tv Bloomberg Surveillance Bloomberg July 14, 2016 5:00am-7:01am EDT
tom: swan secretary johnson will speak to johnson. europe will seek to respond. olivier blanchard with his brexit optimism. markets are calm as prime into 10 may moves downing street. suddenly, it is bank earnings season. mr. dimon will give bank tellers a raise. this is bloomberg surveillance live. i am tom keene in new york. in london --
my words. scarlet fu in london. we are thrilled to have scarlet fu. reunited. to the music. a wonderful day to have the with us. so much to talk about about the united kingdom. first word news, here is nejra cehic. theresa may has promised to build a more just united kingdom. that for brighton to feel their life has made insecure by globalization. >> not by the interest of the privileged few, but by yours. we will do everything we can to give you more control over your lives. ejra: in one of her first actions, the architect of david cameron's austerity policy, she replaced him with philip hammond . she named her new break since
our, david davis. locked --ter may mocked boris johnson's negotiating skills he has been named the foreign minister. he accused president obama of disliking the british legacy because of his kenyan ancestry. the number of japanese living in japan phil are the most on record last year. at the same time, the number of foreigners rose. unless japan's birth rate increases, the labor force could fall 40% white 2060. global news -- by 2060, global news, 24-hours a day, powered by our 2400 journalists, in 150 news bureaus around the world. . checkst's go to the data then get to professor blanchard.
continue to boom. 18,400. stronger.s crude oil, with the bid after yesterday. below screen, the 18. extraordinary equity markets. the unit is weaker. what you have? scarlet: i have to talk about cable. the pound/dollar renewing its advance. yeah the boe meeting later. yesterday, tensions to divert monetarytics to policy. the ftse continuing to leverage higher, 7/10 of 1%, the better performing of the major european market since the brexit phot. a quick mention of the nikkei. we are waiting or -- waiting for abe to unveil the stimulus.
tom: thanks to robbie feldman and morgan stanley, a huge assistance yesterday. bloomberg, the global litmus paper, this is beyond elegant. this is if i were to teach a course for olivier blanchard at m.i.t. on the mystery of charts, this would be a gorgeous chart of euro-yen. all you have to know is a trend is in place of a strong yen and a weak euro. even with the recent moves of wiki and, there's a lot of technical resistance to get to some form of positive abenomics. we're nowhere near that now. one of the most important voices , olivier blanchard for the massachusetts institute of
technology with his service to the international monetary fund and with the peterson institute -- he has been a quiet voice of reason. we are on with professor blanchard. he joins scarlet in london. go to the morning after you wrote to the peterson institute. this quote on brexit is .mportant sterling's depreciation will help, but not compensate for a drop in investment and the adverse effects of political and economic uncertainty. as a canary inen the coal mines signal that generally, anger is everywhere deeper than was perceived and may in turn lead to dangerous policies. as we have moved on a number of leads, do you see -- as we have moved on a couple of weeks, do you see a column that will allow for institutions to come to constructive good ends to the united kingdom? olivier: first, it is great to
be on your show again. i would say that i'm impressed at how i would not eat the words i wrote on that friday after brexit, in the sense that i have the same ideas then that i have today. in the short run, the u.k. is going to suffer. the main effect is what we call the option value of waiting for investment, which could lead to a large drop in investment. this, i continue to think, will be the main effect. partly down to appreciation, but not entirely. you cable go through tough times. i think for the rest of the world comes this was not a major event. on that friday, risk had become n unusual degree. some thought it was the and of
the world, the rest the end of europe. weeks coming days, coming , some of the smoke will go away and we will realize that this was namely a u.k. problem -- which it is. talking about the numbers you just gave, what strikes me is how well the uk's. i get has how well the u.k. has done. king appeared with us. he was adamant that he agreed with olivier blanchard that a measured down was in order. do you think we will get that from the new chancellor, mr. hammond? what was your prescription for the debate of austerity within the united kingdom? olivier: well, i am not going to make any judgment or assessment about the politics.
i do not know the new players well enough to say any thing. in the current conditions, some fiscal expansions and loosening of policy would be the safe things to do. you're going to have a fairly large decrease in either demand, almost surely. i don't see how this will be avoided. fiscal consolidation, it should wait. relaxing a bit with the initial plan was. is aet: you say the brexit u.k. problem. is it an opportunity for the eu? what is the best way for europe to strengthen and unify institutions as both sides negotiate that the divorce? olivier: it is probably good for the eu in some ways. discussions of other cities will go. that is a plus. in terms of the internal
dynamics, i do not know. my sense is that on that friday there was a sense that this was the beginning of similar movements and referendums. what will happen to the u.k. will make people think twice. in that sense, it could be a good day. the are people who want more europe and will try to use it to push. i do not think that the electorate as a whole is eager to do it. i do not see major political changes of direction in brussels. in the near future. scarlet: does the brexit vote and outcome in bold and or diminish the governments involved in strengthening the eurozone? or diminish the governments involved in strengthening the eurozone? olivier: i suspect the exit will be proven right.
you have the initial reaction, then the reaction and ask months or year. maybe the u.k. hasn't done well. there could be a reassessment that sometimes the experts know what they're talking about. will bevier blanchard with us for this half hour. we have good guests linking the u.s. equity markets with all we are seeing in the political economy of a greater europe. breaking news from deutsche bank. an internal appointment within deutsche bank. stein weller to the executive board. he is helping mr. cry and in the more domestic part of the german economy. the backdrop is a sporting italian ranking. he will cover that. scarlet fu in london, tom keene in new york. coming up, richard turnill of black rock will join us on this
wonderful celebration in paris for bastille day. in london, the bank of england will announce it interest-rate decision. it is the first time the monetary committee has voted since the brexit. a cut would be the first since 2009. anna edwards is at the bank of england. i know mark carney said there would be easing, but there has that hasa lot of data come out that would support a rate cut at the moment. not a lot of data or fax to go on. a bit of survey data says consumer confidence is not looking great. the housing market not looking great. will they decide to wait until they have more data? says the meeting in three weeks, you would have more data than here there is the question on whether they go now or in august.
the market does seem divided. 65% of economists talking about expectations of a rate cut today, but many are expecting a cut this summer. tom: how divided is the committee over the aggressive move of a rate cut? anna: it is interesting. to work out how much -- we will get to the minutes, won't we? we will know how divided they are on paper. behind the scenes, how much will they tell us about their division? couple, he has been dovish in the past. will they go for cut? how would they balance being able to be honest about their own personal views and the need for unanimity. london. anna edwards in thank you. more insight into the bank of england and what it does next with blackrock investments chief
investment strategist robert richard turnill. still with us is olivier blanchard. we have seen markets stabilize and calm down. some government stability. as a rate cut still necessary? richard: i think you see rate cuts in the u.k.. followed eventually by quantitative easing. we are anticipating economic impact, we share the views expressed by olivier. a recession in the u.k., a technical recession over the next 12 months, is a likely scenario. anticipate looser monetary policy, rate cuts to zero, followed by a return to easing.tive there is a collection of her much monetary policy can do to
inflate the economy. it can impact financial markets. primet: especially as minister theresa may could move toward fiscal responsibility, could that ease pressure on mark carney? could.: i think it one change we have been calling for is a shift in market and a broad political focus away from monetary policy. the focus of the last few years has been on interest rates and qe to reflect the global economy. monetary policy is not designed have structural issues, it is designed for cyclical issues. over time, you can have that in most parts of the world. to have a sustained acceleration global growth, it needs to move on to fiscal responsibility and structural reform. there are signs the conversation is moving in that direction. tom: the conversation between the united states and germany on the united kingdom.
mr. lew and mr. schaeuble making headlines. professor blanchard and mr. turn ill, let me bring up a quote from chicago. you use this quote in one of your peterson institute essays. the disregard for spillovers could put the global economy on a dangerous path of unconventional tit-for-tat. world leaders must re-examine international rules of the monetary game -- etc.. to get this going, are we in a currency war? no.ier: we have to understand the system of rates, which we have, advance all assays have an effect. for the most part, they do the right thing. trouble,country is in the exchange rate typically
depreciates, helps the country. that has to be accepted as a way the game is being played. you gave quote from the paper that i wrote, actually, i disagree very strongly with the position of my friend. i think that we are not in a currency war. exchange rates move. sometimes they move for bad reasons -- example we see the yen appreciating enormously after the exit. this is not desirable for japan. with i argue in the same paper is that this could slow down the in close. it could he good. in general, i do not buy the idea of currency wars. tom: how does the dollar that in -- dollar fit in? you just assume a stronger u.s. dollar? olivier: yes. i think that is the position. the u.s. is seen as a safe haven
, a good place to put money when risk is off. that is a plus. the u.s. is able to attract in times of crisis. it tends to make the dollar go up a bit. that tends to make exports more difficult. there is no perfect solution. a very attractive place to put your money when you are worried is a good thing. with richard turnill and olivier blanchard. scarlet is fired up about the new globalization. same with us, this is bloomberg. ♪
♪ scarlet: i am scarlet fu in london with tom keene in new york. it is my favorite time, the morning must-read. looking into whether globalization is dead, or at least in its current form. who blameat those globalization for their problems think they will be better off watching from the sidelines. suggests a wall to protect from an unfair economy. but early indications say otherwise. the pound's deep post brexit swim is a signal that investors believe the u.k. is less competitive outside and integrated europe than in it.
richard turnill of black rock institute and olivier blanchard. where do you think we are in globalization? olivier: i think brexit is the canary in the mine. there is a strong push against globalization and everywhere -- against trade. people think trade is bad because they basically see the adverse effect. they do not see the positive effect. on this, it is hard about users.ating the i think there will be an enormous backlash. of the risks around brexit is that it amplifies populism and against globalization, reversing trends of the last injury. already in a very low growth global environment. in the adverse globalization has the potential to slow growth
further over the coming years. a is not a u.k. issue, it is global issue, the brexit just amplifies it. scarlet: perhaps they're panicking more than they would have otherwise. they are staying with us. you can read more on the brexit impact. it is the cover story of the upcoming issue of bloomberg's this week. the brexit will not stop globalization. you can pick it up next week. this is bloomberg. ♪
surveillance." let's check in with nejra cehic. nejra: the u.k. has its first brexit czar, david davis. he will be more formally known as the secretary of state for .xiting the european union he was one of theresa may's first appointments. he is the former minister of state for europe and is a prominent eurosceptic. or missing to take whatever measures needed to shore up the british economy. hammond said the number one challenge is to send signals of confidence to the market, businesses, and international markets. in japan, shares of a printing company rose after reports they want to advocate. japan uses an imperial calendar. it is called the 28th year of -- 28th year of the reign.
news 24 hours a day powered by more than 2600 journalists and analysts in more than 120 countries. nejra cehic, this is bloomberg. tom: we thank you for the comments in the quality of our those guestsne of has been olivier blanchard, formally with the lagarde international monetary fund, now with the peterson institute. on the markets, richard turnill has been wonderful. we appreciate your attendance. we have to talk about negative interest rates. if you are writing a sixth or seventh edition to your macro textbook, you would have to write a new chapter on negative interest rates. what will be the reaction function of chronic negative interest rates to nations like switzerland, germany, or the effect to the united kingdom? i have mixed feelings
about negative rates. i think we understand that when traditional interest rates are lower it increases demand. people take more mortgages. we have learned the direct effect, which is the effect on loverofits, and the interest rate is the law of the profits. that does not imply that negative is the issue. we may become negative, the effect on profits becomes stronger. thanks have a harder time making money. we are in a situation where banks are not profitable. i think negative rates may have adverse effects. i would rather try to decrease the price of interest rates rather than those which are already negative. tom: those effects have to be dealt with.
richard turnill, you are living .his at blackrock how are you responding to negative interest rates? yields acrossive 25% of the global fixed income market. a huge number of our clients are locks into lower and negative returning assets. there's huge demand for yield. it is becoming scarcer and scarcer as you have central banks, like the ecb, buying more positive yielding assets around the world. in financial markets there is emerging-market debt. they become increasingly attractive. in equities, dividend growth, persistent for a number of years now, continues to see and client inflows interest. post brexit it appears we will be in a low or negative interest rate environment longer than
people anticipated. the trends could persist for many years to come. scarlet: richard, you are more positive on fixed income. what about treasuries? they have said you should not buy treasuries at these levels richard:. do you see value? we see a role for treasuries in portfolio. you're not buying those assets to make significant returns. we are in a low return environment where most financial assets will be well going forward. the role treasuries play in your portfolio is hedging clients and individuals against the market, who faced an uncertain financial environment of the next few years. when you have this in risk assets, even though the yield is effectively to diversify your portfolio. you saw it in january and the recent weeks around the brexit
concerns. treasuries play an important diversification role. already has it and there is now a speculation of helicopter money with ben bernanke meeting with japanese officials. is that concerning? whener: helicopter money, it is used by people, it is often a scam. it is not just helicopters dropping money, it is a larger fisca deficit. the important parties a fiscal deficit, where the eufinance by money or bonds -- whether eufinance -- whether you finance by money or bonds, when bonds face year. the important thing is fiscal deficits. if people said, i want a larger fiscal deficit, that is a
discussion i am willing to have. the notion that helicopter money is an additional match of ingredient -- that is false advertising. tom: we appreciate your comments. here is a chart that shows the distortions i see. plus standard deviation difference in yield between the united states 10 year and of the german 10 year. german reunification on the left. we go through some cycle and we are wider now. that is a sense of the great transatlantic distortion. would you recommend chancellor to be the solid foundation of a recovering europe? right, you i am showed a graph about monetary policy and asked me what merkel should do. she should stay out of monetary policy, that is not her job.
the concern is that some monetary expansion aimed at and for structuring, that is something you heard when i was there, and today from many quarters is the way to go. some say fiscal expansion, which does not put into question the sustainability of the debt, but aims at getting a better structure. there is more to be done. i suspect it could help in that direction. ?ichard: can i come in on that the record spread between fund yields and treasury yields, it is a feature that is underpinning the treasury market. every time you see yields that of in the u.s., you see significant foreign capital coming into the u.s. markets. thosesson investor, yields seem low, but from a european or japanese perspective
they are relatively attractive. we have seen capital coming out of japan into the u.s. market going forward. we expect more capital coming out of europe, especially as the ecb buys more of the european bond like it. scarlet: how the yield liquidity ratio is more relevant looking at bonds from germany and the u.s.. comparing them rather than risk reward. looking for more stimulus, how do you go about building your portfolio for the next six months to one year? globally, we think equities offer value in certain areas. we focus on quality and dividend stocks. perhaps safer areas of the market which are more reliable. we still stay away from the european financials, in particular. that will act as a significant drag on the european markets in aggregate.
despite the fact there appears europeanue in many banks, structural headwinds are only getting stronger. low growth, negative interest rates, flat yields. .t is a value trap you need evidence of recapitalization and recovering growth. some hope that interest rates could rise in the future, the yield curve, going back into those financials. we are cautious on the european equity market. financials in the u.s. are more chart. the bond market, investment grade credit like emerging-market debt, is attractive in this market. made global headlines at the imf for you talked about a need for the courage to reflate. are you observing, years on, the needed reflation to help nations prosper? world wouldhink the
be a much healthier place if inflation was higher than it is. is of theflation essence. japan, a country where they should do anything they can to increase inflation. sometimes it is presented as a need to manage demand, but demand is not the issue. they need inflation, to reduce their debt. that has to happen. tom: olivier blanchard, thank you, formally with the international monetary fund, and with the peterson institute in washington. charles peabody will join us. will helpscarlet fu us do jp morgan earnings. charles peabody on radio in the 7:00 hour on best deal day -- on best ill day -- on best deal day stille day inn ba
scarlet: i am scarlet fu in london with tom keene in new york. this is "bloomberg surveillance." we have more headlines and heads rolling in the u.k. government reshuffle. sacked asve has been the u.k. justice secretary. will notgan does she continue as the education secretary. john wooding dell is leaving the cultural secretary post. with us is still richard turnill of blackrock institute. some of these appointments we're anding about our second third day appointments.
the real news is the foreign secretary and the brexit negotiator and the chancellor of the exchequer. brexit forbility of those who campaigned to leave the eu. an attempt to reunite a divided party, but also a strategy so that any difficulties encountered, that those lie at the door of those who got britain into the situation. it is interesting that these are not well known outside of the u.k., with the knownion of boris who is for his gaffes more than anything else. scarlet: his charisma. there might have been frantic googling in europe over who david davis was. scarlet: he is the chief brexit negotiator. emma: it is a clear vision of
what grexit could mean for the u.k.. an optimistic vision. jp morgan thanks britain can have it both ways. can keep access to a single market. scarlet: and limit the freedoms of eu citizens who live and work in the u.k. as positive --t pcs brexit as positive, getting rid of bread tape. -- read tape. -- red tape. that we could negotiate trade more easily. tom: the headline is richer sure heh making it clear that wants a fast solution. he talks about getting brexit done sooner rather than later. are the germans more in affinity with prime minister may than anyone in brussels? is a good question. i think from the u.k. point of view, there is no rush. obviously, the eu is in some
hurry. court.l is in the u.k.'s they have been clear there is no rush. there is unanimity on that. tom: the major thing is the dynamic of time. i think of the phrase, the naval novels of patrick o'brian, there is not a moment to lose. you wonder what the pace will be for foreign secretary johnson. for exiting state the european union davis. he, as well. scarlet: that is a long title. a gave wolfgang schaeuble le,. name, richard schaeub i'm sure he would like that. it doesn't make a difference on how you proceed with u.k.-based investments? richard: we know when we are
facing a prolonged investigation. -- prolonged negotiation. it will last beyond two years. it has removed some uncertainty over the last two weeks. we have clarity that brexit means brexit, and it is now down to negotiations. on thearity negotiations, but come as you are hearing, the eu would like a different stance. none of that will be resolved quickly. in that environment, sterling bull remain under pressure. the account deficit is very large. any international investors to be wary about investing in the u.k. until there is greater clarity over what the future relationship with europe will be. that is good news for u.k. companies that export globally. they will likely keep a high free risk global asset. scarlet: thanks to emma ross-thomas of the bloomberg
news lending bureau chief. richard turnill of blackrock will stay with us. the morning movers. i am focused on the pound. you have the bank of england coming up in a couple of hours, itshour 15 minutes, with first announcement rate decision since the brexit vote. right now, little change in the actual amount. 1.3 to handle. we were just talking about the weaker pound being a boon to the profits of multinational companies in the u.k. the euro yen, we're talking being stronger. today, it is weaker. tom: it has been something to see the yen, retesting serious weakness resistance. the 10 year yield 1.49%. fu in theget, scarlet next hour on jp morgan earnings.
scarlet fu in london, tom keene in new york. a bloomberg business flash. nejra: we have gotten the first reports out of the london housing prices since the u.k. voted to leave the european union. prices fell to the lowest level since the height of the financial crisis in 2009. the royal institution of chartered surveyors said it fell to -46 last month. regulators and keller on your rejected a plan -- regulators in california rejected a plan for volkswagen to recall cars saying it was inadequate. regulators have signed off on the larger agreement covering 480,000 cars, costing vw $15 billion. toee u.s. senators trying elevate local battles over airbnb to the federal level. it asked the trade commission to investigate the impact on the housing market.
some of the airbnb hosts are landlords that rent out residents year round. scarlet: let's look at a chart wet really encapsulates what will focus on in the next hour. season does not get going until banks start reporting. jp morgan will do so in just under an hour. , bank stocks in the u.s. are the blue line. european bank stocks are the white line. they recovered from the financial crisis, the beginning of the chart. u.s. banks gained 280%. european banks, climbing 45%. they hit the cycle peak/july, then have struggled. richard turnill, the global investment strategist at blackrock, the burden of low rates and negative rates.
what will you look for in terms how richard: on banks will maneuver out of this? i suspect that the chart continues to show divergence. .he jaws will continue to widen that will happen for three reasons. the interest rate environment, a negative rate environment in europe. pressure is only downwards. in the u.s., a higher interest rate environment, though rates will be more stable. it is about growth. the u.s. is delivering consistent growth. not strong, but consistent at the 2% range led by the consumer. it is about the capitalization of the banks. jawsof the reason the started to open is the u.s. cut costs very aggressively. beenrope they have slower to cut costs and address capital issues. you see this problems particularly, for example, in italy.
you will see the verges between the u.s. and european ranks going forward. tom: can european banks that establish some of james dimon's best practices? can they become more anglo-saxon? is there optimism that european banks can start acting like the adults in london in new york? .ichard: it is a slow process we would like to see more focus on costs and a move away from the traditional banking business -- interest rate margins. more banks looking at non-interest rate related areas, like asset management. he you are seeing some improvement in capital positions, but progress has been painfully slow. in the short-term, it has to be contained. the structural headwinds of
flattery yield curves and low growth are only getting stronger. yield curves and low growth are only getting stronger. on europeanunt talk banking. scarlet fu in london, a good and beautiful thing. in the next hour, jp morgan will report worldwide. -- david sowerby , they're lined up in paris. david sowerby on your depleted 401k. scarlet fu in london, tom in new york, this is bloomberg. ♪
prime minister moves into 10 downing street with the cap. n will givemr. diamo bank tellers arrays and governor connie will decide whether to cut interest rates. good morning, this is oh vote bloomberg surveillance." -- this is "bloomberg surveillance." we are thrilled to have scarlet act with us with jpmorgan earnings coming out. the beginning of the bank earnings season is critically important. scarlet: it absolutely is an jpmorgan sets the town. projects confidence in the industry. must-read his morning earlier this week about how he plans to give raises to his bank employees. he is setting the tone for the industry. beneath the go
headline numbers in about 45 minutes. let's go to london. may has promised to build a more socially just united kingdom after being named prime minister. she says lives there have been made insecure by globalization. >> the government identification will not be driven by the interest of the privileged few but by all. we will do everything we can to give you more control over your lives. in one of her first actions, she fired the chancellor of the exchequer, the architect of the david cameron austerity budget. ,he named her new brexit czr david davis. -- boris johnson
has been known about talking about foreign affairs and accuse president of, about disliking the them. her legacy. kerry meets with the russian president vladimir putin today in moscow. he will lay out a potential deal that could prevent an escalation of fighting in the syrian civil war. they will share information targeting the islamic state. in return, russian would have to keep syrian forces from attacking rebel troops to agree to it the cease-fire. the population of the world's fastest aging country keeps shrinking. the number of japanese living in japan fell by the most last year and the number of foreigners rose. governmentr -- the projects that unless their birth rate increases, the labor force could fall 40% by 2060. the poll indicates that donald trump will be able to count on support from evangelicals. almost 4/5 of white evangelical
voters will cast a vote for trump this fall despite his multiple marriages and inconsistency on the issues they care about most. inbal news, 24 hours per day more than 160 countries. tom: thank you so much. let's go to our data check. futures are up 20 and the euro is stronger and oil does not get greener than that. x is stunning. 11 points would defeat the gloom. london, we are keeping our eye on the sterling, down more1% but it's
than that since the brexit vote and we are awaiting mark carney to make his announcement on the interest rates. componentsout of 100 are higher. eight soiners, only it's remarkable in terms of the rally. the nikkei gaining for a 4th street day -- a fourth straight day. tom: we will see on that. we showed this with an extraordinary -- if i taught a course at wayne state university in michigan, this would be a textbook course on trends. the trend is strong yen and the yen is just back to the major moving averages.
all you need to know is that is an elegant chart of strong yen and weaker euro. sauerby is with us. optimism on american equities but is one of these people that has done heavy lifting in huge institutional peion funds. i will rip up the script. what do we do with our big money? how do pension funds, insurance companies, survive with a new actuarial assumption of maybe 5%? >> they have to be offensive. they have to understand that the next few years will be longer, stocks are likely to give us 7.5% annualized return in a low treasury yielding market. that's the place you will make money. alternatives are generally suspect. it will be u.s. equities and now
adding a little too international after a big table year run in u.s. equities to get you close to those 7% actuarial returns. tom: your world of tactical investment ability with what we blanchard andivier others. low talk about a new terminal rate. our viewers understand it's not 10 years ago. what will be the actuarial return? >> 6%. you are living in a 6% world. i am never retiring. my casket is outside radio city and will stay empty for a while. >> inflation is maybe 1.5%. tom: i feel better already. scarlet: i have a chart i pulled up quickly.
it shows the historical p/e of the s&p 500. you were talking about 7.5% but is that the case at these levels? >> i believe so especially if you value the market on a cash flow versus a net income basis. if you look at pre-cash flow yields, and can buy solid companies with 5.5%-six .5% cash flow yields compared to a 10 year treasury or abbb investment corporate. i think that still bodes for that mid to high single digit stock return on a cash flow basis which is always a better metric for picking companies or valuing the market than on an earnings per share basis. scarlet: what about going into emerging markets? withn't that be better looking at some looked over sectors? >> it is certainly more
interesting after the turmoil in emerging markets. i think they still need to get back to the reforms that were a 1997-1998.lyst in if you look at the return on equity and the earnings yield or free cash flow yield in emerging markets, it becomes more compelling compared to domestic markets and after having a decided overweight in domestic markets for the last five years. i am now more interested in emerging markets. tom: a little bit of international exposure. this is the inflation-adjusted dow going back 30 years and there are three trendlines. the longer redline is the three decades trend and the two decade trend is a struggle but the recent decade is remarkably parallel to the long-term trend. scarlet: i like that chart. tom: thank you.
trend is your the friend. you have been an optimist. how do i stay on that trend at record highs? >> fed stimulation, cash flow earnings yield and the fact that the economy on the margin is getting a little better. tom: you are saying this is and mariot yellen draghi but you say no. >> i believe that is the case. if you look at investors today, bears and neutral are about 70%. it got as high as 80% in february and this is arguably the most mistrusted bull market that is over seven years old and we know markets go higher on skepticism. ultimately, that's a good thing and you see a rotation off the february 11 flows. small caps have beaten large caps.
high yield has rallied 17%. those are good barometers for the breadth of the market and for active management. siemensooked at ge vs and siemens is trading at roughly half the value of ge. blue-chipropean multinationals owning emerging markets? >> in a way but you have the problem of euro-sclerosis that their companies are not competitive. maybe ireland or switzerland but the economies are not competitive on a worldwide basis despite good individual micro-stories. there is still a macro headwind. scarlet: coming up next, governor mark carney of the bank of england might cut rates and we will go live to the bank of england next. ♪
i'm in london with tom keene in new york, this is "bloomberg surveillance." monsanto is still seeking alternatives to the $62 billion takeover of bayer. monsanto has revised talks with basf of a combination of their aggro businesses. some directors wish to remain independent and others are for the takeover. a chinese report that
company will buy 40% of paramount pictures from viacom. via, seeking evaluation of up to $10 billion. da agreed to buy legendary entertainment earlier this year. -- changinge is pay the way it pays its senior bankers in london. the swiss bank has raised fixed pay while eliminating some cash allowances. european regulators have promised to examine whether those allowances are a way to avoid rules capping bonuses at two times fixed pay. that's your business flash. scarlet: bank of england will announce its rate decision in under one hour. this marks the first time the monetary policy committee has voted since the result of the brexit vote. most economists have forecast a cut which is the first since 2009. let's check in with anna edwards.
of the 54 economists surveyed, 31 predict a rate cut so it's not a majority. it isn't, it's more than half. those who don't think we will get a cut will get something like quantitative easing. that could happen in august and it's only three weeks to the next bank of england meeting. markets are pricing in a different probability around this. chance of it1% being priced in. the bank of england has said since the referendum that they think there will be the need to cut rates the summer. scarlet: a lot of shifting there. pierpont securities wrote that
the drop in the trade rated pound is affected -- has affected easing policy. teresa may may move toward more flexibility. for markay be time carney to step up in a calmer kingdom and pause before a rate cut. where is the middle ground? we heard from philip hammond today. if he wase wondering a fiscal hawk. he will have to differentiate himself. the need toout reduce the deficit. maybe the timing around that could be flexible. he has talked about infrastructure projects as has
teresa minnesota could be something there. will have a meeting this morning so i wonder if they will be talking about that. it's a relevant conversation when you get a new government like we saw. scarlet: speaking of the new government, philip hammond is the new chancellor of the exchequer. zar, davidexit c davis, who is he? we thought teresa may toss campaign manager would be taking net post. what are his credentials? he has been around the political scene for a long time on the conservative time and ran for leadership of the party in the mid to thousands. mid--2000's.
he has place an emphasis on european affairs for the tories. article of triggering he seems to be broadly on the same page as teresa may on that one. he has talked about doing quick trade deals. sees paris free trading with europe possible. debate thisl morning is over the rate of change we will see within these negotiations. thank you so much. stay with us worldwide on bloomberg over the next hour as mr. carney makes an interesting decision. that fling brings us to david sowerby, and now a major bank has a nice decision to make in the fed is nowhere near that kind of decision. >> they are not.
the last nearly eight years now, our federal reserve has had negative real short-term interest rates which is wonderful for equity prices and asset values but ultimately, i worry they will overdo it as they often do and it will be inflationary. there is no inflation today but the magic number is once inflation goes above 3.5%, it becomes problematic for stocks. tom: mark carney needs some backup today. the same fed courage from janet yellen? >> when they say they are data dependent, it concerns me that they are less geared toward their number one mandate which is price stability. we want economic growth with price stability. i think that is one of the concerns the market is missing is that ultimately, the fed stimulation will prove to be
scarlet is in london. there isew york and lots going on in the united kingdom and washington. we will go to our morning must-read. david sowerby is with us. this is our morning must-read and this got huge buzz. republicans have lost the popular vote in five of the last exit elections -- -- the last six elections. this got huge buzz on the internet among right and left. you are living in a rust belt state. how angry are the key rust they'll states when i look at clinton and trump question mark andrade will be a big issue
we saw that in michigan in the primary when bernie sanders up several -- hillary clinton. the unemployment rate in michigan has gone from 14 to slightly below the national average. tom: i did not know that. >> that has been a catalyst. i think he tried is a value stock that has a catalyst to get better after 60 years of secular decline. michigan will worry about trade. michigan will vote with its pocketbook, like any state. if you do that, it will be a tough year for the challenging party based on economics. what i find fascinating is who will be speaking at the republican national convention. supposedly is going to be a speaker at the republican convention. that surprised me. will brexit have an effect on
the u.s. election? >> probably not but maybe it tells us anything can happen. every year with pretty good accuracy, people vote ultimately based on the economy. told you in 1980 that the challenger would win as well as 1984 the incumbent woodwind to the most recent election. that will be what decides this election. it always will be the economy. up, governor carney in the next hour and jpmorgan coming up in 15 minutes. inwill talk u.s. politics "with all due respect." ♪
london. davis?o is david aback by the three david cameron children. that was quite moving to see those little kids figuring out where dad will be next. scarlet: let's get to our first word news. david davis is the brexit czar and will be known as the secretary of state for exiting the european union. he was one of the first appointments. is a former minister of states of europe and is described as a prominent eurosceptic. the new chancellor of the uphequer promises to shore the british economy. philip hammond says to send signals of competence to the
markets and business and international investors. the japanese prime minister has tough choices to make now that he has a 2/3 majority in the country's upper house. he can change the constitution the u.s. imposed on japan after world war ii and supporters want him to increase the role of the japanese military. day,l news, 24 hours per in 120 countries. this is bloomberg. you've got breaking news? scarlet: we have blackrock reporting earnings this morning. in terms of second-quarter numbers, adjusted earnings per share, one penny better than what were looking for. revenue just at a hair higher than what analysts were looking for. $2.79nsensus estimate was billion.
they are the world's biggest asset manager and may set that tone for financials and it will be what jamie dimon says about the brexit effect on the u.s. +++ quarter in terms of press releases. i think it's great to see the jpmorgan clarity. larry think had substantial comments within this press release from black rock and he does not mince words about the struggle. it's a single digit world for these guys and they are struggling with their clients to keep forward motion. scarlet: he says the clients face unprecedented challenges.
he says the money needs to make some kind of return and it's a mystery how to get to 8%. let's turn to the u.k.. carney is expected to cut interest rates according to economists we surveyed. would that be good for the u.k. given that we have not yet seen evidence that brexit has hurt the economy? >> i think we know that brexit will hurt the economy. whether the bank of england decides to cut today or wait until august does not matter too much. two bank rates, it will not turn the economy around. it's a signaling mechanism that says we are easing policy. scarlet: you have an inflation problem potentially as well?
the weaker pound means the bank of england could raise the inflation target and that you get inflation higher. see inflation two years out and how well the bank of england finesse that? shift exchange rate will and the trade rate will go up in two years. should the bank of england tighten policy and make unemployment worse, no. inflation was above target, they have eased policy. blanchard was on in the last hour and he had an optimism about moving forward. the where you sit, what is to do list for the new chancellor of the exchequer, philip hammond question mark >> he has already said he will not have an emergency budget. i think it might be warranted but he will wait until he spells
out exactly what he means to do. for now, that means that the current measure will be in place. until it's revisited. there is still a bit of fiscal tightening going on. within the austerity of the moment, when you combine that with importing disinflation and deflationary tendencies, does that get the u.k. into some port outrightation or inflation? >> i don't think the u.k. is headed toward a recession. fiscal policy will not help. if you are tightening in a downturn, that's what macro policy says you should not do. there will be slippage in the targets and they will be missed in years to come. what's needed is not just passive letting that interior -- the deterioration happen. tom: thank you for the briefing.
estimates among analysts we surveyed. when it comes to the return on equity for the second quarter, 13%. provision for credit losses, what they set aside to cope with bad loans, that is $1.4 billion. the consensus estimate was for $1.3 billion. a quick mention of the top line. that's a concern for investors. 22m net managed revenue, billion dollars and analysts were looking for 24. seven analysts had raised their estimates for revenue for topline for jpmorgan while one analyst brought it down. jp -- by comments by jamie dimon, i would personally congratulate jpmorgan on having a clear press release. overall, the performance reflected the strength of our
balance sheet. we will continue to be a source of strength for client, says jamie dimon. he has an announcement of higher wages for his tellers. what our audience really cares about -- i see double-digit numbers here on what they are doing within credit card processing and what they are doing on global investment banking fees. it's up 8% in market revenue is up 23%. what else do you see? scarlet: i am paying attention to capital markets because this is the first of the big banks to report. what revenues they saw where there was quite a bit of volatility. what we have is for fixed in almost $4 billion. the consensus was for 3.57 billion dollars. this is higher than last year.
was what therter consensus estimate was. you have equity trading revenue of 1.6 alien dollars which is in line with analyst and slightly higher than the same time last year. investment banking revenue 1.49 alien dollars for this quarter which is lower than last year but an improvement over the preceding quarter. tom: david sowerby is with us. we forget how big these banks are. >> is the first data point and what could be a better environment for the banks that can exist without a rising interest rate environment but more the catalyst on loan growth in the high signal digits.
the first data point, we need to see more for the banks to become a better investment. tom: can you transfertom: jamie dimon's philosophy? >> you can and i think that especially will be dedicated on improved commercial and loan growth and their asset management division. we own jpmorgan. another financial that comes to e whose assetpris management business and the wealth management business can be a catalyst for higher valuations. scarlet: net interest margin for jp morgan, 2.25%. lower than the estimated range given by analysts. let me bring in michael moore who spent years covering jpmorgan. is interest rate environment
what is working against the banks now because they were positioned for rate increases or normalization through the rest of this year and suddenly we got the word that will not happen. >> the beginning of the year, it looked like the year you would get some rate increases to help those margins. now you see analysts talking about not until 2018. the nimsikely to see across the board start to compress because banks have taken their funding costs close to zero. is 860 $2umber for me million year over year, down 6% on net interest margin. in your experience, tell me how that is managed by these banks. they see the core number go out by almost $1 billion, isn't the mood to cut costs? certainly, the biggest is to
cut costs and they can try to reposition their portfolio of the bonds they hold. many of the banks cannot find enough loans to use all of their deposits so they make up that difference by investing in the bond market. depending on what your view is of the rate environment, that factors into how long out the curve you go. was yesterday, michael mayo scathing about how slow citigroup is acting. he was very constructed on select the egg banks but feels mustgly that mr. horvath go quicker at citibank even jettisoning their mexico operation. scarlet: jpmorgan is talking about the amount returned to shareholders in the second quarter, $4.4 billion. when you covered the big banks
and the fed gave them clean bills of health and allowed them room to return money to shareholders, does that become more difficult in this environment? at what point might banks like jpmorgan need to think about how much they buy back in shares? >> i think they will continue to be as aggressive as possible because they built up the capital ratios to levels where the regulators seem fairly comfortable. they are above their minimums. growth storyt a which many banks are not, you have to be able to return capital. that's why we see them stay aggressive on that even if the profitability picture is not great. tom: let's look at j.p. morgan versus citibank. white has done well. blueat that gorgeous
normalized line at the beginning of the crisis. citibank grossly underperforming and cannot it out of its way. it is about stock selection. >> always. tom: what are you buying in the banks? bank that is the more the turnaround story like jpmorgan and probably allen said with a higher quality name like wells fargo or u.s. tank corps. tom: what about the small to mid cap area? >> signature bank is an idea, prosperity bancshares. we own those stocks. i have had better success in the specialty finance area of discover and american rise and things like that. -- ameriprise. both were spinoffs and that's a good play in the market. scarlet: j.p. morgan shares are rising in early trading in new york. so far,the early trade up 2.4%.
looked at the trading revenue numbers, higher than anticipated. what does this tell us about how the big banks managed to get through the turmoil of the end of the second quarter? >> it seems the activity outweighed the volatility on that front. it was an active environment for trading. that's a good sign for all the banks. it's rare you see the second quarter higher than the first quarter in the trading business. the first quarter tends to be bigger. the outperformance on fic was pretty significant. read and we will see of jpmorgan just did better than everyone else or this is symptomatic of the sector. tom: thank you so much. we will have more on this.
connie fromernor the bank of england, we will see that in about 11 minutes, we welcome you worldwide. the foreign exchanges looking at sterling. that will be the focus over the next 15 minutes. the euro-yen is showing a week yen. the story on jpmorgan. erik: scarlet: the shares are rising more than 2% after earnings and revenue beat analyst estimates. fixed income currencies commodity trading is topping the consensus and proving to be an increase from the same time a year ago. one thing that caught my attention was the net interest
margin at 2.25% which was lower than expected. when you look at the numbers, what do you think is the bigger issue, the net interest margins icc equityg or f trading came in better than expected? surprise wasy the more than likely what we saw on the fee income side of things. investment banking and trading and other fee related activities went to the upside. of had five aces points interest margin compression which offset strong loan growth. this is a story of fees beating and credit being stable. scarlet: how does jpmorgan
position the bank for growth with interest rates staying the way they are and volatility continuing to be a concern? >> i think that will be a big question on the call is what jpmorgan sees for the third quarter in terms of that the income. the one good thing about lower rates is mortgage activity tends to stay high. the flipside is with all of the brexit concerns, you have uncertain deals being canceled or held off and some volatility in the market. it will be interesting to see what they say about whether that activity that surrounded brexit that helped the trading numbers was a one-off or can continue. how lean are the banks? how much can they cut costs if
the net interest margins continue to be cut? can they cut jobs? think there is a limited ability to cut some costs. the efficiency challenge the banking industry is facing is a revenue problem. it's not an expense problem. this industry needs rates to improve in order for earnings growth to happen. expenses cannot really be cut, we need to take capacity out of the system and that likely comes fromm&a activity rather than cost cuts. tom: thank you so much. he is on the same page with you. optimist on the stock market and american industry and the groups that are clients of jpmorgan. state the bull case one more time. >> free cash flow yields,
valuations with companies generating positive cash flow from operations. stimulative federal reserve board, marginal gains in the economy especially watching the ism index is the one go to number. never underestimate the ability of u.s. business to fight through the headwinds of poor fiscal policy especially on the regulatory side to be a contributor to growth. tom: thank you so much. david, with the bank of england due to announce its interest rate decision in moments, if it cuts rates, does it give the rally in u.s. equities a leg up? >> it connects the dots. fight central banks and you don't fight the fed and low interest rates will be a catalyst to hire asset prices and skepticism will allow markets to go higher. tom: thank you so much. i am fascinated by what we will see from governor mark carney.
i cannot remember the last time i did not have a clue about the bank of england. >> no matter what decisions they make, if they decide to cut interest rates, it would be preempted because the data does not indicate it's necessary. tom: we will do that on "bloomberg ." i am thrilled to bring you michael mckee on bloomberg radio in idaho. it was like 37 degrees there last night. he is running away from grizzly bears to get to the studio. mark carney in london, we will do that next. this is bloomberg. ♪
♪ david: welcome to bloomberg go. jon: breaking news from the bank of england, rains unchanged -- rates unchanged. a slim majority expecting a rate 0.25, did notr is happen, rates unchanged at the bank of england, 0.5%, they stay where they have been since march 2009, the asset purchase program remains as it was at 375 billion pounds. you see the pound is stronger. betrayed. -- is how we trade. let's bring