Alix they were never gone. David timeout for your morning brief. It is joel jobs opening data. The u. S. Treasury will auction off notes. Disney reports Third Quarter results after the bell today. Get update on what is making headlines outside the business world. We turned the emma chandra with first word news. Emma on capitol hill, republicans are discussing a compromise when it comes to overhauling the tax system. According to people familiar with the matter, lawmakers are talking about mixing permit revisions with temporary rate cuts for individuals and businesses. Changee trying to the tax code without adding to the federal deficit. President trump plans to wait a week before going ahead with the trade investigation of china. According to an administration official, that is because china supported those United NationsSecurity Council sanctions against north korea. The white house is still concerned about possible chinese violations of intellectual property laws. Countrys moste senior judge says the government must provide clarity on postbrexit laws. The Supreme Court president said that lawmakers must be specific about eu legal decisions and how it will continue to affect british law after the split. Global news 24 hours a day powered by more than 2700 journalists and analysts in more than 120 countries, im emma chandra. This is blabe bloomberg. Alix the dow has hit 35 record highs already this year. Is it still too good to be true . Many renowned investors believe so. I actually do not say its time to get out. I dont say anything about getting out. I say its a time for caution. Instead of buying low and selling high, you are buying high and crossing your fingers. There are some warning signs here that are getting darker. We have a bond market bubble, which is now in the process of the flooding. Deflating. Its got a way to go and it will affect the outlook quite significantly. At this point, i would be moving toward the less risky. Returns are going to be lower. If we have more of the same for the next year, the markets are going to be quite a bit lower. If they will be quite a bit lower. Quite a bit means what . 15 . Alix joining the ranks is the double long capital ceo saying this is not the time where i can buy anything and not worry about the risk of it. The time to do that was 18 months ago. He is worried about junk bonds and emergingmarket debt thats overvalued. Joining us now is a global strategist. How do you interpret all these bigname investors coming out and warning for caution . we are definitely past halfway in this low Interest Rate, steady growth, low volatility rally where money go searching for yield. Raising ratesen incredibly slowly. We are reaching the point where the European Central bank is going to taper bit more. We will get to the point where the fed starts reducing the size of its Balance Sheet. We cannot get infinitely the same kind of news with this kind of heavily correlated low volatility move going on. Bigt of the folks who are names who may be got it right at the beginning of this rally are beginning to say, look, this cannot go on forever. That is selfevident. Happens tost is what the kind of spread product and particularly the bond space and emergingmarket corporate debt. The big beneficiary of investors being crowded out of the u. S. Treasuries by the fed when they built up that quantitative easing armory. What happens to those yields when those Balance Sheet strength . We dont know that. If rates are low and inflation find that we may go to a world where there is not something a disaster but harder to make money. Alix you hearken back to what was written today by a big treasury bull. Youre not getting compensated for the amount of leverage and the amount of risk that you taking on. Do you feel like its going to be an event risk or is it going to be a slow grind as you talk about the normalization . Kit i think its more likely to be choppy. There will be days when i come into the office and im really sort of panics for can. Like 2006 or 2007 in the sense that we are not going to get Interest Rates up enough to cause major damage. If i look at where money was going, i dont know the kinds of things that mean beneficiaries could you have very strong unsecured credit in the u. K. You have a big revolution of money going into cyber currencies. We dont have the same excesses as we had 10 years ago. Once. Looked at modeled it will be choppy and at some point we will run out of steam. Im still really struggling to see a catalyst for things that are going to really scare me if we dont get inflation. David maybe not a big downturn, but if there is this choppiness or slow grind downwards, where do you put the money . People are looking for yield. Do you go longer duration or less to liquid assets . What do you do as an investor . Kit investors are going to be tempted to look for yield. Let, im old enough that what i would like is a little bit higher real yields to be able to put some money in long durations. By not driven to excitement fortysomething basis points on 10 year inflated securities pick. Can i get something well on the other side of 1 please before i pack up and get my pension working for me . Thats the trouble. Theres not a lot. You can see that we are still buying property and still buying safe assets to protect against inflation. I think its just going to be quite difficult to get the kind of returns we have had in the past. Is even missing out on the last 10 of the body that could be quite painful. David you suggested Central Banks have really contributed to the situation because of the enormous injection of liquidity what. What about the demographics . You have an aging population putting more and more money out for longer time spiri. Is that driving yields down . Kit unless you get inflation. If inflation does not average more than 2 , if inflation stays below 2 most of the time, and of Central Banks continue to believe the right pace for Interest Rates is for them to peak not much above that, then why would i be if someone offers me 3 , why would i be just leaving at them and a mad way and saying yes please, can i have some of that . That is the reality of some people who need security in the longer run. I think what changes everything is inflation. Right now with the Way Technology goes in the way the if il labor market goes, can see how we can generate meaningful inflation. Alix the other question becomes where is the missed price . Theres volatility across the board. You have purple for treasuries and the blue for stocks and volatility for upper fx. We know the story. At multiyear lows, we are questioning what is going to take it up. Fx has the best chance. What do you say . Kit fx is a relative price and it has me either apartment only bullish or bearish. You will get an adjustment. We have seen now from this world of the European Central bank keeping the euro incredibly weak with policies designed to do that. If they take their handoff the currency for two minutes, suddenly its much stronger than anybody thought it would be an awfully goes. And often goes. You get the volatility coming out of the fx market. The bond market is where the source of real potential movement is. If we find ourselves with the same kind of thing. I genuinely dont know what happens to the High Yield Corporate Bond Fund it and the dollar denominated emergingmarket debt market when we start seeing Balance Sheet reduction in the united states. But its the bellwether for whether we are going to see volatility pick up more widely over the course of the next nine months,. David to what extent do Energy Prices affect this . Rick rieder said with energy coming down and staying relatively range bound, we do not see spikes in oil. That was with rapid inflation and volatility. Is that right . Point. To a the big driver of inflation was the ability of the labor market to make it persist. We all does have less money for Everything Else in the inflation is low. Certainly what is true and where he is right is that where we are today is that we have this long time of oil prices and the they come down. Its harder to see oil breaking out of a broad range because of the Way Technology is making us more efficient and climbing as Global Demand increases. That is kind of the standoff. That is another source of volatility. It is a source of comfort across the whole of the commodity sensitive world that this helps the resource producing economies , which not all of them, but in many cases, kind of emergingmarket economies. David kit juckes will be staying with us. Coming up, we will be talking with sir Martin Sorrell. He will be joining us right here. This is bloomberg. We were telling a story and inflation was going to gradually return to target, and especially on this measure, you can actually see the gradual return to target. It seemed to all be going according to plan until we got this year. Off number has fallen way at least on the scale that you have got here. This number has fallen quite a ways off. David that is what st. Louis fed president jim bullard had to say about the fading Inflation Numbers yesterday. The minneapolis fed president had some with thoughts on the subject. Still with us is kit juckes. You referred to inflation and the mystery of where inflation went. The real question is is this likely to affect the trendline of rate hikes by the fed . Kit i think it provides the fed with maybe the wrong word, but may be an excuse of not to add on any given day. Theres always the field that the path of caution is to be too slow and hiking rates and not too fast. If they come up to the runup of any given meeting and Economic Data is a little bit soft or theres a little bit of turbulence in the world, they wait. That is why they only raise rates when the markets have completely prepared for a rate hike. In ands a 99 priced then they will deliver rate hikes, but they are not. They are very easy to dissuade. Last year we had brexit in the u. K. We had the volatility that came out from china at the beginning of the year. They did not get any rate hikes for most of the year. I think that is what the lowflation grants them. It is not going to stop a really slow normalization of rates. It is going to mean at any meeting you have the option. You have the option of saying lets not make things on beer the need to the while we start introducing the Balance Sheet reduction program. Lets just pause for a bit and see how that goes. David as you say, give someone an excuse if they dont want to raise rates. What if it is the reverse . What if they want to raise rates for a whole bunch of reasons . Would they be weak enough to prevent them from raising . Kit they dont have to be. Im going to flip it around and say, what it stop the European Central bank from normalizing rates if there was a debate that said rates are too low and we should be getting them low we dont like them down here . You might see that happen. You might see a different dialogue despite the inflation tha data. For the fed, it creates a consensus in favor of getting rates up any faster than the have been going. Thats probably the right way to describe it. David finally on the subject, both fed president s said we dont think gradually rolling off the Balance Sheet will make one bit of difference. Do you agree with them . Kit i hope they are right. They are talking a good game. Its hard to be as confident as that, but i think the right thing to do is put your toe in the water. If you did think it was going to disrupt markets significantly, frankly why do it . Why not leave the Balance Sheet for another five years . Its not completely clear to me that that changes anything. Testing the waters on a day when all is well the world is not stupid. If it did disrupt the market, the pace at which the Balance Sheet shrinks gets pretty slow. Alix kit juckes is sticking with us. David, what i dont get is the Balance Sheet reduction, what does it have to do with growth . I dont get that in my mind. David they are two separate things. I think that is what they were saying. Alix fair point. Coming up tomorrow, Kathleen Hays will be interviewing James Bullard. We know he is a dove, but we want to get into details on his call on inflation. This is bloomberg. Emma this is bloomberg daybreak. Im emma chandra with your Bloomberg Business flash. Billionaire Business Investor bill ackman has taken his next step in the fight to shakeup adp. He has nominated three people to the board including himself. He says he will hold a public webcast next week to discuss ways of unlocking value at adp. And south africa, the parliament votes today on the motion of noconfidence in president jacob zuma. Ballot will be a secret decision, increasing the chances of his ouster. The main opposition filed a noconfidence motion after he fired finance minister cap and gordon. Catherine gordon. David for more on that important South African vote, we our reporter in the johannesburg bureau. . S he going to win or lose arabile thats exactly what everyone is wondering coul. 201 votes are needed. Equations have been put through and 50 members from the Ruling African National congress would need to vote in favor of ousting the president jacob zuma and voting them with the opposition members as well. It is an interesting one. Expectations are really going back and forth. The anc says they will toe the party line. Whether that will be the case with some women to vote with our conscience is going to be a different story of course. David they may say they are going to toe the party line, but they will not know who did and didnt. Doesnt that make a big difference . Arabile it makes a very big difference. That is why the speaker of Parliament Says she put the vote forward and that it can be done with a secret ballot. She fears members of Parliament May be intimidated to vote in a particular way if this is not a secret ballot. She says it does not set a president president. This may be the one opportunity that the opposition members have to oust the president. President jacob zimmer has survived motions of noconfidence. This is the eighth. The reason why this one is so special is because it is a secret ballot. Alix we will be watching that at 8 00 eastern. From johannesburg, thank you very much. Still with us is kit juckes. Talk about volatility and its the overnight vol for the dollar rand. We have not seen that spike since early may. What happens to the rand of the vote goes through and he is ousted . Kit the rand rallies. That is clear the markets mind. The market thinks he is unlikely to be ousted. You get a bigger reaction if he is. If he isnt, we will see the rally in the rand gain further momentum were it to happen. Alix i we looking at a break and 13 on dollar rand . Kit im not sure there any magic numbers. Yes, we probably are. If you look at where the rent has gone this year in the context of global markets, it has underperformed the mexican peso. Its cheating, but it has underperformed the mexican peso by a significant margin. Money is looking for positive stories. If you get markets excited about the idea of the future of South African democracy, than i think theres quite a lot further for the rand to go. Alix south africa is a great example of the good and bad of emerging markets. , if itother hand doesnt, theres a potential downside. What areas of emr the best calibrated to take on risk . Kit one where evaluation is attractive and where yields are good in that context. South africa has continued to benefit from attractive valuation. Its also were saying that the appeal at the moment now is that theres no sense of systemic risk. Markets, you in get an event in one country and it affects Everything Else. That so far is not happening at all. If we get a selloff in south africa, it will not cause mexico or brazil or turkey or russia or india to miss a step. I still think that mexico has been the darling. It is the strongest performer. That is not a spence of yet. Turkeys cheap. When the party ends, turkey is where its going to end most. It is still attractive at the moment. ,ou cant go short on brazil but im not quite sure i could bring myself to buy it. Before we to help me get excited about russia again. David you mentioned mexico and the pace of. We start negotiations on nafta next wednesday in washington. How sensitive will the peso dollar b to what goes on in washington next week . Kit it still must be. If you look at the selloff from just before the u. S. Election and to the end of the year and the skill the rally, i mean your total return so far you today buying the mexican peso and selling for 20 is an incredibly big move. Thatreally down to a sense the nafta negotiations wont upset anybody. We must be sensitive. David kit juckes will be staying with us. Coming up tomorrow, facebook coo Sheryl Sandberg joins emily chang for an exclusive interview at 5 30 p. M. Eastern time, ironic given whats going on at google. This is bloomberg. This is bloomberg daybreak, i am alix steel. Dumb by three points, Small Business optimism crusted in july. Down joes dow jones flat on the day. We have had a lot of auctions coming, a lot of supply. Will there be the demand . In other asset classes, and watching what is going to happen with dollar rand, down. 5 . Will it move below 13 . Eurodollar a little stronger on the day, and aluminum, threeyear high, up almost 2 . It is not about oil today. It is really about aluminum and strength from china. Lets get some headlines outside in the business world. Emma a draft of a new report ays