Transcripts For BLOOMBERG Bloomberg Best 20170902

From qe to qa, conversations on markets across the globe. 4 growth is good. I dont think 4 growth can be sustained. Uncertainty dampens larger trades. Warren buffett raises his stake in north america. And Brian Moynihan speaks about the high stakes of regulatory reform. Those are the most important things for us. Capital, liquidity, things like that. Straight ahead on bloomberg best. Julia welcome. Im julia chatterly. This is bloomberg best, your weekly review of the most important reviews and interviews. Hurricane harvey again to batter the u. S. Gulf coast and the city of houston. The big storm was the big story. Floodwaters overwhelmed swaths of houston as Tropical Storm harvey continues to inundate. Help us with perspective on how big this issue is. In terms of the houston damage, it is unprecedented. We are seeing places flood that dont normally flood. In terms of the industry itself, we have started to see refinery outages rampup. We are seeing more and more shutdowns as the storm starts to hit major infrastructure in the region. We are looking at a production impact and Refined Products impact. And for the First Time Since the shale boom, we are seeing this impact for products for crude. I have a chart looking at gas prices. We saw a real surge a couple of days ago. We see it at a twoyear high. A lot of refineries have been taken offline. That is where you see gas prices spike. The japanese Prime Minister saying apparently north korea has fired a missile that passed over japan airspace. It appears a north Korean Missile has flown over japan. We have begun to gather information and analysis and we will do our best to ensure the safety of our people. The government wanted to ensure citizens it was aware. They determined it was not headed for japan. It has tried to assure people we are on the same page with the u. S. And south korea. The government has also stepped up pressure on china and russia to take a greater role to try to tame north korea. Moments ago, President Trump released a statement. This regime has signaled its contempt for its neighbors and for minimum standards of international acceptable behavior. All options are on the table. I dont think a military response is on the table. As far as sanctions, i think all of that is being examined. Breaking news out of china. The foreign minister saying china does not favor unilateral sanctions against north korea. He says china is working with the United Nations responding to north koreas missile test. More about collective response is what china wants to see. The latest tests came less than a month of the toughest sanctions yet. The world is united against north korea. There is no doubt about that. They admonished pyongyang, but are they going to back that up like what the nikkei newspaper reported, that japan and the u. S. Will be pushing to impose some sort of oil embargo or strict Oil Sanctions on the north koreans. President trump kicked off his campaign to overhaul tax policy. He just finished speaking in missouri where he Push Congress to reach a deal on taxes. President trump i am fully committed to working with congress to get this done. I dont want to be disappointed by congress. Do you understand me . Did we learn anything about the direction of tax reform or was it just a speech . It was just a speech. It got the ball rolling publicly. Republicans have been working on tax reform for some time. This is going up in public and making the case. The details have still been notty, they still have to figure that out. They need to turn this into a bill they can sell. Lets focus on the cost of harvey. A new analyst, it all could reach as high as 90 billion. The storm made landfall as a severe but conventional hurricane then wandered to houston, the largest flood in u. S. History. Before the latest call for major taxcut he spoke to texas and louisiana about hurricane harvey. There has never been something so historic in terms of damage. That revealed how the storm may add new limits to trumps goals. When lawmakers come back many want to attach relief to a shortterm spending bill and a debt ceiling extension or expansion. President trump talked earlier about forcing a Government Shutdown if his border wall funding is not met. There are fiscal conservatives who want any spending increases to be offset. We have a new dynamic, this may reduce chances of a shutdown because of the optics and the reality of not wanting federal services suspended. It also adds more costs to the max. August results have missed for the past six years. Incentive estimates, Bloomberg Michael mckee at the labor department. Another august disappointment. Just 156,000 jobs created. The unemployment rises to 4. 4 that is not all. Earnings of 1 10. The annual rate unchanged. Core inflation is increasing at only 1. 4 , down from 2. 1 six months ago. So, the fed is focused on wages and inflation to the extent there is a reflective in that. This is a week report. We had a gdp number of 3 . A jobs number that is still very good. If i were to tell you Inauguration Day we would be at 3 gdp, you would have said those are great numbers. That would be an amazing accomplishment. Well, were there. Overall we are very pleased with where we are. We still know theres a lot of work to do. The president is focused on that. We think we can grow the economy further from here. Still ahead, conversations with bank of america and ceo Brian Moynihan and the biggest shareholder, Warren Buffett. Plus, governor kuroda in an exclusive from jackson hole, and more of the weeks top business stories. A tie up in china creates the Worlds Largest energy company. This is bloomberg. This is bloomberg best. Lets continue on our global tour. Uber found a new ceo. He succeeds the cofounder Travis Kalanick who left after tremendous investor pressure. Travis and his allies were pushing for the ge ceo. Benchmark and will its allies wanted meg whitman. The dispute has turned to litigation, suing travis in court. He is a great pick. He has been ceo of a Public Company which uber hopes to be. This is a sign that perhaps it is going to be his first job, to prepare these divisions on the board. He met with uber employees wednesday and said he thinks the company should go public in the next 1836 months. It seems pretty far to me. It is a distant thing. This is a guy who ran a Public Company for a long time. He said the importance of going public at some point. Whole foods got cheaper. Amazon completed its purchase of whole foods today. Prices on items from fish to produce have seen prices slashed. They are down around the store. The marks down produce like avocado and apples. Bananas. Things like that that people think of as whole foods staples. One major change, there is a stand of amazon echos they are selling. The biggest ever deal for a new treatment to diversify the company. He has been saying for more than a year that it needs to go out and do something big, planning on taking those billions of dollars in cash and looking for how it was going to diversify the company. It is one of many names that have been talked about as a potential takeover for somebody. To an extent, yes. Today the announcement was a surprise for some people. China is creating the Worlds Largest energy company. We talk about this all the time. This is an enormous scale. We are talking about a tie up between the countrys top coal miner and one of the countrys largest power generators. In terms of the size and scale, assets will be 271 billion u. S. Dollars. In terms of revenue, the second largest amount in terms of Power Companies in the world. In terms of capacity they are number one. What this points to is a new direction for soe reform. It is about merging Stateowned Enterprises to create synergy. We expect to see more in the power sector going ahead. Apple is planning to change the way you use your phone. Images have been viewed by bloomberg news. A major feature is missing. The home button. Apple touched another record high. Walk us through what we have learned. It is the biggest thing that people are going to notice, a lack of a home screen. It is going to be a gesturebased way to turn on the phone, and cameras to have facial recognition. The screen is going to get more real estate to be bigger. The phone is going to be thinner and have a faster processor. Apple is joining the battle for toshiba chip business. We have heard rumors apple might the in the mixed before what is the latest . There are many plot twists here. Toshiba has been trying to sell this for months. They desperately need the cash. They were getting close to a deal with the american ships maker. Apple is jumping in. Apple has been in flux according to the sources we have talked to. Bain put in a bid that was 19 billion. They need to figure out what they are going to do with western digital. They say they have rights in deciding who is going to get this company in the end. The signs of strength for the economy in china, 51. 7 in august compared with a forecast of 51. 3. The latest indications of growth are pretty much suggesting a steady as she goes for the chinese economy. The pmi rose slightly coming in at 51. 7 four august pointing to slight acceleration in growth. Some of the underlying indexes were pretty positive. We have seen new orders picking up. And critically we also see big banks in the input and output prices. That story could be sustained for a few months longer. The latest data showing mario draghi may need to add caution when he discusses stimulus plans next week. Inflation picking up more than economists forecast. Is it the core rate of inflation we should be focusing on today ahead of the meeting next week . That is right. It was steady at 1. 2. The increase was driven by fuel costs. In august of this year fuel costs went up and that is in contrast of august of last year. That caused the increase in the year over year level which is of little interest to policymakers because they have to look at domestically generated costs. The latest round of talks of brexit ended in a stalemate. Both sides deadlocked. It is clear the u. K. Does not feel legally right to honor obligations after departure. Lets continue to Work Together constructively. Was any progress made this week . Not at all. There was Technical Work on some of the complicated stuff but when it comes to the politics these two sides are as far away as they have ever been. The Biggest Issue is this bill that the eu wants the u. K. To pay which could be a hundred billion euros. The thing is, it is becoming clear today the u. K. Is an thinking it owes anything. Try to bridge that divide, it is almost impossible. A bloomberg exclusive. The ecb meets next week to begin discussions on a stimulus for 2018. The final decision could be delayed until december. They have a lot to do and not that much time to do it. They are starting next wednesday and thursday to formally discuss what they do, but not just that, suggesting it is little chance of a deal in september. The complexity of this means you really cant rely on october 26 either. December 14 might be the meeting where they get to be announced. That is not until the end of this year. You are watching bloomberg best. The biggest shareholder in bank of america is now berkshire hathaway. Berkshire will buy 700 million shares, locking in and 11. 5 billion gain. The dividend we will get now, bank of america has increased their stock dividend. We will be getting 30 plus Million Dollars more annually. We would exercise our warrant. It was fairly automatic. Is this your philosophy of finding management over time, or is this more just the deal . It is management we believe in. I follow the bank of america since i read about it 50 years ago. They got in trouble. They made acquisitions. They were insignificant trouble. That is like a great athlete being in the hospital you have to get them back in shape. I came in at a time where people were critical of the institution and the management. I believe they were wrong. I got the idea in the bathtub in 2011. I called Brian Moynihan and we made a deal very quickly. Bank of america is dependent on rates. The rates go up, they make more money. Do you think that is going you are right about what you say. They are doing fine currently. Brian went through those one by one. Some were expensive and timeconsuming. I knew we could get the job done. It took years, very tough job. They are a retail bank compared to jpmorgan or Something Like that. It is quite an institution in it will do burn it better earnings wise if rates do move up. It has been doing better quarter by quarter. You own 7 in the future, is it more likely to be 10 or 3 . It is likely we dont sell any. They have had a history of repurchasing their shares. Our 7 may be a touch less than that. It will go up if they repurchase more shares than they issue. I would guess our percentage would be higher. Coming up, erik schatzkers interview with bank of america and ceo Brian Moynihan. It is too complex by everybodys admission. This is bloomberg. Julia welcome back to bloomberg best. Central banks gathered at the jackson hole symposium. In addition to speeches by janet yellen and mario draghi, plenty of conversations on the sidelines. Lets start with boj governor haruhiko kuroda. But in the u. S. And in europe, inflation rates are actually close to their target, close to 2 . In japan, the inflation rate is still 0. 5 , far away from our 2 target, so there is some difference between u. S. And europe on the one hand and japan on the other hand. Wages are not rising so fast, that is true. Prices are not rising. Here, there is some kind of differentiation in the mindset, strong among business leaders, labor union leaders. They tend to be cautious in raising prices. So what companies are doing his they are heavily investing in laborsaving equipment, and so on and so forth, and also they are changing the Business Model so as to reduce labor content. By so doing, despite some wage increase, it has not been rising, so they are not required to raise the prices. They are doing well. Gdp growth up six quarters in a row. Exceeding on growth, and maybe something has changed to the degree that does inflation matter so much . Japanese households like inflation. If you have the growth . I dont think 4 growth can be sustained. Probably around 2 growth we can obtain this fiscal year, and even in the next fiscal year, close to 2 may be possible to obtain, but 4 growth his somewhat unusual, but i am quite sure this 1. 5 to 2 growth can be sustained in the coming years. I think we have been consistent on the strategy of looking at the economy, our medium run outlook, moving a little preemptively in terms of we dont want to wait until both of our goals are met. We have learned over time that is not a good strategy. We have been moving. We are well below what a taylor rule or other rules might tell us where we would be at this point, so we have been patient, gradual, and i think it has done pretty well for the economy. Do think the pace has been appropriate . There has been some concern, Financial Stability concerns expressed, prices of assets elevated. Do you see any reason why you would want to move faster . We have to be concerned about Financial Stability. These issues loom large especially as Interest Rates have been as low as they have in. There is some pricing in the equity markets that look different than historical values. Part of that is earnings, but also because Interest Rates are low, so we are focused on that. I dont think that is a significant risk, but that is another factor that feeds into my view that a gradual reduction in accommodation is appropriate for where the economy is now. Julia Interest Rates were just one issue. Several investors discussed the state of Global Markets on bloomberg television. David westin spoke with evercores ceo on the impact. The hardest thing to measure in the propensity to do m a is the confidence or what is sometimes referred to as the animal spirits of corporate leaders. Easy to measure is equity prices are good today, debt is accessible and reasonably priced, the economy is growing at a reasonable pace, so all of those things support m a activity. The one critical component which there is no governmental statistical measure of is how confident do ceos feel and how predictable do they feel the next 12 months. Nobody once to do a deal right out of the gate that looks, why did you do that . And so, uncertainty definitely dampens particularly larger m a transactions. There are also violations. Given that valuations are high and they look like they paid too high . Valuations, you have to remember of the valuation of the buyer stock is also high, so some of these transactions are down on a stock or stock basis, so you are trading one fully valued currency for another fully tight currency. Second of all, debt is very available and very cheap. Literally any transaction that a company does for cash, for debt, is accretive and pretty strongly accretive. That is not the way i believe you should measure a transaction, but in the short run, it does have a very positive effect. Are passive instruments and etfs in particular distorting the stock market . I think they are temporarily distorting the market because they are distorting individual securities. People buy the same names that are the big weights of the index and push them higher and higher. This will not last longterm. It doesnt make sense. Is this why value is out of style . The value stocks are what i call orphans these days, just left out and become smaller parts of the index, less and Less Research being done on these companies. What about the fact that value managers are underperforming . That surely has to play a role. It becomes a selffulfilling prophecy in the short term. We have learned that once everything becomes a common trend, everybody believes in it, everybody thinks these orphan value stocks will outperform, once that becomes conventional wisdom, it never plays out that way. You have been at this 34 years, and longer if you include your career before that. Relative to what you have seen, john, how would you characterize the stock market now . It is an interesting time. There are some pockets of opportunity that are really special. If you do your homework now, it really can pay off and you look to these names where they have been neglected, misunderstood, and left out. This is a fun time to be doing research, thinking about industries and sectors where there can be some hidden gems there. Julia lets revisit erik schatzkers exclusive interview with Brian Moynihan. They set down on the date that Warren Buffett became the banks largest shareholder, and the conversation began on that topic. What kind of input are you hoping to get from Warren Buffett . I think he would say the same thing. He has found our stock for six years. It is not something he did in the last 24 hours. He has been a big shareholder and an outstanding contingent interest. I talked to him once in a wild. He likes how we are running the company. He said that to david. I dont think he would invest if he did not like what we are doing. Our job is to continue doing a good job. The Treasury Department has proposed regulatory reforms for banking. A lot of those can be accomplished without congress. If secretary mnuchin were to get everything he wants to get done outside of legislation, what would it mean for your bottom line . It would be good. I dont have a number for you. If you think about, and there are three or four things that are important. Number one, the leadership in the agencies, people who have to get through congress. There are rules that have been pulled back or rethought. There are rules that have to be changed and actual legislation. What the secretary did is get input from investors, analysts, companies, professors, and said here is a set of principles we have to fix. The key one for us would be capital, liquidity requirements and capital Technical Rules and allowing more access to our capital account when we have 20 billion excess after the stress test. Let us put that best in the market so somebody can use the capital because we dont need it to grow. Those are the most important things, capital liquidity and things like that. Trading market oversight . Voelker is too complex by everybodys admission. The question is what would that principles preventing a straightforward execution . You have fivesix agencies working on different sets of principles. They all know it is too complex. The question is how we will go about it. Now we have to figure out what we mean by that. We dont have proprietary trading. We are not doing it. The question is how many times to i have to prove it. Thats where it gets a little bit tricky. Julia you are watching bloomberg best. Lets return to our review of this weeks top business stories with earning reports from companies around the world. The Worlds Biggest Oil refiner sinopec trading lower,. 5 , this after posting a 40 jump in firsthalf profits. You have to say this is down to downstream operations. Clearly, rish, yeah. The stronger oil price up 30 from last year is a key part of what we are seeing in the positive results across the three big major Energy Producers in china. Sinopec adjoining the others who reported last week stronger earnings. It is the best profit in the first half for sinopec since 2014. Net income up 4. 2 billion, so the chemicals unit in sinopec driving and has driven the firsthalf profits. And that stronger crude price. Shares in best buy down as much as 11 , facing the biggest reversal, the biggest intraday decline since january 2016 despite earnings that show the best sales growth in seven years. Earnings were actually very good. They posted the best sales growth in seven years. If you look at my terminal, it shows that they are. Sales growth of 5. 4 was double the forecast. The company also increased its forecast for fullyear profit and revenue, so we initially saw shares rising, but when the ceo got onto the call, he sounded very cautious. He said that todays good results cannot the scene as a new normal in the level of growth may not be sustainable, particularly the Fourth Quarter around the Holiday Season when we see a lot of promotional activity. It was the ceos comments on the Earnings Call that sent the shares tumbling today. It appears to be another nail in the coffin for athletic leisure. Finish line cut is forecast. Shares at one point calling the most on record. You are looking at a spillover affect and nike and under armour and foot locker. That has been the bright spot, athletic apparel. The fear is that if that goes away, what will replace it . For the Sporting Goods guys, this is a big problem because theyve gotten used to inflated sales, and going back to normal wont be good enough for investors. For everybody else, it could mean we have to find a new trend. To what extent do you think retailers were caught off guard by this . I think it is a big problem for retailer across all apparel retailers, they moved too slowly. Chinas biggest banks be earnings for the Second Quarter, benefiting from resilient Economic Growth and the governments deleveraging campaign. Bank of china saw net income increased by 23 in the Second Quarter. They are one of the top for banks. The other three all saw an average of net income increase of 3. 5 . The strong, robust economy has helped, but it is the net interest margins that have been pushed up, particularly as a result of interbank lending. These four vendors, money market rates have been pushed up. Not so much the small banks. The other point of interest was Wealth Management products. Those have fallen off, but more traditional loans have picked up strongly, suggesting the government is having some success in deleveraging. Porsche released a model with improved fuel economy. The car company will also offer a plugin hybrid version. The question is the future development and use of technology. We will have to see now, but the truth is, the Diesel Engine and Combustion Engine will be important for a long time to come in order to reach the c02 values. One should expect the Combustion Engines to stick around for a while and to set a date for when these engines might no longer be there is too premature. Diesel is important for maintaining Carbon Dioxide levels. We could not reach the lower thresholds without it. It seems like they are phasing out diesel to some extent. They also told me it is not important to their dna as a company. It is important to the larger industry, their Parent Company volkswagen, as well as mercedes and bmw, but to porsche itself, diesels only make up 15 to 20 worldwide. They were able to they them out in the u. S. In 2015. If you are driving this weekend, get ready for higher gas prices. The pipeline that runs from houston to new jersey, they dont have the supply. The blue line is the colonial pipeline. The red dots are the inverted spread between branded and unbranded gas. Unbranded gasoline is now pricing higher than branded gasoline. Talk me through the supply issue. How long will that last . The main problem is a lot of refineries down in texas. That is the main reason why the colonial supply line cannot supply the whole area from florida to maine. The main areas of risk are florida, north carolina, south carolina, virginia, and georgia. Those areas really lie on the pipeline. The situation is not as bad as it was 10 years ago when katrina hit because inventory levels in the region are much higher. Indias economy grew at the slowest rate in three years. Companies and retailers spending ahead of the sales tax rollout. Fifth straight quarter of slowing growth. It has been difficult for Prime Minister modi to stimulate growth. Gdp in the Second Quarter coming in at 5. 7 from year earlier. Economists were looking for 6. 5 . It was 6. 1 the quarter before. The main reason has been uncertainty over gst rates. This was the Second Quarter performance after gst kicked off on first of july. Companies in the manufacturing space were destocking goods and products and not producing because they were not sure about the tax rates applicable under gst. The fact of demonetization and how that would play out as well. Economists say this is disappointing. The growth has fallen when they were expecting a rebound. Interesting to note is the function for all our bloomberg subscribers, ratt. This is bloomberg Credit Ratings trend function. I typed in fitch, the region china. It has upgraded 17 chinese companies, downgraded 14. Another great function is refo , refinery outages and offense. Events. If you type in u. S. Gulf coast, 2500 are out. Julia there are around 30,000 functions on the bloomberg. Maybe they will become your favorites too. Here is another function you might find useful, quic. Here is a quick take from this week. Fish are a renewable resource. Large numbers can be caught with little or no effect on the population because of natural reproduction. At least thats supposed to be the case. Today, 90 of the worlds fishing grounds are being fished at maximum sustainable rates, or overexploited, risking total collapse. Fish accounts for 20 of the Animal Protein consumed by people all over the world. Heres the situation. The United Nations food and Agricultural Organization concluded fish stocks have continued diminishing since the 1970s. The situation in the mediterranean and black seas is alarming. Catches have fallen by a third, and 59 of stocks are over fished. Advances in Technology Like sonar and satellite used to locate fish have sent catch rates soaring and commercial trawling nets practically vacant. Then there are countries like china. It now sends boats that encroach on traditional fishing grounds of other nations. Here is the argument. Fishing regulations can only be set by governments in their exclusive economic zone, which extends 200 nautical miles from shore, but they have been mostly ineffective. They dont seem to curb the stress put on the fish population. Another approach that has been more successful are catch share programs. These grant a portion of the allowable harvest to individual fishers, communities, or companies. They can use it to catch fish or sell the rights. Since fishers want their shares to rise in price, they have incentives to maximize value of the catch. Fishing when demand is highest, slowing down and spawning season, therefore limiting damage to fishing stocks. Another fix is fish farms. In 2014, farm raised fish surpassed wild caught fish as a source of food for humans. This solution may come with an environmental price. Critics are concerned that fish farms are damaging coastal ecosystems by releasing pathogens that harm populations. Relocating farms further inland and using a system to remove harmful contaminants are being experimented with for potential solutions. With worldwide demand for fish increasing, for once it is fish not being around that is starting to stink. Julia that was just one of the many quick takes you can find on the bloomberg. You can also find them at bloomberg. Com along with all the latest Business News and analysis 24 hours a day. That will be all for bloomberg best this week. Thank you for watching. I am julie chatterley. This is bloomberg. Tom from new york city, i am tom keene in for jonathan ferro, with 30 minutes dedicated to fixed income, this is bloomberg real yield. Tom coming up, a busy show. Yields move higher after a mixed jobs report. August will be revised higher. The consensus. August will be revised higher. Where is the wage growth . Draghi and the ecb struggle with delaying Balance Sheet adjustments until december. Is it real yields lower for longer