Transcripts For BLOOMBERG The Pulse 20151006

You are welcome. This is the pulse. Where life from bloombergs European Headquarters. Wellp, what we have we have a feast. We hear from the former cochief executive of Deutsche Bank as he is interviewed by john micklethwait. In about a halfhour, i am going be speaking from the speaking to vittorio grilli. We have an actionpacked the pulse for you. Thatgross who predicted u. S. Equities have another 10 to fall. Another leg lower. Investors should sickout the current volatility. There is no doubt that there was full of tilting which indicates there is a move in markets. Investors should continue to have a risk off posture. What does that mean . That could mean larger amounts of cash. That could mean Higher Quality investments. In terms of bond market, more treasuries and more duration than you normally would. Manus that comes as Goldman Sachs warns there is a chance that Federal Reserve will delay well into 2016 or later. Factoryoured german data printing this morning. Markets digesting this. We have seen a little bit of a pause in some of these equity markets. Lets bring in mark barton. It looks like germany is on the sign mark it is interesting seeing european stocks decline. Theal stocks as measured by country world index, rising for five days. We have the s p 500 rise for five days. Which is the longest stretch since december. Chance that the fed will delay well into next year or even later. Lets have a look at how this effect this is affecting emerging markets. This is indonesia, it is rising the most since may 2012. On the inception on the assumption that the feds will leave rates low. Economy andinese stopping Commodity Prices. Overseaspletons 30 funds. He says the recent selloffs have opened up opportunities not seen for decades. That is a big call. This is the bank of america, Merrill Lynch market risk index. This is an index that checks volatility across equities, rates, currencies and commodities. It is falling. Volatility is falling for the fourth day since midseptember. The threeyear high on september 4. The chicago board option volatility index has fallen for five days. Big, because a monday, a closed below 20 for the first time in over 30 days. Run above lengthy is that level since 2012. Have a look at this. German factory orders. Do you want to see a volatile index . This is factory orders going back from 2000. That is shows that shows how volatile it is. Yes, it it fell by 8 . Benefitingmand is the record employment. Wages and low inflation. Quite a chart here, manus. That is how you put manus that is a put volatility in a chart. Six brokers accused of alleged libel the benchmark market rate is behind trillions of dollars of financial deals. Caroline hyde has been following this. This is a trial that will be closely watched. Years after the investigations began at two months after the first conviction, we now have it evolving from traders to brokers. Six traders have been accused of rigging liber rigging libor. Linked to the japanese yen. They are being accused of working with the man who has just been convicted. That is thomas haze. He has been that is been tom hays. Sentenced to 14 years. Are the in between guys. These are the middlemen. They were accused of using their influence to procure favorable submissions for the traits they aligned themselves with. For the trades they allowed that they aligned themselves with. Understand colin goodman, all these brokers. Meanwhile james go more in terry Going Forward to face the court. Facing decades of jail time. All of them have pleaded not guilty thus far. Lets look at what will face them when they walk into court. We see the trial is taking place there. It could last almost three months. We are going to see 12 jurors have to reap through all of this testimony for the next three months. 9thorities have billion worth. Brokerages, related to these individuals, they have faced crimes already. This is going to keep on snowboarding. Snowballing. We have seen one conviction, six more go today to the london court. There are 11 former traders scheduled to stand trial in january. This is just dollar and again related libel. The next wave of charges we are expecting. It is round two. Back to you. Manus caroline hyde, thank you very much. Let each of to speed with the rest of our radar on the pulse. Interest has left rates unchanged for the aussie dollar, reported the biggest drop among currency among major currencies last quarter. A weaker outlook from its key trading partner, china. They kept the cash rates at a record low of 2 . That was predicted by market economists. Shell says it is pulling out all stops, safeguarded dividends, and a world where Oil Prices Remain lower for longer. Europes Biggest Oil Company is also protecting its plan to buy back shares. Those are your main headlines this morning. Just want to bring you a little bit of breaking news. This comes from opec. They are in disarray. The market is in a cycle. Opec and not opec nations must cooperate to remove the overhang. Those are a few breaking lines from opec. It is bloombergs most influential. Mr. S handed over to micklethwait. We have to ask ourselves is the world moving at a different pace than we thought week then we thought it would back of the answer is not really. The weak payroll numbers last friday, u. S. Growth estimates according to most , not muchstill remain has changed. Right here in europe, good news. Very slow cyclical recovery. Growth estimates have been marked up from where they would have been six to seven months ago. The picture for asia is more complex. China, you are going to have questions. There has been turbulence, very significant volatility. Affected. Th i would still say chinese numbers look more or less in line with where they would have been. Aty look better than it has any point in the last 12 months. The rest of the emerging markets are a worry. A combination of plunging Commodity Prices, slower funds, out of p. M. Out of e. M. And back into the u. S. Japan, ex u. S. , ex asia. Every so part of the gdp. There are concerns. Brazil, russia, south africa, turkey. There are a number of countries with lower Commodity Prices and the outflow funds. They will represent a challenge. How far do you think the worry will go . Which unnerve you . Not as bad as the asian crisis in the late 1990s. Fundamentally differents fundamentally different. Sovereign indebtedness a lot lower. Look toward emerging market corporates. They borrowed a lot of money. Too much in dollars . Since the crisis, we have seen a 50 jump in the borrowing by corporate, or in hard currency. A lot of that has come from emerging. It is europe. A lot of that is emerging markets. Now some of these corporates have hedged it. They have done had flows theyve done inflows. You borrow in dollars, invested domestically, and i think were going to get next line written theave commodity and maybe they didnt have as good as management. U the last five years have been kind. ,nd number of factors in play very cheap funding. Surging Commodity Prices, rapid chinese growth. They have used that to shore up their Balance Sheet. I would say there will be some which will struggle. John we will come back to india in the end. We were talking earlier, you talk about these idiosyncratic events. Things like glencore, volkswagen. There are these things that seem to be unnerving markets. Is it a case that each one of those is different echo or is different . Or is there a common theme . Hu idiosyncratic does not have a common theme. , you have equity violations that had double. That had doubled. Ou had term premium at times like that, when you get idiosyncratic events, that is when you get the 20 , 30 , 40 drop and the 50 bounce back. John you have been a banker for a long time. Have you seen anything or Something Like glencore has happened before . I think it is off a broader theme in markets, where we are poised for much higher volatility. John what is behind that . Anshu it is a confluence of three factors. Qe, the single most important thing. Everything out forget everything else. U. S. Growth is going to be slower. Equity market rally is all about Interest Rates. Produced a very rapid increase in the price. Secondly, we should decompose i thinkese risk youll find a dramatic shift. Banks own far fewer assets. They should and they do. 40 fewer. Retail has been pushed out of deposits and savings. That manifests itself in a dramatic jump in etf, three times. , high yield and so on. The shadow Banking Sector has grown by 20 to 25 . That shift means the way information now hits markets, and the way it is processed will be different. John you said, it is good that banks do not own as much do. I can see that is true from the point of view of leverage. Many institutions are not. , it doesnt that were you a bit . This is a Different Group of people moaning people owning risky assets . Shu there are two strong camps of opinion. First and foremost, banks owned way too many assets versus their 2007. Base circuit no debate about that. That is what led to financial crisis in 2008. One that became potentially paralyzing. It is appropriate that banks have raised a ton of equity. That is a good thing. The most skeptical analysts are now willing to concede that even if we get a large deal, the odds that we will get a Large Department taking systemic bank and the kind of trouble that multiple , against that you have to weigh the fact that processd banks would information very differently. Perhaps, some segments of the. Ew on this you can see what happens when you get large concentrations of retail ownership. John you mean very rapid pullbacks. People will jump out of assets quickly. Anshu the utility function tends to be different. John what happens behind all of those numbers . Where did you worry about that . Point there are three aspects. Are two ways to look at it. In my mind, if you combine that risk rhenium has dropped genetically in the past few years. Different owned by a group of investors now. There is concentration among the investors as well. When we talk about the buy side. There are many fewer Asset Managers and the used to be. It means when they make decisions, markets will move an awful long way. Jonathan you think they need to be regulated in the same way banks are . Anshu i think it is a very different industry in the banking industry. The third factor is the Liquidity Division function. In my mind, and this is where the debate lies, you have seen academics say we have studied the debt the data and we have seen no difference. Areas, whichtain are more Exchange Traded dominant, such as equities, or maybe even foreignexchange, markets have been more efficient and more liquid than they were in the last decade. This is simply not true for many aspects of that market. At highyield debt, we have talked about emerging markets. The risktaking capability of banks have diminished. The risktaking desire of those banks have diminished as well. When you talk about what i worry about, i do worry about a combination of very tight credit stress. By retailship investors sometimes without a clear understanding of how much liquidity they can expect. In my opinion, and impaired ability on the part of banks to provide liquidity. I think we could get some reasonably high volatility. Saying there is reduced liquidity and bond markets. That makes them more risky. at the same time, we have seen Significant Growth in volumes. John do you think that is regulators . Fault . Anshu i am pointing out a combination of factors it could represent risk and volatility here to of which we have seen. I dont want to be overly alarming. The overall picture looks good. How can it not with Interest Rates near zero. Global growth is not the worry. Fundamentally, credit markets are fine. The microstructure of credit and Market Mechanisms do need more change. John if there is a change if there is a problem, there could thereh more difficulty if is reduced liquidity, there is nothing to deal with these problems. U the liquidity has simply shifted. The buy side will step up and provide liquidity. As a market dictation or, there are two things, one, the buy side doesnt have the same contract as dealers do. Dealers are required to provide liquidity. Secondly, it tends to act slower and more deliberate. The possibility of multiple standard deviation moves on the fundamental new development, we have seen it already. The back 12 months. The flash crash. This was bank the swiss bank valuations. We have had examples already. Yieldsnt seen high truly tested yet. John if you add about some of , isnthyield markets that the companies in would were you most . Anshu develop markets have widened significantly. Have not seen a true test of those markets. I worry that we could get john on the question of the latest, you were gentlemanly with the way you looked at them. Who put the pressure on banks to fall back out of this. S them a interposition the risk in the system the question is where do you want to put it . It was in the publicly owned taking sector in 2008. It created the outcome of that. Made, buthave been that is not what you want the risk to sit. Where is it sitting now . And what with the fault line be in the next 12 to 18 months . , a way of dealing this. That have gotten so large they could cause trouble by themselves. U i think it is wrong to blame any particular instrument. Etfs have democratized investment. They give retail access to Asset Classes which in the past, you need to be a large sophisticated investor to leverage loans, high yields, especially at a time when overnight deposit rates have gone to zero. Giving investors access to all of these markets with daily liquidity, you can open a newspaper, you can see where you are trading. There is a reason why they have rocketed as much as they have. My concern would be the presumption of liquidity in these instruments. It has to be clearly understood by both sides. Just because youve got more etfs jonathan money market funds suddenly were not as liquid as everyone expected. the world has moved a long way. Theme, if you want to take moment in the 2000 a crisis which really concern me, that would be in the top five. You knew what was going to come next. Todayt see the situation nearly as alarming. Yes, the presumption of liquidity may be greater than reality. John i want to ask you about such a bank. What are you proudest up . And what you most regret . Bank in juneed the 1995. I was a very prestigious but predominantly german institution. A decade and a half later, it was competing with the best in the world, and asia, in the u. S. That is a largely organic transformation. Likes of which i would challenge you to put forward. Everyone at Deutsche Bank is proud of what it took to achieve that. Regret would be not transferring that the regret would be not transferring that. There is a variety of reasons why that is taking place. It has struggled. Investorsel as though demanded too much of banks . Were regulators the ones who pulled you win on that . Who pulled you in on that . Anshu you have an economy in europe which has not grown as rapidly as the u. S. On the continent there is excess of Retail Banking capabilities, unless the u. S. Where consolidation has not yet happened. Low Interest Rates takeaway profitability. Frankly, like all things, it will end. The sector will recover. John you look at these new organizations coming out of silicon valley, how big a challenge to they pose to banks in the future . Is it a good thing or bad thing . Anshu definitely a good thing. The first thing i would point out is how remarkably undisrupted banking is compared to other professions. I look at music. In the last decade, these we have regulation in the bank. Howunderlying theme is tough regulation has been for banking. There is a big moat around the Financial Service industry. Taking deposits means bringing with it a whole series of competitions. That has kept Tech Companies at bay. In my opinion that phase is coming to an end. Dramatic changes in technology, computing big data are two that i would single out. Changes in bio behavior here it behavior. My friend does all of his banking on the phone. I think that is the case for most people. Significanty Capital Investment going into that as well. In the next five to 10 years, youll see a dramatic change. Jonathan is it payments . Foreignexchange . Anshu take a bank and slice it. Banks provide network, brute force infrastructure services. They provide deep relationship advice. They do really context things. Say a lot of vanilla particularly lending in payments, are right. Jonathan in which ways . John in what ways . Manus if you want to live. That, go to the biggest regret is not realizing the transformation he achieved with the institution. Of retail an excess institutions. More of that on live go. More of that to come. Here is your top headlines. German factory orders unexpectedly fell in august. Europes largest economy is vulnerable to weaker growth from china and other emerging markets. Is it just in seasonal swings . It dropped 1. 8 . Economists expected a rise. Classes would in the investorsies should set up the current volatility. That comes as Goldman Sachs warns the Federal Reserve plans and interest crate increase for 2016 or later. Hartford may justify policymakers australia has left Interest Rate unchanged after the aussie dollar reported the biggest drop among major currencies last all. The impact of lower Commodity Prices and a weaker outlook in its key trading partner. Says it has kept the cash rate at a record low of 2 . The currency fell almost 9 between june and september. The trial of six people accused of trying to fix the libel rate begins today. Conspiredmed that the with another who was jailed in august. Trillions ofph dollars in financial deals. Bloomberg markets most influential it has begun already. It brings together financial leaders, all in one single day. One of the key speakers here in a corporatemorgan, and Investment Banking chairman and former italian finance minister. He joins us now. Great to have you with me. Weore you go downstairs, have had a number of conversations. The consensus is that we are being irrational we still have a real upheaval inequities in the commodities market. How do you look at its at the moment . How do you look at the Global Markets asked the moment . We have huge uncertainty around the world, which is unprecedented and so widespread. You mentioned some like china and asia. Pricesent mentioned oil but that is a major change in the structure. Uncertainty about Monetary Policy and what the fed will do, and of course in europe specifically, you have a lot of uncertainty about the Going Forward, which is complicated by the migration issue, which is really something quite important. ,anus migration refugee and immigrant. But as a former finance minister, as the chair of jpmorgan, how do you look at this story, from an economic and business point of view . Give me your take. Sinceio at the moment, stabilization started, as people moved where better opportunities are, that is the fact. Size,s changing speed and and thats what made it so difficult to manage. I think that germany right now is in the crucial spot. I think if anybody can manage the number, germany is the one. You have to remember that in the in germany there had been a huge internal migration, hundreds of thousands of people coming from east to germany to germany to a very healthy labor market. I thinks it makes i think it makes sense to ask new young labor to get back in the system. Medium longterm it makes perfect sense. The problem is how to manage the transition. Manus managing that transition is going to be one of the biggest challenges. What it you make of the Eastern European response, which is different to the west into the u. K. . Certainly they dont have the kind of labor market like in germany. Eastern European Countries are supplier, not labor. They cannot process the same i. The same way. Cibs you are the chair of. This year has been a heck of a year for dealmaking. Some things are yet to be done. The appleas upset cart and commodities. How do you look at it for dealmaking . Vittorio i think it is a good landscape, first of all because the market is wide open and there is risk appetite. And as we said, it is very much an uncertain landscape but there is plenty of opportunity. As you move, you could be the first mover in a changing environment. Manus when you look at the glencore moment, which was a consensus do events like that you have been a banker and a finance minister and you have lived through a lot of crazies. Of crises. Do those shake the foundation of confidence . Tell me about the conversations you have had over the past 10 days. Vittorio Single Company events dont change the trend. What changes the trend is the nature of events, when it is not just one company. It is double nature one is worried or concerned about the global outlook, because there are so many things changing right now which is really not business as usual. Reading the macro outlook is very difficult will stop nonetheless, you have to refocus there is a lot of optimism, a lot of awareness and you cannot stay put. How can we grow in this market . Manus this is what really fascinates me i want to get your insight. Janet yellen came out as the most influential person in the market. To you is this has the Federal Reserve been very smart in not raising rates and avoiding a policy misstep . Have they gone chicken . They miss the most poignant part of when it would have taken a rate cut and got on with life . Which camp do you think . Vittorio only history will tell. I think it is quite understandable these are not times when you go without ties. Reading the future right now, even mediumterm, is incredibly difficult. I think it is understandable that they would want to be extra cautious. It is not just a little decision this will be a changing trend in Monetary Policy. That pondering and being really confident is quite understandable. Manus should they get on antiget . Vittorio i think they have been sending messages in this direction they are trying to do that. I think they will. Thepmorgan, we look at probability that thisll happen before the year and and that is quite high. But if you look at the decision at theo, if you look market and how they discover the prices, it was not there. Manus there was only a 10 probability. Vittorio even before it was 30 . Market u how the manus would you concur that Goldman Sachs is that the end of the First Quarter . Vittorio we think it is earlier , but anything right now as possible. Manus before you go, i want to ask you about the italian banking market. Should the consolation come . Would it make italian banking more efficient . Vittorio i think it is in the making. Already you can see that the market is moving, there is serious talk about mergers. Of course we have an underlying problem under performing after five years of the deep recession and the banks are suffering stop recovery was held back but i think there is some sort of Global Solution and that will help the mergers. Manus have a great day. We look forward to your comments from downstairs. And therman of jpmorgan former italian finance minister. Up next, how is chinas a slowdown coupled with falling Commodity Prices impacting the growth of africa . Is africa rising . Is it reassessing itself . The group chief executive. Manus welcome back. We are live from london. Here are our top headlines. Five years after talks finally ended, an agreement on the Transpacific Partnership stop that accords for 40 of the world trade. Critics say it threatens domestic jobs, and in washington alone both sides of congress have denounced the deal. South korea says that it will actually consider joining ttp while China Remains outside. Executives fled with their clothes in tatters after workers protested after almost 3000 job cuts. Hadhead of Human Resources to build an eight foot fence in order to escape. Tempers boiled over as the airline said it might have to make its first forced dismissal since the 1990s after talks with flight crew. Some are threatening legal action after aggregated violence. Bring you a couple breaking headlines this is , saying that 8 million diesel engines will be affected. This is the initial banner headline, breaking it down. 8 million will be affected. They cited this in a letter to the german lawmakers, and this what they will do and how they will tackle these 8 million cars in europe will it be a software fix through to the possibility of a bloomberg story you will also lawyers directly vw customers. They are really making clarity on the size of the impact in a european context. 8 million have irregularities. This is according to a spokesperson, saying they will carry out immediate technical measures with no cost to customers. Say they are Strong Company and will overcome the crisis. They are working on a technical solution. More of those headlines over the next 24 hours it will be a decisionmaking day. Market most influential is underway. List ishose making the an african billionaire. I caught up with him he is a Telecom Tycoon and i asked him what his take on the chinas slowdown was. Ade it needs to be taken in context. Ago they were doing 10 or 11 , today they are doing 7 , or maybe less than that, but ago isy 10 10 years probably less than 6 because of the growth a lower percentage of a much bigger economy. There is still good growth happening in china. Bad hink things are as sometimes a headline in the publication shows us has it impacted the Economic Growth for africa . We were just listening to him talk about the context of africa. Africa, ink about think about commodities and resources how does this commodity route impact your bank . Ade thank you for having me. Hink it terms of the cost we get impacted through a cost, and the revenue at the end is going to be lower than it was before. Therefore the opportunity for countries to deploy resources and fix infrastructure problems will not be as far as we thought. Perspective, if you look at Commodity Prices from several years ago, oil was 10 a barrel. To put that out it is not clear among the governments of the african used some of the windfall from commodities to rebuild the Balance Sheet of their countries and to make investment in infrastructure, therefore the expectation is Going Forward that even if the prices fell, at least they have been able to do some investment. But if you are going to impact thought iat we just want people to understand that the investment in infrastructure that has happened over the years there are better businesses to be done today. Manus but it is going to hit you those probability targets, you might have to push those out . Ade it will impact what we can , all that haser happened is african countries on thee importers balance of the portfolio basis, that would be up and down, but in balance our net income should remain. Manus the other conversation i had with him he says that africa is stalling lets take a listen. It shows that africa is stalling. To encapsulate that in a very cystic way, what is the message from your index this year . What is africa stalling mean. Mo we need to pull up our socks. People heard the slogan africa rising a few years ago and now we have done it no, havent done it. We are coming from a very low base and we really want to do something, so we really need to continue to focus in improving the life of our people, to deliver good governance. Manus great conversation. Where are the biggest opportunities for you . Governance is stalling but you have a pan african institution. The biggest opportunities for you where will they be . Ade the biggest opportunities would be across the continent in nigeria. The west african countries but inimportant to us, the business segment the consumer remains important. We are using technology and innovation to drive down the cost of delivery. Of course we need to play in the commercial banking space, but just to go to the point he made more important is the question of governance. We have to come and have Global Standards there cannot be one standard of governance for africa and another for the rest of the world if we want to support our people. We have to have Global Standards. Manus you talk about nigeria and im curious to know we have had some restriction by the central bank in terms of Foreign Exchange policy. Is that going to impact you want to see it scrapped . Nigeria be lobbying in it is critically important. Where are we in that story . Ade what the government is trying to do is to find a way to sufficientet resources into Central Banks so they can support the economy better. The bigger issue is with more governance, it allows us to get creative. They are paying some price in the medium term but in the short term there will be adjustments. Objective toon the get to a situation where resources can be better deployed and infrastructure can develop nigeria is a big economy and it will be better for all of us. Leader to dothe that . Have you met him . He is our leader and we are behind him. We want him to do all he can do so that this generation in the next generation can move up, a continent that is led by nigerians. But we have to have an impact. Manus varies as simply put and lets hope thats what you achieve in your tenure. Fantastic to have you with us. Lets return our attention back to europe german factory orders fell by 1. 8 , missing estimates. Yesterday saw the drop in the pmi. So what are the challenges europes largest economy question mark we are talking about the refugee issue we are beginning to face the realities about global issues hitting germany. S so far you are right germany has been immune to a lot of these global headwinds. We saw that in the Second Quarter gdp figures. Of we have here is a decline year on year. But we have now is to negative numbers in a row it is not always a great predictor, but it is significant in that we have had to in a row on top of yesterdays downward revision on the pmi numbers. We still have positive sounded is one coming, so this data set that is indicating that germany could be facing some difficult times. Vwus hans, lets talk about. Theeading about their clarity, 8 million vehicles in the eu. We will get a little more over the next 24 hours, the West Virginia has come in a lawsuit come in with a lawsuit. Hans it is the first u. S. State that will file suit. They only have some 2000 cars and that gives you a sense of theregnitude already are 229 classaction lawsuits. They are working on a fix and the best Case Scenario is a software upgrade. Worst case is brandnew cars. Puts itres that we have at 8 million, for europe alone. The overall global number we are still operating on his 11 million. But there are many more lawsuits potentially to come. Manus i love this story, going headtohead this is sharks smelling blood, isnt it . Hans there is a lot of tension between mr. Marchionne and dr. Winterkorn. Fiat chrysler is offering 400 for the fiat. Manus hans nichols in berlin with the latest on vw. Pulseond hour of the is coming up next. From state cio street Global Advisors coming up. Stay tuned for the next hour. Manus factory failure. German orders unexpectedly fall in the sign of euros largest economy vulnerable to the slowdown in china and other emerging markets. Bill grosss warning that u. S. Stocks have another 10 to fall, this asked the s p enjoys its longest rally of 2015. And the london libor trial. Six men are accused of manipulating the rates behind trillions of dollars of deals. Appearing at the bloombergs markets post influential, the Deutsche Bank ceo admits he regret not recognizing value of the lender. Welcome back to the pulse, we are live from bloombergs European Headquarters. And joined by manus cranny tom keene is over in new york. A little bit about what we are watching this morning. Everyone was getting pretty excited about bill gross. Tom was talking about yesterday. He predicted the many Asset Classes ending the year lower, and said that u. S. Equities have another 10 apart do you reckon investors should sit on current volatility in cash . There is no doubt that there is volatility which indicates that there is risk, not just in the Financial Markets but in the real economy. Of thinking, investors should continue to have a risk off posture. It can mean larger amounts of more Investment Grade in terms of the bond market, more treasuries, more duration. Sachshat comes as goldman warns that the Federal Reserve will delay its increase well into 2016 or even later. How are the markets digesting this . Lets check in with mark barton. Mark that rally in global starks is rising for a fifth day, the best run since april. Stocks rose u. S. For the fifth day since get in and have a look at the gauge that measures both developed and developing markets, global stocks rising for a fifth day since the record back in may. Has fallen by 11 , but we are seeing a rebound as expectations get pushed back that the fed will raise Interest Rates in 2015. Guy lets talk about this german data not rosie, was it . Can get a clearer idea. A. 5 they were expecting percent increase, just a highlight the fragility of their export oriented growth model but the dangers dont end there. You mentioned the influx of migrants putting a strain on germany as well. But i want to put this into perspective this is a very volatile index. This is german factory orders month on month, 20092015. Look at how is 0 volatile this measure has been in the last six years. Also worth noting the mystic demand is benefiting from record employment, rising wages, and low inflation. The export model is under pressure, but domestic demand is strong and this is a very volatile measure. Guy thank you very much. You have to break it into subcomponents look at what is happening in the eu, maybe not such a green picture. Our next guest expects continued volatility and pressure. Advisors cio at global , managing 2 trillion in assets. Bill gross talks to us earlier about the fact that he sees more volatility. Is that the right way to go . I find myself in the unusual position of agree with bill gross. Very often we have been talking about optimism but we are underweight in the equities. We have a cash position, which is quite rare for us, and we are sitting out that period of volatility. Grosspeaking with mr. Among others, it is a recalibration and readjustment. How are you recalibrating into the Fourth Quarter and in the 2016 . Something dramatic, or are you playing golf . Richard i think the recalibration has happened for us, but we have to keep on our toes and think what will happen next. We are a little bit underweight inequities. We have cash, we have Long Duration bond, and credit. We are constructive on credit but we are not expecting a recession. We think the earnings story is flagging. Tom within the revenue and earnings dynamics of equities, are they linked to centralbank policy, or can you look at them as a separate continuum . Richard i think they are not disconnected, but the idea that the u. S. Has delivered great returns for investors since the crisis, driven largely by earnings. There have been buybacks but it is not just an inflation story. Support of centralbank policies that asrtant and we see an important factor in china, for example, as being supportive of potential growth. Most volatilee credit rates out there is europe long how much backing is required for that trade to work . Richard it has been a crowded trade before quite frankly. Earnings margins could improve a little bit more than in the u. S. , and you have parts of europe that are showing signs of growth. Ausing in spain has become little bit more of a growth area. Germany has the worst unemployment for 25 years and although we have week factory orders there are the beginnings of a consumption story. I think the reason europe looks ok you have a very supportive centralbank. All the analysis of a new terminal value, a dampening that animal spirit or lack of it, are you beginning to work with an equity and bond return that is not only singledigit, but is a lower singledigit . Richard i dont think it is lower singledigit in the longterm. I dont buy into the very longterm scenario as part of and theon is Technology Fact that you have a huge number of people not just in china in turn into the market economy with the potential to grow consumption and demand. Is that a longterm problem . Probably not. Tom where is that technology out there. What do you identify as a societal new technology that will jumpstart this economy again . Thatrd what the Area Technology may have an impact is services it is very hard to grow. Health care spending is a huge part of the economy in the u. S. , and they are announcing the beginning of Technology Starting to improve in that relatively difficult area. Of interesting businesses, people creating models that try to link growth in technology with improvements in productivity and that is a big part of the u. S. Economy they can affect economy and it can affect services as well. Letsgerman data dismiss that for the time being and take a broader picture. Is the German Economy in the wrong place . Europe is trying to become more and more german, yet germany is based on highend engineering and a reliance on the car sector. Youre talking about big shifts in the service sector. Is the economy in the wrong place . Richard i suppose i was talking about the u. S. Economy. Is germany and the run space . Not for its own profile of skills it is history and alture, but does it have concentration risk . I think that is one of the things that we have become more attuned to. To see highering growth and services are engineering . When you look at what is coming and you look at the growth in manufacturing relative to each other, where do we set . Engineering and products is something we understand very well what has been harder to measure is the service is part of the economy and the Impact Technology can have. I think that is one of the challenges we face in a number of areas china, for example. The new parts of the economy are a little harder to measure. Guy we believe that there. Thank you. We will leave it there. Thank you. Ise with a look at what else on our radar this tuesday mornings manus cranny. A the european quarter data sharing pact between the u. S. And eu does not adequately protect eu citizens. It is therefore invalid. The case arose after a complaint about facebook illegally sharing data with u. S. Intelligence agents. Germany has urged for u. S. And eu talks. Australia has left its rate unchanged after the aussie dollar reported its biggest drop among major currencies last quarter. The rba governor Glenn Stevens and his board kept cash rates at a record low 2 , predicted by the market and economist. It fell 9 between june and september. Safeguarding a dividend in a world were Oil Prices Remain lower. The Biggest Oil Company is also protecting its plans to buy back shares. Fleeing with their clothes in againstas workers riot almost 3000 job cuts. They had to build an eight foot fence in order to escape temperatures boiled over as the airline said it may make its first horse to dismissal since the 1990s. They say they will take legal action over what was called aggregated violence. It could be that dangerous to be an hr director . coming up, and exclusive he has been appearing at our summit, the former Deutsche Bank ceo, and he really regrets not realizing investor value. Guy 15 minutes past the hour, welcome back. We are live from london. The central Banking Sector, Deutsche Banks former coceo sat down with our editor in chief in an exclusive interview event stillhe taking place downstairs. He was asked about his promised moment during his tenure. Proudest of the transformation which has taken place at the bank. I joined in june, 1995. I was a very prestigious but predominantly european institution, and a scant decade and a half later i was competing with the best and brightest in the world. In asia, in the u. S. I was widely recognized. That is a largely organic transformation. The likes of which i would challenge you to put forward. Everyone at Deutsche Bank is very proud of what it took to achieve that. Be regret i suppose would not transferring that and not realizing that, in the form of investor value. There are a whole variety of reasons that is taking place, and ours is not the only institution. John do you think tanks in general, that investors demanded too much . Or was it going back to regulators . I think the picture for european banks is particularly challenging. You have an economy in europe which is for the most part not growing at the same rate as the u. S. You have a lot of competition. On the continent, there is an excess of Retail Banking capabilities, unlike the u. S. Qe is a particular worry. Low Interest Rates takeaway profitability. Then of course you have all the new regulations. That is a powerful domination of headwinds, but it will end, in the sector will recover. Guy the former Deutsche Bank coceo speaking with our editor in chief a few minutes ago. We are still joined by richard. The, everyone tells me that thing to play in europe is longer banks. That doesnt sound like a great richard well, it is a leveraged way of getting exposure to the you have to reinvent what the Business Model is, navigating through consolidation without loading off on size, without getting synergy benefits. Tom guys like you talk about synergy benefits and i love it. I never studied that in school. Isnt it just about costcutting more rapidly . You saw du pont this morning with the same idea is this a permanent part of the new global business, cut costs or youre out . Richard i didnt say whether it was revenue synergies or cost, but i think there is a lot of potential for cost synergies in business. At. Has been fabulous wrenching those out and if you go back to the late 90s, during those rounds of m a, we were effective at wrenching cost out of the system. Tom i think this is incredibly important. Can get the word synergy and paradigm in the same interview, that is a success. [laughter] guy i think you just did. We nailed it. [laughter] that vw will talk cut costs. When you look at a business in crisis, is the first reaction to cut costs . Is that kneejerk reaction the right one . Richard i think preserving the value of the franchise is the most important, so you have to find ways to preserve the value of the franchise and satisfy the stakeholders that may involve cutting costs because you may from a debtressure perspective. Finding ways of making the financial pictures look attractive to all the stakeholders it is preserving a franchise value that is important. Deal of it as quickly as he can. And where does that leave the longterm value of the business . There are so many going through this at the moment, this sort of permanent cost revolution. Business another when you are looking at companies and trying to figure out how they will navigate the next few years, when you try and advise on the bottom of story, is the costcutting button still the one to push . Sizzling in certain areas. Which is the right button to push question . Richard the question is will it preserve value in the long term. I think we are not an investor who would always advocate cutting costs. We will certainly wes into investors. As you look out into next year and with the money we got, is this single pass to growth to acquire revenue . I know you can work 10 or 15 on synergy Deutsche Bank tried to do that for years, but is it simply about finding Revenue Growth . I think you can find the impact of investors is tremendous. We have a demand problem in the world and finding that Revenue Growth is extremely challenging. What may be missing in some companies is a calibration between what Capital Markets expect, credit markets and equity markets, and what internal rates are involved for investment plans. I think there are different views on the subject and certainly the reserve bank of australia is suggesting high hurdle rates relative to the external environment. Itne quick question was interesting to listen this morning, about how he sees the credit markets how much concern do you have about the relationship to the credit markets and eps and the buying back of shares . But i am hearing in london is a lot of people getting backed up and im wondering what it is back into the equity market. Richard credit is affected through the volatility channel. We prefer to be in credit, and that is predicated there is a risk clearly, but equities are going to flag. It is supportive of credit where it is. Guy hold that thought. Nexte take you on to our story the european quarter jesters has ruled that a data sharing pact between the u. S. And eu does not adequately protect eu citizens and is therefore invalid. Lets get more from tony aaron, who has been following the case. Give us a topdown picture of why this is important. A 15yearold agreement that just allowed u. S. Companies to move data back to the u. S. From europe. It was a commercial agreement that went on for a long time without any real problems. And then 9 11 happened, Edward Snowden happened, and people became more and more critical about spying and privacy. A 28yearold law student in begin attacking this agreement, filing complaints with regulators and the courts. It has worked its way all the way up to the European High Court and they struck it down. Guy implications are what . Tony nearterm, google and yahoo and Companies Like that will have to figure out how they will deal with data. They have a lot of data that they would normally store in the u. S. And they will have to figure out what to do. Mediumterm, they will have to have meetings very urgently to try and negotiate a new settlement and way to deal with this data. Guy a lot of this is for National Security purposes. U. S. This data goes to the it brings data to collect here and takes it to the u. S. But post snowden, we know that all of this is being subpoenaed in the u. S. I dont know if there is any proof either way both sides say it could be and that is what he is arguing. Assume that some of this data is being used. Presumably the u. S. Authorities can no longer access it. What happens next . Tony that is one question. We dont know. The data right now it is an open question. Thehe nsa asks for it, companies could then arguably say we dont have the right to give it to you anymore, but they could also say it is already here and you do. Someone will challenge the u. S. Court probably, but this all has to get settled very quickly. That is one reason the court dealt with this. Two weeks ago, and advisor released an opinion that said the agreements were legal, and had to stop. Normally it takes the eu court three to six months to issue a followup ruling on an advisory opinion. They did it in two weeks. I dont know if it is a record, but it is the fastest ive ever seen. They looked at it as a matter of urgency. They wanted to say that this was a major issue, and a major problem. There a read across into anything else in terms of data or how it is used . Tony it is mostly Tech Companies. They deal with huge amounts of data every day. Google, twitter, everything. Now that data cant go back to the u. S. And they have to figure out where they will hold it, store it, deal with it. Guy thank you very much. The ruling which could have major implications for tech. When we come back, we will talk about the German Economy. Not exactly rosy. Guy welcome back. We are live from bloombergs European Headquarters in london. I am joined by manus cranny and tom keene, who was over in new york. Give us the top headlines. Manus lets kick it off in germany. Factory orders unexpectedly fell in august, assigned that europes largest economy is vulnerable to weaker growth in china and other emerging markets. Orders adjusted for seasonal swings and inflation and dropped 1. 8 . It was expected to rise. Many Asset Classes are predicted to end the year lower and europe equities will have another 10 to drop. Bill gross reckons that investors should set out the current volatility in cash. Goldman sachs warns that the Federal Reserve will delay its plans for an Interest Rate into 2016 or even later. A slowdown may justify policy makers keeping near zero rates for much longer. Australia has left Interest Rates unchanged after the aussie dollar reported the biggest drop among major currencies last quarter, positioning the impact of lower Commodity Prices. Stevens cap glenn cash rates at a record low of 2 . In currency fell almost 9 june through september. Trial begins a new six men are accused of conspiring with a man jailed. Set to last some 12 to 14 weeks. We will be watching that along with a much wider public. Guy thank you. Those are the headlines lets get mark on the markets. Stocks openan higher, then fell, then rebounded after the biggest to woday gain. Global stocks as tracked by the msci also gained for a fifth day, the longest stretch since april. Close tie for fifth day and it hasnt done that since december. Asatility in the u. S. Measured by the vicks index fell again, also for a fifth day. A closed below 24 the first time in 30 days, ending the lengthy us run above that level since. E 2012. Goldman sachs is saying that rates will stay low for longer, not just in the u. S. Loose globally, and they say the chance the fed will delay its rate hike is quite high. Right now it is at 35 . A month ago they were at 58 . Have a look at the big decliners on the ftse. Yesterday we had the biggest ever gain in glencore shares, up by 21 . Over a week ago we had the biggest ever decline, down by 29 . The shares have rebounded by 62 . It has been an astonishing eight days. The Australian Central Bank is keeping rates unchanged and traders are paring back their view on whether the rba will cut rates again. Foraussie dollar is rising a fifth consecutive day against its u. S. Currency. This is the currency du jour. The biggest again against the dollar in three years, mirroring the gains and emergingmarket currencies as u. S. Fed hike expectations are pushed back. And emergingmarket currencies have their worst ever quarter in the third, and this was one of the worst performers ever, beyond the malaysian ringgit. Guy thank you. Mark barton. Factory orders fell 1. 8 in august, missing estimates. Yesterday saw a drop in pmi numbers as well. So what are the economic challenges facing europes largest economy . Lets go to berlin and speak to hans nichols. What is the latest data telling us about the state of play . Hans what analysts are telling us is yes, it is bad, but it is not time to panic on the German Economy just yet. Will we is factory orders for the month of july negative, august negative. Revised downward and the august number didnt meet expectations. It came in at 120 . 1. 8 . Yesterday we had a negative pmi reading that was downgraded from the initial reading. That is giving us a little queasiness we may be starting to see signs of the German Economy being susceptible to china. One quick note this one include anything on folks like an. On volkswagen. Guy what is the news on them . We have this West Virginia story, and we are getting more uptodate. Ring us hans 8 million is the number in western europe, that is the number they sent to the German Parliament on the number of affected vehicles. Volkswagenuits in for West Virginia. Cars,hey only have 2000 yet they are still filing suit. And you have the company that ds to submit its fix what they will do for germany by tomorrow, the deadline is tomorrow. Potentiala couple fixes one is a software fix that would cost 20 million. The other one is a brandnew car. That will be a little more expensive. It certainly will. Thank you very much. Hans nichols, over in berlin. Lets talk about germany, about what exactly is happening. Tom keene is over in new york. Richard is still here in the studio. They need to learn chinas lesson. They know they are a Manufacturing Society and are transferring to a service economy. When we talked about this earlier on is germany in the wrong place at the wrong time . Richard certainly china has a plan to get from where it is to a new place and there is a lot of strain. A lot of people have said you have to ramp up consumption. There is a sense of imbalance. Now this is an opportunity i think theres something happening on the ground. Bonuses are improving. Some of the property markets are getting hot. Beginning to warm up a little bit. So what happens with the bundestag . Ishave an economy that showing signs of weakness, but on the other hand has what sounds like Inflationary Pressure built into it. Richard they are probably not ready for stimulus yet, and central bankers are fighting that case pretty hard. The south still needs to be prepared in europe, and i think we need loose Monetary Policy to achieve that. There could be differential inflation between germany and the rest of europe, and that would be a great benefit. I dont see anyone in a hurry to do stimulus, but there are certainly fiscal tools available in germany if the slowdown becomes more serious. Tom i look at the german experiment, and they are in a leadership that is tied around the bundestag. What is the relationship of the bundestag to the ecb . That has slipped off the radar with all that has gone on is it supporting a miracle, and other dominant at the ecb . Richard i would suggest that the bundesbank, along with others, is that economic reform is vital if they are going to work as one unit. They recognize that there are also fiscal challenges, but i think picking apart the fiscal austerity story from the economic reform story has become more and more apparent. Greece is the classic example where reform became synonymous with austerity. Now i think there is recognition wit that they are different things. They have signed off on loose policy and they have to change. Guy we will talk about greece in just a moment. We will take a break, but when come back, striking a balance the greek Prime Minister works to appease the public and the countries creditors. We will go live to greece were Alexis Tsipras is outlining priorities. Guy welcome back. We are live from london. Lets get you up to speed with the bloombergs top headlines. Five years of talks finally ended with an agreement on the Transpacific Partnership. The accord covers 40 of the worlds trade and lowers tariffs on a range of products. Critics say it threatens domestic jobs, and in washington, both sides of congress denounced the deal. China remains outside. Deutsche banks former coceo has said that the emerging markets selloff isnt as bad as theasian fall off of 1990s. He sat down with our editor in chief for an exclusive interview as part of the 50 most influential people event. Not as bad as the asian crisis in the late 1990s, fundamentally different. Sovereign indebtedness is a lot lower. Look to emergingmarket corporates if you really want an area of concern. Executives fled with their clothes in tatters after workers protested, as almost 3000 plan jobs ended. Eightad to scale an foot high fence to escape. The airline says it might have to make its first forced dismissal since the 1990s. After talks with flight crews, air france and klm say they will take legal action over what is called aggregated violence. Apple has bought a startup that specializes in image recognition. The terms of the deal havent been disclosed, but it is developing technology that runs Artificial Intelligence systems on smart homes without on smart phones without needing to share as much of the users data. We all like the idea of our data being less shared. Guy it seems to becoming increasingly paramount. Toldone finance ministers greece not to expect bailout conditions to be relaxed. It comes as the countrys Prime Minister told Parliament Last night he plans to offer a loan extension and the lower fixed Interest Rate during debt relief talks. Restoring financial stability, recovery of the economy, return to growth, debt relief, and radical reform of Public Administration will fighting corruption and bureaucracy are our direct government objectives. Their implementation is the only safe way out for the country from the guardianship and bailout agreements. Where lets go to athens, markets is standing by. This feels like a very different mr. Tsipras. Marcus it certainly does. You compare him with february, the last time he gave this he talked like about the greek people giving him a mandate to rip up the bailout. This time around he is talking about the greek people giving him a mandate to implement the bailout. He is laying out his priorities and talking about the importance of getting past the first review. Maintaining financial stability, growth, then returning to Financial Markets. He helps in the first half of 2017. It is through that bailout implementation that he hopes to get that debt relief that he talks about rather than the kind of confrontational approach we saw at the beginning of the year. A big change, staking out a new pitch as a centrist. Guy he is a man that likes to deliver surprises. We had the budget in 2016 any surprises in their . Greece is under such strict fiscal monitoring by the troika that they dont have any scope to deliver many surprises. The main perimeter of the deal main parameters of the deal were all set out in august when greece agreed to the bailout. One issue we saw reported last the in the press government hoped to include a slightly softer recession this year, one. 5 as opposed to 2. 3 . Given that the first part of the data was a little bit more resilient than everyone was slightly lower recession is in line with estimates you will find on the terminal. If that turns into a bit of a trend, perhaps what we might see Going Forward is a bit of a wind tsiprass sails. Guy 2015 is certainly not a year of stability. Always a pleasure. Richard is still here. We all spend our summer getting very excited about greece. Given what is happening now, the slowdown in china, whats happening in western europe when you look back on the summer, was it a waste . Richard i think it was a wasted opportunity. There was an opportunity to engage differently with syriza in a way that would recognize that they are things that could have been done, but they wanted to stick to the agreement. Then it fell apart and obviously there was a lot of emotion. Now he realizes that they cant write off the debt. Lowering the Interest Rate and lengthening that has the same effect. Guy when you look at what europe represents we just spent most of the morning talking about a slowdown in europe. Greece is tiny. It is a fraction of what happens here in europe. Maybe we have this existential crisis that we need to think we haveut nevertheless, a brewing crisis that was beginning to emerge, and greece i look back on it now, greece felt like a sideshow. Am i misreading that . Richard it is not a sideshow, it is a symptom of a design flaw in europe. So how do you fix it . Bankruptcy procedure or fiscal union, Political Union that is hard to achieve. Guy is that happening in germany . Richard i dont think it alters the probability. I think germans clearly want to put off the day when political and fiscal unity might become a reality, because they are fearful of it. In the meantime they have a backdoor subsidy for the industry and a weaker euro. Guy so they need the weaker euro . Richard well, it is a benefit. Right now it doesnt feel so weak. But if you go back for five months it felt like a real boost, particularly to germany. Guy do we understand yet you talk about greece being an example of the problems represented in europe. Can you extrapolate that into other places . They are talking about spain, italy the crowded place that is europe. When we were talking about greece you were getting more excited saying this is just the start. Richard it is the most extreme example but i dont big you can extrapolate. There is a real estate bubble that cause trouble but there are Many Industries that are export oriented. If you had an independent story it may be a different one but it wouldnt make any difference. Those industries dont exist. Greece is in a different position to spain which have a different set of problems. And italy has very different economic profiles in the north and the south, with the lack of tax collection and political challenge. Guy fixing the Banking System in the bankruptcy mechanisms what youre saying that one size doesnt fit all. All these countries have different problems. Does the solution to greece work and have any ramifications . Richard if the overall design problem is that there is no mechanism to shuffle the money, there is no mechanism for countries to stay in the union. You have got to fix that. Guy thank you very much. Up next, what to watch we will be gauging the global economy. See you in a moment. Guy welcome back. We are live on bloomberg television. For a look at what we are watching for the rest of the day, what is going to be dominant, tom keene rejoins us. Tom it is going to be an interesting hour. We will bring you michael spence, a laureate from New York University. He will join us and we will speak about china, and particularly the risks that are out there. You see that in the struggle for all of us to figure out Monetary Policy, where the different nations are heading we will have a thoughtful conversation through the entire hour with one of our most popular guests. Im looking forward to it and after speaking yesterday to mr. Gross to get his thoughts on their sharp comments. There seems to be a dispersion of views. Tom absolutely. Guy at seems to be getting greater and greater what do you make of that . What is the root cause . Tom you are absolutely correct, and you are more than correct that it is a growing dispersion. The only thing that clears that up is a lack of uncertainty. We need to see data, we need to get to this silly december meeting. But then beyond that, it is the what if. I would go back to a number of interviews yesterday which emphasized the leverage o out there. We are still in the very left ridged trying to extract ourselves with financial crisis. Some have benefited but too many have not. We will address that with professor spence. Guy i am looking forward to the conversation. He is a smart guy. Surveillance is up next. Keep it here. It is going to be taking us through the next couple hours, a lot of coverage coming up throughout the day. There are big voices coming up. You can follow us all on twitter. Im going to leave you in the capable hands of tom keene. Tom markets turn on the dawning awareness of a fed on hold. Will commodities continue to theapse, consider china commodity privet. Michael spence of New York University will talk about inflation. Good morning, everyone. This is bloomberg surveillance. From their headquarters in new york. It is tuesday. I am tom keene. With me is vonnie quinn. Vonnie i think you need music when you say that. We had Deutsche Bank saying that there was a better chance of landing a man on mars before a normalization would happen. Tom i knew you would get a map to damon into this with the movie the martian out. Vonnie a 0 yield from