It is wednesday ear in new york city. I am erik schatzker. I am stephanie ruhle. So much news breaking this morning. It would be a blockbuster all the action is in washington. Janet yellen will be back. Rememberces committee its chair by republicans. It is alive right now. It has kicked off. There will be opening statements. Lets take a few minutes to take in our chief washington correspondent peter cook. Lets talk about the kind of question janet yellen will be facing . Senatorsbecause the are a little more gentle but also because this is a committee shared by republicans who have strong feelings about the fed. That is right. It starts with the chairman who basically spent the last few months as chairman of the committee trying to review the Federal Reserves hundred year history, specifically talking about legislation that would change if they rein in the Federal Reserve. That will be a big focus for them and will likely come up throughout the day. The committee does not like freelancing they think the Federal Reserve has done. Extraordinary Monetary Policy moves that have been done and have been made in the last few years. She has been challenged on the notion the stimulus needs to continue somewhat because the economy in her view has still not turned the corner. This is a committee that specifically propose legislation as member of the committee. It could stray from those rules but only if janet yellen came to explain why. Yesterday, janet yellen asked about it. If we were following a specific mathematical rule, i think performance in this would have been dreadful. We could not have follows in the downturn. We call for negative Interest Rates. The bottom line is she said it would be a terrible mistake to force to follow a rule Going Forward. That is a preview of what we are getting a lot of today. More particularly for the veteran must freelancing. A few things are more important as soon as the member of house vices committee lets move on. The huge news we learned earlier this morning in the media world of course am of the one and only Rupert Murdoch wants to bring time warner in his empire and made an unsolicited a theiondollar offer for company. Investors clearly think the company is in play and the up. Es cropped lets bring in jon erlichman, live nla. Also with us is the Pivotal ResearchGroup Analyst who covers some of the biggest names. N media john, lets start with you. What is the buzz with you . The contest is, our understanding is the conversation took lace between Rupert Murdochs his righthand man and the ceo of time warner, in early june, which led to a from foss, a letter for the business. Of reasons variety to give more power at the box sportsand more power was , and there are clearly a lot of tv rights block the and that gives them a lot more leverage televisiond of cable right now. It talked about how, from the getgo, cnn will be paid for each transaction. There was a lot of talk about what would happen if you were to see somewhere else and here we go. You see the reaction of shareholders from time warner. There is a lot of overlap between the Shareholder Base in time warner and foss. Theyre thinking now that this is out there, you can get some of the overlapping shareholders give the same arguments being put forward. You have been seeking bankers who are on the deal or investors who want to get on it. People understand rupert prettys thinking, it is much, why does this deal not make sense . Even if you selloff cnn, they would have 7 billion of revenueional cable between them. Foss and warner bros. , you would the studio. It would be number one on general cable and entertainment. There are so many reasons to do the deal that they are hoping with 85,000 on the table, that more welcoming. John mentioned the offer was initially in june. Rupert murdoch has not participated in the conversations yet because he was effectively waiting for an invitation for beauty is to comment. Highly discouraging that murdoch has not seen the point of coming in yet. Could the Justice Department be discouraged by this . No. They do not believe so long as they sell cnn, they do not think there is any regulation wrist whatsoever. They would not be this aggressive. They have gone public with an unsolicited offer of 85 in cash and stock and they would not be this aggressive about it. Coverhink the regulatory for this transaction is on the distribution side. At t, directv, it will be relatively easy for these Media Companies to go down to washington and talk to these we, thers and say, content side of this mess, need to bulk up here. You are in paris and it puts you in a great position to answer about the International Side of the deal. There are three led to the stool. Hbo is hugely important to time warner, and asked that Rupert Murdoch would love to have. Foss is pretty good with sports but a distant number two to espn. They would get time warners rights to major league a stall. Also to the ncaa tournament, march madness, we know how important that is. Thirdly, the opportunity to build an international business, not only would they have combined cable revenue overseas, but with more programming in one roof, they would pack a much bigger punch with satellite distributors. Does it make sense to you . Absolutely. One of the worlds. Argest players in a lot of countries, they are not that they are it is interesting. They are rapidly growing. Combining the two entities would allow them to have more of a combined operation. Having a larger entity would make them more competitive. That is in important point. I do not think there are trust issues with respect to Cable Properties in international markets. Early is expected to the timing is right. You have the time spent off. The Balance Sheets are strong and the companies are hitting the numbers. Murdoch wants to deal from a and theyof strength are at a position of strength. Really trimming down, getting rid of cable and time inc. He has laid out a longterm growth plan which focuses on international growth. Growtha big source of for them. Trimming down the company and making it green, it becomes easier. John, this is an issue that jeff will have to confront one way or the other. The stock is trading close to 85. Time warner is is in play. Rupertoes not sell to murdoch, who else is in . What about google . There has been all that talk in of google taking an interest in a media company. Jeff makes an excellent point. He just sits there and has to watch this all unfold. As paul mentioned, when you have been so focused on shareholders and cleaning up the business to make it shareholder friendly, this is all about the stock price. Question, isr anybodys guess at this point. Foss comes forward to make their push because they think they have a strong case. In any situation like this, everybody has got to be thinking, maybe this is our shot. On jeffs side, because he is got to be accountable to shareholders, we could see very interesting the next few days or weeks as a result of how this has all come to light. You cover google in addition to the Media Companies. What do you think . Do you think the interest in media is genuine . Is time warner the property they cover the most . Google has been focusing a lot of Capital Investments away from the media. I really think it strikes me as sensible in some ways. I would not rule it out. They are sitting on cash. Thele could be viewed as eric schmidt diversification portfolio in some regards. Maybe they decide that is a good spend money. M to it does not strike me as thing for them to do first and foremost. But that is it. Toy clearly know they need buy more premium content and having more User Generated Content will not do it. Is time warner for arguments sake. In a bageled battle between google and foss, is it even a contest . They still have to be disciplined in the way they evaluate and bid for assets. Shareholders seem to be able to put up with a lot less discipline from google. What google would have Going Forward is the evaluation. Like brian mentioned, i am not tolly sure google is willing lay that bet on the table, but they had to think long and hard about this because the asset from time warner does not come up that often. If google wants to be a player in content, they have to think about it here. Clear,ou have made it take a hike, Rupert Murdoch, what are you doing . Making other calls . I think he is talking to shareholders first and foremost and making a pitch for his plan. We think we can create value with our business plan. Part of his problem though is as john pointed out earlier, shareholders by and large are the same. For both. Ames come up on a share count basis, there is a 70 overlap. To the sameing people chase kerry is talking about. Of a moreestion forceful and persuasive argument. The big thing you are focusing on is one of the synergies of putting these things together . That is an issue. The billiondollar number thrown out, that is a low number when you take a look at the tremendous number of ss between the two companies. Is is a story that aint going away. There you go. Check the rbl. There may be a villa in italy now up for grabs this week. Thank you so much. Brian wheezer, senior Researchers Research analyst. I also want to thank my own partner, who, himself, was on the phone recording all morning. I did not really was. Coming up, we will bring you day two of Janet Yellens testimony. Question yellen is taking testimony. We are now getting ultimate opening statements. You heard some of that yesterday from the banking committee. What matters is the q a. Republicans will be bordering on house bill. Some would say it becomes a highly put a size institution. Continue the conversation about janet yellen and the fed and Financial Markets and how they responded. The global chief Investment Officer, formerly the chief Investment Officer of credit suisse, now responsible for 55 billion in assets at an institution. Isnt Corporate Banking and investment banking, obviously a Private Banking and Asset Management as well. Janet yellen handled herself pretty well before the Senate Banking committee yesterday. What kind of experience do you thek she will happen for House Financial Services committee and more importantly, what could she say that could constitute really Important News . With onelets start important notice. Muchnk there was appropriation and much forward guidance. Yellen is interested in not surprising the markets in a negative way. This was definitely the case yesterday. Marketstility in the everywhere. It also stayed low. Is definitelyce the way to go forward. What are the expectations today when she will clearly get other questions . Yes she will follow that path. No big surprise at all. Cap is clear. It is only a matter of time that we would come back to normalization. On the first glimpse, the economy does pretty well. It is only a matter of time you come up with interestrate hikes. Under the surface, you see it is a mixed picture. Lets take the labor market, for example. Unemployment rate close to the feds target. Participation rate is disappointment. On first glance, everything is ok. She clearly reiterated the statement there it only a matter of time you would come up with rate hikes. This is the judgment of all Market Participants i have spoken to. No one is changed the assumptions when the first interestrate hike would take place. Talk abouts a lot of valuations. Has jan yellen specifically talked about corporate highyield market . Mediad called out social and biotech and she said she does not want to use Monetary Policy as an instrument to of aon against the impact pop in the bubble should the bubble exists. Concerned about the degree to which the fed is inflating the prices of risk assets . It is a balancing act. If we do not see the risk of an equity bubble, for example, but there are risks in some segments. Jenny on is right giving indications that there are some segments that risk reward is definitely not favorable. Themade the comment on technology side, particularly the biotechnology center. Much music has been played there. Many capital flows. In particular, from conservative investors in the last three years. It is the massive surge for yield. It is a big performance problem. But it is a massive surge for yields caused by a fed that kept rates so low. That is right. But where is the alternative . All the problems have to be fixed. No alternative with regards to the Bank Strategy of the fed and having swallowed the same story in europe with regards to the ecb. We now see decoupling. The fed is getting back to a normal path more and more and starts to give the first indications. We now have decoupling story. You say much music has been played. The music has played before. I know it was chuck who famously said, so long as the music is blank, you have got to keep dancing. We know where that brought a spirit of protestant a financial crisis. That is right. Maybe the music is playing for Different Reasons today, but will it have the same ugly and . This i do not know. It can get even more expensive. That is the problem with investors, saying, as long as is playing. They do not feel comfortable with the underlying reality. If they are not wrong and the s p is outperform you, you are sitting there like a chump. It is a good sign, that we have no situation at the market. This is more dedicated to the equity market. I expect a third correction wave over the next weeks and summer months. It would also be pretty understandable. We are only talking about six weeks. Press exactly. What makes me nervous is rather what is happened in the credit much an improving music has been in the credit markets. It is an enormous performance over the last five years. It is quite dangerous. Is dangerous and yet if you look at how highyield are performing, even when the yields are five percent. It seems investors keep on playing. That is definitely right. The relative attractiveness and this is now two more attractive equity markets and also liquidity. Equity markets are much more liquid. The will be much. Etter if something goes sour on a basis liquidity because of dodd frank and who is to blame for that . We will take a quick commercial break. Were counting down to Janet Yellens q and a. Question yellen is speaking right now. We will get questions from lawmakers any minute and take you to the hearing live. It is already been contentious even in the opening statements. Lets bring peter cook back. Peter. The committee is setting the tone from the very start. We have seen the flash point for the hearing. That would force the fed to follow more rules. He has been critical to those opposed to the legislation and setting the tone with a harsh opening statement. We heard from one of the republicans cosponsoring the bill. The pushback will be the flash point here. Toocrats are trying to rally her defense, saying the bill was shortsighted. Contentious debate over the future of the fed and whether it has too much power right now. Stay with us. I want to bring back the managing director, a senior u. S. Rate strategist at credit suisse. Welcome. We are waiting for janet yellen. What do you expect . Contentious, particularly if youre talking about rules. If you use a rulebased model, what do you do . If you use a taylor type role, one of the more popular rules used in Monetary Policy, it would have said you would have Interest Rates at 93 . How do you do that . A rule saying, you have to follow the rules . Also precludes a provision that they have discretion to act outside the rules. They would be dragged up. I suspect what janet yellen will likely say is you do not. Ant to have your hands tied there are sometimes emergency situations where you need to act beyond what a rule would tell you. Halfules also only use data. Used but forecasts into the rules. If they were forced to operate according to the rules, it would be like nothing weve had right now. Ifre we where would we be they were not able to do what they think is justified . Was no alternative to what had been done. They executed in a convincing manner. Dovish instead of two and too hawkish. Classes that a mistake . The fed has much better tools to toht inflation than it does fight jobs. It does. Casestuation is in some structural. There needs to be a fiscal response. We are in a mode right now a fiscal restraint and keeping the budget low, for example. Keeping it low, it is hard for the government to respond to things like monk term unemployment. Janet yellens his testimony is happening right now on capitol hill. Have you had a chance to read and review the legislation . Yes. Yesterday, before Senate Banking, you will find that under this legislation, the fed would not have had for stability to take the actions during financial crisis. During your review of page seven of the legislation entitled, changing market conditions, which reads in part, nothing in construed l be the policy target described under subsection to be implemented if the Market Committee determines such plants can not order should not be achieved due to changing market conditions. I do not believe the language could have been any clearer. Not the intent of the legislation and would certainly welcome any policy feedback from your ex berks to assure it achieves that purpose, but i as clearhe language is as the language could possibly be. Lets talk a little bit