have we priced in a lot of those by now . People are also right to start becoming uncomfortable. David the question for me is how much of the asset values now are based on expectation of what is going to happen . Are we disappointed . There are some indications that it might not be going as aggressively forward as we thought. It doesnt mean is going backwards, but not as aggressively as we thought. If you look at the signs, they dont show as much for upside potential on the fundamentals. Ebrahim rahbari there is no sign of things getting worse but if you look at those areas, they have improved over the last year or so, including perhaps a number of emerging markets as well. It is not evident that there is a lot of room for the economy to further accelerate. On the valuation side, they are quite smart. Alix so alex, why arent you getting more uncomfortable . Alex dryden i think when i am looking at the geopolitical risks and we are looking at the increasing rhetoric, it is very difficult, considering the number of moving parts and the wide range of potential scenarios and outcomes here to draw more conclusions that make it easy to say ok, time to go short list off the back of these political events. When that noise is happening, i would rather focus on the fundamentals and the fundamentals look to be improving. Alix so where do you wind up seeing the potential for fundamentals . The point that we are not going to go much further from here but what area provides the best opportunity . Alex dryden there are a number of ways of looking at it. What if you think about where countries and regions are in the Business Cycles for instance, the emerging markets have a lot of the development the developed markets, and to a degree, japan has more room as well. But you also have to think about whether they are some of these longrunning trends over the last two years. We are waiting for productivity growth to pick up which, we havent seen much sign of it. These would be the things that we would be needing to see evidence of to see much more. Alix now the conversation is turning to how credit spreads are widening but the idea is what is going to cause a turn in the credit markets, what event could you see that would do that . Ebrahim rahbari there is a broad range and i think part of the difficulty is we cant point to that one major risk that manifests itself. One of the things that will be interesting is we have picked into this view that invasion is going to be very very low and if anything will be surprising on the downside. Things are picking up, which could mean Central Banks may be under more pressure. It could be among the things that this locates the market. Dryden, italex sounds like there is something of a disagreement. The opportunity is in emerging markets. You are saying there is more risk. Pretty much in life, you have more risk, you have more opportunity. How do you make that calculation about when it is right to take more risk . I understand you are backing off the e. M. Zone. Ebrahim rahbari we are backing off some areas in emerging markets. Alex dryden for us, it is the area of commodities. Seere starting to see, we this table in commodities. What could give it the next light up . That could kick up in demand. We have had a couple of good weeks in the sector but that has been on the back of temporary chinese stimulus that we think will fade once the major elections have moved past this into 2018. We can see what the big pickup is in the demand side. I know there has been some selling off in the last few days but this is the region that does well when the rest of the world as well. When consumers in europe and the u. S. Get a job and they feel like they have more money in their pocket, they go out and buy phones, tv, cars, the past to which is in Southeast Asia and that is where we think there is opportunity. Get 30 offkorea gdp from exports which we think will get boosted as the developed market economies pick up speed. Alix one of your conditions calls is short treasuries. That hurt, im sure. And based on what you are saying, one of the things is a pickup in inflation, if the fed goes faster, that seems to be what your short treasury call is that on. Et on. B Ebrahim Rahbari what we think will be changing is going into the second half of the year, centralbank rhetoric is going to change. Im watching jackson carefully. I am watching the september centralbank meetings from around the world very carefully because i think what we are going to see is the fed saying we are sticking to our bar. Increased. They have been pointing out the asset bubbles in things Like Technology and the commercial real estate sector and how they want to tackle these bubbles now rather than later. That means the bar to delay their rate hikes has gone up which means we think we will get one more rate hike this year. The market is in pricing that in. We will get three or four next year. Combine that with the Balance Sheet drawdown, that is what i think you will see with treasuries. Alix fingers crossed for short treasuries. At 8 30, alexreak dryden of jpmorgan and Ebrahim Rahbari, you are sticking with us. We have a earnings over the past hour, a mixed bag. Secondquarter results, beating estimates but now that is down by 2 . Samestore sales were built by an acceleration of foot traffic. Macys was up 4 , now down by 7 10. Samestore sales down only by 2. 5 . Coming up, chuck grom, a research advisor, will break down those retail numbers. I thought the bad news was supposed to be good news. This is bloomberg. Earnings season slowly coming to a close. How do we stack up . Jpmorgan is saying guidance supports the potential upside for their earnings per share, especially if the taller continues to the dollar continues to weaken. Ofe is Ebrahim Rahbari citigroup. Alex, i know you have people at jpmorgan but do you agree we want to continue with the weaker dollar trend . Alex dryden that is a longerterm trend. Where we think the dollar will be is weaker than where it is today. The second half of this year, for the fourth quarter, you can see the dollar come back. I think that is a very specific trade. Alix you are short eurodollar right now. Alex dryden i think the ecb is going to disappoint. Chances pricing at a 60 of a rate hike next year. Europe has come a long way but it is a long way off of being able to raise rates and the fed will continue on its path of Monetary Policy which the market is ready for. Alix do you think the dollar downside is overdone . Ebrahim rahbari i think the sentiment is overdone. Whether there is room for it to go down, i will take the other side of the argument. Despite the fact that i broadly agree on monetary policies, i think if the euro wants to strengthen further and for the dollar to do the flip side, it would be despite the policy rather than as a main driver which would be against what we have seen. It would be a bit of an exception. There is room for the dollar and upside for the euro. In part, really because of momentum. We have seen these valuations go a long way. Inn we see those points flex, it is difficult to tell. How does that work, what does that do to corporate earnings . What does it do to corporate earnings and stock valuations . Ebrahim rahbari there is this difference between what happens at the fundamental level and what it translates to. These translation effects in the short term can be more visible and these are what the collies were referring to. In the near term, there will be visible outsides for u. S. Earnings and dollar weakness. Over the course of the next three years, the upset for the economy should also be there for gdp growth and inflation. We have to keep in mind that these effects are larger in European Countries than they would be for the u. S. David do you agree with that and would you say that given your prognosis, in the shortterm there will be some hit on u. S. Earnings and valuations but in the long term i understand you are saying, dollar weakens . Ore and longer term weakens that could be a tailwind over the long run. Alex dryden the s p 500, yes, is registered in the u. S. But 43 of its revenue comes over seas. The other important factor is those overseas revenues are growing at the rest of the world is starting to accelerate. Look at the numbers coming in from europe and emerging markets. Stronger. Etting they will get a boost to earnings and they will come back. Isnt that already priced in . Alix they are all the beneficiaries of that. Alex dryden and that is now reflected in the earnings ratio for the s p 500 at 17. 7 times earnings. Which goes back to what we are talking about before. We have been encouraging clients to say the u. S. Has had a great run and we think the better of thenity is outside u. S. We are encouraging investors to shop in european markets. The dollar can go a long way. Alix so for europe, where is the strength and weakness . The first worlds have been delivering nice surprises on data. Ebrahim rahbari if you think about the evidence, the Exchange Rate is rapidly rising. From italy,g break political issues, maybe looking at questionable trends on the real economy as well. First on the is Exchange Rate side and on the upside, it is on the economy. We still see positive momentum and investment coming in. We see outside investments back into the euro as well. We are contrasting these as the main upside and downside. David how concerns does mario draghi have to be about the euro . Alex dryden concerned but not get alarmed. I wouldnt be surprised if, in september, he comes out and hes got credibility in the central bank and he tries to talk down the value of the euro. And he gets the opportunity in august. There is the potential that you could see him say, this has come a bit far. It is probably not enough to derail this fragile and early eurozone recovery but it will be something that, if it goes higher, European Central bankers will have something to say about it. David alex dryden of jpmorgan and him are him rub re of citigroup will be staying with us. Caution amount and with futures pointing to a third day of losses, we will talk about whether buying will remain the strategy. Steve auth weighs in on that and more at 9 00 a. M. Eastern time. Live from new york to our viewers worldwide, this is bloomberg. This is bloomberg daybreak. I am emma chandra with your business flash. Two of the biggest names in the rental Home Business are merging. Last groups Invitation Homes and are word waypoint homes joining to create the largest Single Family rental manual in the u. S. A billionaire is considering a bid to charge rates for communication, according to people familiar with the metal. They may have some competition. He wants emerged with its struggling u. S. Wire the Company Wireless company sprint. Traders will have to settle for a small rise or none at all. That is according to projections from compensation consultants johnson associates. That is your business flash. Alix it really depends on what divinity work will show what kind of bonuses you get. We have a fun chart to pull up. Underwriting bonuses will be up 20 where as commercial banking will rise five to 10 . Equities could be flat or fall 5 . This is surprising to me. The potential bonus as much as 5 . It is a lot in the Second Quarter for the big banks. They have been struggling with that. David we had some of that going on yesterday withdavid jeff curry. We were talking about commodities but he was saying he deserves structural reasons when there is less volatility and those structural reasons will persist over time. Alix so lower for longer and also less volatility for longer more becauseoldman they havent done their commodity business like the other big banks. David you talked to Lloyd Blankfein about that. Where you said we have to address this. Alix we just dont know how. David he didnt tell you how. Bankrate, you of have underwriting and advisory fees because advisory fees are where bank of america, really strong because of m a, and we have seen a lot of issuance in the market as well but underwriting is very strong. David the bonuses are strong. In this new world, that is good money for a bank. You dont need reserves to get advisory fees. You dont have to have your own capital at risk. That is just on money. Rivalrieske for some around the office. It does not make for good relations when the guy next to you is making a lot more than you are. Alix but do you know . Market, we are seeing movers in the retail space. S off by 3 despite the fact that the company came in 3 lightly better in terms of earnings. It Beat Estimates for its secondquarter and also sales came in stronger. Yet the stock is down. Dillards had a disappointing quarter, stock down by almost acting percent and macys, on the surface, it didnt look terrible, down 2. 5 . The estimates were frustrating, but nonetheless the stock gets hit as well. Earnings at 48 a share at . 48 a share. We will get into what it means for the consumer later on. On friday, libby cantrell, pimco head of Public Policy will be joining us at the intersection of politics as well as the markets. Speaking of the markets, here is where we wind up stepping up stacking up. S p futures slightly lower, around the lows for the session as weakness in europe breaks to the u. S. This is. Alix this is bloomberg daybreak. Here is where we have the Producer Price index coming in at just about 22nd time. S p futures down by nine points. Weakness in europe spreading in the u. S. Moderate buying on the margin in the treasury market, yields down one basis point. It seems like a stronger dollar. When it comes to dollar yen, down to 10 sub 1 . My favorite, the last one, brent spread. The front month is now higher than the back month. The big deal in the oil markets. We have the numbers dropping now. The price index, if you back out food and energy, coming in weaker than estimated, the estimate was for 2. 1 . You also had jobless claims riding and coming and steady. This is what the fed is dealing with. A solid job market inflation still cant live up to that expectation so Producer Price index backing out energy, a rise of 1. 8 year on year. Month on month is down by 1 10 of 1 . Lets get some reaction and dig deeper. Mckeeg us is michael Bloomberg News International Economics and policy correspondent. Still with us, alex dryden and a pretty rub re and Ebrahim Rahbari. Where was the weakness . It takes a while for those two going to imports and impact contracts signed many months in advance. It applies here in economics. We look for that to come. It is not here yet. So you are seeing, specifically, services go down 2 10 in the month which is a worrying sign. The Service Prices continue to fall and that will not put any upward pressure on inflation. David the words that you just issued that struck me were we are waiting for. We have been waiting for some time. The fed has been waiting for some time. When do we say it is not a timing issue but a substance issue . Mike some people are getting there. Jim bullard said it is not working anymore. The models dont show inflation developing and other economists are working on this to figure out whether we have entered a secular change in inflation dynamics. And if we have, that upsets all the models that that uses to figure out what is going on. Nobody has come up with a great longterm investigation. They are still clinging to the idea that these are one offs. Alix do you still buy it . Ebrahim rahbari i wouldnt call them one offs in the sense that there has been a structural break and we know quite a few behavioral changes, in particular on the wayside since workers are bargaining differently when it comes to their wage increase and there are things they need to account. That being said, we think inflation is dead if we think about the phyllis curve affecting prices. We see evidence of it in different parts. It is not coming through Strong Enough to bring inflation as quickly as we thought. Alix we saw because of Health Care Services rising 3 10 of 1 . That could be significant for cpi because rents and Health Care Stocks are weaker and lumpy. Mike health care plays a bigger role in the pce which is what the fed follows so when we get that at the end of the month, we will have to see if that costsates but health care pretty much always go up, just a question of how much they grow up and if the rate of change has slowed, which it has, that doesnt help either. Alix market reactions, typical . You have buying in the treasury market, what the dollar index is doing, moving much lower now with negative territory there in the market reaction. Alex dryden i think the absence of inflation has, again, filtered through to the market. For us, it is about patience. We are looking at a strong labor market. We believe the phillips curve is intact. We believe wage growth will come through. That model isnt busted. That will lead to longer inflation into 2018. It might not be a summer 2017 story but as i said before, the bar for a fed rate hike or the fed delaying its rate hike has gone up due to its commentary about the asset price bubbles. That is something that is still on the table. Alix are you in the camp of one hike in december . Three in 2018 . Ebrahim rahbari we actually are and semantically, there is overlap in that we think Central Banks, being forwardlooking, they are ready to be what draghi patient. If a look at nearterm weakness, if you look at tight labor markets, if you look at the risk of financial instability, still, the balance means if you can go gradually, it will continue to normalize. David it is a strong neighbor market labor market and by any stretch it is a strong labor market in terms of the number of people being employed. In terms of the Pricing Power of employees, it is not strong. There is no indication. What has happened to Pricing Power . This puzzle is something we spend a lot of time thinking about. I dont think there is one clear answer. It is probably a number people can add to it probably the collapse in trade union membership, the lack of Bargaining Power has meant you are not seeing that negotiating wage increases. The rise in robotics in the use of the workforce, it is hard for someone to walk into their bosses office, demand a pay increase and say, im going to get rid of you and replace you with c3p0. Then there is also the psychological aspect. People are nervous about the broader economic environments. If you are nervous about the broader environment because you remember the financial crisis, you are not going to risk your job to negotiate wage increases. David do we know what role globalization plays in this . Might donald trump week a, right in that respect . Mike globalization has made a role because you end up with a lack a slack in labor sources. It is not just in the United States. Chinese jobs are moving to cambodia, thailand, vietnam, because costs are cheaper and manufacturers seek the lowest cost. Alix we were talking in the middle of the break on your fed call and he said the question is, does it have to do with stronger inflation pick up or the process of the fed normalizing . Isnt this what we are doing now . It seems you are in the latter camp. Ebrahim rahbari we think the market continues to underprice the fed rate hikes for the majority of this year more importantly for 2018. Is the drop is, depends on the market going to be forced into changing its mind because inflation picks up or is it just this gradual realization that they havent quite got the fed right. We think it is more of the latter but the former is one of the bigger risks. Mike let me ask you though. In 2018, if the market is likely to believe in the inflation story . Is the fed going to have to change . Do you have any idea who is going to be on the fed . Whether they would be interested in pursuing . Ebrahim rahbari we thought you knew. Alix if there is one person at the table who does know mike if i told you, i would have to kill you. Ebrahim rahbari we dont have great visibility, but there seems to be growing confidence that whoever the next fed chair significantly be more hawkish. It is not somebody who would protect more credibility that rates are going to go up. We think that eventually, markets will have to go in that direction just as they have so far this year. Earlier, people doubt that the andcould go once or twice they have not gone as much so far already. It will be a gradual process and markets will have to be pushed in that direction overtime. David the fed leads the markets rather than the other way around. Even hawkish when it comes to rate hikes. What about the Balance Sheet . Ofthere were a change, most the people being talked about have a real skepticism about using the feds Balance Sheet the way they did and think that it should be smaller than it is. How would that affect markets . Isahim rahbari for us, that one of the big questions. To be fair, there is a specter of that in cities. I think it will, overall, be a drag. It wont be a fatal blow to markets but importantly, Central Banks globally are going to move away from that. We think that that is going to affect market psychology as well as some of the underlying portfolio balances. Again, the dragged into 2018 will probably start to sharpen but probably not take it. Alix that is one of the questions permeating the market. Seekers like Lael Brainard have said it is going to be easy Balance Sheet reduction, dont look at it. How can they do that . Alex dryden we have never seen this before in central bank history. This is unprecedented levels of Central Bank Tightening that we will be seeing potentially beginning in october. I am not sure the market has wrapped its head around what it is and what it will mean for fixed income markets. For us, there are still questions. We wont know roughly when the central bank Balance Sheet which is going to begin in october we know the plan about how much they are going to take down every quarter. What we dont know is actually where the Central Banks are trying to take their Balance Sheets to. We dont know that terminal level so it is going to be very ind for investors to price that Central Bank Activity without the answers to these questions. Alix that is how you make a market. Ebrahim rahbari and alex dryden, you will be sticking with us. Now for an update outside of the business world. Emma chandra is your with first word news. South korea and japan are warning north korea not to fire missiles towards the u. S. Territory of guam. South korea says that will lead to a strong response from the u. S. South korea alliance. Japan says it will be legal for them to intercept any missiles. North korea has warned it will fire four missiles. Aec has the estimates for demand in crude oil and next, the compound projects it will need to supply an additional 200,000 barrels a day. Opec says that is due to stronger than expected to look and some weaker outlook for fires. Robert mueller left millions in salaries to lead the investigation to leave the investigation into the russian meddling in the election. Than 3. 5 million is a loyal over a threeyear period and he was paid 52,000 a speech. Global news, 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. I am emma chandra. This is bloomberg. Alix to reiterate the breaking data that happened 10 minutes ago, you have solid initial the producers but price index backed out food and energy. The s p futures around the lows of the session, following weaknesses in europe and the ftse. You are seeing more buying on the margin in the treasury market, yields moving down by two basis points. 15 billion worth of 30 year supply coming online at one of the p. M. A weaker dollar as well. , offdollar is still down the highs of the session. Dollaryen moving lower down 3 10 of 1 . Up byatching a nice bid six dollars an ounce. A threeday rally for the precious metal. My favorite, the great spread, this is the octobernovember brent spread. The market is getting tighter, the fundamentals are getting tighter. More on that later on. This is bloomberg. This is bloomberg daybreak. I am emma chandra in the hewlettpackard enterprise greenroom. In the next hour, steve off, the cio at federation investors at federated investors. This is bloomberg. Alix the fun story in the Corporate Bond market is tesla making it debut. The automaker plans to sell 1. 5 million to bonds to support spending on its new electric car. The sale will boaster bolster its Balance Sheet even though they pulled in a record 1. 2 billion in cash in the Second Quarter. Here is the Senior Reporter for Corporate Finance. Potentiale is the yield. What are you hearing from investors and are they into it . They are loving it. They are saying they are basically raising a quarters worth of cash. They are burning through cash rapidly. However, it is a brand name people love and elon musk is selling the dream. He is calling out to the true believers. They went to market with the price stock around 5. 2 for yields. That will tighten because the demand is so high and even in a week where so many geopolitical risks are playing up, they have already gotten more than 3. 5 billion already. In alix orders. And covenant light is sort of the theme in the Credit Company for credit but this is extra light at the end of the day. The demand is there and they can play around with that stuff so one of the things people are concerned about is the fact that they are carving out the factory in nevada which is their crown jewel, the biggest factory in the world and they are actually keeping it aside so they can borrow more money against using that as collateral. If you are a bond by are coming be you know you are going to people are going to be layered over you because this company will need to borrow more money and that is what they are going to use to borrow it. David does this tell us more about tesla or the bond market . Compared to other companies who are similarly situated without the tesla name, would they be getting a similar deal for investors . They shouldnt be but we saw netflix come to market last year and a lot of people saw that as the same thing. People fall in love with the brand name and they get in and back it. And netflix was sold at record low yields and that has actually tightened since then but it does say about a lot about what we are in the credit cycle, the sign that we are reaching the peak. Alix we have a question from a viewer. Basically, it supports buying at the end of the day. Exactly. In the atf, you will have some. Alix i love this story. Thank you for joining us. Continuing the conversation is Ebrahim Rahbari of citigroup and alex dryden of jpmorgan. If a client comes to you and says that 5 looks good what do you say to them . Alex dryden i can understand why they are looking for anything with a policy of real yields. 25 of developed market government bonds trading the negative yields, it is closer to 50 as we look at the trading yields below 1 . It doesnt surprise me that this hunger for income or thirst for yield has reached into the high yield market. You have to step back and say, am i being fully compensated for the risk im taking on . The biggest question youve got to ask yourself is, do i think there will be a way . If no, i have to clip the coupon. But you have to be cautious in this market. So what do you say about this . David weve heard about the huge liquidities in Central Banks, maybe driving assets up o far. Alan greenspan talked about that. What point do you really get concerned about the asset valuations like these bonds that are really supported so much by Central Banks . Ebrahim rahbari we are already concerned and i think if you go back to some of the segments you showed earlier, i think a number of investors are increasingly concerned so it is not specific or at least exclusive to the highyield on the month markets. The bond markets. Almost more worrying are these anecdotal stories where people are not on to risk. We are at a level of concern that we can justify. With positive fundamentals. But nevertheless, we should be watchful for excesses or buoyancy getting to the big points. ,avid if you are an investor do you give up liquidity . The you go to more conservative investments and reduce the yield . Or do you go to Investment Grade . What do you do . As an economist, there are pressures to generate yields and returns. Timell think this is a where you have to accept a lower return and accept to some degree a priority of what we have earlier, a return off capital. Ore than a return on capital these are tough decisions. We heard from hsbc, they were saying, youve got to get out of the investmentgrade market. Alix he warned about that because of the excessive leverage and not getting compensated for the risk. How wide can spreads get . Alex dryden it depends on what we see in jackson hole and what we see in september centralbank meetings. We are so many question marks over what the ecb is going to be doing and what the bank of japan is going to be doing, it makes it really difficult to assess how widespread it gets from here. It doesnt feel like they can come much tighter considering the outlook. To thosewhat happens tesla bond buyers . I cant wait to find out. Alex dryden, Ebrahim Rahbari, thanks for talking to us. If you have a bloomberg terminal, click on our charts and graphs and interact with us directly. Go to tv on your terminal. If you are not yet board of the chat, come talk to us. This is bloomberg. This is bloomberg daybreak. I am emma chandra. Now to your business flash. The worlds biggest coal shipper is talking about electric cars. S ceo says electric batteries will lead to more demand for the companys metal such as copper, zinc, and nickel. Electric cars contain about three times more copper than a regular vehicle. That is your business flash. Alix i dont know, when you have the big oil ceos talking , it is go by lithium and nickel. Usually it is the cold eyes in the oil guys but it is a whole different world. David ok. Bridgewater associates is a different matter. He is nestled in a pine forested campus in westport, connecticut. Where his rules, which he refers to as principles, our law. Bloomberg magazine is the most recent to cover the unique qualities of this organization which manages more than 162 million. Catherine burton writes he says anyone can and should be able to weigh in on an idea including him. In a ted talk, he shows any mail from an underling giving him a dfor his fairness and makes it clear he relishes the employees openness. Not everyones opinion is equal and the company runs on what he calls believability weighted decisionmaking. Catherine burton is joining us now. David nice david to see you. One of the themes of your pieces is that he believes in these principles and he wants to continue well past when he is no longer with the company. What is the process for bringing that off . It is going to be difficult because they have a very unusual culture and they want to they say they want to extend that culture for the next 100 years. David it strikes me that it is a unique culture, which is a good thing in many ways, but it is not like jack welch where there are other people copying jack welch. Are there other organizations copying his principles . Not to the extent that he is doing them. He collects a lot of data on his employees and uses that date had to try to figure out who should be in what job or why you are not getting along with your some people are slowly starting to adopt some of these things but no way to the instant that he does. He really wants to put this out in the world so that other companies will do it. It is unclear that people will follow. Alix lets talk about the culture. The article was fascinating on how they managed their staff, what you are in for. It takes two years to break you down and once you are in it, you love it. Tell us some anecdotes and what you have learned. Weve talked to people who have loved it and have been there for 10 years but as you say, even those people, when you e, people are constantly criticizing you. They might praise you about one thing or they might say, you are being too defensive, so that is why it takes so long for people to get used to it. Lets try it right here. Alix my husband below that when i come home and start to cry. Really interesting read, thanks for coming. Coming up next, stephen auth will be joining us. He likes pioneer and verizon. This is bloomberg. Alix north korea has a plan to attack guam and japan and south korea threaten a strong response. ,f her caution on wall street warning of fragility and risk assets. , there the insulation could be a few alarm bells for tomorrows cpi report. Bill dudley is on deck. A warm welcome to bloomberg daybreak. Jonathan ferro was off today. 30 minutes until the opening bell in new york. S p futures are around the lows of the session. Ppi is coming in lower than expected. Eurodollar is off the lows of the session. Marginal buying is coming into the treasury market. Lots of supply coming on the 30 year. Bid, upgetting a bigger by seven dollars per ounce and a three day rally for the precious metal. Lets go to abigail doolittle. Abigail we have a mixed bag for retail ahead of the open on this thursday. Is trading lower by 2. 5 . This is a bit of a surprise. But there areeat concerns around traffic and they have not given guidance. Macys also beat. Investors seem to like it right now and dillards, shares are down 15 which is a disaster. 21st century fox shares are up 3 after the company beat revenues beat earnings by 3 . Is alleeney says this about the affiliate growth in the trends are expected to continue into 2018 and shares are being rewarded. Looking at live nation, up about 7 after the concert and ticket seller put up a huge beat by 90 . These are not small numbers, they beat by 19 . Concert attendance the first half of this year was up strong, up 12 as expected to moderate in the second half but nonetheless, the shares are up 30 year to date and there is a 8 9 shortage so investors are not too happy. That bigs of shorts on run, thank you so much. Its time to reduce risk. Pimco and t. Rowe price and Money Managers are sounding the alarm on markets and fears rhetoric between the u. S. And north korea has resulted in a more risk off sentiment feel. These are the reasons why our guests have said they are more cautious. I am nervous about three much everything. There comes a point in where the cycles return on capital is less important than the return of capital. Its keeping your money and not losing anything. I think anyone who is fully invested now is taking on great risk. We raised cash reserves. Its been a great ride in the stock market. We have a layer of gold g,dx is the etf that captures the gold miners and you take precautions, you change because we dont know how this plays. The dysfunctional, chaotic washington gives us no comfort. There is little room, little valuation buffer should some of the risks out there materialize and impact growth Going Forward. Alix you have some investors starting to buy that protection. Ofs is the ratio of the vix the vix so the measure of vix wins. It hit a record a couple of days ago. This was on monday as the warning signs rolled over. Is the of joining us federated investor ceo and also the head of economics at black rock. Do you agree . Is the volatility now picking up . This is coming with a lot of rhetoric around it. Fear and theyre being signs of things going bad. We also talk about complacency in the markets. We have looked at 100 years of data. The idea that volatility has to go back to a longterm mean does not fit the data. Things tend to be low for a long time to gets to a higher level as regimes change. A longatility lasts for time. They are related to the macro environment. This is complicated but go want to go to yourself to this yourself. The green line is the rate of growth of gdp and zero is the baseline. The white line is the vix. 25 is the baseline. On your hypothesis, you had a where volatility is low and you see gdp goes up and you see the Great Recession and the inverse happened. There are other instances like back in the 90s that dont seem to match up as well. How strong is this correlation . I think its pretty strong. Fromld say we are looking 1870 up to today. We can look at that pattern. What really matters beyond growth itself this is gdp growth its the stability of that growth over time. We are in a low growth environment but its pretty stable. David how do you react to that analysis and put it into resident day . Volatility is low so does that indicate we have a ways to grow in the markets . We put out this week to investors is called the long cycle. The thought occurred to me to write this piece because every economist coming through my office wants to talk about the cycle. They presume there is a cycle. True if you look at the last 10 cycles, this is a relatively longer one that there have only been 10. Its not statistically significant and you cannot draw conclusions from it. You have to look at the internal dynamics and the dynamics of this inspection are very positive. His lower for longer and is consistent. Our ideas that we will trundle 3 ong at gdp growth in the 2 range. The slower cycle is usually the fed getting into play. Because inflation is getting out of control. There are so money Structural Forces at work that are controlling and keep depressing inflation we think for a long time. Labor and commodities are the two parts of inflation. In the labor market, there is competition. There is a massive number of people underemployed who can come back into the marketplace. At the margin, there are robots. Workers are trying to get an increase in wage facing competition from a variety of sources they have not seen before. On top of that, the baby boomers are retiring and thats holding down the average wage rate as they are being replaced by lower age millennials. Technological developments, you had a guest on yesterday morning talking about this, Technological Developments are changing the supply curve of commodities. They are less reactive than they used to be two changes. These are the two forces of inflation out there. I think inflation is staying low and i keeps the fed dovish than there is no reason why this cycle cannot keep trundling away and youre a vix idea fits right into that. Alix we will talk more about the fed and inflation but the issue currently is that you wind up having valuations where there is no room for any kind of wiggle. You have the north korea headlines and thats the reason why you want to de risk a little bit. Is that a Fair Assessment . I think there are a that have been progressing quite a bit. In the heard that comments with a lot of liquidity in play that supports of those valuations. I dont think the valuation is Going Forward anytime soon. Central banks will be very accommodative for a long time and gradual in their exit. Ofts our baseline for most the Central Banks so a lot of the valuation is supported to some extent. There are risks. None of this suggests there is no risk. Koreae seen the north headlines and these will be with us and will lead to some temporary flight to safety. The the s p isre too low and has to go back to a normal is something that does not necessarily happen overnight or in the shortterm. David looking at the valuation issue, theres one thing to say we will have steady growth and volatility will be low which sounds good but that does not necessarily mean the current valuations are supported by that environment. How much is baked in that is more robust than that . I think we have to reexamine all of the accepted wisdoms. Thatjust said confidently valuations are extended because every guest on the show has been tell you that. You had a guest yesterday talking about we know its going to happen. Because we have been through a bear market for 15 years. Every investor knows it will end in tears. Thats why it will not do that. People are looking at trailing numbers right now. We just came through and earnings recession. On a trailing basis, it looks like valuations are extended. If you look at whats going on with the online dynamics come a gradually expanding economy, earnings going to 130 which will happen on the s p 500, 140 next years insight. The market is trading at 16 times next years earnings. Low inflation, low volatility environment, thats cheap and you can look at individual stocks that are in big sectors of the market, they are way below that. I dont accept the idea that valuations are extended at all in this market. Alix i did not say that. Im not criticizing. We can test that question later. Alix we can do that. Thank you both for sticking with us. Coming up, retailers are gearing up for backtoschool but they are struggling to get through a summer slump. Macys and kohls and dillards have a fire sale in the retail space and macys has a good quarter but still down and we will dig down into the results coming up. This is bloomberg. David this is bloomberg. As some are warning that investors should proceed with caution, one of the biggest determinants of which way markets go is what the fed does and the fed in turn will look at those Inflation Numbers including Consumer Price index numbers coming out tomorrow. We have our guests still with us. What do you expect out of the Inflation Numbers tomorrow and how important is it to where we are going in the economy questio . To believe as convictions around the inflation on track and what we have seen our temporary factors that have driven inflation to be softer. We are looking at the number tomorrow to be more in line with recovery. Expect thehat we baseline to kick in the next year. The underlying story is one where inflation is ramping up. 2 in are you saying above core . Know, slightly below. It should firm up toward two at the end of this year. Pickup inld be no inflation the on that amount. The inflation headlines have been soft but we see wage dynamics that are consistent with this gradual dynamic of firming up. David 2 seems to be that magic number. Who made the magic number . A little inflation is the oil that makes the economy run. Earning so anal little inflation is good for the market and the economy. Viewed as a little inflation and its an ideal scenario if we get there. We were light in the wage number last week and i think there are Structural Forces at work that are holding back inflation. Fed into anave the apology mode. Forward, she has to go forward with the Balance Sheet shrinkage and she will go forward with the rate increase, the last one i think in december. But she hates a because she does not want to turn this economy down knowing that inflation is just not there. If she figuratively hold her nose and ups in december, what does she do next year question mark im assuming she will not be in the chair next year. I think if we can keep moving along with the economy, we might get maybe a couple of more hikes at best. Alix what does that wind up doing to the markets in general . If we see the fed deliver on in thend of rate hike market expects nothing, it can just be normalization, what is the risk in the market . We are seeing is a fed thats committed to move forward as you are describing. I think they will move in december. The big deal now is the Balance Sheet management. In december, that should be laid out. That is a pretty impressive 2017 year if you think of where we started and what the expectations were. I think the inflation picture is making it a bit harder for them and maybe makes them toward an apology mode. The rest of it, the relate or market, Everything Else is consistent with their general dynamics. I think they will be very gradual. I think they are scared of creating disruption with the Balance Sheet. What they have laid out is an extremely gradual path. As a result, our baseline is ridethis will be a smooth for the market. At the same time, the key risk on the outlook is around the Balance Sheet management. We have never been there before. Everyone is relaxed about this but that could change. Is when they start moving with the Balance Sheet. Issue is that they are so worried about it. Everyone gets that. I think the risk is they will go almost too slow which will be generally ok for the market. Alix will they have to pick it too slow know, just for getting the 10 year yield. The market would be better off if the 10 year yield could get closer to 3. The Financial Sector would do much better if we could get some spread on the yield curve. Toould like to see it get three but im concerned in the near term that she will promise not to do so much and we will not see that pressure on the 10 year. Its not bad for the market generally but i would rather see the market at three instead of two. Are youow confident that they can get it to three by rolling off the Balance Sheet . Is a smartllen woman, obviously. On the other side of this is if she is too aggressive, she could spike the deal to 3. 5 or four and that would spark a major correction. She cannot afford that. David you are talking about what you think will happen and you work for the central bank. As a central banker, what should happen . If you had the Balance Sheet question that has never been dealt with before, what would you do . Debate about how much steepening of the curve is desirable. At the same time, as a policy maker, when you look at the bounds of risk between disrupting the market and going too fast versus being behind the curve and adjusting, i believe thats the way they will approach it. If you could find things finetune things perfectly, i think a steepening would be better. Thats hard to engineer. My ideal scenario has the risk of her being misinterpreted and causing she cannot afford to have the whole thing roll over 20 . Thank you both very much. Coming up, a crude reversal after two Straight Days of oil talkeases and we will about what oil means to the market and then the Energy Sector next. This is bloomberg. Alix take a look at the intraday chart of oil. About 50 per barrel. You have the saudis and the iraqis saying they will strengthen their cuts but you have opec boosting demand for their oil for this year and next and lowering their supply forecast for the u. S. Still with us is steve auth. What is your oil call . Lower for longer. Alix how much lower . 5050 five dollars. I was thinking about this 5050 five dollars 55. They are disrupting the oil industry. Its fragmented and they are blowing their cost using technology and expanding their production dramatically. Ae saudis are trying to get deal done and they have no choice but to keep cutting. They are Still Producing 9 Million Barrels per day so they have plenty of room but they have to hold the price of to get the deal off. ,lix lets talk about pioneer Pioneer Natural Resources is one of the purest shale plays youll get. Chart of five day pioneer after earnings. You see this big gap down. I know you like the company but here are some of the issues. It lowered the top end of Production Guidance so they are not getting as much oil out and the ideas that is priced so well to perfection that any room for error hurts the stock. Its not going just talk to us about why thats not true. Referencing the gas oil mix. A lot of people have misunderstood what they are saying. The reason the ratio has gone the oils not because production has gone down. Its because the gas output has gone up. Gashey have a little more which is almost nothing after these prices but it does not actually decrease. They have a little bit of a production issue as well separate from that. Think we are looking at a company that can grow its production 15 per year over the next decade. And its trading at four times ibidah. I actually think its cheap on a trailing basis. You have a Growth Company thats ramping up. Alix you basically have these companies that are being paid to be Growth Company so they dont have the discipline the oil market would need to curb production. Its just a pebble in the pond of the global oil production. There is plenty of room for them while the north sea is decreasing and deepwater is decreasing and the saudis are cutting. Other players will have to adjust but that permanent players are the disruptors. They can keep growing. Us. you are sticking with the opening bell is up next on bloomberg daybreak. S p futures are around the lows of the session. There is weakness in europe as asasuries get on the margins yields move lower. The opening bell is up next. This is bloomberg. Is this a phone . Or a little internet machine . [ phone ringing ] hi mom. It makes you wonder. Shouldnt we get our phones and internet from the same company . Thats why Xfinity Mobile comes with your internet. You get up to 5 lines of talk and text at no extra cost. [ laughing ] so all you pay for is data. See how much you can save. Choose by the gig or unlimited. Call or go to xfinitymobile. Com introducing Xfinity Mobile. A new kind of network designed to save you money. Alix this is bloomberg daybreak. We are moments away from the opening bell in new york after Producer Price index down 1. 8 in july. There is a little bit of selling here. The nasdaq futures are the worst of the lot. The s p futures are down by 12 points. The name of the game yesterday was still by the dip. Other Asset Classes, you are looking at a dollar thats a bit weaker on the day. It was stronger but then turned negative in now unchanged after the weaker reducer price index reading. Buying is in the treasury market. The 50 million of supply coming online at 1 00 p. M. Backward curved meaning Oil Prices Today will be more expensive than prices in the future. Thats a sign of the market rebalancing so watch crude. Thats were stocks have open for trading so lets see where we can out. Abigail we are certainly looking at a bare situation for the major averages. All the major averages and the u. S. Are on pace for a third down day. For the s p 500 and the dow, that will be the first time that could happen since the end of june and just recently, i was emailing with the head of Technical Analysis at m km and he has put out notes making note of bearish divergence is. I asked him whether or not the three potential down days could signal a bigger pullback ahead and he said yes based on the divergence. Its tough to know how big it will be. There are tensions between the u. S. And north korea but the sellers are in control right now. Retail and the consumer is the theme of lots of red. Macys is lower and shares had been higher in the premarket. They put up a solid Second Quarter number and the guidance is a bit aggressive. Kohls put up a Second Quarter beat as well and their guidance maintained with their shares down. Is absolutely plunging after the company put up a disastrous Second Quarter. Margins areales and plunging and look at blue apron, the recent ipo hitting another new low, down 50 from its ipo price of 10 not so long ago, down 17 on the session after the Company Posted a larger loss than expected plus they are losing customers as they cut back in advertising spending. The worry for investors around retail more broadly is the rise of ecommerce. It has cut into Department Store traffic in this chart shows it well. Its a twoyear chart and in purple, ecommerce up 102 over the last two years. Overall, consumer discretion he is up about 19 . In blue, not surprisingly, that is the Department Store index, the s p 500 is down about 2 3 since may of 2015. Its being cut into bite ecommerce and investors are doing a lot of the shopping online. Alix for more on retail and earnings season, lets turn to steve auth. If you want to play value trade and look at retail, what do you do with that sector . Contrarian but sometimes the crowd is right. This is one sector i would not play. Amazon is so disrupting the space. They have got such a large base of infrastructure that is looking increasingly not very useful. Its just very hard for them to turn the ship around. I still think its too early and i know the stock is down big and they are dirt cheap on trailing numbers but forward numbers to me dont look all that good. Tohink its too early to try get brave here. I would not try to pick up anything in front of this steamroller. Alix what does the bottom look like for these guys . I am not sure. Jam or ait a total m a bankruptcy . At some point but macys is the big store in new york. Maybe they can turn it into condos. Increasingly near its market cap. Im not predicting a breakup. David this knife is still falling. Talk to us about the other ramifications. Whats of this mean for commercial real estate . What does this mean for commercial real estate . Yeah, i think you would have to run the numbers on how much within the total space. The real estate space has generally been pretty good. We are not recommending people be overweight in real estate assets. A pretty big run it has been supported by low rates. Helpfulargin, its not but it im not a huge fan of the real estate sector. Sector, isor by there anyone not being disrupted by technology . Technology is done a lot in shale as well as the media world its been disruptive. Is anyone not being disrupted or is about to be disrupted . Its a good point. Virtually everywhere you look, its all being disrupted. These are some of the technological changes that i think are creating the long cycle, if you will and keeping inflation relatively low. Bad news is there is all this disruption but the good news is the fed is out of play and the economy can keep expanding. If you can buy the companies that can adjust to that and have Good Management teams that have good competitive positions and may be hard to disrupt and are aggressively doing that, you can make money. Maybe this is an advertisement for active management which has been underperforming for a long time. We mentioned some stocks you like and piner was one of them. What stocks fit your criteria . Hold Like Companies that that have already corrected. Especially if you want to fight stocks but not retail. Astrazeneca is a controversial name but we think weve got a great base of assets and a good pipeline. Stock is trading at 14 times earnings and has had its big correction. That would be one example. Jpmorgan is a company we think is in the crosshairs of all that is good about whats happening here as the yields start to come up gradually and the economy starts continues to move along. The tax reform package should get done eventually and stocks trading at 14 times earnings. The earnings for the year will probably be low. Verizon is another one. More aboutll talk mergers in telecom and cable but joining us on the phone is the ,ordon haskett Research Senior ranked among the analyst top analysts and named to a number of top research teams. He has a 36 price target on kohls and a 25 price target on macys. Thank you for joining us. You just topped off the kohls call, why the negative sentiment in the market when the numbers were better than estimated question m. Its a combination of a couple of factors. Even though the quarter got better as it regressed, they spoke about july transactions Getting Better but the overall quarter was still negative. The second factor i think is when you take a step back, they have had a huge bump from under armour and we will cycle that early next year. The third factor is there was an expectation in the market that the company would have a big costcutting Initiative Program and while they did allude to close to 250 million of expansion of expense , i am surprised the stock is down as much as it is. I think there is a little bit of a carryover effect from other names including dillards which reported disappointing numbers but i think those are the three factors. Kohls a single biggest drop in its shares since early january. Macys have the same kind of thing with comp sales not as bad as expected but the stock went down. It was right on the numbers so what is happening there . Of it was pretty decent. They beat our estimate by about . 10, about a nickel of upside from gross margin. They backed the fullyear guidance a we will see when you take a step back and look at the macys guide for the second half of the year. It implies improvement sequentially on the twoyear stack. This company has had it struggles of the past few years. And betting and improvement in this environment with they are facing a number of headwinds looks optimistic to us. We think for the street as well as probably why the stock is down so far this morning. David looking at the retail numbers out today, one could say youve got to choices and retail if you fall short, you can get killed or few do better than thought, we will just hurt you. Is this because investors have given up on this sector and dont believe it has it on him so it almost doesnt matter what they do . It overld characterize the past few months since target announced their quarter that the backdrop for retail has improved. All the stocks have bounced off their lows. When we take a step back in a. 24 that they were stopially different will when you take a state back them when you take a step back, looking at the large institutions come in order for the investors stepping into on the stocks, they will need to see more than just one quarter of good numbers. They will need to hear more of a strategy about growth and strategy about how they will look to get younger. Easier cons,ook of Better Weather by the retailers if they are cheap, that strategy does not work anymore because of the environment and how much competition they are facing today. You have amazon saying they will buy whole foods. That opens up a whole new vista. Use talk about appealing to a younger audience. Amazon does that by their name. Is this just a backdrop that limits how much upside there can be in brickandmortar retail . Mortarall bricks and retailers are created equally. Look at what walmart has done in terms of acquisitions they are doing to get younger and cross pollinate their brickandmortar business with their ecommerce business. You look at a company like costco, it has a lot of tangible benefits. There is opportunities in the dollar store. Amazon will have its impact ofoss a broad swath retailers. Not all the impact will be created equally. Alix thank you so much. We are just about 12 minutes in todays open. The s p is down about 12 points. And financials are leading the down. 15 Million Dollar hits. And other Asset Classes, the dollar is mixed with the eurodollar down but also lows hithe session and getting is the safety trade for the yen continues. Gold is getting a nice bit and guy is brent picking up. . 13. This is bloomberg. Emma this is bloomberg daybreak. Coming up on friday, libby cantrell, this is bloomberg. David this is bloomberg. Telecom takeover, the french billionaire is working on a potential offer to buy Charter Communications according to people familiar with the matter. A u. S. Pushes helped diversify, buying charter would be by far their biggest deal. Joining us now with more is ruth davis. Our m a reporter. Ruth, how real is this deal question mark why first heard it, i could not believe it. You are talking about a company that if you combine the combined is about 60 billion combined with charter is 40 billion. He is not a man for want of financing. You have two great suitors. It would not be the first time that its a relatively company mergedap with a larger one but talk about the debt. Looks like these two companies which are different sizes have roughly the same amount of debt on their balance, like 60 billion. To put these two together, how much debt would be involved . A tremendous amount and even if you believe they will do a they raisedation about 2 billion this year and i might try and see whether they get the shares their or their some kind of reverse merger. The root the structure of is being worked out. The financing banks have the money on their Balance Sheet. Whether they can pull this off is something thats the multibilliondollar question. David a man named john malone owns 20 of charter. He will have to be awfully convinced about this enterprise. I would be surprised if he just says i want the cash. Exactly, its fascinating. It seems like every week, theres a new billionaire throwing his hat into the ring. None of them seem to of made a former offer yet. How much of it comes to the table and gets into the negotiations it remains to be seen. Charter is the biggest in the u. S. Ends up focused market for all of these guys. Alix how do you play the shift in the media and the Telecom Landscape as well . Its confusing at least. The whole disney thing is very interesting. Rather be with some of the biggest apples players here that have a position. Flows and dividends and then you see how the rest of this plays out. I also Like Companies with some brand power so we like disney. We like verizon. This Telecom Space will start to consolidate. The issue has been Pricing Power. You get a little more of that if you get some consolidation. In the meantime, youre getting paid to wait with a dividend on horizon. I think on verizon. I think those are the ways to play it. Trying to be the bravest investor does not always make sense. This is a very quickly changing landscape. Disruptor. Ack to the one Cable Company buying another does not strike me as disruption. Bob eiger last week, even though we have been on the air, people are not happy with him. What is disruptive about altese buying charter . I dont think it is but i dont think it will happen. If it doesnt add up, it probably doesnt happen. I am staying away from both sides of that trade. Great reporting, thank you very much. If you have a bloomberg terminal , check out bloomberg go online. Its tv on your terminal. If you missed it and want to rewatch, this is bloomberg. Alix we are 10 minutes away from bill dudley holding a briefing on Regional Wage inequality. He was more hawkish back in june. Today we got a weaker ppi reading. Everng us now is International Economic and policy correspondent, michael mckee. There are a lot of weak points in cpi. Its the problem with prices overall. Analysts expect Consumer Prices went up because they have been going down for so long and a lot of it is driven by Energy Prices which have risen. Its not just energy. Look at this chart of a random selection of things out of the cpi report. Apparel,liances, boys used cars and trucks, moving and storage, cell phone services, everything has been going down. There is no particular reason for that. Dropped last month. Why do we see these things going down instead of going up . That is the puzzle for policymakers. Alix how does bill dudley address this in seven minutes i dont mark michael know that he has a good answer for it. The fed Still Believes as a group that there is a one off affect in place. We will see prices turnaround, they will rise at some point soon. Bill dudley make you to that if asked about it. The fed has to figure out why this is happening. If it doesnt turn around, what do they need to change . David there is a fine line between patients and putting your head in the sand . To what mr. Dudley will talk about which is wage inequality across regions. Is it possible the wealth is being transferred to the wealthier part of society which does not spend money on the things you put in that chart in theres not as much wealth growth among those who buy those things. Michael in a longerterm perspective, yes but in the shorter term as we see the decline, there is not been much change in wages. You can look at the way we have set up society with tax cuts for the wealthiest and you can see the overall decline on whats going on. What figures and mores concern about whats going on. The trump euphoria has faded and there are concerns about whats happening overseas. We were talking earlier in the show with people who say people are worried about what comes next after the Great Recession. This other chart shows you that retail sales have also pulled back. If we are seeing fewer sales, maybe thats pulling down Consumer Prices because the demand has fallen. We talked earlier about health care that keeps going up and up. Our people spending more money on that . Michael there is an aspect of that in it and there is also Student Loans soaking of money. Housing prices have continued to go up and gasoline prices have been going up again. Peopleinteresting is it were really pulling back and not spending any way, you was see the savings rate go up and that has not happened. Speaks,en bill dudley what words are we looking for to tell you that hes on the inflation temporary as opposed to there might be a shift at the fed. Michael he would say that we continue to remain vigilant. With unemployment is low as it is, we should start to see wages rise and that will put upward pressure and one more rate rises a reasonable call coming he will say. Alix should, will, monitoring, stuff. T thank you for joining us. We are nearly 25 minutes into the session. Weakness across the board with the s p down 13 points. On the margin, you have a bit of a weaker dollar. Eurodollar is off the lows of the session but dollaryen keeps getting lower as oil takes a hit. This is bloomberg. Whoooo. Youre searching for something. Like the perfect deal. On the perfect hotel. So wouldnt it be perfect if. There was a single site. Where you could find the. Right hotel for you at the best price . There is. Because tripadvisor now compares. Prices from over 200 booking. Sites. To save you up to 30 . On the hotel you want. Trust this birds words. Tripadvisor. The latest reviews. The lowest prices. My mother said get your feet off the versusian the jeffersonian corner snoofment its 10 00 p. M. In hong kong and from new york, im connie quinn. Welcome to bloomberg markets. Vonny the top stories were covering on bloomberg and the top stories. U. S. Stocks going for a Third Straight day. The nasdaq taking it on the chin the most as rhetoric over north Koreas Nuclear Program Continues to heat up. Then in company news, mining companies, glencore is cutting down and building up fund. Who might be in their sights . Well discuss. And improving the culture of Silicon Valley, well hear from sheryl c. O. O. From sandberg to making technology more diverse as google deal with issues of its own. All that come to in the next two hours. About 30 minutes in the trading day in the u. S. And julie hyman is here. Stocks lower for a Third Straight day and increasing in
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