tv Bloomberg Surveillance Bloomberg October 7, 2015 6:00am-7:01am EDT
the crisis over. america is not part of a global retention -- of a global recession. oil is above $50 a barrel. vladimir putin's ruble is stronger. in this hour, willem buiter, ed morse, and tobias levkovich of citigroup. this is "bloomberg surveillance ," live from our world headquarters in new york. i'm tom keene with vonnie quinn and guy johnson. this could be a six hour program this morning. cameron will be speaking soon on the e.u. brief us on what you think you will hear from mr. cameron. nominally, he is going to be talking about houses and the fact that the u.k. needs to build a lot more houses. also any hint about a referendum membership is going to take place.
that is the thing that we do not know yet. he will talk about housing, but listen for the e.u. stuff. tom: guy johnson, thank you so much. right now, let's get to our first word with vonnie quinn. president obama is trying to win over commerce in the public on a trade deal. he met yesterday with business and agricultural leaders. he said the video would boost exports by eliminating barriers. agreementobama: this taxes --te 18,000 this agreement limits 18,000 taxes and tariffs. most of them will fall to zero. vonnie: he must wait 90 days before signing the agreement. then it will go to congress for an eventual vote. russia might agree to u.s.
proposals for coordinating airstrikes against islamic state in syria, according to a russian defense official. midair. wants to prevent confusion in syria. russian flames have -- russian planes of already flown into turkey's airspace. the obama administration will release about 6000 inmates from federal prisons at the end of this month. the goal is to ease overcrowding . it is also part of a plan rolling back long sentences to violent drug offenders in the 1880's and 1990's. tuesday was the first day since september 24. a huge mass of water is flowing toward the sea, which is threatening dams and could lead to more evacuation. turning to baseball, the houston astros beat the new york yankees last night. tom: crushed them. vonnie: the final score, 3-0.
next up, the kansas city royals. for the yankees, it is a start of a long, hard -- tom: i thought the yankee pitcher, tanaka, did not have his footing. vonnie: a lot of people were disappointed. tom: the houston astros move on. -- igin the october season want to go through a data check with our it steam to guests. -- with our esteemed guests. brent crude well out over $50 a barrel. we will speak to everett morris about that. i want to look at indonesian currency of indonesia having a stunning reversal in a rally of indonesian strength. that is a huge three-day move, and we will talk with willem buiter about the emerging market as well.
the chart just went black on us. let's skip the back monitor this morning. technical difficulty that we will fix as we can. right now at this hour we have an all-star lineup from citigroup. willem buiter is the global chief economist, and tobias levkovich, chief u.s. equities strategist. we could spend one hour with each of them. we have had huge anticipation of their appearance. let me start with your call, the probability of global recession. is 3.1% the wrong number? willem: i am looking by the middle of next year for global growth just below two. they're getting there, but not there yet. tobias, it has held up
pretty well. it has been a resilience. why? tobias: we did not see the resilience among the government stocks. they felt pretty sharply as investors worried about the china -- some of it is dissipating. we can see it through various measures. the other factor is, the hardest element of this is trying to capture what the event in china will be in terms of profits. that is what people are struggling with. tom: i don't know if you notice everett morris daily. everybody pins oil and commodity usage to china. is that the correct analysis? willem isnk right. if the world economy is not growing, commodity demand is not growing.
the only places in the world where we have seen a demand response has been in the united states and india. more people are on the road, more people are driving. in india, there is a big gdp factor, plus the fact that they have liberalized prices. elsewhere in the world, it has been relatively disappointing. basically a negligible response to low prices. in from london. global just rates are on the floor, and yet we are struggling to generate any kind of growth. you are talking about a recession. levelterest rates at this at any way stimulating? willem: there are strongly diminishing returns as regard -- all we can extend balance
sheets, they be put rates lower in the u.s. and the u.k., but that is about it. as long as they are zero bound on nominally just rates, central banks are going to be struggling. just wenthree of you into the teen sovereign wealth fund, $142 in it this morning. tobias, do we know what the risk-free rate is? pros like to talk about looking at libor. is there such a thing as a risk-free rate? so that exxon mobil can do their analysis off of it? tobias: in the academic world, i tend to look at the five-year forward contract to get me a better sense of what i will call normalized level. that is probably about 80 or 90 basis points higher than the 10-year treasury yield. that is my baseline. it is quite positive.
vonnie: two questions. when is your call for the first interest rate increase in the fed? willem: sometime next year. if i am right on the global forecast, then it will be a little later. change?should that should the fed move in december or even in march of next year? is that an even worse scenario? only feasible reason they should move is because of financial stability concerns. tom: as we touch on oil later here, the fragility of the saudi oil royalty, there are reports that they are older and elderly and they are moving on to a changing of the guard. is saudi oil the pivot right now, or is there a new one? it is a question of where the supply is going to come from. -- newmont ed: it is a question of where the supply is going to come from. this is a new group of people.
is a rejuvenated government and they are certainly more assertive, not only militarily around their area, but certainly in the oil market. tom: should we rip up the script with these august guests? with let's talk beer. we have tobias levkovich with us. is -- theyte beer are owned by these two people? quebec it is a microbrewery. i have to be loyal to my roots. tom: is it free money that reason that will has -- tobias: some of those things on the high-yield market are starting to put some pressure on the m&a as the financing is not getting done as easily. tom: to bring us over to edward
morse, many edward people have had to justify their balance sheets come october of next year. are we going to see balance sheet carnage ? ed: so far regulators have been comeively accommodating and we have seen issuance of debt and credit against the market general expectations. this october we have seen further contraction. vonnie: are we going to see a lot of combination projects? ed: we have already seen a lot of those. there was one in canada that was not too successful, but this is the time for gobbling up smaller companies. buiter, issor lawrence summers correcting using the term secular stagnation? willem: yes.
in china, that is what they are looking for. yes, i think it is a material risk, but unnecessary. morse, tobias levkovich, and willem buiter with us. we are thrilled to have them with us for the hour. coming up later, lawrence summers, the former treasury secretary. i'm sure he will speak of secular stagnation. look at that for the next hour. we are with the team from citigroup this morning. this is "bloomberg surveillance ." good morning. ♪
third time's the charm. after making -- the offer is worth $104 billion. sab miller says they are offering -- they are very substantially undervaluing the company. working are threatening to go on .trike tonight members of the auto -- the united auto workers rejected the contract. the two sides are still talking. theswagen's chief says diesel powered car at the heart of its scandal will be fixed by the end of 2016. the company says recalls will start next month. today vw must tell the german government how the repairs will be done. vw made 11 million cars with software that tricks emissions tests. tom: edward morris -- edward morse with us. and then there are is the equity
markets. tobias levkovich has combined over the years and acute statistical effort with gaming the sectors and critically were not to be within the equity markets. he joins us this morning from citigroup. tobias, what do i want to avoid right now? where do i not want to be? tobias: we have avoided a few areas like transportation, materials. it may be late in the game to get out of those stocks. one of the areas where suggesting as investors, the long energy relative to consumer discretionary. you get the benefits of oil prices and people go out and buy stuff. that trade has gotten so extended, there -- it is probably better to reverse it today. and if you take the dow adjust for inflation, by any definition we are in elevated prices. how old is this bull market?
tobias: you would say the market came out of its trough in 2009, but the old high was in 2013 and you are only a couple of years in. second bull markets can run a decade or longer. in that sense you are probably at the end of it as long as earnings hold up. from 1982 through 2000, nobody debates we were in a secular bull market. you had a crash, a recession, the tequila crisis, the asian financial crisis, so you can get bumps along the way even in a secular bull market. about whate talking is happening with the oil trade. the bulk of european fund managers are outperforming benchmarks at the moment. that tells me they are probably light on oil. oil is up 10% at the beginning of the month. we set up for a squeeze are as they need to meet their benchmarks? tobias: i suspect some of them are a little bit skeptical. on italyst went long
weeks ago. the on that, we surveyed our clients last week and it was fascinating that the second most attractive sector they were looking for was energy for 2016. they do think there is value there. vonnie: china markets reopened tomorrow. any concern that elsewhere in the world will impact u.s. markets? tobias: sure. the last couple of months have suggested we have to worry about that. it is more that there is this excess product out there that has to go somewhere. it gets discounted to move it, and that hurts profits. , when youssor buiter look at what tobias is talking about in the fiscal policy, is it a single digit world? advocating forn decades that we will see 1% or 2% returns. going to return to
tobias it's a there is a 7% return on equity is? willem: i would say so. tom: you cannot say that. i am never going to retire. safe real rate at the short end is zero. tobias: i would say the last 50 years the return on equity's is 7%. -- on equities is 7%. 5% underlying growth is normal, and 2% dividends give you that. that is not that outlandish. tom: what is outlandish is that ed morse did not say a word in this lock. .- in this block on friday, folks, from lima, peru, at the annual meetings of the world bank and the international monetary fund, francine look law will give us -- francine like law -- francine look law will give us wonderful
tom: good morning, everyone. eigning question at the nation's capital -- can the washington capitals get out of their own way this year? what a great year for the capitals last year. we will see as we cover "surveillance" hockey for you. washington, d.c., waking up to a new nhl season. vonnie: that is why you are so excited this morning. nbc sports network we will
watch. it is great. vonnie: i am not so much about hockey. back to your morning must listen. withernanke sat down charlie rose and talked about the importance of the inflation race. bernanke: the inflation rate is essential to this because inflation has been quite low, and for good reasons the fed has set a target of 2% a year, which was done while i was chairman. it is important that the fed reach that target. so the judgment they are making -- first, how strong will the economy be? will he continue to be growing at a pace sufficient to keep putting people back to work, and to have the economy heating up enough that inflation will move back to target? vonnie: what year is that from? it feels like that could have been any year. tom: he looks really rested, away from the public. willem buiter is with us.
all the textbooks of all these people we speak of, including what you taught. if we are zero bound, how do we get off of it? willem: with helicopter money. that is the only guarantee. infrastructure investment in the u.s., finance -- tom: but that comes from washington, from capitol hill, not from the fed, right? willem: absolutely. it has to be a combined fiscal policy action. vonnie: you are saying that we need congress? not shooting ourselves in the foot by raising rates too soon, yes. tom: everyone i know, such as willem buiter, needs infrastructure. your history can lean on that, right? tobias: there are parts of
infrastructure that the industry -- tom: at the end of the day with mr. bernanke trotting out his new book, it is about the model of the art criticism being the old model, the phillips curve model, in the basement, a physical model that a w phillips came up with -- that a w phillips came up with. does that model still work? do you believe in the phillips curve? the phillipsn phillips curve, but a suitably augmented phillips curve. he had this long run trade-off with inflation and employment. it is a very strong stretch of the imagination, a very firm belief in history, saying you can get there. intelligence -- and intelligence -- i would say an intelligent phillips curve works, yes. on bloomberg,
for the first time, an assault on rebels by syria upon army was backed by russian jet opposition leaders say the coordinated upon primary rush propping up bashar al-assad, not stopping islamic state. an announcement that he will not seek another term. some candidates are already emerging, but the next scheduled election is fighters off. has to persuade congress and the public to go along with the free trade agreement. he told business and agriculture leaders yesterday that it is a win-win for u.s. companies and workers. president obama: the trans-pacific partnership took five years to negotiate, and i want to get the best possible deal done for american workers and businesses. that is what we have achieved. vonnie: the president must wait 90 days before signing the deal. then it will go to congress for
an eventual vote. south carolina where it -- south dealing residents are with record floods. the flooding is blamed for at least 15 deaths. a first for china's ambitious state program. four satellites have been put into the atmosphere. china wants to land on the moon within five years. tom: this morning, what we do is a conversation with smart people. we have willem buiter of citigroup, tobias levkovich is well on the equity markets. now joining us, edward morse on oil.
advising their clients worldwide from an international perspective. at $80 you said no, at $60 you said no. at $40 you said we could spike down clear markets and then come back. , did we clearl the markets and find stability? ed: i don't think so. it is hot money chasing headlines. he had perished in the last week. at the end of the week, we had a report that was fairly bullish and the market responded. it goes down, production will follow immediately. we should have learned from last spring that that does not happen. then we had some bullish data from the upi and inventories. the market momentum from last week -- this carried forward. it is dana point driven, but underlying those data points are underlying fundamentals that are fundamentally bearish. tom: the chart of oil is stunning, back 60 years.
inflation-adjusted, and when you adjust for rising wealth, it is an approximation chart. will we stay back to where we were, or can opec assert price control again? ed: i think opec is not able to assert price control. opec, saudik about domestic politics, it is hard to predict. it is hard to predict another recession, hard to predict who is going to win the battle underway on who is going to be charged. we have everybody in saudi arabia hiring consultants from around the world, telling them what to do on oil policy. if you were to tell them what to do now, particularly system, whattical would you say to saudi royalty? ed: what they are doing now. when prices go up, it will stimulate production. 80 looks like a real ceiling.
vonnie: i wanted to point out a headline this morning that abu dhabi is exploring asset prices. 'sy: i am curious to get ed take. there will be a meaningful impact on how some of the u.s. rigs are working. talk about saudi policy. how will they see that? as an opportunity? how will they look to lean against that? if we get these rates going a little bit longer, talk about that relationship little bit. is a u.s. rollover happens, it will probably be fairly shallow and not meaningful enough to the balance of the market. somebody will have to give. say wait a minute, we are going to make a contribution. they know if they pull back on
supply, they will be in danger of losing market share. we have iran around the corner. any barrel of oil market that the saudi's give up now, iran is going to grab. it will be hard for them to get it back. i do not see them at this point blinking. vonnie: shifting back to the domestic market, you were in oklahoma and traveling around the u.s. doing? ed: the texas economy is much more resilient than in the 1980's. the dakotas are hurting in the sense that the level of activity has fallen. workers have been laid off. they are moving to other states. this is a bit of a relief. tom: i am trying to think of willem buiter on a horse going across the plains of north
dakota and south dakota. have we observed yet the value of cheap oil? those its a benefit to is a benefit to those who consume it, and loss to those who -- it is a benefit to those who consume it, a loss to those who produce it. tom: it is a loss. willem: it is probably negative. guy: let me ask you -- what happens with unemployment inflation, and i want to bolt in the oil price here. i get a sense that we're moving off about how much slack there is in the economy and moving on to figure out where the equilibrium rate is. how does oil feature into that? if you look at supply and demand and what is happening in the u.s. economy, and you factor in a lower oil price, are we having
to lower down that equilibrium rate? willem: clearly the u.s. is a net importer of oil. it will boost demand ultimately. it will hurt capex in oil and the industry extraction, but it should also boost capex for the percentage of the economy they uses oil as an input. it is not do anything directly to the equilibrium unemployment rate. tom: tobias, i look at exxon moyle -- and exxon mobil and other winners. earlier some enthusiasm for energy. when you look at energy, glencore and all that, can you overweight with exxon and those kinds of companies? tobias: we are currently neutral energy. on a relative trade versus consumer discretionary, areas like retailing services, yes, it
is an interesting opportunity. on onese who go long way side and short on the other side. you do need to see some consolidation on the industry. you will see some companies go bankrupt and clear it. the higher-quality names are probably a better place to be. thertunately, you may see more highly leveraged companies get the benefit. tom: what is your terminal value for oil? do you have a number? ed: we have a number, somewhere between 60 and 80. tom: "somewhere between 60 and 80." got to love that single-point estimate. coming up later on bloomberg television, a conversation with the former treasury secretary, the former president of harvard university, lawrence summers.
tom: this will not make headlines in america. it should. the prime minister of the united kingdom is talking of domestic issues, but maybe not. we go to guy johnson as david cameron speaks in manchester. you mentioned the e.u. referendum. where is the nation? are they behind prime minister cameron, or do they have other ideas of what the i-19 them -- of what the united kingdom should do? guy: we do not know where camera is. that is the starting point. that is what we're listening for in the -- we do not know where cameron is. that is the starting point. where does he think the government should be positioned on this? we do not know where he is starting from, i think is the
problem right now. we are still waiting to find out. tom: does he have a united tory party guide him? guy: that is a joke, right? no, is the answer to that question. he very much does not have a united party behind him. inform those to dumb americans like me. right now, a single best chart. this.quickly through the 10-year yield comes down. the morgan stanley global dividend is flat and now higher than the 10-year. tobias, we mentioned dividends earlier. european dividends are large, so are we getting the fair dividend we should get? ed: i'm just saying, when was
the last time we had to struggle through this? it took years. i think it was 1958 when you saw the crossover the other way. people only bought stocks after the great depression for income. the return that we think about, the appreciation came later. once they crossed over back in the late 1950's, there was this idea that it is over, do not buy stocks anymore. maybe this is in the secular stagnation world, dividends are the way to go. tom: there is a lot to do with discount cash flows. the thing the three of you have in common. tobias: where do those cash flows have to go? tom: are we going back to the 19th century? are we going back pre-martial to another time? bill gross just started clipping coupons per it has anybody here clipped a coupon? have you ever
clipped a coupon? willem: not yet, but i am waiting. it is really a very strange world in which the real rate is zero, negative. , it isually, nominally this crazy risk-free rate. and the nominal rates to go with it. that is the anomaly. with the bank of japan doing nothing today, guiding forward that it is not going to do anything at the end of october either. is in athe country recession and this will not do much to get it out of it. vonnie: we move on to top photos, tom. tom: are they all citigroup photos today? vonnie: tuesday afternoon, thousands gathered in central park's east meadow to pay tribute to john lennon. his widow, yoko ono, was also
there. can you believe this, he would have been 75 years old on friday. there is strawberry fields there. our second top photo. guy: the rehearsal for the indian air force day. that is near new delhi, the 83rd indian air force day on october 8. we are going to be seeing jets helicopters, team drills, and a few paratroopers as well. vonnie: a very pretty photograph. thank you, guy. more's, -- that is buiterleftwich, and parachuting down, right? lauren's last name was
covered in this post by tom hanks. that is very cool. vonnie: i would want to visit his office to get the id back. i would not want his office visiting me. it would be like you finding someone possible id, tom. we are talking with willem buiter this morning. coming up, we speak to john from stanford university. professor taylor will talk about american monetary policy. don't forget, ben bernanke is with us tomorrow on bloomberg radio as well. from new york city with willem buiter, tobias levkovich, and edward morse, this is "bloomberg surveillance." ♪
good morning in the united kingdom. prime minister cameron speaking on domestic issues. guy johnson is telling us, a little bit of division among the tories. we are waiting to see if there is any comment particularly on the united kingdom, and a fractious relationship in brussels, as well. cameron looking at hydrocarbons in particular. the yen and the euro do nothing this morning. there are three ways to look at the ruble. 62.06, speaking of a stronger ruble, speaking to a recovery in oil process. -- a recovery in oil prices. here it is, the loonie. we need to look at corporate news worldwide. here is vonnie quinn. vonnie: down 17% premarket.
toggle bell missed third-quarter profit -- tocco bell missed third-quarter profit estimates. stop ofy results -- the -- samsungk of yum closed 7.5% higher. and an investigation in new york. the attorney general wants fanrmation from fan dual -- duel and another fantasy sports company. tom: i thought they were going to go down in flames, and that is where we are right now. vonnie: do they have a hockey fantasy league yet? tom: i don't know. i am shocked by it. i don't not know what else to
say besides that. what a wonderful hour this has been. we end strong with willem buiter, tobias levkovich, and ed morse. we speak with willem buiter's world making headlines on global recession. how do you define a global recession? willem: to me it is global growth falling below 2% for a year or more. we already have a slight negative gap, and that would put underutilization of resources, which is my definition of a recession. not negative growth. vonnie: the imf and the world theirave downgraded outlook. but they are still not forecasting recession. willem: i am more pessimistic than they are. they have a long tradition of being behind the curve in for their forecasting. we will see. is in theweakness
economy, it will keep us occupied for longer. guy: professor, the banks have a meeting tomorrow. how quickly will central banks respond to your thesis? do you think there will be anything from dr. carney tomorrow there will disabuse the markets that -- willem: i think that if the central banks drink the coffee black, they will indeed not raise rates anytime soon. it will indeed be the case, if my scenario works out, the fed cutting rates further. necessary if this weakness deepens. vonnie: this bounce in emerging market shares and currencies, that we have seen over the past few days, will it stay the same this volatility, it
goes up and goes out. there is a lot of noise. professor, you are at lsc and teaching a course, and you program,regiment differential equations, and all this modern mumbo-jumbo. is one of the challenges we are having in central bank leaders and thought leaders -- they are all thinking in a modern sense versus thinking in a more 19th-century static sense of having the courage to get off the zero bound. willem: the traditional market teaching of the last decade is useless. you enter the central bank, even if you believe in dynamic static equilibrium, you lose it very quickly and begin to think of financial structure, about liquidity, and all the issues that make no sense. tom: bring up the chart here of brazil.
it is the brazil up chart and the brazil down chart. if janet yellen's central bank or to the willem buiter prescription for chair yellen with brazil? willem: it is not a mandate, right? she would stay lower for longer, i think. that could minimize the damage. tom: you say that, and cannot throw golf agrees with you. do believe that the -- and cannot throw golf -- ken rogoff agrees with you. he is very much of the same school, that it dual mandate at this point to raise rates anywhere. buiter, this is been a pleasure, the first time the three of you have ever been together except for the meeting that you guys had with mr.
a new strategy has smartphones and microchips flying off the chills. -- off the shelves. "bloombergwelcome to go." i'm stephanie ruhle. david west in. thanks for being here with us. >> i have to tell you i am a bit rattled today. i am. i sat down with bill ackman last night. we will be sharing that interview with you. his production for 2016 was not about the fed about herbalife, about biotech. it was about mike bloomberg. if you are looking for "bloomberg