Bestselling has e selling has ebbed somewhat. David we get the advanced goods trade balance for the month of may. At nine 30, ecb president mario draghi, bank of England Governor Mark carney and bank of japan and the bank of Canada Governor will speak at the ecbs forum over in portugal. At 10 00, it is u. S. Pending home sale numbers for the last weeklynd we will get crude inventories data after oil has come off with its most consistent gains in almost a month. Jonathan that is the lineup for the rest of the day. The lineup for the next 10 minutes, if you want political theater, you will want this. The house of commons where Prime Minister theresa may will be taking questions for the First Time Since the general election, pitting her against the labor leader in the opposition, Jeremy Corbyn. T is may versus corbyn you can watch that on your bloomberg terminal. That will begin shortly. Over in the United Kingdom, the story in the world of Central Banks is the fed taking notice of rising asset valuations. The british economy in london, chair janet yellen describes the climate prices. Asset valuations are somewhat traditionaluse metrics like pricetoearnings ratios, but i would not try to comment on appropriate ,aluations and those ratios which could depend on longterm Interest Rates and uncertainty. Jonathan chair yellen is not the only one calling attention to the rally. Stanley fischer said so far, the appetite has not led to increased leverage across the financial system. Close monitoring is warranted. Joining me now is Benjamin Mandel. Great to have you with us. Is it the unofficial third mandate in becoming a little bit more official . Two is a lot as it is. It is important to keep in mind that even within the dual mandate system, one is more important than the other. So the feds objective at the end of the day is to maintain price stability over the mediumterm. Stability over the medium term is consistent with an array of tasks for the Unemployment Rate and you can argue it is consistent with an array of paths for financial conditions over the short term. What they are focusing on is the fact that inflation has been soft, Inflation Expectation measures have been coming down, and now they are willing to look through that in the short term. But that is their ultimate goal of the mediumterm. Conditions, what janet yellen was that financial conditions have not responded all that much to the initial round of tightening. Jonathan my colleague over in london pointed out we face the emergent paradox, this evolving reaction function that seems to be a moving target with a fed and other central bank as well. As you point out, inflation is getting softer but they remain on the same path. As a market participant, how are you meant to distill the message from the Federal Reserve . Mr. Mandel there is a lot of things in motion. Raised, which, judging by Economic Conditions is actually very low right now, you look at where inflation is. It is not that far from 2 . When you look at the Unemployment Rate, it is below what most economists consider to be the natural rate and the fed funds rate at one is looking incongruous. Economic conditions suggest something probably over to right now overdose go right now and we are playing catchup. There is a Balance Sheet policy where they are determined to start normalizing and sent into the background as this whole thing unfolds. At the moment, it is more important to signal that you are not on a deterministic path necessarily but that you are committed to the path you set out on in terms of rates and the Balance Sheet. Alix just to pick up on what you are talking about, look at financial conditions versus the current rate hike cycle. You see the hike cycle pick up but financial conditions are loosening. Inflation has really picked up so obviously, that is causing an asset mispriced in the market. That is what bankers are talking about. Where is the biggest mispriced in that divergence . Mr. Mandel that is the question we grapple with all day long. Mixedrkets telling us messages. Our equity markets reflecting the fact that growth has picked up and is honest a high and the fact that we are slowly moving through a supportive environment for risk assets or bond markets telling us something. We are ok with bond markets reflecting slightly lower upside risks on real outcomes, slightly softer inflation but the trajectory is still the same. Probably, a gradual pace of tightening in terms of Monetary Policy but i dont think we actually see a mismatch. I think both are actually right. Alix but when you look at earnings yields for the s p versus the u. S. Treasury. It is about that, so people who are bullish tend to make that example, the earning deals are higher, do you buy that principle . Equitiesl i buy that are attractive now in spite of high valuations. U. S. Equities. And globally. U. S. Equities are overweight in , but we areiews looking at developed markets like japan and emerging markets like higher beta markets. What what chair yellen was saying was valuations are somewhat rich. She has a point if you look at the s p, compared to what it was on the end of the last market cycle in 2007, it is 10 higher than it was back then. Should care about what valuations are telling us. In this instance, i dont really see a negative sign. Valuations are not a brick wall. He wasdfather, when driving, used to say red lights are not a brick wall. Alix wait, is that true . I just got my license. Mr. Mandel im not actually saying disobey the traffic signals. But the point in terms of valuations is that valuations that are high are not in and of themselves the source of vulnerability. Look at a decent back row a decent macro environment and decent fundamentals and a slow Business Cycle driving things gradually higher. David valuations being high may be an indication that there is onital misallocation going because of the lenient Monetary Policy which must be the concern of Central Banks. They are causing bad decisions to be made. You mentioned priceearnings ratios . It is not just stocks but there are other valuations. What do you look at to determine whether they are bad decisions . If you want to talk about relative valuations, spots are a little bit extensive when you look at what is driving bond yields, the driven bond yields being by Balance Sheets, the term premium, what investors are being paid to hold, that is extremely expensive. Look at what are the relative distortions in terms of valuation, i look at the term premium and the fact that for the u. S. , it is negative and you have to start adjusting as Central Banks adjusted Balance Sheets. We look at asset allocation, we in positive on stock runs part reflecting an environment for equities and in part reflecting that Government Bond yield will rise. Jonathan the horse has halted. He japanese are buying etfs president draghi has been buying corporate debt. We are seeing very counterintuitive moves versus where the economy is actually going. Look at the treasury curve. It is steeper. There is no data that suggests it should be getting steeper. What we have is president mario draghi taking a step back. Maybe remove qe. So how are you going to handle markets over the next couple of years as the Central Banks try to normalize . What you think is going to happen, what is meant to happen, probably wont happen. Looking at traditional indicators of the Business Cycle can be misleading. The slope for treasuries is pretty flat by historical standards and it has been coming down. I would argue that is not the yield curve telling us growth is going to be lower in the future. That is the fact that central and pushe in en masse down the term premium and pushed down bond yields. That is the distortion we are unwinding. That is already in place. Jonathan good luck, right . Benjamin mandel will be sticking with us. In the house of commons in the United Kingdom, Prime Minister may is taking questions from the opposition of from the leader of the opposition about the tragedy in north kensington. You can watch that as it plays out on live go on the bloomberg terminal. Alix coming up, continuing the central bank conversation, a major gathering of leaders from the ecb, eoe, bank of canada, and boj. Draghi, will he take a pause after yesterdays speech . This is bloomberg. David this is bloomberg. I am david westin. Senate republicans took a tactical retreat yesterday when Mitch Mcconnell decided not to go forward with plans for a vote on health care this week. He said he needed more time to get a majority together. President trump summoned senators to the white house to talk things through. After his meeting, he said things were close but not there yet. We are going to see what we can do. We are getting very close. But for the country, we have to have health care. It cannot be obamacare, which is melting down. The other side is saying all sorts of things before they even knew what the bill was. This will be great if we get it done and if we dont get it done it is just going to be something that we are not going to like and that is ok. David joining us now is chief washington correspondent kevin cirilli. Even before we came on the air, the president came out with a new tweet in which he said some of the Fake News Media likes to say that i am not totally engaged in health care but i know the subject well and one victory for the United States. The president has this in hand, where do we go from there . Kevin it was interesting in the clip you just played, behind him, senator Lisa Murkowski from alaska, who has emerged as one of the moderates that he needs to win over, people like her as well as senator susan collins, and all of that is just really kind of illustrating this division amongst the ranks of the republican party. They dont have the votes. Finding themselves after the july 4 recess and they are going to have to wait. Of where this goes from here, there is increasing pressure from the sources i am speaking with on capitol hill to not just move on to some other type of issue but to Start Talking about some type of other substantive policy issued to put forth a plan. Dont have several key plans on a host of different fronts including tax reform. David we have that one page outline and as best i know, that is what we have. How will time help this situation . It seems like if they make it softer they lose the conservatives but if they make it harder they lose the moderates. I spoke with several republican consultants yesterday from the conservative wing and the moderate wing and they told me these lawmakers are going to picnics and family barbecues and they are going to be talking to their constituents. This is a tough sell for conservatives to do this obamacare liked but for moderates it is a tough sell because of entitlement programs. It cuts for Senior Citizens and planned parenthood and lack of funding for opioid addiction programs. A host of things that all of these republicans campaigned on not in that bill. David sounds like a long and hot summer for me. Alix for more, we are joined by Benjamin Mandel, global strategist. We were talking about how you deal with Central Banks over the next five years but how do you deal with d. C. In the next 12 months . What is your base case for tax reform and health care . Mr. Mandel we have had modest expectations. Part of that reflects a deeper issue, which is that there are significant constraints to major initiatives in washington including tax reform and Health Care Reform and they are actually independent of who would be in the white house right now. So for example, one of the constraints is that you need a long runway for these reforms to thenacted going back to last major tax reform in the u. S. In 1986, under reagan. That took four years of recovery strength growth coming out of the doubledip recession in 1982 through 1986 for that to come to fruition. The currentk Business Cycle is at risk right now, but i am also realistic in the sense that i am not sure we have four or years more to get things done. The runway is not there. The second constraint is that fiscal policy is not a blank check. Going back to the 80s, those reforms were built as revenue neutral and juries in on that. They were not revenue neutral is not the revenue today to run that experiment. All of these constraints put a lot of inertia into the system high dont have very expectations in terms of the timing or the magnitude of major initiatives coming out of d. C. Smallobviously, you buy cash or financials, you along the dollar and short bonds. That was the trade. How do you think about those Asset Classes now . I know you like u. S. Equities but the small caps and financials, if you have to discount anything in the sea mr. Mandel you have to put weight on a factor you think is important. Story. The Global Growth there is a Business Cycle story and there is a policy story. I am saying we are treating the policy story as somewhat neutral right now. As far as Monetary Policy on a tightening pass, fiscal policy may happen next year, but we dont have high hopes for that so you are putting more weight on the growth path and the Business Cycle path and where we are in the cycle right now is gradually migrating from the middle of the Business Cycle into the late portion of the Business Cycle. So you ask, what is your policy, itr fiscal is for the late stage in the Business Cycle. You like higher cyclical markets including equity markets outside the u. S. You are still moderately overweight in the u. S. Market for exposure to those risks that could be heavily discounted, but you are under way you are underweight. Jonathan with the administration, goals of getting gdp up to 3 , gdp is going to have two in front of it and a very low singledigit the next couple of years. Are you along with that . Does that mean we will not get that late stage knelt up in u. S. Growth . This is the 2 economy. Mr. Mandel it hasnt really caught on yet, maybe you can help me with that, but it has been a 2 economy in a wide array of scenarios. Recession, a disappointing 2 , 2 in 2011 and 2013, we have a euro crisis. E. M. Was having its own version of a recession, so what is your forecast for this year . Is it 1 or 2 . Mine is 2 . We have seen the prospect for a future a huge knelt up. David coming up, as Senate Republicans try to pick up the pieces of their Health Care Bill and find a majority, we are joined by michael leavitt. Former secretary of health and Human Services. Live in new york and washington, this is bloomberg. This is bloomberg daybreak. I am emma chandra with your business flash. First concession to activist investors. Euros largest company, announcing a buyback plan to reduce stock prices. It aims to increase leverage even more. Phillips has agreed to buy american heart maker. Health care is phillips largest business. The Dutch Company has been waiting for acquisitions to expand it. The cyber attack that started in europe has now reached asia. The virus has infected businesses, and government computer systems. It is demanding users pay 300 in cryptic currency to unlock each successive computer. That is your Bloomberg Business flash. David for more on that attack and the broader risk, we are joined by cybersecurity reporter mike riley. But you have you here. Take us through what happened as far as you know yesterday. Mike yesterday was when it got unleashed. It looked like an attack that started in ukraine and spread quickly across the globe. Kind of unevenly, but it hit shipping lines and a Major Law Firm in the u. S. , a russian pipeline company, it hit a lot of government websites and computers, even if he ends in ukraine and now it moved to asia. It spread unevenly. Why is it so uneven . David another question is why ukraine . We had a tax on the power grid in the last year or two and that was attributed to russia because they had geopolitical reasons to attack ukraine. Why is ukraine such a focus . It might mike be a political message, which raises the question about the motivation. This is coming up on a major kind of day in ukraine to celebrate its independence and the timing of it suggested this was something more than just a criminal attack. It is disguised as a criminal attack but why does it spread quickly and who is behind it . Ukraine would point the finger at russia but a lot of Major Russian Companies that hit as well. Jonathan you mentioned the objective of the attack. If it is to raise money, they are not doing so well. Compare that to the last one. That is what happened. They hold ransom with your computer, they ask for crypto currency, some people pay out and some dont and when it comes to the grand total, what does it come to . Mike it is a Good Business if you are a cyber criminal but this kind of ramp do effectivet business. It raises a