Transcripts For BLOOMBERG Bloomberg Daybreak Americas 20170711

We are seeing how this all fits into the focus with theresa may and whether she can work with the labour party in particular. We will be looking to talk about that with our brexit team here at bloomberg. We also have great guests coming up. David thank you very much. Lets get caught up on the markets. Alix here is where we stacked up. Equities have gone nowhere. Volume in europe is pitiful at the moment. I am looking at cable, not necessarily on theresa mays speech, but the chief economist at the boe will talk about where he comes down on the hawks vers us doves side. Selling on the margin coming down on the board. Crude goes down, 0. 8 . There is a risk of oil below 40 if opec does not shock and on the markets. David it is time now for your morning brief. We will get u. S. Job opening numbers and turnover for the month of may. And we will get the keynote address on normalizing the Central Banks Balance Sheet in new york city. Sell 123ury will billion in u. S. 10 year notes. That is all taking place today. Late yesterday, we learned President Trump is nominating randall coral to be the Federal Reserves chief banking regulator. He is the newly nominated vice chairman of he is expected to play a pivotal role in carrying out Donald Trumps pledge to ease banking regulations after the 2008 financial crisis. There are a couple of specific banks, but the macro thing things, but the macro theg like the volcker rule, macro issue is that the government should not be a player in the financial market, it should be a referee. David joining me now is michael mckee. This is a big move. What will this do to banks . Michael it should mean less regulation for banks and perhaps a little more profit. The question is how much can orioles do on his own corals do on his own . What changes he makes he has to get through the fed board of governors and working with the office of the comptroller of the ad toncy and fdic he standardize regulations across the industry. It would probably do things like have avolcker rule volcker rule lightnened. He thinks capital standards are too high, causing banks to raise Interest Rates to increase profits. He thinks there are good things about doddfrank, but he does want to make some changes. One would be to lighten the stress test regulations. David it is not as clear to the world what Donald Trumps Monetary Policy is, but it is clear he wants less relation of the banks regulation of the banks. Michael dangelo was the point man forgetting new regulation for getting new regulations into the banking system. From what does he want Monetary Policy, is he going to care about financial conditions . He mentioned that a little bit talking to bloomberg tv. Doddfrank repeal is politically difficult at this point. You could see significant changes at this point. In some ways it was not ambitious enough, and in other ways it was overly ambitious. I think there are a lot of ways to refine doddfrank and other regulatory policy. Alix that was also about doddfrank. Nonetheless, we are talking about a rulesbased economist. He is not an economist, but he is a lawyer. Theres something wrong with that. He believes you should use a rule like the taylor rule to make Monetary Policy predictable so wall street is not trying to guess what individual members of the fed will do. They know what will happen a stunned the inputs to the role. Based on the inputs to the rule. The fed is very much against this. If you look at the bottom of the screen, these are all the inputs into the Bloomberg Taylor rule model. These are all different taylor rule models. The blue line is how the Interest Rate would go up if you use that model. If you use the aggressive rate, it goes up even more. The question is which will do use, how do you use it. Fed officials will say we need discretion because there are too many variables in a complex economy. Alix with us is Michael Purvis ribari. M her party will we see more rulesbased Monetary Policy now . I dont think so at all. I think this years hearings in congress will be illustrative. I think there are political pressures across many economies to push in that direction. I think Monetary Policy is too complex to be formed into specific roles. Behink Central Banks will successful in fending off this pressure. Alix there is so much unpredictability in the fed, we need some predict ability in the markets, and rulesbased is a way to get that. The rules are not only very complex, but some of them are broken. I think the fed has been learning on the job that some of these things we all learned in Business School are not necessarily as relevant. When you talk about aggressive central banking, you have to talk about inflation, and the inflation story is nuanced and complex. I think that is where janet belens strategy is going to very relevant. Understanding which taylor rule is going to be implemented is going to probably be as confusing as not being rulesbased. The answer of going away from rules is to signal as far in advance as possible what you are thinking about. Interesting to hear from janet yellen as she testifies before congress about this discussion against rules versus data. Are going to have a tougher time because it is not clear the rules are working. Findseem to be really to as where wage pressures are versus employment. I think there is a lot of discussion about specific roles. The devil is in that detail. To pushing responses for roles to tell what specific rules you would use in practice. I resume that chairman yellen will reinforce what is already in the Monetary Policy report, which is how difficult it is to work with the practical elements of rules but instead the fed is ready to be accountable. Giving the fed the discretion the possibility of complex economy requires. Alix they deal with the dual mandate of inflation and employment, but there is also asset bubbles of financial conditions, do we have an idea where mr. Corals stands on asset bubbles . He believes they have been too low for too long. He has not used the word bubble or suggested we are in trouble, but he has suggested he is worried. David thank you very much. Our guests will be staying with us. Coming up, we will set down with David Shulkin and talk about the sweeping changes he is setting up for the v. A. And what that might mean for the Health Care System overall. This is bloomberg. This is bloomberg daybreak. J. P. Morgan chase seo jamie dimon says the European Union could force banks to move more employees from the day after a first wave of relocations. He said he thinks more people should focus more on the second step. If the eu wants to move jobs out of london, they can dictate that. Google will find out as soon as tomorrow if it owes 1. 3 billion in back taxes to france. Judges are set to roll whether google illegally. Taxes by moving sales in the country to ireland. Illegally dodged taxes by moving sales in the country to ireland. About 1take over billion. Your Bloomberg Business flash. Caroline thank you. U. K. Prime minister theresa may giving a speech in london this morning. Lets get the latest headlinesi what is next for the brexit process. This speech coming from theresa may, it felt like everything was leaked, there was not much substance. Ofre is a slight whiff desperation. She is talking about Worker Rights and regulation and part of that message was that opposition lawmakers should come up with their own suggestions. Ideas . Ut of is she asking others after this real change making election . , thee flipside, on Brexit Labour Party has yet to fully formed a position in part because they dont have to and they want to keep some of the powder dry. Theresa may wanting to push them into making commitments that may come back to them later. Caroline Jeremy Corbyn himself does not seem to be averse to brexit itself and is not the biggest fan of the eu. We know optimism is falling among the confederation of businesses. We know jamie dimon, jpmorgan eue in london, saying the could actually move more than hundreds of jobs out of london. How much is the Business Community going to lean on theresa may . There is a real sense of momentum behind is this is. They think the election was again changer. It is honest like we are a year back before brexit. Jamie dimon has been the most outspoken of the week American Bank ceos in discussing brexit. They think their moment has finally come to shape brexit and make it more bank friendly. The chancellor of exchequer is someone willing to listen to them, but the question is if theresa may willing to listen to them. They are hoping to shape their agenda so that when we get to the trade deal, theresa may takes their thoughts with her. Caroline lets listen. Though the results of the general election are not what i expected, the dividing believes are unchanged defining beliefs are unchanged. I remain steadfast. Caroline that was theresa may speaking today at the royal society. Bloombergs managing editor or brexit is with us, and joining us is Michael Purvis for weeden. You are with us from new york. Let me get your point of view first. When we talking about political posturing, the markets, im looking at my bloomberg, looking at the outperforming currency, which is the british pound, but i feel it is moving more on what we may see out of the bank of england. I would agree with that. I think the Monetary Policy story in the u. K. Has become interesting. We have had a number of bank of england speakers pointing to the possibility of an Interest Rate hike. Markets are believing them more than we they were earlier in the year. Theres also a sense of Financial Markets that there is an opening to a softer brexit eventually. That is probably somewhat supportive of the pound overall despite the fact that the economy is actually showing mixed developments. Caroline certainly, Consumer Sentiment on the downhill. Do you believe politics plays into all this . Maybe we are having a regime change. Maybe Political Risk is something that is going to be factored into currency pairs. Is Political Risk going to be one of them . The last couple of years, real rate and nominal rate differentials have been the factor for defining em currency pairs. You are saying that shift. That shift. I think not just fx markets but also equity markets have under priced Political Risk. This may be a u. K. Specific issue, but whether the forces for the catalysts of populist events like brexit a year ago and donald trump in november, whether those are being translated into the far left. You saw that in the French Election with melenchon getting 20 out of nowhere. Tremendouscorbyn has momentum right now. The markets still have to contend with if corbyn were to be a prime minister, what does that really mean for fiscal policies and such. That is not just a pound discussion, but a broader economic discussion. Fxid we will start with because that is your specialty, are they basically pricing and brexit and perhaps even a corbyn prime ministership . Is it too soon to tell . Saying we will lose employees in the first round, but there is also the second round. When it comes to what markets are pricing right now around these specific political events, it is essentially impossible to tell. I have not that anybody who seriously doubts brexit is likely to go ahead. I would assume that is incorporated into Market Pricing. There is also a slightly softer version of brexit than what was discussed earlier. I would agree with the previous speaker that some of the uncertainty related to potential labor victories is not reflected in Market Pricing currently. For marketre is room reactions eventually. I think the whole range of areas, as you mentioned brexit, political future in the u. K. As far as when the next elections will take place and who is the next government. Alix we have standard and poor saying today they dont expect rate hikes from the boe until 2018. What is your take on the base case of what the boe is going to do . We also doubt that the bank of england will go ahead and hike this year. We dont pencil want in until late in 2019. We think the u. K. Economy is slowing, and when it comes to willive decision the boe shrink away. Theyre putting up a scenario of hiking. He is an important figure. I think it is not just the obvious one, but the following Inflation Report in november. Alix good to see you. Michael purvis, weeden global strategist, sticking with us. Caroline hyde will be with us throughout the program. Up, dont miss it, this is bloomberg. Alix this is bloomberg daybreak. Volume is light. Equities are stopped pretty much across the board. Interesting reactions taking place in the currency and bond markets. Dollaryen, fourmonth high. Centralbank divergence, as is where it is playing out. Bond bears getting a relief here. Crude off over 1 . Goldman sachs says there is a risk of oil below 40. By jamie dimond speaking today about the Balance Sheet unwind from the fed can be more disruptive than we are pricing in. David as well as ecb. This may be worse than people anticipate. Alix the fed is like the sleeper risk. David you notice coming. Sooner or later it is coming. Coming up, secretary dr. Shulkin, he is the secretary of the department of veterans affairs. Live from new york, this is bloomberg. Europe, s p down in 500 and dow futures down. Not a lot of action in europe. The man watching oil off the over 1 . Barclays is cutting its forecast. A relatively stronger dollar in terms of yen. Sterling the only currency stronger than the dollar. We are waiting for the chief economist speaking in an hours time. Where will they come down in the hot trend of debate. Dove debate . Wk and across the board, a sleepy tuesday, waiting for action. That could come from yellen tomorrow. Lets get an update on headlines outside the business world. The man who said of the meeting between donald trump doing your and donald trump ior and election lawyer trump junior conceived teammate time for the meeting trump junior was told ahead of the session that the russian government was behind the information on clinton. The trade deal with donald trump is saying they will be easy to promise but hard to deliver. That is a warning from trade analyst to say the challenge for the u. K. s america boost more leverage the u. K. That will cause may to compromise on areas. Thousands are expected to attend the funeral of a new York City Police officer who was shot and killed while sitting inside a Police Vehicle last week. She was a 12 year veteran of the force and a mother of three. Fors day two of hell commuters at penn station. Ridershe first day the had mostly no issues. Repair work will last until labor day. Global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. I am emma chandra. This is bloomberg. David the Veterans Administration provides comprehensive health care for military veterans, employing some 380,000 people and spending billions of dollars to do it. Improving the va is one of trumps Top Priorities and we are joined by the man he asked to get it done, and before coming to the va, he ran the moorestown Medical Center in new jersey. Welcome to bloomberg. Good to have you. You have a big task, and you have it undertaken. Give us a sense of what you believe you need to, set the va. First, we have to get it right for our veterans. There is no doubt the country has a responsibility to those who defend us and i feel strongly that we have to do better than we have been doing. We are modernizing the system and in every way possible, we are getting veterans more choice, updating our system, so they are better tools, and we are making sure we can back the trust of our veterans. David give us a sense of deliverables you want to get done. We are making it easier to get care in the ba, making more appointments in a timely way. And making these veterans who went to get care in the private sector or community and we are improving our facilities, getting new information system, it improving the timeliness and making a valuable and , andparent wait times everything we do, including when we let employees go. David you post wait times so people can look at them. This is a vast bureaucracy. Other people before you has said they wanted to reform the va and it is fair to say they have not gotten it done. How do you change that they a bureaucracy . Dr. Shulkin we areve the issues dealing with our issues dealt with over multiple administrations and for decades. Now is the time to address these problems. The way you have to do it is with support from the president. We have that. Then you have to have bipartisan support in congress. This is an issue democrats and republicans agree upon. It is time to take the reforms necessary. David do you need more money to get the job done . Dr. Shulkin i do not think this is a money problem. The president has put a budget forth for 2018 that is enough to get this job done. Primarilyis is improving the way we do business and treating it more like a private sector would approach a problem like this. This is a fundamental reform, not necessarily a money reform. David whether it is a business or va, there can be resistance from inside. You are trying to higher people faster and move people out who are not getting the job done. Are you getting resistance from rankandfile . Dr. Shulkin overall, people who work in the va are there because they believe in the mission and they want to do better. They know when they are part of a bureaucracy that isnt working. The vast majority of our employees are behind us and are encouraged by the changes they see. That are a minority stuck in the status quo, and what we are hoping to do is let them understand this is not optional. We will make the changes and we wanted them to come on board. For the few who do not, they probably need to find another place to work. Provide medical care is a large part, and you are a physician. You see patients at the Veterans Administration but you also run private organizations. Give us the sense of not the politics on capitol hill, but what should we do to Reform Health care in this country to make sure people have health care and it is affordable for the country . Dr. Shulkin as we have had this debate, pace is not an easy issue. This is not an easy issue. I will to you some of the things essential. Giving the patient more choice and involving them in decisionmaking more has to be the foundation of any new Health Care System. We will seethink the biggest advances in cost and quality through better diagnosis. What we are seeing now is revolution in what i call artificial intelligence. The ability to assemble information from big data sources, even when it relates to an individual patient and make more accurate diagnosis so we can target treatments personalized and individualized. Finally, i think technology will help provide more care in peoples homes. We spend so much money at the end of life and nobody wants to leave their home to go to an institution or dying hospital. The more we can keep people in a comfortable setting, the more costeffective area david we recently had effective. David we recently had another technology and they said can make a practical matter. How much money could we save on health care by the full implementation of what Technology Makes possible . You combine when technology with better and faster diagnosis, you were looking at a 30 opportunity. So much time has been spent replicating testing and looking for the right answers, and not providing the right treatment in the first place. We are looking at a 30 opportunity there. David that is a lot of money. Thank you. That is dr. David shulkin, secretary of veterans affairs. Thank you. Alix thank you. Staying with washington, russia versus President Trumps legislative agenda. Reports report donald trump was part ofezvous the effort to help his father take office. Joining us now is our chief washington correspondent kevin cirilli. It will be russia versus legislative agenda, what is the tension . Kevin the latest report from the New York Times suggested emailed that donald trump junior was aware that the meeting he took with a kremlin affiliated lawyer was actually someone who was going to try to help efforts to help the candidate donald aiding campaign in against hillary clinton. Donald trump juniors attorney at what the statement that says in my view, this is much ado about nothing. Don jr. Had no information on what was to be discussed. Further, there were still understanding or commitment that he or anyone else would find information, whatever it turned out to be, would be of interest or would survive due diligence. Donald trump junior pressing back against criticism he was working with any type of russian kremlin affiliated attorney to collude with russians. The criticism from the left, as well as concerns within the republican party, growing this morning. Alix we will be watching that. Also with us is Michael Purvis. Your base case that the s p is below what we are seeing now, one of the more bearish calls. What gets us there . Michael for starters, i have taken my expectations down. That makes me an outlier. The second factor would be some pe contraction, particularly if rates edge higher throughout the balance of the year. Alix what about volatility . Headlines do not disrupt the market, what is your base case for volume . Are deepthere structure forces for volatility. Turn taking earnings down does not have to be volatility event. It does not have to be an epic, vix is going 38 and will average 25 for the second half of the year. Having said that, there are some key, tectonic plates starting to shift at the central banking level, where you are starting to see rates rise about sovereign yields in the u. K. , germany, and starting to edge higher. Tothose rates start normalize, the chances for communication errors from the fed increases. As that happens, you will have more robust volatility environment potential he. Josh potentially. I think the senate potentially. I think signaling well in advance what they are trying to do, there is still going to be on that page gradualist, but the room for error increases and that should increase the floor of the vix to a higher level. Call, michaelyour purvis of weeden co. Is sticking with us. Lots to say about this environment in investing. This is bloomberg. Am emma chandra. Coming up in the next hour, the encore ceo. David we want to go to erik schatzker, there with a special guest. Erik ive with scott adelson, joining us in our bloomberg headquarters in new york. Great to see you. People who do not know your company will might mistake it for a two m a forever to m a four a boutique m a. Where is the new business coming from today . What industry, what companies . Scott one of the great things we have is this bullbear balance, where we have a large restructuring business. We were the first mover advantage in the restructuring area. Capre focused on the make space, which is 90 of the market. If you compare us to other investment banks like green hell or of record, which are focused on that large cap marketplace, we are focused on the sub billion dollar marketplace, which accounts for 92 of the market. Erik this gives us a sense of how Houlihan Lokey has done. Like i say, everyone tends to of the clientso you are trying to recruit, where is that business coming from . What companies are looking for your services . Scott it is twofold. One of the great exports of the United States has been complicated Balance Sheets. More and more companies are putting in lots of layers of debt. At any given point in time, even in a low default rate like we are in today, you start to see Companies Running into this rest, whether it is region, sector related, or idiosyncratic risk of something going on with the company. When you take a look at that, that drives a tremendous amount of restructuring. M a is something that is proliferating around the world. When i started doing this 30 years ago, the bulk of the m a activity was in the u. S. , today, we are about one third, europe and the rest of the world are about one third. Lastly, it is the changes in who provides capital to companies today. Public toshift from private debt markets. Scott exactly. Erik restructuring, your firm benefited from turmoil in the energy industry. What is the outlook for restructuring now . Corporate defaults are low, credit spreads, even though they backed up the last few days, still narrow but oil has dropped to the low 40s. It makes one wonder if we will see a repeat of what free to life into revenue for you last year. Scott somewhere, there are issues in the world. Where . It was energy last year. Scott retail. Retail is going through difficult times. It is understandable. Yes, we can see why. I just walked down the village at an empty storefronts, but erik is the opportunity in energy as big and retail . Scott it could be. Erik really . Scott again, you have to look at there still will be companies, even in energy, that will not survive. Region and a given point in time. A huge quarter for restructuring at the end of your fiscal year. Is the outlook for restructuring better now than a couple of months ago . Scott it is, a couple months ago, yes. Better than a couple of years ago . Probably not. Erik which industry would you say would retail be more stressed at the most stressed at the moment . Scott yes. Erik what is close behind . Scott that is a sector that stands out. Erik stefan health care and ff in health steu care and technology . Scott yes. Erik how are you on the Technology Cycle . Scott when you take at the levels when you take a look at the levels of activity, it does not show it is subsiding. You do not see a time in the credit cycle . Scott does it feel like it. Erik how is this possible . Scott i say that every day. Without a doubt. You have to remember, we had a. Evere correction with 2009 if you look back through history, it takes a longer to recoverime through that. It is something we think about a lot, all the time, that like it isit feels getting late. Having said that, if you look at the data and our client behavior, it does not erik its something dissipates precipitates a credit distraction, what will it be . Scott some to political shock. Erik when that comes, would you expect it to be first in the terms extending in private credit commitments or public bond spreads . Scott public on spreads. Public markets react quickly. Private markets react in a more measured fashion historically. Erik here is the other thing everyone is wondering. As we do almost every day, stocks ran up and highyield spreads contracted quickly after the trump election in the anticipation of faster Economic Growth and tax reform, and perhaps other things, as well. None of it has happened yet. A, what are you telling clients . B, what kind of future is Houlihan Lokey planning for . Scott that is the beauty of that model. As long as capital is moving in one direction or another, we are in a good constituency. We have had a culture of individuals around for a long time. Our entire Senior Management has been around basically 30 years. Erik you think you are finding their way . Scott yes, that is a practical reality. Erik what are you telling clients . Scott to build models like we have to be successful in any economic cycle. The more resilient a company can be, the better their valuation ultimately. Erik good advice. Scotts, great to see you. See you. Great to that is scott adelson, president of Houlihan Lokey. Alix thank you. As that credit cycle extends, earning season kicks off friday. Jpmorgan, wells fargo and citigroup. Just didnot say it you it, but you told us you did, talk is to your philosophy of why we will see Earnings Growth declined to a roundup we heard the credit cycle is extending . Michael i agree with that guest of the credit cycle being extended for various reasons. By reduction of my earnings, i think the bottoms up confesses consensus is 130. At 129, but if you are 130, you were expecting 20 yearoveryear Earnings Growth. The back half of last year was the recovery after that horrible earnings recession we had, but the best we have had since the financial crisis is singledigits. When i look at the nominal gdp, of s drives the top line and p profits, if i look at bloomberg consensus for inflation and gdp, you get to 4. 5 . 5 , what when you are looking at 129130, you are assuming the nominal gdp will be north of that. The bond market has it right and the equity market has it wrong, in a way. Consensus estimates are implying considerable margin growth. If you will get this youocharged nominal gdp, will get margin pressures with that. I am not expecting a recession on the horizon at all. I am saying there is a mismatch between what is realistic to expect in a decent year. 116 is pretty decent Earnings Growth. Alix right. Lets talk about the consensus. If you look at the bloomberg, these are earnings divisions. Technology upward. Health care revisions lower. Financials lower but not a lot. Are there sectors are you see consensus is right and the ones that have to be rerated the most . Michael energy, for example, from the bottoms up, it is an obvious analysis. They are implying average oil prices in the low 60s for the year. It is a little south of 50 right now. Their oils lowering forecast. Maybe the buy side got that right, Energy Shares underperformed the first half of the year. That does not mean the shares have to reset but the earnings and energy will be coming down. David we talked to people about this question. You were talking about gdp in the United States. Global rates are growing faster than that and u. S. S p is dependent on that, and will that make a difference . Michael that will make a difference. The nominal gdp was a u. S. Story, but if you look at the trajectory of gdp and inflation overseas, you are seeing and echo of the same thing. Alix great stuff. Michael purves of weeden co. Cheap investment strategist will join us. Later, eight chief investment strategist will join us. Later, we will sit down with the encore ceo and get the real deal later in the show. This is bloomberg. Alix you are hired, President Trump will hire a new chief manager. The boe chief economist will take the spotlight as investors look for clues between the hawks and doves. And reports that donald trump juniors meeting with a kremlin official was in attempts to help his father take office. David Jonathan Ferro is taking the day off. Im happy to say we have joining us our colleague in london because the u. K. Prime minister spoke earlier today and caroline, you are the best person to tell us about it. Caroline thank you. A big review going into the economy and tried to provide workers with more foundation and support. Charitably, there were ties to relaunch herself as prime minister. It is almost one year to the date she is taking the helm. She has lost the majority of parliament. We are now hearing jamie dimon, a big employer in the u. K. , leader of jpmorgan, and today, front and focus is what happened after brexit. Not just hundreds of jobs will leave the u. K. And go to the eu, but will the European Union force jpmorgan to move more employees . It is fascinating. David thank you. What is going on in the markets . Alix it is pretty much a flat equity market. S p 500 futures off by two points. A stronger dollar story, except with sterling. You have cable moving higher by. 2. And its going to be about Monetary Policy rather than u. K. Politics moving the currency. On there is getting more juicy gosh bond bears bond bears getting more juicy today and crudes off 1 , downgrades, saudi arabia producing more. You name it. David it is time for your morning brief. At 10 00 a. M. Eastern, we will get u. S. Jolts numbers on job openings and Labor Turnover for may. Thats what 00 noon, said governor will give a keynote address on normalizing Central Banks Balance Sheets in new york city. At 1 00, the u. S. Treasury will sell 23 billion worth of threeyear notes. All day, we will be bringing you key interviews. That is what is coming up later today. Overnight, we got word the randyent would nominate quarrels. We talked with him about his overall view and this is what he had to tell us. There are a couple of specific things, the macro things, that we are not well designed to see. Is that thesues government should not be a player in the financial sector, it should be a referee. David here to take us through this approach is mike mckee. His wall street celebrating this morning . Michael wall street should be generally happy. Quarles thanks doddfrank goes too far and he would like to dial some of it back. Much of doddfrank is in the legislation but it was in part directing agencies to make rules and he would like to tweak the banker rule, change the resolution rules, and he does not like to stress test. Those could be eased a little, he had said. David wasnt the fed on the way to doing this already . Michael they were. Suggested that some of this went too far. Mosted does not regulate of the small banks, but they set the tone for overall Bank Regulation and working with the comptroller of the currency and head of the fdic. Randy quarles may be able to help them back off a little bit. Chiefjoining us is a investment strategist, does this make you any more or less positive on banks today . It does. This has been a central part of our thesis on the Trump Administration and banks. Policy,l this especially when it comes to regulation. We felt for a long time that as far as the financials and Energy Sectors are concerned, there was going to be a meaningful tone change. The other things that require legislation, like budget and taxes, will be more difficult, we are more overnight overweight financials because we think leverage will increase in the banking sector. David one of the things not to overlook is he is the pro. There have been a number of areas, where the Trump Administration says they want to do it but have not had the expertise. He has been in private practice doing Bank Regulation, and he knows his way around the government and wall street. Michael he started in the george h. W. Bush ministrations with the loan crisis and then assistant secretary for financial institutions, so he knows his way around the finance industry. He is someone with impeccable credentials in that area and a longtime member of the republican establishment. He knows what he would like to do from his point of view, and he is respected for his views. He will not be seen as someone outside the mainstream, so he probably would not have trouble getting confirmed. Alix Monetary Policy will be key. Jamie dimon was talking about the Balance Sheet reduction in what it could mean for markets. Jamie dimon react likely know we act like we know how it will happen and we do not because Central Banks do not always have a choice. There would like to provide all of you with certainty, but you cannot make things uncertain, certain. Wants to makeles it certain, so it is your view on how you would make it more rulesbased . Jason there is no rulesbased people that will be there. That almost automatically disqualifies him from being there. I say that is unfortunate because i think there are too many phd is running around the Federal Reserve board in my opinion. I would rather have people who had experience making loans as opposed to people that do the reticle models. Theoreticaln do models. Jamie dimon is right. I think Central Banks have created a monster and the terms of size of Balance Sheets and they have little idea of what the consequences are, unintended consequences of expanding Balance Sheets, and i do not think they have any sort of perfect foresight in terms of how diminishing them will look either. I will say diminishing the Balance Sheets will be going out a glacial pace, so it does not risk markets or assets. Goal,l that is the feds as jamie dimon said, it would like to provide certainty and they hope to provide the markets with certainty about how they will roll off their securities. So the markets in price in advance what will happen. They admit, as he said, they do happen,hat will but they save the markets have seem to be able to put this in excepted and it does not seem to be a real danger. David it may be a glacial pace, but the glaciers had a profound effect over time. It is not a matter of pulling off the existing Balance Sheet read worldwide, Central Banks are so acquiring at a dramatic pace. If it is turned around, it has to affect the markets, even if it is gradually. Jason i am not sure about that to which you look at how it fits with the framework. At the same time, there has been tight regulatory policy. The irony is the velocity of money has declined by 30 . At the same time, the fed Balance Sheet has quintupled. If you have an easier regulatory policy, a lofty money should pick up and there should be plenty of reserves and the banking system. I think they can do those simultaneously. I think the fed is their largely to be the buffers on the bowling lane on economics. I do not think it should be involved in the game actually. I think it is part of the problem. Some of the criticism Central Banks are coming under is they are participants in Economic Growth, which is not particularly i think sophisticated or does not seem sophisticated or an elegant way of going about it in my opinion. Alix the next fed chair and vice chair will be key to that. What do we learn about Randy Quarles appointment and how they might be able to push ahead . Michael quarels will get through the process midfall and take his seat. They have to come up with two empty seats now. One candidate has been talked about and they want to put a Community Banker on it. Jason would like that, but the problem is finding someone to take that states. You have stan fischer and janet yellen. If they are not reappointed, she could stay on the bed. Fed, soould stay on the we could have a different Monetary Policy next year. Something to follow up on, they do not want to be the buffers. Now is the time they are trying to a job. The question is how successfully can they do that . Once they do that, how do they proceed after . David michael mckee, thanks. Jason trennert will be staying with us. Catch fed chair Janet Yellens testimony on bloomberg at 10 00 a. M. Eastern time tomorrow. Coming up, we will head to london, where theresa may spoken her first speech since that disappointing election, as she admitted. This is bloomberg. May giving a speech in london, where she is for their labour support. Despite election results, she says she remains committed to changing burden. Prime minister may the results in the general election were not those that i wanted. My commitment to change in britain is indented. My belief in the potential of the british people and what we can achieve as a nation remains steadfast. Caroline talk us through this speech. Some calling it conciliatory and affiant. She is having to go back and reassert your agenda once again. She is trying her best. I think part of it is to smoke out opposition. They have been playing it from higherdes to try and get grounds and a hope she gets summer with it, but i expect there would not be a lot of luck. Caroline she was making this speech around the taylor reviewed of looking into the gig economy and how they can support work, but aside from this review, that is more about potentially helping with wage support the workers. Meanwhile, this was an explicit knowledge meant of her own fragility. How much can she get the compromise that has been helped from the labour party that she is asking . Cus i think she will talk about accepting the speech and regain lost ground. The report itself does not really offset the union too much. Nonetheless, the only thing that can pick out is the middle class cache payments cash payments. Again, this is not going to set new ground, but she is using it as a reach out for her credentials and trying to make out to people that she is reasonable, in touch, and that the opposition parties can stop throwing it at her. Caroline we have jamie dimon saying, by the way, not only will we move hundreds of jobs from the u. K. When brexit is official, until march 2019, but this stage after that and we could be moving even after that because of regulators. Dimon hit on the good point that this is not a finite point. It will be ongoing forever. This is something for the rest of our lifetimes will be going on because the rules can change from both sides. This is a fluid scenario and setting ground rules down. Not to happen in 2019 actually and it is too important to get certain decisions and i think there will be a staggered price. Essentially what jamie dimon points out, businesses will need to plan the information at the moment, which is contingency to develop a plan between business in europe. If europe were to try and alter the financial rules, and control everything, which is not practical for them, but over time, may well be, and it may be a sliding situation. Caroline great to have you from bloomberg gadfly. Lets dive deeper into how brexit will impact the markets. Still with us is Jason Trennert. Mr. Davis ofw is vanguard. I want to get your take on the exhaustive process that is brexit. I am looking at the bloomberg, which currencies are outperforming, and the pound is outperforming, but that is about the mpc it would seem. Is it much more about the bank of england then this political posturing . When we think of the bank of england, we are not likely to see major changes in the next year or two. There is a softer tone emerging, but realizing this will be a longterm prices longterm process. The markets will have to wait and see how this phase out over the next several years. Caroline jason, businesses have to keep on making decisions, but how can they as jimm jamie dimon says we dont know how to move, does this affect decisionmaking and what does it mean for the markets . Jason as a Small Business owner i south, it is difficult to make Small Business decisions without knowing what the rules are. Inhave that same issue here the United States. I tend to think the issue is more intense in the eurozone, and that is simply because of the possibility of it never ending, which is you will have 28 countries continue to have elections and there are questions about the sustainability of the union over a long amount of time. Economic growth is stronger now, so a lot of those questions are tempted down a little bit. In my opinion, you have seen a lot of money in european equities this year. I think there are better values in japan and perhaps the United States. Clearly, as you point out, the Political Risk not only for the u. K. The continent, remains significant. David it is not just business is then have to make decisions for investors. It has been over a year since we have known there will be a brexit. Do we know anything more today than when youre ago as to how one year ago as to how it will end up and how do you invest around that . It inyou have to take stride. Most people realize it does not happen overnight and it will take time to figure out details. That is what investors have to focus on, in terms of what it means on the impact of Monetary Policy and what impact it will have in the growth of economies in the u. K. In europe. We always justify what we say to investors and say, stay focused on longterm. There will be shortterm disruptions, but it is important to stay diversified and manage risks accordingly. Sidee equity side and bond to make sure theyre comfortable with the amount of risks they have. David Jason Trennert and greg davis will both be staying with us. Coming up, a possible bidding war between paul singer and Warren Buffett. We will talk to bob sheppard shapart. Manager, later, ubs live from new york and london. This is bloomberg. Alix if you are a bond bear, you celebrated last week. Twoyear treasuries are at a decade high. You can see the additions of short positions in the last week. Jason trennert and greg davis still with us. Is the best trade in a bond market now . Greg we are favorable in terms of breakeven expectations. We think the fed will be successful in raising inflation in the economy. When you look at breakeven at 175, we think that could move closer to 2 target. That is one area we are favorable on. Alix there is a conversation you will not see action in the long end of the curve, do you agree . Greg i think it is dependent on overall inflation in the marketplace. To the extent the fed continues to push on raising Interest Rates a little more aggressively than what the market prices in, that will help keep the longer end of the curve anchored. We think that the longer and will have a hard time in this environment of muted inflation to rise significantly from where we are now. Alix what is happening in europe is different. U. S. Premiums have come way down. Does that change the search for yield conversation . Jason i think it does and maybe weharkens back to where started a discussion about the Financial System in the United States. It is probably so far in the future it is hard to forecast. We are expecting inflation to pick up in the next year or two, largely because you will be adding at least regulatory stimulus to the u. S. Economy as far as the Financial System is concerned and a fair amount of fiscal stimulus at a point to a the Unemployment Rate is 4. 23 . On the bondear market, tough over the years, but in my opinion, i think you may have reached a turning point. I think the trend will be higher than the where. David when you talk about Interest Rates and u. S. Treasury yields, is the fed the main driver or to the extent of what is going on in europe going to drive field back here . Greg we would say the biggest driver in the u. S. Would be the fed in that short end of the curve. When you think of 10 years and beyond of the treasury market, right now, all signs are the fed is clearly on pace to hike rates again. They seem committed to hike later this year. You are going to start seeing the normalization of the Balance Sheet happen in october. Alix great stuff. Jason trennert, you are sticking with us. This is bloomberg. Daybreak. Loomberg one hour before the cash open here in the u. S. , equity futures flat, european stocks lower. Attacks on a threeday winning streak, just up by 1 10 of 1 . It was a story of a stronger dollar, the dollar coming off of the highs of the session. You have the euro and the pound up against the dollar. Watch the sterling as we head into some boe talk. Dollaryen, fourmonth high. The bond bears like Jason Trennert fearing feeling better today. Yields up by one basis point. Crude Oil Continues to be hurt, down. 7 . You have the saudis pumping more in june and a downgrade from barclays this morning as well. Watch those energy stocks. Now lets get an update on what is making headlines outside of the business world. ; 16 people have been killed after a u. S. Military plane crashed in mississippi. The aircraft left a trail of debris. No details are immediately available on the cause of the crash. President trumps nominee for fbi director Christopher Wray faces the senate and a confirmation hearing tomorrow. He will be asked whether the president asked for loyalty in exchange for his nomination and if he can stand up to the white house when the job requires it. His predecessor james comey was fired by trump in may. Theresa may has attended to reset her leadership after losing her parliamentary majority last month. She said she is still determined to change britain for the better. Know the results of last months election was not what i wanted, those dividing beliefs remain. My commitment to change in britain is undimmed. I believe in the potential of the british people and what we can achieve together as a nation remains steadfast. Emma she spoke exactly one year after the conservative party leader. The London Taxi Company will become the london other trivial company as it launches a new cab powered by batteries instead of diesel fuel. They will be on the street in november. Global news 24 hours a day powered by more than 2700 journalists and analysts in over 120 countries. Im emma chandra. This is bloomberg. Battle of thee billionaires. On the one hind you have elliott unveiling a billiondollar plan to beat on Warren Buffetts bid to oncor electric here in Berkshire Hathaways proposal for 80 of oncor is just a third bid we have seen for a deal for one of the largest Power Transmission utilities in the United States. Joining us now from houston with those details is ryan collins. Walk us through what is going on here between Elliott Management and buffet, and why it is so significant. Rheingold and it is so significant because there are multiple times where this is the third deal we have seen, that has come to fruition. What we are seeing now is the fact that Oncor Electric Delivery system is going to be in the hands of either elliott or Warren Buffett. If it goes to buffet, it will utilitiesis hold on in the United States. Have had two deals that try to buy oncor, both shut down by regulators. What is the problem with a buyout of oncor . Ryan regulators shut down that did because of the fact that the care refused to keep certain measures in place that protect the case of a in bankruptcy, which we saw in 2014. Mean fort does it buffet, is he lobbying regulators, does he have a better chance of getting it through compared to next era . Ryan he has laid out 44 regulatory commitments that were published last week where he says he has promised to give those ring fencing measures in place and to keep the board of oncor independent. Fascinating when you have this sort of matchup. Ryan collins, we appreciate it. For more, we are joined by the man in the center of it, the Oncor Electric Delivery ceo bob jeff her. Thanks for coming in. How do you talk to Elliott Management . They are the largest creditor in the group, we know them well. We know them quite well. Are they brought into the negotiations you are having with Warren Buffett . This is the third attempt to acquire us out of bankruptcy. Involved, ining 2007, the company was bought in a large lbo. And theght us unregulated generation. They bought the entire company. But the unregulated part, the generation is essentially a large been on natural gas. We know what happened, too much leverage, 10 to two dollars. The generation side went to bankruptcy. The state of texas ring fenced us from that. They say, we are not going to subject oncor to that type of financial risk. Wiseturned out to be quite because they have gone through bankruptcy and we are still in Investment Grade company. The ring fencing protected oncor and we want to leave that in place. The first to the view of bidders wanted to control the company more overtly. Berkshire hathaway came along and said we think it has been great for the company, we can work with this board. They went to texas, negotiate with the parties and said, what do you need . Estate told them. Then they submitted a bid. They went to texas first, and that was the distinction. Berkshire hathaway worked with the state of texas. With they have their past texas regulators. If you are a big red to judge and you have burke way Berkshire Hathaway and another better says they will pay more, why would you say, you have an option and figure out how to work it out . Robert the commissioners would still have to rule but they do have that. Matt they have reason to believe they can get it through the regulators. Judge the bankruptcy wanted to end. As important to him as value is certainty of closing and speed to close. What an elliott would have to do is not only show that they have superior value, but they can get a deal closed. Notd Warren Buffett has been shy about saying he does not like auctions. Give elliott sometime to come up with a bed, are you worried about him walking away . This company has strong cash flows, i think we are a great fit for them. They want to own this company. Whether they are willing to get into a bidding war is another question. They could easily sit where they let the court make the decisions between a bid that is certain and has likely regulatory approval, and uncertainty. The Elliott Group is a fine group of people, we just dont have any details. Alix what is your biggest take away from elliotts conversation . I think there is more value, they said it would be high to work with Berkshire Hathaway. I think they are still trying to decide. We dont have any more details from them. Alix would he bring anyone else into negotiations . Robert i think we have plenty. If this ends up in the hands of Berkshire Hathaway, its a great outcome for us. Whether elliot has an alternative or not, that is not up to us. Same time, he has people reviewing his decisions as well. , i didare a debt holder not get the money i should have out of this because they went with berkshire. Are you concerned this could end up in an appellate situation where you are mired in the courts of appeals . Robert he has pretty broad discretion. If this fails a third time, the cost of this bankruptcy, the interest cost, professional fees are so massive. By the time you get to a next one, you will probably have impaired the secured creditors. There is a real risk to a deal that is not certain. He has plenty of discretion to make his decision on cost. Alix the elephant in the room we are not talking about is that elliott owns 74 of your unsecured lawns. If a deal is below what you wanted to be, they will lose money on those bonds. How much hey do you think they can make . Are prettyy influential, we have seen them in the Capital Markets. They will argue their point rather vigorously. It will be interesting. David if the deal with Berkshire Hathaway goes forward, how much will it change oncor . This would be integrating with a much bigger version it would change your business inevitably. Robert we have been working with a distressed and bankrupt company for more than a decade, so working with Berkshire Hathaway would be a great asset. We have Large Capital needs. A good fit would be for Berkshire Hathaway, and i think they agree. Thank you shapard, for being with us. Coming up, tech, financials, and the summer squall. At earnings with Julian Emanuel. And then we will talk about todays market environment. Governor foruty the boe was speaking in scotland, he made some headlines, looking at the pound, taking a look lower on the news. He said a reduction in trade with the European Union would be damaging to the u. K. And potentially morning into a more dovish camp for the boe after hearing a lot of hawkish talk. Is this another point to not wind up hiking rates . That is the issue that the fx market is contending with. Much more on that. This is bloomberg. Daybreak. S bloomberg coming up in the next hour, conversation with stephen lark, the metlife cio. Now to your Bloomberg Business flash. Goldman sachs as opec needs to shock and on oil market for prices to gain. The bank says they must increase output cuts to prevent oil prices from slipping further. The analyst said without further production cuts and inventories remaining so high, oil could fall below 40 a barrel. Company hased agreed to sell a 20 stake in for about aom house billion dollars. Shares are falling as investors had expected the company to allocate more resources to its dividend after the partial sale. That is raising concerns the company may require funds to prop up its Balance Sheet. Alix thank you. Big banks kitzhaber earning season this friday. Jpmorgan, wells fargo, citigroup reports. Jason trennert is with us. I know you are into the banks but overall will we see earning season support the valuations in the market . Jason they should, it looks like a earnings will be of a percent yearoveryear for the Second Quarter, even if you included energy, probably up 5 . S p 500 operating earnings have been flat for about three years at 118. Not to continue to beat up on a Central Banks, but that is my opinion, this unusual meddling in the Capital Markets by the Central Banks. You have earnings generally not flat for very long. The good news is, the change in we ares for the year, expecting 100 24 for s p 500 operating earnings for the year, 135 for 2018. Financials i think will be a bigger part of it into the second half of the year, but you have some of the march divisional sectors, particularly energy, which will help out a bit. Inx a lot of money rotating and out of tech and financials. Is there a risk of credit stocks , meaning a beat will not be good enough to keep the valuation . More of think that is an issue for Technology Stocks and financials. The is simply because valuations of financials are still relatively attractive on a pricetobook basis. Tech, i think, is a different story. It seems to be untethered from any kind of normal valuation metric that you could use. I think there is more risk there. Earnings, but the i think there is a change of as far as the in ministration is concerned as far as the Regulatory Environment. Which is to say the sectors that from ast scrutinized regulatory perspective in the last eight years, financial and energy, are becoming less scrutinized. One sector that was largely left to its own devices, technology, i think there are more regulatory questions surrounding that sector than before. Amazon by whole foods, some of these other things, have started to raise questions about the power of that sector. That is one thing im looking to. I am overweight technology, too, but in some ways, the risks are greater because the valuations are greater in tech. Take me through the arithmetic on the earnings, how do you get 8 on earnings when you have sub 2 gdp growth at the same time . Jason it is hard to believe but margins continue to surprise people to the upside. Alix labor costs creeping higher . David how are you saving the cost . Jason it is happening largely because of globalization and technology. Im not saying its sustainable, but its interesting, an interesting paper came out, a legend in the investment business. He took it as an article of faith that margins are mean reverting, and they have been for a long printer of time, except for the past 10 years. They keep grinding higher. It is partly because of a mixed shift in industries, industries taking a more of the market, health care, financials, technology, tend to be less capital intensive. Margins tend to be higher. So that is part of the reason why the overall mix of s p 500 earnings continues to grind higher. There are different types of companies. The problem, for the average person that needs to be employed , a company like facebook has 300 billion, employee 17,000 people. I think this is one of the where,s that you have financially, things look pretty good. How it plays out in the regular economy for the average person may be quite different. David the companies and shareholders may be getting richer but the average man on the street is not, and that can affect tumor spending, which is two thirds of the economy. Fair point. A very my own opinion is that the questions about income disparity or wealth disparity have only grown in the past eight years. Despite a lot of efforts to try to close that gap, you could say in many ways, policy made it worse, not better. I think that has been borne out in the politics we have seen, not only in the u. S. But outside of the u. S. Im not quite sure that is over either. There will be a lot of questions. I think a big part of this, onimately, will hinge whether the administration can get a fiscal package through. Not necessarily tax reform, but tax cuts. 2004, look at 2003 into even relatively modest tax cuts, tax holiday, repeat you did profits, cuts in the capital gains, dividends taxes, led to a stronger economy. If the administration can get that done, there is a chance the top line improves. If you dont get that through, then i think we have got problems in 2018. Alix and we will be talking about those problems in the next segment. Good to see you, jason. If you have a bloomberg terminal, check us out online. Click on our charts and graphics and interact with us. You can also interact with our guest. This is bloomberg. David this is bloomberg. Im david westin. You are looking at washington where there has been quite a bit of noise. To separate out the noise and the signals, we speak to kevin cirilli. What is signaling what is noise . Kevin , of course we have this bombshell report about donald trump junior meeting last july with paul manafort, then campaign manager, as well as Jared Kushner meeting with a kremlin affiliated attorney. The president sons Attorney Says this is much ado about nothing, but it comes as he has not released to statements, first saying the meeting was originally about adoption and visas, the second statement suggesting there was no reference to whether or not sanctions would have been brought up in that meeting. Donald trump junior tweeting there is no consistency in statements, the meeting was primarily about adoptions and response to further qs, i simply provided more detail. No republicans i have spoke with this morning are concerned that the could have impacts on president s agenda, particularly as the Senate Majority leader hopes to Pass Health Care reform the head of the august recess. Mitch mcconnell is having to negotiate not only with negotiation conservatives on the right but as well as dangling to conservatives the possibility of working with democrats, if people like ted cruz do not get in line. Found the signal now. Lets bring back in Jason Trennert. You thought it was really important to markets ultimately whether we get some sort of fiscal package. What is the likelihood, as you assess that, how do you put a probability on that . Jason lets start with health care. You also have to separate tax reform from tax cuts. Unfortunately, i personally think tax reform is extremely unlikely. The last time you had tax reform was 1986. Ronald reagan won 40 of the states, but it still took two years. I would actually take tax cuts, to the extent they left Economic Growth and earnings. If 2003 is any guide. I think it is very hard to get tax reform if you dont have Health Care Reform first. Then you just dont have the money to play with in terms of the budget scoring. David do you need health care to get tax cuts . Mean it would probably higher deficits later on and you may have to play some other games in terms of how large the budget window will be. You will get it through. Health care, i would say, talking to our washington analyst, he has the odds of them passing health care in the next week or two as Something Like 30 , 40 , down from over 50. People may still think that is high, because there are still arm to twist, other horsetrading that may get you through. If they dont get health care through, they will have to move pretty quickly toward the budget and then look at taxes as well. The bullish trade was go along small caps come along equities, along the dollar, short the bond. What is the trade now . Jason im somewhat concerned about the next couple of weeks, months. Regardless of whether they get health care through or not, again quoting our analyst, he said this is the eat the spinach part of the meal. Even if you Good Health Care through, then you have to do very complicated stuff that must get done, like the budget, and then if you have any hope of getting people reelected, you probably need to have some tax relief as well. If you think health care is tough, this could be particularly tough as you move throughout the fall. It is not something you can do quickly, not some thing you can do easily. I guess my point is, im still structurally bullish. But by the same token, the next couple of months can be particularly rocky. It may be hard, despite good earnings, to make forward progress on the market. Alix i was expecting the raging bull over here. Really good to see you, thank you. Coming up in the next hour, Julian Emanuel, ubs the record of equity and derivative strategy will join us, as well as Steven Goulart, metlife cio. This is bloomberg. Alix President Trump will hire randall corals as the chief banking regulator. In earnings we trusted wall street is at a crossroads with stocks knowing going nowhere but the stalemate could be broken as reports that donald trump juniors rendezvous was part of an effort to help his father take office. Jason welcome to bloomberg daybreak. Im david westin. Alongside alix steel. We are 30 minutes from the opening bell here in new york. , prettye equity markets flat across the board. A little bit of weakness over in europe and not a lot of volume as traders taking advantage of that summer tuesday. S p futures flat. The pound, an interesting story. Have higher earlier in the day. Bank of england Deputy Governor spoke in scotland and he warned about trade risks between europe and the u. K. It seemed like the market interpreted that as a more dovish communique from members of the boe and the pound took a leg lower because of it. Fascinating story that unfolded. Weakness on the margins here with the margins here with yield backing up by one basis point. Crude off the lows of the session despite some downgrades from barclays. Abigail doolittle is looking at some of the individual stocks on the move ahead of todays open. First we have pepsi co. Not moving so much, modest declines, shares slipping between small losses and gains. Out, they we pointed are kicking off the Second Quarter earnings season with a bead on the top and bottom line. Earnings they beat by 7 , to put up 1. 50 per share. They also boosted the fullyear view. It is ananalyst say inline quarter driven by fritolay. It seems investors wanted more. Snap,ock down sharply, down 3 , yesterday closing at 1699, right below its ipo price. Around this, we have Morgan Stanley downgrading shares to an equal weight from an overweight, saying they are concerned about product growth and competition. , 32 oftion here is analyst all have by ratings. Is this the first of many to come and will we see shares slide more . Rentacenter soaring after the Company Rejected a 15 a share bid from vintage, saying they were undervaluing the company. The streets target is 12 per share, so it will be interesting to see how all of this plays out. Right now, shares are soaring for rentacenter. David late yesterday, we got word that President Trump would nominate randall corals for the open position of the vice chair of the Federal Reserve. When we spoke earlier, he talked about his preference for a more rulesbased approached to Monetary Policy. Is, is that decision going to be a discretionary decision based on the individual assessment of people who are at the Federal Reserve at a particular moment, or is it going to be is the Federal Reserves Monetary Policy going to be more rulesbased. Is the job going to be, we will determine what the rule is, and the markets can then assess what that rule is, and from time to time we may change the rule but while that rule is in effect, there will be certainty in the markets as to what the consequences of it will be. Whether it is one mans decision or 18, it is a decision. The market uncertainty is driven by the fact that that position will not be noble in advance. Now byjoining us telephone is Charles Plosser who served as the president of the philadelphia Federal Reserve under chairman bernanke and chair yellen. Good to have you back on the program. With you, david. Appreciate the opportunity. David as you follow this debate about rules. You know what it is like. Is it a real choice, is it realistic to say we will be more rulesbased that in the past and we set Monetary Policy . Y possible, certainl and it may be desirable, but that doesnt mean that you set up a straw man were you say we will turn over to computers and everything will be mechanical and the Committee Members dont have any input or say so, or you cannot deviate from this mechanical rule. That is the wrong with you think about the choice. The choice is how to make decisionmaking more predictable and more systematic. I think there are things the fed can do, and i have argued for many years to do that, to improve. Occasion to the public and the markets, about how they will approach their strategy of Monetary Policy decisionmaking. You have had a lot of experience in this area. Rules are,t as the is who is applying the rules. What do you know about Randy Quarles. What do you know about him as a person, a candidate for the fed . I think randy is a terrific choice, i worked with him on a few occasions. I think his approach will be much different than some regulators are. Regulators in washington its the crisis have sort of adopted a command and control strategy. The more things they can ortrain or oversee in a Bank Financial institution, the better off things are. That is not always the case. I think randy will be a voice of questioning. Ce of regulators, whether it be at the fed or other places, tend to slip into groupthink about this type of command and control strategy. I think randy will ask questions, will wonder not whether regulation is needed, but have we got the right kind of regulation, is it efficient, are we using our resources efficiently, are we achieving our objectives . Athink randy will bring refreshing, if you might say refreshing view, and not necessarily fall in line with the groupthink that sometimes comes out of washington. David as you know we will hear from chairman yellen tomorrow and thursday in front of congress. We know that she worked closely with dan tarullo, who was the factor predecessor for Randy Quarles. Will he be able to play on the janet yellen team at the fed, or is this indicating a move away from janet yellen down the road . Charles that is hard to say. I really think it is important, certainly for Monetary Policy, that the fomc is the policymaking arm for the fomc. I think the Regulatory Environment is going to be different. Certainly, the personalities of dan tarullo and Randy Quarles would be different. Randy has worked in washington a number of times. I think he knows how to get things done, how to work with people. Regulatory the and or Monetary Policy at the fed as being some sort of, again, one persons view of the world and that person, whether it is ben bernanke or Alan Greenspan or janet yellen, being the pervasive view of the fed, i think that is a mistaken way to think about what should go on. I think randy will be his own person but he also knows how to work with other people and get things done that he thinks are good. I am kind of relieved and pleased with this nomination. This up, ito wrap seems like a third thing bubbling up at the fed is Financial Stability. Potential inflated asset prices. Do you have a read on where quarles stands on that, should that be an emerging third mandate . Charles no i dont think it should be an emerging mandate. The fed has enough mandates that the people have imposed on it without adding get another one. Yet another one. My suspicion would be that he would be skeptical of layering yet another mandate on feds Monetary Policy actions. Mostly Financial Stability should be done through regulators, not through Monetary Policy. Unless of course it is Monetary Policy causing the financial instability, which can be the case sometimes. Skeptical ofuld be officially adopting yet another mandate for Monetary Policy that stood as Financial Stability. Plosser, thank you for being with us. Always great to have you on the program. At thee on the changes fed, we are joined by Julian Emanuel, ubs director for derivative strategy. What do you make of the Randy Quarles appointment . Not confirmed, but nominated. Will it make a difference for the fed, to the better . Think Charles Plosser made an interesting distinction before where he talked about rulesbased governance. The rules of communication versus the rules of actually implementing policy. You have to distinguish between the two. My suspicion is that Randy Quarles will help in both respects, but the thing here to know is that, it has been the communication that has been probably the biggest challenge going back to march and how the thebasically yanks expectations from no rate hike to the certainty of a rate hike in a week. The fact is, when you think about a rulesbased fed policy, there is a challenge, because you are coming from a zero Interest Rate environment, coming from a world that is still awash in negative rates. It is not something when you think about negative rules, they tend to be back tested, really parsed. It is difficult to implement in a very overarching way. That you sort of heard echoed by jamie dimon, talking in europe about the Balance Sheet and communication. Like we know exactly how it will happen, and we dont. Central banks dont always have a choice. They would like to provide all of you with certainty, but you cannot make things uncertain things that are uncertain, certain. That point, do you feel the markets need certainty to still be ok as we undergo Balance Sheet reduction . Julian in a lot of respects, you need an element of uncertainty as well. It is well and good the fed is potentially proposing a sort of metronomic way of looking at the Balance Sheet online, but you still need a way of less certainty in terms of what Interest Rates are going to rise. Quite honestly, the environment continues to prove it quarter after quarter, year after year. We have to be sensitive to incoming data. That part of the mandate is not likely to change. David the fed has already laid out the pattern on which they will start rolling off the Balance Sheet. Just not when. Was there a Market Reaction to that . Julian i think the market was pleased. If you look at the equity markets, volatility remains quite low. In fact, there is the sort of calm that there is the aspect of something arranged, but there is a recognition, particularly given the fact that the political situation is as it is, that the data could change over the course of time. David we have more to talk about with the equity markets and volatility. Glad to say that you will be with us. Wednesday we have full coverage of fed chair yellen as she kicks on day one of her semiannual Monetary Policy report to congress, 10 00 eastern time. From new york and washington, this is bloomberg. Alix earning season officially kicks off friday. You have jpmorgan, citigroup, and estimates for the Banking Center have been coming down. Overall estimates are holding up, but not when it comes to big banks. The big shift when it comes to forecast for goldman sachs, the blue line, the white, Morgan Stanley. What to expect over the next few days . Julian emanuel is still with us. What happens on friday . Julian its a big day for the markets. If you look at it, with the exception of the quiet in the markets, which every Bank Executive will complain about, it has been quieter than normal. Everything else seems to have been going right. The yield curve has been helpful. Regulatory pronouncements have been helpful. These stocks have moved. The actual numbers themselves will be significantly better than a year ago, but we question whether the stocks have already discounted in the near term any positives that could come out. Alix we have seen reservations revisions from analysts. In other sectors we have not seen that. Befinancials, what a beat good enough . Julian normally it would, but the stocks have rallied so far in the last three tier four weeks as leadership and technology has sort of been passed over to financials with the yield curve resteepening, Central Banks talking more hawkish way. It is an open question. Isfact, an encouraging sign that the estimates have been coming in while stocks have been rallying. It is an open question whether they can run further. An important question, i think, is what is driving those estimates. Particularly on the loan origination. If that picks up, that indicate something more broadly in the economy, beyond financials. In the past its been disappointing. Last report was not that great. How important will that question be of how many people are asking for money . Julian that is another critical issue. The craving revenues are probably a temporary summer lull, but loan origination, when we have seen the confidence measures that businesses and consumers have expressed, not seeing it translate into borrowing, that is the disconnect that we are really trying to reconcile. If there is positive commentary there, that is evidently a tailwind. David what are you seeing with a soft data, hard data . There was a time when soft data was running off the scale. His hard data starting to come in yet, softening . Julian incrementally. You see these confidence measures come off of their peak, but not enough to get concerned. You still see measures like the ism his new cycle highs. It is rather mixed. But you are at this point where, again, past guests have talk about this, there is a thought that policy will be hopeful. We have not seen it, and when you look at the discourse in the next several months, it is questionable how much of a bump we will see. Alix lets look through the earnings microscope. We have the warning on financials. What sectors will do well, which will not . Talk about overcrowding or positioning julian no question about it. We have made it clear over the past five or six weeks, technology was born herbal in the near term, and thats ofying out as a function discomfort from the crowding, the fact that the faang names have been disproportionate in the gains for the year, but also rates on the long and moving higher, which fx higher multiple stocks is proportionately. But the earnings will be good. You will get 10plus percent growth out of technology broadly. The question we have is has the sentiment washed through completely enough for that to be effective . Alix how do you position . Julian if you are a core holder of technology, you really just want to ride on the potential storm. If, in fact, you get the kind of earnings that we are thinking, and those stock selloff, that is were you want to add the positions. Stuff, Julian Emanuel p are sticking with us. Investors get antisocial with shares of snap. The stock falling below its ipo price for the first time. And later, investing in an Interest Rate environment. Metlife cio Steven Goulart joins us with his strategy. Much more straight ahead. This is bloomberg. Alix breaking news for you. Adnocs is abu dhabis national all company. Ofy are planning a sale their Services Unit and could seek as much as 14 billion. You have saudi aramco also spinning of some of its business, going public as well. You have the abu dhabi state National Company announcing it ahead of that. You have these stressed opec nations, Oil Companies needing to diversify revenue. This seems to be a popular strategy for adnoc. Bond it reminds me of the market. Last year, rumors that saudi arabia would go into the bond market, and then other gulf nations went in first. Alix qatar had a killer bond offering. The abu dhabi state oil company, will be ipoing part of its unit. Focus it is now time to on technology. This is the weeklong focus we have, bloombergs focus on tech week. This is where we bring to bear the allimportant tech sector, the full breadth and depth of bloombergs expertise and global reach. Today we are focusing on snap, shares falling for the first time below the companys ipo price of 17. Caroline hyde has been following the stock as it sinks even farther past its ipo price. Caroline, where did they go wrong . Airline where did facebook all right, that is the key question. The key is competition. It is coming thick and fast. Analysts are starting to take note. We had Morgan Stanley, which underwrote the ipo offering in march for snap, cutting its price target from 28, all the way down to 16. We are likely to see that affect shares. It is all being about their ad products. They are not really evolving quite as quickly as Morgan Stanley wouldve hoped. They say the buyers of these advertisements are not seeing the rewards, they are not showing that this is a must buy, still a bit of an experiment. Also competition, this is where facebook is getting it right. Instagram keeps on taking some of their ideas and deploying it, often for free. Morgan stanley saying some of parts oflled sponsored snap, they are giving them out. It doesnt bode well when you have a stock that looks like it will go past 17. David is it a problem of what the company is or what people perceive it to be . Itis a question of thinking as a facebook and being disappointed, as opposed to thinking about it as Something Else, like a Camera Company . Caroline if we cast our minds back in march, they were desperate to say we are a Camera Company, dont associate us with twitter. Please dont associate us with our key competitor, instagram or facebook. They are not doing as well as many had hoped. Q1 numbers were not that great. Look at what analysts are telling us. If you look at the bloomberg, you will see that analysts, not many are saying soviet. The bulk still say hold your stop. The bulk say by, in fact. Only if you would number say actually go for a cell. The numbers in red. In hold in yellow. I leave you with this last function, which is the short interests. We are seeing that continue to head higher, 20 of all the float is now in the shorter territory. That lockup could come as soon as july 30. David fascinating story, thank you, caroline hyde. Alix the opening bell is moments away. S p futures down by one point. This is bloomberg. Some breaking news concerning the tech the potential takeover of encore. Elliott management coming out with a letter saying they will accept terms for encore. That is significant because it prevents to other deals really pushing it for the company. You have a regulatory part, which is oncor, making a lot of money. Alix they own likes 74 of the debt. Help for it tod go through. They could estimates months ago and i have not done it. Alix markets just opening now. European equities a little softer as well. Oil is relatively weaker. Up to what isn happening at the market. Selling picks up at the bond market. Abigail doolittle is there for the opening of trade. Abigail we have the dow slightly higher. S p and 500 s p 500 and nasdaq, a small move yesterday. It feels like investors are on hold. Nasdaqorth noting the did close above the moving average, flirting with that level. Keep an eye on what the nasdaq does could give an indication as to the state of the tech pulled back. One sector under pressure today is home builders. All sharply lower down more than 1 on a downgrade equal weight. Survey showed moderately slowing buying traffic and he believes nearterm catalyst could disappoint. The s p 500noting home index, an alltime high. We will see whether or not this is a stall or some sort of inflection point. It is a great chart because we off in here about how prices correlated to what analysts think. It is a twoyear chart in blue. Increasese net change and analyst price charges. We see back in march of 2016, press charges went well above the us 500 and over the medium to longterm, analysts drooped to be correct with the s p 500 rising over that time. Now declining, the s p 500 higher, you have to wonder whether the diversions suggests see stocks perhaps drop down to meet what analysts think of where they should be trading. Thanks very much. Even some bowls are a touch cautious. I am still structurally bullish but i think the next couple of months could be particularly rocky. It could be hard to make a lot of forward progress on the market. We know a he stands, he is a little bear on the market. I know you want to say something. Technical. Quite we are in line. The issue is when you think about it, in a world where Interest Rates are rising and psychology in terms of Interest Rates changed after the softness where first five months, earnings estimates in all likelihood are going to come in, gradually over the course of a the, valuations amongst highest we have seen, we are not saying the bull market is over but we are saying it could be challenged over the next couple of months. You have a different point of view. Take a look at the two Day Moving Average when it comes to the tenday yield, what does this technical chart tell you about equity . For the s p 500, we have a bullish trend and we can see the index is still grinding higher above the rising 200 Day Moving Average. I think the 200 day does a great job showing what the trend is doing. The surface, we are having Healthy Activity and what we see is consistent with a healthy bull market. More recently, we are encouraged about what we are seeing in the bond market. Upturn in Interest Rates. Rates the rising interest , i think it is a bullish tell that you can buy a little bit of a nearterm pullback within the equity market. It is very similar to what we saw last october with rates moving higher right ahead of that postelection turnaround. Do you agree that this is actually a good sign that it will be ok . At the moment, i dont but longer term it is. The reason rates moves the way they did is because the fed has been consistent about the fact the economy is likely to the data has to and sort of mixed. High, notns have been met. But we are choking along in the low twos. That is not necessarily a unique positive. And really it depends on what happens to leadership. See technically that we need to see to resume leadership role . It is a great point and probably one of the main premises of the bull market call is at the rotations are indeed healthy in nature. There is confusion misinterpreting the leadership shipping shifting around. Leadership is indeed rotating but the overall breath of the while is quite strong tech was rallying in the first half of the year, we had a lot of reflationary sectors pause and out maybe it goes the other way where it is in the process of pausing and a healthy manner e that leadership speaking about text cynically, we think this is a secular story. Think tech is a that candidate to leave potentially over the coming years. A lot of these conditions can be worked off over time. The 50 Day Moving Averages, to us, the risk is sideways ahead of what we think will be. We like tech in the long run. Back to a julian was just talking about and the reason the yields had done what they had done. If that is essentially the fed not in, that the data are actually necessarily supporting but saying trust us, they will get there, they are not there yet, but we are looking through them, does that give you pause . Things could reverse. You really areut not seeing that. To us, it is more the short end of the yield curve that will be more correlated to fed action. Not been a strong backup in the long end. We have a wide gap between u. S. Weight rates and rates everywhere else and it is causing an anchor when you have a gap coming off its widest level in 30 years. Far as the signals from the bond market, it suggests the risks are actually coming forgetting about the valuation differential between the u. S. And europe, we think u. S. Offers a much more tractive risk reward profile because if we get another one of these growth scare, as the scenario usage just suggested, we think the risk is more the premium will be placed on the u. S. Alix i like the contrary and deal. Your call . The u. S. Continues to prefer europe. The biggest thing that people have not really things that people may not have fully grasped is the fact that this time last year, we were wondering whether european into orght dissolve three or five years time. The development of the last several months and the likely Political Development of germany and the fault, it really takes the risk off. Gray conversation. Great to see you. Oppenheimers had Technical Analysis analyst. David . News conference is going on with the secretary of state. Secretary of state tillerson is trying to reach the risk that develops between cutter and four nations qatar and four of its nations. Qatararabias claim that is doing too much to fund the region. Alix softness across the board and not a lot of action. Financial and materials, Second Quarter kicking off on friday. Across the board also a relatively stronger dollar since the pound really gave up his game earlier. Deputy head trade issues between the eu and the u. K. The 10 year yield was higher was lower on the day and it is now relatively unchanged as you see some of the bulls come back into the market. This is bloomberg. X this is bloomberg daybreak. Coming up later on bloomberg markets, the president and cofounder of Nextgen Climate action. This is bloomberg. David metlife is expanding Asset Management. The largest u. S. Life insurer agreed to buy partners bringing its assets under management for outside Client Management for 144 billion. Steve is here to talk about the business and share his perspective on Financial Markets overall. He is with erik schatzker. Erik schatzker good morning to you. Anyone who knows metlife knows expanding and Asset Management is important to your companystrategy. But this is a challenging time to be doing it for a number of reasons. Give me perspective. We are excited about the opportunity. It really expands the growth that we are already seeing in metlife investment management, which is, we think, a very unique business which really specializes in private assets and specialty fixed income assets and real estate. Step back, what we have been doing with metlife since steve became ceo is defining the greater to emphasize cash flow and more current revenue. Of course, is one of the largest Life Insurance investors in the world, we think we have plenty of capabilities. Very well in that respect. We started and we looked at where could we make the greatest progress right away and it wasnt recognizing the capabilities we had in private assets. Firmat about obstacles any in the industry has to overcome today . The shift from active management, the rationalization relationships by Institutional Investors . Is no question the business continues to become more and more competitive. You cited a number of trends. Entering the business really came down to do we have unique capabilities . That is what is most important and that is what investors are looking for. Is there anything unique and Asset Management . There are plenty of things that can be unique. Go to any asset manager and they will probably identify for you but they think makes it unique. From our perspective, it is really looking at the asset categories we have amped emphasized. ,hings like Corporate Drive it private infrastructure debt, commercial mortgages, Real Estate Equity we had unique capabilities given our history of doing it, nearly 100 years or more in the metlife general account, that we thought were also capability that Institutional Investors would be capable of. The business you are buying and public fixed income strategies. Here is the thing. It is not like metlife is a stranger to the bond market. A case of by overbilling term . The lot of people ask question. I will give it to you from a Strategic Development perspective. Our goal was to continue to move outward in things that we knew well. What i calltegy and specialty fixed income categories in the Public Market like emergingmarket debt, highyield and longduration credit. It takes time to build track records where a new manager, it is really all about the time tradeoff. Acquire opportunity to partners came along, it led us to a decision to say we can jumpstart what were trying to do to local circle. As to us over 33 billion in management here at outstanding track records in the same areas we are talking about in Short Intermediate longduration credit, highyield. What we aretly trying to do it most important we, our distribution is a most entirely where else would you might like to find opportunities to jumpstart the expansion . We have got a time to make sure we close the circle. That is what the focus will be on. Also continuing to grow the business organically. We look at the ways to grow the business, we think organically is really the best way and you always want to do it that way. Unless Something Like this comes along. Preclude continuing to look for ways. The when i think about our to, how do come back we differentiate ourselves as an asset manager. Really think of ourselves as an institutional fixed income manager specializing in private management and real estate. Erik 15 years ago, 140 billion was a lot of money and today it is not how do you compete with direct competitors of yours at prudential or the black rocks or the pimcos . Us, 100 40 billion of thirdparty Asset Management is a big number. Was zero. Ago, it that shows how we have grown the business and how we are thinking about continuing to grow it over time. There are a lot of very large managers out there but it comes back to what i said previously. There is a role for an asset manager who can identify unique capabilities and provides services and performance to clients. That is what were focused on. Is a lot of pressure on Asset Managers like yourself. These are something you also have to fight for as an investor. To what degree would you putting pressure on private equity firms to find ways to coinvest in order to bypass those fees . Steven my general account investing hat on to answer that. We always look at fees we are paying but what is most important to us is the net return we are getting. I might not like the levels they are charging but erik is that a general statement . Levels lets say the fee we know are fairly high and certain alternative asset classes, but to us, it comes down at the network and is and what the capital charges. That is what differentiates us as an insurer. We have to hold capital against every investment we make p i am looking at return and capital just return. Erik treasury yields just backed up i 25 basis point in the space of about 10 days. Would you look at that and say it is a healthy reprising or Something Else . Steven i am not sure which of those two i would pick of this point. It is interesting to see what happens. Speaking from investing perspective, we want to see back in thees rise inhouse forecast, for 27510 year by the end of the year. I will admit until a few weeks ago, i started to doubt that we could really get there. You look at what has happened in the last few weeks and say maybe we can. There are a number of factors cited and there are two things that really stand out. I will not call it coordinated but there was a lot of centralbank narrative around the time about the prospect of rising rates and starting to remove accommodation from the market. That got the market going. We are continuing to see reasonably strong growth statistics, reticular early in europe. I mentioned europe because youre talking about u. S. Rates but that is important because the last five or six years, we have talked the Global Capital and we see growth in rates increasing in europe and we might see capital flows. Metlife is a large purchaser of Corporate Bonds. Do you expect that to remain as tight as they are . High yields has backed up a little bit but investmentgrade spreads are mere basis points off the post crisis lows. Steven when we look at the Corporate Bond space, Investment Grade highyield, spreads are tight across the board. Wearing my general account investing hat, that is why the diversification and flexibility we have is so important. We can say heres what we get in the corporate nonmarket but what all the what are the alternatives, infrastructure debt, commercial mortgages, those really make us unique as an Insurance Company investor, and as a thirdparty manager, that is what has allowed us to move as we have in this macro environment come a lot longer than anyone thought. Just having the option to go on a number of different paths. To 275 by the end of the year, it will hopefully be on the path that takes us higher. Erik thank you, steve. Chief Investment Officer at metlife. Alix really great to get that perspective. We appreciate that hear it if you missed any of the interview, go to tv on your terminal, click on the charts and graphics. You can go back and rewatch the interview if you missed anything. This is bloomberg. You had an official warning of a trade in eu and the you pay. The market interpreted as potentially a sentiment shift toward dovish rhetoric. And yields moving higher up, you get a ton of supply and crude oil flat on the day. Exciting for a minute. Day. Vid, have a great tomorrow. Ut janet yellen testifies before congress wednesday. This is bloomberg. Vonnie it is to 10 00 it is 10 00 p. M. In new york. Mark welcome to bloomberg markets. Vonnie here are the top stories were covering from the bloomberg and around the world today. President trump will nominate randall quarrel to be the feds chief banking regulator. How will the choice affect financial . Are the biggest opportunities in emerging markets and how will more Hawkish Central Bank policies impact them . We will talk with sergio, at blackrock. And, drains in the perfect storm. Suddenly turns into a hot market. We are about 30 minutes into the trading day in the United States. Week in july, julie hyman is here to tell us