The chinese want their stock market to look good before they celebrate the defeat of the japanese in world war ii. More for that in a moment. Stocks in europe rising as well this morning. Up 2. 4 . And europe a poll released this morning could add one more reason for joe biden as he considers a run for the white house. Bidenrvey shows that pulls better nationally against the top three republican candidates than Hillary Clinton does. At the poll shows biden has a higher favorability rate and then clinton or bernie sanders. Republican candidate donald trump says he has plenty of enemies in the hedge fund crowd. One of his proposals on taxes. As to do with carried interest much of that money is taxed at a lower Capital Gains rate. Trump was asked about carried interest. Do you want to tax carried interest in the same way . I would take carried interest out and let people that are making hundreds of millions of dollars a year pay some tax because right now they are paying very little tax and i think it is outrageous. Erik trump says he wants to cut taxes for the middle class. Youkraine creditors are taking a haircut. Both sides have agreed to a structuring deal that includes a 27 breakdown to the face value of about 18 billion of euro bonds. Of the redemption date will be pushed back by four years. Ukraines economy has been devastated by fighting with prorussian separatists in the east. Mourners turned out for a vigil in honor of two television station employees. The killer was a former reporter of the station hood previously been fired. He killed himself after a police chase. President obama is in new orleans to celebrate the citys come back from hurricane katrina. This saturday marks 10 years since the hurricane made landfall in louisiana. The president is scheduled to speak in new orleans lower ninth ward. That is coming in 5 00 p. M. Eastern time. David guerette is in new orleans. What is the president going to find when he shows up . David this is president obamas night trip to new orleans. He was last year for the fifth anniversary. Im standing in front of the Community Center opened rather recently. This was a neighborhood that was devastated. The president wants to look forward to the degree which new orleans has rebuilt. That is something i talked to mayor Mitch Landrieu about. It is something he attributes to the coming together of parties in new orleans. Nothing in the city of new orleans that is going well has been done without the partnership of the federal, state and local governments in partnership with the foundation, the notforprofits and the citizens. It has been a complete team approach. Health care, education, criminal justice, that kind of approach has produced a much better result. The new new orleans way. David that is a phrase ive heard time it again. The mayor coming up with a trademark phrase looking at a new city in the wake of hurricane katrina. A lot of people refer to this as a laboratory for new ways of running a city and what a city can be. Erik many Success Stories in new orleans. The president will see evidence that the reconstruction still continues in new orleans. David absolutely. The federal government sent out sent about 71 billion so far. I had the chance to tour a new hospital in new orleans. People are very proud to have a Teaching Hospital open again 10 years after katrina hit. Erik thank you very much. David gura is on the ground. Tune in at five clock p. M. Eastern time. At 5 00 p. M. Eastern time. This is the point of the show will be get you started with the five things you need to know. Julie hyman is back to help me kick things off. I dont see anywhere else to begin but with the comments yesterday by bill dudley. We will be hearing from a lot of fed speakers over the next couple of days thanks to the kansas city said jackson hole conference. Dudley talked about when the fed might raise Interest Rates. From my perspective, at this moment, the decision to begin the normalization process at the fomc meeting seems less compelling than it was a few weeks ago. Normalization could become more compelling by the time of the meeting. Julie there was a lot of hedging. That, theyay from will not raise rates in september. The other takeaway seems to be, stocks rose on that. I have an intraday chart of the s p 500 yesterday. Around here is where he made his comments. Lows of the session after he made those comments. It was around 12 45 that they bottomed out and started going up again. Can you attribute the comments to dudley directly . The timing does not seem to work. Erik it formed part of what traders and investors are factoring in. Julie on a day like that people are looking for an excuse to buy. After all the selling. They found one. Erik they appear to be finding another today. Ulie china overnight, china was able to stem a 5 trillion route in its markets. Fails, you just go into the market and buy. Is that what the Chinese Government has been doing . Conflicting signals on chinas economy. After watching stocks have their worst twoday selloff since 1996, the government has been forced to start buying shares again. It tells us two things. This market has not found a bottom yet and the selloff could have a way to go. The government is sensitive to what happened because they want to make sure the market is on a stable footing ahead of a military commemoration next week. It has forced the government to come back in. To Global Investors in ascending confused messages. If the idea is to avoid embarrassment, Everybody Knows thats what they are doing. How does that avoid embarrassment . Nda welcome to china earlier in the week they were saying is staying out of the market because they were debating whether there was point in trying to prop up stocks anymore. There was a view among some that ultimately what is happening in the stock market is not necessarily going to hurt the real economy because of the small investor base. The optics have forced the government to get back in and make sure there is a floor on prices and theyre not going into next weeks memory should with a big selloff. Erik thank you for staying up late with us. Ari fortime, for errari considering appointing its chairman and ceo. This is according to people familiar with the matter. Fiat chrysler selling a 10 errari. N fo it sounds like markey only bash chionne doesmarke not have a lot to do already. The guy gets three hours of sleep a night so when you are up for 24 hours i guess you can run another company. Julie he has been trying to shop around Fiat Chrysler or find partnerships. Erik he believes they need consolidation among automakers but there that only the niche will survive. In the creditves card business. Fidelity investments may replace American Express as it credit card partner. It may drop bank of america. Fidelity will try to find new partners. It is said to be in talks with visa and mastercard. Another blow for amax after losing cosco and jetblue. They need to figure out a new strategy. It appears retailer after retailer, company after company, realized that customers want access. Better access through visa. Produces been known to so many phonies. Designer purses, movies. Now there is a fake chinese wall street right. Goldman sachs Leasing Company right across the border from hong kong in mainland china. The company has the same chinese characters as the real Goldman Sachs. Shenzhen financial Leasing Company. Goldman has very little power in mainland china. Not much the company can do to change this. Apple runs into this all the time. Julie hopefully customers realize it is not the same Goldman Sachs. You do not look too confident. Erik gdp data and jobless claims will be released. These are important data that could have an impact on the feds decision to raise rates or not on september 17. Carl riccadonna is here to give us his sense of how the second reading on secondquarter gdp and these initial jobs carl i think the numbers are a little less relevant. The focus on gdp. A lot of folks will say this is old news, nothing really to say. It is going to be a fairly substantial upward revision. Going from two and a quarter of 23 and a quarter. Gdp. Econd print on with this, we will get the first look at economy wide corporate profit. That is new information that is potentially relevant. We had corporate profits on a National Basis contract in q4. We have to see what happens in q2. The economy is performing better so we should get a modest gain but if we see another quarter of slumping corporate profits that is bad news for the private sector because corporate profits drive decisionmaking like investment and hiring. The pace of hiring has held up relatively well, averaging about 200,000 per month. If profits continue to slump that will auger for a slowdown in hiring later this year. We see weakness in the labor market, all bets are off for the fed. Julie what is your prediction . Carl i think we will get a flat to modest positive so we should see corporate profits are if option of economic activity. You should see profits respond in kind. Faster gdp growth for the Second Quarter also impacts fed outlook. There is a correlation between gdp growth and the temperature in the economy or inflation rate. Gdp is reacts elevating. You should see gdp is reaccelerating. Erik key data coming in at 8 30 this morning. Coming up, what the markets look like in a post doddfrank world. The volatility around mondays selloff. We will be speaking with the ceo of one of the largest institutional trading networks. We had to jackson hole were policymakers are meeting for an interview. Erik you are watching Market Makers. What does the market look like in a post doddfrank world . Point gary volatility may that volatility may point to a new normal. Seth merrin may know a thing or two. Good morning. I wants to get to that question but first, im looking at the way futures are trading this morning. The market ended up 619 points yesterday. Has a floor been put in under stock prices . Seth so many macro events can change on a dime as we have seen in china with the recent intervention. This is a stock pickers market. What we saw in terms of the Market Structure, in terms of the new normal, we have this massive amount of money that has come into etfs and they are all concentrated on primarily the same stocks so when people start panicking and selling, you are selling the same stocks which exacerbates the markets. Our members are 800 of the largest Asset Managers in the world. They sat out when the market was down 1000 points. They said, erik that 25 minute window on monday. Seth the and then they started coming in and what we see, in our market, there has to be a buyer and seller. There are those folks that have to sell. They found refuge because we dont have any hft. They came into the pool and there are some folks that sold but some folks, the same number of players on the buy side looked at this as a great buying opportunity. A lot of those people were right looking at yesterdays market. Erik neither were they buying nor were they selling. Seth during the first half hour, the drop of 1000, they sat on the sidelines. Erik that says something important. Yes they were not seizing the opportunity to catch the falling knife but at the same time those institutions that use your network were not selling. Seth i think that is what you pay those active managers for. What is more interesting this is a global story. We saw 170 surge in our cross european to United States trading as well. That is interesting because erik arbitrage opportunities. Seth i think they have a five hour at start headstart. They had enough time to breathe, talk to Portfolio Managers and say, what should we do. I think a lot of those guys took advantage of the drop in the United States in a more seasoned , patient way. Normal this the new in a world where we are post crisis, post doddfrank. Etfs did not really exist before the financial crisis, certainly not the way they do do now. Seth we have seen 150 150 billion come into etfs this year alone. When you are trading in etf, that is a concentrated group of stocks. Most of them are on the s p 500. When people are buying and mass, the s p 500, yet the buy although stocks. When they sell, they are selling those 500 stocks. Those of the folks forcing the market down. Erik im wondering whether now when there is an excuse to sell or perhaps an excuse to buy, reason to buy, the price swings are going to be more extreme and violent just because of the way the market is structured. Seth that is correct. The reasons for that, the huge concentration in these securities. On top of that, when you have this kind of volatility, this is where highfrequency traders play. They exacerbate those price swings. The great thing about liquidnet, we are hft free. This is a safe zone for these guys to be able to buy and sell. Orders are so large that individually they can move the market themselves. In our market, we temper that. Erik thank you so much. Seth merrin. We are back after this break. Erik the Federal Reserve might not be raising rates next month after all. That is one read on comments from bill dudley who spoke yesterday at an address in new york city. This is different from the financial crisis. The crisis was very much about us, subprime mortgage lending, securitization of securities that turned out to be highly toxic. This is not about us. This is about development abroad. Erik here with me this morning, bob michele. Is there are differences of opinion as to what bill dudley intended to convey yesterday. What was your take away . Bob i took away that they may or may not raise rates in three weeks time. I think they should. I think if you look at the u. S. Economy, it looks fine. Well see gdp in a few minutes. They have the cover to do it. If they are going to worry about whats going on internationally, and they are. How do you know youre not going to get those bursts every so often the next time you do think you may want to raise rates . Erik of what use is it for Market Participants to have bill dudley give a this but that address where he says, the likelihood effectively feels lower now but things could change between now and then. There is important data that may help guide the fed in one direction or the other. Bob he is trying to calm the markets. Erik did it work . Bob it looks like it worked. I think it is debatable whether the markets were already recovering before he got on or not. He did not want to say anything which was going to cause i further selloff. It is open mouth operations. It must have helped somehow to help stabilize the markets. I think the chinese policymakers did more. Erik why with all the stocksity and drops in that we saw on friday and monday and late on tuesday, have we not seen similar price action in the fixed income market . Bob the fixed income market feels a bit tired right now. It has gone through a long rally. Everyone had their sites set on the fed beginning the normalization process in a few weeks. You did have a bit of a rally leading into the decline and equity market. You had already pulled the 10 year close to 2 and the 30 year down around 3 . On top of that you have a tremendous amount of corporate issuance. We were aghast at the amount of issuance we were seeing after july 4, headed into labor day. It is on a record pace. The weight of that hundreds of billions of dollars of new Corporate Bond issuance adds supply, duration to the market. Erik there are reports of the last couple of days of chinese having sold a lot of treasuries, in part of because of in part because of what is going on with their stock market. Do you buy that as a reason treasuries yields did not drop more . Bob that is some other reason. They have 3. 7 trillion in reserves roughly. A lot of it was accumulated in the last several years to offset the qe in the u. S. This is an opportunity for them to bring back some capital as they are seeing capital outflows. They are experiencing the cumulation. Isme, the bigger issue looking at all of the policy levers the chinese have to pull. For a long time, everyone was comfortable with them. If they reduced their reserve ratio requirement, that is good. If the pboc cuts the central bank rate, that is good. If they buy equities, thats good. When they try to deal value the currency, that is bad. The market is friendly to things that expand the liquidity base and reserve base globally and things that are focused purely on the chinese economy, not so firmly to capital markets. We are counting down forget important economic data. The second read on secondquarter gdp just came in. Once take it to vonnie quinn with more details. Vonnie Carl Riccadonna hit it on the head. 3. 7 is the revision to secondquarter gdp. 3. 2 mists were looking for. That was a big up from the big reading from the first 3. 7 ng which was 2. 3 . Annualized gdp for the Second Quarter. If we look at some of the details, consumption came in on consensus at 3. 1 of again. If we look at the inflation data, core pc came in at 1. 8 and that was as economists were forecasting. Jobless claims as well. We didnt see a drop from last week by 6000 to 271,000 people claiming benefits. Futures higher and they are continuing to expand and in terms of treasuries, a little selling. All told, it is being received well in the markets. Erik lets return to the conversation with bob michele. These are very old data but they do tell us something. Bob it feels like bill dudley may have to have another press conference. I think the data looks pretty good. Going into the Third Quarter the u. S. Economy was fairly healthy. We looked at personal consumption expenditures quarter over quarter. 1. 8 is pretty solid. Corporate profits we were 2. 4 percent. P the u. S. Is in a good spot to begin the normalization process. How much the fomc is going to weigh in International Development in the markets, that is their decision. They should tolerably let that go for the time being. Probably let that go for the time being. Erik if the u. S. Economy is potentially improving, i want you to explain what i have got on my screen right now which shows the widening of spreads in Corporate Bonds. The white line being high yield and the red line being investment grades. A large gap between but they do show the same trend that over the past year we have seen highyield spreads widen from about 375 two currently about 600. Why should that be happening in a world where at least a u. S. Economy that is improving . Bob i dont want to say these are oneoff things. The widening spreads started with the collapse in oil prices and there was a lot of discussion that there was some assumptions that up to 20 erik we are higher than we were back in january. Bob and then we had a lot of funding. There was concerned that companies were beginning to leverage their Balance Sheets. You could look at it and say things were so good for corporate profits that they began to look at their Balance Sheet again and think about things they could do. More shareholder friendly, Bond Investors do not like. Storythis does not tell a that we should be concerned about . Bob it does not tell a story that there is a week and frail economy. Erik and the credit cycle is about to turn. , it it tells a story started with Energy Prices and it has morphed into Companies Looking at leveraging up their Balance Sheets. A lot of m and a activity. Erik thanks very much. Bob michele of jpmorgan acid asset management. Fidelity investments says the real risk is deflation. Buyng investors to highquality bonds to diversify holdings. One expectation has reached a fiveyear low. The bloomberg Commodity Index has dropped to its lowest level since 1999. Amazon is coming coming back on the development of consumer devices. Has started to scale back work on projects such as a large screen tablet. An allwheeldrive version of the tesla model s electric car scores off the charts. The quickest sedan ever tested in the school of 103 on a 100 point scale. This tesla has a socalled insane mode that takes it from zero to 60 in 3. 5 seconds. In theernors convene setting of jackson hole, wyoming. The snake river in the foreground. Bloomberg is on the ground and we bring you the first of many interviews. Next. Erik coming up later today, the president of aol, bob lord, he will be with us to talk about how aol has changed its business focus in an effort to lead in an online world. New york fed president bill dudley tempered expectations of a september rate hike. There are many other fed governors we have yet to hear from. Over the next two days, bloomberg will be bringing you just that. Federal reserve bank of kansas city halts its annual su symposium. A gathering of policymakers and economic thinkers. Thats where we find Brendan Greeley and Michael Mckee this morning. Lets talk about the highlights thus far. Brendan the highlights are closer to where you are. Fed president s and centralbank chiefs from around the world are arriving today. We spoke to Esther George of the Kansas City Fed earlier today earlier yesterday. The action is in d. C. Where we got numbers from the bureau of Economic Analysis. If the fed is data dependent, what are they thinking . Michael if it were for the volatility in the market, they are thinking in moves up the opportunity for a rate increase because we are seeing strong growth not only in Consumer Spending but also businesses starting to contribute business spending. There was a build in inventories which may be a bit of a problem but we did not see a big hit to exports from the dollar. Some of the things they worried about, not so bad. People have been talking about the disinflation. We did not see it in these numbers and we dont see it in corporate profits. While the concerns was, do Companies Pull back because they think they cannot make money . 2. 4 . Ate profits come in a big turnaround from the first quarter. I put the question to Esther George and i asked her, do you worry about what happens to companies when they see profits and inflation go down . Ms. George we will watch and see how corporate earnings due over the next few quarters. When you look at what is happening in labor markets and Consumer Spending, those are encouraging signs. I think you should begin to see investment follow. Consumerwhen you see spending over 3 as we saw in the most recent quarter in this revision, the fed has got to be optimistic about what that means for production from companies, additional hiring and the possibility of inflation down the road. Brendan they are sitting here this week looking at the data but the broader theme of the conference is inflation. You were here 20 years ago when he last had an inflation conference. At that point they were worried about the taylor rule. The question now is, how do we create inflation . The theme may become Something Different which is watching what is happening in the markets even though things seem to be recovering. What does that volatility mean . That is the one piece of data we have left that is newer and the stuff coming out of the bureau of Economic Analysis today. Does that change the path of what the fed is going to do . Mike put that to Esther George yesterday. Ms. George we should expect volatility from time to time. We are in a period of some uncertainty. Questions about china. Questions about Global Growth. I think we should expect some volatility. What it means for monetary policy, i think is not yet clear. It is a cub location. A complication. Im not ready to say it has a particular longterm effect. Brendan Esther George is focused on the longterm. Erik thank you brendan and mike. There is lots more coming to you over the next couple of days. A couple of big guests in Market Makers tomorrow. Marty feldstein, the president of the kansas city and minneapolis fed and also president and commissioner of the bureau of labor statistics, erica groshen. Launching a Popular Exchange traded fund is a tricky business even for the likes of blackrock and state street. How did a pretty much on known 30yearold launch one of the fastestgrowing in history . Stay tuned and find out. Erik a beautiful morning in new york city. We are live from bloomberg World Headquarters in midtown manhattan. There are 6500 etfs in the world and more being created every day. Mostly by giant firms like lack rock and state street. Occasionally a little guy hits it big. Andrew chanin is the ceo of pure funds. He launched an etf that went from zero to 1. 4 billion in assets in eight months. Hes here now with the secret to his success. The success did not come immediately. Andrew certainly not. In the early days we launched funds and they did not take off. Global equity plays. In two dozen 14 we realized we had to rebrand ourselves. We had a vision of being first to market and being a leader in etfs. You cannot be second in market and be a leader. Trying toed and rebrand ourselves as the technology etf specialist. With our Cyber Security etf we have been doing just that. Erik your Cyber Security etf which trait under the symbol hack is what exactly . Global equitya basket that contains 32 Cyber SecurityCompanies Publicly Traded from around the world. These companies focus on all different areas in a Cyber Security space. Having a global diversified back basket like this could be a way for investors to play the market. Erik are all of the stocks in the basket Cyber Security pure plays or do they have to generate . What is your methodology you use . Andrew the International Securities exchange typically looks for companies that have market caps on over 100 million to start. They look at the companies that have a High Percentage of revenues derived from Cyber Security activities. Andrew how do you go about marketing and new etf against the Marketing Power of a blackrock or state street . Personally coming from the etf business my entire career, i have a lot of relationships i have been erik youre a child of the era. Andrew absolutely. We have seen this growth and so many people have been helpful in helping us get that message out. Something likes im security, about two weeks after we launched, the sony attack happened and it has been an onslaught of focus in that space. Being the First Company to provide the first etf to folks on this area makes it a natural part of the conversation. Erik your expense ratio, what does that translate to as far as income . Andrew cant go into specific details but we have strong partners. We have International Securities exchange, u. S. Bank and huge players in the space. For us, it is not necessarily about trying to get the biggest these of their management fee. It is about working together and having powerful groups on our side having benefit in promoting it together. Erik what is your next etf going to be . Andrew we did launch the first big data etf as well as the first mobile payment etf. We are looking at a bunch of different ideas that are coming from us or thirdparty groups that are interested in partnering to create more funds. Erik why is it that other companies have not seized this opportunity to create somatic etfs inside technology thematic etfs Insight Technology . Andrew i think a lot of hombre called other Companies Like to focus on broader. Some are focusing on currency hedge. Some focus on currencies. Some folks on leverage. We are one of the First Companies to think, what are those exciting growth areas within these technology plays and how do you create a fund for thats a peep of exposure to it . Erik are you concerned by what youve seen transpire over the last few days with some of the Market Makers putting wide did ask spreads on atf because they are having trouble figuring out the prices of the underlying stocks . Especially in the first 30 minutes of trading with prices have been all over the place. Andrew i started my career as a prophet trader a profit trader Exchange Traded funds. What any, i said opportunity. Some etf trading down 30 . The average of those companies should be down 30 but they werent. Some were looking at the market in seeing the etf leading underlying securities, that is an arbitrage opportunity. The educational story is, dont use market orders and be cautious of using stock orders. Once they get crossed, they can trigger more selling market orders. It is something you should be aware of and understand the etf. It was more of a market maker issue than some type of contagion. Erik thanks for sharing your story. Andrew chanin, the guy behind the Cyber Security hack etf. You can read more about andrew on bloomberg. Com. Erik youre watching Market Makers. Julie hyman has something on tesla. Julie it is a good morning for elon musk. Tesla is one of the companies doing well this morning. After Consumer Reports scored one of its vehicles above perfect somehow. This is the allwheeldrive version of its model s and it 100a 103 out of a possible from Consumer Reports because of its combination of power and efficiency. The magazine said for luxury vehicles, the internal furnishings of the car were not necessarily up to snuff. Interesting that it was more than perfect overall. That stock is trading higher. Solar city as well. Solar city was upgraded to an overweight at Morgan Stanley. Jim chinos recently said he was shorting the stock. The stock is down a bit over the last month. We have seen Solar Companies fall on financing concerns but Morgan Stanley says in the case of morga solar city they do not hold water to that. With your prices lower, solar becomes less attractive. Morgan stanley says that is not the case either. You can see solar city in white versus the guggenheim solar etf. Even though trajectory is different, over the past year the percentage change, both of them down by more than 30 , has been pretty much the same. Morgan stanleys argument is that solar city should not be trading in line with the rest of solar. Erik thank you very much. Julie hyman. Coming up in the next hour of Market Makers, the chief u. S. , Aneta Markowska. Erik good morning once again. This is the second hour of Market Makers. Stephanie is off. Lets give you a quick look at how u. S. Equity Index Futures are trading. It will be another update for u. S. Stocks. The s p 500 of 1. 25 . It will be up at the open unless something dramatic happens in the next half hour. Points, its in 619 thirdlargest point gain ever in yesterdays trading. We will bring you a look at our top stories this money. The economy grew faster in the Second Quarter than previously estimated. The first at 7 estimate was for a 2. 3 expansion. At 2. 7 a record increase in inventories may be a signal that strong growth will be tough to sustain in the short run. Jobless benefits claims fell to a low below the key 300,000 level. That level is important because its consistent with an improving labor market. Ukraine has breathing room now. A group of creditors has agreed it extendsate redemption rates by four years. Russia rejected the request. President obama is heading to norlins to celebrate the citys recovery from the most costly Natural Disaster in american history. Heading to norlins good new orleans. Those are your top headlines. The title wave of stock selling we saw this week undoubtedly began in china. The timeline of events from the selloff in shanghai to the disappearance of 300 points on the dow has become stuff of legend. The question is whether the made in china meltdown will be a recurring curse. That just a few bears. Done the first draft of history. Youve try to explain why in a very short number of days, why in the space of 25 minutes or so the dow melted down by 1100 points on monday. Peter it was crazy. We do need to step back and think about that. It was on your show as it was happening as the markets recovered, we say that was a hiccup, lets forget about it. We need to think about it. The u. S. Economy is strong. Gdp growing come on appointment down unemployment down, housing strong, etc. The chinese stock market is small. Even for the chinese, it is small in terms of their household and come it was a necessary correction. The market had gone way high and it was simply going back to normal valuations. The yua have gotten high and was going downn. Why should the u. S. Stock market because you . We try to answer that. Be crashing . It was crystallizing sentiments that people already have. U. S. Stocks had tripled from their lows in 2009. The quantitative easing and low Interest Rates made investors feel like this is funny money. Maybe we cannot trust these valuations. They are looking for any kind of warning signs out there. China comes along to say lets sell. Then, you have market following avior, trans following trans following trading strategy, momentum trading. All the momentum sellers are now selling on the downside and amplifying the downturn. Erik what do you think of the argument that i would layer on top of those fundamental explanations that Market Structure is something to do with it . Peter for sure. Erik we live in a world of etfs. Fragmentation of exchanges. We live in a world of dodd frank where the Worlds Largest commercial bank can no longer function as a shock absorber because capital prevents them from making markets. Is trythe old expression to catch a falling knife. Today. Even more true dont try to catch a falling knife. This looks like a great opportunity to buy, but dont buy it. It is too uncertain, it could go down more. Theres a lot of sentiment out there. It will take a while before the bug bargain hunters are willing to come in. Tuesday was down, wednesday ended up on the losing track. Wednesday was our big day and now thursday, maybe opening upward. Erik how long will it take the american psyche to adjust to the volatility in Financial Markets will be more extreme and more violent, even if its only over two or three days because weve had friday, monday, tuesday, nobody has we had black money. , the was these three days many flash crash in 2014. There was the flash crash itself with the tapered tantrum. Monday. D black they all happen for different reasons, but they are beginning to look the same. Across asset classes. Peter the fear indicator, fear gauge had been pretty moderate for a while. Markets are unpredictable, but one thing the academic finance people have proven is that volatility tends to persist, either high or low. When it spikes up like this, it doesnt go right back to normal again. It takes a long while before markets find out that is very revealing in a fundamental way. What do we really know . Erik will the vixen settle at again . Settle at 18 or 12 ge, home depot and j. P. Morgan chase fell more than 20 at the opening bell on monday. Was that reasonable . There isy knows collective agreement to say that current valuations are in line we collectively buy into that. Thatwe see now groupthink can disperse quickly. Erik thank you. Read his cover story on newsstands right now. Business week so good with the covers. On china. The country is headed for a recession. Stay tuned to find out why. Erik what is really happening in the chinese economy . Our next guest at the provocative point of view. He is the head of research at blacklight and a fellow of club University School of Energy Policy center. Columbia university. What is happening in the chinese economy . Good to see you again. On the last segment, its important to recognize that its not just the financial seeing, weess we are are seeing a real contraction in them role economy. Erik the world economy. Erik the chinese economy is contracting . Its shrinking . Chinese bears will tell you the growth rates have been slowing for many years, and that is true. In july,ants something new and important happened. Pricesst monday when oil cratered six or 7 was a real wakeup call that something was changing. We see it in inventories, building in singapore, Passenger Car sales down 6. 6 in july, Electricity Generation down 2 . Freight traffic actually contracting. A variety of statistics available on the terminal. For yourself. Its important to understand that as the fed gathers, we cannot be looking at oil as a tax break for the u. S. Consumer. There is an investment angle in asia that is important. Erik how do you square that with the comments that we get from people like Andrew Mckenzie whom i interviewed yesterday who said we are still shipping iron ore to china . Its not like the chinese arent buying as much or even more than they were buying before, its just the growth rates are not what they used to be. My answer would be its important to recognize that china has some of the best traders in the world. Ellie wishon is cheap, even if demand is contracting. Valuation is cheap. Hina is short copper it is short oil. Makes perfect sense when prices get down to these levels that chinese have strong import demands, but that is not the same thing as consumption. People will use the apparent consumption we just using to assist x to guess what it is. This statistics to guess what it is. Its more important to be focusing on these industrial statistics. ,rik going back to commodities you are drawing some of your conclusions on the basis of Commodity Prices and other things you see mother indicators of what is going on in the real chinese economy. Have Commodity Prices corrected enough to reflect the recession you believe china is undergoing right now . Probably not come unfortunately. Optionsook of the oil markets and detect a clue as to where prices might go. The Options Markets say theres 0 chance for a 20 price you might see both of those prices. Whether its php or any companies he mentioned, you have to be careful here that in the near term, what financial itkets are reacting to sporadic bouts of lack of confidence, how that will be repaid. One of my favorite indicators is the bloomberg highyield Corporate Energy bond index. Most of the damage has come from coal companies, not oil and gas companies. The top performers in the index are russian oil and gas companies. The next shoe to drop a some kind of russian Production Cut over the next 12 months. We cannot skip that step. Erik great to have you back on the show. I look forward to our next conversation. The chinese economy is in recession. He is at blacklight research, with us from boston this money. Our gray skies clearing . Is another market Storm Brewing on the horizon . Why are next guest is worried about next month our next guest is worried about next month. Erik stocks are not as cheap as they were on monday or tuesday afternoon. Not after the dow 619 point gain yesterday. Is now the time to buy before those stocks get even more expensive . Ian is the director of equity i gather you dont think they will get more expensive. You think they will get cheaper. Why . Ian i think we will get cheaper lower prices. Your definition of cheap depends on what you believe the earnings are. I think the earnings are going significantly lower from here. They may not be getting cheaper on a valuation basis. Ian i dont think they are. If you look at the actual growth rates, topline, there is almost none. Even Earnings Growth will be in the high Single Digits at best. Could be down depending on what the energy patch does. Im not sure why a market trading at 14 times earnings is that exciting or cheap. Erik why do you feel so certain the economy will slow down . Because of whats happening internationally or whats happening here at home . Ian almost all the time the early cyclical index is get killed, these are the lead indicators. If you look at metals, energy, semiconductor index, all of these including the transportations are pointing toward a much a global slowdown. A real global slowdown. Some of the markets are reflecting that around the world. Ours is not. Im pretty sure the west u. S. Is not immune to that. We are growing a little over 2 . Maybe 2 next year. I dont see why that makes the market that exciting here. Erik the investors who are pricing the underlying securities and transports or commodities or semiconductors are looking beyond the shortterm economic data, the stuff we saw this money come in the backward looking data on secondquarter gdp saw this , the backward looking data on Second Quarter gdp. Ian the markets have always been a leading indicator. Those specific subsectors have always been the lead indicator for the u. S. Economy and global economy. To me, and makes sense that if you are betting all the transportation and commoditiesrs and are all going lower, that tells me a significant divergence from the entire market, they are telling us something is wrong. There is no doubt that it is. M a and can buybacks, Central Bank Intervention and support hold the market here relative to where the fundamentals are going . Erik how low do you think the s p 500 goes . Looks like it will open another 20 plus points. If its going to bottom out, where is it going to be . Ian probably around 1700. In six months. Which would put us in a bear market or close to right around the 20 decline from the highs. Athink ultimately there is shot that earnings will be down yearoveryear. Cane done as much as we from a Central Bank Intervention that there is not much left to do. As far as investor confidence, it seems to me these wild swings are not particularly good. Funds holdingsive an emerging market bonds with no liquidity to get out. At some point when they go to sell, there will be pressure on the 20 markets. On the equity markets. Erik coming up, what did this mornings gdp revision signal . A big lineup of guests. You will see those people tomorrow startin. Erik here we are just a few minutes from the opening bell in new york city. Michael regan is here with the three things you need to keep an eye on today. Also joining us with the chief u. S. Economist at louise analytics. Lets start. Mike gdp is what we will be talking about today. 3. 7 growth in the Second Quarter. Way above every economist estimate. Business spending is up, Consumer Spending is up. Bignews potentially is that building inventories helping to spur the growth. Bythis large increase inventories and suggests that production might be restrained in the Third Quarter. We have to get rid of those inventories. We have to be ready for a much slower reading on Third Quarter real gdp growth. I looked, gdp was grown by 1. 8 in the Third Quarter. We are looking at 2. 2 . Erik what about corporate profits . I will take that. As long as we have a very low Interest Rates. That will be the case for some time to come. Minimal profits growth ought to be enough to prevent stock market from entering into a bear market. This is good news for equities, tells me that dividends will continue to grow. Becomehere is no need to concerned about the nearness of a bear market inequities. In equities. Right now, the fed is very much focused on Financial Market conditions as opposed to the data via gdp it gdp or the employment number. The fed will not be hiking rates in september until the fed is convinced if it does raise rates, it does not risk another round of Financial Market instability and doesnt risk an Even StrongerDollar Exchange rate that would perhaps make it all the more likely the u. S. Ends up importing price disinflation if not deflation from the rest of the world. Mike stronger dollar really. Urting tiffanys sales sales dropping to 991 million from 993. On a Constant Currency basis, sales were up 7 . Using these companies currency forwards and derivatives like that to hedge against their currency risk. Near ceo is thing the dollar appreciation was a lot stronger than expected. The dollaris saying appreciation was a lesser than expected. Just how poorly s p 500 sales even after we hedge on Energy Companies whose sales were 33 the rest of the s p 500 a. 8 increase. My impression is that companies will be less inclined to increase Capital Spending or to add to payrolls. Equity a private great story out about private equity basically raising a lot of money to buy energy assets. She quoted the energy banks and they raised 100 billion by the strategic buyers, the m a companies have as much cash, so private equities is finding a spot here. The biggest land sale in north americas history, 850 million louisiana gas properties. As far as energy is concerned, we are looking at quite a mess in highyield energy space right now. The junk bond spread for Energy Companies is over 1000 basis points. Let me quickly add that that same spread for highyield companies that have a great deal of exposure is also over 1000 basis points. Julie is following the early trading now that the New York Stock Exchange and nasdaq cap open for business. A big day. Share with us some of the things youve observed. Julie as we see stocks get off to a start here this morning, we are seeing the dow having its biggest twoday gain in about six years. Quicklyings change here. The nasdaq having his best couple of days since 2011. The nasdaq is also now positive on the year once again, up. 5 on the year. None of the major averages have recouped the losses we have seen over the past week or so. The rally continuing into a second day here. Taking a quick look on my groupsrg at what are doing the best, tech seems to be leading once again. It is goodap to see where we are seeing the buying concentrating today. Tech was the leader yesterday. Continuing its rally today. In terms of the individual stock movers and stories we are denying aere report it was considering making a bid for saint jude that would value saint jude at about 25 billion. They are not making this offer. Saint jude is in the process of thoratec. Yesterday, this stock closed at nearly a 13 year low. Snapping back by 10 today after saying it is going to cut production and cut its Capital Spending because of lower Commodity Prices. The moves will cut about 10 of its workforce here in the unites states. Theyve been battered by whats been going on in the commodities market. I wanted to look at how the 1. 7 o his trading, down as the currency impact hit sales. A different story for signet. They are the owner of zales jewelers in the United States. It has about 13 of its sales in the u. K. But is mostly concentrated in the u. S. Its comparable sales up is mostly concentrated in the u. S. A lotares doing better than tiffanys today. When you see a market like this with 442 out of the 500 or 502 stocks rising, what does it tell you . Sentiment is improving. We dont want to forget about the reality is, we are still down from our highs and still down for the year to date overall for the market. Erik down for the year to date, but thats not a net bull run. We are moving in the right direction right now. , inimportant take away is all likelihood, we are perhaps not entering a par market this bear market because profits continue to grow. Not entering a bear market. Erik ian was here just a few minutes ago saying we will enter a bear market and see the s p 500 dropped to 1700 because of what he sees investors thats how he sees investors pricing in and transports transports and commodities and semiconductors globally. The stock trader will tell you the stock market reflects the economys fundamentals. Economists might say its the opposite. , does a big dip like this in the market affect peoples confidence in buying a new house, buying a new car . Will it have an effect on Economic Growth just watching these paper lists pileup . As long as the Employment Outlook looks favorable, it will not. Growth for hiring will slow down, but that doesnt add up to a recession. Unemployment rate rising over several months before i believe the possibility that equity prices might be headed lower. I cannot get away from the earlier argument. As long as we get Earnings Growth outside of energy, equities should do ok. We will not see the equity market glut by 10 , but 35 annual gains. Go up by 10 . Convinced thatbe financial conditions have stabilized enough that a rate hike does not put additional downward pressure on equities. Erik lets talk about spreads. A chart that you have given us helps illustrate a point you want to make. Right now, the highyield bond spread is just over 600 basis points. Go back historically, when we look at the previous two recoveries, the first two rate hikes occurred with a highyield bond spread at 400 basis points. How is highyield doing outside of energy . We look at these index materials aret doing poorly. Highyield outside of energy and are better by 100 basis points from one year ago. The market is not as healthy or robust as it was 12 months ago. But nothing like 2000 and. We are not seeing that broadbased weakness. Nothing like 2008. That warns us that moving , the highyield default rate will climb higher. That makes it more of a risk to buy into the highyield bond market even though spreads have widened considerably. I think the credit cycle is a top this peak may last for some time. Forward,is that moving the default rate is much more likely to rise than to fall, spreads will remain above the readings of previous recoveries and as a result, perhaps the best news is behind us as far as the credit cycle is concerned. Thank you very much. Can there ever be such a thing as too much goodwill . The answer is, most definitely. It could drag down returns. Erik you may find it hard to believe, but there is too much goodwill in wall street. Not talking about whether Goldman Sachs likes Morgan Stanley, we are talking with the premium one companies willing to pay for another. Why should goodwill attract attention . Its concerning because this is the first evidence we are seeing that Companies May be overpaying for acquisitions. The big m a freeze beginning last year, we are seeing goodwill pileup, which signals that if the are paying too much for what they are getting, these deals may disappoint. Erik we are looking at a chart that shows multiples to revenue in pharma. Pharma has been a great industry to watch because the multiples have risen so quickly into medically, its been crazy. Quickly and dramatically. Pharma, there is a bit of frosting us now because companies are paying so much for a lot of businesses that dont generate much revenue yet, nothing in the way of earnings. Its a big risk for investors. Erik desperation on the part of the ceos. Absolutely. Companies were under immense pressure after the shareholders activist shareholders were everywhere. Everyone started to do deals. It became this frenzy and its getting really frothy now. Erik these questions come up on conference calls. What do Companies Say to justify the prices they are paying . Companies always say there will be lots of synergies. Maybe there are, but that is hard to work towards. That is not a from number. Firm number. They say they will be able to fire people, do things like that. That is hard to actually do. We will see if any of that plays out. Ive been around for longer than i like to count hi deal multiples are often a sign of a frothy market. Absolutely. It feels like a bubble. Erik this was very much the case in 1999. The multiples being paid in tech world beyond anything that anybody had ever seen before. Sure enough, markets cracked in march of 2000. The economy, china, was happening in emerging markets this is another real threat that people are not taking seriously yet because stocks are still rising on deal announcements. Next year could be pretty telling. Erik thank you for bringing us the data. You can find her story on bloomberg. Com. Lets check in with the latest headlines. Two dozen people are being held by chinese authorities investigating the deadly warehouse explosion. The government is reacting to public pressure for action after that disaster two weeks ago. The blast killed 139 people and injured 700. Philadelphia investments might lace American Express fidelity would seek new partners had better terms. Windows 10 is now running on 75 million devices. The new operating system was introduced less than a month ago. The company told shareholders the new windows will help one billion users within three years. We will take a quick commercial break. See you on the other side. Erik u. S. Stock exchanges are open. The indices moving higher, the dow up 200 points. This bring back julie hyman for a look at some of the big movers. Julie second day of a rally for the major averages. As weve seen over the past several sessions, there could be a lot of volatility today. We dont know if stocks will hold onto the gains. For right now, all three major averages up 1 . I want to talk once again about freeport and copper and gold. In the s prforming 500 with an 18 or so gain coming having its best day in seven years. This is coming from a very low the company said it would cut production and cut its Capital Spending to try to save money. Normalized this is a percentage adjusted they have underperformed copper and gold by quite a bit. The stock is down 75 over the past year. Weve seen copper fall by 28 and gold down by 13 . Freeport has done worse than the underlying commodities. A couple of earnings reports i wanted to mention. The companys earnings coming out beating estimates. Revenue meeting estimates. It makes chips for the apple iphone. Pvh up 5 . Beating estimates, raising its forecast for the full year. Like many of the Apparel Companies we talk about, its all some downward pressure from currencies. Erik thank you. Earlyhyman with morning movers. The new york fred president rate on the outlook for a hike in september. In his opinion, it is less compelling for the fed to move on the 17th than it was before. Our next guest says too many people are taking his words at face value. Aneta markowska is the chief u. S. Economist. Welcome. Lets listen to what bill dudley had to say specifically about areinternational pressures having on domestic economy. The slowdown in china and sharp fall in Commodity Prices are increasing the strains on many emerging market economies. This could lead to a slower Global Growth rate and less demand for u. S. Goods and services. Erik why shouldnt we take a Statement Like that and when it with the less compelling that should draw an obvious conclusion that the fed is on hold until october . Stephanie its a question of magnitude. Aneta this will have a negative affect on the west growth outlook. Exports to china make up 1 of u. S. Gdp. You are talking 4 of gdp for all exports to the emerging world. This will hit the financial sector, which makes 12 of gdp. The domestic economy will not be impacted by any of this. You are seeing momentum in housing, sing pretty good numbers out of the consumer sector. Good Income Growth in nominal terms, in real terms, even better. Domestically, you have to look here at home, the economy is doing much better. Erik couldnt there be some second or third impact on the consumer economy in the service all of thee because figures you said are actually othert, but there are economies that are more impacted by the slowdown in china. They are more important trading partners aneta . It is certainly possible. Even if you look at total exports out of the u. S. , that is 15 of gdp. This is still largely a domestically driven economy. If you look at whats happening at home, theres a lot of room for housing. We are lagging in terms of construction activity, lagging half a Million Units annually. Inventories are pretty neutral. Theres a lot of upside for housing. Erik you feel certain the fed will move in september . Aneta that is not a strong culprit in this market volatility continues to my think september will be off the table. Yesterday, the case was not so compelling. He said in two weeks it could be given theling data my will say september is a more compelling case against. Erik what about the problem that they run into . Janet yellen told us this would be a data dependent thing. Say you and everybody else the fed cannot move in september because of Financial Market conditions. Aneta dudley clarified this yesterday. When the fed talks about dated dependency, it is marketed as well. It is not just what the data is doing today. Market data as well. It is problematic for investors if the fed redefines its definition of what the data are as it sees fit. Aneta a lot of investors i talked to have been saying for the last few years that the fed keeps moving the goalposts. Perhaps thats the problem with policy when you look at what happened last week, it was after the fomc minutes which is wishy washing and uncertain that the u. S. Equity markets started to sell off sharply. Markets dont like the fed redefining the goalposts. Which would make a strong case for if things stabilize a little bit, lets move in september because that will send a strong message to the markets, to the country as a whole that we are confident that this economy is Strong Enough to withstand it. The markets would receive it as a positive. Erik Aneta Markowska is the chief u. S. Economist at a societe generale. Startingeup of guests at 8 00 tomorrow. President s of the cleveland and minneapolis feds. Good morning, it is 10 00 a. M. Here in new york city. 3 p. M. In london, and 11 p. M. In tokyo. This is the bloomberg market day im olivia stearns. I want to start with a check on the markets. U. S. Stocks are rebounding again today. This after the s p posted its biggest rally since 2011. You can see the dow is up 167 points. The nasdaq up about 60 points. The big news this morning, we had Second Quarter g. D. P. Coming in at a revised 3. 7 growth. So that boosting sentment here on wall street. Time now for your top headlines. Olivia breaking news. Economic data out right now. July penny home sales, they are out. Hi, julie. Julie resaw rebounding pending home sales with an increase of half of one percent. Thats less by half than what analysts had anticipated. Still again represents a rebound from revised 1. 7 drop. The prior month in june