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tv   Bloomberg Daybreak Americas  Bloomberg  February 23, 2018 7:00am-9:00am EST

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, china takes control of anbang insurance group, the largest takeover of a private company ever. the secretary of treasury says you can have -- inflation snoozer, japan inflation stays below 1%, eurozone inflation stuck below one. david: welcome to "bloomberg -- "bloombergi am daybreak," i am david westin. alix: we are about to run a half hours to the cash open. deputies -- equity futures, just hire, but it is all about selling it to the close. the dollar is broadly stronger against all g10 currencies. by treasuries, that has been the theme over the last couple of days since bond options did not blow up the bond market.
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crude rollover continued a little bit as the dollar trends higher. david: at 10:00 this morning eastern time, president trump will speak at the conservative political action conference outside washington. at 10:15, new york's william dudley and eric rosengren appeared together in new york here it the fed releases its semiannual policy report to congress. at 12:30, president trump goes back to the white house to meet with australian prime minister malcolm turnbull. alix: we discussed the top three stories of the morning. a $315 billion china blowup. higher wages may not lead to higher inflation? where is the inflation in japan? david: we are going to welcome lisa abramowicz and michael mckee. i heard when they bought the waldorf-astoria.
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this shows some of the places where they made investments around the world. this came from nowhere, for me, and grew really big. now the chinese government is saying, not so fast. so manyis raises issues, especially after what we have seen with hna, another glom dutch conglomerate -- conglomerate. you can see a $2 billion investment in the waldorf-astoria and other huge property investment. will they have to divest? which chinese conglomerate is next to be targeted? what does that mean about thernational purchases and real estate market, as well as the chinese economy is xi jinping is serious about cracking down on leverage? david: they are not nationalizing it, it will still be private. they say they will just run it for a year or so and they will charge the former leader with financial crimes, and recapitalize.
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michael: you have to look at the way they put this together. to -- are going to try try to d erisk the economy. mismatch raised a lot of concerns. they used that money to buy properties. as anbang a bad company? analysts say no. ubs says this could be a viable company if you strip out the high risk her kisses -- purchases. 11% of the company is high risk. lisa: there is a big question, are these properties going to be worth what anbang pace for them? liquiditye not, that mismatch is a huge problem. think about the siv's during the crisis. states, in the united
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we may companies and shareholders pay for these things, or taxpayers have to do it. in china, the taxpayers are going to do it. no question the government will print the money to make this work out in the long run. they put some people in the jail. maybe the founder will have to go to jail. in general, they feel they can get through this. they want to avoid an aig moment, the thing we saw here. that is the take away from this, if you want to buy yourself a hotel. alix: clearly. u.s., we are taking a look at steve mnuchin. you canin an interview, have wage inflation and not necessarily inflation concerns in general. how valid is this? you are laughing. michael: i am joining the rest of the economics world in
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laughing. lisa: and economist was on bloomberg television yesterday afternoon and he thought this was viable. michael: probably not. for a couple of reasons. we are probably going to get inflation anyway. finally, inflation is picking up around the world. it is a question of how fast it accelerates, and the problem for the administration's they talk about this being a supply-side problem and you increase the supply and they do not have a supply-side problem. it will not take that long for inflation to show up. how does the market react? the market will not wait around to see if in the long term this works out. investors,al view of kind of the obvious thing, you get wage inflation like he is talking about without increasing -- wages higher without increasing inflation, then your profit margin is lower and that
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is bad for shareholders. if you get inflation, yields go up. lisa: steve mnuchin was echoing what white house advisor hassett had just said. i wonder how much this is a wink, wink, nod, nod to the federal reserve, saying you do not have to raise rates oh quickly because this will not be an inflationary story, it will just be a growth story. about inflation, you do not have to worry about it. that has been the big tension. i was just in minnesota talking with neel kashkari, the federal reserve bank president. while this was before those comments, he said something interesting. he said we have great disagreements on the board about inflation and how fast we will have to add,d -- but we are united that there will be no political interference and we will react
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to inflation. david: this is not the first time we have heard this. it sounds reminiscent of the reagan years. it is almost a matter of theology or orthodoxy. if you are pro-business and progrowth, you believe the supply-side will take care of itself. michael: and it has not historically. lisa's point, there is not an economist at the head of the fed. let's talk about inflation elsewhere. the final read for inflation for europe as well as japan. japan could not breach 1% and euro area core inflation stayed at 1%. is this an fx story? michael: not right now. maybe to it a little bit -- a little bit of an extent in japan. huge exportting numbers, half a percent.
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that powered the german economy to grow at its fastest rate in seven years. the euro not weighing on german trade and it is probably not affecting the rest of the eurozone. japan's inflation rise on the headline was basically due to cold weather, because fresh fruit and vegetable costs went up. they have been trying to generate inflation a long time. they finally got a little bit, and it is not rising hugely fast , but it is the same story the world over. david: the question is if the ecb thinks that is the real issue. arians what mohammed and -- mohammed el-erian has to say -- highlight common economic optimism and similar analytic challenges, but apply different risks. the fed says they are worried about a bubble. the ecb really goes after fx.
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they are concerned about the stronger euro. lisa: there is a theory out there -- and i think this is very important -- that the ecb is driving above globally with bond yields, and their worries are frankly paramount to everybody's, because that is the next shoe to drop with respect to tightening. if you see 10 year treasury yields on the second day of declines, we saw a big decline in german ten-year yields as there was a big question of whether 10 year yields can continue to rise in the u.s. if you are seeing softness in some of the data, excluding exports, some of the data in the european union. michael: we are seeing strength in germany. if it continues, because it is not just exports but also capital investment, because they are using up so much slack in germany they are starting to spend a lot more, companies are, to increase productivity. if that keeps happening, they
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have an issue of -- we also saw the first pattern wage negotiations in germany, with a big increase for workers. if that continues, you will see some inflation there that the ecb will have to react to. they do not think they will have to go off course yet, but the markets will think about it. alix: jeffries had a note saying there is overheating in germany. thank you so much. lisa abramowicz and michael mckee. treasury secretary mnuchin says you can have your cake and eat it too bank, -- eat it too bank, and jeff gundlach says no dice. this is bloomberg. ♪
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taylor: this is bloomberg. general mills adding natural dog and cat food to portfolios. the company has agreed to buy blue buffalo for about eight alien dollars. global food giants have been snapping up makers of natural and organic foods, which have faster growth than mainstream brands. posted its first full-year profit in a decade, but no celebration going on. rbs has not settled an investigation into u.s. securities and they cannot return dividends to sell the british government's majority stake. issued anckard optimistic forecast. are seen as signs that hp's turnaround is starting to work. company announced plans for a billion dollar buyback and plan increase. that is your bloomberg business flash. alix: treasuries secretary
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mnuchin brushing aside investor worries about raising prices, saying you can have wage inflation but not inflation concerns in general. jeff gundlach disagrees. -- we will policies expand the buffalo art museum without making it bigger. -- theliest the break of silly sarah bryant called and lena komileva are with us. we were just talking about this on break. you say a supply-side argument is not totally crazy vassili: the point i would make is whether wage increases translate into higher inflation depends on the purchasing power. if you listen to some of the fomc speakers last year, they devoted time to that. it is still affected by global
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competition, digitalization of the economy, the ability of consumers to make price georges -- choices in a more informed way, so there's the possibility firms will not pass on the full increase in wages to the consumers. timetheless, i think over higher wages should lead to higher inflation. david: i am not an economist. what has to happen with productivity to have 3% or three plus percent growth for an extended time, but no underlying inflation? can you hear me? lena: yes, sorry. i did not hear that the question was towards me. look, there is the fundamental question that you raise here, but if we leave that to one side for a second, there are two political and policy implications behind his comments. if a minister of finance of any
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nation is not talking down the trade deficit and talking down the cost of its treasuries, talking down inflation, talking up productivity, which is what is needed to limit the transmission from unit labor costs towards higher end-user inflation, to the question that you just raised. this minister of finance is not doing his job rate. front, therecal are attempts to politicize the tools of monetary finance by politicizing the exchange rate or the interest rate, by giving an open hand to the suggestion to the fed they should perhaps consider the two sides of the story, not just the demand cyclical mentum but -- momentum, but supply-side -- that is a dangerous path to go towards, the u.s.alking down
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cost of borrowing or the u.s. currency is a matter of international relations. david: let's put fx aside for just a moment. help me as a matter of economics, has the white house is saying if we get capital investment up, we will get productivity up and that will keep the inflation down. from an economics point of view, how direct is the relationship between capital investment and productivity increases? it is basically about return on capital, return on investment. the truth of the matter is that we have had very spotty signals from the stock market, that this return on investment is happening. the question is, is this happening on the back of the projection generation economy,
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and the jury is still out. the importance here is one of time. it will take a very long time before the deficit spending and tax cuts materialize in the form of stronger investments, private sector, public sector as well. how this is financed and implemented, there are some significant lags. in turn, that would eventually egoove the real economy structure, the ecosystem that supports a productive investment. butdividends will be there they will be very much in the long term, whereas for the fled -- fed, the inflation calculus is about raising questions of where the potential growth of the economy is here and now in the next two years, and how in turn that will translate into the cyclical inflation premiums the u.s. economy can generate.
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the two sides are not inconsistent, but we talk about two different time horizons. the: is this just sort of way of trying to get higher yields on a weaker dollar? you can see the correlation between the 10 year yield an dollar index, almost in negative territory. vassili: i think the dollar has been re-coupling with yield. i doubt that these particular comments were directed at the dollar. , anynk it is obvious that administration would want an acceleration of underlying growth. this is what we want. in the long term, it is all about productivity at the end of the day, the trend pace of growth. there is a currency link in the sense that if we were to get an acceleration of the trend growth in the u.s. economy, i think it would be positive for the dollar because we would have a good steepening in the yield curve in terms of the long-term real
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yield would go up. i think the dollar could benefit, but unfortunately, in our own forecast and more generally, we are not expecting that strong of an impact on productivity from this tax reform. david: what are you projecting over the next year as far as the dollar goes? vassili: i think we are in a weakening cycle. it started really last year, and the cycles last five to seven years. it does not mean the dollar will weaken every month or every quarter. the currency situation looks a little bit like 2005, where the dollar rallied in the middle of a down cycle. you had earnings repatriation back then, so if we got a little more hawkish in the fed, yields can go up short-term. longer-term, i think we are still in a bear cycle. both of you, please stay with us.
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we will talk about the rise and fall of anbang. the chinese government takes control of the deal hungry conglomerate and charges it ceo with fraud. this is bloomberg. ♪
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david: big news out of beijing overnight, as chinese regulators step in and take over anbang. you can see from this map, these are some of the places they have made big investments. we now welcome enda curran from hong kong. tell us how dramatic this was. over here, this seemed like quite a big announcement. enda: that is a very big announcement. it is something of a cinematic fall. one analyst described it today. there are two sides to it. you have an in sure that ballooned in size through there arens, and
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questions about financial stability, how they are being financed, and asset and liability mismatch because they were shilling's -- selling short-term management assets but buying long-term. there is also a real political, economy side. is serious about taking risk out of the financial system. the state rules over everything in china's economy, and if you youa private enterprise have to fulfill the national interest and meet the communist party objectives. david: he said all of those things and the congress. what reaction are we seeing in the markets in asia to this action? enda: the market reaction has been relatively controlled, because as you say, there has been an expectation or understanding that china is clamping down on these conglomerates. move caught a lot of people
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by surprise. one analyst said it was like the fed taking over a company. this is not a takeover by any conventional sense. it is the state going in and while the state is temporarily taking it over for a year, there is no guarantee they will take a year before they run down the assets of the company and get the financing involved. very certainly unprecedented by western standards. alix: what does it mean if you are a company now? you can take a look at china's breakdown of debt. this goes back to the end of 2016, and the white bar is the corporate debt. clearly it is the corporate sector that are uber leveraged. the government is going to bail me out? enda: it certainly raises a question of hazzard. at the same time, there is a feeling that throughout the
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near-term pain, authorities are clamping down on companies that borrowed in a big way. they want to slow the pace of credit growth, which will mean near-term economic pain and disruption. longer-term, this is about putting the economy in a more sustainable, durable footing, and moving away from the debt funded growth. it raises questions of moral hazard, but the bigger picture, it is part of a shift. alix: thank you so much for staying with us. and the current, bloomberg's chief -- and the current. -- enda curran. inflation challenges faced by japan and europe. ♪
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: will thatx
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continue? european stocks on the upside despite the fact that core inflation did not go anywhere. the final read at 1%. the brexit drama continues to roll out. deal without hearing the specifics, plan or no plan. look at what is happening with sterling. it is a broader story with the exception of what is happening with the cable rate, almost hitting 140. in the 10-year yield on a weekly basis they are on their longest 20eak of gains and almost four years. however, jpmorgan is saying make it see a short squeeze coming in the bond market. we have seen solid buying. crude is a little softer as well. david: taylor riggs with first word news. taylor: in florida, authorities say that the on deputy sheriff's -- the on-duty shares deputy
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took cover. the sheriff says that his office received two dozen calls about the suspect over a decade. they may not have followed up adequately. there is a report that the trump administration is considering an offer from a billionaire to pay in part of the u.s. embassy jerusalem. government lawyers are looking into whether it is legal to accept the money. that would add more controversy to president trump's decision to move the embassy from tel aviv. joyce has quit over a sex scandal. he was having an affair with his former media advisor. that led to allegations he breached ministerial guidelines. global news, 24 hours a day, powered by more than 2,700 journalists and analysts in more than 120 countries. this is bloomberg. i am taylor riggs. thank you. the inflation story in japan, stays below 1%. still stuck at the 1% level. with the data means for markets.
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the potential story this year was that a combined convergence tapering, is it continuing to be a story of diversions? recognizemportant to that the story in global bond theets is greater than month-to-month changes in cpi figures. we have seen nothing short of a regime change in 2018 compared to 2017. the last 12 months, there were concerns about the pace of growth of 2.5% in the u.s. ofay, the realization is one a coherent global growth environment. in the last year there were fears and questions about the unemployment rate is low enough to predicate more rate hikes from the fed because of concerns about a weak wage
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growth. today there is a solid confidence consensus among officials and investors that at the very least the year of low inflation is over. the important ring here is that we do not really need strong inflation figures -- and important thing here is that we do not really need strong inflation figures to justify a strong bond yield. wages, not much has changed in the last six to eight months, but you are 90 basis points higher than august 2017. then, the same story in euro area and asia. inflation in the eurozone has not stopped the ecb towards ending quantitative easing which brings the end of negative interest rates. it is a historical transition and policy. i think that coming from this point, from bond yields that are clearly asymmetric, the fed will not need stronger inflation
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figures to integrate hikes this year. the ecb doesn't need inflation to put the world closer to the .% target without that historical support for low yields and low volatility, it is coming to an end. david: putting aside the reaction of the ecb, what is the data confronting? are we seeing real inflation in the united states as opposed to europe or japan? >> you have a global cyclical upswing. you have different economies with a slightly different point in the cycle. there is still quite a lot of spare capacity in europe. inflation will pick up quite slowly. get tot think that will core inflation until 2019 and the ecb will hike rates.
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down the road, not today. from the ecb, the war on deflation has not been completely won. they have been careful in their communications. same in japan. we have seen some positive news on the inflation front, but we do not think that core inflation is going to get consistently to the 1% level until 2019. the question is, we know there will be a tightening policy, but how quick? 106? the dollar-yen at vassalli: you can make the argument if you look at the trade weighted, it has not strengthened as much as the euro-dollar so maybe it isn't as negative. that is what they will need to
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manage. currency will need to be managed. that is a reason not to expect an extreme dollar weakness because so many other central banks are not comfortable with a lot of strengthening in their currencies. david: investors, when they look at this, what does it mean? here's what some people had to say about europe as an investment. there long-term volatility and we can take advantage. the economic activity is good in europe. we have growth rates that we have not seen for the last 10 years across the eurozone. >> for the last two to three years we have been reducing the u.s. and increasing europe and emerging markets. in the u.s. we own materials companies, like atlas cop go and industrial gas companies, that are very international that are headquartered in europe with cheaper valuations in the u.s. >> where are you most excited about your portfolio? >> most excited about europe. >> there is a tremendous amount of good economic news out of the eurozone.
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that is no secret. on a relative and absolute basis they have put in more growth than any other major economy. david: we just heard from a series of ceos, investors, and analysts that are saying it is time to buy europe when it comes to equities. does that make sense? think, looking at the of month-to-month changes and international comparisons has been a poor have to look at the spread of euro-dollar of the last 12 months to realize it has nothing to do with the exchange rate movements of the dna of global finance, the dollar against the euro. what makes sense, is understanding interest rate the context of the global risk cycle of the last 12
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months. we are seeing the early stages of the dollar strength that 2017,ed between 2014 and which happened in a very different international risk environment of concerns, taper tantrum concerns. china, questions about the durability of the eurozone recovery, and the inflationary cycle.ce compared with today's environment of coherent global growth, confidence in policy as , it is a very different story. i think that in a world where central banks are prioritizing growth over inflation control, it is too early to expect normalization in exchange rates versus interest rates relationships. alix: talk about investment coming back into europe. billion.tflows of $2.4
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what does that do as cash comes into the eurozone? vassalli: that is why you are seeing the outperforming interest rates. there has been a re-asset interest story that favor the euro. i think that the story will continue. to be a strong consensus behind european growth, and i don't think it is wrong. forooks like this will go european equity markets to continue attracting inflows and that is why we think the euro will be supported. investors can get more creative with how they want to play the european recovery. it is not only the eurozone. there is the central european economies that are highly geared to the euro. there are countries outside of area like sweden and
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norway that are also highly geared to the recovery. there are opportunities in the eurozone and around it. david: how does that interfere with the underlying economy? there is a piece in a bloomberg saying that the ecb is concerned about fx because the engine of growth is exports. that stronger europe can cut into exports at some point. beenlli: the recovery has more domestically driven than other recoveries. that is an important point. i think that they are more concerned about the euro. we heard about this from ecb officials before. there's noteakness, much that the ecb can do about that and that trade weighted euro has not been as strong as the euro-dollar. 130, and a run towards fair value is around 126 in our view, if you cross over 130
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quickly that is a stronger argument it is becoming too expensive. alix: when we go into the italian election and a potential coalition with germany, what is the downside potential? vassalli: ultimately i think the outcome will be benign, but going into the elections markets like to hedge their bets. we will see more than increase in euro downside risk going into the italian elections, but we think it will bounce up after that. for us, the focus will be more about the fed and the reaction. thank you both very much for being with us. intois it take to make it the 1%? next.l explore that if you can't watch the
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television, you can listen to the radio from 7:00 to 9:00. is on bloomberg surveillance and you can hear them in new york, boston, the bay area, and in washington, d.c. on sirius radio. this is bloomberg. ♪
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here in the hewlett-packard enterprise agreement, my quest to the ceo of century alumina. ♪ taylor: now to your bloomberg business flash.
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there is a surprise at the top of the rankings in the u.s.. new genesis luxury line. they beat audi from the top spot. bmw, lexus, and porsche round out the top 5. talking to goldman sachs about returning to the firm according to the washington journal. how was the deputy white house security adviser until last month and ran goldman sachs's philanthropic role. , the price for $.5 billion. part of the price is a 20% stake in phoenix. aberdeen wants to focus on asset management. that is your bloomberg business flash. david: we will turn to the wall street beat, where we cover three things that wall street is buzzing with. number one is the pay gap showing up for big banks.
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show bigand rbs differences between men and women. number two is the rich get richer. blue buffalo to general mills was already having a good run. and number three, the 1% threshold. how much do you need to make to e in the top 1% or the top 1%?00 of paid 38%, women are , 48%.n average, barclay these are huge numbers. >> this is part of the u.k. initiative to get this data out of banks that have offices in the u.k.. it will be interesting. we were talking in the newsroom yesterday to see how the numbers come out in the u.k. to how banks position it in the u.s..
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people are starting to voluntarily report some of this, but the numbers are stark. it, you thinkat that if a woman has a job and a man has a job, -- alix: and it is the same job. >> it is actually a deeper problem. we're talking about it before we came on, you are seeing many fewer women in senior positions. that is what is skewing the numbers. this is a deep long-term structural problem. the pipelineve issue, you have people lined up and who is making the decision to promote them early to have them move along. you can't just pick someone at random. that it isow prevalent in many industries, but bloomberg did a lot of good work on the oil industry, talking about how there is one woman ceo in the major oil companies. there is one. field, theyn the
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wanted to cut costs and did not want to build a separate facility for women. they didn't want to build a bathroom so they couldn't promote women, therefore there are no women ceos. david: given the me too movement that is not directly related to that, but you have to wonder if some of the side effects will be an increase in reporting on this. you come out with your earnings, and let us know what your pay cap is. >> to that point, when we have seen the u.s. banks come out with it, they have been able to play with the numbers a little bit and say there is not a pay cap because we are adjusting for position, geography, and all of those things. it is non-gap income. the pay gap evens out. anyway, you can use that. general mills announced that they will buy blue buffalo.
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a very strong position in healthy pet food. 45% is owned by a private equity group. getting a nice premium. they also own 45% of weight watchers, which is up 480% year-over-year. this equity group is largely drawn from europe. >> making out very well. it may be initially hard to draw parallel between organic dog food -- one of the things that i antioxidant rich dog nutrition and walnut-based kitty litter. up.cannot make that people are buying it. what is fascinating to me is that they are making very big and seemingly successful lifestyle bets. weight watchers, the relatively new ceo, if you talk to her, you will hear her talk about how this is it a diet company.
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it is a nutrition and lifestyle company. disinvestment in blue buffalo is about lifestyle -- this investment in blue buffalo is about lifestyle choices with their pets. people are willing to spend tremendous amounts of money on their pets. like walnut-based taylor. alix: do you have cats? david: i do not. alix: i have world's best cap litter. it is a gazillion dollars, but it is worth it because it does not smell. privatery about how equity can exit investments. how will the exit when there is not that much opportunity elsewhere? to buy smart at the right price. you have to invest with the theme. you know what a private equity nerd that i am. this is private equity in the modern age where you have to have a thesis beyond cutting cost and stripping it down.
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the have to invest in something that has a theme where you can see a lot of big growth. alix: how rich are you? if you want to be in the 1%, this is how much you have to make before deductions. $480,930. over oners ago it was million. what does that tell us? dig into this to yesterday. one of the amazing things to me was that the average for the 1% is 1.4 8 million. if you want to be average, that is where you have to get to. alix: and .001%. million.
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alix: i literally had to go through and count my zeros. >> to get to the 2% you have to be a little over a hundred thousand dollars. up and down wall street -- over 300 thousand dollars. of and down wall street it is found a season so people are feeling a little anxious. member years ago before i was in this business one of my friends sisters husbands was a top manager. house and iheir didn't mean to, but on the table was a check. i looked at it and i had to count zeros. like, whoa. i was working in a restaurant. that manyre counting zeros come you are not worried if you are making the 1%.
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david: jason kelly, thank you. regulators and the volatility spike. check out tv and watch us online, interact with us directly. go to tv on your terminal. this is bloomberg. ♪
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aftermath of the low volatility products. we know the whistleblower came forward. turns out that the sec is looking at it. what caught my eye as they are not sure they did anything wrong. they asked for documents from
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credit suisse. one thing that caught my eye was that given what happened to come you remember volatility spiked on monday and came down on tuesday, you would expect that if you bought at the end of that monday, you would make money on tuesday. it went the other way. the sec is scratching its head. alix: it is so expensive for these guys. go along vol, you could lose billions and billions. -- mikep, mike bless. this is bloomberg. ♪
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alix: china takes the control of
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nbang insurance. powell's purview. a new fed and a new monetary report. we will get a preview of the new testimony to congress next week. david: i am david westin with alix steel. alix: happy friday. david: tomorrow is saturday. alix: it is. up.ty futures are we have seen a selloff in the close for the last few days. a broadly stronger dollar story. the dollar down by .2%. the curve, jp morgan is calling for short covering in the treasury market as yields are down four basis points and crude is unchanged on the day. at 10:00 eastern, president trump will speak at
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the conservative political action conference outside washington, d.c. get fed speak with william dudley and eric roseman appearing together on a panel. will release fed its semiannual report to congress. a 12:30, president trump will meet with malcolm turnbull. alix: actually played at malcolm turnbull's house one night with his kids. david: cool. alix: here is taylor riggs. islor: steve mnuchin brushing aside signs that investors are nervous about rising prices. he tells bloomberg that the trump administration policies without causing broader inflation. long-term treasury yields have risen and concern that ticker deficits will fuel inflation. in florida, the only armed sheriff steffi at the school
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where 17 people were killed took cover when the shooting started instead of going after the attacker. the deputy resigned after being suspended. the sheriff says that his office received two dozen calls about the suspect over a decade, but may not have followed up adequately. reports that the trump administration is considering taking money from a billionaire tomove the embassy jerusalem. that would add more controversy to the decision of moving the embassy from tel aviv. global news, 24 hours a day, powered by more than 2,700 journalists and analysts in more than 120 countries. this is bloomberg. we will go to china now. the news out of beijing when chinese regulators took over a nbang insurance. some of their big investments across the world, this is a high flyer.
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welcome to both of you. we will start with you. is what went wrong from the chinese government's point of view, why did they feel they needed to step in? onset thats a whole created a mismatch. everyday individuals, households, buying products high-yielding short duration products and being financed by large purposes -- large purchases at the waldorf historian new york. they would have to come up with the cash very quickly and probably couldn't do it. that is a good thing, i think. alix: you see that highlighted with the corporate debt in china exploding. we note this is the end of 2016. the white is corporate debt the
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blue is household debt. walk us through the debt in china. at what point do you say this is a government backstop. why not buy? bonnie: when you look at the anbang news it highlights the government's willingness to take out some of the problems in the system. i think that the market has confidence that china can navigate through the bad debt issues and the debt load and they can feel there is stability in the chinese market. you can see that reflected in the currency, which has been stable. and also that the narrative has slipped from 2015 when the market was concerned about the slowdown in growth to today where you see people asking about how to get in as china opening its capital market. and we're looking to see that, constructivewe are on china and their ability to
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navigate the transition. david: you could look at this anbang story as saying they stumbled or that president xi feels like he could do this because growth is solid enough that he can take the risk of slowing down? bonnie: i do not think he is looking to slow it down. i think with they are trying to achieve this 6% growth and they will try to maintain that. i think they can do that, given the state of their economy now. ways they the got the growth was by borrowing money. we have a chart that shows the ratio of debt to gdp. white is gdp and red is that. -- is debt. they are pushing well above their gdp growth. that is a dangerous situation. damian: deleveraging will be long and drawn out. this is credit positive for china.
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that is a proxy for risk in the system. for the most part the market reacted positively. to your point, the chinese government will not have to offload all of these assets overnight. alix: the emerging-market debt conversation, you noted that the spread held up well versus other shakeout that we have seen. does that change as you see higher yields in the u.s.? damian: definitely. i do not think that anbang will have a impact today on in spreads, but we are seeing it. end ofpproach the february, we will see a lot of people get involved. i think that is a risk to the system. inething like this which is, my opinion, credit positive could be perceived as a negative for the chinese financial system like state owned banks and property systems which comprise
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a percent of the currency debt outstanding. what they are doing is they are take thisare going to on and work this out over time. we are going to be systematic and methodical about the process. alix: how do you like em debt? bonnie: it is one of our highest conviction trades at western. although the spreads have compressed, we think there is room to go. higher yields in the u.s. aren't driven by issues in eem. it is driven by uncertainty around the path of u.s. growth and inflation. for em, you need to see em growth continue and em inflation contained. that is something we expect. the real yield differential between em and developing markets is over 2%. we think there is room to em growth wille
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continue and not be at a rate that is inflationary to the emerging-market economies. alix: thank you. coming up, steve mnuchin versus jeff gumbel. what side are you on? this is bloomberg. ♪
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adding general mills is natural dog and cat food to a portfolio that includes haagen-dazs and cheerios. global food giants have been snapping up makers of natural and organic food.
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selling phoenix group. the price is $4.5 billion. % stake in is a 26 aberdeen. shares of hewlett-packard enterprises are higher in premarket trading. the company issued an optimistic forecast. signs of theng turnaround under the ceo starting to work. that is your bloomberg business flash. treasury secretary mnuchin and brushing aside worried over inflation saying you can have wage inflation and not have inflation concerns. jeff gundlach says that is not true. he says we are going to expand the buffalo art museum without making it bigger. he with us is bonnie wongtrakool. what do you think of mnuchin
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standing by? we are inwould say the mnuchin camp, but not that you would see that much wage inflation because. of the fiscal stimulus you have the demographic problems, you have the forces of technology, and you cannot discount the employer pricing power over wages. there is industry concentration. fiveross markets, the top companies basically generate half of the revenue. against that you don't have the level of unionization we had in previous years in america. the idea that there is going to be a rapid increase in wage inflation beyond what we are seeing, which is rather low, is one we looked out. weould --is one that would doubt. i would add that the fed looks
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at wage inflation not core inflation. they would be happy to see both, but to the extent that we had wage inflation, core inflation could remain contained. we have seen that in the past. even in the mid-1990's. we had ahe mid-1990's big increase in wage inflation to over 4%. core inflation was below 1% due to increases in productivity with technological developments. alix: i assume that you would be buying treasuries, what is your duration? bonnie: we do like the treasury market. when you look at the yield at almost 3%, though it has backed off, we think that is attractive. bedon't think there will higher growth and inflation at a sustained pace, but there will be some incremental effects from the stimulus.
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over the longer term we have an economy growing at a moderate pace, not one running hot. david: if your approach is right, and i'm sure it is, there are structural changes in the labor market that take pricing power from workers. does that drive you away from companiesroduct because there's less cash in the pockets of the workers who are the consumers? bonnie: we still think that the consumer balance sheet is healthy. agingu look at the delever we think that the economy is doing well and we are not concerned about a recession or the consumer balance sheet. we do light corporate bonds, selectively. spreads have titans, but there are opportunities. particularly in the banking sector. banks are well-positioned right now, not just because of the
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fundamentals of the economy, but because of what regulations have done to the business model that they have completely derisked. the banking sector is something that we have liked for a while and we have overweight in the u.s. banking sector for a while. last year we cycled some of that into europe where we see the risking,cess with de and with the european economy and consumer doing well, we think that trend will play out in europe so we have an overweight to european banks in particular. alix: investment grade and high-yield spreads, how much investors demand over treasuries to purchase that kind of debt, it looks like we are overbought. but you are looking at specific sectors. what happens with ratings, up or down the scale? bonnie: we like to focus on companies that are rated below
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investment grade but will be upgraded to investment grade. we call them rising stars based on their fundamentals. those are across different sectors because it is issue where specific. there are some in energy, metals, and mining, but even in retail there are opportunities. that is where we are focused. david: what other factors you look at as you try to identify rising stars? strengthening balance sheet is one, but what in terms of revenue growth? bonnie: from the rating issue perspective it is about debt ratios and balance sheet metrics with a look to see improvement over time. that will be driving the ratings of great for them. we are looking at it from a becausecome perspective we are a bond to specialist and not from an equity or shareholder perspective. alix: as we see the money come
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to the front-end of the curve in the u.s., may the backend in your point of view, where does that suck money out of? bonnie: what you are seeing more is flow out of the front and further out the curve in terms of duration or down in credit. that is a trend that we have seen in our investor base. we like to take the other side, for example in the intermediate think those yields are attractive and we have moved from the 30 year to the five-year. david: thank you so much for joining us. bonnie: thank you for having me. gunmakersres of dropped after the shooting in parkland, florida. how consumers and investors are reacting. this is bloomberg. ♪
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david: last week we witnessed another tragic school shooting in parkland, florida. in the past these have driven the stock in gunmakers up over fears of gun control regulation. you can see if these spikes is related to a shooting. stock prices have been coming down despite the incident. eggy and rumd by p on the any seo -- and rommel d ionisio. welcome. there fornation is this apparent change in the relationship between these incidents and stock prices? is in the white house. in the obama administration there were fears of heightened gun control legislation with a
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democrat in the white house. so you see a demand surge following the mass shooting and calls for tightening gun control legislation. with a republican the white house there is no longer that fear. that may change after yesterday because of trump tweets. david: that was my question. the president tweeted, may 20 14 sold weapons, mental health checks, and ban bump stocks. did you see reaction in stocks? absolutely. this came as a surprise to many investors because there was the belief in the marketplace that with a republican president you would not have tightening gun control legislation. the tweets were unexpected by the market. david: you have to some extent project what will happen. do you think there is a gathering momentum on capitol hill?
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that there will be real gun control legislation? rommel: if the effort is even made. we saw after the newtown tragedy that president obama try to .ursue a ban on assault weapons administration that should drive an increase in the demand among the public. in florida right now, you saw the students campaign in the statehouse to say that you have assault weapons. is there reaction from possible state regulations? rommel: not really. we see federal moves impact the market at large. the bigen you have investor pushing against specific companies, it is nothing new, but this time it is larry fink. they're working with clients who want to move manufacturers of weapons that do not align with
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their values. is that a push back? >> what you are seeing is a push towards the behemoth index when some ofact these things on a global or national scale happen. what happened is that you are seeing more index providers become the, largest holders and stocks across the nation including guns as blackrock is, there is an outcry saying what are you going to do as the largest shareholder? we had fund managers picking stocks, but now with a range of stocks it is harder to say we going to throw out one. do they say we will not own that at all? a couple of things are happening with institutions, in down rents, and pensions who after the newtown tragedy said we are not going to hold these stocks. they can exclude certain stocks.
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institutions are saying to providers that we want you to build an index without that. that brock said we are seeing increased demand for building indexes where people can say we don't want this or that stock in it. we heard the first national bank of omaha will stop issuing nra-branded visa cards. will that be the next wave? peggy: i do not know how many credit cards the nra has sponsored. that is a private bank in omaha, but i do not think it is massive like visa or mastercard. that it will happen across different elements in the financial system, you're seeing it. the question is, how long will it last. people move fast after the shooting, but how long will people sustain their outcry? could havehink this
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a longer-term effect on the values of the stocks if we create etf send exclude them? rommel: we have not seen the impact on valuations from state pension funds. there are a lot of investments, but when you get significant players like blackrock, the biggest holder of american , 11% for american outdoor brands, that could have a big impact on valuations. be inwhat company will the best position to outflank these issues? rommel: ultimately, if there is gun control legislation -- not legislation, blackrock, credit cards, what is the best company? rommel: probably outdoor. as an ammunition supplier, long gun rifles, they are not subject . so i think outdoor is best
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positioned. alix: appreciate it. both very bless up we will ask mike how to impose aluminum tariffs, how many he will hire, and how many plants will get online. and publishing in the digital age from the ceo president as we head into the operation get to the close. we have been selling into the close. watch out for those potential gains with a stronger dollar story. yields continue to move down as buy across the curve continues. this is bloomberg. ♪ retail.
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under pressure like never before. and it's connected technology that's moving companies forward fast. e-commerce. real time inventory. virtual changing rooms. that's why retailers rely on comcast business to deliver consistent network speed across multiple locations. every corporate office, warehouse and store
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near or far covered. leaving every competitor, threat and challenge outmaneuvered. comcast business outmaneuver. alix: happy friday. we are in our from the cache open in the u.s.. equities futures trying to eke out again.
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core inflation coming in with a preliminary read for january 1%. the ftse is moderately lower. brexit concerns be gone. sterling is the only one to outperform the dollar today. asset classes, sterling is stronger on the day. the euro-dollar is down .3%. across the curve story. we are seeing yields lower by three basis points. we are headed to a weekly basis on 10 year yields with the longest streak of gains in almost 24 years. crude is weaker on the day. david: now for an update on what is making headlines outside of the business world, taylor riggs. taylor: pakistan will be placed on a tear financing monitoring the in june according to global financial action task force. it is backed by the u.s. and its allies and may hurt pakistan's
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access to financial markets. hackers from north korea are going after one of the few foreign companies willing to rk with the regime. telecom media and technology. it helped to build north korea's communication network. in most really the deputy prime minister quit over a sex scandal. he was having an affair with his that led to advisor allegations that he breached ministerial guidelines. global news, 24 hours a day, powered by more than 2,700 journalists and analysts in more than 120 countries. this is bloomberg. alix: thank you. beat earningsum estimate and expects a windfall if the u.s. follows through on tariffs on aluminum imports. mike b me is like --
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less. there are three potential options. which is the most beneficial for your company and the immediate effect? mike: we don't have the position on which of the three remedies. we think the objective the commerce department got correct. the u.s. production is ready to come back. we think that any of those remedies will do that, or an alternative as the secretary of commerce said that the president to choose something else. as long as the objective is achieved, we are good to go. alix: you could have 7.7% of imports from all countries. canada, should can other be exempt? mike: if you look at the report, it suggests that whatever the tariff and/or regime is, it should be apply to everyone. we think that that is important and is clear in the report.
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alix: how many people do you hire? mike: immediately, we would bring back all of our 150,000 tons of the roughly 700,000 tons that the commerce secretary predicted could come back. we have a plant in south carolina and it is more complicated. we need to solve a power issue. that would be another 350. up to 700 people would come back. l in kentucky, good paying jobs. that aames mattis argued might antagonize allies and have that repercussion. how do you think about that? mike: targeted, broad, the for -- we are agnostic about how we get there. alix: do you export? mike: no.
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one of the things that this solved was that the u.s. market is so short. we are producing 700,000 tons every ton thatll we produce times 10 in the u.s. alix: if you look at chinese exports and lower aluminum prices, we have a chart on the terminal, chinese exports have been increasing significantly. they produce the highest amount aluminum since june. that will lead to higher exports regardless of the tariff? mike: the data is absolutely correct. we think that they will be up another 20% with another record in 2018 with something like 5 million tons. we think that ultimately the remedy put in will address chinese overcapacity in exports. longer have a place to send their excess production. might make its way
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into the u.s., but ultimately we are the dumping ground because we supply 700,000 tons for the market. if that is not economic for them to do and the metal cannot come in at economic prices, they will have to do something. alix: we showed u.s. imports from china and they are very low. there are two schools of thought. one is that they are getting in in other ways, the other is that they are weighing down aluminum prices which makes u.s. companies, like yourself, having to cut down refineries -- shut down refineries. mike: both. they're coming in in the form of semi-fabricated products, absolutely. the impact is that the globally traded commodity, no matter where it is or where it goes, if there is excess production that will weigh on the aluminum price long-term.
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one is cause and one is effect, absolutely. alix: something mnuchin said yesterday, he wound up saying that wage inflation is not going to trickle through to overall inflation. can have wage inflation without wage concerns. from where you sit dealing with a mighty cost, hiring more people, what do you think of the statement? mike: got a big issue for us. everywhere, but maybe 10% of our costs are labor costs, and that includes pensions and other so-called legacy costs. for us, labor is important and we try to be more productive every year, but wage inflation over a couple of percent a year, and we are at middle competency right now, we see somewhere between 2% and 3% this year. issue for us.g electric power is a big issue for us and the aluminum price. great to catch up.
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century aluminum ceo. david: we will turn from aluminum to textbooks. every business you can imagine is going through a disruption from digital technology. publishing and education giant pearson is undergoing a transition. earlier they released full-year earnings which beat estimates. they beate earnings-per-share and we will show the stock price. john, welcome back. thank you for joining us. 2017, what did you do and what are you looking forward to in 2018? john: the good news is that we delivered profits and earnings at the top end of expectations for 2017. most importantly, 116% cash conversion, really strong cash
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performance. slashed to 400 million pounds at the same time we are pound a 750 billion sterling and -- sterling investment in the digital transformation of our business. we talked about our college textbook business, 30% of pearson, it is our biggest being secondhand sales of our own textbooks. as we move to the digital transformation, the spotify generation, they feel more comfortable renting than owning. they are happier to pay for access then ownership. we can deliver better solutions, high quality content, personalized learning at a lower sticker price. the $300 textbook is dead,
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costing more around $50 per c ourse delivering better value to professors. when we get through the transition, a better business for pearson shareholders because although the sticker price comes sell goes up dramatically because we win back shares from secondhand sales. is hard making the transition from analog to digital, when you get through to the other end you have a better quality business. about theant to talk transition. what i understand is that your cutting and growing at the same time. where are you in the cutting process? you let go as much as a quarter of your workforce, where are you in that process? john: absolutely right.
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over the last five years we reduced the cost base by 600 wasion pounds, sterling another 300 million pounds of cost savings that we will make over the next 2-3 years. at the same time, the investment on the digital side is paying off. really excited about some of the new products and services we have coming to market over the next couple of years. would makent that i is that inevitably when we have these conversations the focus goes on the business going through the challenge. pearson another 70% of in professional certification and virtual schooling, partnering with universities to deliver online degrees, -- digitalssessment assessment and support for schools in the u.s. and the u.k.
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that business will grow in revenue terms this year and will enable pearson to deliver like to like profit growth for the first time in a few years. 2018 is a big year for us and we are excited about the capability of the business. cenegage, is there a deflationary pressure from the digital offices? you have the pricing power to keep the margins up? john: it is great to see one of our competitors talking about doing what we have been doing for the past three years. we already have one million across in 450 colleges america that are benefiting from re, thegital coursewa access model that i talked about. price,ates the cover
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sticker price, from the $300 textbook to the $60 digital courseware. your sell through rates go from 30% to 90% or 100%. dramatically, that means when you get through it you have the best of business all around on the other side. a business that delivers greater personalization. an example, we know that if you are trying to solve a math problem, the best ways to work it through on a piece of paper. the new technology that we have, you take a photo of the written problem, send it in on your mobile phone to the pearson adaptive learning machine and in assessme we can mark and each of the six or seven steps in the math problem and give you direct feedback, link you to the right part of the textbook for the part that you got wrong, and
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share that data with your teacher. andersonalizes learning gives better support to the student and teacher, it actually delivers greater outcomes with more people completing university degrees than out of community college. challenges in america is how low community college completion rates are. this is not only about more affordable choices, it is better learning, better outcomes, and inaking the promise of ai practical reality to one of the biggest problems we face in society. to lead ans hard organization through that change, the ceo gets blamed fairly or unfairly. you feel like you have the support of the board and the shareholders to follow through on the transition? john: i think that the board and the shareholders recognize the size of the challenge and what had to be done. they also share my excitement
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about the opportunity and promise on the other side. major shareholders have been challenging, but patient. they recognize the opportunity that lies ahead, and i think they will take comfort i that we delivered on our numbers last year and.we are forecasting profit growth this year we have hugely strengthened the balance sheet which puts us in a great position to see this through and get the company growing again. very interesting story. thank you for sharing. up, we are waiting for warren buffett's annual letter. you can tune into our colleagues on the radio from 7:00 to 9:00. then pimm fox will join tom keene from 9:00 to 10:00. that is on sirius xm radio. this is bloomberg. ♪
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i am taylor riggs in the hewlett-packard enterprise greenroom. the former chairman of the american conservative union. ♪ annualwarren buffett's letter is coming out tomorrow. some things you might address include succession, a windfall, and underlying challenges to the insurance operations, and a new health care venture with j.p. morgan and amazon.
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for more we welcome tom russo. he is a close buffet follower and a top work sure investor. thank you for being -- a top brookshire investor. having read, there is a lot that is the same. what are you looking at that will be different? move along the continuum is different. first it is more about charlie munger than warren buffett. it shows how the firm is preparing for succession. they will be entrusted with the thatimportant feature warren has deliver to berkshire, the design of compensation packages. hire has done a remarkable job of creating incentive packages. i understand that is not the
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primary responsibility for each of their divisions, industrial and insurance. in the world of succession, both will fulfilll helping subsidiaries understand investments that they consider will make sense or not. i do not think that there is warren, in training for it is more about participating alongside charlie and adding value of compensation as a terrific story. as part of the investments, i share your point it is most exciting to hear about the venture with j.p. morgan, amazon, and berkshire. three great companies coming together for their own specific for one of the big problems confronting america,
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health care insurance. the fact that they could take that show on the road is exciting. they are dealing with extraordinary enterprises. year ashat came up last they have a lot of cash. what are wecations, going to hear about how they will allocate and invest all of that money? tom: it is my hope that they will reassure investors on one truth. really stupid things happen on wall street regularly. at one point, warren and his team will deploy the enormous amount of capital. when bank of america fell apart theydly some years back, had a 6% convertible preferred. it happened again as a result of the instrument. per share strike
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price for bank of america. he has exercised those warrants this past year. billion ofrth $20 additional wealth for berkshire hathaway. for the deployment of $6 billion in the middle of a crisis, we have an investment over $20 billion. i do not think that there is any worry about deploying capital at berkshire. the: the other elephant in room is health care. warren buffett said that the ballooning cost of health care is a hungry tapeworm on the american economy. joining forces with j.p. morgan and amazon to fight that. will -- what will you be looking for? tom: i'm not sure what they will talk about. i'm intrigued by it. insurance companies have an enormous amount of benefit because they can teach the
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people that are members of the captive insurance company habits that are more helpful -- healthful. different levels of coverage. it is a superior way to cover the liabilities. the scale that they have by merging the reason three companies together. on top of that you have amazon with its extraordinary marketing and distribution that promises to make a huge impact on how they use ai to better impact health care. it is exciting. thank you very, much for joining us. no doubt going to be up all weekend there. make up your mind, the s&p selling off into the close. if you have a bloomberg terminal you can watch us online, click on charts and graphics, and interact with us directly. this is bloomberg. ♪
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alix: what i am watching is the close. this is what we have seen over the last few days. selling into the close. why? the big money and the big funds are selling into the close because they do not believe in the rally and go long overnight. we will see that, especially into the weekend. david: risk parity with funds rebalancing at the end of the date to get back where they want to be. i read that somewhere. alix: rebalancing maybe, but it is not that wide. you could make the argument that the rally does not have the brea dth that we are used to seeing so there is validity selling into the close. this relatively recent
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sense volatility came back into the marketplace? alix: it used to be buy into the close, and now it has reversed. i'm interested in what will happen at 4:00. in the market, we look at the equity market futures trying to eke out some kind of gain, but will it sell into the close? core inflation at estimates at 1%. it is buy across the treasury curve. a broader, stronger dollar story with the exception of sterling. this is bloomberg. ♪
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jonathan: 30 meters of started trading, this is the countdown to the open. -- 30 minutes until the start of
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trading. this is the countdown to the open. no rarely seem safe on wall street. another s&p 500 advanced fails to hold, most of the gains going into the close. secretary mnuchin brushes aside investors concerns. he says don't worry about debt or inflation. a week of huge supply, pimco says it's a good sign to add exposure. we can down to the opening bell in new york city. furtheres away, futures going into the cache open, up about .25%, seven points in a positive territory and the fx g10, euro-dollar back south of 1.23, down .25%. yields down three basis points on the 10-year and we drop to 2.89%. ,e caught up with steve mnuchin who isn't worried about rising prices and growing debt.


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