francine: this is bloomberg: surveillance. i'm francine lakhdar in london. joined by the- chief investment officer. we will speak exclusively for the provincial ceo. we will be joined in the studio in 35 minutes. just after those earnings come on. in the meantime, a lot going on in markets. tensions surrounding the korean and insula. korean peninsula. a little selloff in asia, in little cellophane european stocks. down from 0.2%. i am looking at the dollar strengthening the day before the u.s. inflation data. that is what we will be focusing on. oil advancing and looking at the 110.s, again, the fix and deck skinning a touch. let's get to a first word news. nejra: south korea and japan have warned north korea it faces a strong response if it carries through with the threat to launch a missile towards the u.s. territory of guam. it comes after the regime outlined plans to hit the island after trump's comments about releasing fire and. . kenya sliding to a political crisis following allegations hackers interfered with vote tallies from general elections. protesters took to the streets after the election commission released initial results showing the president with a commanding lead over his main rival. only to say later that the tallies weren't official. the new zealand dollar losing ground after the country's antral bank held its rate at record low. it was also said he doesn't expect to raise rates for two years amid weak inflation. the former google engineer whose controversial memo has triggered a debate on gender differences and diversity has defended his views. speaking to bloomberg, he said company executives are smearing him at the memo went viral. i shared it with many of our diversity programs, but -- and with individual googlers, but no one higher up ever came to me and said don't do this. even though there were many people who look at it. it was only after it got viral that the upper management started shaming me and eventually firing me. google's ceo has issued a statement saying our job is to build great products for users who make a difference in their lives. to suggest a group of colleagues have traits that make them less suited to that work is offensive and not ok. global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. hitch -- thank you. francine: inflation has been the major headache for the federal reserve and james bullard said the failure to lifted to the 2% target is eroding credibility. he spoke to bloomberg ahead of tomorrow's u.s. inflation data. i think there has been surprised from inflation coming into the downside during the spring here. reallyjust tiny amounts, by a large amount compared to the progress we have made through 2015 and 2016. francine: meanwhile, two of the biggest money managers say it is time to dial back risk. pimco is advising to reduce high-yield debt and lower risk assets and mortgage-backed securities. price group has cut its holdings in high-yield bonds and emerging-market bonds. biggest names in the asset management industry have issued warnings. let's bring in the deputy chief -- investment officer at credit suisse. great to have you in london. let me start with you. when you look at the world with live in, does everything depend on fed? if you are on the wrong side of the what the fed will do next, could you lose probably more than ever? >> i think it does and it doesn't. the fed's following markets and markets are watching the fed, but inflation is dead. but may be an exaggeration, to date it for a couple of years. the murderer is not the fed or the central banks, the murderer is amazon. they areese companies, deflationary. to put it short, the internet has killed inflation. that is one of the reasons workers of this world aren't revolting. because consumer prices have been stable or lowered. there has been no pressure for them apart from the fact they are less unionized than 20 years ago to revolt against stable labor prices. there is no inflation around the theer from as long as internet is brutally keeping prices in check. francine: you agree with that? it would mean the fed is focusing on things and we should have a whole new metric to measure the strength of the economy. >> it is hard to disagree with that statement. it has a considerable amount of evidence behind it. a number of other factors are keeping inflation low. there is economic insecurity. despite high levels of employment, countries like japan don't think i certainty about future income is what it used to be around levels of unemployment. i think that is crimping the bargaining power of workers as well as their desire to trade off inflation but in general, i think inflation is mysteriously low. it can't be fully explained by some of the spec is. it is therefore, in some ways, the big risks for portfolios. if inflation surges, it will undermine stock and bond holdings. francine: are you sure the fed is wrong? this is a way of measuring trackson, you can see it itself, but there is a bet on whether the fed is right, they can hike rates. or you believe mom -- bond markets and they won't he able to. where do you stand? burkhard: i think the fed will still raise rates one more time. just to document they have a plan and they can follow up on they are they said, data dependent and the labor market is doing as well as ever. will signal strength and confidence in the economy and low dollar will do it -- warranted. -- warrant it. burkhard: i believe -- larry: we are beginning to shift away from ap reliance in equity data in terms of returns. we are not necessarily underweight in equities, but we want to augment some exposure in that space with nondirectional types of positions. some areas mortgage backed securities, we have been longtime holders in off the run securities. i would suggest the target return strategies, a combination of relative value trades are supposed to pick up incrementally, but with equities and bonds, a fruitful place to be. francine: do you worry about distortions? you have a few players in the markets, so if something goes wrong, the amount it could swing by is anonymous. larry: it makes more of a difference for individual stock tickers, and managers in that space. we have releasing all fact these days. fact areo a single called momentum. momentum has been driving security level returns in ways that have been unusual relative to houston or he -- history. -- that is where the greatest amount of tension in the market resides rather than the fx level. francine: do you see the momentum turning quite quickly? burkhard: it always scan, and that is why you have to stay diversified between all types. who hasook at someone been up in the game for more than 10 years, why is he continuously up in the game? not because he is beating every time he scores, but because he makes fewer mistakes than his opponents. that is what sets them apart from the other 99 and top 100. investment is about making fewer mistakes and there is a craft in that and the deceptively simple secret to it is being well diversified against those sudden swings you refer to. francine: great analogy. equities are telling you one thing, bonds are telling you one in. it is almost able -- binary position. they can't both be right. which one is? burkhard: at the margin, if i was coming from mars, the earth looks like a beehive. industries are rather productive, there is a synchronized global upswing, i wouldn't spot the geopolitical challenges right away because they are underneath the surface and then i would spot investors are paying an incredibly high price for the security of government bonds and relatively little for shares. so something is wrong. suggestingield curve we are in a strong upswing. one of the strongest in the last 20 years. you should go with where risk premiums are highest and they are higher in equities compared to bonds. that is why a balanced investor in our case, we recommend something around 45 percent in shares. francine: you pulled back, you're more cautious. larry: somewhat, i wouldn't want to overstate the degree to which we pull back and we like aspects of the equity markets, including emerging markets for valuations being compelling and they earnings are there. also like the secular story on earnings in japan. there are areas of equity we like, but we have been on a 12-month uninterrupted run in terms of share prices. we have been fortunate in terms of the earnings recovery we have seen but a lot of that is priced. we are not seeing a lot of momentum in stocks, suggesting good news is pretty price. suggests we balance those portfolios. it does speak to the variation points made, which we would agree with. francine: thank you, both stay with us. let's get to the bloomberg flash. nejra: foster -- wall street investment banks can count on hefty bonuses but trip -- that is projection from john shimkus associates. it says -- fees rose after first quarter. other passive investments mean equity traders may see flat or fall as much as 5%. has built a war chest in the first half of the year continuing to cut it as it ramps up acquisitions. while profit improves, the world's largest commodity trading house kept dividends unchanged $1 billion for the year and used the extra cash to pay down borrowing. is chairman of bloomberg lp a senior independent nonexecutive director at glencore. there is a potential avenue -- offer to buy chancellor communication. the european telecommunications company and its american subsidiary have yet to decide whether to bid for charter. it isn't the only possible bidder for charter as softbank wants to merge with its struggling company sprint. toshiba's auditors have signed off on its full-year earnings. they reported in a .8 -- net loss. the japanese company struggles to stabilize after an accounting scandal and illegals that it threatens to delay the sale of chips business. that is the bloomberg business flash. francine: thank you. south korea and japan have warmed -- warned north korea that it would face a strong response if it carried out a threat towards juan -- guam. the proposed launching four missiles there after president trump promised fire and fury. our guests are still here. at anot sure how you look lot of this political or geopolitical concern, it is not really playing out on the markets. is this because the market doesn't know how to traded or he -- they shouldn't work -- worry about it? burkhard: it is frightening, as a citizen of this world, it is frightening that multiple leaders of this world are engaging in such tough and frightening talk. besides that, your question related to markets, these are at onegular risks which hand are impossible to predict because they are low probability, but if and when they hit markets, they have a massive impact markets are not prepared for it and if they do, the diversification will be the only thing that will be helpful and some investors will go to run into cash or gold. that is what is going to happen. francine: larry, let me bring you to my chart. to the point about cash and gold, this is the three-month risk reversal on the south korean. we're calling this chart saber rattling. it is unfazed by what is going on. is this different from previous times? larry: a bit different and we safe havenome other asset classes, for example gold, the value of the swiss franc, movement. it has been sent to the relative to the small probability of a very bad outcome. what markets are confronted with is more uncertainty than certainty. to elaborate on that point, had the comments that had come out of the white house this week come out of a previous white house, i think we would know very clearly what is about to happen. but in this white house with its very unorthodox methods of communication, it doesn't give us any clarity about what comes next. therefore, the markets don't know how to judge this situation. i think that is probably the big difference between today and earlier episodes where the kind of language would have pre-staged intervention. francine: we're calling this chart, use your haven currency wisely, because there has been balance on the swiss franc even compared to yen. does it go to cash if anything happens? larry: the swiss franc had been one of the world's weakest ,urrencies against other things so there wasn't some point when the market was perhaps oversold and there is that correction going on. moment, markets are waiting and seeing and i think the real actor they are waiting for is china. china is a silent but potentially important partner for those that perceive north korea has gone beyond a certain line and how china responds now is a dictator of how the market response. the grim i feel like reaper, but what if markets don't function properly because of this -- we haven't seen normal interest rates for about 10 years. yesterday, the ten-year anniversary of three hedge funds frozen. one of the reasons is asia in general has not been an area for geopolitical concerns. don't know how to price this ordeal with us, how to judge the probability. one thing's for sure, if this willthe wrong way, the yen have serious issues. francine: eli quick ways -- you like equities, what else? burkhard: diversified portfolios, bonds and hedge funds to support and diversified equities and still believe commodity markets should still have a leg up before they can reach their next plateau. francine: larry, what do you like? larry: we tend to like certain areas of credit i know that is falling out of favor, these generic high yields, but i think there is opportunity at the security leveler. i do like folios from the point of diversification -- portfolios from the point of diversification's, looking at idiosyncratic risks. think we also have to condition ourselves after strong period of returns in equity markets for something more subdued. we should really be conditioning our own portfolios as well as client expect haitians on the second half -- client expectations on the second half. francine: the weight of the balance sheet, the bank of japan, european central bank, where does the biggest policy mistake -- could it come from? larry: probably not any single central bank. we could have a central bank that delays normalization for too long or is too hawkish too soon. but it is probably more about the general shift in monetary policy we are seeing led by the federal reserve, the ecb at jackson hole is likely to lay out its program for balance sheet adjustment and the potential for the removal of negative interest rates. the swedish central bank is likely to move in the same direction. it is kind of the normalization of monetary policy on many that ist footings slightly the biggest risk in the adjustment over the next six to 12 months in markets. francine: jackson hole, august 24th and 21st. up next, the man behind the memo. the engineer fired from google on his comments on diversity in the tech industry. this is bloomberg. ♪ ♪ francine: you are watching "bloomberg: surveillance." the former google engineer has caused uproar in silicon valley. he authored a memo asserting there are biological reasons for gender inequality in the tech industry. that cost him his job. in an exclusive interview, he defended his stance and said google has smeared his name. >> i support diversity and also,ion and i think that our lack of ideological diversity has hurt our projects it makes usand think that, for example, just the stereotype that all conservatives are stupid, for example, that is widely held within very left-leaning circles and that has hurt us. it makes us alienate large portions of the population. susan talkeded, about how her daughter was asking her if there were biological causes for the lack of women in tech. the things that you said are being conveyed to the next generation and we have talked a lot about the importance of getting more women into technology. view you have a concern that your views could discourage young women and young girls from entering technology? >> no, because a lot of what i was just saying was that there are simply fewer women that want but ifinto these fields, you are a girl and are interested in technology, then that is great. manyn, there aren't that people in general that are interested in technology. it is not as if 50% of the male population is in tech. it is still a small percentage. if anyone is interested in technology, they should pursue it. francine: that was the formal google engineer speaking to emily. the ceo also issued a statement and said our job is to build great products for users to make a difference in their lives and to suggest a group of colleagues have traits that make them less biologically suited to that work is offensive and not ok. that was the google response. latest u.k. manufacturing and industrial production data. both sectors bounce back from losses last month. we also talk brags it. -- brexit. ♪ ♪ good morning, everyone. this is bloomberg surveillance. that's get to the first word news. south korea and japan have warned north korea it faces a strong response at the kendrys through with a threat to launch missiles toward the u.s. territory of guam. -- northafter i plant korea outlined a plan to hit the island after president trump's fire and.elease . -- opposition allegations that hackers interfered with vote tallies from tuesday's general election. protesters took to the capital after the election commission released initial results showing the president with a commanding lead over his main rival. only to say later the tallies were not official. zealand dollar is losing ground this morning after the country's central bank held its official cash rate at a record low of 1.75%. says he's governor not -- doesn't expect to raise rates for two years and his deputy says the currency needs to adjust down. global news 24 hours a day, powered by more than 2600 journalists and analysts in more , this iscountries bloomberg. francine: thank you so much. we're just getting figures for prudential. the cl has just -- ceo has just walked in, we will quiz him about earnings. this is what the stock is doing. point 1%, first half operating profit seemed in line with expectations. billion pounds. last year, they were at 2.04. pence andence, 14 looking at the asia division -- if you break down the numbers, i will go through it with more of a fine tooth,, but it is the strength of the asian franchise that distinguishes prudential. operating cash flow is why we want to quiz the ceo on that. 20 more on prudential, share prices a touch below 1.6 percent. maybe there is a little disappointment with the amount of the dividend. i will look into it. exclusivelypeaking to mike wells, the ceo. meantime, breaking out of the u.k., which leads us to the brexit conversation. industrial production rising 0.5 percent and manufacturing unchanged as forecast. are both still with us. thank you for sticking around. larry, when you look at brexit, i am not sure to give you a level of pound or brexit negotiations, or you look at the boe because they are looking at negotiations so they do the work for you. larry: the boe has an difficult task because it has been complicated by brexit. but they are right to look through the rising inflation, it is transitory and linked to the weakness of the pound unleashed by last year's referendum. that shall pass and there is little evidence of underlying inflation story they should responding to. be brexit negotiations will long and complicated and will undoubtedly put the u.k. in the worst position in terms of growth going forward the next two years. for all those reasons, it seems to me the bank of england will be on hold for a long time to come. francine: burkhard what does that mean for the rest of europe? people saying they want to buy euro against anything and everything. are you in the same camp? thatard: no, we have seen for now, but that is as good as it gets for now. we need more clarity, when you ask about europe, we need more clarity in what happens in the italian elections next year. not, that is an important milestone that can make or break the euro in both ways. francine: are we too optimistic about political opposition? it seems the markets discounted any of people. upheavalp -- . burkhard: this is a historic opportunity that emmanuel macron and angela merkel undertook to fix the euro, but it is not done yet. there is a lot of wishful thinking in it. i think macron and merkel are a match made in heaven. we know she always prefers to lead from behind. is a naturalon born leader, charismatic like few others. they fit perfectly well, have the same agenda, they need to fix the democratic deficit, the poor governance of the euro zone and if they can do that, it could propel the long-term growth rate of the eurozone by even 1%. toobefore we even get excited about that, we first have to see some real action. larry, i guess the prospects for the eurozone, notwithstanding that, will be affected by brexit? or it is more of a u.k. problem, not europe? larry: it is definitely more of a u.k. problem, european growth is supported by a number of other factors including the more general recovery in the world. as well as improved domestic demand north of the alps. from that perspective, the impact of weaker growth to the u.k. will be fairly marginal. politically, europe means europe. across europe, whether one looks at holland or greece or spain or any other country, there is a rejection of the idea of leaving the eurozone or in some way repudiating the eu. there is momentum behind repairing the eu and macron and merkel will lead that. italy will follow that direction as well, i think. francine: what we charted was inflation data. this was in view for the u.k. and the base trade. you think the blu will stay lower for younger -- longer. why was mark carney sounding hawkish? was it a mistake or does he want to talk the market up? larry: he has to address that inflation is overshooting target , he has to acknowledgment is some risk that in a relatively fully employed economy, that could become more manifest in a broader sense in prices and wages. in some sense, he was articulating a risk case than a base case. the base case would be that in -- inflation -- growth will remain challenged by by blair --s posed brexit and policy sugar named unchanged. that is the way the committee is continuing to vote. francine: are you worried about central-bank communication? burkhard: no, i think it has come such a long way. it is far more detailed, better than it was 30 years ago. i agree with what larry said about the bank of england and would add, this pickup inflation you are pointing to, the mostly reshoot one, is structurally different from the other two in 2007 and one in 2011. namely that the first two you are referring to were reflections of a poignant isnomy, where is this one the reflection of a tumbling pound and england having the world's largest current account deficit is adding insult to injury. inflation -- and it is one of the reasons the bank of england will be in no rush to preempt it. francine: thank you both for joining us. cio at credit suisse. we speak exclusively to prudential's ceo here in the studio. this is bloomberg. ♪ ♪ francine: this is bloomberg: surveillance. i'm in london. the insurance and investment giant prudential has released its latest earnings. operating profit came in at 2.36 billion pounds. we are joined for an exclusive interview with the chief executive mike wells. welcome to surveillance and for giving us your time. i am looking at your results. one thing investors want to know is your outlook for asia. is it better or worse in six months? mike: i think it is better. what you see in asia is very broad-based performance. eight of our 11 markets producing double-digit returns in new business profits and the balance of the region, the numbers are unprecedented. up 16%, new business profits up 18%. cash up effectively 15. if you convert those to sterling, those numbers would be in the 30's. competitively, the scale of the platform is there, our ability to reach clients across markets is proving well. tremendous first half of the year and as a group, the numbers are great. these numbers give you an idea, the first half of this year is about the equipment level of earnings we had four and a half years ago. for the asian business, you had a target in in 2017 andle that you have almost completed that. what comes next? target of 10out a billion pounds of free surplus generated that was due at the end of this year. we hit 11.11 and surpassed that. we are target for the other two but will wait until those two are completed. they are on track, but we will get to those first before we talk about targets. it is the third set of targets the asian business is handling that, and i think the proof of concept of those has been demonstrated and the market sees the values that we have. francine: you have replaced a couple of people in asia, including your chive -- chief financial officer, is the more cleanup ahead for the asian operation? mike: no, the businesses are in good shape. hugh have to move quickly. the structural demand in asia is well documented. if you think on the health side, you've got three quarters of the health expenses paid out of pocket. the demand for health is high, the protection gap is measured in trillions if you were to ensure what people need to replicate their current standard of living with life insurance. in china, the regulators -- the target is 4% penetration by 2020. that got to where we are, is larger than the uslife business in growth alone. there, butral demand you have to look at how clients want to meet and that is technology, pace, product. francine: you say behavior changes quickly. like what, what they buy or how? mike: both. the products want our risk off product, they want satan -- some savings, health and production -- protection is where we have focused. it is good recurring cash flow, about 94% of our client -- financial commitments with them are there. the earthquake today, but claims payments we do will be on we chat. we collect payments -- premiums on digital platforms. we underwrite in 30 minutes. the client with one of our bank offices transact on a mobile device. francine: interim dividends is 14.50 pence, what will make you increase it and give share buybacks? mike: that is mechanical for us at the half year, we look at -- and review in dividend is a bit different than the insurance industry. we are growing and we believe the way to look at dividend is grow the earnings first, stress them for potential market environments and pay them. we make that decision after our year-end financials. that is the decision for us in february and march. francine: do you worry about a stock market crash? equity valuations have been pretty high. mike: no, we are pretty well diversified and very heavily hedged. we disclosed our equity sensitivity -- sensitivities solvency, we- and are resilient because of the amount of money we're spending on hedging. the last financial crisis about a decade ago with zero losses, we are even more robust than that. across the region. more of our consumers are ,roduct that aren't correlated so that is helpful in cross cycles. francine: you worry about equity valuations or even geopolitics and the fact -- affect on possible recession? the: no, i think it is more impact on consumers. we are the risk off trade, we are where the claim goes if they believe equity markets are going to do incredibly well, have a limited range of products. if the clients believe globally there is risk in the market, we have a broad range of products that service that. way, the more instability we see, the more -- more demand we get for the solutions we provide consumers. that is a tailwind for us. the work we do to manage those risks is more complicated on volatility and around levels of markets. francine: there is speculation you would sell off your entire back book. any truth in that? mike: we are looking at internal and external ways to do risk -- derisk that business. back, looking at selling not any reason to do that. we are not in any hurry to do any transactions in that space. we have exited that on a retail basis and wouldn't do anything that would affect the concerns -- consumers adversely or diminish shareholder return. it is a profitable backbook. very good cash flow, but very capital intensive and where we are going with the business is a more capital light model. francine: it is worth 45 billion. would you look at selling 10 billion and take it step by step. mike: i won't get into the specifics because part of what we do is price discovery. i don't want to build the expectation we will get rid of a -- we generate a lot of capital, 10%, we are capital generated without doing anything in the back book. for competitive reasons, we will look at what is out there. there are a number of firms that are interested in sharing that risk and we will see if any of their pricing meets our total shareholder return objectives and if they can't, we won't. the spreadsheet impacting the way people buy insurance in this country or are you seeing no impact yet -- cost, thes some ability to replicate funds there and contingency plans, i think on her domestic consumers -- our can -- domestic consumers, himeji was up over 7 billion in the first half of the year and our proof fund, a smooth product, sales were up 29% first half of the year. when you are seeing consumers look for is nonmarket correlated solutions for cash right now. temperamentisk appearing in u.k. consumers and and thebrexit related return in banks. our two u.k.on of businesses announced today, part of what we are aiming at is the non-correlated equity and debt and total return markets. we have traditionally been in that, the other side is -- and socially this is an issue in the billion andve 255 45 billion a year chasing the yield. this chart we have here, we talk about on a daily basis. mike: that is not an appropriate place for long-term retirement saving. is investing numeral property, real equities, debt, those sorts of solution need to be broadened by firms like us and competitors. jobs in theo better manufacturing models to get some of those clients fully invested in the economy. francine: are you moving people out of the u.k.? mike: no, adding staff. initially a couple dozen. it is not material to us in the but will help us operate those classes of funds. some of this in hindsight, with out brexit. i think it is important that we let clients own hair asset management products in the share classes they want in the currencies they want. .rancine: any outflows in mng mike: no. inflows. theil disproportionally in u.k. and international. a wide range but disproportionately retail. francine: what would mmg become in four years. national champion in two markets. the clients that want to participate with some level of market risk and that is the non-correlated fund market and if we do our job right, we will have a larger piece of the structured retirement solution market to get clients out of cash isis, more fully invested in things that will produce a better retirement for them. there is huge opportunity there. we are investing in both firms, we are doing this from a position of strength. there is no breadth of -- breadth of funds is excellent, market-leading, we are in a good position to do it. francine: you worry about mn day in the sector? a in the sector? mike: this gives us of the scale to compete with anybody from an earnings, asset point of view. investments we're making in both firms, the passes have a place. is aur client right now little older, a little closer to retirement and they are not looking to have the daily volatility of the retirement outcome. are looking for somewhat risk mitigated solutions for retirement and in the case of or mng high dividend stock total return debt centric, or remote -- or a more total solution. francine: claim running out of time. where do you see the euro-u.k. business in five years? mike: it is the market leader in that space. digitally enabled, faster growing from a larger piece of the u.k.-european and to a degree, international retirement marketplace. francine: wonderful. mike wells, the prudential group chief executive. its get to the business flash. wall street investment bankers can expect heavy -- hefty bonus games, the traders may have to settle for no increase. that is the year-end projection from a consultant. selling stocks and bonds rose last quarter of a competition from index funds and other passive investment mean equity traders may see yearly incentives remain flat or follows much is 5%. glencore has built a war chest in the first half of the year continuing to cut debt as it ramps up acquisitions. while profits improved, the world's largest commodity trading house kept its dividend unchanged at $1 billion for the year and used the extra cash to pay down borrowing. chairman of, the bloomberg lp is a nonexecutive director at glencore. and billionaire is working on a potential officer -- offer to buy chancellor communication. the european telecommunications company and its american subsidiary have yet to decide whether to bid for charter. it isn't the only possible softbank wants to merge the cable operator with its struggling wireless companies print. -- company sprint. toshiba signed off on full-year earnings. and eight point -- $8.8 billion net loss in the year of march. that is lower than analyst estimates. some temporary relief as the company struggles to stabilize after an accounting's scandal and a legal spat that threatened to delay the sale of its chips business. that is bloomberg business flash. francine: uber is in the market for a new ceo. coo sheryl sandberg is on the wish list. wasy asked sandberg if she surprised by the sexual harassment allegations and the exit of uber ceo. >> sexual harassment has been around for a long time in any industry. it is abominable that it still exists in this day and age. people know better. it is great when people lose their jobs when it happens because that is what will get people to not do it in the future, and i think this is a leadership challenge. as the leader of the company, there needs to be no tolerance for it. full stop. no one should go to work and face this. francine: what is your advice to the next leader of uber? what ise respond to tolerated and encouraged. a great leader can change the culture of almost any company and situation. you put in your policies, you have new procedures, your language is different. i am always optimistic. one uber investor comey he would die to have you in that spot. why not? >> because i love facebook. i really do. i love my job, i love every new mission about eldon community and i love the community that is this company. i get to do something i believe work with mark's account are all day. there are a lot of people out there who can lead uber and lots of other companies in ways that don't just prevent sexual harassment, because that is a basic. we can do better. ofncine: that is the coo facebook. tom will be joining me out of new york. we will talk to the chairman of union group. we will be looking at euro markets. a lot of the focus has been on geopolitics and if you are an investor, how do you trade this uncertainty? tensions around the peninsula, sapping global equity markets. oil is up. that is your data and this is bloomberg. ♪ who knew that phones would start doing everything? entertaining us, getting us back on track and finding us dates. phones really have changed. so why hasn't the way we pay for them? introducing xfinity mobile. you only pay for data and can easily switch between pay per gig and unlimited. no one else lets you do that. see how much you can save when you choose by the gig or unlimited. call or go to xfinitymobile.com. xfinity mobile. it's a new kind of network, designed to save you money. a warning from south korea, they caution the north against launching a missile against wong. -- guam. becomes the latest fomc member to criticize the fed. lining up a bid for the second-largest u.s. cable company, charter. this is "bloomberg surveillance." i'm francine lacqua in london. tom keene is in new york. inflation tomorrow. we have a lot of earnings in europe. tom: a jumble today. dominant constant talking about what james bullard said about the mystery of inflation. geopolitics front and center this morning. francine: let's get straight to the bloomberg first word news. taylor: we are starting with geopolitics. south korea says an attack on guam would lead to a strong response from the u.s.-south korean alliance. japan said they would intercept the missile. in kenya, hacking and fraud thems are threatening elections. president trump used twitter to rip senate republican leader mitch mcconnell. trumpell suggested that was a political novice. trump responded by asking why they could not repeal and replace obamacare after seven years of trying. sheryl sandberg spoke with bloomberg tv's emily chang. >> with so many people posting to facebook, we make mistakes. we are trying to address them quickly and correct them. we are really investing in community operations. we are hiring another 3000 people to work with our community, hiring them from all around the world. we are trying to get the policies right, get there quickly, make sure we are staffed to be as responsive as possible. taylor: she also spoke out against sexual harassment. i'm taylor riggs. this is bloomberg. equities, bonds, currencies, commodities. the chart of yen-yuan. i really want to underplay the market movements of yesterday. equity futures negative. out.ix goes onto to the next screen where we show the vix. the euro is remarkably stable. these are all on numbers. there is dollar-korean yuan. yen-yuan. the chart is clearer than the statistic. gold moves out a little bit more. i would use gold as the western proxy here. francine: it is definitely the tension around the korean peninsula. because i knew you are watching the others. one way of charting this haven currency choosing, i'm looking at swiss franc versus yen shortly. tom: very good. let me go to the bloomberg and look at one of the charts we are looking at. i'm going to put together a series of look backs. here is the financial crisis in 2007. here is the great deflation. look at this. this is remarkable. the zero bound. paul krugman's zero bound. many others, i should say. we have truly been at the real yield zero bound for 10 years. it is amazing how that redline lines up with the blue zero bound. hillary clarke alerted me to this. this is the swiss franc bouncing back against the yen on these north korean worries. both are havens. the swiss does seem to have benefited handsomely from what has happened with korea. the swiss franc was undervalued. they said it would not be surprising, according to analysts, to see the rally another 1% or 2% if geopolitics gets worse. on to geopolitics. south korea's military has warned pyongyang that it would face a strong response if it launched a missile for the u.s. territory of guam. they say the military is fully preparing for any action by the north. joining us is our chief asian economic correspondent. , always a pleasure. can you outline some of the possible scenarios as to what happens next? good morning. if economic sanctions do fail, investors are investigating what military options are. a northd be a strike on korean nuclear facility, but they are in the mountains of north korea. if they miss, north korea could retaliate with conventional weapons. they could try to take out kim jong un, but then you have to take up the rest of the body. the third option would be all-out war, which has been called insanity. tom: maybe an unfair question, i will give it a shot. is it a flotilla of boats off the korean peninsula? the koreans are there, the south koreans are there, i assume north korea has a couple canoes they are using, as well. are the chinese floating out there, as well? , but their navy is much less limited compared to notwithstanding the aircraft carrier. we will have major exercises between the u.s. and japanese military. if you want to talk about the flotilla of boats, there will be plenty of naval boats in the weeks ahead. francine: is china the only person the koreans were listen to? enda: there are plenty of options on the table. they do hold key leverage in that they continue to supply oil to north korea. without engines, they cannot juice their nuclear program. oil has been kept off the table with the current sanctions. the view is that china could perhaps turn the tap on oil, but even that runs the risk of problems. all eyes are on china, but i think the solution probably needs to be wider then that. francine: thank you so much. the very latest for the geopolitics, especially in the korean peninsula. we are now at the head of european strategy at jpmorgan. always a pleasure to speak to you, especially on a day when we don't know how markets will react. geopolitics is not really filtering into the aura. is it because they don't know what the trump administration will do next? or have the discounted the possibility of something turning ugly? havem not sure markets necessarily discounted something turning ugly at this point. the left to infer that markets participating that this is a war of words that will not translate into something more aggressive. francine: what does it mean for how you build a portfolio? cass, gold, or do you keep a cool head? stephen: you might want to run a slightly higher cash buffer. it is much more important to keep a cool head and go with the fundamentals. the fundamentals still look attractive. tom: what did jpmorgan interpret from the earnings season? what did you learn in the united states and what did you learn in europe? stephen: i think it was interesting. levels were not rewarded by stock price movements. we saw the same pattern in europe. there is a function where you contract that on the bloomberg. what it shows on the european index probably speaking, earnings were beat and yet there was no concomitant reaction. i would say that people have moved into equities, there has been a fair amount of slowing into equities. people were positioned for a positive earnings season. given how far markets have moved in the last nine months since september of last year, it is no surprise. francine: let me bring you over to my chart. this is a quick way of looking at derivatives. showing that the south korean yuan was unfazed by geopolitics. the dollar or something like korean yuan, does it now trade instead of the vix? stephen: i think the dollar has been surprisingly weak to my mind, but i think a lot of that was about position. they expected the reflation trade to continue in a straight line. as the dollar has weakened over the course of six months, there has been a shock to the dollar. the futures exchanges. the dollar has things working in its favor. unless the currency moves in your favor, you are paying out on that. better dollar strength would be unsurprising. tom: interesting to see. that is what we do, we drive forward economics, finance, and investment. we will do that in the next hour with deutsche bank. focused on inflation as an acronym some. ♪ this is "bloomberg surveillance." let's get the bloomberg business flash. trainer -- glencore saysut debt and the ceo the rollout of electric vehicles could lead to more demand for copper, cobalt, zinc, and nickel. talks for a flash memory chip business. reach ant been able to agreement with its preferred group. idders have offered toshiba $19 billion. the former engineer at google whose controversial member on gender differences and diversity is speaking out. he gave an exclusive interview to bloomberg tv. it just hard to regret because i do believe that i'm trying to make google and the world and generally better place by not confining us to our ideological igo chambers -- echo chambers where only one side of the story can be heard. taylor: google denied his claims that some employees who expressed support for him and -- i've been contacted by the human resources department at google. francine: thank you so much. the main has been headache for fed officials this week. >> i think the fomc has been not just the tiny amounts, but the large progress we made the 2015 and 2016. do you worry that there is some kind of policy mistake. equities are saying one thing and bonds are saying another? stephen: i'm not concerned there is a policy mistake. if you think about what central banks are likely to want to achieve, once they have sold the issues of excessive weakness in wouldnking sector, they want to withdraw accommodation, they are not going to roil the recovery in doing that. it has been interesting to see the way in which inflation has failed to pick up and this variety of conflicting explanations. it comes back to euro strength and commodity price weakness in the second half of the year. headline inflation has undershot expectations. all prices down 40% year on year. level, we areng not yet seeing an acceleration of wage growth. in the eurozone, that is not altogether surprising. , but pullback from that there is still somewhere to go. it is slightly depressing to see that wage growth has not picked up. do you just add to treasuries or do you think that the fed will hike more than bonds are expecting it to? stephen: i'm going to be guided by what the fed are actually saying. they say they continue to tighten monetary policy and we should take them at their word. if nominal growth improves, that is good for the areas of the market that we favor in europe and to some extent in the u.s. tom: when i look at inflation is , there is phenomenon a different type of inflation 10 years on from where we are now. we will talk about this theme in her next hour, as well. is the inflation now different than it was in 2007? stephen: if you look at the long-term capital market assumptions that we park it every -- publish every year, our long-term it -- expectations were that it would struggle to get to central-bank targets over a 10-15-year period. we have seen the expansion of central-bank balance sheets. the waynot translating we might have expected it to. i think software can explain some of that. the economy can explain some of that. our expectation is not that inflation is going to surprise to the upside. francine: thank you so much. up next with venezuela on the brink, we will speak about the perils and opportunities of investing in latin america. this is bloomberg. ♪ francine: this is "bloomberg surveillance." tom is adjusting his glasses. our next guest is the founder of union group. billion ranging from energy, real estate, and agriculture. latin america faces economic and political challenges in some of its biggest markets. talk to us little bit about your investments. you are one of the experts in the region. if you are a foreign investor, you worry about politics, the uncertainty of regulatory , where do we go in the next five years? >> when we analyze latin america, we look first at economics. we then look at political overlay. we are seeing it with some examples we may speak later about. how the politics is important in our continent. then we look at foreign investor flows. it is a small market driven by foreign investors in or out. we decide what are the most .nteresting countries we go deal by deal. francine: is the trump administration making it more difficult because you don't really know what happens next? juan: in some respect, but it is really not the main factor. in latin america, today, we saw this with earnings from glencore oflier today, the resurgence the commodity markets. latin america starts waking up with the resurgence of the commodity markets. of theseum weight markets is commodities. mining, oil start moving, usually, there are very good runs in latin america. tom: i look at currency dynamics, i looked at the venezuela black market, i guess it has improved from $15,000 down to $10,000. i guess that is a vast improvement, tell me about the currency wars of the rest of latin america. juan: you were talking before about inflation, if you like inflation, venezuela is it hundred percent per year, a country that is getting off the charts in every single metric. other than that, the main currency in south america, brazil, very reliable to trade. a little bit more stable than in the past. are coming back, they are stabilizing the situation across numbers. inflation in brazil is 2%, that is very low. low in arates are country that has historically high interest rates. growth is between zero and 1%. there is no big movement. tom: let's come back. juan sartori with us, as well. coming up in our next hour, the toughest republican to speak to. from oklahoma, the former governor, frank keating very look for that inner next hour. stay with us. this is bloomberg. ♪ good morning, everyone. "bloomberg surveillance." we are looking at markets. calmer markets. as a look at the terminal, futures, -10. dow futures, -54. we will go to taipei in moments to talk about the policies and sanctions toward north korea. right now, here is taylor riggs. taylor: we are starting with geopolitics. north korea has come out with a detailed plan for firing missiles at guam. --y would be carried out tests would be carried out in the middle of this month and missiles could land as far as death close as miles from the u.s. territory. counsel robert mueller left millions in speaking fees to investigate the trump campaign. over in the u.k., a slump in london housing prices spread to neighboring areas last month. according to the royal institution of chartered surveyors, the prices of england southeast had the worst performance since 2011. the former google engineer his controversial memo on gender differences in diversity led to his firing is speaking out. he gave an exclusive interview to bloomberg tv. >> the point of my memo was actually to improve google and google's culture. they just punish me and shamed me for doing it. taylor: google denied his claims that some employees who expressed support for him have been contacted by the human resources department at google. i'm taylor riggs. this is bloomberg. tom: one of the things we try to do at surveillance is not only try to bring you the first word news, the fire, the fury, the bluff, the bluster, but what about a sane conversation about what is beneath the headlines? this is the most important interview of the morning if you care about what is really going on with sanctions in north korea. in canada bomb working with david -- daniel tannenbaum working at pricewaterhousecoopers. an expert on global sanctions. mr. tanenbaum from taipei. thank you for being with us this morning. what do all of our viewers need to know about the power of sanctions against north korea? i think certainly it is important to note that there have been sanctions on north korea for a number of years, but with the escalating situation of the past few months, the events of this summer are probably the most significant effort to ratchet up sanctions on north korea in really the history of the north korean sanctions regime with an increased focus on u.s. and u.n. actions of further cutting off north korea's access to the global monetary system, more recently through cutting off certain access to the financial markets, as well as attempting to limit exports of certain goods that could account to up to $1 billion per year to the north korean economy. tom: within any political and economic system, there is the idea of leakages. how leaky are the sanctions? koreasy is it for north and china to get around the rigor of these sanctions? terrifico, it is a point. chinese institutions have stated that they suspended dealings in north korea, noting that china and russia are significant trading partners. assume there are still institutions supporting the north korean regime. in the end of june, the u.s. treasury department designated a preventede list that access from the u.s. financial system notably because they supported the north korean economy. there are likely smaller players that are still supporting the north korean regime within china. francine: daniel, what if the sanctions aggravate north korea more than they need to? it is aggravation, but they don't get much done? sanctions can potentially have an impact on bringing countries to the table and the underlying purpose is to force a change in behavior. you can look at what has happened historically with cuba and argue that the sanctions did not work because it did not force a change in regime, but iran is an example where sanctions did impact iran coming back to the table, along with a lot of other reasons. it is early to say whether this new regime will mean something, but i do think it is impactful that china and russia and the security council voted to pass the measures over the weekend. it is critical to see whether they put their money whether mouth is and implement this locally, which every member state has an obligation. tom: we spoke to a previous guest about venezuela and the black market. what is the so-called black market of north korea? is it ample? does pwc know where the flows are moving? does the cia or dod noteworthy whereial flows --know the financial flows are moving out of north korea? daniel: i think it is safe to say that the government does have a view where the money is flowing, into what institutions. department has hold back on releasing a list of additional institutions that theseessentially prohibit chinese institutions from accessing the u.s. monetary system like the one designated at the end of june. francine: daniel, thank you. ,till with us here in london stephen macklow-smith. when you look at geopolitics and , do you just look at market flows? normally, we are waiting to see how we are going to get guided by companies. that very clearly had an impact on german companies to or three years ago. we have to take that under advisement. second-guessing to the impact that sanctions are going to have. francine: we have sanctions against north korea, but you can also talk about venezuela. talk to us about the latin american psychology in certain countries. do they work or do they just say, i hate america even more? juan: from our experience, sanctions are useless and counterproductive. it is what countries do when they don't want to find a serious solution. it is just from a pr point of view when the want to announce some sanctions. it also usually has more of an impact of -- on the populations in on the leaders of the country. venezuela is very soon going to become a military dictatorship, civil war, or more a path to revolution, but that is unlikely. it is going to fall into antagonism. tom: from where you sit, stephen , fat and happy in london, i'm fat and happy in new york, full disclosure, the sanctions matter? i think at the margin, there was an impact. exactlyfficult to know what sanctions will be applied and across what sector. company bye to see company if it has an impact on the revenues. the next up for germany with the election coming up? aat do they want to do about sanctions debate? to the safety washington, stay out of this until after the election? stephen: i think germany is very clean desk team to be a good global citizen. i think germany is also a very moderate political spectrum that you have that. i would have thought that in the run-up to the election that germany would run business as usual. francine: which means no sanctions, but if you are german exporter -- stephen: they are required to contribute to a sanctions regime, they will do that. the business as usual is germany being a good global citizen. i don't think the proximity of action would affect that. tom: a smart discussion in london as we look at the old in of international relations into what we do at "surveillance." interview onortant inflation, the permanence of inflation 10 years on. that is in our next hour. ♪ francine: this is "bloomberg surveillance" with tom and francine in london. glencore'she ceo of mind. tom: we are having technical difficulties. let me pick it up. glencore, what a turnaround. we are going to try to go to our stewart wallace in london on the bounceback of glencore. tell us why glencore turned around. was this a shock to the commodity community? >> i think what the shock was was that there trading business did not form as well as it could have. you assumed they would be on the winning side of the trade, then they made some bad calls on coal in particular. i think they are turning around. look at the equity prices at the depth of the crisis, it was almost pricing and collapse. they have done the right things. debt.ave paid down their they have suspended their dividend. they have held off m&a. we are not quite back to business as normal. but get the equity price. francine: it is amazing how they have changed in the last 3-4 years. what kind of m&a will they go after? >> they want agriculture in the u.s. they believe that is the next big prize for them. they have record harvest after record harvest, increasing food consumption around the world. that is a huge opportunity for them. francine: full disclosure, the chairman of bloomberg is also a nonexecutive director at glencore. one of the things we have been trying to figure out is do you ever worry about climate change? agriculture is something that we need food security and it is also labor-intensive and you don't have control of the weather. juan: we see in the data that the flexibility of weather patterns are very broad. this outstandingly good harvest over the last couple years are not normal. what is going to happen when it goes the other way and it is going to happen relatively quickly. i think agriculture is positioning itself properly in the short-term and that is going to be good for prices coming back up. we're watching it. we could be poised for a great turnaround. they have barely nudged up in the scale of years. can you call bottom on currencies? do you call bottom in commodities, rather? i misspoke. juan: for sure, we saw the bottom in the oil, we saw the bottom in mining. on the agricultural side, we see a driving around the bottom. also looking at the fact that soybeans, for example, we are hitting prices were 60%-70% of the world production is not economically at these prices. that is not sustainable and we anticipate commodities to start running out definitely. we are seeing the worst prices in the long-term. francine: what does that mean for the industry? are there any companies in europe that actually have the kind of profile where valuations look attractive in the space? stephen: euro has a very big agro-chemical sector. foras been one of the areas stock prices over the last 5-6 years. a strong global soft commodities market is going to be good for those companies. production site is all in private hands. tom: let me bring up this chart, the bloomberg commodity index. this is actually very good math. we have adjusted it for inflation. we're showing the grand commodity disinflation. it really puts into perspective how we barely nudged this. can you see any enthusiasm on supply additions within the broad set of commodities? innie: i think --stuart: think we are seeing it in metals. in the last 3-6 months, everyone realized that electric vehicles are going to be a big deal. it may not be today or tomorrow, but you even have the huge oil companies talking about it. nickelinto cobalt, zinc, , lithium if you can get your hands on it, those kinds of materials. you got to be a little bit cautious. we remember the huge run-up and crash 20 years ago, so that is what you have to avoid. tom: what are you invested in -- francine: what are you invested in given that it is not in your control, a lot of demand from china? juan: i'm investing in what tom just showed. this is probably the biggest opportunity to acquire commodities after a cycle of , removing some of those excess costs built on the big china boom. growth in terms of quantity into additional demand for these commodities relatively small, soybean, wheat, rice, quite significant. investors are going to come back to the sector, valuations will improve, you will probably see quite a lot of them and they. -- m&a. francine: thank you so much for joining us, juan. we will be back with stephen maxwell smith of jpmorgan. i think there was a viewer comment on the dollar touching -- more questions for anyone of our guests. go want to tv and then you click underneath the video screen and you see some of tom's charts. ♪ taylor: this is "bloomberg surveillance." morgan stanley says a correction in the u.s. junk bond prices may already be underway. the banks that valuations are high and investors underestimate how much pressure the fed will put on junk ons by removing quantitative easing. earlier this year, the trump administration announced new measures to curtail the use of foreign workers. the ceo of blackberry has a different view. >> i think it will work out. in this day and age, this is a point of no return. believer that they will arrive at a certain peaceful resolution. taylor: some critics have said the visas are used to replace american workers with cheaper foreign employees. a bit is being considered for charter communications, that is according to people familiar with the matter. to merge charter with its struggling u.s. wireless company, sprint. that is your bloomberg business flash. francine: let's get more on the charter takeover talk. suitors hasrumored the balance sheet firepower to mount an offer that would be more attractive than the go it alone strategy, they say. is still with us. i know you don't want to talk about individual companies, but what is the rating you would give to m&a right now? the trend for global growth is ok, but you have this cheap money out there. stephen: i think that is quite true. from an m&a point of view, it is easy to make the numbers stack up, particularly if you are an american company buying into europe. the dollar has been strong the last four years. intore also investing valuations that have been lower. francine: on to something of little bit different, i want to talk to you about the dollar fx. we have questions from a viewer. this is what he is asking. go to 80 anddxy hurt u.s. corporate earnings? this chart basically shows the currency and if you take it back to 2012, it was about that 80 level. , the weaknessally of the dollar we have seen so far this year, you can see how it bounced very strongly on the back of 2016. all of that strength is down. it is sitting at the bottom. i think it is entirely likely that it will bounce. my sense is that it will not go to 80. we do think the dollar looks fairly stretched. u.s. growth has been higher than eurozone growth for about seven or eight years. is going tontial change and that is the forecast that we have clocked into the market assumptions. idea ofp me with the earlier in the hour you said you want to build cash. what do you sell to build cash? i'm not saying we are , itding cash, but investors would be entirely logical for them to build a higher cash buffer. the strong rally that they had over the last nine months, you are seeing a little bit of digestion at that price point. i don't think that there are any specific sectors that look particularly troubled at the moment. tom: thank you so much. coming up in our next hour, we are going to have a piercing conversation on inflation dynamics and the new dampened reality of output. an will join us. it will be a must watch for all of global wall street. , the dreaded new york yankees, this is an outrage of major league baseball. the scandal of the new york yankees new jersey. this is bloomberg. stay with us. ♪ got you outnumbered. the dinosaurs' extinction... don't listen to them. not appropriate. now i'm mashing these potatoes with my stick of butter... why don't you sit over here. find your awesome with the xfinity stream app. included with xfinity tv. more to stream to every screen. ♪ francine: america, did you sleep well last night? markets are stable still, the japanese yanis -- yen strengthens. state, manage to tone and strength the presidential message. and a hedge fund manager boxes philosophical on radical transparency. good morning, everyone. this is "bloomberg surveillance." i'm tom keene. francine lacqua is in london. a little bit of brexit news. what is emma went to tell us about brexit? i thought everybody was on holiday? francine: we have european data. the hawkish comments that confused everyone, you want to first of all, see what that means in terms of the strength of the economy and there is a twitter fight among the chief of staffs to various members of cabinet. konstam, we will get to him in a moment, but on korea, here's taylor riggs. taylor: japan and -- japan is noting north korea about launching missiles toward guam. japan said it would be legal for them to intercept the mess all. in kenya, fraud claims are -- may spark a crisis. initial results were released showing the president was a big lead over his rival, but said the vote count was not official. back in the u.s., president upsetused twitter to senator mitch mcconnell, saying that mitch mcconnell was a novice. the president asked why congress could not replace obamacare after years of trying? saying more excuses. sheryl sandberg says mistakes are inevitable and facebook. the team says the important thing is how they are fixed. sheryl sandberg spoke with emily chang. >> but so many people posting to facebook, we make mistakes and we are trying to correct them. we are hiring another 3000 people. that is a serious investment for us. we are hiring them all around the world. we are trying to get the policies right and make sure we are staffed well. sexualspoke out against advances saying if it happens, people should lose their jobs. i'm taylor riggs. this is bloomberg. tom: thank you. currencies and commodities are not the upper we saw yesterday, but nevertheless, subtleties and equity markets that cannot get out of the way. futures are negative. the euro has not done anything over the last few hours. next green. -- next screen. dominic konstam knows the normal vix is 19 or 20. we are dead, dead, dead. we will talk to mr. konstam about that. francine? francine: tensions around the korean peninsula spreading to global equities, including european stocks. 12.15., you can see at tom: we do not look at our data checks before hand. right now, they are overlapping. that brings us to our two good reporters. take fromt quick yesterday with an update on korea. kevin cirilli is involved with the gulf. today for asten response from beijing? beijingl comes down to 's response on how they not only implement the sanctions against north korea, but whether or not they follow up with them in terms of putting out the key components, part of the current sanctions of oil. china is the biggest supplier of north korea's oil and food. if it does feel that the sanctions are not working, that would mean it could break a deadlock. china is essential to the ongoing north korea situation. francine: all right. kevin, when you look at what the trump administration said, how seriously do we take the threats is the mark kevin: they are taking the threats. seriously. there have been some reports that the administration officials were not aware that president trump was going to say that fiery rhetoric he said the other day with regards to north korea. that they would be met with fire and furey, but as they are looking ahead, try to move forward, they are trying to see what role china will play in helping to curb north korea's missile ambitions. china is a top economic partner of north korea. francine: you wrote this brilliant piece looking at the facilities and how they may look like a live in a couple of weeks and months. what is the next if you will be looking out for? what people are looking at is how effectively sanctions are implemented, and whether or not they succeed in supply.some of the the current run of sanctions are steeper and could hurt the real economy. they may not do enough to upset kim jong un's regime or stock his nuclear weapons ambition. tom: i want to bring up a morning must-read. kevin cirilli, this has to do with three generals and maybe admirals to be. yesterday, on the cuban missile crisis, surely one of the experts, michael dodge, the fact that our current twitter and commander in chief is surrounded by highly competent generals is only partly reassuring. out crazying kim jong un is a scary proposition. game theory also teaches us that if neither drivers worse, everybody goes up in flames. kevin, tell me the game theory of the players and the trump cabinet? kevin: i think it all goes to china, and quite frankly, the president and his unpredictability is something that several senior administration officials feel is an asset and not a political liability. and others feel that it is an liability, but again, in terms of how they are trying to take on this 33-year-old dictator in north korea is really through economic sanctions. they feel that the international coalition is something that is their best route. u.n.is why you saw the ambassador bring together global leaders of of the weekend. tom: does beijing look at mr. trump, the president of the united states, as a castro-crazy, or level handed -- or levelheaded like a kennedy? >> remember, fundamentally, china is quite happy with the status quo and don't want a north korea regime to topple. they don't want u.s. troops on their border over northeast china. and they don't want a humanitarian crisis triggered with refugees pouring in. china is interested in protecting the status quo. it is about keeping the brakes on kim jong un's nuclear ambitions so they don't have their own strategic interest in the region threatened. tom: thank you so much. this is a perfect time of the year to speak with dominic konstam of deutsche bank. his strategy reports emphasized economic dynamics with what we see in the financial system. dominic konstam will be here. you do have a simple statement within your note that volatility is dead. get over it. it's dead. is that a good thing that volatility is that? >> rising from the policymaker's perspective, they like the idea of it not going anywhere, making their life a bit easier. markets,of financial it is not. in terms of financial markets, it is not very good. tom: you talk about rising equity markets, but the idea here of double-digit equity returns, the synthesis of your writing is that we are in a single digit world. are we? dominic: that is possibly true from how most people think about equities in the context over subdued nominal growth, and the idea that productivity gains are very low. there could be a world out there know where we could rerate -- the could be a world out there that we could rerate equities. the idea that rogue growth could be stronger in the bar below inflation environment. that could involve a significant re-rating. equities are quiet -- or quite cheap -- equities are quite cheap in some respects. francine: when will that re-rating happen? that instinct is let's normalize interest rates first to see how the markets react. it would be significantly longer after? think the idea that we have is this idea that if inflation is going to stay very low for some time, nominal rates are not going to move very far, it is a process going on where you could, through the re-rating of equities of real growth of citations, could jump quite a lot thanks to tobin's q. if you like the market value to replace on cost. that leads to a big investment recovery. we saw the late thing in the early 2000. it is a leap of faith with the banks. tom: can we sit out here and talk. this is great, francine. we are going to talk about a reinvestment in america. one person agrees with dr. konstam. francine, one more question. dominic: we can keep for as long as we want. one final question. when you look at volatility and the way the markets are going, and you look at cycles, we do for a recession anytime soon? mean, there are a lot of indicators that suggest that you could be close to a recession. one of the main ones is the fact that markets are extremely tight and productivity is very low. in the past, that created inflation in the central banks have had this target, so they stamp on the economy. that is what you get these indicators. sometimes in the corporate market, you can signal that. it is totally avoidable. it is avoidable if central banks recognize that we are in a different central bank equilibrium. the services do not have to panic. maybe unemployment will drop a lot further. it is avoidable, but mistakes can be made. tom: we will come back with dominic konstam and dive into the inflation idea. a quite essence of the world. coming up, a conversation with someone with real fbi experience. the former governor of oklahoma of the street trump -- oklahoma on mr. trump. d.c. a complex washington to say the least. stay with us from london and new york, this is bloomberg. ♪ ♪ francine: this is "bloomberg surveillance." electrical vehicles and batteries would lead to more glencore has cut debtal. . they said the roll up of electric vehicles to lead to more demand for zinc and nickel. the chairman is on the board. toshiba is in talks with other bidders for its memory chip business. they said it is because they have not been able to reach an agreement with bain capital and innovation network corporation. according to people familiar with the matter, those bidders have offered toshiba $19 billion. that is your bloomberg business flash. tom: thank you. before inflation, an important conversation yesterday. our kathleen hays in st. louis with james bullard, the great, neutral voice on the fed. someone talking about credibility. here is president bullard. >> i think they were surprised by inflation coming into the downside during the spring here. and not by just by a tiny amount. really by a large amount compared to the progress we made through 2015 and 2016. tom: james bullard of st. louis. we dive into the conversation of central blanks -- central banks and inflation. you are provocative about central-bank policy. what will be the new regime for the central bankers if inflation is an anachronism? dominic: there are two things going on. one is the cyclical pressures down on inflation, and some of the disappointment we have seen in the data. behind that, there are structural forces down on inflation. in particular, the failure of the phillips curve. this is what people won't appreciate. if the phillips curve is important because it makes sense of inflation targeting. if you don't have a phillips curve that works, there is not much point for any central-bank targeting inflation because it is the expectation through the phillips curve that makes inflation targeting critical. tom: we saw this in the yesterday, there is this feeling within our system. central-bank orthodoxy is not adapted to a dampening function across an entire economic system, is it? dominic: no. it is true for perhaps any organization. you have to self justify so they basically have this sort of toolkit that make sense to them, and if they don't keep buyers, they are not justifying it to themselves. that is the challenge with all of the central banks. they are missing the inflation target. the fed has missed nine out of 10 inflation targets for the past two years. the whole thing is obviously looking bury back from that perspective, but they have to keep on believing in it because otherwise, what is the point of an inflation target? they would have to drop it all together. francine: is that what you think they should do? i was speaking to an investment officer at credit suisse, and he said inflation targets have been going to buy the likes of facebook and uber? --inic: there was clearly inflation is being created by different process than what we thought it was being created, is the way i would put it. in the process that you thought was created was by you believing in inflation targets, and expect higher wages and line with wages -- expect higher wages in line with inflation, anchored by this inflation target. the phillips curve only serves to allow the central banks to revolve around those cycles. what is creating inflation? uber and amazon are creating lower efficient equilibrium. we will continue this conversation in our next half hour. this is an exceptionally rich conversation. we will come back with dominic konstam. later on, we touch an important bloomberg markets article. mr. dally oh and transparency. stay with us. this is bloomberg. ♪ ♪ francine: "bloomberg surveillance" single best chart with dominic konstam. we have service sector inflation to goods inflation. inflation is an anachronism. into an we're moving inflation equilibrium that will be closer to 1% than 2%. tom: you said 20 minutes ago and i already have emails on this, that we may see will growth out of this leading to investment. no one wants to agree with you. how do we get investment spurred in europe? people think that the equity market will do well relative to bonds, but bond yields will have to rise 3% of 4%. the excess premium will go away in a bad way and some sense. if you accept that nominal yield to stay in the 3% range, then equities could do quite well. but prices could go up a lot. you can be talking about s&p 3000 in the next few years. that re-rating of equities is more significant, and would raise tobin's q. companies most of buying back their stock. they will eventually stop merging with other people. tom: francine? francine: with this be across the board, or does it get accelerated in certain industry groups? one issuees, i mean, will be hopefully, it will depend a little on what are doing, etc. but yes, there will be high-growth sectors and technology-driven sectors. the point is that the capsule-labor ratio in the u.s. is growing extremely slowly. it is wait at the bottom end of the band. to get itt take much to normalize. tom: dominic konstam with us. talking about volatility and inflation debt. --k is a former existence mark is a former cabinet secretary. challenges ofthe renovation. renovation with the mr. trump's white house. >> ♪ is "bloomberg surveillance." we are talking a little bit about brexit. where shegreat story argues the prime minister, theresa may's cabinet remains divided three ways over brexit's transition plans. we are with our bureau chief and will get hurt take on it. let's get to first word news with taylor riggs. taylor: north korea has come out with a plan for firing missiles at long. kim on june's regime set the test be carried out in the next several months and could land within u.s. territory. ,apan said the missile flyover said if the missile flies over them, it would be legal to intercept them. according to a financial madeosure, robert mueller $3.5 million over a three-year period and was paid up to $55,000 a speech. in the u.k., a slump in london housing prices spread to neighboring areas last month. southeast hadand their worst performance since 2011. the report says nationwide, prices that needed. and the former google engineer whose controversial memo on diversity led to his firing is speaking out. he gave an exclusive interview to bloomberg tv. >> part of my memo was to improve google and google's culture. and they just punished me and shamed me for doing it. denies hise, google allegations. no one is 24 hours a day powered by more then 2700 journalists and analysts in more than 120 countries. this is bloomberg. francine: thank you, taylor. u.k. brexit secretary has described the second run of negotiations with the e.u. as difficult, but productive. in a letter published yesterday, he highlighted a major sticking point. audio there.some we are having a challenge with the surveillance cable that goes under the ocean. we are fortunate to have dominic konstam here from deutsche bank. within the debate we have been having, the greatest uproar is about chair yellen and about what will follow if we can assume after chair yellen. within your theory of debt volatility, inflation is an anachronism. but yet, a new central bank regime, does it matter who is the next central bank had? dominic: it always matters. the question is whether there is going to be perhaps a rethink around how they view financial conditions. the conundrum that the fed has is they believe they have to tighten up policy, and they are worried the financial condition seem to be easing and are not tightening after that. that creates a certain group think that they think they may regret. tom: folks, this is incredibly important about the outcome of these great thoughts. one of them is, we hearken back to the 1930's. we hearken back to a time of transactions that lead to combinations of industries, almost an andrew mellon america. is that a risk that we have, that we have become too concentrated? dominic: i mean, yeah. as possible. and you don't think of a paradigm shifts and regime shifts that need a completely different approach monetary policy. that is the kind of danger, looking back at the models 20 or 30 years ago. they may not be relevant going forward. tom: the new model in the united kingdom is going forward. news on brexitew is we have great articles on bloomberg terminal, talking about the cabinet of theresa may is split. she is on holiday at the moment. they will get back to work early september. ,et's get to our bureau chief who is in london, following this buried --following this very closely. when you look at the negotiations, now it is august, when do we negotiations actually restart? >> the last week of august. francine: are they more difficult than we thought? seems like your is refocused. emma: europe is presenting a united front. in july, there was surprising similarities in the british stocks when it came to subjects such as the rights of citizens. i think they were more aligned then they thought. but there is the sticking point which is the european quote of justice, code of justice. so, if there is no progress on that, it will be difficult to see how they will come to a final deal. francine: there is a great article that the captain of theresa may is split in three ways. how can she refocus the troops? emma: it is interesting. outthink tank that came with this research, it showed there is -- in the majority -- in the cabinet, they said this -- they said there is a long, arrangement. we do not know what boris thinks. quiet been unusually recently. the chancellor hammond, which is pro-business and pro-long arrangement, has come out saying the arrangement should last as long as three years. fact, there seems to be more pre-brexit members of the cabinet, offering him support of the transitional arrangement. however, we don't know what boris or theresa may thinks. francine: we heard from the , even -- heaying was contradicted by david davis. theresa may is kind of the driving force. who did she listen to in her cabinet? emma: that is interesting. it will be interesting to see what she comes back with after her quite long holiday. tom: thank you so much for the briefing. thomas, our london bureau chief. we will continue with dominic konstam of deutsche bank. keating, republican of president trump's gop america. stay with us. this is bloomberg. ♪ ♪ francine: this is "bloomberg surveillance." stanley says a correction in u.s. junk-bond prices may be underway. the bank says valuations were high and investors under evaluated what the fed will put on junk bonds by removing quantitative easing. the trump the cartel of hb one visas for foreign workers. president trump there was widespread abuse in the program. the ceo of blackberry has a different view. >> i think it will work out, i really do. withis day and age attention -- with attention, this is a point of no return. believer that they will arrive at a certain, peaceful resolution. taylor: some critics have said the h-1b pieces are used to replace american workers would cheaper, foreign employees. and billionaire patrick dodgy thinking about a different operator for charter communications. he may have some competition. that is your bloomberg business flash. tom: thank you. there are always too many things to talk about with frank keating, the acclaimed author for children of history books, the former governor of oklahoma with the fbi. with the oklahoma city bombings. governor keating joins us from oklahoma city. thank you for your early appearance, governor. mike allen just published something moments ago, disappointing with the trump's administration fire and theory. what is your point of view? frank: what is important is to that thisthat key -- is something he has not done before. in politics, you cannot do that. when i was governor, i broaden the democrats. i set down and said, how do we fix this? if the u.s. oklahoma goes down, we all go down together. the president needs to bring both parties together and leaders need to understand they have to work with him and each other. it the united states goes down -- if the united states go down, we all go down together. tom: are you concerned that the president is general the up. are there too many men in uniform or serving in suits and tides? he. keating: the generals selected are first rate people, but i am concerned about that as well. for example at homeland security, and jill kelley was an excellent choice, i am concerned about a statute that says the military cannot play a rolling in domestic law enforcement, and the department of homeland security is a domestic law force -- enforcement community -- entity. i think general kelly bit a great job. i think general mattis is first rate. -- but youe to risk have to surround yourself with experienced people that think like you do. tom: i want to ask you an inside baseball question. the story with north korea yesterday, fbi descendent on a home, mr. matt forte's home, and decided to look around. what happens when the fbi wanders into somebody's house? gov. keating: i was a young agent. when he open the door, his lips study to quiver. people do fairlawn force but on occasion, and sometimes -- people do fear law enforcement on occasion, but that sounded melodramatic to me. i am an ardent opponent of special prosecutors in independent counsel. hopefully, a grand jury was involved and they wanted this done and the fbi did it. tom: this is critical perish at president trump fire mr. mueller? gov. keating: i think that would be terribly inappropriate. the decision to appoint a special counsel was a mistake. but now that he's there, i think the deputy attorney general needs to make sure the investigation is barney constrained -- is very constrained. there is no reason to try to grab somebody. the people of the special counsel, it is one victim, one prosecution. tom: and the sprawl of the conversation and themes, senator portman of ohio is leading the charge of heroin and opioids. give us the on the ground the of this drug epidemic and the injury and illness to the community. what do you observe in your oklahoma on opioids? a book that is a bestseller tells the story of southern ohio and kentucky. every state is afflicted by opioids and every state is afflicted by drug overdoses and abuse, which means the explosion spendingre, medicaid's rather, has put states in a terrible position. office, oklahoma was spending about $600 million a year on medicaid. that was not that long ago. today, it is $2.2 billion. no wonder there is not enough money for teachers, schools, and highways, and even law enforcement. that inate is facing this expansion of medicaid, all of these crises are causing us to really break the bank. i think there needs to be leadership from both parties at the state level. recognizing this is a human crisis that we have to address, but it is beyond comprehension of how people would destroy their lives with drugs like this. governor, if you had to rate the trump administration so far, what linking would you give it? would you focus changing communication with attending a policy? gov. keating: practically, i think the grade would be a c plus. in a time whenup there was great inflation, but on foreign policy in national security, i would give him a solid b. on domestic affairs, i would be more concerned. the health care debate ended badly. we should have had something done about health care. obviously, the next tax debate needs to result in a success. that means bring everybody together, having the president, the cheerleader convincing the american people of what he'd once -- of what he wants. again, they are just getting their shoes on, but they need to know that the track races already underway. francine: right, but how does president get the covers back on his side? gov. keating: by working with him. they are a coequal branch of government. democrats are not institutionally evil or bad and republicans are not institution good or solid. you have good and bad in both parties and the president needs to say, here is what the country needs, let's work together. we are not walking out until we get this done. that is what governors do and that is what the president needs to do with both parties. the health care debate and the resolution was handled exclusively with republicans, and i think that was a mistake. tom: governor, give us some guidance about what the governor of indiana ought to do. the vice president is in a unique position. does he go on a holiday? or does he become more active? gov. keating: well, i think he needs to become more active is -- acted as a partner and help make to the governor. mike pence is a barely fine person, very decent. she knows how congress works. he has been governor of good-sized states -- he has been governor of a good-sized state. his leadership at the state level is important. governor, asormer i was a former governor and the vice president, i would say, here is what we need to do. governors need to put pressure on the president and on the congress, and the congress needs to work with the president and the government to resolve all this. if the united states goes down, we all go down together. tom: maybe we need to read the frank keating children's books. governor keating, greatly appreciate it. let me show you tv . dominic konstam has us at the desk from deutsche bank. there it is, tv , bonus run. you can click on a block and get that chart, which i stole from dominic konstam. ♪ ♪ francine: this is "bloomberg surveillance." i'm francine lacqua in london and tom keene is in new york. coming up is bloomberg daybreak with david westin and alex still cared -- and alix steel. david: we have north korea. we are asking us what this means. we have mark kimmitt, a retired brigadier general. he was responsible during the height of the research and served in senior positions at the state department. share that, we will with you on radio. tom: thank you, david westin. we look forward hearing from general kimmitt on radio. now, a brief conversation on the hedge fund manager ray dalio that describes his contribution to the discussion around finance, the theories of finance. newsan important bloomberg article on some of the theories and beliefs of mr. dalio, including radical transparency. he is the king of everything out there. there are no closed doors in bridgewater, are there? francine: absolutely. it is been described as a brutal culture, but it is meritocratic. he lives by principles not to please everybody and not that too much on anything. tom: critics have said that mr. dalio has been off on his theories. i would say after many conversations with mr. dalio both informally and informally, there is a kernel of reality in their that he has absolutely nailed, and that is tepid economic growth. he has been way out on this idea that we will not return to the glory days pre-2007. ray dalio with an important lengthy article on bloomberg news, a must read for all of global wall street. dominic konstam with us. there is a lot of criticism of ray dalio's theories with economics and finance, but the major one is weaker economic growth. you have real growth up, but what does the animal spirit do? what does nominal gdp do if inflation is dead? dominic: weaker real growth is obviously the problem we have been living with for many years. our idea is to somehow break it. and it embraces risk asset and a new world. what is interesting though, i absolutely agree with ideas around weaker growth and low volatility, which is ray dalio's real point. francine: all right. dominic, if you were in charge like ray dalio, do you worry about the underlying currents in the markets? we talked about it with tom, maybe hedge funds having too much power in these kinds of markets? dominic: the idea is that the traditional sort of hedge fund has struggled to do as well as they have done in the past because of low volatility. but the low volatility story is also due to the breakdown in growth and the fact that the banks have had to take a massive role through quantitative easing. the collapse has gone hand-in-hand with a single factor driving asset prices, which, let's say qe. getting away from that is the key thing to bring volatility back. i would link that to say that if you do that, you can get growth back and break the bad structural story that we have been impaired -- that we have been in. mr. khan stump will join us -- dominic konstam will join us. a quick foreign exchange report. you have to look at korea. dollar weaker by a solid 6/10 of showingore esoteric yen stronger yen. it is a beautiful summer day in new york city. across all of bloomberg, stay with us. this is bloomberg. ♪ got you outnumbered. the dinosaurs' extinction... don't listen to them. not appropriate. now i'm mashing these potatoes with my stick of butter... why don't you sit over here. find your awesome with the xfinity stream app. included with xfinity tv. more to stream to every screen. >> sabre rattling, north korea has a plan to attack guam. japan and south korea threaten a strong response. and calls for caution. t. rowe price warns of fragility in risk assets, and credit spreads start to widen. show me the insulation. new york fed president bill dudley on deck to speak, and markets get the latest read in the u.s. welcome to bloomberg day break on this thursday, august 10. m alix steel alongside david westin. jonathan is off today. we head into the open of trading here. s&p futures down by 10 points. but remember, that dip was bought yesterday. s&p closed relatively flat on the day. a euro-dollar treading water around 1.17 as the dollar moves slowly higher. you have some buying coming into the treasury market. yields moving down by one basis point after a mushy auction yesterday, $15 billion of 30-year notes are going to be auctioned at 1:00 p.m. gold up for three days in a row, up.

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