jihadist make the rules. they name an islamic state. good morning, this is "bloomberg surveillance." it is monday, june 30, i am tom keene with scarlet fu and adam johnson. let's get to our morning brief. >> a brief week. june inflation rate stays at half a percent. in. mortgage approvals fell may. sort of curious. almost like a conflict of headlines. you would think borrowing would not be going up if inflation is staying as low as it is, tom. we are going to have to discuss this.

europeant friday's summit overrode the u.k. prime minister david cameron's objections. they nominate former luxembourg premier for the european commission president. >> raging battle in europe. phone calls over the weekend to smooth things out. all diplomatic. you really wonder what the effect is. >> and very personal. it wasn't just, we don't approve of his policies. and 9:00 we have the i assume milwaukee, aism read on effectively manufacturing activity in the midwest. 9:45, chicago purchasing. pending home sales, national number at 10:00. at 10:30, dallas manufacturing activity. of datais a whole lot effectively in three days.

>> no warnings. but this is the day for argentina, on the brink of default. back to 2001 decision, bankruptcy for argentina. >> you have followed this more than i have. is a hedge fund making the nation bankrupt? >> no, but hedge fund led by paul singer is effectively saying you have to make good on the interest payment that has and theus for 13 years u.s. supreme court said, yes, argentina, your point have to make do on payments interests. today is the day for argentina and there's a 30 day grace period. the last of the second quarter. >> stocks, bonds, currencies. live a lot to talk about on "surveillance."

stronger.r you wonder where the u.s. dollar will be in three months, six months. oil lower this morning. that is a headline. the tao can't get to 17,000. brent crude, let's go to it. you can see the news off the weekend were in five or six days , here's the move up off all the news in iraq. you can see the percentage amount. not a very exciting chart, but it shows the pullback in oil. whiskey are the front pages, the webpages over a busy weekend. -- we have scoured the front pages, the webpages over a weekend. >> france's biggest tank agreed -- it did get a bit of reprieve during final negotiations. the bank will get six months to

prepare for a ban on handling certain dollar transactions. they can plan for that as opposed to having a start right away. if you suspected of $30 billion of illegal transactions. i said, you guys are the pros, what does it mean? affects wholesale. >> oil trades and dollars, does that mean you can't trade oil? >> how can a bank really operate for the six months? peoplecase, according to familiar, the u.s. is also not ruling out the possibility of charging individuals in the future. on top of the $8.9 billion ban and a suspension of dollar clearing transactions -- >> $8.9 billion is an entire year's worth of profits. bnp paribas would say, it is

france's largest bank. it is twice the size of deutsche bank. twice the size of credit suisse. this is a big bank. follow bloomberg television for that headline. >> big news for veterans. president obama will name the former ceo of proctoring campbell -- procter & gamble the head. he's been five years in the army. if confirmed, he would replace eric shinseki who resigned over failures of medical -- you remember what people are talking about allegations that records were forged to cover up the legs. the da services more than 8 million vets the year. the white house on friday says there was a corrosive culture, lack of accountability and they're hoping by bringing in a professional manager that he can change all of that. >> it will be interesting to see. it is a huge task. >> he is 61 years old, spent four years at png.

during that time, stock prices rose 51%. >> interesting, to say the least. there it is. what else do we have? >> iraq. the al qaeda breakaway group ruling really everything in the area has to cleared an islamic state in areas that he controls, not just iraq and syria. >> the maps on this from aleppo than east toward kurdistan, moving targets and there's guessing about jets, the u.s. has jets, russia has jets. >> iraqi government of baghdad says f-16s promised by the was are taking too long to arrive. serious.s really >> they are imposing taxes and areas it controls and says the caliph will be its leader. remember that name. here and we move on

and we will have to see what the news is this weekend. >> those are our front page stories. >> we are off friday. even i will be off friday. let's continue with iraq. it is a caliphate. that word goes back to 1753. the isil form an islamic state stretching from aleppo well into iraq, pay homage to 632. also live in is a middle east expert -- paul sullivan is a middle east expert in giving his as the background on the word caliphate. will the rest of the middle east respect the caliphate and in particular, will saudi arabia respect the formation of a caliphate? >> i think this calling themselves the islamic state and stating their the caliphate could end up to be a strategic error on their part. i don't think a lot of people look at them as representatives

of muslims or islam. saudi arabia will consider this a direct threat to the sovereignty over the holy places of islam and mecca and medina. many muslims will consider this offensive, particularly in the time of ramadan. >> from where you sit with your expertise, is there enough military might to at least staunch the jihadist aggression? to having the ability to push back whether it is baghdad or any other forces, curtis dan? >> the biggest weakness of the iraqi military right now is their cover. they were essentially left with no are force -- air force or limited air force. very few attack helicopters. that is why they want to have those f-16s quickly, white russia delivered -- why russia deliver their aircraft as well and they're trying to get aircraft from belarus and elsewhere. they're trying to get the thataft back from iran

some of their defectors flew in their many, many years ago. part of the problem with that, he will take time to get these aircraft in shape and including the russian aircraft, and to train the pilots. it is not like you just walk in it these things and drive them like a car. >> dresser sullivan, can you help us understand the tension for saudi arabia which is effectively sunni and isil? in other words, the tension sunni against sunni? >> it is really not a tension of sunni against sunni, but a tension of extremist against those who take a more moderate stance. it is not just was saudi arabia, but many others. many muslims, i'm certain, look at this group of murderers, thieves, thugs as harley representative -- harley representative, but if anything, an insult.

this is their holy month of ramadan. it is doubly insulting. the fact this guy calls himself caliph uber hang is an absurdity. if you look at his name but he said is his actual name, it doesn't fit into any arabic naming distinctions. it makes no sense. it is crazy. >> professor sullivan, i wonder if you could give us some context on isil and how flush they are with funds. there's a great article on sunday detailing how they know how to raise money locally. how sophisticated is there funding pipeline? >> when you put a gun to someone's head, you raise money. that is pretty much what they've been up to. they been robbing banks and treasuries. certainly, they will get some funding from people who do support them. some of the former baptist --baathists are using the isil to get back in power. they are kind of bundlers, if

you will. but i think as these people move on, become more violent, it is only going to be the most extreme funders who are going to be backing these guys up. they're going to be involved in more extortion, more criminality. probably involved in the drug trade to some degree. it is a mess. >> professor sullivan, inc. you so much -- thank you so much. of what we see in iraq. we have a wonderful guest host this hour to get your four day work week in the second half started. our guest host, banking analyst at stanford c bernstein. looking at the state of global wall street. and the deputy chief u.s. economist at ubs. an optimistic view on the american economy. brad, let me start with you. what is the state of layoffs and wall street for all of the

people watching the city, london, and here in manhattan? will there be a dribble of layoffs until labor day or will that be formal firings? >> you're going to see cutbacks continuing in the trading business, particularly fixed-income, but also a lot of the cutbacks are done at this point. are an investment banker, you don't have anything to worry about. m&a is doing well, equity capital markets is doing well. >> house economics research doing? >> we never did well to begin with. what are you hearing from your clients? they need advice, don't they? >> the problem we are running into now, everything we're talking about is three to six months out. there's very little tactical advice we can give people.

our forecasts are, yields are going to go up. i think a most everyone is there. when you're talking, it is a bit like an echo chamber. by the time something actually does happen that you forecast, we've been talking about a placement for six months, they're like, yeah, we were talking about it, too. many economists are five minutes late and claim they were on time. >> just talked himself out of a job. ubs with us.th >> coming up, we will be talking about bnp paraquat. this is that it would expect to hear about the $9 billion settlement. stay tuned as that is going to presumably be announced sometime around 12:00 noon. get your cup of coffee. we will be right back in two minutes. ♪

>> good morning, "bloomberg surveillance." coming up on bloomberg atevision, robert nardelli 8:00 "in the loop" with betty liu. i'm sure he will have something to say about mr. and milk along the way. i am tom keene with scarlet fu and adam johnson. >> i have to finish my noonday show tomorrow and then i will be out. around a minute 88 was pretty exciting. >> result mainly -- barely made it. bnp paribas plead guilty today to charges of laundering money

to sanction nations like syria and iran. top-ranked banking analyst at sanford bernstein, part of the settlement may disallow dollar-based transactions. how does bnp actually operate here in the u.s.? >> it is pretty simple. you engage a correspondent bank. this would be the equivalent of original bank in the united states isn't going to have its own clearing business, it is going to deal with one of the major capital markets, one of the money center banks. the problem with that is fundamentally, you're opening up your client book to a competitor. that, many have done of these corporations that you will deal with may never come back to you at the end of it. there is the fundamental issue that they're going to face. they realize there's going to be leakage from the client base. >> so if that is one side of it, the other is a $9 billion penalty which effectively is an entire year's worth of profits. financialst a major

obstacle or is this something more? >> what it does, if you look at ,he ratio of bnp paribas they're near the top of the european banks. areghai and ups -- ubs higher. this will bring them down to the meat of european banks. it isn't going to knock them out or have a counterparty risk issue to it, but it is going to really put them back. it will take him another year in delayed return of capital. >> brad, you're so good with your black books and years that lehman brothers. as the ramifications on this for the u.s. banks and how are we going to do business in paris? well, all of us would love to know what kind of conversations went on between the governments there. this is a national -- >> would you have liked to see washington step in more aggressively versus the

regulators in new york? >> well, remember the conversations we had regarding credit suisse, which is you're playing with matches. when you start doing large fines against commercial banks, particularly european commercial banks which rely a lot on dollar funding. remember, have to balance she will be nondollar work eligible nominated assets, which means they're buying money and the marketplace. you have to make sure confidence remains. infidence is very ephemeral the banking aspect. giving these guys time before all of these things occur and that is buying them time in terms of talking to their clients, talking to counterparties, talking to creditors. i canon to credit suisse, see there being more cautious. to credit suisse, i can see there being more cautious. perhaps there has been communication between the fed and the justice department about the caution you have to do when dealing with banks. >> did a benefit bnp

shareholders and employees for these discussions to take ingres than the credit suisse and government? >> yes, it did. this is going to be a major fine. it will be an embarrassment for the company. there will be a fallout. our placeto ask about because there's investigation and lawsuit into its dark pools as well. culturally, barclays needs do have a lot of fixing. is there something different that barclays has versus the other big banks? culturally is it that different? >> that is a tough one to tell. what you really have is an amalgam of cultures at barclays, a lot of legacy cultures that are there. how many people were involved in the dark pool and what comes out of it, it is difficult to say. what i can say is to the extent this is causing a fallout in terms of a loss of trade volume

in their equity business. it ultimately flows through into the investment banking business. we will see whether this permanently damages the equity business or whether this is just a temporary problem that management is going to be able to address. >> something we will continue to watch. as this lawsuit takes hold. brad hintz, one of our guest hosts for the hour. coming up the next hour, simple market strategist will be our guest host. we will talk about the quiet in the bond market as we get ready to close out the first half. ♪

>> good morning, "bloomberg

surveillance." we need a morning must-read. i have it for you. with everything, george will nailed it was some of the background on this redskins upward. in washington, the government decide -- that is a very thoughtful essay, whatever you are in this, i really recommend you pondered george will in "the washington post." >> what about the chiefs? >> i can't believe it -- remember if they brought it up. >> if it were black skins or yellow skins, i would be offended. i'm sorry. >> he says they score points, but he really walk through the history of it. whatever you think, it is a morning must-read. it sort of captures the debate

right now. >> do you carefully redskins change their name? >> not in the least. as long as the phillies remain the phillies and eagles remain the eagles. everything is fine. >> the city of brotherly love. >> philadelphia. >> that's right. >> the essay sums up nicely the debate. >> it does. let's get to the twitter question of the day --

>> midmorning, "bloomberg surveillance." -- good morning, "bloomberg surveillance." end of june, in of the first half. well, the equity strategist got

it right. the bond people got it wrong. oil across the board weaker this morning off a relative quiet in iraq. >> went to talk about one of the development in washington. president obama turning to the corporate world to solve problems of the veteran affairs administration. later on today, the white house will cap bob mcdonald to be the next head of the v.a. after the government health system has been rocked by allegations of mismanagement and coverups of long patient waiting times. joining us now is peter cook. peter, bob mcdonald comes to the front of the line because he is the ceo-type. the government was weighing between folks in the military, folks in the hospital industry, and the ceo types. why did they go with the former ceo? >> first of all, his name is a surprise to many because he had not been mentioned previously.

the reason the president is turning to bob mcdonald is because this is someone with significant management experience. 33 years at procter & gamble, started entry-level him arose all the way to ceo and effectively the white house is saying the problems that the v.a., the corrosive environment they talked about in terms of management problems not only in phoenix but across the country, they need to be solved by someone with management experience and that is why bob mcdonald is the right guy for the job. they highlight he does have ties to the u.s. military. he served five years in the u.s. army, a west point graduate. he had an uncle who has been treated at the v.a., vietnam veteran. he has ties to it. but he is there because he is management experience. >> peter, i'm going to go with the run rate of 278,000 employees. something in the vicinity at the v.a. can anyone manage this bureaucracy? a it certainly is going to be challenge. it is a giant organization. roughly 278,000 employees, more than twice as many when he was

at procter & gamble. $600 billion budget and a long growing list of patients thanks to not only the retiring baby boomer generation, those in their 70's who served in vietnam or earlier, but now you have all these iraq and afghanistan veterans who have very serious medical issues, mental health care issues just to name a few. this is a management challenge and that is why he is going to someone who is had to run a very large organization. peter, what is the timeline for mr. mcdonnell to effectively lay out his plan for the v.a. administration? >> next wednesday. >> i would not expect to hear a specific land until he gets confirmed. and midtermington election year. he will be nominated formally today by the president and then he has to go through the confirmation process. i assume we will hear few words from mr. mcdonald when he is dominated by the president, but he has to get confirmed.

it doesn't seem like it will be huge challenge, but this is washington. he has interviewed more to republicans in the past than democrats, so that might help them in the confirmation process. his biggest challenge may be liberal democrats who aren't convinced he's the right guy for the job. >> thank you, peter cook. >> incredibly busy week for economics. economics may determine janet yellen's summer. crew.g against the gloom repeat or stage. report will indicate ash job report will indicate better times to come. you resiliently have an optimistic. what did the bloom crew get wrong? >> i think you are too fixated on bad weather between january and march and not fixated enough on what the rapid expansion of credit that we're seeing is going to mean for the economy and also this affective

quantitative easing which is still in place in which janet yellen will tell you will continue with the growth going forward. andrisk is she is right when the fed actually goes to exit, they're sitting on a four dollartrillion balance sheet. >> will we look back and say, that was silly? >> i think so. i think we're going to look back and think it was silly because i think we're arty beginning to see wages pick up. above 6% andrate everyone is talking about the participation rate as if we don't have a retiring baby boomers in the world. what really troubles me is the economist seymour willing to brief does believe what comes out of recession and entrepôt. an algebra is better. 29 for the october summer 17. you can get that at fomcgo. which of the states to care about? >> i don't care about any of

them. untils taking it out 2015. >> inflation we found out last month of 2.1%, cpi. one-month aberration or is this legitimately starting to build? >> we've been talking about this that ubs for a while. it is coming from many sources. disinflation more from overseas. more wage inflation. if you want to be a monetarist, yet the giant balance sheet -- you have the giant balance sheet. almost any way try to avoid having to look at inflation and think it is a problem, you end up staring at another thing moving higher. rents are another great example as our medical costs. that up.ad you bring the affordable care act has been shown was not good for the gdp, at least in the first quarter. is it good for the labor market? it's not.

what we know from the massachusetts experience is that in massachusetts, the implement something like the affordable care act and we saw a reduction in small business hiring and the one thing we don't know about is whether it cause more part-time employees. we have this huge number for time employees janet yellen is coming on being slack in the labor market. it might be they are permanently , structurally part-time employees because of the affordable care act. why is it understand, as we talk about inflation, why is this to 10 spread that is a measure of fort inflation grant out 10 years, why is it narrowing? >> i wonder how long you can keep a flat yield curve with inflation rising. is is a fundamental issue. you think about fixed income, trade volumes are down. people are buying any credit they possibly can and taking more risk.

curve keeps getting lower and lower and lower. out,at my colleague points usually the market doesn't respond until about three months before the first rate hike. we have the taper to get through and maybe by the end of the taper, people will build a look and anticipate the rate hike. you may be looking at a q4 event. >> brad hintz, can your banking business run in the quiet that dres matus suggests? movement to make the machine know, right? that is the oil. >> we all took the same investment courses. if you get a yield curve fitting back-and-forth, you get a duration shift -- >> [indiscernible] >> that isn't happening right now. people are buying bonds and putting them away. >> a critical question, do agree with bill gross? >> i think the key thing to bear

mine, one of the reasons we're seeing the behavior we are seeing is because of zero interest rate and this idea they're going to be there forever. returns forer things like dividends and buybacks and no one and fast. now you're seeing people beginning to invest. why? they see the end is coming. the rate hikes will eventually show up. everyone can see them six to 12 months out. and you begin to see normalization of some activity like m&a. >> i have to get you in trouble here. does ubs advocate the token rate increased to show normalcy by the fed? >> i would hope they would have been doing rate hikes for the last year. i think we would be much better shape. >> brad, what would a rate hike do to the banking system? >> it would cause trade volume. a couple of banks it would be very good. people like schwab or cme or all

of those guys would do extremely well with the short and coming up. but on the fixed income side, the short and coming up is going cause everyone was still on the long end of the curve to move it all down. trade volume would go through the roof. typically, you get a couple two, three quarters of very good fixed income because the clients are moving their positions around. it is only later as the yield curve rises that you see fixed income going to a permanent -- >> scarlet, two guys from two different worlds, banking and economics. >> keep doing it. later on we want to get -- >> there are squared ends. .92. >> oh, my god. coming up, alibaba headed toward what may be be the biggest ipo in history. we will show you how alibaba is actually an anomaly in our single best chart for my next. ♪

>> good morning, it is "bloomberg surveillance." johnson is pumped, four-day work week. >> i'm pumped about this. a crucial ruling on the limits of corporate rights is expected today from the supreme court. the case was brought by the

hobby lobby store. the company is fighting part of the affordable care act unreligious groups saying it should not be forced to pay for contraception in his workers health plans. they could set a precedence. the white house responding to the crisis caused by thousands of immigrant children crossing into the u.s. without parents. the obama administration will ask congress for more than to glean dollars in emergency funds. smugglers are spreading rumors in central america telling people they will be allowed to stay in the u.s. if they sneak in. economists say the roulette wheel should be stopped for a while, at least in elena c-suite. to ease what they call casino saturation in the northeast. there are a dozen casinos in atlantic city since the start of the year, but three closed by labor day. those are the top headlines. that is a fascinating one. >> i wore my suit and bow tie in las vegas -- >> i would not think -- they probably thought you were a

maître d'or a guy going on stage. right? i mean, nobody -- well, nobody wears bow ties except for you in las vegas. >> it was las vegas. >> what was the speech? >> i've gone to las vegas, but not a suit and bow tie. single best chart. when ali baba eventually goes public, maybe the summer, it will be the biggest ever u.s. of $20 the neighborhood billion. but it may be an anomaly because our single best chart shows the total value of u.s. ipo since the bull market began in the first quarter of 2009, the number of ipos this quarters about 100 for fixed-rate quarter but the total value has been declining. there've beenay, 118 ipos with a total value of $12.3 billion. that is down 14% from the first quarter. the smallest since the first quarter of 2010. interesting. we fixate so much on the big gigantic ipos.

if you strip away ali baba, are we looking at as much activity? >> it looks like a snoozer. data is data. >> we will talk about it in the next quarter. brad hintz with us. is this the only act in town right now for global wall street? >> the equity capital markets business is doing quite well. but it has been doing well for a while. you have been -- liquidating. >> in a bonus, do the m&a guys go, oh, those poor bond guys, we better throw them a bone to keep their tuition payments going? well, wall street never could be characterized as all true a stick, but i think there is a recognition they knew the infrastructure. you can get rid of a fixed income business and still have a net capital. either goingyou're

to say, i want the lines sure for myself, so the bankers versus the traders, that i will always exist. >> this came up a couple of days ago. we are number five. we have to get the number two. where number four, we are not number one. i think going up the rankings, how much damage has that caused? >> i have a great story for that. it 42 seconds. >> i walk into a morgan stanley ceos office. mac and fisher were arguing. fisher was written about declining market share. mac says, dick come if you want me to sell five dollar bills for $4.95, i can get a long line. what he is saying is you can buy market share but what it is going to do is in essence you're giving away money to do it. some market share is good, some is unnecessary and expensive. >> the most important conversation in the next four days. >> yes. >> that is a lesson from the

1980's and 1990's of japan. they were buying market share losing profitability in the process. >> the heart of the matter, we're not number five, we're number three by labor day, then heads are going to roll. we are number five, if we are not number three by labor day, then heads are going to roll. >> coming up, would you be more inclined to order a sausage mcmuffin if you could do it from your phone? mcdonald's hopes that is the case as they try to pick up market share. this is "bloomberg surveillance." ♪

>> this is our twitter question of the day -- scarlet? >> this is "bloomberg surveillance." let's get you some company news from the files of bloomberg west. philips sees a bright future for the led bulb business. they will separate the lighting unit into a standalone company

by next year. philips is the world's biggest maker of light bulbs. refund checks are going out to some customers of aereo and many of its workers are on open-ended vacation. the supreme court last three ruled -- last week ruled they were breaking copyright laws. the ceo said the company's journey is "far from done." ownboss is getting his museum online. restrains team is the subject of a website that features memorabilia from his career. fan foundedsuper it. there are thousands of items with plans to add more every month. that is this morning's company news. are you buying as breakfast this morning? >> i am on the mcdonald's website. actually, it is not as caloric as i thought. we might be able to do it. >> caloric?

what the hell is caloric? >> you can get the adequate mcmuffin for 200 calories with only one serving under daily salt. calories, eggs, pancakes, sausage and 90% of your recommended daily caloric allowance. >> what is happening is fast food is getting faster. mcdonald's testing a new app that will allow customers to order their hash browns ahead of time and reduce their weight time at the drive-through. this mobilel claimant platform help -- payment platform help? problemsld's has had with service for a while. what they're hoping introducing this ordering app is to reach customers or new points of sales so their experiment in with kiosks in some stores and also experimenting with multiple drive-through points.

what they found a stores that have multiple sales points actually perform better than those that don't. whether operationally this will make things easier in the kitchen has yet to be seen. the app has just rolled out in about 22 stores in georgia, columbus georgia area. i am assuming at first the kitchen will be trying to figure out how to deal with this new stream of sales coming through. basically, how it works is you order on your phone. when you get to the store, you check in with your phone and they fired up at that point. >> so they don't start cooking until you show up. generally speaking, mcdonald's at of the curve are playing catch-up to other companies in coming up with innovative ways to serve customers fasters? >> other chains have been working diligently on digital already. panera has just rolled out a nap were they also have this rapid pickup desk. you order ahead of time on your

app and then you set a time you want to pick it up from the store. you go to the shelf and kind of like bring it back. the margins get better, etc., etc., and does this lead to margin improvement? >> that has yet to be seen. hopefully, if it increases sales -- i think what they're trying to do is your phone is one of the best marketing devices they can reach you at right now. i think they're just trying to get customers at this stage to engage with them at all points. >> we will do a test run. adam johnson is -- >> this could work. i have my mcdonald's app. looking at the quarter pounder bacon hub in our ranch. habanero ranch. >> i like peanut butter and peaches, that doesn't mean i like peanut butter and peaches together. >> looking for to breakfast, adam. >> i'm going with the big guy.

90% of my daily salt. >> brad hintz with us. also dres matus from ubs. let's talk about the animal spirits. >> it means companies making decisions. they will make good decisions and bad decisions. if they make good decisions, they're probably expanding and after raise money. bad decisions, they will have to be restructured. of hunkeredhe idea down. is your wall street hunkering down now or looking outward? >> there are a few banks that are making changes. we know the fixed income business has faced challenges. some of the banks appear to be operating as if this is a cyclical phenomenon. allwhen rates rise, then will be better. other banks, and we can think of it as ubs or morgan stanley,

credit suisse is addressing it., barclays is addressing they are making changes to their business model at this point. whether you agree or disagree, they say this is a secular shift. >> as a look at the earnings estimate from morgan stanley, up 20%, goldman is minus. >> morgan has the wealth management business. it took them a long time to do this but finally that integrated . now they have this integrated platform and their ranting a product through it. the big ramp up this series the banking business which will run through it. >> i would like both of you back together when we start the earnings coming out. brad hintz, thank you so much. drew matus, from ubs. vanessa wong, thank you for the double cheeseburger breakfast report. stronger.

it bears watching. brazilian rial stronger. go brazil. >> big win over the weekend. is ourup, tony crescenzi guest host. ♪

>> what will we know of the american labor economy? ,ergers and acquisitions keeping wall street afloat, we speak to the head of m&a at morgan stanley. morning, everyone. this is "bloomberg surveillance." we are live from our world headquarters in new york. i am tom keene. joining me, scarlet fu and adam johnson. our guest for the hour, anthony crescenzi. ourt now, let's get to morning brief. >> a couple of items. rate holdsflation steady at half a percent. leaders at friday's european union union summit oversight -- overrode david cameron's

objections. that brings you up-to-date on what happened in your. a lot of data -- >> very busy. >> we have the isam milwaukee manufacturing number. at 10:00, pending home sales followed by the dallas fed --. know, argentina is on the brink of default after a $539 million payment got blocked. today is the last day they have to make that payment. it is the last day of the second quarter. second half of the year begins tomorrow. >> we star would general motors. it will reveal how it plans to compensate victims of accidents caused by faulty ignition switches. there will be no cap on payments. cap feinberg.y th

-- by kenneth feinberg. is laying plans to start a hedge fund as it tries to compete against the largest firms in the business, according to the wall street journal. they well funded teams to place a large number -- a small number of a large, high concentrated wages. paramount pictures has a blockbuster movie hit on its hands. age oformers: extinction" pulled in more than $300 million worldwide. that is your company news. >> i thought "revenge of the fallen" was much better. fox, whichwith megan was that one? >> the original "transformers."

you guys don't even know the name of the robots. werethought the reviews shaky on this one, but it did not stop the box office. barclays does optimus prime. isil a more serious note, has declared a new islamic state across syria. those borders were established back during world war i. state is a challenge to the west. bookn rhodes wrote the "how wars end." a iraqis actually transformer. it turned into a train wreck. the local parties will continue to fight in a secretary in war

that will get worse before it gets better. >> this has been going on since 632 a.d. why should we think there should be resolved anytime in the near future? bouts ofour local power within and in no government strong enough to get the allegiance of the entire society. statesh does the united have to care that iraq is in chaos? that is something people are coming to grips with now. some are saying we have to go in to make sure we keep a lid on this. others are saying let's run the risk. >> i wonder what the effect is on the ground in iraq. there has to be a lot of people leaving now that you have a caliphate. >> it is like vaporware. this is a group that has established -- it has had a good run the last few weeks and has a lot of territory in eastern

syria and western iraq. you can make a claim that we are the real deal. we are the brand in islamic jihad. a lot of the brain drain has left, as it were. >> one of the smartest voices we and all of the analysis and overanalysis of this, when you listen to him or others, what is your to do list? >> the challenge here, and what biden talked about was something of a federated division. >> switzerland? >> the problem is it was always going to take a lot of trouble to get there. that is a bad outcome compared to if you have gotten a stable iraq. if you cannot i get a stable, is some government,

kind of division on the ground plausible? oil resources are not necessarily linked to the population. the shia have oil and they want the whole thing. the kurds are saying do not bother us. it gives the kurds leverage. they benefit from all this. they cannot overplay their hand. in a real war, they would lose to some of the other factions. they want to keep things going in the other parties fight each other. reading up on this to get to an outcome, i cannot figure or the outcome is. >> what is the outcome when you have sunni versus shiite. you have those who have oil and those who do not.

>> if you had jihadist , youolling the territory could have a safe haven for terrorists who strike abroad. how much are you going to do to prevent that from occurring? is there anything you can do, even if you wanted to? fine.s is i am glad international relations people are having a field day. are we war-wary? -- war weary? things you do not know until you fight wars is how much they're going to cost. doves -- the course of a war gives you new information and tells you how expensive things are going to be. what we have learned in the last

decade and more is just how difficult it is to transform these countries. do we really want to go back? >> not so much in the short term. a lot of the stuff we are producing is not sufficient to change the market. fracking becomes a policy of geopolitics. it allows you to be a little more calm are about problems in the middle east. at the end of the first half, we might want to call it the new

quiet. the lack of volatility is historic in nature. anthony contends he is with timko. -- anthonykrasinski pimco.zi is with >> the thing they cannot control is --. they thing they can, but they cannot. we have had it for decades. i read about a panic of 1907. it has gone on for a long time. base.is a small capital they can take a dollar in turn it into eight dollars and they can come -- they can make too many sometimes.

the banks are trying to keep the level of indebtedness at the current level because they know if it were to fall rapidly, it would cause -- >> this is great. is it in your classic book? this is an original territory. we speak to this idea of what we are trying to do is transform -- the biggest transformation we have had in a century, trying to move away from this fractional reserve system that we cannot. >> we will talk about that further. tony crescenzi. >> how are you going to make money in the second half of this year? ♪

>> good morning. focuses on the mechanism of fed unwinding. the emptying of the monetary punch bowl. the punch bowl is as wide as the atlantic ocean. they will empty it at some point. what will be the ramifications? >> they are printing lots of money.

they are afraid of the reversal of the fractional reserve banking system. there is a small capital base upon which banks lend money. bank and you go to the you decide you want to de-lever, you want to reduce your indebtedness. say we are not going to replace your loan with another one. from the moneyo supply. it is no longer in the system to buy goods and services. that shrinkage of the managed -- money supply and losses purposes suppresses aggregate demand. --panies have to >> that is how you get a cautious neutral call. >> be beautiful and not ugly.

>> the core of the matter, this will lead to greater volatility. do you agree that we are going to have a period of greater volatility in bond prices or can the fed get a calm and safe pass? to beis starting successful in creating a de-leveraging. a slow unwinding of the credit bubble. >> all of our viewers and listeners say it is a free launch. thepaul wrote a book said fed sprint too much money.

>> we are stuck with the arencial system that we going to have to contend with and banks are going to have to print the money to deal with it. banking, -- will plead guilty to criminal charges. that is today. we will speak of that in a moment. ♪

>> it is a four-day workweek. how are you going to make money in the second half of the year? we have a lot of good answers so far. how are you going to not lose money. >> i want to make it. >> don't lose it first.

>> this is "bloomberg surveillance." a four-day workweek. our guest host, tony crescenzi. he works in the short-term space, as they say. >> we are going to start with a ruling on the limits of rights. the case was brought by hobby lobby stores. it is part of the affordable care act on religious grounds. set a precedence on whether for-profit companies have religious rights. the white house is responding to the crisis caused by immigrant children crossing into the u.s. without their parents. smugglers are spreading rumors, telling people they will be allowed to stay in the u.s. if they sneak in. -- we'lltte will should stop spinning for a

while. they are advising a temporary shutdown in atlantic city for casino saturation. there were a dozen casinos at the start of the year, but three of them could close by labor day. is the last day of the second quarter. shows no sign of slowing down. 2.1 trillion dollars in deals. --s perch and of all some purchase of all somsome. is great to be here. >> can we presume we will get to 4 trillion by the end of the year? >> it looks that way. el great about our business. >> we have a return of ceo confidence. stocks at record high. -- will it spur

more activity? >> ordinary road bumps is probably not going to get in the way of the m&a market. if you look at what has happened since the last healthy market, the equity markets are up over 50%. em and a markets are just returning. becausea lot of cushion the two markets are correlated. as things get choppy, we will see them -- in the m&a market. >> a little acceleration of bank lending. it is hard to see what to make of it. does it tell you about the credit story, that credit markets are opening up? >> they are deep and wide. there is ample capital out there. on anyes are attractive measure.

they are on an absolute basis, compared to where he could borrow historically. >> investment banking accounts .15%.bout 15 how do you get respect to say any capital to do these deals? >> you do not have to worry about being polite with me. i make my living in forums like this, where people are far from polite. that is the first time i have been asked that question. it remains the flagship part of our business. we have institutional support. it reflects in the results. market,ok at the bond the equity market, do the normal rules work, given the distortions from the fed and given the distortions of low interest rates?

>> i think they do. and i thinkout m&a investors want companies to put their capitalist. it is an interesting consortium of people. our sellers ready to sell? >> they see stock prices at an attractive place and they are more open to selling. it is a healthy market. you had disciplined sellers looking for high prices and buyers that need to get a return on their capital. if you look at buyer stock prices, it is a great leading indicator. your specialty is tech media and telecom. i have to ask you sprint and t-mobile. the is the thinking behind belief that there needs to be for wireless carriers to compete

effectively, but legacy airlines can go to three? really talk about any specific transactions, but i will say, regulatory oversight has always been a part of our business. if you look back at the first m&a transaction in biblical times, they probably had regulatory oversight. we have to think about policy and government and how they're going to react to transactions or it i will defer to those who make a living following -- >> morgan stanley did that transaction. >> the biblical one. is it fun, with the boom business, it's a fine? >> i think it is. i have worked with the same group of people. we have over 50 bankers who have been with morgan stanley for

over 20 years. it is fun. that is the reason we stick together. >> it will be more fun if we get to fort wayne dollars by the end of the year. trillion by the end of the year. ♪

>> this is "bloomberg surveillance." and is a holiday shortened week. we have a lot of economic data. >> economic data on jobs. futures negative two. doubt futures, -28.

-- dow futures, -28. to 105 on american oil. good morning. this is "bloomberg surveillance." now, we look at bnp. good morning. >> good morning. at bnp, i presume they will give up the dividend with all of these goings-on, is their long-term strategic clan derailed? >> it should be limited. restoreuld [indiscernible]

and therefore should be able to [indiscernible] we are having some technical problems. >> we will try to reconnect. the news of a settlement today. the report is straightforward. there is a gap. they give up the dividend. that the dividend will come back. it is a pause, not a structural change. you basically lose all of your profits for a year. ofwith us, tony crescenzi pimco. overlay a regulatory you are facing. do you fold that into your model? >> any investor should be

thinking about the intermediary. there is no bear stearns, no lehman brothers. >> do you feel like if something happens, a sudden move, we do not have anyone to call? >> we calculate in the liquidity in terms of making decisions. last week, there was an issue by jordan. the u.s. government was guaranteeing it. it was a five year maturity. about 30 basis points over the u.s. treasury. we have to compare that to other agencies. we have to think about how it would be if we got out. what is the cost to us? we may have calculated 10 or 15 basis points. we need to calculate the cost of liquidity in any investment we made because you have to think about how much it costs to get out and the ability to get out at all. >> that is a bigger cost to get

out -- >> without question. last year, when ben bernanke seemed to hint at tapering, the quotes shrank in half. intermediaries are not holding large boundaries. >> where are you placing capital this morning? when you go into your investment meeting, what is the geography that pimco likes best? >> we like the emerging markets. we bought russia on the backups. we did not think bruton had -- >> do you like argentina? >> we do not. >> i have my argentina blue pom-pom here. >> we like european assets. ofis still the early innings the bank deleveraging story. it is three times the size of gdp. it was shedding assets. there is no bear stearns or lehman. you need to have -- >> when you save them, european

assets, which ones? >> investing in the banks. havethough the yields calmed down, there is still opportunity. includingcials, coco's bonds. to 300rket will grow billion. you can have one half percent of your capital. >> are you getting more esoteric? are you staying of and simple at pimco? there are returns relative to volatility. we look at the financial companies and subordinated financial companies and consider how volatile they can get and how liquid are they? we are not going to reach for yield. with us fromenzi

pimco. that was really interesting. >> a lot of challenges. let's get a data check. a lot of data coming today. purchasingcago manager, pending home sales. futures are down slightly. >> "bloomberg surveillance." on bloomberg television. all of our interviews on digital media. we have put a lot out on social media. i am tom keene. with me, scarlet fu and adam johnson. we are thrilled to bring you tony crescenzi. market strategic does not even next -- describe it. >> a couple of quicker figures. 4% of global oil supply. why is brent crude up only 4%? citi's head of

energy. have not seen any material disruption. the market on edge because you have about two point two point 5 million barrels of exports coming from the south. there is no impact for dale. -- there is no impact for now. >> the differential between brent crude which trades in london and wti, which trades in the u.s. the trade is about seven dollars. what happens to that spread? >> the ruling that the u.s. will be more liberal in terms of how it interprets refining, that has given a lift to wti, as do some of the fear coming out of the iraq situation. wecould compress, although need to get clarity into what the u.s. kaunda said -- rating does.

the impact on actual volumes in economy today is not a big mover. they are liberalizing the interpretation of what it means to refine crude. we would think you are to see a lot of companies want to get .ssued legal challenges >> your combination with edward morris is powerful. rights the fear premium now? is it $13, $17, is it even calculable? >> a nice question. you cannot prove me wrong on that. $15.ave $10 to you have the physical markets a little bit on edge. premium, how much of that gets eroded by the

possibility that u.s. producers could supply oil or export oil to world markets? >> you will need clarity. you do not have any certainty. it looks like things might be getting better in libya. the market is going to discount that until we get certainty. it looks like things are ok in iraq. it is hard to be certain when you see the news flow. here, there is maybe more oil coming from the united states, but the market does not like uncertainty. >> you nailed it. i cannot convey how important this is. at the margin right now, where do i look for clarity? there is a lot of uncertainty in the world right now. that is reflected. have been trends we talking about, the demand, the surging growth in u.s. sales, it has been enough to start the market rallying.

the entirety it seems of the rock, east, into air breaking down and getting reform, the world is an uncertain place. >> let's take it to year-end 2014. >> coming into this year, the risk may be to the downside. have risks to the upside and a libya is looking worse than it did. >> seth, thank you for joining us. >> fascinating stuff. day on hown of the to make money, maybe you think you can make money. you heard seth kleinman say, maybe not.

how are you going to make money in the second half of the year? bnp will plead guilty for violating u.s. sanctions. we will discuss the fallout. ♪

>> good morning, everyone. the yen a stronger. 101.33. a stronger japanese yen. the insurgents who have seized large sections of syria and iraq are creating a new islamic state. proclaimed a new state in territories they hold in two countries. the baghdad government confirms experts are there to get a dozen russian built warplanes into the air. a corporateama hope executive with a military background can unravel the mess at the v.a.. robert mcdonnell is expected to be the new head of the v.a. veterans affairs. the agency is coping with a scandal over the treatment and delays at the hospitals.

for theca makes history first time, they will play in the quarterfinals of the world cup after defeating greece in a penalty shootout. the netherlands beat mexico in the last nine minutes. >> pretty exciting week for world cup soccer. >> it is not like there's a game every three hours. it is spread out. >> all you need to know is tuesday. >> 4:00. usa versus belgium. >> it seems like they are playing defense to get to the shootout, some of the teams. >> brazil and chile went to a shootout. it was 1-1 and double overtime and they had to go to a shootout. >> joining us now is betty liu. you watch any of the world cup games? >> a little bit. you cannot go anywhere without having the world cup game on the screen somewhere. i got it by osmosis.

today, we are not just talking about world cup. we have lots of news on tap for monday. ken feinberg will be releasing the details of the victims compensation fund. >>? >> that is what we hear. --? they can claim for money and it is unlimited. , the former chairman and ceo of franklin or is joining us to talk about this. remy sharp is going to ebay to sell her designs. >> is she famous or am i clueless. >> in new york, yes. you are not clueless.

there are about a dozen designers using ebay to sell their fashion lines. >> that will be their distribution channel. maybe that is something we will look into. >> ladies dresses -- i don't think i will be looking into it. when will the federal reserve raised interest rates? we will discuss with tony crescenzi of pimco.

>> good morning, everyone. tomorrow, is the internet retail thing working? great experience on wall street. we're going to slice through the hot air in the summer. guilt, but the other internet retail franchises. we will do that tomorrow. >> this is "bloomberg surveillance." i am scarlet fu. our guest host, tony crescenzi. company news from the files of bloomberg west.

phillips sees a bright future for its led bulb business. failed -- had sales of almost $2 billion last year. refund checks are going out to some customers of aereo and workers are on open-ended vacation. the supreme court ruled they were breaking copyright laws. analysts doubt aereo can reinvent itself. the ceo said it was far from done. are furious,s saying the company used them as guinea pigs. they manipulated the pages of nlmost 700,000 users for a experiments. the overall tone of postings emotions.er's that is the hypothesis very grace of you ever gotten a memo on an open-ended vacation?

an open-ended vacation for employees. >> is this a paid open-ended vacation? if so, i am intrigued. i have a suspicion it is without pay. >> you are flying the friendly skies. >> we are talking about honda's new business jet. first jet is off the production line and made a successful flight. in auto terms, it is a compact car, it seats only five passengers in the little amount of luggage. the two engines are so small they could fit into a large suitcase. the assumption is it is like the air taxi. so many airports are not served somemmercial jets and yet,

percentage of the population has access to the smaller airports. for 4.5 million bucks, you can buy this and maybe open a taxi service. >> it will be interesting. our gulfstream is bigger than that. >> you want something quit. quick.thing >> very interesting. jet, right? to theine if uber takes skies. it is an air taxi. they are trying to reach underserved -- >> i am surprise our newsroom takes a helicopter to the hamptons every weekend. charge for they

that? >> more than we can afford. they live large in the control room. >> on the federal reserve, we wait for a better job economy. rising wages. it will put a bid to higher inflation and then we're off to the races of higher yield and lower bond prices. is at newport beach. to see risinging wages? >> we do not know. lots yellen says there is of slack. 7 million americans work part time would rather work full-time. --.points to it is a lot of slack. the jobless rate is falling. it does not seem to be handling any new wages. >> why? >> there are many people who

have left the workforce who are a potent force against the existing workforce and they can say i will take that low-wage from you. they will take a job from those who are already working, if the workforce demand higher wages. >> i want to pin you down. optimists pulled back their calls marginally towards -- >> like ian of goldman sachs. choosee is a massive -- third quarter and fourth-quarter. two point fivets to 3% growth of the year forward. it looks like the economy is getting back on track. -- it forced it the economist to bring the numbers down. investors are thinking an essay

2% economy where it has been for years. it takes something stronger to push wages up. it takes higher wages to push inflation up. 70% of the inflation story is higher wages. that causes bond yields to rise. >> first there was the new normal. that got downshifted to the new neutral that is the 2% growth figure. what does it take to get us to a new acceleration? , withoutup the slack question. part-time workers that would rather work full-time get a full-time job. maybel take time, but some could say this is a goldilocks condition where it is not too strong and not too weak and he keeps things good, especially for investors because they worry about rising rates. one quit point, when the fed ites, it will be like moving to four. you have to think of a combined with balance sheet actions.

a trillion dollars of purchases equals about a one-point reduction in the funds rate. when the fed gets to two, it will be like four. it is subtraction by the illumination of addition. >> you are going to get us started. do this with pimco's idea of a new neutral. the bank of international edelman -- international settlements. they warn of excessive leverage and say enough about the medicine being prescribed that will be consequences. this may be beneath the curator. i thought it was important for the weekend. >> pending home sales. they come out at 10:00. last week, we got a strange number.

numeral sales the strongest in 22 years. you look at what we are getting today in pending home sales, expect it up only 1.5%. >> both are based on contract signings. they might be mirroring each other. havertgage applications not been great. do not expect a gangbusters report. bank is set to plead guilty and playing -- pay a record fine for violating u.s. sanctions. ban they are this going to impose, bnp got a bit of a break because it has six months to plan for this. the suspension will last for a year, but it has time to get ready. >> from brad henson, the ramifications of this are obscure. >> very obscure. that they could

clear through another bank, like jpmorgan. they become, a customer of jpmorgan. >> does the new customers just go to jpmorgan? >> this has never happened before. >> let's get to our twitter question of the day. how will you make money in the second half of the year? , get ready for earnings acceleration, filling my world cup. off the tableoney before the pullback, not being greedy is an essential investment strategy. >> this is what makes a debate interesting. >> i'm going to buy a couple of lottery tickets. >> thank you for sending that in. it is fascinating.

>> cell volatility. >> tony crescenzi. >> surveillance continues with radio. "in the loop" is up next with betty liu p. ♪

the -- >> good morning. you're watching "in the loop." i am betty liu. we have a lot to cover. bob nardelli. at ourst, here is a look top headlines this morning. expected to plead guilty today to charges that violated u.s. sanctions. the u.s. will have to pay a record fine, almost $9 billion. streaming video startup, aereo is regrouping after last week. it has shut down its service over the weekend temporarily while trying to figure out if it has any you chirp. and, on the brink of default for the second time in 13 years. that country is expected to miss a bond today.