tv Bloomberg Surveillance Bloomberg June 28, 2016 5:00am-7:01am EDT
francine: sterling halts its decline, europeand. leaders meet in brussels. cameron has his first brexit encounter with his old allies. kang and brexit will sit down with mervyn king -- we will sit down with mervyn king. i am francine lacqua in london with tom keene in new york. the markets have seen a little
bit of a reversal as they try to figure out what comes next. a lot of people saying this is not a floor but a temporary reprieve. was talking to david westin earlier about the idea of financial markets with a bounce today but i do not know if the political markets have a bounce. you see the jeremy corbyn conference. by no means do i feel and all clear. francine: when you speak to traders and market participants, it is very clear that they believe central banks will once again step in and that is why we are seeing a little bit of a bounce. tom: can i say quickly how cool it is to have alan greenspan one day and mervyn king the next? we are honored. francine: but get to the bloomberg first word news. british prime minister david cameron meets with his fellow european union leaders today for the first time since
last week's vote to leave the eu. he will be pressed on how he expects the u.s. to trigger article 50. ruled himself has out of the race to succeed cameron as prime minister. he was the one time favorite for the job but he writes he has become too divisive after last week's brexit vote. he campaign for a remain vote. tag will be price higher than expected. a settlement will be filed today in a court in san francisco. vw will agree to pay more than $15 billion, $5 billion more than previously reported. drivers will get up to $10,000 per car for their troubles. turkey's president is on a diplomatic charm offensive,
ending their 60 year estrangement with israel and moved to improve relations with russia, apologizing for their shooting down of a russian warplane. a supreme court ruling is expected to improve abortion access across the u.s. it struck down a texas law that forced many abortion providers to shut down in the name of health. it is likely to do similar restrictions in other states. global news 24 hours a day powered by more than 2600 journalists and analysts and more than 100 countries. tom: let's get to the data right now. finally a bid, that is the headlines with futures up 195. the euro a little bit of a bid and that shows some of the nuance. the yen does not move.
there are some real dynamics in the spread market. the vix comes in 2141. what a wacko fix yesterday. stronger, 1.3307. there is the dynamics of the yield curve. francine, what do you see? francine: i am seeing pretty much the same things. european stocks rebounding as investors are speculating from our policy help. you, this isw probably not the stocks europe 600 today. i do not believe they are down 20% but overall this is the fix index. -- vix index. there is something wrong with my board. do not freak out. tom: can we blame that on marissa the intern? probably an intern screwed up
the data check, right? francine: it was just a one-year data check. tom: our interns are only with us for like four days. let's go to the bloomberg. when in doubt, beat up on the summer interns. the difference in the two-year and 10 year yield, some of the gloom crew says this is a recession. what i would suggest is yesterday was quite odd, a flatter yield curve because the flight to quality with essentially the two-year pegged and the 10 year at a lower 10 year yield. it is a twisted yield curve. francine: i picked out something a little bit twisted as well. showing up tois meet his old allies in brussels. .his is overall market cap the u.k. in white, the japan -- japan in blue.
chart, thesey this are various events. cameron comes into power, we go into negative rates, and no u.k. market cap is 15% smaller than the french-german combo. tom: francine lacqua with the ipses, the ovals. francine: andrew wilson now joins us. ea.s in charge of p.m. we talked a lot about the prospect of special banks -- central banks and brexit. do you think the markets will get uglier? andrew: we have had a pretty severe market reaction and today is an example, markets have gone down a lot and things may be that bad.
the level of uncertainty is incredible. we have had a repricing across sterling, equity markets, and other markets not just in the globe, youross the were talking about the two-year and 10 year in the u.s. saidrobability of the moving in the near term has been diminished. this is not just a european event, this seems to be a bit of a global event, generally keeping rates lower for longer. francine: that means more negative rates? te saw the 10 year u.k. gil yield below 1%. how far can they go? andrew: i think it depends entirely on what happens to the u.k. economy. is likelyow the u.k. to go into a recession or certainly a material slowdown from the uncertainty.
i think ceos everywhere will be waiting to see what the rules are they will be acting on. if you look at the consumer, there is no doubt this fall in sterling will result in upper push back on inflation. it has wealth affects. all of that is going to depress consumer activity and depressed the economic activity. the fall in the pound offsets a little bit. is going to be softerto result in a u.k. economy and likely the bank has to raise rates. -- lower rates. tom: andrew, we have mervyn king coming up within this hour. there are some scheduling issues and we hope to bring him this hour. he says it is the young of today who will suffer from the next crisis.
i believe we are at the next crisis. what does the city of london, what does global wall street need to do to reattach its faith? your goldman sachs is one of the great pinyon us for the american public and i would suggest for the european public. how are you guys going to reattach yourself to the use of the united kingdom and europe? andrew: we would like to think we are pretty attached. we have a lot of summer interns and i was addressing our new interns just half an hour ago so we still have a lot of people coming into goldman sachs. there is still a lot of interest coming into the city and the financial sector. our work forcef european nationals, about 30%. that reflecting some of the greatest concern, what does this mean for my future in the u.k.?
those are the issues we are trying to work for now and that is going to take time. it is a high level of uncertainty. tom: help me with the decision tree. i want to clarify that mr. wilson is in asset management, not trading or investment banking. are you going to move bodies out of london? andrew: it is too early to answer that question. we have not even triggered article 50 yet. once we know what the rules are we can make some decisions and i think it is almost irresponsible now to make decisions without those rules. is, we simply do not know and until we know the answer we are not going to make decisions. , thanke: andrew wilson you so much. "surveillance," we speak with mervyn king coming up. we look at the markets and the
francine: welcome back. we continue our brexit special but markets today, a little bit of relief. they certainly seemed to be looking a lot at what central banks can do. let's get to the bloomberg business flash. nejra: the biggest manufacturer in the u.k. says the brexit vote will have no immediate impact. rolls-royce is sticking to its saycast this year and they underlying profit will be close to break even in the first half but business will pick up in the second six months. a stake in the young brand in disagree with
their proposed $10 billion valuation. llama operates kfc and pizza hut in china. airbnb is suing its hometown, filing a suit against san claiming the rental restrictions violate protections of internet companies and its speech rights. that is the bloomberg business flash. tom: thank you so much. she has given us sterling coverage. get it, francine? coverage from outside westminster, just superb. anna edwards has migrated toward the tower of london. insight onnk your what london is going to do is really important.
are we going to see a london exit from whatever remains of the united kingdom? anna: it sounds like a ludicrous question and it is and is not. standing at city hall, the home of the mayor of london in this big city. he has been giving a speech today talking about taking back control. he is trying to reposition. the mayor of london was fighting in the corner of remain and he wants to get more control of decision-making for london. he is using the results of this brexit referendum to push that her member that 60% of londoners voted to remain ers voted tondon remain. he is not talking about full on independence or london cutting
its ties from the rest of the united kingdom. a second referendum may be on the terms? he has a labour party politician as well so he saw what was happening at the top of the labour party. francine: what people that live in london is wanting -- want to know is whether this can be overturned and it will probably be unlikely. what do we know about financial passporting? it is probably up in the air. right of the the british financial sector to sell its products around the eu. in the wake of the vote there is very little known because we do not know what kind of trade arrangements will be made and this divorce negotiation that is itng to start at some point, has not even really started in earnest, as your last guest was saying it is difficult for banks
to plan where to put staff if they do not know what space in london the banks will have compared to the rest of the european union. francine: it is not conceivable -- on conceivable they would have to play by the eu rules. wilson, ceo of goldman sachs is still with us. sense trying to get a from the financial committee is whether they want an article 50 triggered right away or whether you just want to wait a little bit and see how things pan out in the hope that the outcome would be better. andrew: i think the longer it takes the more certainty. i think time probably is helpful in this decision because we do not want rash decisions. the morer it takes favorable it is i think. clearly isassporting
critical to the city of london which has been a financial capital. there is no reason to believe it will cease, it is just the nature of what functions can be performed here that remains incredibly uncertain. tom: let's do a financial question. bonds are priced to perfection. for faith and credit bonds are priced to perfection. what do you do for duration and what do you do if you have to sell them? is cash king? andrew: i think the question is around economics. if the economy turns down enough , i would still say they are a safe haven asset that people go to and we have seen that in the last three trading days. yields have come down significantly and that tells us are still seen as the
safe haven asset. as the economic picture becomes clear through the next 18 months to two years, we will get a better sense on should you be moving into riskier assets. from a dollar perspective, u.k. banks look very cheap. the question is, do they get cheaper? i think these environments create opportunities for investors. in the short term i think the bond market is going to stay relatively big. oris going to be 12 months so before we start to get a clear picture on the trajectory of u.k. growth. francine: andrew wilson stays with us, ceo of goldman sachs and be a. we also speak with the mayor of london, sadiq khan, and possible
financial footing as well as its national confidence. a smaller and more unified european union now functions in a more coherent fashion. .ith us is andrew wilson hunted el-erian basically says that however this would be the best possible outcome, not that likely and they would have lost so much influence in the global world. on a grade of one to 10, how much do you worry about the future of the u.k.? you are more on the optimistic side, that can things turned ugly if article 50 is triggered at the wrong time? i think it is the whole negotiations and this is what is unsettling markets, the uncertainty around that. exactly what role is the u.k. going to play in europe? it is still the biggest trading
partner by a long ways to that will not change overnight. there is going to be so much focus around the access the u.k. gets. general, europe is pretty good at negotiating things so i would not rule out the possibility of the u.k. staying on the fringe of europe but the terms and conditions of that and what that environment looks like , it will be very important. financial passporting, that will be very important. i think the point he makes about , thee becoming more united leaders in europe will realize this is a real threat to the eu and that they need to change policies. you could argue the old austerity push might need to be phased back a little bit because it is a clear vote against the establishment, against that austerity measure. tom: i believe there is a now
one-way bet on weak sterling. all of my radar is up. as portfolio managers, du hedge currency? do you get under the table? andrew: given how far it has fallen, i think you are starting to make a case that sterling is becoming more of a two way that 1.30, there is always a risk. markets have a tendency to overshoot but somewhere around these levels, i think it is a one-way bet. tom: andrew wilson with goldman sachs. coming up, willis sparks of eurasia group. ♪
investment on the international relations of a disunited kingdom, we continue our coverage on what is a political day with market doing better. jeremy corbyn front and center. ecb president mario draghi is calling for a global policy alignment to lift economic growth. he spoke at the annual forum in portugal. >> monetary policy has inevitably created destabilizing spillovers as well, especially when business cycles have been less aligned. the large exchange rate fluctuations into a major currencies and the pressures some emerging economies have experienced from capital flows are testament to that. this is not so much a result of the measures central banks have employed but rather of the intensity with which they have
had to be used. he did not mention the u.k. decision to leave the u.k.. leader labour party jeremy corbyn faces a no-confidence vote today. massrexit vote prompted a exit this from his campaign. the implication is that he does not have what it takes to win a general election which could happen sooner than expected. auth korea is in -- planning $17 billion fiscal stimulation package. the south korean government cut its growth forecast for this 2.1% -- 2.8%. to the pentagon is looking to ramp syriansining for battling the islamic state. last year the training plan was abandoned.
the washington post says the u.s. is training specialized fighters rather than ordinary ground troops. global news 24 hours a day powered i more than 2600 journalists and analysts in more than 150 countries. francine: we spoke earlier onto willie walsh. ryan chilcote spoke to him. 2016had to lower their profit targets and talked about currencies. the impact of the vote to leave the eu principally affected currency so we have seen the collapse of the pound against the euro and the dollar. in europe and what we have is a translation impact so our british airways translation is translated at a
completely different exchange rate. we are down in our profitability. we also have the impact of a weaker pound against the dollar and as you know, the dollar is the currency for feel and aircraft related so now we have higher expenses as a result of the weaker pound. there are two significant impacts on our profitability. you break that down starting with the weakness in the pound and how that affects your cost, explain that to me? wholeyou look at iag as a we are short about $2 billion so we have 2 billion more dollar costs then revenues. that is driven largely by the price of oil. we are saying the price increase in recent weeks and months so our fuel bill is going to be higher but it is also going to be higher because the pound and the euro have both weakened
against the u.s. dollar. that no doubt will have an impact. poundif we have seen the move from $1.46 to $1.33, is that the hit you expect to take? >> it is unknown where the pound will stabilize against the dollar but clearly on friday we believed it was going to take a significant hit. the pound closed stronger on friday than we expected but weakened again yesterday. going view, the pound is to be structurally weaker against the euro and the dollar and that clearly has an impact on our business. ryan: and it has an impact on consumers and what they do so you have talked about weakening and demand. how do you see the demand picture for the rest of the year? >> the area we witnessed the most softness was u.k. corporate's and that is down to the uncertainty around the vote.
prior to the vote being announced i think a lot of u.k. corporates where pausing as they assessed the impact. now that the u.k. has voted to leave we expect that to continue and had the vote gone the other way we would expect to see it bounce back. francine: that was a really interesting interview because we have seen the fallout in some discretionary consumer goods. yesterday we heard from easyjet saying it will hurt them. when you go on holiday, the exchange rate will hurt you if you are a british citizen and decide to go to europe. the first thing to cut down as things like holidays an airline ticket. tom: it cuts the other day as well because you have people coming with empty suitcases to harrods. i did that last week. what i would suggest is british airways and easyjet, these are symbols of british confidence and as dr. el-erian mentioned,
british airways had this whole disclosure, they fly the beast and it has been wonderful but the basic idea is this is how you restore national confidence, with flagship businesses whether it is the airlines or rolls-royce. francine: he has done a sterling job at the helm of british airways if you look at the profits in the last couple of years. debate,ck to the brexit british airways makes a significant demand of its revenue on business. if this country is going to be hurt or hit by a recession you also lose some of those business flyers. tom: not a chance. their champagne is better than the american carriers. willie sparks and ian bremmer have attempted to synthesize last week's activities at eurasia group. speak tocap -- we
willis sparks. willis: the united kingdom has broken itself off from europe or has launched the process. it has reduced its info ends. it is essentially a bridge that has been lost between the u.s. and europe so it is going to add to the fragmentation. 12/31/15, you guys hit the ball out of the park suggesting transatlantic tensions were better than anything else. how does the united states of america help europe as a whole he'll through a three or 10 year process? willis: i do not think we can and that is part of the issue we talked about with a hollow alliance. we are going to have to do plenty of repair work after this election. the next president, there is going to be a lot of work done to reconcile sharp political differences.
we can help them at the margins but no more than that. opportunitymy great is it hot fair or is there a sense of federalism within brussels in europe? willis: i think it is going the other way and you will see mr. juncker much less involved. i think what we are already seeing in terms of a core group gathering to negotiate with britain is, it is going to be led at the country level not the federal level so whether the germans like it or not they are going to become a more powerful force in europe. for you and i could go hours. i would suggest this idea of euro federalism is maybe july's
theme. francine: or even after that because i do not know whether it is conspiracy theories or wishful thinking that we could have a second referendum, whether this country can somehow go back on its word. even if you have 17 million people saying they want to extract themselves from the eu. if they want to become even more united in the next months, that means there is no chance of renegotiating with the u.k. because we know they do not want that. it is difficult a new how you would have referendum. it was 52-48. i think with the scottish independence referendum, i think these are long return questions. i do not think we will see another vote anytime soon. tom: willis sparks with us with
willis sparks of eurasia group as well. any number of ways to go on british companies, their fact, european companies, their effect. some of these have been hammered. michael: so far it has been a question for american companies of cell first, negotiation article 50 later. tom: this is not big companies, is it? michael: it is companies big and small. mostompanies who are at revenue risk are those who have a lot of operations there in mid-caps. two of the top three are s&p companies, in the middle some business software companies and sotheby's, the art deal broker bgc partners and ralph lauren is in trouble. the market is punishing those
seen as most vulnerable to those revenues going down. apparently investors think this is going to drive investors to eat weight watchers. genesee & wyoming is a railroad. tom: we are glad you are on set. francine: the real leader in all of this has been mark carney and the boe. we have been told the boe's allotting 1.3 billion pounds in special liquidity operations and that the banks have been 3 billion pounds, and we will have plenty more on that. this is basically the third operation to provide banks with extra liquidity. when you look at the company's most affected by brexit, it is probably not the u.s. companies or the european companies. i would argue it is the u.k. banks.
we have seen convulsions on the markets and the boe is trying to provide liquidity and stability. tom: you showed me that headline bailingy about italy out the banks. his mark carney doing that in italy -- in the u.k.? michael: what is striking to me is the amount that banks are requesting and the amount the bank of england is allotting is not that big. there are big stock declines which may indicate some trouble down the road but nonperforming loans have not ramped up for u.k. banks. so far it does not look like anybody has capital problems. they may have liquidity problems and that is what the issue is. u.k. banks have been made much stronger since the financial crisis and it is banks in places like italy that we have to worry about. francine: we have seen of course
in the last couple of minutes this bid that bankers have a new year to fear. 2008 is a way of putting it very simply. in the last couple of hours many of these british banks recouped losses but over the three days they have been down 30% overall. if you go to the crux of the matter what people want to find out is whether the u.k. banks will still have access to the single market. this is what we call financial passporting. there is a concern out there that they will be subject to eu rules without having a say so they will still be subject to it without having access to the market. that would be the worst case scenario. michael: it does not seem like a good idea for the europeans to do that because the u.k. banks have the most highly capitalized operations and are the healthiest, not just british banks but american banks
headquartered in the u.k. it is going to be an interesting negotiation to see if europe wants to cut off its nose despite its face in that particular case. thank you so much for that update -- francine: thank you so much for that update. coming up, we hear exclusively from the mayor of london, sadiq khan with anna edwards. ♪
tom, we have had some pretty harsh words coming from different parts of europe. angela merkel addressing the bundestag and we really had a showdown between jon klein yunker and nigel farage. is taking to the floor because he says he wants to renegotiate. cker accusing for roz of lying during the campaign. angela merkel warning that they
cannot cherry pick. anna edwards spoke to the mayor about the sadiq khan, future of london and whether the city can extract it tell from the referendum. am asking for us to be an independent city state. the british public have chosen for us to leave the european union. i recognize the verdict but i think we need to ensure that rush -- one that has more power over how our country is run. when ourlly important government comes to negotiate with the european union that london has a seat because importance for jobs, trade, investment in the single market and my worry is if the government negotiates without us they could negotiate a deal that
is bad for london and the country. anna: what about things that matter to the city of london how importantng? is that going to be for you? sadiq: it is crucial. financial services is so critical to our economy. i have been speaking to executives in the financial sector and it is important that we have access to the single market. the banks and insurance sector and everyone will be leaving london are going to berlin or frankfurt or paris, meaning jobs leaving our city. all of those running to be the next prime minister, sooner rather than later can you reassure businesses that you will argue for us to have access to the single market and passport social services. anna: is that realistic? sadiq: i think it is.
we have got to recognize the jobs created are not simply in the financial services. that means jobs created in investment and the government needs to recognize that london is the beating heart of our country. if london does well, the country does well. we in london take back control. anna: a nice repositioning of that phrase. of all of these calls for a second referendum asking the same question or another one on the terms? sadiq: my view is that the british public has spoken. it was a tough campaign but the british people have spoken. we are a country that is split. leave.ed to remain -- to we have to heal the rifts. i accept that the new government will negotiate a good deal with
the european union. once youealistically voted to leave, if you think the public is cynical now, if we were to go back on that and say we are going to ignore you, there would be some issues. anna: so you would not support another vote? sadiq: no. anna: jeremy corbyn is under pressure. do you think he should stay as leader of the labour party? sadiq: i have been speaking to businesses and investors to reassure them but also to say to investors in china, india, we are still the best ways to do business with. involved with the leadership party contest. anna: do you have anything to say about the type of leader the labour party needs? sadiq: i think it is important that i do my job and we learn lessons from the referendum campaign.
there were too many people who voted labor in may who were not clear what the labor position was. what is really important as we learn the right lessons from the referendum campaign. francine: it is very clear because of this referendum the u.k. has to lose but london will lose the most. the mayor arguing maybe they could get some sort of passporting right. merkel could not have been more clear, no cherry picking. will london have to extract itself? willis: there are national elections next year in germany and france and the leaders are going to drive a hard bargain with the u.k. an saying mayor kh london once a seat at the table. he wants their voice to be heard but it is the case that angela merkel is going to be very careful what she is seen to
concede to the british at a time she has to worry about her own political future. tom: willis sparks with eurasia group, thank you for being with us. it has been a chaotic day. what a joy yesterday to speak to alan greenspan. that interview went worldwide, greenspan on scotland. we will speak to mervyn king and -- have to ask the former could scotland leave? francine lacqua and tom keene, we continue with our coverage on brexit. ♪
thanks advance. restoring trust in the united kingdom financial system. we are confident of the no-confidence in labor leader jeremy corbyn. the usual suspects are uncountable. they are many. the united to kingdom alchemy. in this hour, a conversation with marvin king. the morning, everyone. this is "bloomberg surveillance ," from our world headquarters in new york. explain to our global audience jeremy corbyn's tentativeness, his fragility with the labour party. with him we will speak in a minute. it seems that he will not step down, and the people who put him basearge are a very strong that probably will not push him out. cabinet, in the shadow cabinet, left, but it is
unlikely that he will be -- i would look at central bankers as the real firefighters, and i would look at what is happening in europe, the first time david cameron will face them when he and theth angela merkel rest in brussels at 1 p.m. tom: let's get to bloomberg first word news in london with nejra cehic. nejra: it may be an awkward meeting in brussels. david cameron meets with his fellow european union leaders today for the first time since last week ross vote to leave -- since last week's vote to leave the eu. he is expected to give some indication of how it expects to trigger the mechanism for leaving the union. himself out of the race to succeed david cameron, the chancellor of the exchequer was the one time expected successor, but he campaigned for a remain
vote alongside cameron. volkswagen's price texas huddle lawsuits -- to settle -- volkswagen's price tag to settle will be higher than expected. thanill agree to pay more $15 billion. that is $5 billion more than previous reported. drivers will get up to $10,000 per car for their trouble. turkey's president is on a ,iplomatic charm offensive ending at six years treatment with israel. they are expected to improve andtions with russia, turkey is trying to resolve confrontations that have hurt its economy and left it increasingly isolated in the region. expected court ruling to improve abortion access across the u.s. struck down a texas law that had forced many abortion providers to shut down in the name of protecting
health. it is likely to do similar restrictions -- to do with similar restrictions in louisiana, mississippi, and wisconsin. global news 24 hours a day, powered by our 2400 journalists and analysts in more than 120 countries, i am nejra cehic. this is "bloomberg surveillance." this is pretty good. futures up 22, dow futures up 200, one point. everything is risk reversal today to a better tone. euro, 1.1099. francine has some insight as well. yen was stronger earlier, turned around. 102.38. francine, what do you have? francine: i have a similar data board as you do. european stocks, when you look to market participants, they are policy,at monetary looking at mario draghi to possibly add to the qe program,
and that is why markets are up a touch. the vix is down. the pound is at 1.33. tom: 1.3351. quickly on the bloomberg, this was the news yesterday afternoon , with the curve flattening. what is fascinating about this is this is less two-year dynamics and more 10-year dynamics, with the yield, the 10 year yield coming in much quicker than two-year. this is an odd curve flattening through basis points. francine: it is the first time deborah cameron is showing up to speak with his european counterparts in brussels provide benchmark the current value of stocks. have now committed france and germany. because of the brexit fallout, you can see the fallout, and the concern has driven stocks down across the board, but currently the eu market cap is now $15
more than the german combo. joining us from london city hall, she has been migrating around the various political institutions of london, anna edwards. you had that wonderful interview with the mayor. i know you want an interview with mr. corbyn today. tell me about his morning. anna: he is under pressure, let me put it that way. anyone who thinks they know what pressure means, try having 40 members of your front bench resign and call for your resignation, saying they have no confidence in your ability to get the support out amongst public. this is a guy under pressure. it looks like he is facing a no-confidence vote. i asked if the chair of the labour party would back jeremy corbyn. he stayed well away from him today. he could coming back to his job to represent the city of london.
remember, jeremy corbyn has a lot of popular support among the members of the labor supported. -- of the labour party. they are the want to put him there. he could be voted in once again. elite -- wee labor care about this because we are hoping they will see a general election pretty soon. what is the likelihood of a general election in the next 12 months in the u.k.? anna: there are a lot of people talking about this. if we see another leader taking charge of the conservative party -- and that will happen because we are going to get a new prime minister by september 2 -- it will be up to that person whether to go out to seek a country, thethe details of what our relationship will look like with eu. if they decide to do that, the labour party wants to be ready. that is why we see this queue taking place now. -- this coup taking place now.
they did not think jeremy corbyn put his heart and soul into it. they want him out so that if there is another general election, they think they have more of a chance of doing well in that. tom: anna edwards, i am sure we will hear again from you today in london. away from politics, from brexit, there are people who have to sit with a green eye shade on and figure out what to do with your money. david winters had to suffer under the vicious tutelage of michael price. mr. winters is a legendary deep value investor with mutual shares and now with wintergreen. are you acquiring shares this morning at go what do you do when you have this event? david: one of our biggest positions this -- one of our biggest positions is british american tobacco. it went up on brexit. and we look for gems. we have cash, and we start buying.
tom: i am going to cut right to the chase. francine and i have spent days on the european banks. the fabulous macquarrie chart. a guy like you was loading the boat on european banks. are you? david: we are not buying banks. we are buying things like heineken. we are buying things that we know do not have the financial risk. no matter what happens, people continue to consume. they have pricing power, and we take advantage of these kinds of instability to accumulate. francine: how difficult is it to see where the next value is yet that we know george soros was .ong on the pound, if we look at the banks, how do you trade them? will go through remote volatility either on the downside or the upside. david: we have learned that trying to guess what is
happening in banks, which are kind of black boxes, is a difficult thing to do. we have decided to buy into companies that have stable cash flows that are knowable. nestle would be another one. we have stayed away from most of the highly leveraged financials, and we have sought companies that are cheap because people's emotions are running high right now, and it is a great deal. francine: when you look at brexit, i am not sure whether it is black or white because it has been telegraphed so much. how sure are you that you can take a leg down very quickly, that sentiment that people's fears can come back on? today they are up because of central-bank policy hope. david: i do not know what is going to happening zachary, but there are companies that if you isthe work the likelihood that you will do just fine.
what people's emotions are, you try to ease your way and as a buyer and be rational in a period of time where people are frightened. we decided to stay away from the banks because there is so much that is unknowable. tom: we will continue. a breaking news item -- scott sanborn -- i guess he is back as ceo of lending club. the stock is 25-4. it has been greatly challenged. dutiesborn will do ceo at the beleaguered lending club. we are thrilled to bring you later in the hour the former bank of england governor mervyn king. his wonderful book is out. his acclaimed book, which probably needs a rewrite after the events of last week alan greenspan yesterday, mervyn king today. "bloomberg surveillance." ♪
nejra: let's get the bloomberg business flash. fiber is boosting its presence -- pfizer is boosting its presence. building a block in china. the factory will make biologic context medicines made from living organisms. the acquisition in the generic drug business -- australia's maine farmer will buy from -- 652 million dollars. generic drugs may account for 90% of all prescriptions in the u.s. within a few years. the two largest pharmacy benefits manager's say that
generics now make up 85% of their business. a decade ago they made up 60%. that is the bloomberg business flash. francine? francine: joining us from the ecb -- from portugal is paul -- we, overseeing listened to the mario draghi news conference. he did not touch brexit at all. is he afraid of talking about brexit, or does he need to meet with other parties first? paul: i doubt he is afraid. it is more likely he wants to wait for the eu summit in brussels. he just passed me out of the conference. brussels is where he is going next. his big message was instead global policy alignment. that is fiscal regulatory policy, not coordinated as such. will he do more?
we are already wondering whether what he has put in place is working for the economy. is he needs to do more, what can he do to fight brexit? or hehe has some options could still cut interest rates. the deposit rate is up -0.4%. but there is room to cut a little bit further. not much. he could also boost the qe program as 80 billion euros a month through march of 2017 could be extended or increased. there are potential liquidity problems in some countries on the horizon. he has limited action. that may be one reason why he says it is time to take this collective responsibility to act. tom: paul gordon, thank you so much. we greatly appreciate those detailed, -- those detailed comments from mr. jockey today. mario draghi today.
talking about anchored. do you have a clue where the risk-free rate is now, when you see double negative rates in germany? where is the risk-free rate? david: it is lower than it used to be, so it changes valuations and expectations. part of what has happened is you have had massive money flowing into index funds, and we have the stocks called the terrible 10, and they have gone through the roof. everybody owns these stocks, hugely risky. but if you do the work, there are all these other securities. tom: so you sit and you wait. at yourp value people mentor, michael price, yourself, david winters -- can you figure out where the break is? david: we think it is happening. companywhich is a great
-- we have calculated through our own research that the expense ratio at the index funds is more like 4.2%. tom: how do you get there? you take thelly compensation ratio, the deferred cop that is being given -- the deferred comp that is being given, plus the buybacks, and we think there will be huge rotation out of these high tech loved stocks into the deep value. tom: can the 2.56 standard deviation the scene in selected equities, can that be the shot that initiates? david: sooner or later the whole thing is starting to roll over. you see a company like microsoft doing a big deal, trying to buy growth. yet there are all these selected securities that i think money is to be made. tom: david winters, you can come
i am francine lacqua and london. tom keene is in new york. we are delighted to bring you this next interview. the bank of england is in action today. governor mark carney chairs a meeting with financial stability officials. u.k. bank stocks clawing back some of their losses after suffering their biggest two-day decline in seven years. we welcome mervyn king. he wrote a book, now a best seller, on amazon called "the end of alchemy." thank you so much for joining us. the book discusses some of the points that were raised in the referendum. first of all, your main message is don't panic because of the result. why. willking: because nothing change in terms of the way britain trades with the rest of the world for at least two years. there is obviously a great deal
of uncertainty, and people do not know how the trades and negotiations will take lace, but nothing will take effect for quite a long time. the most significant effect of the referendum so far has been in or miss political term -- has been enormous political turmoil. francine: was the brexit vote and anti-globalization vote? lord king: it is not as simple as that. it is more complex. it is about issues like sovereignty, who decides issues such as the numbers of people admitted to the united kingdom. that kind of issue is more important than the general concern about globalization. thecine: you mentioned future of banking in the book. we do not it now -- we do not know what the future of u.k. banks will be with the eu. what will be the best possible outcome? lord king: i do not think this need be a particularly dramatic outcome at all. some banks will need to set up new subsidiaries or enlarged
subsidiaries to enable them to clear transactions scenarios in the european union, and that will keep some people moving. most decisions about assets to on in sell can be taken their existing headquarters in london. no one was stopping british banks opening very large branches or subsidiaries in the rest of the european union, but they did not do so. there will be some move in this direction, and no doubt they will make all the noises that the french and german governments in particular will want them to make. but i do not think this will have any significant bearing on the future of the city. it is the european time zone financial center. much of its activities have to do with aspects well outside clearing in euros. fund management, insurance, the legal system is one that people
around the world want to come in and use. i do not think it will be altering the status of london at the moment. tom: we will dive into your wonderful book here in our next section, but i need to follow up on francine's comment on the lack of hysteria. olivier bart chart that the cult -- olivier blanchard on this show led the call for everyone to calm down. what does mervyn king need from the next prime minister? lord king: i think it will be two or three months away. the problem at present is precisely that we do not have a new prime minister and will not have one until september, at the earliest. we do not human up -- we do not even have an opposition now. that seems to be crumbling as we speak. that political uncertainty and the consequences of that, and the uncertainty it creates are one of the things driving volatility in financial markets. i do not think we can expect
anything other than a period of uncertainty between now and september. tom: very good. mervyn king will come back with us. francine, i cannot wait to get to mervyn king's book in our next section. i want to talk to him about the audacity of pessimism. it relates back to president obama's idea. francine: i like the fact that you bring it back to the u.s. i would say audacity -- who would be the best leader. i want to know what he thinks about what qualities are needed for the next leader. this is what the markets are doing. a little bit of respite because we understand the markets are asking central bankers to do more. you can see the european stocks are at 2.5%. ♪
with nejra cehic. nejra: harsh words today in the european parliament. ec president junk logic or accused -- ec president ker accuses junc nigel farage of lying. >> you did not tell the truth. i enjoy sparring with you. i think we share some of the sense of humor. you used to have a sense of humor. i still do, i think. you will not be coming back. nigel farage told european lawmakers they have done very well in imposing poverty -- in imposing poverty on greece and the european union. angela merkel told german lawmakers the u.k. will not get favored treatment once it leaves the european union. she says she will make sure that cherry picking principles will not apply in the negotiations.
in spain, acting prime minister mariano rajoy is playing a waiting game. group to was the only increase its vote sunday when spain held its second election in six months. he has not been able to form a government with rivals in parliament. he is expected to push negotiations to the point where the only option is for those rivals to support him or seek a third election. global news 24 hours a day, powered by our 2400 journalists and analysts in more than 120 i am nejra cehic. this is bloomberg. francine: we are back with mervyn king. he recently wrote a great book, a best seller on amazon. i urge everyone to pick up a copy of it. it is called "the end of alchemy," in which he discusses a new world order and banks. on friday, banking stocks were pummeled. what does this tell us?
is there a concern about solvency? is there just over panic on the markets about what we do with these banks? lord king: banks are so highly leveraged that small differences in judgments about the value of assets to the banks can lead to lead to big swings in the value of the share prices. ., one of in the u.k the significant differences is their exposure in the euro area. their impact may be greater in the euro area than in the united kingdom. the exposure they have in the in part counts for their exposure in the crisis. i think some of the numbers which were put forward before itself,tion, the vote were based on the idea that the
long-run consequences would be a bit of a disaster and people would anticipate that. the short run predictions actually hinged a great deal on the assumptions. we just do not know. tom: governor king, one of your great moments was october 20 20 -- october 20 of 2009. you travel to scotland to give a speech on banking. it was a magnificent can try -- it was a magnificent cry on basel in banking. when i look at the future of the eu banks, their disparity to the american banks, do you have any hope that they will clear their balance sheet and that they will be able to raise capital and move forward? lord king: i am not optimistic. , the bighat we saw lesson from 2008-2009, was that the united kingdom and the recapitalized
their banking system. the united states in particular was very effective in the way that it did it, and i think the banking crisis ended with the announcement of the stress tests and the recapitalization of the american banks in may of 2009. that was a model for everyone to follow. since then i am afraid there have been so many stress tests of european banks, yet none of them have really convinced markets that they have been completely upfront about the potential losses, and there are many potential losses still on the balance sheets of european banks. even this year we have seen a number of european banks suffer as new information is revealed about their state. of thehe economics european area, this is only likely to continue. tom: jon klein trish a uses the word "brutal." this is for our global audience -- there is a unique structure as being a german and being a london bank. does brexit limit the degrees of
freedom that someone like mr. cryan has? i think theo, strategic issues about the future of his bank that he will worry about are about the asset composition of his portfolio and the trading strategies and how he will balance investment banking on one hand versus commercial banking on the other. the bank has had some difficulty , struggling hard to try to remove. i do not think the united kingdom is central to that. the reason banks are based in london is because london is the natural financial center for the european time zone, and a wealth of activity unrelated to transactions in euro areas takes place here. firms have chosen to locate their staff here. no one forces them to. they chose to place them here. tom: i know francine has many things she wants to adjust with you. usn greenspan flat out told
yesterday that scotland would leave mervyn king's united kingdom. do you agree with chairman greenspan? i very much hope that scotland will not, but i fear the arguments put forward on the referendum for scottish independence two years ago were rather reminiscent of what we characterize the eu referendum campaign here, and there has been a backlash to that. i think it is a more likely prospect that has seems to be the case, but i very much hope that if there were another referendum the westminster government would put forward a strongly positive argument which would say we value scotland, we want scotland in our united kingdom, and not say that they could not cope on their own. it seems to me they could, but that is not the issue. the issue is, what would, if anything, give scotland the presence they do not have?
i hope scotland will not go for independence, but the only hope of persuading them to stay in the united kingdom is to demonstrate the positive arguments for them and for us, not to harp on the negative consequences of separation. francine: did you vote in the referendum? lord king: i did, yes. francine: which way? lord king: i will not tell you. tom: good for you. contributei did not in the campaign as to whether i thought the u.k. should stay in or out, because i had no intention of making life more difficult for my successor as governor. it would be very bad for the bank of england. tom: plus, the governor is canadian. francine: let him finish, tom. we will get to you in a second. lord king: one of the
fascinating aspects of british life is that no one in britain even noticed in any way that mark carney was canadian or not. it did not matter. what matters is that the you is the best -- is that he was the best person for the job. the fact that he was not a national would have been a big issue, and in britain it was not. that speaks volumes for the true openness in this country. do you think brexit damaged mark carney in any way? he was criticized because he was too close, they said, to the remain figures. lord king: i do not think it has at all. it has damaged the credibility of the politicians on the side of remaining because they put forward exaggerated claims. mark did not say whether the u.k. should or should not remain in the european union. he did not say what the long run consequences would be. do was give a
judgment of the short-term prospects given the uncertainty that would be created by a de tocision leave about the outlook for the u.k. economy. he had to do that, and he did it. he did in the company of the monetary policy company as a whole. bank wille undoubtedly lower the temperature on this, and wait and see. as to whether they think the consequences are shaping up to mean a faster slowdown than was expected or a milder slowdown than was expected. tom: now i know where the phrase came from, "keep calm and carry on." we will stay with lord king. i want to speak with him about his book and also on pessimism as well. moving forward on "bloomberg code. howard ward of gang the opportunities for investment, given his political economic moment.
tom: thank you so much for your comments and the quality of our guests, the quality of the conversation over the last week or so. francine lacqua in london. i am tom keene in new york. we drive the conversation forward with the former governor of the bank of england, irving king. congratulations on "the end of alchemy." "thee are actually reading end of alchemy." i was speaking the other day with lord desai, and we were talking about his idea of an economics of equilibrium and disequilibrium. politicalclear this
economic mess. is it through government policy? is it through the hobbesian idea of admiral spirits? -- of animal spirits? what is the idea to get the united kingdom back on track? lord king: the most important thing is to have a government and opposition. we have effectively lost both with the resignation of david cameron and the turmoil which is evolving by the minute in the opposition labor party. by september i am sure that will have been largely resolved. what we will then need is a clear statement by the government about the strategy toward negotiating the trade position with the u.k. with its departure from the european union. there will be various options for that. only a new prime minister can do this. 50 will be invoked, and
the negotiations with the eu will start. but also i very much hope negotiations with other countries will start. there is no reason why that tandem.roceed in but what needs to happen now is for the u.k. government to find a way of putting together a with all thele officials involved to start to work out these details. things have not really been discussed very much. -- the position of northern ireland, the opportunity this gives us the waythe eu to reform that we give subsidies to agriculture, if we do at all. that will be based on the environment rather than eu rules. tom: governor king, i want to take you back to when you shared an office with an upstart from america, ben bernanke, a few years ago. i want you to give us a clinic on the pessimism of the moment, the audacity of pessimism, which
is the united kingdom is going to die through a terrible current-account deficit. now it is 7%, and the doom crew said this would be terrible. the current account deficit will expand. help us here. fordoes a nation compensate an ever worsening current-account deficit? lord king: the current account deficit has increased since the crisis. one thing that was pretty obvious was that after the 2008-2009, thes, united kingdom needed a depreciation of sterling of a significant amount in order to rebalance our economy. and indeed sterling fell by 25%. we absorbed that quite well. i think if the euro area has grown anything like its previous average growth rate, the u.k. would have rebalanced satisfactorily. but like much of the world, it did not. that made life more difficult for us. what particularly went wrong is
in the past three years, 16%,ing has risen by 50%, -- by 15%, 16%. foreign exchange rate that has taken place in the last couple of days, which everyone is portraying as a dramatic and terrible thing, has lowered sterling merely to the effective exchange rate, which we had exactly three years ago. francine: what we try on "surveillance" to do is to make sure that our viewers are not left on the back foot. today we saw the demand for cash surging. since the brexit vote. financial institutions more than doubled the amount allocated. is this a sign of stress in the banking system? lord king: i think it is a sign of caution that people want to find themselves in a position where they know they will have access to liquidity and tell lock that in in advance.
the bank has rightly provided that, and i think one of the benefits of the regime after 2008 was central banks around the world rethinking the way in which they provided liquidity to the banking system. that has been a big plus. i do not think anyone need worry on that score. francine: thank you so much. tom: mervyn king with us right now. we will continue with lord king in a moment. out of the united states, i do not think we will blame brexit on this. dow chemical will illuminate 20 -- will it eliminate 2500 jobs. we have good markets, a risk-on feel. upures up 21, dow futures 180 eight. francine lacqua and tom keene with the former governor of the bank of england, lord king. stay with us. "bloomberg surveillance." ♪
alix steel, you have a packed show. alix: we do. we have seen a selloff in global bonds. the record lows that we will be following today. rick rieder is the cio of fixed income at black rock. we will speak with him. -- will it happen? we will be speaking with carolyn mccall, the ceo of easyjet. thecine: mervyn king is former bank of england governor. he wrote a book, "the end of lchemy." tom keene has posters of the book in his room. when you look at monetary policy around the world, should more be done to calm markets in general to coordinate central-bank action? the most: no, important thing at this stage is for everyone to understand that central banks are prepared to supply liquidity if and when it is needed.
the central banks will provide it on demand. i think the concern is that the longer run economic position is one in which most countries in the world feel that if only the rest of the world would grow properly, we would be fine. so what do we do? we try to lower the exchange rate. i think central banks should not compete and try to push down their exchange rates, but there will be big changes in exchange rate needed if we are to get back to a stable position. we should not try to resist that. in the meantime, monetary policy in terms of interest rates or money printing -- i am sure the right thing at present is to wait and see. let things calm down a bit. markets are trying to discover the new prices for sterling, for bonds, for shares. there is bound to be a hit and miss trial and error process with overshooting and undershooting before the price
converges and with a new level will be. in everything. francine: are you comfortable with negative yields? lord king: i am not. easing monetary policy will not be the route to getting back to what i think of as the new equilibrium. that will require a much broader set of policy changes. the first step is to recognize that. tom: governor king, you speak of clearing of markets. to clear our desire markets and i belve that is off the balance sheet. eight years on, nine years on, have we truly cleared out balance sheets, or is that a way to further shock and adjustment? we have not got back to a new equilibrium at all. i think that back in 2008 when the finance ministers and central bank governors thought that they were taking that dressed action to save the financial system in order to
help the world economy, none of them -- and i can promise you this is true of everyone around that table, believed we would still be doing this eight years on with interest rates at zero, large amounts of money having been created. what we're learning from this is simply that monetary policy is not the solution alone. the bigger change is to change the structure, on the pattern of spending. that will not happen easily. so far governments have been too leaving thish just to central banks. as a result, central banks have been disappointed in their ability to generate recovery. tom: governor king, your parents now ap -- you are certified card-carrying member of the elite. whatever their persuasion, how do they reattach to a people? lord king: that is the biggest question to come out of this
referendum. there is no doubt in my view that the political class lost touch with a large number of voters who felt alienated, who felt cut off by a degree of political correctness, where certain issues were not allowed to be discussed and where they have not shared in the prosperity in london. as governor i traveled regularly outside of london. i came from outside london, and i was worried and concerned that the ruling class do not really feel themselves as closely in such -- as closing in touch with voters as they need to if they are going to provide leadership to take us through the next few challenging years. francine: how they should regain -- how should they regain that trust? lord king: as the prime minister said on friday morning, now we have to deliver it. attempts of people to try to would be a results
mistake. we need to find the right way now to deliver the results. tom: lord king, thank you so much. he will continue with us worldwide on radio. the book is "the end of alchemy." i cannot convey how many of our guests are reading this cover to cover. let me do a data check here for the first time in ages. the data check has some kindness, some gentleness to it. downes up 21, dow futures 191. -- up 1.91. "bloomberg " is next on television. it is nice to be back in new york city. ♪
demanded.is as banks >> the german chancellor warns the u.k. should have no illusions about life outside of the eu. jonathan: for viewers worldwide, a warm welcome to "bloomberg ." with davidn ferro westin and alix steel. a couple rough days. david: everything is snapping back this morning after a really rough ride over the last two sessions. we have some great guests as we continue to cover the aftermath of brexit. isx: joining us