Transcripts For BLOOMBERG Bloomberg Daybreak Americas 20170811

Aides try it to style them back. It happened yesterday. He was asked about north ring remarks, saying his remark. I dont ink they mean that. I think its the first time they heard it like they heard it and frankly, maybe it wasnt tough enough. David that was the president yesterday. This to sayis had about diplomacy. The americane effort is diplomatically lead it. It has diplomatic traction. It is hitting diplomatic results. I want to state right there. The tragedy of war as well enough known. It doesnt need another characterization beyond the fact it would be catastrophic. David to take us how this is playing out, we go to our chief correspondence. Lets start with you. How is this in asia . Reaction is one led by the australian Prime Minister who came out strongly to emphasize their alliance with the u. S. President ed with trump early in his term. The newspaper reported the moving interceptors and the place. China should stay neutral if north korea provoke the u. S. Into war. Andhe u. S. Were to try topple the regime in north for it, the chinese should intervene. Strikingght that was a morning. David we talked about the stock exchanges, they had all been down. How are they reacting now . Week. Is off by 3 on the selloff inr indexes australia. Investors are nervous because we have military exercise coming up with the u. S. And south korea. There is the anniversary. That is a concern or investors that it might create more nervous sentiment. I would when it to one little wrinkle in history, during the last missile standoff, u. S. Stocks dip before recovering in a space of two days in 1962. Investors are hoping it will react similarly. David thats a really interesting point. When you go back to 1962 to draw an analogy to whats going on right now. How is this playing out in washington . Kevin the response from republicans within the president s own party have 10 muted after the administration has tried to signal they will not tolerating any type of missile test. They pointed out the out that in the chinese newspaper, sending a signal to many throughout the world of the chinese are anticipating the north korea not be able to continue with its missile program. Of the u. S. Should not have a preemptive strike. The u. S. Is very much relying on economic sanctions in order to try and win over its message to kim jongun from continuing on. This all does come back to china. Whats going to be interesting in september is whether or not the u. S. Is going to be able to put more tough sanctions onthe chinese and sanctions chinese Financial Institutions in order to pressure north korea. David traditionally, when there has an International Crisis like this, our governments come together. Has he managed to do something the president do . Kevin we saw this with the president receiving a bump in the polls following the syria incident. He was greeted with praise by that. Right now, we have not a response or a bump in the polls. That is something that could be interesting to watch. He was criticized for fire in fury. The generals were not aware of that comment. It will be interesting to see if people rally behind the president. Many thanks for some great reporting this morning. To get a perspective on whats going on in north korea, we turn to the peterson institute. He is down there in washington. Take us through this. You are a student of korea. Take it to us. How did those two upset the regime . Kim jong noon has been pursuing a policy which means is developing both the military and the economy. This is in the top began the. This is what he is going for. It serves a couple of interest. When you look at the military advancements, is able to have a stronger capacity to deter against what he perceives as United States threats. Economics,ok at the he came in and promised he was going to improve the livelihood of regular people in north area. Legitimacy as a leader. For him, he is pursuing both of these. Its a dual track policy. It is somewhat of a balance. Alix when we hear from the Chinese State newspaper that they dont want north korea ramping up tensions and the United States doing it either, what does he think about that . What is his response . They have an agreement with north korea the they will defend them. This goes back many years. There has been some peculation thate last several years china is upset with north korea and they might not come to the defense of the regime if they are getting too aggressive. Or if they are the ones whos are some kind of war. This is a classic problem you have with military alliances. I think that china is saying they might get involved if north korea is invaded. Thats going to be a positive message received in north korea. Message it indicated to the North Koreans is if you ,tart some kind of provocation china is not going to necessarily come to your defense. As we have seen with north korean provocations in the last several years and china agreeing to more stringent sanctions in the unrth korea security council, china is upset with north korea. Its not like you have these great relations. They used to describe them as lips and teeth. That we are far from that right now. Alix thank you very much for joining us us morning. Coming up, we will take a deeper dive into the Top Performing sector, the Financial Sector. There is great potential. Is bloomberg. Alix speaking out, he recommends a hedge against Rising Economic risk here in he conflictpotential could go awry. Gold would benefit. If you dont have 10 as a hedge, look at this. Dont let traditional biases stand in your way of doing this. Michael joins us. Michael ive been constructive on old all year. As i break it down, i tend to agree with where his head is at. There are two things. One, real rates. When i run my models, you can look at gold when its in a strong up front. You can see it trading at a premium where it should we. Market is trading at a discount, i measure that discount. Thats a function of things like political risks. The discount increased. Now it is narrowing again. Forhave two things going gold. Rates are not probably going up. Inflation is starting to stabilize. A it is interesting to see when this tension disappears. Alix you bring up an interesting point. Is the call for caution just because were so overvalued and so many sectors . Moving to safety because we do start something . Michael if we go to nuclear war, all bets are off. Alix are we seeing the selling because of that lesson mark we had some overextension of some classes. Michael its a great question. Bitmber, when we have a spike . Probably we would if you start looking. If you dig into some of the volatility metrics. Of volatility sectors out there looking at the vix futures curve. If you look at the next chart, every couple of months you have a spike. I suspect we would have had some of this anyway. You are seeing signs of risk off. What should the price be given the real rates. What is your model . Michael its one of those things that is tough the value. You can go through a lot of different mental exercises. A 0 discount, it would get you to 1400 or so. Thats not a massive move higher. Into ifs getting it starts doing that, the price action can be very powerful. That, as isd something you do longterm. Would you sell the golden go back into the market . Michael that is another a question. Because its a hard asset the value, you have to look at the technical. Trend, it was three steps forward and one step back. About longterm aboutg, you are thinking this being high right now. As it gets to a premium where it should be relative to real late rates, you can bring that back down. Its a lot inflation. Equities, what do you do . Ishael the signal right now this is probably a natural cleansing like we were just talking about. The basics are strategic factors. They are still in play. The earning seasons are respectable. To step back. Ve you watch this play out. Once that starts going the other way, you start to see some support. There is some are term trading violence. You probably want to buy the same steps. The long tech trade is going to work. How do you interpret that . Michael its a natural function. Alix is it a turning point best mark rk point western michael the latter. I think its important to look at it. Credit spreads have gotten really tight. Everything has gotten supported. 1964, backack to then you had volatility half of what it is right now. Long amount of time, credit spreads tightened much more so than today. Ceiling goes away and we have this backdrop, there is a reason to think you cant tighten further. David what happened before 1963, the cuban missile rices. I hope we dont get that far. Michael will be staying with us. Next week, we will be joined by some important guests. Live from new york, this is bloomberg. Alix in germany, the pain trail itself is merkel has a 16 point lead. Tomorrow, she will begin a tour across the country. With us is Michael Purves. Michael its something you have me monitoring. We had the death of euro populism. That in austria. In april. Pen you never know. It could come back. If it does come back, this concept of repairing the new European Union political condition could be a challenge. Macron workingin together, that could rate. That can be something to be watching or. Alix we talked about the potential for what it means. What markets will focus on his this idea that at the core of europe and between france and germany, this idea of working for a stronger European Union. A push towards reform we might not have seen in a way that we have a number of years. It that has been one of the key calls of our strategy. The euro remains very undervalued. Michael i think i could not agree more. The euro has gone three regime change. It has been defined by rate inferentials. Its arguably increasing in the u. S. And decreasing in europe. That is a huge factor. Even though the positioning shows everybody is in the euro right now, the charts are telling us something. The dollar is not dead. The euro has been really resilient. What is happening is there is a regime change underway, which is really important. Becoming a key factor. David you mentioned the surplus. Purchasing power would indicate the euro should be higher than it is. There are various reasons. Is reform the major Thing Holding back euro western mark michael its been a strain on growth for a long time. Honeymoon a be over. We will see if he starts getting into their reality of dealing with french unions. The bar has been so low for so long. Specific . Want to buy michael as it relates to the equities, the first part of the year you saw the euro getting strength. Now you are starting to see some divergence. If you are long european iies, these might be think you have to be careful. European banks are interested. Alix good stuff. Michael will be sticking with us. Later today, the bank analyst from wells fargo will be here. This is bloomberg. Got you outnumbered. The dinosaurs extinction. Dont listen to them. Not appropriate. Now im mashing these potatoes with my stick of butter. Why dont you sit over here. Find your awesome with the Xfinity Stream app. Included with xfinity tv. More to stream to every screen. Alix this is bloomberg daybreak. A few hours before cash in the u. S. , futures up by 17 points. S p 500 headed for its worst week of 2017. The ftse the weakest dragger. You wound up having a lot of minors hit on issues miners hit on issues in china. The dollar trading around neutral. Sterling slightly higher against the dollar and the euro weaker, relatively flat. 10 year yield goes nowhere. Crude down by. 4. David besides everything else, a big week for earnings in the retail sector. We are waiting for jcpenney earnings and we will bring them to you soon as we have them. Lets talk about the sector in terms of spending. Alix jcpenney coming at a loss lossne cents a share, the estimation was for four. Slightly below estimates. The nine cents a share was adjusted loss. We will see how that stacks up against estimates. It is down. 13 . The Company Reaffirms its forecast. We will follow those headlines as you wind up having khols and macys having a solid quarter but those stocks hit in the premarket area i want to come premarket. David i need to talk about our president for a moment, he just tweeted military solutions are in place, locked and loaded, should north korea act during hopefully, kim jongun will find another path. Locked and loaded, which is not reassuring. Joining us is bloomberg correspondent mike mckee. Lets talk about the consumer. Where the consumer is now and how that affects retail. Mike i found jcpenneys results interesting because it was the Company Everybody thought would go out of business but it is still there. All are reporting trouble. Does that tell us about what the consumer is doing or the Department Store space and the idea of the generalized store where you can buy everything . They seem to have fallen out of favor. We will find out next week when we get overall Consumer Spending figures. We have seen a jump in thatdence fall off, but does not predict about what will happen with retail sales. Consumer confidence, along with the s p index, and i will reverse the and employment line to see the match, and Consumer Confidence is driven by headline about the stock market and unemployment. If we have any geopolitical tensions, that will affect spending, but it isnt a good indicator for Consumer Spending. It follows the headlines but does not lead the numbers. David i am told jcpenney is down about 5 in free trading. Explain the state of the consumer. They are confident. Particularly, look at the extension to which they take on debt. It is not related to retail spending but others that is encumbering their money to spend at the stores. Mike confidence is up and rolled over in the last month and they are waiting for raises. They are nervous about what is going on and they have been directing their money towards things like student debt, darling money to try to keep spend borrowing money to keep spending, but we are not seeing a major rise. That is where the economy has been. David we want to turn back to jcpenney for specific information. We will go over numbers with our gadfly colleague terry what do you take them them . Calling. But do you take from them . They are similar to macys and khols, which is butment that a lot of not a lot of clarity. Is enough of the change for it to be viable down the road . We do not have a lot of answers. Alix the distinction between macys and khols, where macys has done the right things but it isnt enough, versus kohls, and where does jcpenney stack up . Jcpenneys has not been as aggressive in closing stores. They are closing 138 this year, which is more than macys but a smaller share of their fleet. They still have over 1000 stores. Jcpenneys is making more active moves, expanding in the appliance category and they smell blood in the water there. Sears is having trouble there, and they think that is a good highmargin area to get traction and that seems smart. Alix we have Michael Purves here, as well. Talk about underperformance, value. You will say, retail sounds good. What do you think . Michael or is it . A lot of value guys are looking at macys now, which is a retailer with a stronger position. Had amazon not existed, jcpenneys would still be there for a lot of folks. I think there are a couple of to pull away. One, look at jcpenneys stock price chart. It dies a slow death. A lot of people three years ago that this stock was going to zero and it does have some there, so if you are short the stock, be careful. The broader news, the amazonification of the retail space does not seem to be stopping anytime soon and the course analogy of, it seems a lot of these retailers that states to cancer and has gone to 2 cancer and ite has gone to stage three. David we usually talk about amazon, but how is jcpenney doing in their move to order things online and they can be picked up at the stores question mark stores . They are seeing Good Progress and excited about buy online, pick up instore because of attachment spending. Retailers are finding when you place that order, surprise, you buy Something Else when you come to the store and they think that creates a chance for them to build brand engagement to make you more loyal to them. It is true that would amazon is doing is putting enormous rush on them in other ways. Amazon is ramping up in privatelabel apparel, trying amazon wardrobe, where you can order close to your home and only paid clothes to your home and only pay for the want to keep area my has keep. Alix my husband would hate that, a box of clothing that i am too lazy to return. How do retailers try to monetize parts of their business that are working . Because medics in real estate like cosmetics and real estate . Jcpenneys has had a andtionship with sephora that has been a strong strategy for them. They have stronger sales per square foot than the rest of the jcpenneys store and it gives what is goingto on in the retail space. Ute has been a bright spot in a gloomy retail environment, so it gives them entree there. Sephora is experiential. We keep hearing about how Consumers Want and experience and not just an errand and sephora provides that. Alix great stuff from bloomberg and Michael Mckee and Michael Purves. You are sticking with us. Melenchon to see with emma chandra is here. Emma north korea has sounded off with the u. S. Their News Agency Says President Trump is driving the Korean Peninsula to the brink of nuclear war, after President Trump warned korea not to conduct a missile test area President Trump they can be nervous, and they should be very nervous because things will happen to them like they never thought possible. Emma the president tweeted military solutions are in place should north korea back, adding, hopefully, tim jon kim ongun will find another path. According to abc news, there is part of a probe into the meeting with Trump Campaign officials and a russian lawyer who promised dirt on hillary clinton. The International Energy agency has had estimates for the amount of oil needed from opec this year and next. They saved emerging nations like china and india will not consume as much. Meanwhile, they are saying they are growing down all the countries involved in the Production Cut agreement. Global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. This is bloomberg. David coming up, more on a big week for regional earnings. Jeffries retail analyst both join us from new york. This is bloomberg. Emma this is bloomberg daybreak. Coming up, michael mayo, wells fargos Securities Bank analyst. This is bloomberg. Alix inflation taking the spotlight u. S. We will get Consumer Prices for the month of july. Expectations are for 1. 8 but it has missed economist expectations the past months and fed officials continue to sound concerned about inflation. We are not going to get a 2 and so low rates drop out of statistics six months to 10 months from now. It could take time. Bythey have been surprised inflation coming in during the downside in the spring and not by tiny amounts, but a large amount compared to progress we made through 2015 and 2016. Inflation has been coming up short relative to our 2 target. That matters. You think, 1. 5 is not a big deal, but it matters that investors believe the fed can achieve its goals. It has moved up from a low level in 2015, when it was held down by oil, but the last numbers were on the weak side and inflation continues below feds 2 . Alix mike, when we going to look at the story for the last four months was Telecom Prices . Mike last month was also airfare, so it is hard to know. The fed picks out these one offs, which they say will disappear, but there is Something Else. We have seen price declines on a broader scale than anticipated. It will be interesting to hear what they had to say because i have a chart of what has happened to the cpi over the last five years. They were making progress and has gone back down, but we have been below 2 from long time. Every time the fed forecasts we will get to that 2 level and falls short, it hurts the credibility with the markets. We have seen that reflected in the way the markets are pricing what the fed will do. The fed says it will raise rates in the market does not believe it. Alix there is an argument to be made that it should be passive troubles asset levels we should be bubbles we should be worried about not inflation. A piece says if the last recessions have been rooted in the misallocation of capital, the fed would do well to remember this and act accordingly, even if fridays cpi report does not show progress to the inflation goals. That is the way to look at it. Michael without question, cameron does fantastic work. One thing that is different this time, however, is because of the 2008 crisis, the Banking Sector is strong. You can see asset bubbles, see it in thevix and the thevix and the credits the vix and the credit spreads. The Banking Sector is a fortress because of prepares to the Balance Sheets and a galatians since 2008. I think the fed and the Balance Sheets in 2008. If the Financial Sector is strong, perhaps, the fed will be willing to say, it continues to expand. David let me ask a fundamental question, what is magical about 2 . That is not in the statute. Fromprevents janet yellen saying, no, it is 1. 5 , declaring victory and retreating . Might nothing really e the idea you could influence market behavior by setting a target and that would push Inflation Higher david how has that worked . For yearsorked well and other countries, which is why they adopted it. The british have had this. One of the problems they had got is there is this ceiling and they have to get to it. It could be above it and then you run Monetary Policy to get inflation down to 2 as a signaling mechanism for the markets. You were talking about the idea popping abg bubble. The fed does not want to get into this because the only thing they can do is raise Interest Rates and then they dont want to do that and then be the cause of a slowing economy is Interest Rates are too high. David Michael Purves, this question of 2 , there is indication that something is happening in the economy, and maybe it is in respect to inflation and there are factors that say we should knock over 2 . Michael when you are talking about global central banking in the markets, you are talking about the wild card, which is inflation. Itt is the problem, whether is the phillips curve and so for it. The problem in the models the fed have been using are predicated on traditional data. If you defined inflation by some restriction on quality source, whether labor or commodity, you have this rapid escalation of technology that says, if you need more labor, you can create an algorithm and in theory and and what we have seen with Shale Technology is it creates a bigger supply of oil. The fed is steering its ocean liner of models and navigating the waters carefully. It will have to reevaluate this whole 2 level and on a related note, lets say we get 2. 5 to 3. 5 . Can the fed take that risk and quickly squash it because of bonds and mortgages westmark what yellen suggests mortgages . What yellen suggests is, yeah, we will take that risk. Alix unfair question, 10 year yield, 2. 9 , what happens at 8 30 . Michael probably it will not move much. Yields have come down, so you could see it pop a little but we are a long way to get better than expected reading. We are long way from any point will influence the decision so the markets will take it in stride. Alix for those of us still here. Michael mckee will be back and Michael Purves will stick with us. Jcpenney getting taken out to the woodshed in premarket, down by 12 . The typical move for them on earnings 6 . You had a loss of nine Cents Per Share and the markets very unforgiving to a retailer that misses estimates, even for those like macys, that topped estimates. If you have a bloomberg terminal, check out tv. Interact with us directly, go to tv on the terminal. Click onve a question, ask a guest a question and we will do so. This is bloomberg. Is bloomberg daybreak. Shares of social media plunged in premarket trading. The parent of snapchat reported growth that fell short of estimates and raises concerns that competition from facebook s potentialsnap after it went public. David thanks. When it went public, snap was the biggest tech ipo since they split but they have had a challenge with quarterly resorts yesterday results yesterday, where it missed. It has been growing hernandez fast as people got. We are joined growing but not as fast as people fought. Stock has moved down 14 . Still with us is Michael Purves. In a nutshell, what went wrong . This is not a great showing. This date i am looking at is that daily active user number. Growth has declined for four great quarters. They have a competitor in facebook stealing growth, but that seems to be it. When snape listed, they did not talk about the product for the future. It is disputed Secretive Company and they pointed that past cycles. Since march, we have not seen anything that has excited users. They added a mapping product but folks are not jump into it and instagram seems to be stealing some users. David we have not seen much new out of snap. It is possible that miranda kerr had the answer to the question because she earlier said, i cannot stand facebook. Can they not be innovative . Do they have to steal all of my partners ideas . When you copy someone, it is not innovation, it is this grace. How can they sleep at night . Whatever snap does, facebook copies and they get more people for it. Mark zuckerberg seems to be copying them unabashedly. He is arming his folks on facebook and instagram to say, that is a great idea, lets do this, too. It does not seem like that will stop. Alix do you like snap . Michael i am not a single stock analyst. Alix in terms of those that have to create with facebook, or you like that kind of story . Michael not especially. When you look at the bank stocks and facebooks and googles and amazons, it is the board of directors that are management there. You will engineer this to be a rocksolid fortress. You have the cash flows to pay the best developers and you will keep doing that. You look at any competitive stretch and squash it like a bug and that is why their stock in the market loves the stocks because their fortress is they can grow massive cash flows against a low nominal gdp world. David until it doesnt. Finally, with the have been better up selling rather than taking public and is it still possibility . It is. Valuation is down by almost half of what they considered initially. The question is, who is the buyer . Facebook is copying them, why did they need to buy it themselves . Greatgreat reporting and to have you on set for the hour. Coming up, michael mayo, wells fargos Security Bank analyst will be joining us. He has ideas about what goldman positive. S to do and we are excited. This is bloomberg. Track your pack. Set a curfew, or two. Make dinnertime device free. [ music stops ] [ music plays again ] a smarter way to wifi is awesome. Introducing xfinity xfi. Amazing speed, coverage and control. Change the way you wifi. Xfinity. The future of awesome. Alix game of chicken, ray dalio says buy gold, while President Trump and did not. Leader President Trump and the north Korean Leader play chicken. Analysts are cutting their price forecast. Inflation on that, cpi hits a 30 and the fed is determining whether it is transitory. Welcome to bloomberg daybreak. Tgif. I am alix steel, alongside david westin. Here is where we stock up, s p futures down by four points. The worst loss for them this year. Dollaryen at one point breaking drama in, despite northeast asia and old gets its bid about a twomonth high about one dollar announce. David as you call that dollar in asia, there is a pattern where on the one hand, the president of the United States says something aggressive about says hehen aide said this morning, military solutions are in place, lot and loaded, should north korea i unwisely. Will find kim jongun another path. You can see the american effort is diplomatically led, it has diplomatic traction, it is gaining diplomatic results, and they want to stay right there, right now. The tragedy of war as well enough known. It does not need another characterization beyond the fact it would be catastrophic. David to go over this, we are joined by kevin cirilli. Is this intentional . There seems to be a good cop, bad cop, with the president claimed the bad cop and secretary of state and defense claimed a good cop. Kevin good points. We have seen this on several things, not just Foreign Policy but on domestic policy, where the president takes a much more aggressive tone, aggressive rhetoric than some of his diplomats and lieutenants. That said, that has sparked controversy because while it might the savvy political strategy, some would argue about success rate on domestic policy, and on Foreign Policy, it is another in and of itself, particularly when reportedly, the president s journals were not briefed he would make that generals were not bring to it make that comment earlier about the fire and fury that would be met should north korea decide to do anything with them whistle launches. All of that said, the president tweeting since we had last spoken about the u. S. Military being ready and in place should dictator kim jong un acted wisely. David since we were reporting yesterday, there has been support and world leaders, like the head of australia, japan, europe. What about the chinese . What is our relationship with the chinese now . Is the minister should working with them to orchestrate a diplomatic solution . Kevin japans Prime Minister clearly has been working with this administration for quite some time. That relationship is strong, at inst from sources i speak the International Diplomatic community. They feel Prime Minister abe has been someone who does feel they might be able to partner with the u. S. To pressure china in order to get the chinese to act on north korea. That is the second point i would make, which is when you Start Talking frequently about what secretary of commerce wilbur ross will start to do with the chinese in terms of the host of incoming potential new tariffs later down the line, is his word administration deals that can bring the chinese to the bargaining table as their four meetings with resident xi get on what president with president xi gets underway. David that is terrific, thank you. Alix how do you price that into the market . Ray dalio is the latest voice of caution, saying that during the calm of august, we are seeing two militaristic leaders playing chicken while the world is watching to see which one will be caught laughing or if there is a fallacious war. The best that one can do is the neutral. Is be neutral. We are joined by wells fargo investment president and ceo. What are you doing now . I think it is wise to take risk off the table. Markets are coming off alltime highs. We have been talking about this through the summer that when markets are at alltime highs, you do not want to be out over your skis. It is wise to have dry powder back some of that. We think it makes sense in certain sectors, we can find value today but think it is wise to have dry powder. Alix you highlight what im trying to understand, is the risk off shift we are seeing because you have these run much and valuations are overextended, or is it because investors need to take profits because they are starting to price in geopolitical risk . Darrell probably both. Are,u look at where we there are a number of indicators flashing that we are late cycle. If you think about buybacks that have been in the market recently, q2 earnings season, those were beat on the top or bottom side and are not getting rewarded. Those who are best are getting punished severely. Who missed are getting punished severely. Leverage is increasing if you look at debt in Corporate America. Valuations are some argue stretched. You have to Pay Attention to those, notwithstanding the geopolitical sphere. David that echoes to the core of the question which is, if the north is the north korea situation because of the markets weakening or catalyst . Is it triggering something already and it just needed something triggered because that would affect Investment Decisions . Darrell i do think it is catalyst. When it comes to National Security and Foreign Policy, words matter but actions more. At a good point, it has been a lot of words backandforth we have not seen it escalate into actions. That is what the markets will begin to Pay Attention and move the catalyst and the reason to take risk off the table to a more staunch is a city. Staunch position in. David unpack about risk the table. Ray dalio says the buy gold, does that mean going from highyield to Investment Grade, how does one calibrate that . Darrell i think taking profit in the equities overall, so when you look at year over your equity markets this week, they are up 20 plus percent. You do not get those kind of moves that would argue that may be the wise to do is look at races that have smallcap that moves into your point, one of those are highyield spreads. I know you have talked a lot about that area. We just do not see a lot of symmetrical opportunities there for risk return. An investor probably clipped a coupon and it spread to widening and that creates problems. Alix we will dig into specifics of that market, as well. Where does this put the value and growth debate . A look at my chart shows ratio. Growth index. Shows a ratio of share value growth index. It underperformed, less than growth. We have been waiting for this location for years. Are we going to see it sustainably take hold . Darrell in traditional value sectors, telecom, staples, utility, those types, those rich test now. You are still trading close to alltime high multiples are within the 95 to 99 percentile. We would still underway does. Those. Rweight if you look at health care and financials, you are getting close to the same growth rates that you are enjoying it lng and not paying the same multiples. You are getting it at cheaper prices. One more point on that is if you look at financials, and as an example, they traded a 30 discount today overall to the bond prices, so they have better growth upside, we think, on the other side of that. We would probably look to target those sectors of the market and thus of the traditional value utility staples. Alix what do you do but treasuries . Typically, that is a safe haven and could argue it is an at all because you can have a bubble. What do you do . Darrell the sweet spot to us is the intermediate heart of the curve. We do not want to be extended on duration. What ist side interesting is look at the two year yield the election from 90 basis points up to 132, a 50 rise in the twoyear. The 10 year on election was to 15 and is now at 219. Was at 215 and now it 219. We have got nowhere since the election. That of people look at every day. We still find the value in that steepness of the short side of the curve and financials because they do better in that type of environment. Alix Darrell Cronk of wells fargo will be sticking with us. Coming up next week, a lineup of guess. A line above guests. Guests. Eup of politics will intersect with markets. This is bloomberg. Alix a bad day for jcpenney. Shares get whacked in the market after estimates missed results. They are closing about 140 underperforming stores. They had to deal with clearance sales and that wound up hurting their top and bottom lines. Jcpenney down a whopping 20 , typically down by 6 . The last 48 hours, you have macys and khols not terrible and their stocks got hit. Dillards and jcpenney get hammered. David but they had a significant miss. Nine cents does not sound like much. Com was fine. Re there is no forgiveness now for the retail sector. Skeptical market is about jcpenney, so any slight move to the downside, there were punish them. Talking about the economy, we heard from William Dudley yesterday and he had a positive prognosis for the u. S. Economy what more and it is going to take time for inflation to rise above 2 . Anticipate ay we moderate growth trend with further strength in the labor market. We think it will push inflation over mediumterm, back to our objective of 2 . David we will be breaking july cpi numbers in less than 30 minutes. Is carlpreview the data riccadonna and Darrell Cronk of wells fargo. Give us the prognosis, what do you expect us to learn in 26 minutes. Cool streakk the will continue and core inflation. 1. Ht be up we are not seeing a lot of waving off of inflation weakness. More importantly, if we get a top trend today, we need to stop chopping this up to a couple of inducing credit and transitory factors like cell phone contract and drug prices, even if we stripped those out of the core cpi, it is decelerating aggressively. Core cpi has decelerated by 60 basis points since the start of the year. We would still have decelerated by for the if we strip out those factors, so it is a more pervasive problem. David there is a slight talking my homework aspect to the fed dogging my homework aspect to the fed. Is that what you are forecasting . Arrell i think carl is right you look at push at the headline number because oil has moved higher in brought gasoline prices with it but the issue is the core. The core. Without core inflation, and cpi has surprised to the downside four months in a row, this is becoming a problem in backing the fed into a corner about what they can do it teacher Interest Rates. They need some level of inflation support to justify the path they want to put on Monetary Policy. Alix when you look through details and you put aside airline rates, telecom services, what are going to be the sticky downsides of the cpi you want to focus on . Carl we have seen it across the core goods sector, so we talk about deflation in the goods component of core cpi. That should start to abate given that we have seen the dollar weekend since the start of the year weaken since the start of the year. I suspect we will start to see some turn in the next months not to great degree. On the other side of the equation, it is watching for services. There has been this deceleration and if we strip out those factors, we see a decelerating trend, so it tells you something is bigger at play than the one off the fed reminds us will drop out of the occupation and when youres time. We have to remember one years time. It is an indicator of Economic Activity and the best fit is about 1. 5 year leg. If we look at one for five years ago, we were posting growth rates of. 5 and. 6 on real gdp, so it was weak and were getting payback now and inflation. Alix the second part of the discussion will be what it means for the fed. I went to point to a piece yesterday saying that the last few recessions had been rooted in assets, market imbalances and misallocation of capital and the fed would do well to remember this act accordingly, even if fridays cpi report does not show the longawaited process toward the fomc inflation goal. Do yous share the concerns . Darrell i agree with the statements and it is off the asset inflation bubbles. Im not sure we are still seeing that today. Im not sure there is an evident asset double out there bubble out there pushing forward. Ls point is well taken. We saw cpi yesterday, services were down. 2. Last week, i us some services spike ism spike down. If the Services Side of the economy slows, that can be a problem for overall gdp growth, which becomes a problem for the fed. David give me sensitivity analysis. If it is. 1 more or less them you expect, is it symmetrical risk, which matters more . Darrell certainly the consensus is. 2 as the headline but. 1 of the court. The court is weaker. If the the core is weaker. I think the market likes that if it comes in haotter. Hotter. If it surprises to the downside, that puts us back into a wash down. 2 or better, maybe everything is ok and not much reaction. If you get a soft print, you ask questions, when is the next fed rate hike coming . Are we going to see a turn in this inflation number . We have yields coming down due to geopolitical risk, so this is the perfect storm on a summer friday in the lack of inflation pressures and it will push things in a downward direction. Going back to the opinion piece about the fed going after asset bubbles, we are in a low inflation, low growth environment and the fed is raising rates to go after financial conditions. It may be unstable and they could push the economy to a slower speed, which could be a dangerous development. Their mandates come up for the employment and inflation and price stability Financial Stability secondary. Alix that is like the asterisk, the first footnote. Darrell but an excellent point and carl is right on. David with that, thank you to carl riccadonna. K will beron staying with us. Live from new york, this is bloomberg. Alix calls for selling highyield debt coming on strong. Junkbondk at the etf, the white line. A fella over the last big selloff. S p 500 also, but there is a gap between them. Darrell cronk, do we need to see the s p rollover to meet the high selloff . Darrell no, i do not think so. I am watching credit spreads and wherek they will dry equity prices go. They have been well behaved, both, credit spreads but it highyield gaps out, that starts ice to pays in the attention to an elegant investors pause. Alix what is that gap . The high yield spread is looking at Something Like 380 basis points. That does not seem that dramatic. What do you have to see to get nervous . Darrell somewhere 420, 425, 20, 420 where people Pay Attention ,ecause you will get a risk off flight to safety, so government yields will go down, how yields will go up and that 425, the market starts to Pay Attention and that becomes concerning. Alix are there opportunities in the highyield market still . With the these get hit harder and triple cs are more immune . Can you break it down in that respect . Darrell i think the british to go down to the credit stack to triple cs, i think when you go down to credit stack to triple cs, does will get hit. The best thing would get Long Duration and roll down the credit as far as you can to the lowest tier and that gave the wonderful returns. Those look like those are the most mispriced. We have been telling client investors that it is time in the cycle to roll up in credit quality and shore up the bond and fixed income portfolios. Alix but Investment Grade by type, so how do you argue that will not first if we have highyield out of it . Darrell credit itself because of strong Balance Sheets because of Corporate America is still pretty good. Even though they are cycle types, if you look at credit spreads where they are relative to past cycles, they are 1 history, so there is value. The reason is because Government Debt is so expensive. The reason we are 1 wider is because of government that cannot credit debt and not credit. Alix would you stay away . When youwhat do look at credit quality, without commenting on names, it looks if we had areas in the market where you are getting asymmetrical opportunities and there is not much upside. If you are going to take on the risk, there could be pretty bad downside is the wrong thing happened. Alix Darrell Cronk, you are sticking with us. Today, watching jcpenney, almost down 24 points after missing estimates. Brutal day. This is bloomberg. Alix u. S. You are losses, down by one point. Particularlyloff, in the short end of the curve. There is some interesting hedging owing on. Dollar is weak or. Allave that coin, that is moving higher today. Look it that killing, over 3500. 1. 7 is what we print. If you have that on a month to month basis, that is up 1 10 of 1 . Of course, cpi, its coming in at 1. 7 , unchanged from the month before. We went up seeing reversals in the treasury market. That is reversed. Yield is moving lower as the selling has reversed. There is more buying coming into the market. Classes, thet dollar index is moving lower on that as well. Its a typical reaction as we look it muted cpi inflation, but not yet a miss. Policyjoined by correspondent Michael Mckee. Its like steady issue goes. Steady as she goes. Truckl used car and prices are down. That you knew was coming. I dont see anything else that stands out as an excuse for why we missed. People are going to be calling in to weston when the next fed rate move is. It doesnt help the case that inflation is coming back anytime soon. We are joined by the Senior Analyst from toronto. Take i theses your numbers . Francis there are not many surprises. The stabilizing we see will pay into the view that we have seen the bottom. That is what the fed can really target, that is what they are going to be most focused on. David what is the message the fed will take from these numbers . They are concerned or the Inflation Numbers are. Francis they will continue with the same narrative, that inflation will rise. If they are looking for 1. 7 by the end of this year. They can achieve that. The challenge will be in 2018 when they are looking for 2 inflation. Thats going to be more difficult when we look at numbers like we got today. Alix can they do this . Theael they can use transitory conversation and use things that are pushing down on inflation. Differentup with a way, a different take on it yesterday. Inflation is lower on a yearoveryear basis because it is lower in previous months are as francis said it, its going to take a while. From your point of view, is this the goldilocks scenario, where you dont have inflation and you the modest price pressures. I think the market overall could like this. All that does is expands real growth, like the difference between gdp growth and inflation. That said it, this looks a little bit disappointing overall. If only for the reason that we had for months in roper we had disappointing numbers and we thought there might be some payback. Of i dont see the payback. It still makes a difficult conversation for the fed in the back half of this year. David let me be more provocative. The definition of insanity is doing the same thing and expecting the same result. As of the fed doing that . They been doing the same thing and not gotten lohse 2 are it why will waiting turn that around and mark around. Francis we have seen a settle shift from the Federal Reserve, a lot more on targeting the real meaningful rate. They believe that is above 0 . They need to get the rate up to the inflation rate. Even if the inflation rate is 1. 7 , that still means two or three more hikes to get to a neutral rate area the market is underpriced for that an area. I think the focus needs to move away from will we ever get to 2 to when will the fed have a neutral rate. They can probably do that next year. David that sounds like a good plan. I dont hear that from the fed. They dont say it about 2 during 2 . Havent market they are trying to guide the market toward and push rates higher. At this point, it is not working. They want to get rates up. Alix i want to get to our economists. Cpi, ifwed that core you back out Wireless Services and prescription drugs, it continues to fall, down to 1. 9 . Sinceore cpi has declined january. If you back out wireless contracts, its down 40 basis points. That would indicate its actually much more broadbased than two telecom and prescription drugs and drugs. That makes the job harder. Michael the fled does not think we are seeing deflation. They need to convince the markets of that. The market doesnt follow the fed. You got a problem down the road. We have a focus on another story. A that is jcpenney. They are down over 20 . They are missing on sales and earnings. Ideas, i getome it. Why is the stock down so hard . Samestore sales were down. If you remember about a month ago, management came out in sales were gaining traction greater at that point, everybody thought there was improvement. We had said from the beginning that the improvement is due to liquidation sales, which they did get a bump on top line. Things are beginning. Alix what do you make of it . Back to theomes challenges that retailers face. No matter what you do in the near term, what is the longerterm outlook. That is still a challenge. There is really no way they can. David i want you to explain the theory, they are cutting 100 already eight stores. 138 stores. If there are fewer stores and the same number of people, sales go up . Samestore sales should go up as they reduce the number of stores. I think there are a lot more to go. They have over 1000 stores. They sell it twice that rate. Alix lets put them in the cpi print. Apparel was down. 4 . Earnings are struggling. You have the amazon affect. What is the permanence of any apparel disinflation . Your certainly addressing we seeructural reasons cpi continue to fall. This is average. Me these big to factor amazon effects are going to persist going forward. I think you will see deflation. They are starting see a little bit of that. That is the only silver lining. You guys are going to be sticking with us. Lets get an update on headlines. Emma chandra is here. Emma president has another warning for north korea. The president tweeted military solutions are fully in place, locked and loaded. Came long after they accused him of driving the Korean Peninsula toward nuclear war. The president has warned not to conduct a missile test. President trump says he is ready to declare a national emergency. That should clear the way or extra money with overdose deaths. More than 33,000 americans died from opioid overdoses in 2015. Jeff bezos is down a marked natch. His fortune drank by 2 billion yesterday. That pushed him down to third richest person in the world. Global news 24 hours a day powered by more than 2600 journalists and analysts in more than 120 countries, this is bloomberg. I am emma chandra. David coming up, mike mayo will be joining us right here on the program. This is bloomberg. Emma coming up, the cf are a research analyst. This is bloomberg. Alix by gold, that is the message from ray dalio. Said in a note we can say if things go badly, it would seem the old would benefit. If you dont have 10 in gold, we suggest you look at this. Dont let traditional biases stand in your way of doing this. Gold is up or a third day. It is up more than 2 . We are joined by our boston bureau. How much more upside can we see . Another 20ve got in the near term. Our target is 1350. I do think there is more safe haven that could be involved with old. Alix how much of that is fast . Michael thats a fair observation. The way the markets are turning in a low volatility world, i think there is some nimbleness. 1300,d breaks through some people would jump on board. That could add more to it. In the near term, being nimble is good. Alix what about real rates . They rise if you dont have inflation. Inflation is on the road to nowhere. What does that do . Michael thats a fair observation area one of the major drivers of the price of gold is lower real Interest Rates. There has been a concern. Could bevish fed helping. Seere going to need to continued low rates. I think you can see that from overtime and inflation expectations. I think that could be a solid opportunity for commodities. David how much of this rampup in gold is simply because of north korea . If they kissed and made up tomorrow, what would happen to the price of gold . Michael it 2 pullback. Supportive,en very the demand trend in old, the weaker dollar. There are concerns about real rates staying low. There have been things helping gold. Alix i covered told back in 2010. I loved it. If we were having this conversation then, we could talk about gold it 3000. Michael thats a very good point. As 2009, we have had tripling of the s p on the dow. When the rubber band has been stretched so tight relative to real assets like gold, it has dampened the lever. We do get some sort of normalization over the next few years, gold can spike ready high. I remember those times when it 3000. Alix it was a given at that point. Its great to get your perspective. Do you want to buy gold . . Think its on the high end of its range. Michael has good points. The dollar is down 9 . We have the geopolitical risk. We expect the dollar to strengthen from here. We think the dollar is a little bit overdone on the downside position. We will see where the risks go. The risks elevated into the fall. We have Congress Come back. That budget has to get past. Is the supply is as high as its ever been. Its hard to make a case for a big upside. The idea that we need to protect against risk, what kind of downside you see in a shortterm western mark shortterm . It is not going to change any of our gdp or other Economic Forecast in the short term. Ignoring it is imprudent. Risk will distract from the fundamentals we have in the forecast. As asset managers, you have to Pay Attention. Even in the Federal Reserve has a geopolitical risk. This is something we watch very closely. Alix i feel your pain. Youre going to be sticking with us. If you have a bloomberg terminal, check out tv. You can access us directly. Just go to tv on your terminal. This is bloomberg. Emma more bad news for retailers. Jcpenney had a secondquarter loss your than expected. Sales were lower than estimates. They reported sagging sales. The stock is getting hammered in premarket trading. Isearly investor in uber suing the former ceo. The lawsuit is a culmination of a bitter fight. Packuit says he tried to the board with allies to keep them as the director after he resigned in june. Tech this is the biggest ipo since facebook is they have had challenges. They announced quarterly results. There was not as much growth as thought. Movingck to step down, below the traditional offering price. It is down 12 . Here to explain why is alex. Is going wrong . It is daily active user growth. When i look at what the street is saying this morning after these results, they are pointing to active users and revenue growth. They have had a couple of ways for advertisers on the platform. You heard the company talk yesterday. Safety percent of advisor coming from these easier advertising places. Growth is not necessarily where it needs he cant the. They missed estimates. The street is not happy across the board. Usersanted daily active rather than monthly. They come back a lot and they are deeply engaged. Withe going to make up deep engagement. Is that not panning out . Alex they dont like looking at daily act users. You have to be of the show and using number. They look at engagement. How is an investor supposed to modify in age meant . Quantify engagement . That is the metric they have given to the street. When you look back to when they listed, they had financials that were lumpy. You might see some fits and starts. This is a bit of a fit for them. Are investors going to buy into the longterm opportunity and that on their innovation . Are they going to run for the hills western mark hills . They seem to be running. Any room lefte for snap . This was a hot thing. The bar is really high. 10 the s p his given us so far, a quarter that has come from the bank side. When you look at the positioning, about 30 over position toward technology and 65 to bank stocks. Here is a big positioning they need to be long on the stocks to supplement the performance. If that walks back at all, thats for you have some risk. David should you not be so overweight in the stocks . We are at neutral weight on the whole sector right now. We think there are some issues to talk about. Next we will be watching tuesday, a lot of retail. Thank you so much. She covers ipos for liberty news. Coming up next, we have mike mayo. Now he works for therell cross. He is going to be joining us. This is bloomberg. Alix buy gold is resident trump and kim jongun of play chicken with each other. If President Trump says the military is locked and loaded. Jcpenney is getting taken to the would get it. The Department Store is in drought. The latest read on u. S. Inflation it came in light of act occasions. Welcome to bloomberg daybreak on this friday. This is a busy friday. I am alix steel with david westin. We are 30 minutes until the opening bell. S p futures are moving higher after that weaker cpi. Core cpi matt missed. U. S. Equities are getting that reprieve. This actually moved below 109. Gold is turning negative on the day. Inflation expectations of not living up to what the market needs. Its an interesting reversal in the last 30 minutes. Movers, individual lets head to abigail. Downil first up, snap is 12 . Ofwill open a low ipo price 17. Disappointing with daily active users and revenue missing estimates. They have Ryan Fitzgerald look through the noise and be patient the longterm. Those shares are down sharply. Prior to the decline we see in premarket, up 50 . They were down after they Beat Estimates once again. It looks like the they are disappointed with data center growth. The shares were priced going into this quarter. A do have them saying it was good quarter, it needed to be perfect. Jcpenney is down 23 . Its on pace for the worst day of the last year. That is saying something. 53 stock was already down during samestore sales are down. That everybody is surprised. There is a interest on the stock. Lots of bears are already on it jcpenney in front of another supporting work. We work. David we hear fighting words from the resident on north korea and diplomacy coming from his a. Today he tweeted, military solution is locked and loaded. This came after yesterday when we heard from general mattis. He advocates for using diplomacy. You can see the american effort is diplomatic the lead. It has diplomatic traction and is gaining results. I want to stay right there right now. The tragedy of war is wellknown. It doesnt need another characterization beyond the fact that it would be catastrophic. Washingtonchief correspondent joins us. Even as we have been talking, the foreign minister of russia says the odds of war are very high. Kevin the thick russia is trying to ease into the uncertainty that some of the markets have tapped into regarding this for words between trump and kim jongun. This type of unpredictability has shifted the policy from what we saw in the obama admin is versuswith north korea the Trump Administration. Typically, this is just an opening bid to try and get diplomatic aid into their economy. They field by doing this bad behavior will get the International Community to get them to back off with a. Last,y continue on their that has further copper hated things. The unpredictability of the Trump Administration contrast with his senior officials. That has been a strategy we have seen domestically and now geolyrically. David s first responsibility is National Security. At the same time, he ran that he was going to help business. Whats going on right now markrn mark now western kevin if you dive into my terminal, you can see how this is played out in the market area you will see vstoxx have dipped upon the uncertainty this week alone. Meanwhile, this has skyrocketed. That uncertainty has surged. Investors are taking most look at this. The uncertainty really is taking off. This is the president said himself about that fire and purity remark. Thank you so much. Alix kevin doing his own chart. This comes from the chief investment officer. He sounded the alarm, trimming that quick eight that equity exposure. Paulsen ands jim with us is Michael Mckee. View . O you share that jim we certainly can have a modest pullback here. I think the risk is getting too infatuated with that. I think were going to go on to new highs. There could be a couple of months. I think we might end the year higher. Thats more important to keep focused on. I think rather than try to time that perfectly, i would just take advantage of it. You want to get your portfolio where you wanted to be. That would take advantage of the defensive stocks. I would be looking in materials and energy and industrials in Tech Knowledge he. Take it from stable utilities and telecom. This has been an intense steepening of the curve. Walk us through the weaknesses and why the reaction to the bond market. Michael a lot of people are pointing to that as an excuse the red will be looking at those. I brought along two of them. Everybodys going on big asian this time of year and cars and trucks were down. Prices are going down on a really basis. You can see how the impact was dramatic. Are those transitory factors . Yes. The problem for the fed is it has been a transitory oneoff price. They are not pricing pressure. Alix do you have to have a goldilocks bed to have that call . Can it stabilize and move higher, even though todays print is weaker . Will run likeet most do, under a sense of overheat conditions. We have to adjust to that. I donate we are that close. I think we will need a 10 year yield above 3 . Thats going to come with more fed rate hikes and contraction of the Balance Sheets. One of the reasons i am bullish at the moment, the 10 year yield is down year to date. The dollar is down. Both of those are stimulating the stock market. There isnt any hurdle or restriction on that. This has a lot to do with a fearbased chance of a nuclear holocaust. Down in the first half of the year, it is turning back up. I think economic reports are improving again. Thats going to force the fed. David he makes a powerful case. It wasnt increased demand, it wasnt growth, it wasnt capital investment. Is there any sign thats coming online . Michael we are starting to see more growth. We dont see significant increases. The pace of gross is. Growth is increasing. Business spending is what everybody is looking for. They hoped with the trump economic proposals, we would get something and we have not. Spend,panies continue to or do they try to raise their earnings by compressing their expenditures. Thessaly see. We dont see the additional spending. David are you concerned about the leverage . Leverage is Student Loans and automobiles. Jim i am less so its a moment. I think we are not going very 2. 5 ande can row at , wehat at full employment can do that while creating healthy jobs every month, we can do it while raising real wages. Real wages have been climbing smartly. You can do it while we are raising real profit. Good big if we can do all of that without aggravating inflation and is rates. Thats a pretty Good Environment for stocks the consumer is in good shape. Theyve got strong conflict. Employment and rising wages. They had to use more that. In some sense, they should are you should it. Mike mckee, thanks for being with us jim paulsen is going to stay with us or it comes up next, we have mike mayo. He is joining us right here on the set or it is bloomberg. Alix s p futures are moving into positive territory. The weaker cpi rating is helping usa these. You see a lot of selling coming in to the backend of the curve. We are seeing that play out in the market area market. Beid now if we should betting on the banks. Earning season was not quite as kind. Joining us is mike mayo. He is at wells fargo securities. Welcome in your new guys. Talk to us about the sector in general. What is your take on financials. Are bullish on banks. You have a permanent structural risk reduction. Bank regulators have forced them to include capital liquidity and now they can withstand to financial crises. Justg said that, its not risk reduction. The biggest headwind is in the history of u. S. Banking. All before any benefit from rate increases. Higher. Revenues going risk is going lower. David does that distribute evenly . Is equally that official western for our top recommendation, we see one half upside. Is the moment. Nationalhen you had banking. Tech double burst. And you had more. The big banks were clean up. Big banks are a national bank. Bankare not doing other acquisitions. They are finally doing what was promised. Alix what is wells fargo doing to you . Have 30will say we individuals analyzing financial companies. I watch the banks yesterday. This is my debut. I collaborated. You think i am a lone ranger, but i like to rely on other people expertise. So far so good. David even though there is one bank you cant cover . Mike i have covered the industry for a long time. Alix fair point. The big issue is deposit data. Mike the margin decline is the biggest its been since 80 years. That is a function of lower Interest Rates and cash on bank Balance Sheets. 2 trillion. Ed to margins have been affected by many factors. When you look at the detailed financial eight meant, statements, its around 50 . Its been less than that. Increase in Interest Rates, im not getting a lot. I value the convenience. I value a lot of other factors. The positive data has stayed lower. Have mobile banking and everything else. Its a different environment. Youve gotten a lot of crazies off the street. What is your estimate for margins . They wind up charging more for shortterm loans. Mike i had an off hot moment. Bank of america is a beneficiary of higher Interest Rates. Bank of america has grown deposits organic the. That is all organic. David you are positive on the bank. You have a remarkable projection. On the regulation . Mike let me be clear. I think citigroup is getting the job done. They are not getting the job done enough. I talked about the structural risk reduction. Citigroup has reduced its risk structurally more than any other large bank. Part of that is the increase in capital and liquidity. Capitale else up enough that they havent to return. That is a function of the strength of the allergy. Where you seen that before this is the lowest risk profile. Until they can generate liquidity and stop destroying al you, the heat should be on to the group management. At one point, they said maybe they should consider restructuring. They have six alien dollars of tax credits. To 40hink that will go billion. Waysld like to see new they can use those tax credits. It would be getting closer to longterm targets. I spoke to Lloyd Blankfein last week. They were beaten out by morgans hanley. This is what he had to say. We did not perform well. We dont always perform well. Us. R people are better than we are on the balls of our feet. We are concerned about it. We have underperformed. We know what we have to do. Us. An execution for mike i think that what is remarkable, we havent heard ceo say that. I dont remember when they said toy are underperforming. Have not and in this position often. The two thirds is not training. They are lending more. Market good bailout Goldman Sachs. Income d on fixed research. That is the best for six years in a row. Thats one of the reasons why i am here. I can use this research. On tuesday, the volatility will increase i one third. Pieces, food in you want to own it . That would be Goldman Sachs. They need to get the job done. Theyve done it even with revenues. They buy back 1 5 of their shares. Up,evenues dont pick david they are technical reasons why commodities may not come back. Alix lloyd is talking more cyclical. David exactly. Mike one thing Goldman Sachs is doing differently, they are evolving. They are doing a lot more financing. They are still serving those. They are not sitting on their hands. Aix he did want to switch to mix. Its great to have you. , a little bit more energy. The opening bell is up next. This is where we are stacked up in the open. Futures are trading in a positive territory, up two points. They had a rough day yesterday. Youve got some selling coming into the treasury market. The curve is steepening. The dollar treads weaker on the day. The opening is up next. This is bloomberg. Alix this is bloomberg daybreak. Moments away from the opening bell. Im alix steel. Shortitical risks rang with disappointing Consumer Price index numbers, boosting futures across the board. Futures 1 10 of 1 . You are seeing the dollar trend tread water. It is lower on the day. Down to tens of 1 . Of 1 . 2 10 nymex crude getting hit. Conflicting reports of opec came out yesterday. Lets see where we have opened for trading. Abigail doolittle is standing by. You have retails, inflation, snap. Abigail investors are trying to figure out what is going on, especially after yesterdays selloff. We have buyers tiptoeing back in. Going into the session, both the s p 500 and nasdaq was on pace for their worst week of the year. The nasdaq climbing out a little bit. It will be interesting to see what happens. They say it has shifted sentiment to emotional. Lets see. Turning to the big movers. Company Beat Estimates. Falling. K is look at seagate, trading higher. 7. 2 . Apple up 1 , nice rebound after yesterdays 3 drop. To a deal. Ose a mixed bag helping to explain very small gains. The question is whether the 3d pullback will turn into more. Investors look at fixed income as a sign. Have a highyield junk bond etf. In blue, we had the s p 500. There is not a lot of fear here. Back in march, there was an exception were fixed income investors sold off a little bit more ahead of the s p 500. It is speaking to the complacency of what people have been talking about. This is a good one to keep an eye on. Alix thank you. With us is jim paulsen. How do you understand the selloff we have seen in the junk bond market . Reflecting the general markets. We have had selloffs across the board in stocks. Fears about spread widening the junk markets. To see a little bit of that is not surprising given the fearbased nature of the pullback. At the end of the day, i still think that the odds of anything really happening on the geopolitical front are pretty low. Ultimately, if it drags on, the fundamentals will take over. Right now, Corporate America is doing very well. There Balance Sheet are their ego strong. Their Balance Sheets are very strong. Alix what is making you really nervous . Jim if it is more fundamentallybased, it would bother me more. If this whole selloff came after a really big surge in Interest Rates, big flattening in the curve, a significant increase in monetary tightening, overall, a big rise in the dollar that is shutting down trade flows and manufacturing, i would be concerned because that is a more fundamental force that gives credence to a worsening in the financial conditions of corporations, but that is not what this is about. This is more fearbased. While the fundamentals have remained quite strong. Widens to the extent it even further, it is more of an opportunity at this point, you know . I would feel differently if there was a worse fundamental policy that is proceeding this event. David but when it comes to highyield debt, doesnt the spread become a fundamental in the sense that these are companies that are not as creditworthy as an Investment Grade would be. If there are Interest Rates go up and they have to roll it over, isnt the possibility of default larger . Jim yes, i think that is true. Every time Interest Rates go up, but you have to way that against what every but you have to weigh against what every against what is happening. This point, it is much more significant for the financial wherewithal of Corporate America spreads atidening of this point. But you are right. Its in isolation, if rates move up enough for spreads widen, it puts more hardship on the financial situation of corporations. David as you make these determinations and judgments, what do you do about talking individuals in the marketplace . I have been talking to people who have expressed concerns about how tight the spread have gotten, especially with respect to highgrade. A highgrade a highyield. This has not been seen before. Should we Pay Attention to that or not . Yes, much like valuations and the stock market, you know, valuations in the bond market are extremely high. Low. S overall are very and spreads are very, very tight. There is no doubt, of the two markets, the highyield market is overpriced than the stock market. The question is, how long can it stay there . I think the answer to that is, when is the next recession . If the next recession is next year, then highyield bonds represent a huge risk because they are so overvalued. But if it is going to be three years until the next recession, then they could stay at very tight levels even if they dont tighten further, and you can get a fairly significant premium to treasuries or something over that period. If we start to climb, which could be significant. Of completelyeads blowout until a recession is coming. So, the answer to your question is, you have to come to grips of when the next recession is . I think that is a few years off. David jim, that is very helpful. E will turn to snap after reporting disappointing numbers on daily active users and on revenue, snaps price target was cut by many analysts. And our next guest dropped his target. Joining us is scott kessler. He maintains hold rating on snap. Welcome, scott perry explain to us what is going on welcome, scott. Explain to us what is going on . Scott angela, david. You referenced the fact that the Company Reported disappointed numbers in daily active users. But there has been disappointment up and down the income statement. And as it pertains to daily active users. This is a repeat of pretty extensive indicated challenges. And we think they are reflective of the fact that facebook for the last year has had the company in its offerings squarely in its sights. We see instagram overtaking snapchat over many different metrics. It is resulting in the celebrating growth, which is a problem for a company not generating earnings and trading at substantial to peers. David when you listen to what they say about the stock, is this a problem conceptually in the idea that it was not as good as we thought, or an execution problem . I think it is a little of both, honestly. The idea was tremendous. Honestly, they still have a very vibrant business. They increased revenues in the Second Quarter 153 . That is nothing to sneeze at. However, what people are looking at compared to facebook, for example, and they see snapchats overall number of daily active users increased 21 . In the quarter, which is good but then you look at facebook increasing daily active users 17 in the same period. That causes people to wonder why exactly snap perhaps deserves a kind of premium that it has been afforded. The other point is, they highlighted the fact of the are working through some backend infrastructure issues related to their android app, which is holding that performance. That is clearly an execution problem that will not be corrected for another year or so. Alix does this make the case stronger less offer a takeover, scott . Scott that is it that is an interesting question, alix. Clearly, there are a lot of assets and reasons to like snap. On the other hand, it is pretty obvious that facebook has snap and its offerings as a major target. So, as a potential acquirer, i would definitely wonder whether or not it snap would be able to regain momentum anytime soon . The indications from last nights call was really that they are investing and innovating, but they do nothing to be keeping up as it pertains to the financial metrics the people sing to care about. David is this google . Scott there was a story that was reported, but we have not confirmed it, indicating that out for that and google that out the bet alfabet and google were interested in purchasing snap. It has doubled the market value of the company now. It is unclear whether or not that story was true, or whether the feelings continue, but it is fair to say that there is interest. But his alix pointed out, there is concern about the longterm growth trajectory and fundamentals of the business. Alix right now, snap is at a record low, down 30 from that ipo price. Scott kessler, thank you so much. Here is how we stack up. A little upside after a brutal week. The s p up by one point. Utilities, real estate, retail leading. Weakness included weakness continued in europe. Up by one basis point, and the dollar up 1 10 of 1 . I got to look at gold. That is a good barometer of where we are in terms of fear. Curve thathaving the is steepening of the day. Pay attention to that. Taking a break after sitting at a ninemonth high. This is bloomberg. Alix this is bloomberg daybreak. Coming up on bloomberg ceo is, former jcpenney at 10 30 eastern. Alix jcpenney having a brutal day, plunging to record lows, unable to escape the assault on its Department Stores that missed on earnings. Down by 1. 3 . Joining us now is an equity analyst. Are you surprised by the extent of the equity downside we are seeing . Not especially. The good news of the jcpenney the numbers are better than expected. The Gross Margins were weaker than anticipated. We saw that out of macys as well. I think with Department Stores, the pressures of amazon combined with the pressures of general mall environments, also combined with the issues of Gross Margins is taking the stock down. Alix in the end of the day, they were hurt by clarence sales. Clarence sales. They were related to 100 store closures. The Gross Margins from the sales were lower than expected. We are done with those issues in the Second Quarter. As we go to the third and fourth quarter, jc pennies should see better gross jc pennies should see better Gross Margins. Did they give us a sense of what their Gross Margins would have been without the clearance sales . The Gross Margins are impacted by an extra 100 basis points. It wouldve been better than they were this morning. Because of the store closures, your closing over 100 units in a compressed period of time. It is hard to gauge how the margin impact will impact the numbers. The stocks are down because they missed expectations. You have a hold rating on jcpenney with a price target of five dollars. Why not a cell a sell . The issue a jcpenney is there is much limited downside because of the asset sales or store closures that could improve things over time. From a shorting perspective, were asking more aggression with higher enterprise values. That is Something Like limited brands. Limited brands has Victoria Secret and back and body works. B ath bath and body works. Alix what about your long money . You wind up seeing this quarter. The stoxx that kind of did not miss, getting hurt. You is the place to go along . Vp constancio randy we have more brandcentric. We started off with the call of nike. Also, tiffany is a big brand name. We started to focus investors attention down the value spectrum as the chapter the year because nike and tiffany ran up 20 year to date. What we have been doing is getting more aggressive with calls like a michael kors. We downgraded coach three weeks or two weeks ago. Full investors to get into Michael Cores ahead of the curve. You are telling investors to look at gap. Valuetype retailer where the stock is trading four times. We are actually looking at some of the value names come off Mall Real Estate by unions, off Mall Real Estate. David you are looking at brands. Take us back to jcpenney. I dont see the brand play there. Do they have a permit is going to work . Randy look, out of all the Department Stores, the one thing that is good about jcpenney if they can to deal with a lower income consumer, one that is less likely to shop on amazon. Com, and they have a good deal of value in their product assortment. I think they are doing a good job or they can. Because the stock is where it is today, the incremental downside from here for a jcpenney is not enough to warrant a cell a sell rating right now. If you look at the back half of the year for all the Department Stores and retail, you will see in easier, or better backtoschool comparison versus a difficult one last year. We have fiery easy holiday comparisons. Alix thank you so much. Jcpenney at a record low at one point. Really ugly. If you have a bloomberg terminal, watch tv go. Interact with us directly. More on retail with randy, you can rewatch. This is bloomberg. This week, north korea issued a new threat against the United States claiming our country is on the edge of life and death. Which sounds pretty scary to remember they dont have vegetables and north korea. [laughter] ry. Maybe they are hang [laughter] alix i love that. That is pretty funny. You have to laugh. I am hungry. When i am the definition of painry of hangry. David lets get back to these econumbers. Morning, but that the latest read with u. S. Inflation in july coming in lighter than expected. Joining us to take it through the numbers and what we can look for two next week is carl riccadonna. Mckee. E carl, should we be disappointed at all . Karl we need to reevaluate this notion that there are transitory drivers that are weakening the Inflation Numbers. This is what we talked about ahead of the data release. It confirms our discussion earlier this week. If we strip out those components , the pharmaceutical prices and the Wireless Phone contracts, you still see a deceleration happening on the inflation front. David forgive me not being an economist, but it sounds like if you stand on your left foot, close one eye, and turnaround three times if we look at the headline, it is decelerating. If we want to strip out the few special factors the fed has been blaming, it is still decelerating. We have to step back and not be too cute with carving out trimmed means and this higgery jiggery stuff if you will. We are seeing a slowdown. It is a broader problem. The fed has to it knowledge this the fed has to acknowledge this. They had been in denial. This will let be happen when we get the september summary of economic projections. They will have to flatten the feds Fund Projection projections. The speaker comes. We have Robert Kaplan speaking in texas saying inflation is running below 2 of the target. Mike mckee, and bob dudley had to give a speech today rather than yesterday, with his beach have been different . Mike no because they see everything through the filter of a phillips curve. It is broader than just employment. Theyre looking at overall slack in the economy. Overall, our model say inflation should start to rise. And which should be seeing inflation rising. The only problem is that inflation is not rising. It is decelerating. How do you figure that into your calculations . They are not raising rates because they want to head off inflation. Even if they are correct, and we did see inflation go to 2 , that is what they want. They are raising rates for they want to have a margin of error when the economy turns down. But the markets are saying no, you cannot raise rates because you need to boost inflation. They are caught here. And carl says they need to redefine how they are looking at it and what they are doing. They are raising rates to create that buffer for downturn, they may need that buffer because economy is growing at a slow pace. But the economy has barely digested the one per your hike we have seen in the last two years. You are talking two or three hikes. Alix all about jackson hole now. Carl, mike, great to have you. That rate that wraps it up for us. S p up three points. Have a great weekend. This is bloomberg. Got you outnumbered. The dinosaurs extinction. Dont listen to them. Not appropriate. Now im mashing these potatoes with my stick of butter. Why dont you sit over here. Find your awesome with the Xfinity Stream app. Included with xfinity tv. More to stream to every screen. Vonnie it is 10 00 a. M. In new york, 3 00 p. M. In london, and 3 00 a. M. In hong kong. From new york, im vonnie quinn. And live from london, im near a chick. Welcome to bloomberg markets. Vonnie here are the top stories we are covering. Stocks are higher even as President Trump ramped up the rhetoric, saying the military is locked and loaded on north korea. Wall street is turning at the latest trump remarks. More signs of concern in the u. S. Economy. Inflation remains subdued, coming below forecast. What does it mean for the Federal Reserves next rate hike and timing . At two retail woes with the company posting bigger losses than estimated. First, we are 30 minute into the trading day in the United States and julie hyman is here to keep an eye on all things geopolitical, earningsrelated. Julie