i am jonathan ferro in london with tom keene in new york. it was a non-decision, but a hawkish hold? tom: deutsche bank said this was big. jon ferro will speak with alberto gallo and then john andng and richard claro -- richard clret -- arida. discussions include the u.s. and european allies, russia, and iran. russia backs syria's president, that recognizes he is a roadblock to solutions. trip toerkel began her china. a number of business deals are expected to be announced. the chinese will buy 130 airbus plans for $17 billion. a dramatic rescue saved 240 migrants. the greek coast guard pulled them from the sea. three refugees died, including 2 boatren when their capsized leaving turkey. more than half a million refugees have reached a greece this year. the number killed trying is unknown. republican presidential candidates try to break out of a night'smarket last debate in colorado. it focused on dollars and cents. marco rubio defended himself after a florida newspaper called him to resign for not showing up to recent senate votes. >> in 2004, john kerry missed 60% to 70% of his votes. endorsed him.el barack obama messed 60% of his votes and the same newspaper endorsed him. this is a double standard between the mainstream media and the conservatives. donald trump said his numeral for a casino bankruptcies were good, they taught him to restructure debt. a compromise reducing a .otential debt it includes a two year deal on defense and nondefense spending. the senate is expected to approve the measure. what an afternoon yesterday. i know that you are looking on. it is supposed to be boring. saved -- thereze was a reshaped bond and equities market. yesterday, let's go right through the 10-year yield. to love nine onto the euro/dollar. a weaker dollar. parity watchn a yesterday, but there was a weaker euro. nymex crude, oil lists 45.30, a nice bounce off the 43 handle of earlier. dow, 14 point 33. the dow not at 18,000. have the bears been wrong on equity. the two-year yield is the focus. monitoright over to the , the basic idea of a two-year yield and the fed meetings. here we are. this is the fed meeting through the year and the shock and all of the accommodative super dovish fed and the trend. this is exactly what janet yellen wanted. 50/50.ve that back up to tom: we go to alberto gallo and jon ferro. overshot to a restrictive guests. all they have done is get back to trend. we get to talk to john ryding and richard clarida. we begin with alberto garlow. -- alberto gallo, this is more than good. going toing was happen. you changed to lines, then it was an aggressive repricing for federal fund's futures. when you look at the possibility of a december move, is not in line with your thinking? to think they are trying keep the market and check. very fewok, there is hawkish members. --be the vice president they're trying to get the market and check to avoid the market a potential bubble. he do not have the inflation economics needed for a hike. the data you look at and the surprise move, this was meant to be a nondecision. i asked myself, what actually changed in the last month that change the thinking of the federal reserve? tom: i saw a skewed domestic. alberto golomb, there seems to river --reness of the an awareness of the international crisis is over, correct? mr. gallo: a little bit of lipstick has been put on the macro. you have positive reform news from china with the plan that ends today. china is talking about reforms. more action. if you think about the influx of qb in europe it is different than the u.s.. it goes that the banks with a trillion euros of nonperforming loans in the systems. through the real economy. it is more the markets -- it is more of a market event. tom: the best of the research we saw yesterday. with a nicegroup quote on where we are. the october meetings showed how ephemeral the criteria for raising interest rates have become. the importance of placating markets. alberto gallo has risen an importance to arrival or dominate the traditional jon ferro mandate. thus says it all about the need to placate a guy like you. did janet yellen placate you yesterday? they are: i think really putting themselves in a potential box. the fundamentals of very weak, even in the u.s. inflation's are not rising. the international issues in the emerging markets are still there, even if we are in a slightly better mood because china is doing reforms. reforms mean slower growth. a readjustment on companies. china doubled of leverage and never had a credit crunch. the problem is still there, you're just postponing it for a few months. they want to tell you that cute you worked, but we will not see realization in our lifetimes. jon: the euro/dollar. .he two-year yield pushing through 70 basis points for treasuries. it carries over to german bonds. the fedt decision of yesterday as we go into december change the calculus of the ecb? ecb haso: i think the more pressure to fight lower inflation and growth. if the ecb decides a new cutie, like they said they will do, it will be harder for the fed to hike a few days later. especially if the new qb is aggressive. we should look at diversifying assets. taking credit risks. buying corporate bonds, nonfinancial lawns. they are doing a small amount and buying regional bonds, and even potential loans. internally, they have discussed everything including stocks. tom: a key distinction, with the ecb will buy, versus what america and the fed is buying. this is the same chart that janet yellen had in the next meeting. the shock and all of september, october, who knows where december will be. the message of the chart is to the left, we are miles from normal, aren't we? mr. gallo: exactly. the way that i look at it, have we de-levered? that has been, accumulating for 40 years. we have not the lever -- the levered -- de-levered. delerope, banks are not vereging. is harder because we are borrowing more than we grow. with us for gallo the hour. jon ferro in london, i am in new york. we are thrilled to bring you john ryding of rdq economics with his 10 years at the bank of england. john ryding is joining us in the next hour of bloomberg "surveillance." futures -10, dow futures -84. tom: today's phrase is the next meeting. the next meeting to the new york mets better be a win. new york city wakes up to a royal pounding. right now, we need a business flash. here is vonnie quinn. vonnie: there is a report of a possible block buster deal. according to the wall street journal, visor and allergan are considering a merger. invaluable in hundred billion dollars. talks are in the early stage. barclay says profits fell 10%, missing estimates. they have been restructuring and cutting costs. yesterday they named bailey as the new ceo. he is making what he calls a necessary transformation of the investment bank. deutsche bank has announced a loss and job cuts. germany's largest bank had a loss of $600 billion, the biggest in a decade. deutsche bank put aside more money for legal costs. .ncovering 26,000 jobs by 2018 2/3 will leave a part of assets that will be sold. the bank had operations in 10 countries including norway and mexico. john mcfarland, the chairman is called mack the knife. i wonder what we should call john kline at deutsche bank? christopher wheeler, what do we call john kline? does he need a nickname? wheeler: he is known for being village in being conservative. i think what he is doing is telling the market, his clients, this is a long job in a big overhaul. at the very best, i will get you to a 10% return in 2018. that is not exciting, but it is probably realistic. jon: you cut the work force, pull a lot of countries, then i see 50%. was that a shock for you? mr. wheeler: i suppose it was, but we say we should focus on the class that provide us the biggest part of their wallet and avoid those that give as little it's a romney and. it is a big number, but it is part of a very major overhaul. get stuck't want to in the minute of the intraday moves. stock is up 4%. the negativity, they are not raising money. what is the deal with the stock move? mr. wheeler: thrillers asia and we knew deutsche bank had a lot to do. globale is fantastic in markets. it is a cost basis below that, it's capital bases has not been affected by the capital side and investment ranking. this is a long cold. he is talking about 2022. tom: a security analyst, that is what you're becoming. as a utility analyst, how many bodies will go out the door? that is a big number, some of it is layoffs, some of it is selling businesses. is it 100 or 200 bodies among banking mr.c wheeler:? when a seller german retail bank 26,000 staff, they're looking to shed 10%. i.t.are shedding 6% of consultants not on the payroll. i believe they have 20,000 note on the payroll. tom: it is not just the in retail pink slips branches or investment bankers with a big paychecks and bonuses , there is a nuance of i.t., staff, and potential businesses? jon: a lot of moves. the thing that stands out for me is that they face job cuts, their bonuses/. if you -- their bonuses slashed. the irony is it performed well on the quarter. while you and why can't that continue? mr. wheeler: they head of equities is running the markets business, including fixed income. to itscome did well peers. the macro business is where they were slow. i think that is because there was uncertainty in europe. equities were weak compared to their competitors. the issue is not the topline line revenue, the cost associated with that. the capital is tied up with that . the free world post-regulation crisis, it will be higher. tom: what are you modeling this "topline revenue." as a topline gdp, or kid may do better? mr. wheeler: they have been clear about revenue. -- they will lose revenue. they're focusing on wealth management. they are talking about flatlining revenues in 2018. keyword.lining is the christopher wheeler, always brilliant on the state of transatlantic banking. we have john ryding and alberto gallo. also there will be professor clarida. of pimco.arida all of that after the important fed meaning. stay with us. ♪ jon: good morning. this is bloomberg "surveillance." i am in london, tom keene in new york. the chinese premier says they need growth of 6.5% to meet the government's goal of a moderately prosperous society. on the one hand the target shows the readiness to accept the weakest growth since the economy opened three decades ago. on the other hand, it is a higher and higher days to achieve 6.5%. on the surface it is slow compared to last year, but in five years, how difficult will 6.5% the? question on the concern many economists will they see the number? since .5% is a low figure for china. when you think about the downward pressures that they will be facing from absorbing overcapacity in real estate and sector, 6.5% in 2020 looks testing. jon: 6.5% will be the headline number that comes out of the four-day convention between leaders in beijing. what is the headline you are looking for the holland the gdp target? when is the key challenges for china's leaders are facing a growing question about credibility and confidence. china's leaders in the past have been regarded as supremely competent in managing this system. in 2015, with the equity market and the currency devaluation, i think this has raised questions about credibility and competence. what china's leaders need is a five-year plan that is ambitious but realistic, and concrete steps to take to meet those targets to close the credibility gap. jon: bloomberg intelligence in beijing. alberto gallo alongside me from rbs. i see lower rates that will fuel the overcapacity. in your world, does that need lower yield? mr. gallo: exporting inflation. china is exporting inflation globally. they have chosen a soft landing in the past, they can do that. they have enough reserves. they won't use them for another stimulus, the reserves are not enough. they have enough for a soft landing. companies,you keep you keep factories running for longer. you export deflation. it puts more pressure on central banks to ease. jon: including another central bank will on -- another central bank reluctant to cut. we will talk to the bank of israel, next. ♪ tom: good morning, worldwide. bloomberg "surveillance." good morning, south africa. a nation struggling with the buffering of what the central banks, especially the fed, does. here is vonnie quinn. vonnie: for the first time, iran is taking part in international talks on syria in vienna. iran is a supporter of the syrian president. u.s., allies in europe, and the persian gulf are also taking part. nato may increase troops in countries bordering russia. they would add 1000 troops in 4 countries, poland and the three baltic states, that is to deter russian aggression. candidates that have never held office leading the republican polls. -- thee trying to gain establishment party try to gain traction. criticize the new budget deal in washington. ohio governor john kasich says he has been there and done that. >> i'm the only person on the stage that was the chief architect in balancing the federal budget. you cannot do it with empty promises. vonnie: ben carson and donald trump lead in the polls. the vote will be cast in the iowa caucus is 96 days. john boehner promises to "clean the barn" before leaving congress. they approved a compromise bill avoiding a government shutdown. to passte is expecting it. the house formally installed paul ryan as john boehner's succession. he says republicans have lost their vision, and he intends to restore it. ratesnk of israel says no will be needed for a while. karnit flug discussed the impact of the federal reserve raising rates. ratesug: the interest were passed with one element that had an effect on our market. just one element. we will have to see what happens in our market, and what happens in our foreign exchange market. an effect of the growth dimensions before inflation, that is what will affect our policies. israel cut bank of interest rate since 2011 13 times. jon: let's get more on the bank of israel with our middle east editor elliott gotkine from tel aviv. how much can she do? mr. gotkine: she was adamant and clear she would only go forward with what she said were extreme policies if there was an extreme situation. in the be a slowdown global economy, a change in inflation, a prolonged intensification of the violence israel has been experiencing. given the current situation, she believes the current policy is appropriate. not to say it could not become more loose, but everything suggests the policy they have is the correct one. tom: stanley fischer had what was regarded as a more than successful 10-year at the bank of israel. what was said about the u.s. and the u.s. focus on international events versus a dual mandate? as you heard in the clip, she said when the fed that is one aspect and one element that will inform the decision of the bank of .srael on where to go israel is a small domestic economy and reliant on the outside world. if there were a big change and global output, it would have a big impact on israeli exports, that could reduce , andh for the next year could inform their decision to make some kind of change for interest rates, especially with the shackle was to appreciate. it is now the best-performing currency of all the major currencies. tom: i think that was a shameless plug by elliott gotkine. jon: i think we should allow that. unfortunately, it is live and we have no choice. alberto, i see rates that are very low. i think this is a bank is saying they could do more. they call it a race to the bottom, i wonder if this is a race toward infinity? the question is, what is the limit? the last conference of the ecb, they mentioned the swiss national bank. this was national bank reached of gdp, almost as large as the swiss economy. 2 other central banks are higher than their gdp. if the central bank balance sheet is larger than the economy, that means central banks are an owner of a large sovereigne targets, bonds or equities. you will have an environment where the state owns a large part of the capital market, looking more communist than capitalist. i am looking at the french curve, with negatives out to the 4-year. how do they get there by sovereign debt with where they are already? will need toe ecb diversify. he to diversify in december, not only sovereigns, but corporate bonds, regional bonds. i think they need to expand in the real economy, loans -- in the end there is not enough assets. tom: we're left with the words is outan stanley who front of a delayed fed. this is the comment from morgan stanley, the critical piece of data will be the unemployment williamen following the dudley speech to the economic club of new york on november 12. while you listen for from president william dudley? mr. gallo: there's a lot of short-term noise we need to look at. job creation and wages, also a liquidity in the market, he believes that liquidity has declined despite what the market is observing, that trading is harder. these are clues to look for. the big picture is that we have cut rates over the last seven or eight years because debt has gone up in the last 30 years or 40 years. debt is not going down and it is hard to normalize policy. despite one or two hikes, i think we are going into an environment of qe infinity. tom: why'd do you not think you'll use the phrase qe infinity in his speech on november 12? mr. gallo: the fed is telling you that qe is working that you can fix a problem with a cyclical tool. we are is more honest, trying to fix problems we did not create. we are reacting to problems that others have created. it is more realistic. is with us. gallo full disclosure, william dudley did a chapter in my book years ago. coming up, the chief executive airlines andng at the inability to get a decent pond in the 7:00 hour. jon ferro and tom keene. you are listening to bloomberg surveillance ♪ jon: good morning. this is bloomberg "surveillance." i am jonathan ferro. i'm am in london, tom keene is in new york. year into the worst oil bust in a generation. $60 crude is the new reality. and othersom shell this week. that's bring in will kennedy. $60 crude is the new magic number. why? $60 is where people can generate enough cash to avoid borrowing. we are still $10 away. jon: i keep asking strategists and ceo, what is the strategy between trying to protect the short-term and in five years? ill: these companies will produce less oil if crude had stayed at $100. the projects have cut back. you don't feel it now, but there will be less barrels on the market. $43 andt texas under brent crude pulled away from 50. we continue down off of the microeconomics of too much or you. you are the pros, what you look at worldwide, to measure oil up to your eyeballs? and demand.oduction at the moment, that is 2 million a day, that needs to find a home in storage tanks all over the world. or: is it in storage tanks in boats off of singapore? where is the oil? still in tanks, we are getting to the stage where it might make sense to put it in boats again. when that is happening, you know there's too much oil in the --ld, and rices meiko and prices may go lower. pn: when it is done, you keep umping. we will not see the legacy of these cuts for years to come. is so flexible, it will come online. the new dynamic is in u.s. shale. tom: the micro economic shifts around in a new greater speed because of the engineering and technological improvements, is that right? jon: you have that right. i want to bring in alberto gallo . we look at the oil price every morning. bond markets are moving. the commodityo guys as much as anyone else at the moment? mr. gallo: both things are linked. what used to have been is he used have high oil prices with petrodollars coming out of the ground into the fixed income market. there was a strong link the between sovereign wealth funds and dollar assets. it is reversing. any sovereign wealth funds, the saudi's, norway, they are having losses or the states are withdrawing money and there is less demand for dollar assets. that is why you see dollar high-yield bonds wider than the european market because there is more energy exporter and with the demand for sovereign wealth fund is waning. tom: we had a guest stay there is a currency war going on. spoke with norway's stat oil and how they adapt to the norwegian currency. will we see that is by euro to parity? mr. gallo: that is the target. i think the defense reaction is important. if the ecb does an aggressive qe on december 3, the fed will be reluctant to hike, and we could see resistance. i think it is heading toward one, but i think the feds reaction. keep the euro/dollar above one. low forling with a longer reality. in your world you deal with a low for longer reality as well. the oil majors were not willing to swallow it. has that changed? they faced at shell a net loss in excess of $7 billion, extraordinary. lowered their price forecast. you can really see that accounting for a lower for longer. that is across the industry. $60 route is the new reality. coming up, we will have the managing director of pimco, richard clarida. discussing the fed nondecision. big moves by the head. -- by the fed. this is bloomberg "surveillance." good morning. ♪ tom: there was a debate last night in boulder, colorado. washington reacts to the debate this morning. mr. rubio did that are then good. an important fed meeting, more and orton -- more important than many thought. we are giving you coverage of that today. right now, a is this flash with vonnie quinn. vonnie: deutsche bank settling claims over a violation of u.s. sanctions. a 200rman bank with billion dollars to settle an investigation by the federal reserve and new york state regulators. the bank broke u.s. laws on dealing with iran and other blacklisted countries. a $50 billion cash pile. the korean electronics company will use the money to buy back shares. it will boost capital spending by 14%. it is struggling to cut into apple's share of the market. sony returning in the second quarter. sales of the playstation 4 soard and the movie "hotel transylvania 2" said the box office records. that is the business/. -- the business flash. tom: we are giving your perspective on a market that recalibrated yesterday afternoon. let's call it altra accommodative to use a phrase from stan fisher, it is back to neutrality. we are getting perspective from the royal bank of scotland head of microcredit research, alberto gallo, in london. ecb, the acclaimed french economist, mr. cure made it clear that are worries of deflation and disinflation. here is janet yellen, more on the yellen banking curve. is where that she has to be on the is to real economy curve? mr. gallo: obviously, the fed does not have the deflation problem. you have a lot of imbalances. the job market is polarized. you have a few people with high paying jobs, a lot of people with low wages. china is deflating the global economy. inember, the fed decision december is adjusting the ecb. if the ecb does a lot, the fed will be constrained. tom: the headline that jon ferro pointed out of negative interest year yieldegative 2- in italy. this is the italian two-year down. to see the negative interest ites we saw the other day, has to spill into a u.s. analysis? mr. gallo: the biggest beneficiary of the deflationary story in china and the spillover to quantitative easing is europe. that is where the central bank will go forward. they have not done much before. we are still long on italy and spain. italy is using a little bit of its headroom to spend more. they have a 40 billion tax cut planned, which is ambitious given the level of public debt. spain, it is a little better. spain is an opportunity. the political risk is creating noise in the market, but the fundamentals are good. there is not a lot of money to teammate, but it is a good place, spain and italian bonds. jon: a good place to hide. we were looking at the fund market, and said we could not forecast bond yields anymore. how difficult is your job becoming? mr. gallo: for the periphery, given what the ecb will do, there is only one way, lower free yields. bunds that there is very little value left in the basis points. i'm recommending to be long is very difficult. for spain and italy, which are relatively stable, the larger periphery countries come the yields will compress. if you have the central bank owning a lot of free flow in the asset markets, is qe continues with no fiscal stimulus, there is little left for it festers. jon: wall street wakes up and listens to alberto gallo talking about lower yields on the periphery, that means treasury looks like higher yields. people go back to treasury. will the federal reserv have difficulty getting the market to tighten in the market that alberto gallo is describing? tom: that will be one of the themes in the next hour with clarida and ryding. parity, thateuro is just as much for the flow to the united states? mr. gallo: in fixed income, that is what we are starting to see. there is a little bit of money on the sidelines. they are afraid of the uncertainty around the fed. they don't have a lot of clarity. the number is growing. the confusion is growing across it investors. two thirds of investors think central bankers are losing credibility. there is a confusion issue. if you get more clarity, the fed is trying to do, you will get more money going into dollar yields and compressing the dollar yields to where the euro is. the ecb, we knew what mario draghi was going to say, we went into the federal reserve nondecision and came out surprised. the doj, will we have another surprise from the bank of mr. gallo: japan? they will continue to do more. they have done a lot. they already own a lot of assets in the economy. the doj is the second largest central bank balance sheet compared to gdp in the developed world, 60 percent. what is the limit? more and their economy, take losses? if you have a balance sheet larger than your economy, you can take huge losses. , thank you soallo much. jonathan ferro and i will continue this discussion. michael mckee is back. from pimco and john ryding will join us as we look at the market ramifications of the fed decision. bloomberg "surveillance." ♪ tom: the next meeting is december 16. in between a jobs report. a speech by bill dudley at the new york fed, janet yellen changes guidance. synergy means 26,000 bodies at a door at deutsche bank. trying to catch up with james dimon marco rubio scores points at a gop debate. this is bloomberg "surveillance," live from london european our headquarters as well, i said london, new york and london. the markets with a rebound off the 2:00 p.m. shock yesterday. jonathan: the hawkish toll, the least anticipated federal reserve meeting in months. a decision to make for the federal reserve many people do not think was there is there. to make yousts smarter on the market ramifications of our global economics. right now to the first or desk with vonnie quinn. vonnie: world leaders, some at odds with one another, are starting talks aimed at ending the syrian crisis in vienna. the meetings include russia, u.s. and european allies. iran is taking part for the first time. saudi arabian representatives or invited. russia and iran support syrian president bashar al-assad. war hasl claimed more than a quarter million lives. migrants are saved in a operation.scue the greek coast guard pulls them from the aegean sea after their boat sank. 3 died including 2 children. the wooden ship capsized in high winds after leaving turkey. it was one of 4 sinking in the aegean yesterday appeared more than .5 million average degrees. angela merkel is making a visit to china. germany is china's big european trade partner. , china's thatnt it would buy 130 planes from airbus for $17 billion. the pitcher who started the season and cincinnati is a hero in kansas city. operation. the greek coast guard pulls them from the aegean sea after their boat sank. 3 died including 2 children. royals to ahip capsized injohne 7-1 victory over the mats and a lead in the world series. two hits, that has not been done in 20 years. the series resumes tomorrow night in new york. the royals have been playing well. tom: you are up to speed on the world series, you know more than i do. vonnie: i've been wearing mets gear. tom: time warner cable earnings, they put a positive gloss on it. .k revenue, 3% there are some negative numbers here every year. time warner cable out with a published beat. comcast the other day doing better than good. let's go to equities, bonds, currencies and commodities. clear to and john writing with us -- richard clarida and john ryding with us. gallo's call for a move to parity based on strong dollar flows. the u.s. two-year yield says it .ll ick, here's a picture of the two-year yield, up. the trend is rising. the drama in september is the red circle. the key message is we get back to trend, not back to the hysteria of a hawkish fed. vonnie: some would say janet yellen succeeded in bringing up market activity. tom: getting it on track. john ryding has given us great our dq economics and four years at bear stearns. serving at the bank of england and the set as well. tag teaming with him is richard clarida of columbia university and the pacific investment management company, pimco. to start with this, i've never done this with you guys. john ryding, what research did richard clarida do? clarida gertler? jonathan: where does -- tom: where does clarida fit in? you were the short list of who will be chairman or president. things has been different with a different mix than ben bernanke and janet yellen. richard: i think i set a couple weeks ago that if i were at the fed i would have voted for a hike in september. they did not. i've given the fed generally high marks in the crisis and post crisis period. i have no major complaints with the yellen fed. we need to get off zero and they will try to do that in september. tom: did for guidance die? john: it may have taken some people a while to pick up that next meeting is pretty -- tom: i believe it is december 16. richard: i've done a little research with connie chri-- crescenzi, the last time "next meeting" appeared was 1999. about federalalk reserve communication. and investors will cup without a clue of what the fed is doing. give them some advice, what do they need to look out? john: a 25 basis point rate hike on december 16. unless we get a big change in the labor market numbers and recognizing the job growth was slower and august and september. we do not get a pickup in inflation, it is pretty much set in stone based on gas prices. it is clearer than it has been in some time. the statement was explicit that they are considering a hike. they have not changed their metrics. yellen said a couple weeks ago she would be supporting a hike. i don't think your friends in europe should be puzzled. the fed is not committing but to be hiking in september. tom: can they be overcome by events? what has changed? they are still data dependent and particularly international dependent, aren't they? ohn: if the market is ,oing into a september meeting the most important number to me is the vix being down a point yesterday, they would have raised rates in september, i think they were scared by the market developments. catch 20 policy and they have gotten out of that by saying we're going to hit fundamentals. jonathan: i think tom's point is important. the only thing that has changed is the market was much more stable. has not in the u.s. gotten much better. as we go into december, are we and other meeting away from a market tantrum and pushing this back to 2016? does that push the credibility question to the forefront? richard: it will depend upon the flow of data. the u.s. data has been mixed. the gdp number we get today will look soft. that is a transitory inventory correction. the thing that is key is risk appetite has returned. has fallen. we've had the ecb and people's bank of china easing. i think it makes it easier for the fed to hike. tom: this came out at the meeting, alan ruskin at deutsche bank on the dynamics of a dollar. he said this was a big deal. adecember hike is by no means done deal. the payrolls bar to tightening does not look that high. non-farm payroll numbers will likely pull the trigger in december. you fine-tune the numbers. is a key issue, levels versus rate of change. unemployment at five .1% is pretty close to what the fed thinks is full employment. given how slow the labor force ofgrowing, the growth nonfarm payrolls does not have to be anything like the 2000 plus numbers. presence inte fed 413,000 is all they think they need to keep unemployment steady. tom: professor at richard clarida, the bank of england was big on level analysis versus the media hype of rate of change. do you suggest because we are at good levels of verses three years ago this is a fed that must go in december? richard: excellent point. part of the reason it is confusing is that the economy and two then growing 2% point 5%. potential growth has slowed. the gap between demand and muchy has narrowed not so because of a recovery but a slowdown and productivity. tom: richard clarida and john ryding with us. the discussion will continue. blackrock's chief investment ter will bek rei with us at 8:00 as well. futures deteriorating after a big day. this is bloomberg "surveillance." jonathan: good morning. this is bloomberg "surveillance." i am jonathan ferro. tom keene is in new york. let's get the business flash. vonnie: two pharmaceutical giants in merger talks. it would be a blockbuster, the wall street journal says pfizer are in early negotiations. it would be one of the biggest deals ever. allergan has a market value of $112 billion. barclays felt 10%, the bank cut its profitability target next year. barclays took a $433 million hit for overcharging customers. restructuring. germany's biggest bank announced cuts after a dismal third-quarter. deutsche bank posted its biggest lost in a decade, $6.5 billion. the bank plans to eliminate $26,000 in three years. tom: despite spirited attacks from his former mentor jeb bush, marco rubio came out on top in last night's debate. >> in 2004 john kerry ran for president, missing 67% of votes. -- son sent not -- " endorsedentinal him. this is an example of the mainstream media versus conservative media. , what ishen joins us jeb bush's plan? someone who is supposed to have every advantage in politics. what does jeb bush do? >> no question that people were expecting jeb bush to step up tonight. with concerns about donors and his falling poll numbers, he needed a big night. he did not have a big night. he was not a presence on the stage. he got schooled by marco rubio and some other candidates when he spoke. his campaign is saying we will be there when it counts. but not a great night for jeb bush. tom: how did the calculus change for iowa and new hampshire? they are going back-and-forth. what does it really mean about our american political process? is the state to watch. there the first voting state. ben carson is ahead there. onre's a number of people the stage last night playing for iowa. they think dynamics can change. one of them is ted cruz. had a strong night and a strong presence on the stage. playing to the conservative wing of the party. he did pretty well with evangelicals, which are a big constituency in iowa. he is someone we should be watching. the dynamics could change. vonnie: how long will it take before we see the reaction from last night in dollars and cents and in the polls? ven: cannot hear you. vonnie: how long will it take before we see the reaction in the polls? steven: marco rubio is the one we should watch in that case. i think he's going to get some donors for last night. a lot of people are looking for an alternative to jeb bush. whether that will translate into to beis going to remain seen. we should watch iowa, new hampshire and south carolina to see if that will happen. we will know whether he gets a bump from this. in boulder,yaccino colorado. richard clarida is with us from pimco and john ryding of our dq economics. into the psyche of a nation, our political confidence. how does this shift with a lame-duck presidency? how does that shift the american economy? some surprising news this week that we've avoided a showdown over the debt ceiling and the budget. i think that essentially clears the uncertainty for the next few years. there are people angling for the next election, probably not a lot is going to get done in terms of policy. thing to getrtant that out of the way. tom: what is your run rate on gdp? , whichget back to 3% gdp helps every politician saying if i am elected, free beer? get: we have to productivity growth. job growth has been running at 200,000 jobs a month. 2.25%-two getting point 5% gdp growth. the economy is getting closer to full employment. despite all the technology around us, we have productivity growth issues. can we get the productivity growth back? we've been for seven years thinking about inadequate demand. now we have to start thinking .bout supply-side constraints my attorney policy does not really address these issues. tom: we're going to talk about that next. ," ang up on "bloomberg conversation with somebody dealing with the microeconomics of the transatlantic space. carsten spohr of the fans up -- carsten spohr of lufthansa. this is bloomberg "surveillance." ♪ jonathan: good morning. this is bloomberg "surveillance." i am jonathan ferro in london. tom keene in new york. the attention from d.c. to tokyo. your morning must-read. vonnie: thank you. the best central bank watchers in the world onset. "ft,"the big rate in the fretting about japan, which will come out with a decision tomorrow. "mr. kuroda faces a choice, double up on his policy and increased easing or take a gradualist approach. accepting that the boj must wait and hope for 2% inflation would be tantamount to contention of defeat." richard clarida, i will start with you. are ignoring we deflationary pressures in japan and everybody is happy with policy, that is a strange thing to accept. what are we going to hear from the bank of japan tomorrow? well andi know kuroda he's doing a great job. he is trying to elevate explosion expectations in an economy that has had no inflation for 20 years. if he moves tomorrow it will be quadrupling down. i do not think they have moved tomorrow. i expect the boj to get more engaged. they will fall short of kuroda's goal to get inflation around 2% next year. i think he goes further down that road. you know the man. i'm looking at the policy, they own half of japan's etf market and half of the jgb market in the next couple years. how much risk is this man willing to take. is this more about signaling that effect? richard: it is about signaling but in terms of the boj's balance sheet, my view is within the next several years it could approach 100% of gdp in terms of jgb. it is off the charts but right now, the alternatives are worse. regardless of one's opinions on fact of lifeen a in japan for many years. tom: john ryding, none of this is in the textbooks that anybody studied in school. the central banks are buying this stuff, it is totally original. come on! reading and one question was this going to be episode, would this be a footnote in the textbooks or a chapter? right now it is neither. japan, i think a very important lesson that we have been missed learning. japan's problems because of deflation? or are japan's problems because they failed to act like the u.s. acted between 1990 and 1997. is it deflation we should fear or a failure of the banks. that goes to ben bernanke's speech where he lectured the japanese and they did not listen. richard: i think john is right. japan has several challenges, productivity growth, demographics, immigration issues. you are not going to cure that with the best monetary policy. the boj is trying to get a positive rate of inflation. a lot of deflation is from the real side. they face pressure from china and other asian countries on exports. in terms of what they will do is not backing away from qe. tom: richard clarida and john ryding with us. on monday, joining us from columbia is joseph stiglitz. this is bloomberg "surveillance," stay with us. ♪ tom: good morning, everyone. 2.09% on the u.s. 10 year yield. showing as the changes from yesterday. the royals are doing it last night for those of you that missed the game. let's get to our news, vonnie quinn. areie: world leaders starting talks today to end the conflict in syria. iran and saudi arabia are participating. russia, the u.s. and european allies are taking part. and iran support bashar al-assad. russian airstrikes and. farthest are complicating the four-year long civil war. nato considering a boost in forces on russia's western border. the alliance would send 4000 and baltic poland states, part of a new effort to deter russian aggression. neverandidates who have held political office leading the republican polls, some identifying with the establishment side of the party tried to gain traction. candidates outlined tax cuts and criticized the budget deal in washington. john kasich asserted that he has been there and done that. the only person on this stage involved in balancing the federal budget. you cannot do it with empty promises. vonnie: before last night, political outsiders donald trump and ben carson were leading. votes will be the iowa caucus 96 days from now. john boehner promised to "clean up the barn before leaving congress." the house approved a bill that would avert a government shutdown. to passte is expected it. the house will install paul ryan as boehner's successor. lostsays republicans have their vision and he intends to restore it. the army is trying to figure out why a blimp got away from its handlers. the 240 foot blimp broke free and maryland and drifted north before crashing in pennsylvania. lines was hurt but severed power lines along the way. tom: is that it? that is serious stuff. vonnie: how long does it take to deflate a 240 foot blimp? going to rip up the script but you really just look back decades, the china exhibit and all the changes and china over 40 and 50 years. china allows to children for all couples. we rip up the script. this is a huge deal. we are so fortunate to have john ryding, who mentioned this moments ago. let me go to you first, you mentioned demographic economics and the impulse of population to affect an economy. we learned this in the textbooks richard clarida taught at columbia. you need people to make an economy go. you do, two things drive growth, one of that is productivity and the others labor force growth, which comes to a large degree from population demographics. policy and a bias towards trying to choose to have boys rather than girls, that also affects the demographics. is, it has an impact in a short span of time. recent anuches on the gus deaton. madison looking at medieval times. and then harvard looking at dd oplingng -- at the depe of china p has to stop if you want societal pop. >> there has been some expectation that this might happen. i think it is a huge deal. years to play 20 out. china is the second largest economy in the world and in 10 years will be the largest. now potentially even larger with this. a real positive. jonathan: they are dealing with the reality and the legacy of the one child policy. the first question that springs to my mind is is this too little, too late? the reality of a previous policy is going to bite in the next decade? richard: demographics are powerful but it takes decades to play out. i think that will be true in china's case as well. in a lot of countries there is another dimension, the approach to immigration. one challenge japan faces is because of policies and cultural issues discouraging immigration -- in the u.s. we have our own challenges. tom: "the new york times" about italy, closeg of to no population growth. you mentioned japan. when i look at china, a goes back to the plenum. they come out with a landmark and emotional announcement. that is true. to some think richard said, is china going to be the largest economy? to 6.5ent from 10% percent. one of the things the textbook has is the difference between the move out in the production frontier and the move towards the production frontier. china has had a tremendous benefit in moving towards the production frontier. i think that has to slow. we have to going -- we have to stop going off 6.5% gdp growth. we have to re-benchmark our what china'st sustainable growth rate is. demographics do take a long time to play out. that is not going to change. vonnie: another headline xinhuaa is coming out with, all the headlines from the five-year plan of. plenum.-year china is targeting medium economic growth. is this significant in that there is not a figure out? you are ahead of me, i have not seen the headlines. tom: vonnie is always ahead. richard: that is significant for a couple reasons. the goal of this figure has driven the data. tom: if you are joining us with richard clarida and john ryding, a huge announcement that china allows to children for all couples. tom joins us from beijing. i think of the metropolitan museum show early this year, the huge china success. there in the basement was the red guard uniform of when the policy came in. on thees this signal streets of beijing or a small village 1000 miles west. what does this mean to the people of china? tom: it is a consequential decision part of a broader trajectory where china's government is loosening its grip on what goes on in people pass personal and private lives. that is a move in the right direction. of its impact on the economy, i think it is going to be somewhat limited for a couple reasons. first, clearly there is a very low lead in before we see additional children coming into the labor force. this is not the first move we've had to loosen the one child policy. the evidence from past moves is that even after you loosen the policy there are so many pressures on the lives of young chinese people today, pressures to earn money and get ahead in their career, actually the policy is no longer the defining constraint on how many children young chinese people want to have. enum tie this into the pla we just saw. i think about "the search for modern china." beijing is searching for a modern china. what are they searching for? tom: i think what premier li they areas said is looking to achieve a moderately prosperous society. that seems to be translating into in terms of economic targets, a six point 5% growth target for the next five years. 7% in the 12thom five-year plan. lots of people think that given pressure from a shrinking working population, overcapacity in industry and real estate, it is going to be a testing target to achieve. tom: thank you so much from beijing. this momentous announcement for so many decades of one child and china, they began a policy of .wo children long-term consequences. we continue with richard clarida and john ryding. desai from bring you the london school of economics. he wrote in the financial times about a change in the international monetary fund. this is bloomberg "surveillance." ♪ 3-decade-old policy. china abandons a one child policy off of a plenum just held. many other announcements being held. hong kong and china adjusts to search for a modern china. from new york and london this morning. i will go to single best chart and get us back to john ryding and richard clarida. the single best chart, it is the ryding spoke, john about this. this is the inflation-adjusted two-year yields. we are just not back to where we are. richard clarida, i would suggest ryding's putting green. we are on the golf course and the putting green is getting farther away. wedo not know which hole are on. the confusion is extraordinary. richard: i think for the foreseeable future the fed and other central banks are in a new neutral world. those that want to hike realize they need to hike slowly into a low destination. you had john williams this week saying as best as he can estimate, this is a voting member of the fomc, the neutral with 2%ate consistent employment is zero or negative. is: your putting green completely gone. the golf course metaphor is gone. john: i don't even think we know what sport we are playing. tom: good point. how do you respond to what professor claire to just said? take the have to numbers consistently. if you look at the work before, you have to estimate the neutral rate along with the output gap or nairu for employment. that is an issue, janet yellen was guilty of that. ns todouble plug io translate what you just said. you cannot have one and forget about the other. say my worknnot shows the neutral rate should be zero and also shows the economy is beyond for employment. and then say we've got a lot of slack in the labor markets, a've got a zero rate and negative output gap. tom: you and i have to discuss this with a beer in our hand. jonathan: it is too early to talk about the phillips curve. you talk about the economic models, do you throw out the models of yesteryear and we deal with a new reality or do the models of the last 10 year still apply? i'm talking about the labor market. richard: i think it is extreme to throw out the models. acknowledge have to there uncertainty about the parameters of the models. the slope of the phillips curve and intercept. i would not throw out the phillips curve that i would have an open mind. similar to the neutral rate, the taylor rule is a good framework for thinking about monetary policy but you have to and optimize the ne -- but you have to endogenize the neutral rate. john: we have thrown out the phillips curve before. phillipsdled with the curve, the slope has to be flat. if the slope is flat, that has consequences if the fed subsequently makes a mistake with higher inflation. that means the unemployment cost of getting a placement down becomes very significant. inflation in a world with a flat phillips curve is difficult. tom: john ryding and richard clarida as we look at elasticity as the responsiveness of the phillips curve space. rick rieder will join us in the next hour, 8:00 on "bloomberg ." goldman ondavid china and two children. stay with us on bloomberg "surveillance." ♪ tom: good morning, everyone." hong kong in the evening hours. a forex report. talk about with richard clarida, john ryding and david goldman. 120.84.en, euro-dollar, stronger dollar, 10968. that is a change over the last number of days. off the yellen fed announcement. 133, 152.134, stronger yen. 97.35.ough 96, to a 98 or 99 print would be a big deal. vonnie: time warner cable says new customers boosted its bottom line in the third quarter. the company beat estimates. profit per share was 7% better than targeted. time warner cable is awaiting the blessing of regulars for its takeover by charter communications. samsung selling some of its cash back into the company. the korean electronic giant plans a stock buyback. capital spending will be increased. samsung is buying with apple for high end customers. sony gets back in the black during the second quarter. $278 million dollars, reversing a loss in the period last year. sales of playstation 4 soared. that is the business flash. is givet we try to do you perspective. richard clarida of pimco and john ryding of rdq economics. and david goldman of reorient has spent years synthesizing market work and looking at asia. what does two children signal for the people of china? david: first of all it is an extremely important symbol that the reforms of the xi jinping regime will be deep and profound . this is coming at the beginning, the fifth plenum will address a range of reform issues p a desist such a basic change in the party's social stance -- this is such a basic change in the party's social stance. it means that society will be different. china is looking at a perspective labeled -- labor's shortage. they will have to export jobs. the question we have is what these demographic impact of lifting the policy will be. will behavior change? years ago about generational change. we could talk about generational change in the u.s. does this signal a generational change of moving on, not so much from mao but from recent leadership in beijing? david: it is a profound change. the past 30 years, china has and exportstack economic policy, which has served them well. for a number of reasons that policy cannot continue. the world cannot continue to theive chinese exports and chinese standard of living cannot continue to be raised off the back of exports. one of the most important changes that a service economy is more labor-intensive. if chinese economic growth comes through service jobs, they will absorb more labor. the scenario that you have sputtering growth, unemployment makes itical unrest flawed. the shift from industrial to service gdp is more of a jobs generator. tom: david goldman from reorient group with his perspective on asia. richard clarida from pimco and john ryding from rdq. isook at nominal gdp and it a conundrum. should we have central banks look further at the animal spirit at nominal gdp versus real gdp? in certain circumstances, absolutely. this is one of them. at least we can measure nominal gdp. we know how much people spend. andtting between price consumption is hard. nominal gdp is relevant for thinking how much that can be service. hard saysessor blanche arar we need to target inflation. is that still a valid debate to jumpstart nominal gdp or is that yesterday's story? john: it is a debate within the fed. the problem with a nominal gdp path is if you go back three years to what one of your colleagues was talking about, you were talking about nominal gdp. if we had tried to drive the u.s. economy back to the nominal gdp, we had a 50% shortfall, we are at 5.1% unemployment and still off the nominal gdp. what would that imply? productivityto growth. nominal gdp is easier to measure then real gdp. nevertheless, taking a target have a view of inflation. the 5%u might get nominal gdp with 4.5% inflation. this has been wonderful. richard clarida is with pimco and john ryding is with our dq -- with rdq. futures -8 on the s&p. .hat a landscape change the two year yield, .70. normal andld back to not hawkish. jonathan ferro, thank you so much in london this morning with a terrific news flow out of china. michael mckee and i continue on the radio. good morning. ♪ pimm: deutsche bank will cut thousands of jobs and pull out of 10 countries. china plans its future. more modest growth and reforms including an end to its one child policy. in colorado. republican candidates came out swinging in the debate. what did we really learn? welcome to "bloomberg ," i am david westin. stephanie: i am stephanie ruhle. our authority on banking christine harper. i'm tired. did you watch the debate? david: part of it. stephanie: if i wanted to the in a disrespectful fight, i would call my sister. we are going to go to vonnie quinn. republican presidential candidates try to break out of a crowded pack in colorado. the