Transcripts For BLOOMBERG Market Makers 20141013

Stephanie ruhle. Weve got the nobel Prize Winners plus your exclusive with James Patterson. Right now, we will begin with a bulletin a new ceo for the recovering retailer jcpenney is going to be Marvin Ellison who is currently the executive Vice President of stores at home depot. He will join jcpenney then formally become the ceo in august to replace mike ullman who is now in his second tour as jcpenney seo and has been trying to revive jcpenney. Bill ackman has gone public in shares of Pershing Square holdings are trading down this morning as 11 in amsterdam. It raised 2. 7 billion in its ipo. Hans nichols about what he will do with the money raised. The cash we have raised we intend to use for a new commitment. We will announce that in the next 4560 days in the capital goal will go for that new investment. A usbased company . Yes. . Can you giveme a hint on the sector no. A potential merger in the Railroad Industry has been derailed for the moment. Csx has rejected a takeover offer from canadian pacific. Yet as too word whether cp will make another bid. 10 days ago, they float the idea of a canadian rail merger right here in oh quote Market Makers. I dont think there is a choice. If you look down the line, theres not going to be more railroads built. We got to start doing more with less. Mergers with him . I think you can look at any eastwest combination. For the first time, someone has contracted ebola inside the United States. The Healthcare Worker beltre the ebola patient in dallas. They started decontaminating her department and she wore protective clothing but there was a breach of protocol areas she was not among the 48 caregivers who are being watched closely because they saw the patient before he was placed in optional in isolation. The nobel prize goes to a french economist. He has spent several decades studying how government should start doing with cartels and he receives a 1. 1 million prize and we will be speaking with the brandnew Nobel Laureate in a few minutes. Investors are preparing for another wild ride on the markets this week. We have already seen five 200point swings on the dow on october. Our u. S. Equities headed for the first correction in years . Good morning, gentlemen. I spent the weekend with head spend guys and i assume they would be concerned but they expressed relief that finally there was some volatility and they would be making more money. Is this a healthy wakeup call . Is this your idea of a fun weekend . At least i did not go to a wedding. What is happening is that things have changed. Probably tooe optimistic and complacent for the first nine months of this year going into midseptember. We had low volatility, low Interest Rates, low implantation low inflation. Everything the stock market was telling her that things were great but the bond markets were telling you that things were not so good. Yields were at record lows, 500 year lows. Investors have started paying attention to the bond market. There is a reintroduction of a tail risk of possible deflation. I would agree but also the market got caught off guard about the lack of an effective strategy by the ecb. Europewere falling in and marry out draghi comes out and mariota and mario draghi comes out lowering next peoples expectations. The ecbd more action by and you potentially got the fed moving towards a rate hike. Expectf that was high haitians of growth in the u. S. And a bit of complacency and some disappointment from central bankers. That raises questions about how the fed needs to act in the weeks and months ahead. Lets look to stanley fischer. The stronger u. S. Economy should directly benefit our foreign trading partners by raising the demand for their exports and perhaps also indirectly by boosting confidence globally. If foreign growth is weaker than anticipated, the consequences to the u. S. Economy could lead the their motions. He was talking about how the central bank used the importance of international economy, not so much domestic growth. How surprising is what he said . Consistent with the kind of reassessment of the Global Economic position. Dollar and rising weaken growth in europe and japan and concerns in china give the fed cover to remain lower for longer. Do you think we will end up having to deal a the rate hike . We are not forecasting that delay it but we think mid2015. It removes some of the concerns about an early reduction. Time, almost every time over the past several months when it seemed as though the fed had reason to stay lower for longer, the market rallied. Thats not what is happening now. Youve got some idiosyncratic risks like ebola and isis. One of our chief economist is talked about the japanififcation of europe. The ecb has to do more. Mario draghi got away with spending zero. Talk is cheap in the market is disappointed when he finally decided to spend the money. The fed is saying that the stronger dollar is doing the job for them by slowing the economy down and its deflationary and we are importing inflation from europe and japan. If they can save this will delay the next rate hike, we dont expect them to hike rates until the First Quarter of 2016. The market is pricing that mid next year. Ironically, japan may be ahead of europe now. They have been more aggressive on the monetary front. They are seeing signs of improved price movement. Strong support to continue on the patties on and a lot will be learned in the next couple of months as they look at economic results to see if they can continue on their path of performing. They have to digest another consumption tax. What do you think Mario Draghis next move is . Got a european summit meeting coming up. I think there will be an entity for them tompetus react. Aqrs at the banks and the stress tests and recapitalize the banks. The banks may have to lend more. Credit growth as well as slowing down europe so its a combination of monetaryfiscal policy with stress tests may get the ball rolling. It may not be gangbusters but getting them moving in the right direction we have been hearing that for many years. Why will it be different now . People are asking what inning we are in the u. S. The fed made the banks recapitalize and did the stress tests. There was lots of fiscal and monetary policy. Europe has been delaying this. Youve got a diverse region over there with different fiscal policy versus monetary policy. They are probably in the second or third inning. Japan has leapt at had. I had. Ahead. Let me bring up a chart that has many people scratching their hearts their heads. A second. Ing it up in that is also ahead scratcher. We have the s p 500 and white and the russell 2000 in yellow and in the middle is the s p midcap index. How was of the largest corporations with the most exposure to europe and asia and all the problems we see in emerging markets are outperforming the companies that are by definition more domestic . Able to takebeen advantage of growth in the emerging markets until recently. They have had the ability to ro at lower rates and the ability experience the kind of wage pressures some of the Smaller Companies are. They have had a lot of tailwinds behind them. As is changing. They have not seen wage pressures. It has been felt by the Smaller Companies. Larger companies and not seen that kind of pressure on wages. We think this is changing. We do not say it is time to go into small caps but we think or domestically Oriented Companies in the United States will benefit and that will have some bias toward smallcap stocks eventually. M a cycle is starting to pick up. Thanks so much, we will leave it there. When we come back, theyll act ands ipo as he takes this bill ackmans ipo. Plus, the dream raise for some political pundits, Hillary Clinton versus mitt romney . We have the results of the new iowa poll. Bill ackman is hardly a shy guy but he is more public than ever before because he just completed an ipo for one of Pershing Squares funds. The shares started trading in amsterdam this morning. Raised 2. 7 billion in the offering and shares immediately slumped. They are down about eight percent. He says thats a good thing and it means he did not leave any money on the table. Investors might disagree but remember, its only day one. What is he going to do with all the money raised . Hans nichols spoke to bill ackman this morning. Good to see you. Bill ackman is clearly going to go on a shopping spree. He will buy one thing, one company, we will hear about it maybe as soon as next month. End of november we will get his sense of what he has his eye on. I asked him how he will spend potentially 6 billion. Comes intotal that Pershing Square gets repopulated among all the funds we manage. Weve got about 18 billion in capital and about 1 3 of it is in Pershing Square and we have a new investment we will announce in the next 4560 days in the capital will go over that new investment. A usbased company . Yes. Can you give me a hint on the sector . No. You will spend the bulk of the cash in one place . Thats correct. We heard an interesting speech, about 1608, crybaby shareholder do you think of yourself that way . No, maybe carl icahn would call me that. The reference was to the fact that in those days, governments was not top of mind for many corporations and it has become more top of mind as a result of shareholder activists and shareholders being more engaged. I think its a positive trend. Im glad you brought up activist investors but you are different. You stay in for the longhaul and you see these traits to the end. We dont even call them trades. They are investments. We think a Pershing Square as an Investment Holding company. We are not Berkshire Hathaway but thats not a bad Business Model if you think about longduration. Well only invest in Public Markets but we will buy large stakes in public companies. This will enable us to have a capital base that matches the the ration of our investments. Do you think of yourself is more like Warren Buffett than carl icahn . I think thats a better choice. I am friendly with both. Strategy,f investment we are more like Berkshire Hathaway. What is your definition of an activist investor . Visit someone who stays in till the very end . I think is not necessarily related to duration. There are kinds of different ways to make money. We buy a large Minority Stake in a performing business. We work with the management teams and boards and shareholders to make changes to help the business become more profitable and we get the benefit of that. Our typical holding. Is four or five or six years. S is notood for other necessarily good for us. Sometimes shareholders have very little input. Because we are a lead shareholder, we can create alternatives and sometimes management change. All of the shareholders benefit. We do a lot of work in the shareholders benefit. We get supported by the large and smart she and small shareholders. Securing it going with meetings with allergan. They have not been willing to meet with us. There are serious governance issues there. I think ultimately we will get the right answer. Shareholders have called for a special meeting and we are leading the charge and hopefully that will take place in december and i think the new board will likely be installed. There is legal insurgency whether you can vote your 9. 7 share. Consequence remote i think that will be settled by the courts. Well before december 18. From terms of a new offer you, will you have a new offer before the december meeting . It is something we will announce when we announce it area and. That is not a manner like to reveal a whole lot before he is forced to. He knows his way around the media and in terms of what that come to me maybe where he will put some of that 6 billion in cash. Version ofinvestor an answer dam striptease from bill ackman. Someone that knows how to build a little suspense before he moves in for the kill. If he suffers from lack of confidence, he rarely, if ever, reveals it. Ask you about the idea that the money raised in the ipo in amsterdam will be used to purchase shares of a single company. We were all led to believe that the purpose of the Public Offering was to raise socalled permanent capital. The idea was that he could sprinkle it among his different funds and if there were some major market dislocation, that would form a ballast so people could not redeem the money and now it is all going into a single fund the same way he did it to what he did with target back in 2007. That turned into a nightmare for investors and they lost 90 . The 6 billion he raised that dollars will be dispersed among his different funds for a total of 18 billion. The 6 billion is what he plans on a new acquisition. That does not mean its 6 billion he raised in amsterdam will go directly to the new acquisition. Its just the numbers are analogous. Thank you for clarifying and great to see you. Thank you for the interview. Next, a 61yearold frenchman has one the nobel prize and we will speak with the man himself, jean tirole in just a minute. Its time for oh quotes on the markets. We are watching go pro as it experiences a sharp decline, down 10 and is the fourth straight day we have seen a drop for the stock. It became public earlier this year at 24 per share. There is a report that a french journalist speaking on a french Radio Program made a claim that the entry of michael shoemaker, the legendary racecar driver got brain injury during a ski accident that his injury may have been related to the go pro he was wearing on his helmet. This is just a report. Comments. Lining the about relatives trying to make that connection. Thats not there in the context shows the stock is trading at 93 estimated 93 times estimated earnings but it has been pulling back as of late. This report is causing another leg lower. It is about 10 lower. Thanks so much. Shares are still triple since they went public earlier this summer. Still to come, as the economy improves, we will look at the problem of the longterm unemployed. And the newest nobel prize winter and economics scientist, jean tirole. Up next. Live from bloomberg headquarters in new york, Market Makers. Good monday morning. Im Olivia Sterns in for stephanie ruhle. The nobel that matters most to wall street would be the nobel in Economics Sciences in this era goes to a french man, jean tirole, a professor of the university of toulose. The professor is with us on the telephone. Michael mckee is here as well. Congratulations to you, professor. Thank you very much. How do you feel . I feel great. Its unexpected but its a wonderful feeling and im very pleased for everyone, for the family and colleagues and for everyone. We mentioned you were recognized for your work studying in perfect competition and regulating imperfect competition. How would you apply your research to the Banking Industry right now . We have to realize that the crisis starts before the crisis itself. Prepared in 2006 in particular. We need strong regulations that are going to prevent banks from gambling with money. Not only retail bikes but investment banks. If they are to be bailed out, they have to be regulated. Regulation is not about preventing firms and banks from functioning come its the reverse. Regulation is about the rules of the game and an independent enforcement of the rules of the game. Thats a sickly what we are trying to do. Thats basically what we are trying to do do you feel the regulations that have been in response to the crisis are achieving the desired result . It still too early to tell. I think there has been a lot of improvements like more emphasis on liquidity, trying to reduce risk for banks and the like. Evenanking in europe though the devils are in the details, the Banking Union in useful with be discipline. It is too early to tell. If you think about the Banking Union, the key thing is how much incretion will the ecb have order to downsize banks which are undercapitalized. At countries like germany, for example, or britain, or switzerland, or france, it appears as though postcrisis regulation by creating these National Champions is made banking less competitive. Tendencyhas been a forreinitialization. There is some competition. The main thing is to get the risk,not to take too much to be capitalized. There is competition on the world level but probably not enough. The main topic right now is about whether they can fail and be bailed out. By the way, sizes a complex matter because you can be a big bank that diversified and conversely in the smaller banks, they can fail. Remember spain and ltcm in the u. S. Its not only size that matters. Too big to fail is a big issue but more generally, there is the issue of regulating the banks in general. What you do with an industry that is an important link in a Production Chamber is basically oliby an monopoly or gopoly. You could look at even payment systems. Those and regulate are they properly regulated . Toulouse we built a twosided market theory and tried to understand the new Business Models and which a platform is trying to attract multiple sides in the same market. A platform like American Express or visa or mastercard or paypal has to attract cardholders and merchants at the same time. Ules to proposed r regulate the interchange fees. That is a fee which is paid by the Merchant Bank to the cardholder bank which was deemed too high by the merchants. Toulouse rule is the official rule in the european union. Markets are kind of special. Side areces to one zero or negative and if you , we haveut google users who get a good deal and we dont pay and get those Services Like gmail for free. It is like a negative price. Lots of the Business Models which have emerged have tried to understand how to bring both sides on board while still making money. You mentioned monopolization which is important. Those industries tend to be highly concentrated, not the payment industry. Visa and mastercard have about 7000 members. They serve a lot of banks. You think about google and so on, those are heavily concentrated and i think theyre competition is more dynamic. Other leaders can emerge when they have something to offer. They need to allow leaders to be challenged by strong competitors. We congratulate you and thank you for spending time with us. , the winner of the nobel prize in economics. Still to come, the situation is that unlikely going to get worselongterm unemployed. That is next on Market Makers. Dont be fooled by the Unemployment Rate. It may be low but 20 of americans laid off during the recovery, not just the recession, cannot find work. A new report finds people out of work for more than six months face a bleak future. The coauthor of a study is a Public Policy professor at rutgers. Tell us about this dudley, what were the predominant findings . We found that even during the recovery and your viewers know there has been a good recovery going on, there is still this persistent problem of longterm unemployment, people who have been on employed or more than six months. We find that most of them are unable to get a job that pays anywhere near what they were paid before. Many of them are also in temporary jobs. Even those who are succeeding are not succeeding very well. This is a problem that means that overall, our economy will continue to grow at a slow rate as these people who could be contributing productively to our economy are still left on the sidelines. Despite the fact we have had job growth, why arent we creating and a fulltime jobs for people who want them . There are several reasons but lets focus on these people. The problems they face are folks who are out of touch with the way the labor market is moving and many of them cannot move to where the jobs are. Time, some ofn their skills atrophy and they are not uptodate with what they need to know to be successful. Lastly, some employers discriminate against longterm unemployed workers attributing negative things to them that they are not the best workers. They face all of these obstacles and last but not least, many of them are depressed and have mental problems big does of the mental anxieties because of this experience a great deal of stress. Theyre not really ready to work at that point. They have been so dispirited by their long unemployment. As a result of this work, do you subscribe to the idea that there is a two speed or to track economy but because of structural changes that became evident during the recession and the recovery that there is this group, a large group of americans who would work if they of a but cannot because lack of skills or an inability to move around the country they have effectively been locked out of the labor market . The rest of the economy is moving forward. There is a little twist that is different and that is if you look at the edge of haitian background and work force experience, they are the kind of productive excellent work as we would expect would be successful in this economy. Many of them have College Degrees and advanced degrees and many of them are Older Workers which adds another dimension to the difficulty. Theyre not being successful reconnecting. The only way to explain those folks not getting a job in many cases is the fact that there is discrimination against them or preference for younger workers that cost less money. These individuals would otherwise would normally be working and have good work histories got blown out by the terrible recession. Even during the recovery, they have not been able to reconnect. We hear about whether technology is creating and destroying jobs. Feel the efficiencies through technology are constricting the labor market . Technological advances both kill jobs and create jobs. Workers, onehese kind of technology has been beyond their grasp and that is the weight which job searches take place through. Especially theg Older Workers, they are not really prepared for that. We found that many of these folks who never lost a job before really did not know how to look for a job. The last time they look for a job with a long time ago. Are you still with us . It appears we have lost the professor. People do not recognize this when the economy is growing. The Unemployment Rate is below six percent. Labor department economists say this is the key reason why we are not seeing wage growth. It is the longterm unemployed, of theon people, 1 3 unemployed population. We will take a quick break and when we come back, we heard him say he will not run but maybe the new i awoke poll could help mitt romney changed his mind. Helped gete of iowa president obama to the white house but six years later, voters are turning against him. 54 say they have an unfavorable opinion of him and 67 say the country is on the wrong track. Lets bring in our Bloomberg Politics editor. This is the state that made barack obama. In 2008. Six years later, why are they turning their back on the president . Its not that different from any other place in the country. The president is not very popular broadly around the country and particularly in these contested races in iowa has always been a purple state. Towas the place accountable test that catapulted barack obama, poll numbers are about the same as in other parts of the country. They say the country is on the wrong track and wrong track numbers tend to correlate with disapproval numbers so the president is not in great shape out there. The prominence that iowa plays in the republican nomination process makes me wonder if a study like this of what people have to say and i was says as much about the Democratic Party as the republican party. There are two different samples for this poll and the one we looked at for 2016 is a sample of democrats and republicans who are general election voters. In terms of the head to head matchups between Hillary Clinton and other candidates, its a good picture of what the electorate would look like. Its a swing state in any important election. Howwould hilla creek would Hillary Clinton do against the republican favorites . First of all, one republican is ahead of her this poll within the margin of error and that is mitt romney. Two other republicans are in a couple of points of her statistically. Ryan and rand paul. Thats the biggest surprise. He is not as well known nationally or in iowa as Hillary Clinton but he is only a couple of points back. Bush, Chris Christie and others are a few points back in ted cruz is bringing up the rear. Wideout we get bill clinton down there to sprinkle his magic dust . When i let mama and his association is not helping candidates in iowa. President clinton will probably go out to i was soon and is by far the most top of the politician in the country and the most potent democratic surrogate. Welcomingobama is not most contested is not welcome in most contested senate races. President clinton will be everywhere. Laterin New Hampshire this week and has plans to hit every contested race. He is in colorado and michigan and will be in kentucky and michigan. He is welcomed with open arms by most Democratic Candidates but president obama is not welcomed. Lets talk about the overwhelming finding on the whole that 67 of iowans believe the country is on the wrong track. Persiststhis notion when unemployment is below six percent, the economy is improving even if it is not gangbusters, and people are beginning to see signs of the stuff they should expect light raises. They have been a Long Time Coming but the senses is that where we will be next year. This is a frustration and the white house. Is Macro Economic picture improving. Most average americans are not feeling it. Wages have been stagnant for decades now. Everyone is happy the Unemployment Rate is coming down for the standard of living is not going up for many people. It will take a while. The recovery is starting to take old but it will take a while longer before people start to feel it. Canad and celtic kansas and south dakota. To be in play. If the democrats win, will that be enough to secure the senate . Its a complicated senate picture. Republicans had a much easier time to winning back the sentiment majority couple of weeks ago before kansas came into play and especially last week with south dakota in play again. Thatikeliest outcome is the republicans will and up in control of the senate but every game they make in the race they expect to win, they now have to worry they might have to make up when another race to make up for a couple of unexpected losses in places like kansas and conceivably south dakota. Willter at 5 p. M. , you talk more about this . Will talk politics and there will be a lot of news coming out of this poll and we will go through the numbers and a lot of detail. Thank you so much, john holloman. With all due respect. The latest political news and analysis, go over to Bloomberg Politics. Com and tune into with all due respect. It is approaching 56 met minutes past the hour. Lets show you what is happening. Its a little less wild today. Was down by about 26 off. S and the s p is we can see new York Crude Oil is trading down. Isis brent oil which cratered at 88. What does the oil trade signify for the rest of the market . Nobodys quite sure. What has the market by the . Are we talking about a selloff in equities . The s p 500 is up by three percent over all and branches off more than 20 since early this year. We heard from saudi arabia early today saying get used to lower prices for oil. Lets talk aboutcsx. The railroad was approached by canadas cp over the last 10 days with a proposal that they merge. That has shares of csx higher today. Csx rebuff to the approach and lets not forget that bill ackman is lurking in the background. He put Hunter Harrison in the job of ceo a few years ago. He said consolidation is inevitable. The question of who will end up with home a whom. Bill ackman also said hes going after a u. S. Asset. Market makers will return. Live from bloomberg World Headquarters in new york, this is Market Makers with Erik Shatzker and stephanie ruhle. Will do that will the bank dont back . Big Financial Institutions are going to be written running third earnings. Fear and loathing about europe. Why so many are concerned about a european recession and what it might mean for the u. S. He is a oneman publishing industry. How does James Patterson crank out some a test sellers every year . I sat down with him to find out. You are watching Market Makers. Im erik schatzker. Im Olivia Sterns in for stephanie ruhle. Lets start with the top Global Business stories coming in this morning. The big three Auto Companies are all trading on the new york stock New York Stock Exchange. General motors and ford. Theyve been higher in the trait and it makes it the Worlds Largest seventh automaker. The newsays he wants stock traded new york so the company can be benchmark benchmarked against the detroit rivals. Jcpenney when shopping for home depot. Join jcpenneys and formally become ceo and replace mike ullman whos on his second tour as chief executive. He is been trying to revive pennies after a failed makeover under ron johnson. Bill ackman has picked his next target he is in amsterdam today where Pershing Square Holdings Just went public. The ipo raising 2. 7 billion. Hans nichols asked him what he will do with the money. The cash we have raised we intend to use for a new commitment. We have a new investment we are probably going to announce the next 45 to 60 days. A usbased company . A usbased company. Are you going to give me a hint on the sector . No. Fed policymakers a slowdown in the economy could undermine growth in u. S. Stanley fischer spoke at the annual meeting in washington. If foreign growth is weaker than anticipated, the consequences for the u. S. Tonomy could lead the fed remove accommodation more slowly than otherwise. According towas that officials expect raise the benchmark Interest Rate sometime next year. And trick or treat candy sales are expected to hit 2. 5 billion for halloween this year. Here is the shocker the most popular candy at halloween . Its not candy corn, its chocolate in any form followed by the seasonal favorite candy corn. Thank goodness its not p eeps. The banks. Week for it has been a rough first half of the year for financials in terms of performance. My guest is a Senior Analyst covering the industry. Good to see you. You are bullish on the Banking Industry. Were going tonk see in the Third Quarter that is going to explain what you believe banks are going to deliver . The Third Quarter is going to be relatively unexciting. Sick actually, you will have lower earnings but sequentially, you will have lower earnings. Yearoveryear, trading is flat or might actually be up a little you can get that to stabilize and turnaround, october has been very volatile but i think we are moving in the right direction. Is up 25 year over year and you are starting to see some things move down a little bit. Investment banking can almost carry a firm like goldman sachs, maybe, but isnt it kind of a rounding error for jpmorgan are citigroup . Its part of their earnings that are volatile. Youve got the Capital Market and it cang well definitely move the needle. Thingse some good happening on the Traditional Bank side and the little bit of loan growth now. Good expense control, so the bank side is looking better. We are not talking about anything too exciting mid Single Digits will stop is a good for the banks bottom line . Volatility is good in the shortterm if you have market selloffs, it is bad. Little market decline here and there is not a bad thing. It gets people out of complacency and gets investors losing consensus trying to buy on the dips. As long as its not sustained and we dont have a multimonth downturn, it can be a good day. I think the market is going to stabilize and we will have continued good banking and better trading. For banks to fulfill the promise inherent in your by theyg and to demonstrate can generate meaningful return on equity, theres going have to be revenue growth. Where is it going to come from . Thats a good point. Its not just about revenue growth, its about all the excess Capital Building up. The thesis has two major points earnings and Earnings Quality is going to get better and theres an aspect of that that drives the multiple up a little bit. The real multiple expansion comes from better roes. Approvals ford capital returns for shareholders is going to pick up because these companies are now well above the most stringent benchmark that is out there. Getng, we are going to better news and spring of 16 as well. Are we seeing loan growth pick up or slow down . Commercial consumers are sluggish, mortgage has run its course. I think if you get something going on a card side and get out of these 1 or 2 numbers, you get something a little healthier. We need to bring up the pace with the commercial side. I think about a year and a half ago, jamie dimon articulated very well how jpmorgan was positioned for a rising rate environment. Were not there yet and it may take some time before we do get there, but they are ready to profit from higher rates when they come. Banks, the bigger rate equation is complicated. There are quite a few things that go into it, not to mention hedging, the punchline is when fed funds start to move up, i think there will be some pain in the short term. I think the first couple of quarters will create some margin squeeze. See it you will start to really expand into the Traditional Bank business and get yourself more spread. What are your readthrough through his for what this means for pay when all the bankers watching want to know if its going to be a bumper year for bonuses . Certainly not the trading side. You have midterm elections and that could create some interest on the trading side. Does, tradersed right now could be looking at something relatively flat, but in the Investment Banking side, ford a and much higher pay those who produce. It is starting to run its course. What about the word beginning to emanate from the administration that the Justice Department wants a criminal guilty plea from a u. S. Bank and the live probes, libor and the fixing of the Foreign Exchange rates and other benchmarks are very much alive . Companies dont commit crimes, people do. Companies are an abstraction. Peoplehave individual who you can find evidence of intent to defraud and things like that then certainly you would expect those things to come forward. The reason why you have not had much on that front yet is because a lot of the worst thing that happened were not criminal acts, im more curious if you think this is going to create another regulatory and legal overhang for the banks, not unlike the one they are just emerging from now concerning mortgages. If you are talking about the grab, i think the latest one was jpmorgan got thieves andber states attorneys generals are trying to get out of it. I dont doubt that will continue as long as there is opportunity. And the big money grab. Great to see you. He has a buy rating on the five biggest banks in america. Janice capital is not stopping with ill gross. Theyre making another move to boost its profile. If europe catches a cold, how much will the American Economy sneeze . Its a question we will put to andrew ball of pimco. Janice capital is expanding its are folio and we are not talking about bill gross. The firm has agreed to acquire Velocity Shares, the leading acquirer of exchangebased products. The cofounder of Velocity Shares is with us today. Why does it make sense to team up with janice capital . But thanks for having me. We were really excited about working with them for a number of reasons. Management team has been focused on intelligent diversification. They hired bill gross as part of that strategy but it has been deeper than that. They have a successful fixed income business, they have been building out a liquid alternatives business, and Asset Allocation business, they have a great franchise with intact and their mathematical investing. We are able to bring to them two things that make a lot of sense. One, we have a deep expertise in volatility. That has been our focus for the last five years or so. Addition, hopefully we can bring some product delivery across the wealth of expertise that is there and help deliver products that have become a really important piece of anybodys portfolio. Think they will use your exempt of relief status to launch new etfs such as bill unconstrained bond fund . We Just Announced this closed and we have not yet. Were working with them on a strategy and obviously we are excited about what we are going to do in the future to roll out new products but we dont have any comment on what those might be. I think a couple of people might be scratching their heads over the marriage between janice capital and Velocity Shares. Janice capital manages mutual ,unds, largely a retail product and what you specialize in is a type of Investment Vehicle that is not nearly so familiar to the momandpop investor. I think thats fair. We have two businesses that we have told. Last grown up over the five years by focusing on fairly sophisticated and technical products that we market to a different client base. Understand why people are confused and cant understand where the synergy lies. Are two pieces to that. One is our traditional business we mentioned in the press release and we will continue to build and grow and has been a successful business or us and we are quite happy with. When it comes to the Retail Investor or the more traditional client, we have been building out a number of etfs recently that are suited to that space and a distribution that exists there. Theres a much broader opportunity here. Janice has been slowly building up a pretty impressive and diverse array of businesses and hopefully we can help wring some of those out in an etf structure. The core of what we do overlaps quite nicely with what they are trying to deliver to clients in terms of a more intelligent approachintelligent where we are focusing on helping get a volatility Management Solution that is prepackaged for them and helps them stay away from some of the products we have out there and are delivering to Institutional Investors. I appreciate janice has been versa fine janice capital has been diversifying. I wish you could get an acquisition done in that short amount of time. Products are your based on volatility. An effect on the vix or sometime its a multiple of. Do you believe in volatility in all Asset Classes . We get asked that a lot. In terms of how it is used in a portfolio, certainly if it is well implemented, it can act like an asset class. A negative correlation benefit and if you can mitigate the cost that goes with that, it can act like an asset class. What we try to help people do is come up with solutions that allows them to have a longterm permanent allocation. Thats the crux of the etf that we rolled out. For an asset class to exist, there has to be an asset. And longt investable only as edition Index Futures have high amounts of negative returns in most environments on the order of 50 is an average return over the last six years or so. Call vix oro volatility itself an asset class but i believe we have products that achieve this. I believe a well implemented volatility strategy which is both long and short can be added to the portfolio and can have those features you really want from this negatively correlated instrument. The trick is to implement it well and thats where we help Institutional Investors with our tactical products. Im afraid we have to leave it there. The ceo of Velocity Shares, us. Uired by jan for the first time in seven years come you can buy shares of chrysler. From milan to manhattan, a newly emerged chrysler and fiat made its debut. Still seen growth but is weighed down by two fold billion dollars worth of debt will stop this is one of my favorite stories that canadian guy running an Italian Company it was an Italian Company. For tax or business, it will be headquartered in amsterdam. Executives will sit in london and the stock will be listed here in new york. So much for an Italian Company. They are still going to make a lot of the cars over there, so i guess that is what is important to the italian people. There will be jobs in that country but it is an incredibly international company. Its not only weighed down by 12 lien dollars and that that is because a good thing they expect a slew of consolidation in the industry. This 12 billion acts as a poison pill. In the global auto industry. He does not have enough money to buy any competitors, but none of them will buy him because he has 12 billion in debt and a fiveyear plan with 61 billion worth of investment that has to go off absolutely flawlessly in order for it to work. The crux of the plan is jeep. I dont think anyone realized if you compound the 12 month trailing growth since 2009, jeep is the Fastest Growing retail auto brand in the world will stop i dont think a lot of people noticed that when sergio did. 700 32,000 jeeps. This year they will sell a million stop to execute is land flawlessly, they have to sell 2 million by 2018. It does not seem so difficult when you look at the trajectory of jeep growth, but one thing that does sound difficult is part of the plan is to sell 150,000 alfa romeos in the u. S. Thats going from zero to 150,000 which is basically how many audis were sold. I love this story. Jeep is an American Military vehicle. You have an italian guy he is canadian. Making the jeeps in russia. Russia has been a real problem. That is why the stock did not have a great day. Im going to go down to the New York Stock Exchange right now and get sergio in front of the camera and put him on tv at 3 00 all stop be sure to tune in. 3 00. Live from bloomberg World Headquarters in new york, this is Market Makers with Erik Shatzker and stephanie ruhle. You are watching Market Makers. Im erik schatzker. Im Olivia Sterns in for stephanie ruhle. When it comes to bankers, what tops their list of concerns is europe. Financiers from all over the world were in washington over the weekend and a threat of a european recession dominated the conversation. Martin goldstein was president reagans chief economic advisor. Europe is in terrible shape. Look at italy, spain, france they are all hovering around ,ero growth will stop germany which used to be the strong point isnt much better. In very badpe is shape. With us now from london with local fixedos income chief investment officer. Thank you for joining us. Lets start with the obvious. Is europe already in a recession . Its pretty close. It has been week for the last several years. Growth is at zero. Italy is in recession. Be above zeroll but it is very weak growth. It seems like the real trigger in the markets was german Industrial Production contracting to the worst levels in nearly five years. We have already seen german gdp slowdown and contract. And europe still the core versus the periphery . How has it changed . In the past, we had the virgins between the stronger call and the week periphery. Today, spain is one of the stronger growing countries. Italy in recession, france and germany close to zero. Germany relies on growth abroad to drive its growth, export the thought that asia can slow and germany continue to have strong growth is not something that adds up. Periphery, youhe have weakness that shows the extent that the ecb challenge and other than some german quad german commentators, there is quantitative easing in europe. With german shortterm yields in negative territory, what howard does mario draghi have for the european economy . Does he have to do with the fed did with the u. S. Economy . There are number of channels that qe work through. There are pretty significant spreads between countries, borrowing rates in germany and the potentials for compressing some of the credit spreads in europe and significantly, you have the euro is nott that the euro week versus the u. S. Dollar, thats for sure. There are a number of ways that can work and mario draghi just identified the Balance Sheet as a soft target for policy. At some point, you need to get on and have this discussion. Thisbeen talking about with you on bloomberg now for a couple of years at least. At some point, we need to get on and do it. The danger is the longer you wait, the bigger the challenge is you are trying to address. Would you say thats the case now . That it is significantly larger than it was the year ago . Yes all stop yes. He has identified forward Inflation Expectations. Down. As been coming if they want to maintain an inflation target of close to 2 , its not something you can ignore. The politics in the u. S. Was difficult enough with senators writing to ben bernanke when he was fed chairman and complaining about qe, so europe is not the only place where theres controversy over policy. German opposition means you go slower and weight till it is stunningly obvious that you need to act. It is harder to be preemptive but the growth coming down in germany, inflation coming down in germany, from my reading, more balanced comments from the bank they are never going to be cheerleaders for the qe, but mario draghi runs the European Central bank, and i think he has made clear in the last several months that he will act in the interest of the whole of europe. To be weak continue and Inflation Expectations continue to trend down, thats a strong signal. Lets controversial to put it lightly. Controversial to put it lightly. Go to the matd to on mario draghi converting money and whether its actually legal. Overs plenty of debate whether whatever the european fiscal agreement is, the mandate to do qualitative to quantitative easing u. S. Style. I think its pretty straightforward. Subject of england is to the same tree as the ecb. The ecb has stated its legal and comments last week. Problems insee any terms of legality and that was my understanding in terms of his comments. You can debate the effectiveness or whether it was a good idea or legality,n terms of the bank of england has the same treaty and it hasnt stopped them. You cannot buy from primary markets. Coveredl be buying bonds and the difference between doing that and buying government bonds is zero and the symbolism is a different question. If you were to look across european financial markets, where do you see the greatest point of vulnerability . Issue. Omic growth is an for mediumterm stability in the euro zone, they need Economic Growth and nominal growth. Both real growth and on the nominal site as well. When you look at countries in terms of vulnerability, you can see this pretty much across the board. Spain is one of the better stories. They had a difficult slow down just like the u. S. Or u. K. But seem to be doing better. Italy is a concern and a barometer for growth. The fact that france and germany are not growing is an issue as well. Highyield markets have in week. Some of the financials, its a pretty attractive sector in terms of the financials. Italy, spain is and others continue to do quite well. That is the anchoring impact of the ecb. I doubt spanish tenyear yields would be trading below u. S. Debt. We have to leave it there. Thank you for joining us for stop he went from mad men to the best sellers list. His books have put him on the ways on the way to the billionaires list. I sat down with James Patterson. The war between amazon and older is six months six month old and does not seem to be going anywhere. James patterson has sold 300 million books worldwide and his publisher is little brown, a achette. H patterson was critical of jeff bezos who compared him to a cheetah hunting on the serengeti. This thing with comparing his company to cheetahs and pouncing on wounded gazelles and those are publishers, i dont think thats a great idea. Like a cheetah and bites like a cheetah, its probably a cheetah. Im not sure if thats the optimum for companies in this country. I dont think it has to be that way. Has the standoff between the company that owns your publisher and amazon hurt you personally . It hurts my spirit because i think its a terrible thing to do. I think its a bad thing and in that respect, jeff has done a bad thing to her writers. But a lot ofiously writers really depend on the back list which for a lot of authors, they put a four or five week waiting time on it. The books presell which hurts. For a lot of writers, it can put them out of business or ruin their families. I understand what the strategy was, although it hasnt worked. That they would put pressure on the publishers. Writers you look at what has happened throughout the history of the world, getting into religious wars by powerful countries or organizations doesnt seem to work. It did not work in iraq or afghanistan. It didnt work in syria or ireland. Amazon has created a religious war. Writers are religious about books and they will take the punches, they will take the blows and they will use whatever they have to do. Will not let books get hurt in this country. Amazon has attacked a group that is small but we have this issue of the pen having a certain amount of power. I dont think the writers have turned up the heat yet but we could. How . One of the things we can do askiterally come out and for a ban. It has come up for a lot of writers. We could just all take our books off of amazon. If you were to take your couldoff of amazon that change something. If myself and all of the authors who are sympathetic which range from stephen king, ifrisham, philip roth everybody says they are doing the wrong thing here, you would think that would have that that would mean something. Is the pen mightier than most mightier than the sword . If theyersuaded took their books off of amazon, would that inflict enough pain on the company for jeff bezos to say we need too come to terms . Obviously its interesting to see jeff bezos setting up an actual brickandmortar store. Interesting to hear James Patterson described his darwinian appetite. I asked him if he thought jeff bezos was a bad guy and he said i dont inc. Hes a bad guy. We look at the world in a different way. The problem he faces is that even if he were able to organize such a boycott, books represent just 7 of amazon. Amazons revenue. As he describes it, they are not gods. Still to come, we are not done quite yet. Why has harvards performance been so mediocre lately . Harvards endowment, you might say has lost its groove. It has yet to make back its endowment losses in the financial crisis. A new endowment chief is on his way in, so we are looking at some of the challenges he faces in the years ahead. Bloomberg has been digging through the numbers. Rings and inherit the to understand where theyre going, you have to understand where they have done. Harvard manages 36. 4 billion dollars and are about half 1 billion shy of their precrisis levels. Other universities have rebounded but not harvard. They are at records. Brown specifically. There are emerging market exposure caused a nominal drag. You also saw their precrisis private equity undercut performance. I spoke to an analyst who said what you have here is they are hurting from Natural Resources as well as commodities. Take a look at their Natural Resources allocation. They have decreased that over the years. For the fiscal year going forward, its 11 . Commodities as well dave reduced commodities exposure to zero. They are not going to be in this day many more. This used to be a good diversifying play because it was a correlation with public commodities, but thats no longer the case. They have also increased exposure private equity is one example. Everyone is probably happy to be out of commodities, but how else have they changed their portfolio mix . Precrisis investment undercut performance but have increased in that space. According to their annual report, they are convinced they have been able to get returns and have adjusted their portfolio to have more allocation toward these illiquid investments. What puzzles me is i spoke to the president of Harvard University in the summertime. She was part of the Search Company that the runs the endowment and she said theyre looking for a different kind of investor. Then it went and picked this guy who has been there for eight years and is a specialist in Public Markets, which is to say stocks and bonds. It doesnt sound all that different to me. He is an insider, but he is a statistics professor at harvard. He can no longer do that once he takes over, but he is an academic at heart. Enqueue for joining us. Thank you for joining us. Market makers returns in just a moment. Cortex that is going to do it for Market Makers this monday. Youve all heard the joke the one person you are expected to sleep on the job we will bes , the with the ceo ofseta mattress maker. And its 56 minutes past the hour, which means its time to go on the markets. Stocks starting the week in the red all stop everybody has been watching the 200 day moving average. We fell below it for the first time last week in two years for the first time in two years. Unclear whether we will go above and or remain below it. Joining me is a derivatives holdings. From mkm everybody has been watching the vicks as tense to happen when stocks pull back, the vicks except will stop the vix picks up. Its been incredibly volatile week. Youiewed in isolation, might think this volatility event is past the point of maximum intensity. First, it is worth looking at what happens with the distortion in an environment like this will stop like this. Vix futures curving out to december and the six months future is its widest weve seen certainly in the 22 months of this low volatility regime. All that means there is a massive distortion right here and now. Typically it does not last long but there are reasons we think it could last longer. They would be what . That we view this as a cross equity volatility back him. If you look at volatility across classes and geographies, they are not at levels we believe the broad event for equities are over, specifically emerging market volatility is higher but not high enough, comparing it to 2013. Mper tantrum of july the Global Financial stress indexes similar. If you want an even more straightforward metric, the implied volatility is round 21. A year ago, it peaked out at around 28 or 29. Theou are looking to play in particular and you are more negative on that itself . We think there has to be upside in emerging markets and currency volatility as well. The upsideipping to because of the firstround Election Results there, but over the very shortterm, we think this plays out over the next couple of weeks. We would want to come in and buy by 40. 5 strike puts out right. If it declines from here, you benefit from that directionally and the higher implied all attila the we think we need to see before this is over. This concern,of weve got earnings coming in the United States. We are going to start with the financial earnings but you are f, theg at the xl financial select spider as a way to play this. What is your outlook for financial earnings . Broadly constructed on the group, jpmorgan, wells fargo report tomorrow morning. The risk we see in the metro in the macro perspective is not what we see with single stocks. Exposure, add longer especially where the volatility surface is distorted. So we want to use the broad etf bingo all the way out to january. We want to sell a 20 strike put and by the 40 strike call and typically that theres a 10 volatility point spread between those two betweens will stop those two contracts. You are taking advantage of the fact that investors are bidding up the price of puts and thats something we want to exploit to gradually add longer actual exposure. Thank you so much. We will be on the markets again in 30 minutes. Money clip is next. Welcome to money clip im adam johnson. Square, he pershing says he wants to be more like buffett. Fiatchrysler hitting the stock market. Goesio marchionne global with cars and trucks. A frenchman wins the nobel prize in economics, in an age of tougher rules for global corporations