Transcripts For BLOOMBERG Bloomberg Daybreak Americas 20171013

That the ecb is continuing crude getting a nice bid on the iran conversation. Looking at the banks, bank of america up 6 10 of 1 . Wells fargo unchanged. It feels like a really solid quarter for bank of america on earnings. It was the Consumer Banking unit that felt really good. Loans and deposits were up. They werely only at 834 million. David it looks very solid but we looked back to yesterday and thought citi and jpmorgan were doing well and they turned over. Alix fic was down 22 . Is the focus for banks turning to consumer loaning, which will make wells fargo allimportant . We want to turn to Michael Mckee with a very special guest. Michael good morning. Washington federal and Eric Rosengren joins us on the boston fed annual Monetary Policy conference. A special welcome to the Bloomberg Television and radio listeners, particularly those on one of 6. 1 fm in boston. Thank you for joining us 106. 1 fm in boston. Thank your for joining us. Nice to have you in boston. Michael we know how you are thinking about Monetary Policy Going Forward but we want to. Alk about the why you said a december move is justified and maybe three next year, but what justifies that kind of policy . Eric the Unemployment Rate is 4. 2 . By historical standards that is pretty low. Inflation is lower than we mightve expected at this stage. That thattion is temporary transition and if you look both at surveys, the summary of Economic Projections, the participants of the fomc provide as well as private forecasters they are expecting inflation closer to 2 next year. My worry is we get to a place that is unsustainable and that can be reflected in wages and prices starting to go up too quickly or asset prices going up too quickly. What we want is a sustainable recovery and that would imply keeping the Unemployment Rate fairly close to what we expect full employment to be. Michael but a year ago, Eric Rosengren to Bloomberg News said that we will presumably be very close to our 2 , if not our 2 inflation target i the end of 2017. I am not picking on you, but that is the kind of forecast that has drawn some question, shall we say, on global wall street. If you look back to march, we still were expecting 2 inflation and one of the temporary things that occurred is the pricing change that had a big impact on the current numbers. We are trying to get the underlying trend in prices, so there can be relative prices that can change a lot. That is one reason why we focus on core inflation rather than total inflation. Sometimes we get spikes in oil that are not predicted and sometimes oil prices go way down. We are not trying to address all the relative price changes that occur in the economy. We are trying to get that underlying rate. Reported inflation right now is quite low but i think it is partly a reflection of temporary factors. We are about to have more temporary factors. The hurricane is likely to have that effect on inflation. The oil prices are a little bit higher because refineries have been shut down, and places in texas that were affected by the hurricane. Some kind of housing supplies and other things may be elevated due to the rebuilding. That is not something we should react to. Of relativeods prices going up or down but we want the underlying inflation rate. I think it will be close to 2 over the course of next year. Michael the idea that there is temporary, idiosyncratic reasons for inflation being low on the domestic front is one thing but it is low around the world. Have dynamics changed . Eric it is certainly a possibility that inflation dynamics have changed. One of the reasons why inflation has been low around the worlds we had a long, slow recovery from very serious financial conditions here, in japan, europe, all experienced significant recessions, elevated unemployment, which means inflation was much lower than it wouldve been had we stayed at a more sustainable pace for economies around the world. We are getting to a different stage of that cycle where at least in the United States we are already beyond what my estimate of full employment is. In japan, there close to full employment. Butpe still has a way to go i would say the labor markets are improving around the world, and that is one of the reasons i am expecting inflationary pressures to get us back to 2 over the course of next year. Michael you said it is below your measure of full employment. The inflation rate does not respond. You question yourself, maybe i do not understand what is going on with inflation anymore . Eric we have to ask ourselves whether there has been a more permanent shift in inflation dynamic we do not understand. At this point, it is too early to make that judgment. Wages and salaries are still going up. We are definitely seeing wage growth. We are definitely seeing the employment cost index going up and those are indications of a tight labor market. It is only the last couple of corners where we have had an Unemployment Rate below 4. 7 full employment. Michael so you still believe in the phillips curve model . I believe if labor markets get tight enough you will see wage and price pressures over time. Michael does the fed have an alternative explanation . If that model doesnt come through, we do not see inflation start to rise again, what do you do . Eric we would have to try to understand what the reasons for that are. There certainly have been a variety of explanations that have been thrown out. One would be greater globalization is a possibility. If you look at the imports we ise in the United States, it not dramatically different than 10 years ago so im not sure globalization does a good job of explaining why inflation would be so persistently low when we have very tight labor markets. That is something we would have to continue to look at. People talk about structural changes in the economy, but for a persistent change in prices we need the structural change to keep Going Forward. We are trying to get at the underlying rate of wages and prices, and it would be unusual if we got very tight labor markets and there was no response. It would basically saying labor demand and supply no longer work, or that corporations as they start facing higher wages are willing to shrink their price largest margins. As labor markets tighten, we will see labors go up and firms will want to maintain their Profit Margins. With a lag, you will see prices move up. Michael you talk to ceos all the time. What do they tell you about their Pricing Power . Eric things are changing now, they are seeing much more wage pressures. Theyre finding it more difficult to find employees now in a much wider range of job categories than previously. Be people inuld the computer industry worried about cybersecurity in pretty isolated areas. Now you are hearing stories that are much more general about difficulty in getting bank tellers, bakers. These are not jobs you would expect to be in short supply. Those are examples where we are starting to see the labor market heat up and you are seeing it in wage increases in those places where labor markets are quite tight. Michael cpi today, retail sales, you mentioned the numbers will be distorted because of the hurricanes, so how are you going to look at the data in december if the data are not necessarily giving you an accurate picture of what is happening in the economy between now and then . Eric certain data series are more or less affected by the weather so we have to factor that in. An example is the employment report. The Payroll Employment number was quite low and it was definitely hurricane related. It was particularly in leisure and hospitality areas where there was less employment and that reflected the fact that for the employment report, if you are not paid in that week you are not included as employed for employment report on the if you did not get paid that week you are still included as being unemployed employed. The Unemployment Rate went from 4. 2 4. 4 to 4. 2 . The number i think would be less distorted is the Unemployment Rate. It will not be as affected as survey where surveying firms. We will have to look through the data and sick figure out dhich data is most survey effece by the series of hurricanes that hit the United States and devastated those areas, and made our data less reliable. Michael we are talking with boston fed president Eric Rosengren worldwide. You raise rates in december maybe. Is the current level of Interest Rates, another rate rise inhibiting credit growth or keeping otherwise qualified people from getting jobs . Eric we are expecting growth in the second half this year, at least at the boston fed, to be roughly 2. 5 . That would imply the Unemployment Rate would keep going down. We want to make sure we do not get to a place where we do not have a sustainable, continuing recovery. That is why i think gradually increasing rates does make sense. We are going to be at a point where potentially we get unemployment below 4 . That is an area where i would expect to see more obvious trends on the wage and salary data, and we will see if that does happen. Economist atchief the bank for International Settlements has argued the only thing low rates is doing is leading to an unsustainable buildup of debt which will have its own problems down the road. Do you agree . Eric one of my concerns with low rates over a long year of time as people try to reach for yield, and that can be households and firms. If you are a household saving for retirement, it is a problem. If you are keeping your money in a short term cd paying a low Interest Rate you are taking more risk. Firms have that same kind of behavior. I do worry you end one consequence a very low Interest Rates for a long time so people take on more risk, and when something happens in the economy, a negative shock, they are less prepared to handle that. That is one reason to want to normalize Interest Rates when we get to a point where we think the economy is likely to get back to 2 inflation, where we are very close if not beyond full employment. Michael is there a danger the economy moves towards contraction the next few years . When would you see the Business Cycle coming to an end . Eric economists are fond of saying recoveries do not die of old age, which is that is not particularly timedependent. It is a reflection of policy mistakes that occur with fiscal or Monetary Policy, or mistakes that occur elsewhere in the world that generate results we do not anticipate. Sessions are hard to predict. Most private forecasters never predict them. Events, whycipated very nature, are difficult to predict. I am not expecting a recession dothe next year or two and i not see anything in the data that tells me that is likely. Could there be some geopolitical or other kind of shock . That is certainly possible. Michael there are job interviews underway in washington. I know you will not comment on the respective fed chairs individually. How much sway doesnt individual fed chair have . Does an individual fed chair have . Can they say we are going to change the way we do policy . Eric it is a committee so we have to find a way to bring along the committee. The leadership matters, the chair it does make a difference in how Monetary Policy evolves over time. They do have to work with the committee. Frequently, there is a lot of influence that occurs from staff around the Federal Reserve system, so it is not just the fed president and governors. Have a very confident competent staff that goes through and provides a lot of the briefing documents. Change may occur, but it probably evolves relatively slowly. You normally do not see big, discrete changes in Central Bank Policy against there is a lot of role for the staff and a lot of people who were president s before and will be here after. How much influence does the president of the United States have over the Federal Reserve . Eric certainly has the influence through who they appoint. Not only is the chair up, but a number of other slots. The president gets to pick those people and they do make a difference for how Monetary Policy evolves. In that way, the president has a big influence. Once the person is in their position, it is a little like the Supreme Court that there is less influence once they are in that position, and that is by design. Goal is to have a central Bank Independent of politics. There is some involvement in the appointment process but after that, hopefully whoever is picked is focused on getting the right outcome for the american people. Michael for our radio listeners in boston, you have talked about equity prices and the possibility asset prices get distorted. Etfs long only, which will funds. Is there any imbalance there . D. C. 4 do you foresee problems in the future . Eric one of the areas i have raised questions in the past is the real estate sector. I think valuations have gotten outside historical norms so that is an example where i would be more conservative and worried that those valuations may not be sustainable over a longer time. I think there are areas of the that people should take a close look at and see if they are comfortable with the valuations. Michael but you are good with the boston economy . Eric we are doing quite well but we are seeing commercial real estate go up and an Unemployment Rate that is quite low. Worry aboutthings i in terms of sustainability in the long run are reflected in how well the boston economy is doing. Michael Eric Rosengren, president of the boston Federal Reserve bank. David coming up, we will be talking with Larry Summers, u. S. Former u. S. Treasury secretary who says the tax plan is an atrocity. Live from new york, this is bloomberg. David this is bloomberg, im david westin. Donald will announce his highly anticipated decision on the Iran Nuclear Deal. Joining us from washington is chiefilli, keep washington correspondent. Kevin the president essentially has had to recertify the iran deal twice, not once but twice during his chief washington correspondent. Presidency. That stops today. He will send this to congress and say they have 60 degree 60 days to renegotiate. He has been critical of this before, but this is a major turning point in the u. S. Relations with iran. David he is also paying a lot of attention to health care and just tweeted out obamacare is a broken mess. These bike peas, we will begin the process of giving america the Great Health Care it deserves. Hes by piece, kickstart thell discussion on happened up capitol hill. What he did yesterday through executive action is allow Small Businesses to band together to get health care, which would destabilize the risksharing folks towarting some reincentivize them to remove themselves from obamacare and into the private vector, destabilizing the market. When he announced late last night is he stopped government costsg for some of these for obamacare, which democrats are out in heavy force criticizing all of this. Designed to do what he can to pressure the Republicancontrolled Congress to destabilize the markets to get Health Care Reform passed. David our very own Kevin Cirilli reporting from washington. A programming note, we will be bringing you President Trumps remarks on iran at 12 45 eastern time. Joining us in new york is Steven Friedman. To pick up on the Health Care Part of this, because this is potentially disrupting the Health Care Market, particularly the insurance market. What possible effect for this have on the economy and some of the stocks . Steven in the near term it looks like there is even more uncertainty about health care and the governments role, which is probably a negative for Insurance Companies. It looks like some of those cost sharing subsidies will be going away. , they need at large to think what does this mean for the overall quality of plans, for the overall choice. The smaller plans coming online will probably be lower quality. David less money from the government going into the health care system, so all things being equal, it does not effect it well. This is an important driver in the economy. Steven it is a big chunk in terms of the health of households and also when it comes to inflation numbers. We have Bank Earnings trickling out over the past two days and i want to talk about what they say about loan growth. Credit quality of the consumers are really front and center, and i want to tell you what marion lake said yesterday. We absolutely expected some point that we will initialization of credit. We have not seen that yet. Butre appropriating costs we are not seeing any deterioration or thematic fragility in our portfolio that we are concerned about. Alix we saw increased reserve in the consumer unit, 300 million for jpmorgan, over 500 million for citi, bank of america much lighter. Where are we in the credit cycle . Have noticed overall delinquencies have started coming down and have stabilized. There has been a continued increase in consumer leverage. These are some things we need to watch carefully. The deleveraging of past years is behind us. Alix can consumers pay their debts . Steven yes, to link with the rates are not coming down but they have stabilized. We are seeing some modest increase in wages, the labor market is doing well. David we just all listened to Michael Mckees interview with Eric Rosengren and one of the things they talked about was the fed leadership. How important will that be in terms of keeping the economy growing or tightening . Steven it could be quite consequential in terms of who was actually chosen. The has been indications that Current Governor powell is a front runner and warsh is in the running. The markets will largely see it as a continuity of the yellen fed, but generally in that sense they were not see a major fed. Warsh would be a little more problematic because i think there are some things he said in the past that give me concern alix . Alix Eric Rosengren talked about inflation and he is in the camp that the phillips curve is alive and well. We get the latest inflation today. What do you expect . Steven strength in the headline number. There will be some decrease in gasoline prices. We could get Something Like a. 5 ,. 6 month on month gain. Perhaps some strength in the auto demand. Alix what about Services Inflation . Steven they are a major component of the housing market, both primary residence and rent. It did pick up last month. He Overall Service sector of the economy in terms of inflation david did the ppi numbers from yesterday tell you anything . Steven when it comes to health care numbers, they were a little bit strong relative to the recent trend so that means if we see strength particularly in the Services Components and housing tomorrow, that could set the stage for a further pc rating. Alix Steven Friedman of bnp paribas. I want to get you up to speed with what happened with bank of america about 45 minutes ago. They did beat on earnings and what they said about credit was interesting. The increase their Consumer Credit union by 150 million, less than their peers. A Net Interest Income was up 19 . These numbers coming in very solid for bank of america. David coming up, we will be joined by Larry Summers, former United States secretary treasury secretary, talking tax reform and his problems with the trump plan. Alix this is bloomberg daybreak. Happy friday the 13th. S p futures up. Dow jones up. Bank of america getting a nice pop and premarkets. European stocks seeing their highest level since last june. One of the performers is the german tenyear bund. Webasis points is what printed there after bloomberg reported their bond buying but extended the length that which they buy bonds, affecting the euro. It is higher on the day but lower on the session. 118 1. 18. Ar now waiting on inflation data and you see the spread between five and 30 is steeper but crude getting a nice pop on worries the iran deal could be reshaped. Lets get an update on headlines outside of the Business World with taylor riggs. Taylor President Trump is expected to not abandoned the Iran Nuclear Deal. The president will refuse to certify that the courts officially serve u. S. Interests. He is expected to ask congress to amend the law. The president said it is time for the entire world in demanding that iran world and its pursuit into and destruction. The most drastic steps yet are taken to end obamacare. President trump has cut out subsidies to help lower income people after he signed an executive order designed to drive people away from Health Care Coverage markets. The administration is cutting tens and thousands of dollars from groups to help people enroll in obamacare. Week ofe deadliest fires in california history. At least 31 people have been killed. Hundreds of people are still missing. In the city of santa rosa, almost 3000 homes were destroyed. High winds are keeping firefighters from maintaining the fire containing the fire. In next weeks summit, they will bailout theresa may. There is little appetite to make any concessions to help may. Your european leaders have made it clear that there will not be trade talks until a brexit deal. Global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. I am taylor riggs. This is bloomberg. Thank you. President trump is pushing hard for his tax plan based on the claim that cutting Corporate Taxes will lead to better Economic Growth. We talked last week to dean of columbia business school, who said it would lead to higher wages but was concerned about how he would taper them. Cuts in the corporate grades will increase investments, productivity and wages. Fortax cut will not pay itself, though. There has to be as broadening. It will pay for part of it but not all. I think the two sides are talking past each other but the center of debate needs to be growth in wages. Lower Corporate Tax, higher wages. David Larry Summers has helped with economic policies for several president s now. You recently wrote in the washington post, that the tax plan from trump is an atrocity. Good to have you here. Larry good to be with you. David i once to focus on the economic question, do Corporate Tax cuts lead to corporate growth . You heard jamie dimon said, if we had tax cuts, he would hire more people. As an economist, is that true it will lead to growth . Larry directionally when you cut Corporate Taxes, corporations invest more and there are some positive impact on growth. The problem is it is not nearly large enough to mix the tax cut to make the tax cut paper itself. It has perverse distributional alncert distribution consequences and if you do it in a responsible way, you create debt that does more damage to growth in the corporate cut spurs growth. There is also the fact that this a probably about as bad moreland for counting on those effects as you can imagine. We already have the cost of capital at an extraordinarily low level because of low Interest Rates, superhigh priceearnings ratios, because corporations are already permitted to ride off writeoff half of or more of their investments on a day when do notke them, so i think cost of capital is the constraint corporate investments, nor is the cash flow, given that profitability and Profit Margins are at near record highs. This is not the moment when the focus should be on Corporate Tax cuts. Should we do something about the problem of cash abroad . Yes, but part of doing something about that problem is making it neutral, whether you leave the cash abroad or forget home. The important part of that is taxing it more when it is abroad. It is an extraordinary thing. This president is as nationalist from an economic point of view as any we have had, but the center of his Corporate Tax plan is an idea called territorial. What that means it is whereas today, you get taxed in principle and in some weight on your corporate profits, if you are a u. S. Company wherever you find them in the world, he has so you onlythings get taxed if you operate in the United States. That seems an odd way for the antioutsourcing president to be structuring his tax reform. Yeah, there is a case for Corporate Tax reform and of course cutting Corporate Taxes can, if it is done right and carefully, being encouragement to investment, but doing it in a way where that is the whole tax package, where you bloat the budget deficit, or you do not do anything or enough about corporate shelters, would you do not provide numbers or details on your plan, that is responsible. David lets take those one at a time. One thing you refer to is the deficit. Hubbard said,lenn you have to broaden that base. If you could have Corporate Tax business were reducing reductions that you could pay , with broadening the base that move it toward something you think would be positive . Larry a revenue neutral corporate reform that encouraged drinking back the capital from abroad would be a valuable step, something i have been calling for for years. To the does not resemble notions that have put forward by the administration. David you also mention distribution all affects distributional effects, a hot issue across the country. Is that distributional concern of economic concern or more a matter of policy or morality . Larry i think it is both. Saying no apology for that in a moment when we are in a new gilded age, or Income Distribution is back to where it was in the 1920s in terms of how much is going to the top 1 , that when you think of changing the tax code, it is important to do it in the fairway. I make no apology for saying that, but it is also a matter of economic efficiency. One crucial part of their proposal, david, is that new treatment of socalled passthroughs, people in business but are not in corporations, i cannot imagine why from an economic efficiency point of view, we would want to onengaged in a huge tax cut the partners in the major urban law firm or for what matter why it would want to give me a big tax cut if i do consulting for a company. So i think that is perverse from an economic efficiency point of view. I also think that if we want to maximize the spending that propels the economy forward, we are better off finding ways of cutting taxes on people who are not like you and me, and two are in a situation where if they earn an extra dollar, they are likely to be able to spend most of it. The question of distribution, fairness is both a moral issue and also a direct economic efficiency issue. I think it is also an indirect, broad issue for the morale of the country. There is a lot of unhappiness and anger out there. That is an important part of why the president was elected. If we do not do something to a auge that anger, we will have problems in politics for it to come and it is hard to see why focusing a Corporate Tax cut at those on the highend is going to do much to help them anger. Tax reform is the right word. That has been no word both parties have used for many years. I have been talking about it not then i matter so much but i have been talking about tax reform is the right thing. But it has to be done in a sensible way. And this is not i will say one other thing, david this is not a partisan thing. You had my friend lynn hubbard on. We do not Glenn Hubbard on. We do not agree. He is much more oriented to supplyside incentives than i am, probably less concerned with fairness, but he is a person who makes serious or respectable, legitimate, straightforward arguments. Those are the basis for compromise and things can be worked out. Have and i hate to be in a position of using this word about our government senior economic officials making claims that are e up, when you have them when you have our Treasury Department taking down Research Studies done by Civil Servants from the treasury website because their conclusions are embarrassing to the administration, it is very hard compromise,ogue and and get to a good place. David you mentioned fairness more than once. I went to understand iw want to understand what you maintain of had a 80 , would that be fair . For should be shipped the brindamour, if it is or should we shift it more, would you keep this tradition constant . Larry if i had my choice, i trends inond to the the country to more equality by making the tax code more progressive, that is what i would do. But if someone said that they wanted to keep the distribution of tax burdens constant across income classes, that would not be my first choice but i find a planet that kind an entirely reasonable basis for discussion and debate and their moving forward. The problem is that that is not the plan that appears to be on offer. Is key part of their plan repeal of the estate tax. As you well know, because you there are a lot of affluent people in new york. Only 470 people in new york, estates, paid the estate tax last year, so that is 100 people at the area, very highend, and that is one proposal. Item in this i referred to the question of the passthroughs, so i am not somebody who thinks that every economic issue should be turned into robin hood. There are people in my Political Party who do, but that is not my perspective. That when you put something force called a tax plan, it has to be described in a way where people can figure out what their taxes would be under it. That is what makes it a plan. That you need to put forth an analysis of the revenue consequences, done by somebody other than a heated advocate of the plan, and you need to present data on who is going to be held and two is going to be helped and he was going to be hurt. Those are the norms of american political life and we are operating outside those, so i think we are missing an opportunity. Alix lets clarify, did you pay your estate tax last year . David i am not dead yet, so i did not have to. Larry im side, who paid . The president is alive. David i am still here. Larry david, nor the president s, fortunately has paid a state tax yet. Is 75 more years before you pay, david. [laughter] alix i want to turn to central ank policy because you had report out yesterday talking about what the next crisis will look like and what Central Banks and governments can do. Potentially, the ecb is looking to extend their Bond Buying Program but reduced the amount they buy. Bloomberg shows the amount of weight that has put in the market. 34 ,is the percentage, substantial, punching above their weight. What does that do to the market . Hasy i think mario draghi been the most important and successful central banker of the last 35 years. Without his efforts, i do not think the euro area would have stayed together. I am very confident that any changes that he and the ecb may will be very carefully measured. The good news is that we have seen significant evidence of turning in the european economy, and therefore, it is going to be more selfsustaining and invest need of monetary support than it was the previous several years. This kind some kind of adjustment is appropriate to that. I think that in general Market Participants should not be qe,med about reductions in as long as they are well signaled, done with an element of gradualism. There is a possibility of her personal message of reversal of necessary and i think it will be ok. David i have to ask who will be the next fed chair. You get one word. Larry i hope it is janet yellen. David perfect. Many thanks to Larry Summers, former u. S. Treasury secretary. Was fascinating. I think it is interesting he is willing to keep distribution the way it is now. That is what gary cohn said, as well. He said that was their goal, to keep this to be sure in the same. Maybe they can come together. Alix didnt President Trump disagree . David congress will have something to say about scoring distribution. We will see. Alix in the markets, s p relatively flats, up about the points as bank of america earnings come in solid. Eurodollar flat on the day. We wait for that cpi data. I want to head over to tom keene in washington. Welcome Bloomberg Television and Bloomberg Radio worldwide. Good morning. Our first conversation of the day at the meetings of the International Monetary fund, theres no one better to do that with than david lipton, the american representative to the imf. Far more than that, he is one of our Frontline International in commerce, with russia, it seems like a lifetime alone with service to the imf and america. You were at west lane and andard, at weslayan harvard, is anything in the textbooks their appropriate today . David i think it is interesting so many old problems came back after the Global Financial crisis. We are applying basic economic concepts and terms of fiscal policy and Monetary Policy. I think a lot that we learned in school is useful. Tom some of that is the challenge on the fiscal side. It was brought up in conversation this morning. I think of your g20 dinner last night, secretary mnuchin is in the room, madame lagarde is in the room but they are not sitting together. The tension is there about the appropriate use of tax policy in the form. What have you learned in the last 24 hours about this raging debate between Trump Administration criticism and the mandate article four of the imf . David first, i think the u. S. Economy recovering is important. We have a lot that we view in common about the state of the world. Taxtax policy, as far as policy, the imf has favored it in the United States for a long time. We think the tax system can be much more supportive of investment, provide a stronger position for workers, middleclass americans, and by strengthening the revenue base, you could set the stage from keeping debt from rising further and being in a better position to deal with expenses and entitlements coming up. The most important part of tax reform is to broaden the base, to eliminate tax referrals, lower rates, and create a stronger foundation. ,om across the work you lead there is the bloomberg the blue book to read book to green book and they are all intertwined. You know this from your group work at citi. The bottom line is it is about fiscal responsibility. Is the imf worried about it . In america, there are two sides, tending to the books of government but also making sure the economys growth is robust enough and tax ace broad enough to be able to make sure there will be fiscal sustainability overtime. I think they can have both and what makes sense is a welldesigned tax is to be sure, one that will help the middle class and incentivize investment. I think that could be good for america and the world. Across whichte growth across many countries at the International Monetary fund, with Michael Mckee with an important conversation with the president of the boston fed, is wage growth dynamic different now across countries because of new technology and a new supply fund . David we are looking at that. Has anof our books important finding what goes beyond what we learned in school, which is we look at how the Unemployment Rate is the measure of slack, and that will tell you how responsive wages low be. We are learning a new thing, that there was a lot of involuntary parttime unemployment, when people who are working parttime and would like to work fulltime, that is additional information. Countries were that is the case tend to have worked sluggish w age growth. Tom i read a paper out of austria on the uniqueness of parttime employment in europe. Im sure our american viewers and listeners are unaware of the nuances country to country of the cultural structure of parttime versus fulltime. David that is a good point but i went to make an important distinction. If people want to work parttime, that is good. If they were parttime rather than not at all, it is a contribution to the economy. I am talking about people who want to work fulltime but they are parttime. That is a measure of slack and may explain why which growth is sluggish and could be good news because it means there can be more Growth Without inflation. Tom should that be more aggressively debated . David no, i think people are looking at this and it is going that part of the story determines the ultimate pace of normalization votes in the United States. Tom i want to go back to your work. This goes back to the frontier economies and the emerging markets of another time and place. How is the russian economy and Eastern Europe doing right now with the tumult of sanctions . David david i was just in russia and ukraine, and their situations are pertinent. Has gone through a tough decade with the Global Financial crisis, the oil shock and the sanctions. They have come out of recession. The truth is there policymakers handled this well. In earlier times, they might not have done this well. Our projections are russia is they will grow at maybe 1. 5 to 1. 7 , the same as europe. There will be no more convergences, no more russian Living Standards rising to european levels, which before the Global Financial crisis, they were catching up. So russia really needs to find a way to free up their economy of the heavy footprints of the state and to try and be dynamic and get in on the technological revolution you are talking about talking talking about. Tom i was remiss not to talk about china. These are key meetings. David they are. We do not know much about the political process in china, but we will be looking to see what comes from these meetings in terms of Economic Policy and reform policy. China has managed their economy well but there are vulnerabilities and there is the continuing need to rebalance the economy further towards being a serviceoriented, household incomebased growth driven model. I hope they want to go in that direction. Tom david lipton, thank you so much, with the International Monetary fund. Alix that is tom keene in washington. Everybody likes middle class tax cuts. The problem is how you wind up doing that. David and to is the middle class. Alix it seems that gary cohn had a higher and did that, so that is a huge debate. Stack up, halfe an hour away from inflation readings in u. S. S p 500 futures up and bank of america earnings come in solid. Eurodollar flat on the day. It was higher we heard the news that they could potentially extend the Bond Buying Program to reduce how much they buy. 10 year yield up about one basis points. The curve continues to flatten as we go and nymex crude up 2 . If there is a change in u. S. Iran strategy, what does that mean for their protection after he jumped to one billion barrels after they jumped . s frontf the consumer and center. Coming up, David Malpass, u. S. Secretary, will be joining us. Alix healthy debate. President Trumps Administration takes a step to rollback obamacare, heading up subsidies to ensure. Circle is said to january on the calendar. The central bank is considering a 50 cut to the monthly Bond Buying Program and bank of america posts its best profit in six years. Shares jump 1 and wells fargo is out now as we speak. If comparison is correct, earnings coming in at 84 cents per share. 150 2 billion, also liked. 192 billion, also like. The conversation around banks has to do with provisions for credit losses, what is the health of the consumer . Wells fargo missed on estimates. Allison williams of Bloomberg Intelligence joins us. What is your take on the Consumer Health . Think the consumer is coming in at the higher end of the range, but consumer charge ups come from rising from the shouldd something we expect to happen. What was more disappointing at citigroup was you have some of the trends in their portfolio and expected to see some revenue growth, things getting better, and they had higher balances, so things a little bit worse on the margin. For is more important citigroup than other banks and something people will continue to watch. For these major banks, mortgage still very good and strong and that is where we saw bank of america this morning. For them, mortgage is much bigger versus banks yesterday, and their provision coming in better than expected. Wells fargo looks a little worse than expected but that is about in mind with the cost, which you will want to dig into the details, things coming in much worse than expected. David the earningspershare is what jumps out. Alix that is a big mess. David exactly. Alison the cost is much higher than expected, efficiency ratio much worse than that interest margin seems light, but the question is, is it illegal thing in their . David they have had so many problems and they keep going. The last one was Auto Insurance and you do not know how much of that is an aberration in numbers. Alison my guess is we are getting more towards the end. When they first talked about this, one problem comes up, you dig deeper and find other problems, we call it the cockroach theory. We have seen more about but they have gone in, they extended the time period, they sort of have taken care of what the issues were from that standpoint. Our regulatory analyst talked about that. Perhaps, moving away from the doghouse i do not know if they are totally out yet but some of the terms of what they have had to do, so getting that behind them. The one big thing they still have is residential mortgagebacked security issue, which other u. S. Banks took charge of years ago. Bitman and morgan a little later and wells fargo still has that. They showed signs they are getting that behind them and getting closer. Im not sure if plays into the cost. Alix lets talk about positive data and that is hikes. When do they pass that on to consumers in the deposit banks . For bank of america, their Net Interest Margin rose. For wells fargo, it fell. What banks having the best shot at passing that and why . Alison there are a couple of things unique about wells compared to others. The couple of years ago, they did take on hedging in their portfolios, so they sort of have less upside as rates rise. The other thing is keep in mind, the two big to fail the too big to fail ratio, so that is not necessarily related to the deposit data but that is something we are watching. Jpmorgan still talking about it is still low, and bank of america talking about offering products on the higher end. David the miss on earnings per share, if you add the 20 cents, you get back into the expected range. That may be the answer because of the problems and they had to accrue a lot for possible litigation expenses. Alison theyre one of the last banks to settle this issue, and im going to guess that is what it is related to. If they could get the scandal behind them the scandal, i think, is a small fine, but more important to the culture of the company because it plays a big role in the company, whereas this rmbs issue is more of a big dollar fine. Alix if you look at the stock intraday market, you can see when the headline crossed. We are down almost 4 and now off by 2 . They were freaked out by that headline number and now we understand. Nonetheless, this is one of the weaker movers. David another thing that strikes me as their Net Interest Margin missed the estimate. Take america did all right on that bank of america did all right. Bank of america got some boost from increased rates. Alison wells fargo has a couple unique issues. They do have different sensitivity profiles, so bank of america is more sensitive to the short rate side. We will want to see what is happening with deposit repricing, are they doing Something Different . There is also loan mix. If you are pulling back from highermargin products, that will impact your top line. David Alison Williams will stay with us. We will be joined with more on banks from benjamin segal. Give us your take on financials. What is your take . Benjamin i think the results are showing that the u. S. Consumer is fairly solid, but has recovered quite nicely and will start to raise rates soon. A lot of the good news is builtin to share prices, where you see weaknesses with some areas of the consumer and corporate sector but will starts significant leverage. As i look around the world, i see the incremental positive good news more out of europe, where rates have yet to rise and that opportunity to expand margins is greater and valuations probably a little bit lower. Banks, in the u. S. , the the companys less focused on corporate banking, as alison says, the mortgage market, the high quality highend consumer is relatively solid. I think we see that globally. The concerns are that the broad consumer, the credit card portfolio and auto loans, are the downside risk. David we translate that internationally, and we are seeing a lot of concern of reserves being taken. Is that reflected overseas . Tyra banks nervous about consumer risk on credit . Benjamin not so are banks nervous about consumer risk on credit . Benjamin not so much outside the u. S. Morenk they are relatively constructive on the european consumer at home, where you have not had the level of leverage and have had ongoing you leveraging in europe. I think the credit concerns outside the u. S. Are lower than domestically. Alix do you like the banks . Benjamin we do. Some more than others. We are steering away from big Investment Banking banks. We take a barbell approach. The pure retail bank we like in , thee but in the u. S. Companys more on the Asset Management side, no balance sheet, credit risk, get into Financial Markets and advice in nm varmint were navigating markets is challenging. Alix where in europe . Benjamin switzerland for advisory led banks. Whether it is advising on private equity or abroad we are not buying Deutsche Bank now. Banking very heavy and undifferentiated. The companies with real strength in the local market and if you start to see a healthier economic recovery in countries like spain, Northern Europe and the scandinavian region, that would be positive. If you see rates rise, that would be progress. All of these factors have led to the appreciation in the u. S. Banks in the last three years or four years in their beginning stages outside of the u. S. To ask about expenses. What did we learn about bank of america . They have an Aggressive Program in place. Citi, bank of america, jp, that was across, and wells fargo will take me a little to figure out. I will have to go to my spreadsheet because it looks like they have this big mortgage chart. We will want to look at other professional expenses, the ones related to the scandal. In general, we see rate cost control, the impact of digital banking, something all banks talk about, and that is helping them on the cost side. David Alison Williams, thank you. Benjamin segal will stay with us. Coming up on bloomberg markets, an interview with wells fargos cfo at 4 00 this afternoon, eastern time. Later in this hour, he will have David Malpass, coming to us live from the imf meetings in washington. Live from new york, this is bloomberg. David this is bloomberg. I am david westin. President trump will announce his decision on the Iran Nuclear Deal this afternoon. We are joined by Kevin Cirilli with the latest from washington. Him . We hear from kevin 12 45 this afternoon, he will unveil that he is not recertify in the iran deal. That will of course start a 60 day period from lawmakers on capitol hill to decide how they want or whether or not they want to reimpose sanctions against iran. The legislation lawmakers will be grappling with is being led by senator tom cotton, or public and from arkansas, and also, get ready, senator bob corker, who has found himself locked in a feud all week with the president. Feud all week with the president. David well, he doesnt want to do it. Kevin exactly, it is the president using the power of the pen an executive order to force lawmakers on capitol hill to do something. We heard this from general john kelly yesterday when he spoke to reporters and said essentially that the president is very frustrated with how congress has moved on a host of issues. David including health care, which they did not move on at all. Kevin cirilli, thanks. A programming notes, we will bring your President Trumps remarks on iran at 12 45, eastern time. Joining us now is kevin logan. Stewart this is benjamin segal. Still with this is benjamin segal. Among other things the president has done is really go after obamacare with a series of executive orders that allows Small Businesses to join together to buy insurance but say the government will no longer subsidize any of those private insurance policies. What chaos could that reap in the Health Insurance market . The short answer is it as more uncertainty. I do not think we have a clear view about what the about how the industry will look if there is a strong vision. Adopt ators, have to wait and see attitude and companies themselves are struggling to figure out what the program will look like and how they should participate. David this is a substantial part of the u. S. Economy, 17 or so of gdp. We have a chart that shows since the election, Health Insurance stock has had a healthy ride. What could this to the markets . It does create uncertainty about profitability of companies. When some of the subsidy would a stream of money from the government through Insurance Companies is disrupted, we are and deductibles. A lot of people in obamacare receive subsidies to buy insurance, but people at the lower end of the income scale also get help paying the duck the bulls and copays and that goes to the insurance company. People do not see that money. Insurance companies are compensated for people not paying those. And of course it is going to adversely impact the insurance profit. Alix on one hand, there is this issue and on the other, central tax reforms. How do you balance that . [laughter] now we are getting complicated. It is meant to upset the business spending. That is the intent to promote Economic Growth through business investment. Care,ined that to health to some degree, a lot of businesses will ask, what is next . Private Health Insurance paid for by employers will be affected by these changes in health care legislation, but it creates more uncertainty in general for the markets. You have to wonder if something will spill back to employee programs. Insurance companies are having difficulty making money in subsidized programs and might find themselves raising rates for private employers. They are not immune to changes in the Health Care Markets. All i can say is it creates more uncertainty for businesses when you have these developments. David how do you play the tax reform . Do you make Investment Decisions at all or put it to the side . Benjamin i think they have a tin a lower net tax taken the u. S. To a territorial system, which the administration seems to be enthusiastic about, will be strong for u. S. Businesses. Again, the more domesticallyfocused niche businesses in the u. S. Are more likely to benefit. Alix does that mean you are buying small cap . Narrowly theyre more defined and mix more sense but it is in the Banking Sector because they are big are in the mortgage than Financial Market oriented banks that are global in nature. I think small caps in the u. S. And domesticallyoriented businesses are the most direct beneficiaries of tax cut and business enthusiasm definitely make a lot of sense. Alix kevin logan of hsbc and benjamin will be sticking with us. A big up, katie koch, deal in the industry. We want to get her views on everything from health care to tax reform. This is bloomberg. Alix this is bloomberg daybreak. Taylor i am taylor riggs. Uber has appealed the decision in london not to a new its operating license. Transport for london said they had concerns about their state the and attempts to avoid regulation. Uber can keep operating during the appeals process. Amazon has put the head of their Television Unit on a leave of absence over sexual allegations. Price has not commented. The allegations come days after similar accusations led to the firing of harvey weinstein. When Analyst Sees Oil becoming more viable, not less. Risesay brent crude could to 80 by 2022. Shying Oil Producers are away from new investments because of the u. S. Shale boom and prospects for electric cars. That is your Bloomberg Business flash. Alix i noticed 2020, but one of the most bullish calls i have seen in a while. David when the numbers came in, boy, oil is up. [laughter] alix you are making fun of me. David no, i admire it. Alix all right, lawyer. The inflation target is up for debate, along with its regional head. We have heard from many over the last 24 hours. I think there is much more to learn about what is happening in terms of inflation dynamics. I would say inflation is starting to pick up around the world. One risk with this framework is that the public may start to doubt the central bank is in fact committed to return inflation to 2 . Getting inflation up to 2 is important and moving expectations up by just talking about it, making sure we are willing to go above 2 because we have a symmetric objective and ethically should be willing to push inflation above 2 because we should be spending some time above 2 , like we did below. Inflation is lower than we might have expected during we are well below are 2 inflation target, but my expectation is that temporary transition and if you look at surveys that summary of Economic Projections participants in the fomc provide, as well as private forecasters, the expected to be closer to 2 the next year. Alix did anyone get any clarity from that fed speak . With this, kevin logan from hsbc. He sees one hike for 2018. I would think you are of the brainer school then. Flat, theis quite right word. Our view is that inflation will not pick up that much and approached the 2 target the fed is hoping for. Some are hoping for above 2 . So,t remains at 1. 7 or there will not be as much rationale for three rate hikes as projected. In addition, the fed is already tidying with quantitate tightening with quantitative tightening. It will start slowly but buildup. By the time we get to the middle of next year, i think there will be restrained in the money market. The outlook for inflation is low and at best case, we hope it will rise to the 2 level and i think we will be disappointed and not get excessive rate hikes from the fed. Alix ben bernanke was talking about inflation price targeting, 3 to 4 , particularly in a lower inflation environment. Is that would you recommend . Kevin not necessarily. Target, the correct level providing enough oil to grease the wheels of the economy but not so high. Now he is suggesting maybe we need to get it higher because we cant even get 2 . Why set higher target to convince people you are serious . ,hose comments we heard earlier they were talking about expectation. Their concern is that this long period of low inflation is leading to her people do not expect inflation to go up. If they do not, that inflation is stagnant. The wage earner overly fight for big wage increases because they do not expect companies to raise their prices and so on. Mr. Ben bernanke is trying to break that situation, break that problem by raising the target temporarily. That is playing with fire a little bit. No, it is not something that i would, myself, be advocating. I do think some of the suggestions the fed should insist now that perhaps its current path of rate hikes projected, if it is too high, that could convince people they are serious about getting the inflation rate back to 2 . Do not predict three rate hikes next year. Say we are willing to wait. Have had that target a long time and have not gotten close. Will stick of hsbc with us. Coming up, we will be joined by David Malpass from the imf meetings, live in washington. 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 hasnt 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. Choose by the gig or unlimited. Xfinity mobile. A new kind of network designed to save you money. Call, visit or go to xfinitymobile. Com. Alix this is bloomberg daybreak. I am alix steel european stocks are at a junior high. You see some by ratings on the out performers from europe, the german 10year yield lower by 10 basis points your the eurodollar flat, the curve continues to flat. The latest inflation data is out as this data drops here. If you take a look at cpi year on year, back out energy, back on food, sequentially, it does not move and it fell short of estimates. If you look at auto, gas, this , muching in at 5 10 of 1 better than the negative drop from back in august, which, by the way, was revised back into positive territory. It is being in line with estimates. If you look at, say the month on increase, yet a, is it an improvement on cpi ,onthtomonth increase, yay but is it in improve on cpi . You see that yield dropped like a stone by two basis points. Lets head over to tom in washington with a special guest. We are on Bloomberg Radio, Bloomberg Television thedwide, the second day of meeting of the International Monetary fund. Cast. Ectic theave David Malpass, clearest rider of economics i know and he owns the word fast. Malpass economic has always been impatient economics and he brings it to Public Service for President Trump. I want to digress. You have the job the john taylor had a few years ago. David m exactly right. Make fed john taylor chairman question mark he has the International Experience you have now. David m he would, and there are other candidates. Itsu think about the fed, going through a giant transformation of its balance sheet. One of the hardest challenges Going Forward is how do you find a way through that that allows for growth, Small Business growth . Tom would it be a malpass interview if we did not get Small Business in their right at the top . David m ha ha ha. Tom what is the thought for you and the Trump Administration to move Global Growth forward . Mnuchin iscretary here and he has been emphasizing tax reform as a critical spot forward growth to push regulatory reforms and we are sending that message to the world, really and making the ifsage it benefits everyone we grow. Sent thatlagarde message last night. Its not enough. Mario draghi talked about how do you keep that approach Going Forward . The chief minister of india made the point that india has gone through two very difficult. Tructural reforms attacks change that they have done and now they get some benefits from those structural reforms. Tom at that dinner last night i believe they had secretary mnuchin sit separately from madame lagarde. Give us new insight on what the Trump Administration would like , if the imf has a responsibility to look at tax reform under article iv. Is an economist versus economist kind of debate. There have been for decades the idea but some economists think rates are better for world because youre able to distribute money to people who that mechanism. Others inc. , wait a minute, we ought to have a low rate on a broad basis in the private sector will do well. That conversation goes on in the imf. Its often putting too much emphasis on more taxes. Tom on, this goesllow to your wonderful analysis at cant reform you through fiscal policy. The former head of the cbo said we have a vector of deficit to gdp that could be 5 or 6 or, heaven forbid, he said 7 . We cant allow that to happen. Talk to me about tax reform and fiscal responsibility. David m i dont think that is exactly the right question. The question is our current tax code does not work. It simply blocks growth. Separately you can say our sitting policies need to be reformed from the ground up. There needs to be a budget crisis. The means to be strength by politicians down the line and on and on and on. That is something be Trump Administration the Trump Administration can work with you do not want to combine a tax of warm analysis with a fiscal policy analysis . David m i think the important thing is to get the tax reform done early so people can begin hiring. How do you get more people employed, the Participation Rate to go higher in everyones wages to go up . Hassett are kevin frontline economist. You of a voice in the administration . Do you have a voice in administration . Are you jetting around internationally or do have a voice in the administration . David m we have the linebacker economist playoffs tom oh, come on. I talked to secretary mnuchin. David m we are trying to save be more restrained with what money will do be moret liberating the private sector is the highest priority. I have made two trips so far, but mostly i am working in the administration to have policies americantoward workers. I know that sounds cliche except that is what is going on every day in the government. You and i know the courage after september 11. Maybe it is not as urgent now. You have to worry about corruption and crime in our treasury flows. David m those were talked about substantial yesterday. Quoted johngarde kennedy saying if it is not raining, fix your roof. The were private sector people involved yesterday from Financial Institutions talk about their cybersecurity plans and how the u. S. And governments around the world could help with that effort to stop both the correction the corruption, the crime, and the treasury, secretary mnuchin pointed out yesterday, he is spending a large portion of his time on the counterterrorism efforts, the sanction efforts. One of the discussions yesterday was on venezuela where the people are not the. So, there is a big world effort to say, how do we get everyone going better . corruption and cash. Sweden is providing leadership on this issue. Sweden has the courage to tackle this. Does the Trump Administration have to do this david m . There is have to do this . Avid m there is huge courage. I would say there are efforts within all levels of the government to stop that because of the security of all americans. You can do that by applying people, i am having meetings all day, yesterday, today, and tomorrow that touch on, well, the g7 meeting yesterday, which is the group of seven central bankers from the Major Economies cyberlong session on security sanctions. North korea is an obvious big challenge people are talking about. Bloombergs tom keene joining us in washington. Thank you very much to David Malpass. Cpi, strong. And retail sales, week. That is playing out in the market. The dollar down to tens of 1 . You look at the 10year, the yield lower as buying comes in. The yield down three basis points and gold getting a bit as well. If you pare back rate hikes potentially, you may want to buy gold. Here is a number. This is the number of core cpi year on year coming in light. Is at 5 10 of 1 . Both of those missed estimates. Out autos, you back out gas. Inflation is still not there, david. Mysteryt is the great of inflation. What happened to it . Why is it not coming around . We will talk with our guest on this very subject. He will be joining us later in this hour. This is bloomberg. Taylor this is bloomberg daybreak. Im taylor riggs. This is bloomberg. David returning to the Economic Data we got a few minutes ago, the markets are reacting as alix just took us through. So, as you pointed out, and the numbers actually were up a ,ittle bit, 5 month over month but the estimate was for 6 and it does not show a robust topline or core number. A big spike in gasoline prices last month because of the hurricane. Of course the headline number is going to be higher. Not quite as high, as it turned out, as people expected, but more importantly, the core rate only came minute 5 10 of 1 . We came in below the expected to tenths. Five out of six months. What is going on . Core inflation is coming in less than expected. We can dig in a little deeper. Rent. Equivalent medical care selling on the month. We have the transitory changes from monthtomonth. So, what this is telling markets ,s the trend rate of inflation they are monitoring those are the words we are going to monitor inflation and that could affect the outlook, if not for december, the perhaps for the next year. If this continues, the fed will not have a strong case for pursuing a tightening policy in 2018. Benjamin, what view do you have on these numbers . Are they getting used to investing in a world where there really isnt much inflation . I think that is incredibly exactly what we are seeing. Number one, obviously the fed kevin isbe slower, as outlining. I think that keeps the dollar down. If companies are unable to push their topline, they need to be that much more focused on cost. U. S. Businesses have been ruthless the last seven or eight years. Are they now coming into the muscle and bone rather than just the fat . The reasons from the market perspective what youre saying the more mediocre, lower quality businesses showing signs of life is because those are the businesses with the upside in a low rate environment, low dollar environment, where you want to those of the businesses outperforming in markets the last few days. Was a benjamin, there time when we thought we knew the rules. When unemployment went down, it would have to pay more for workers, you would get wage pressure, and that would rise inflation. What broke down in that . Things. a couple global trade. Our workers were getting more expensive, but we were buying things from other workers, and they were earning at a level structurally significantly below the United States, and so globalization, a strong dollar exacerbating that, and now, of course, we have technology, which means some change. Vity benjamin, what do you buy on this . Benjamin we are very supportive and technology, the Companies Selling productivity driven technology i think cybersecurity is a really attractive niche within that, and obviously David Malpass was talking about cyber sick or do. We have the internet of things and all the technology. And then secondly all of those companies, the more holistic adopters of technology in order to make themselves more efficient again. My topline is not growing too fast. They need to be more efficient in terms of cost. Have the most productive workers and if i can be focused on reducing inventory, reducing cost, matching my labor to my demand, that will be a much more successful business. The most proactive users of technology and the Companies Selling the product so want to buy. David think you both very much for being with us. As we go to break actually the secretary secretary, secretary mnuchin, is speaking while we are on air. The messageo be right now, its all about the middle class. Alix the middle class. A bloomberg terminal, check out tv. You can interact with us directly. You can look at charts, graphics, anything you may have missed. This is bloomberg. Alix it is the conundrum among economists and markets where is inflation . Take a look at the bloomberg. We just got finished reading a core cpi from the bls. No sequential growth and missing estimates that is the white line. The other two lines that show wage growth. You have the blue line and the yellow line is the average hourly earnings. They are moving. Inflation is not. What is happening . Joining us, new oriole roubini you know himini. As dr. Doom. Rate to see you. Why is there that disconnect between wages and inflation . Nouriel there is a disconnect because Profit Margins have risen so much that even if there was an acceleration of wage the margins may be compressed, the profit margin, rising everything. Theres also a lot more competition now. Many people shop online and therefore the Pricing Power of the Corporate Tax curve is low. Ofo, there is the question why inflation is so low despite growth. That is the question, not just for the u. S. , but advanced economies. Alix ben bernanke talk about a price target, maybe moving the price target three or 4 , maybe that would be some help. What is the solution . First, we have to figure out the cause before we discuss the solution. You would expect the inflation goes higher. Suggests that there is some supply shock. Maybe globalization, weak labor, unions, technology, innovation, and so on. Now, the fed has been telling us the last few months, dont worry because these are temporary factors, telecom, medical stocks. Normalizing these rates. But suppose these factors are more permanent . Then the right response will be not to hike more, but to pause, and maybe even ease. But the fed is not willing to do so. They may be right, or they may be wrong. That is more to suggest there is tightness and the labor market. So, they should look at the working or are should they look at the realities of low inflation . David if there are structural reasons that inflation is lower, what is the reason are that . Do we need some sort of structural reform on the fiscal side . Certainly, any reform that isl going to be positive for growth is not going to have an inflation an impact on inflation. If there is the risk that there are forces that keep inflation low, then the right response should be to fight and be more aggressive in terms of easing. Theres also the downside of inflation expectation. So, that is the right response. The fig leaf for the central bank is to say that inflation is only for temporary factors, therefore we should keep normalizing because temporary go away. Re going to if they are right, it is the right spots. If they are wrong, Monetary Policy should be more aggressive rather than exiting faster. Onid one of the questions all of our minds is who is the right person to make that decision at the Federal Reserve . Who should be the next chair whether it is janet yellen or someone else, to address that and make that critical choice . I would say if janet yellen was reelected, she would be the right choice. She has done the right things. She is a steady hand. You know what her views are. She has essentially been moving the economy the right direction. The problem is she a democrat, not republican. Most likely this president does not trust her. Therefore i think there is the chance that she will be reappointed. Gary cohen. L, alix are you going to place your bets . [laughter] nouriel to be honest. We dont know. I would say someone following the current holocene of janet yellen. Alix thank you for joining us. This is bloomberg. Alix show me the inflation. Yields of the dollar tumble after cory inflation slowed and evidence Economic Growth continues without price increases. And healthy debate President Trump fell Administration Takes step to roll back obamacare. Top democrats call it pointless sabotage. Bank of america jumped after posting its best profit in six years. David welcome to bloomberg this friday, october 13 spirit it is friday the 13th, as you pointed out ,alix. Im david westin. Alix steel is the me. Jonathan ferro is off today. Alix we saw the market move on that cpi data. You do see the rally continuing over in europe at the best level since june in a nice outperformance in the german bond market. Lets take a look at the action. U. S. , youarket in the , the curve is steepening on that cpi move. Inery interesting play out the u. S. Lets go to Abigail Doolittle who is looking at stocks. Abigail happy friday the 13th to you and all of our viewers. We have overnight news that the white house is cutting off subsidies for insurers. We have health care sharply down. These companies were the most exposed to obamacare, so they stand to lose the most. Also they have lost 60 or 70 of their revenue from medicaid. The administration seems to be loosening obamacare, lots of questions on the first week of the year. This is also hitting the hospitals. Holdings are all down sharply, and also on that executive order signed yesterday. One analyst says all of this is profoundly stabilizing, that the Hospital Group may be impacted to medically and ending the subsidies to insurers will help these will hurt these hospitals in a very big way. Get this, on all of this. Asthe shares opened lower, it appears they will, they are on case for the worst losing streak on a daily basis since 2008. In a decade. That is how bearish as this news is being received. We are slightly lower with a downgrade of our clays. We are up nearly 8 10 of 1 . Potentialg catch up on the electric vehicle ridesharing. Economists trying to catch up to set to tesla. Tesla has received all of the electric vehicle attention. Analysts believe that jam could get a piece of that. These shares could rise more than 20 from current levels. Not so shabby. So much, Abigail Doolittle. Im thinking of buying a new car. David i have a track or you can look at. I will give you some reviews. Economic Growth Continues apace, stoking price increases, core cpi coming up, essentially flat and the dollar treasury yield, moving lower, three basis points. It is still down by 2 10 of 1 . Joining us now, kevin logan of katie from goldman sachs. Thank you. Where is the inflation . Are sogiven valuations extended, we like to see this combination of good earnings, good growth, and low inflation. People should feel good about that. Beiously, some people would surprised, and we talked about it earlier, why inflation has not come through. Really technology we can continue to thank for a very big role in depressing prices. We think it will have continued strong growth. That does not change our view about a rate hike, which will probably happen in november. Alix we have retail sales. We have not talked about that in the last hour. They were really solid. Katie first, we tell you to stay long in equity markets. Around the world would be a good thing, and we are encouraged by retail sales and this absolutely points to the health of the underlying economy. In order to maintain steady growth you need a strong consumer and Capital Investment. Katie thats right. David where are we . Are we seeing any weakness in the consumer . Katie we are actually pretty encouraged. Were working through those numbers. In aggregate, we are pretty in courage what banks are telling us. Creditere have been losses, but from a very, very low base. Actually you want to see pickups and that low base. Be good for Economic Growth. We also brought up capex. When you look across the whole Thing Companies have done is under invest in capex. Himre looking it at between federal investing into themselves. We think the market will reward that. Inid have you seen a pickup Capital Investment . We have not seen a lot of growth. Katie there is the testament to measure productivity. Which i can come back to. We have seen companies pick up on capex. What is your top conviction . How do you have a constructive portfolio . Where is stuff valued . U. S. Equities, one place we are looking for opportunities, we have a tail it tailwind of past perform. We think we will get progress by the end of the year. 25 . Have a tax rate of small cap is 32 . They will be the beneficiaries of any tax reform. You always pay a premium for smallcap companies. And then there are interesting secular growth stories you can identify in the smallcap space. Particularly in the consumer space, which you alluded to. Maybe people are not buying apparel as much, but they are spending a lot of money on experiences. Owns ski resorts. See all of these individuals secular growth stories. So, smallcap is definitely an opportunity. Im glad you put those together. This is what perplexes me about smallcap. The earnings are coming down. Lower. Ning estimates are have you square that for smallcap . Katie there will be a lot of super bowl noise. A lot of the quarter of the benchmark loses money. This is where you want to be with active stock managers who can find earnings. Theyok at our portfolio, are doing so much better, and yes, we have had a recent rally, but if you look at a year to date basis, they are underperforming, so therefore not fully pricing in the tax reform that we think will come in. David tax reform or tax cuts sound good, but does it matter how you pay for it . If youre running a deficit, doesnt really affect bonds, which ultimately can hurt equities if your yields go down. Katie yes. This is the long road. The aggregate, that can be good for equities markets because, of course, we have to look at the impact on bond markets and we do not know all of the details of policy. But big picture, we think the tax rates will come down and i should be quite good for equity markets. Koch will betie staying with us and we will have pierre moscovici. Live from new york, this is bloomberg. Alix shares of wells fargo are lower premarket. A disappointing earnings increase. Those Net Interest Margins coming in at 2. 1 percent. On the good side you have bank of america beating on the bottom line. Shares are edging higher before the open. ,oining us now, Sharon Cassidy what is your take away . I would say be bank of america numbers, as you pointed out, were a strong bottom line number. Many of the metrics we monitor for these large banks came in very positive for bank of america. Also point out the expense control of bank of america is quite strong and they continue to focus on reducing expenses to a 53 billion number for next year. They obviously had the one time charge, so they came in line with expectations on the bottom line. But it was not as strong as other banks as they continue to work through this scandal they are dealing with. Is, what big question is the credit quality of the consumer loans. 300 million for jpmorgan, when hunters 70 million for bank of america. What is your read on that. What is your read on that . I would say right now we are not to worried about it. When we look to the Global Nature of these companies they are handling a higher level of expenses. D but theyre coming off a very, low basis. Are going tok we see an acceleration, you know, Going Forward from the current level, and therefore it will be very manageable. These are big, diversified companies and they can handle the elevated levels. If they continue to grow at this rate, next year there will be greater concerns. David in general, what point will they be dealing with growth again . Look at brian moynihan. At what point do they go back on the offense . I would say they started to go on the offense, specifically bank of america, jp morgan has been on the offense for two or three years. Citi is on the offensive turn as well. Granted, wells fargo is dealing with the scandal. Banks generally grow at a phenomenal rate of gdp growth is 3 ,t phenomenal rate four percent, maybe 5 , that is the less that is the best you are going to see. However, if they can control the operating expenses, the operating leverage could lead to 8 , 9 Earnings Growth and the share count could push the Earnings Growth into possibly double digits. So, we could see bottom line doubledigit Earnings Growth for these companies with midsingledigit topline growth. David all right, always good to have you. Koch is simply here. Kitty its a leopard bet on the health of the u. S. Economy. We have big positions and u. S. Banks and banks around the world. I would say were looking at slow growth. Growth incking loan the sea and i stays. That looks little tepid compared to banks that are at 2 , 3 . That could tell us something about the confidence of companies and we need to track that. But we already touched on credit quality. A little bit of deterioration, but we are not panicking about it. And then technology so, what is who is making the biggest tech bet, because you will have to see costs come down. Obviously the market was to see more on that front and it is waiting on revenues because people want more frictionless banking, and that should really benefit the large banks. Jpmorgan, i think, this year has spent about 10 billion. It should benefit the large banks. Its important for their longterm future. Alix how important . The big guys, the regionals, the insurers . Katie yeah, we deal with these large banks in the u. S. And around the world. And because technology is so sheetsnt and the balance are better positioned, we do like Regional Banks, but you have to be very, very selective. We own them. We have a larger position in first public, which announced this morning. That is a company that as a Regional Bank targets very highquality banks. Extremely caught strong credit quality. Good lung growth, but at the same time, they have been really missionaries. David are you expecting consolidation among the regionals . Katie of course, that is a theme that we are looking at. David ok, katie koch will be staying with us. Coming up later, an interview with wells fargos chief financial officer. Life from new york, this is bloomberg. Trump isesident reforming appear on his own after failing to get congress to move. , issuing he issued an itcutive order, saying that is ok for interest get together and sell insurance across state lines, but the governments not going to pay those premiums anymore. Still with us in new york is katie koch. You. , lets start with the president has been pretty busy on health care. Explain what this means netnet. He comes out and says we are not going to pay the premiums anymore. Sure, lets separate the two. The executive orders yesterday will have an impact, but is going to take months to be felt in the market because the different agencies have to write rules that then will set the guidelines for these new policies. The more impactful decision the president made was regarding these cost sharing reduction payments, and in that is an immediate stop to subsidies which will have ripples in washington and in wall street, and lets be clear about what is happening here. There is a slow, but systematic attempt to remove the nuts and bolts of the Affordable Care act in order to foster uncertainty in the market and, i think, catalyze some degree of legislative action. The game here . Is it going to say im going to do this because it will make it so intolerable congress has to act question mark because i wonder how this Congress People will be treated when the quebec to the district and people find out they no longer get subsidies for their health care . David, youre right, especially members of Congress Facing reelection in 13 months. You have to look at what the white house is done. Everything from those orders yesterday to ending because chairing payments all the way to the open enrollmentperiod. In half and they said the website will be down for maintenance for 12 hours on each of the sundays when it is available. So i think what the white house is doing is all that it can do without let without legislative action, which is to create a degree of uncertainty around the marketplace and therefore put pressure on congress to act. David katie, generally in the health care sector, where are you . Ofie we have seen a lot challenges to the insurers. We are under with that part of the market. The other challenge to the Health Care Market is the amazon ification, if i can use that word, of businesses. We are worried about health care being upset by amazon and other you retailers. Where we are positioned is in biotech. Biotech looks pretty attractively valued, relative to its history and relative to technology. Usually the premium is that discount. The government has seemed supportive of faster fda approvals. Bedo think that there could more accommodation around doug for drug prices. You have to separate the noise and look at what is going to happen in the real economy. We are not so concerned on that front. We have the path to victory selectively for the real biotech companies. I want you to weigh in on the drug prices. When President Trump first came to office he was very open he would reform this, there are be cheaper drugs, competition. Whatever happened to that . Are they still proceeding with that . Falls sure, i think it under the category of View Campaign import tree, but you govern in prose. The reality is theres not a lot that can be done that would make it through this congress. Senatese republican and are not going to cap drug prices. The most that you can affect were changes to the Medicare Program with regards to negotiating drug prices, but sweeping action is highly unlikely. Instead it will remain the political punching bag it has been for 18 to 24 months. David what about sweeping action on cutting back on stimulus . Do you expect congress to go after this then . Importanthink it is to keep in mind this is not the final word. There most likely will be a lawsuit from a number of states, 17 or 18 states probably will challenge it in court. More importantly, i think there will be a legislative deal to put these costsharing payments back into place for some time, if only because these lawmakers to not want to go home to the midterms with this hanging around their next on top of everything else. Do you hedge against cc . Katie i think in general you we thinkhe portfolio, that theres a lot of optimism that is not in the equity market. I think people are overly i hear the challenges, but people are overly pessimistic. They are pricing in absolutely no action and we think that there will be progress around tax reform, around deregulation that should be supportive of this. Alix theyve got to go home and get reelected. ,ll right, Isaac Boltansky always good to see you. Koch will be sticking with us. The dow jones up as well, and i want to highlight the rally we are seeing. The outperformance is in the german bond market. You see them lower by four basis points. Other asset classes, watching eurodollar, pretty much flat actually moving higher as the dollar sells off. You have the curve steepening. This is bloomberg daybreak. I am alix steel. Cpi data. Boost that a nice bit happening in treasuries. The 10 year getting a nice close , opening lower by four basis points. Like alar index dropped stone. Having cpi. Disappointing. Where is the inflation . Crude is totally different. By 1. 6 . President trump moving away from an iran deal. What does that do to supply . Abigail a moderately bullish open. Nasdaq slightly higher after small declines yesterday. Were looking at some records. Rading at an alltime high the nasdaq the same deal. Bullish activity on the open. Lots of records on the open after small declines yesterday. Match aon pace to streak in march of six weeks in a row. One sector getting hit, lots of the Insurance Companies trading sharply lower. The white house is cutting subsidies to insurers. And anthem, they are trading lower. They have little exposure to obamacare. Tock plunging down 8. 6 lots of exposure to medicaid. It seems like all of these Companies Trading off on the uncertainty. The Trump Administration is trying to shake up health care. Lots of carnage there. It is not all about health care. We take a look at technology. Some investors are getting bearish. What we are looking at his option activity on the queue qqq. That is a bet the nasdaq is going lower. The Overall Option activity is rising. Investors getting involved on this. The ratio trading higher. More investors are thinking the queue qqq could take a hit in the relatively near future and theyre looking to cash in on that. We will see how those earnings come in next week. Thank you. S p and nasdaq touching record highs. Still what thus, where do you like tech . People arelot of nervous because it has had a big run. Than thea point higher s p 500. If you look at is this the tech bubble . If you look at the top five stocks in the u. S. Tech market they are on average on a multiple. Those stocks were on 60 times the multiple. Valued. Etty reasonably we do see opportunity there. Like the sales growth. Much higher than the market. If we are not going to get a lot exposure, following companies with good sales and Free Cash Flow is a good thing to do. Tech has a lot of different companies. Is there any segmentation . Driving it more than others . Those companies have great management teams, great execution. We say a lot of runway ahead for them. One thing we are monitoring is the Regulatory Environment across those Companies Including the tax front with cash abroad and antitrust policies. It is something we are monitoring. Beyond them there are companies involved, like the cloud, ecommerce. Is final thing i want to say you could argue that Many Companies across many sectors are technology companies. Ford. Data out on gm and they can embrace technology the most and make the biggest rides toward winning the electric game. They could be some of the winners. Not just within the vertical but who were the leaders in adopting technology . Something tore be discount for newer companies . Regulars have taken a hard look. We know what the regulation is. With the new guys we dont know. Should there be something for the unknown . There are lots of moving parts. But you do need to apply some discount on how that is going to play out. You should do that. Auto that have the greatest technology and are the leaders in autonomous vehicles, the market is in asking them to make money. They are trading at rich valuations. We should be concerned about that. What would Regulatory Environments me . Mean . Can they win the race of technology . How much are they going to have to spend . Do they have the ability in terms of expertise, and can they emerge as a winner . Interestingto be an space to watch. A lot of out the to be made in that space for investors. Alix what do you expect for earnings . We need earnings to come through strongly. This is the risk of the market. If we see a weakness, markets that selloff. We want to see a robust earnings season. Generally that is our expectation. We had doubledigit Earnings Growth for the first time in five years. We are expecting similar strong earnings but we are watching closely. Any disappointment is going to be bad for equity markets. Alix the bar is pretty low. A pleasure to have you with us. Financials and health care, the biggest laggards today. Hospital stock. Each of administration would end insured subsidies. And covering the hospital plans, who gets hurt the most . Whats the biggest impact last night was the cutting of the csr , loaded up the bulls for low income. That is going to have a onetime cfos n medicaid in mcos. Both have said they have anticipated this. The hospital exposure isnt going to be as large. It is more longterm exposure. Do towhat can they protect themselves . Especially when they dont know what workarounds there may be. How do you handle that . , the volatility is straightforward. There were two programs to fund for these public exchanges. The premium subsidies, now that they are gone, they will increase premiums. Premiums are the basis for the size of the subsidies. They will be able to adjust for this pretty easily. For hospitals, having more exposure is more typical. That has been an ongoing theme. That is an operational challenge to figure how they are going to collect. Take us through that. I have a chart. Since the election the track of the stocks, the blue line goes all the way out. The providers have not done well at all. What is accounting for that . Lance the insurers are doing well as a result of Earnings Growth they have been seeing as well as improvements in valuations coming out of concerns about what health care would do reform would do to the. We have gotten to a point where you are at full and fair values on the insurance side. Youre going to look for this insurance growth from these programs and some selfhelp stories on particular companies. On the hospital side, you have seen weaker utilization of hospitals. The the past 510 years deductibles have gotten large enough so that individuals are deciding whether they need to go service oral for a maybe they can go somewhere that is less expenses, or delay a procedure. The Insurance Companies are trying to shift people out of the expensive hospitals for surgeries and out to freestanding locations that are less expenses expensive. Does that mean we are starting to bend the cost curve . Curveare bending the cost when it comes to hospital costs. The issue is there are a number of health care costs. Pharmacy costs have continued to rise. They are one of the fastestgrowing components of that. We shipped people to these , that area isters growing disproportionately high. Overall costs are lower than they were 10 years ago. Alix great stuff. Thank you very much. Here is where we trade on this friday the 13th. Smashing through a new record high. S p up by two points. High continues in europe. The bond market also rallying in europe. Yields moving lower. He saw a huge move. Trade that. We are one of the losers in the stock market today. This is bloomberg. Alix this is bloomberg daybreak. Up, the ubs chairman live from the spring meeting. This is bloomberg. Strong earnings coming up from america. A drop in fixed income trading revenue. , they wereells fargo disappointing numbers in the third quarter. The stock of all the financials is down. Joining us now, the managing director and senior bank analyst. Lets go to you, david. Explain these two banks. We think of them in the same way. Earnings coming up from wells fargo on the one hand were very different today. They were mildly different. Wells fargo had a charge related to its litigation. The trends were not meaningfully different. Both are generally in line with expectations and stocks ran quite a bit going into these are earnings. Locket forward for us. What did you say . Alix what do you like in and out of earnings. It would be the most boring quarter we have seen in some time. Slow. Been pretty margins are flat. Credit continues to be good. We are of the view the risk reward is an attractive if you look at sentiment and how positive it is and how much they have run. That is the outlook for the they are now shorting Italian Financial stocks. You own financial italian banks. We do. We have a position. We have some positions across europe in highquality european banks. It could be a difference in time. We see and improving back drop. Find things wedo like across europe. I would say take a step back and look across the world we see better opportunities outside the u. S. And beyond europe in japan. That is our favorite place to look. When you look at japan we havent market offering great secular growth opportunities. We talked about the electrification of vehicles. When you look at japan, we own a company that makes the inside parts to those electronic vehicles. Current cars have 10 small motors. In 10 years they will have 50 to 100 motors. Theyre making a good amount of money that they can invest back in the business to defend that innovation. Overall in japan you get exposure to that in the emerging market consumer. It is a threehour flight between tokyo and beijing. You can get exposure in japan. If you look at the market overall it is a 20 discount. We like the price. Alix thank you. You, it was a real pleasure. Watch us online, click on our charts and graphics. This is bloomberg. This is bloomberg daybreak. Here is how we trade on this friday the 13th. Record highs. You are looking at the nasdaq near record highs. Up 14 points. Are leadingx, they the charge. Look out for Bank Earnings as well. I want to head over to washington. We have a very special guest. Welcome you to Bloomberg Television and radio worldwide. The most interesting socialist in europe, he is a supporter of president hollande. With the european commissioner for economic and financial affairs, Francine Lacqua would insist i get that correct. So important to me is the generali shall change in the labor dynamic generational change in the labor dynamic in europe. You have been at the center of a dialogue in paris. In france the where does it stand . Socialism, labor and the elite . France is the country which from the imagel it was at the center of europe. Now it is somewhere in the french. This country could have chosen populism. They chose to elect a young president macron with a proeuropean language. The french are not unable to be reformed. They are people who are worried and generous. It is high time for this country to reform. France is in recovery. We need to also have a point of compromise between labor and wealth. That is probably what the difficulty is today to find a Strong Social dialogue. That social dialogue wraps an around wraps around interesting european centralism. The stunning results of germany where the far right reenters. Shift ina generational European Social contract . There could be a contradiction. Two opposite moves. Europe, there are elections in austria this sunday. The extreme right will be strong. Battles has lost some in france. But populism has not lost the war. There is a feeling that people are dissatisfied. Maybe stronger. Takes youngsters. It was the case in france and austria. We need to be more careful about that. You are talking about the mainstream parties. It threatened to disappear. We need to fight to recover. It can. There is still will you provide support for that . Here ine things to do washington and europe but i will provide ideas. I think my generation is not so ancient that we cannot deliver messages. I tried to express myself. Eadership is another question but the european elections, lets go back to the essential and the rightes, party, the republicans suffered a loss. There is a new generation. Can there be a comeback . Is one of the challenges. I have to go to brexit. The distrust and tension between france and the united kingdom, we see brexit as well, what do you need from mr. Hammond and Prime Minister may to jumpstart the Brexit Debate to a constructive opposition is clear. It is a divorce. It needs to be a good divorce with a strong relationship after the divorce. To discuss the future relationship, the u. K. Will be a european country even if it is not inside the eu. We need to see the issues on the table. Andeed to have a strong definite discussion about short settlements and cities, and rights. First things first. You use the divorce model. Do you need a more structured ,ialogue like a Court Process or Something Like american arbitration . What do you need from the british . More precision from them . Two weeks ago may delivered a speech, everyone appreciated it. The idea of transition. The reaction by all was it is getting better. But everybody said we need to move from this speech, which is good, too precise proposals. We are still waiting for them. Had to say there whereas there was not significant progress to move forward. Progress is possible. Progress has to be happening. And it can happen outside of the courtroom as well. You represent the european union, or will it be driven by the state leaders . We have a precise organization. Our british friends are aware of that. We have a unique negotiator. Spoke about phil hammond. He is a friend. Im not negotiating with phil hammond. It does not only represent the commission. He has a clear mandate by the european council. Thebritish side must know 27 have a clear position. We see bank of america decide they are going to move from london to paris. Are we going to see more people in london in the city make the choice to leave for paris . Is of course a fantastic city. Through this shift, it is not one, there are other centers, also spain. You can see how necessary it is for these banks to have a strong foot in the eurozone. This is why im a strong advocate of the eurozone. To value that. Are my bowties going to be more expensive because of brexit . Dont worry. Dont worry. Timely appreciate your today. We are at the meeting of the International Monetary fund and the world bank. Madame lagarde is speaking right now. Briefings, middle eastern development. The asian meetings were important for a number of our guests. We need to thank our team here in washington and new york as well. This is bloomberg. Stay with us. It is 10 00 in new york city. 3 00 in london. From new york, im vonnie quinn. And i mark barton. I am mark barton. Vonnie more from the Imf World Bank meeting. Health care. Ng we start with breaking data. Julie we have the university of Michigan Consumer confidence 101, higherng in at than the 95 that was estimated. This is the preliminary number. Current conditions holding pretty steady. Current conditions still tracking higher than expectations. That has been the recent change here. Consumer sentiment continues to be strong