concern and skepticism as north korea claims it has tested for a hydrogen bomb. some leaders challenge the claim. confidence crumbles again. since 2011.fixing and mapping the past. the fed minutes today are expected to provide clues on another hike. good morning, this is "bloomberg we are getting

breaking in terms of data. .eakness in general if you look at the markets, there is so much motility. -- was pretty gloomy. francine: -- tom: i don't know when he wasn't gloomy. is driving lower this morning. we are getting into on thetional relations multiple threats from north korea. we are.: this is on tractor territory. let's get to the first word news with vonnie quinn. we start in north korea, they say for the first time they have successfully tested a hydrogen on. the government called it an act of self-defense. the u.s., south korea and japan condemned the action.

meanwhile, skeptics say the test may not have actually involved a hydrogen bomb. there is a report that the u.s. syria's president staying in power for another year or so. it outlines the best case scenario for political transition in syria where civil war has raged for five years. the plan sets that unspecified march 2017ch 2015 -- two about the presidency. david cameron meets again today with angela merkel. he is trying to convince the other leaders to agree to changes in the membership terms. davidickiest one is cameron's pledge to restrict welfare payments to non-eu citizens. that president guna's executive action on

safety is not worth the paper that it is written on. ted cruz says that when he is elected, he will repeal all of the executive orders. the national rifle association says his actions are right for abuse. man accused of providing the rifles in the san bernardino massacre appears in court today. he could get up to 50 years in prison if convicted. he has said little in two previous court appearances and has yet to enter a plea. news, i am vonnie quinn. let's get to some data. tom: let's look at equities, bonds -- before north korea there was a lot of news, but then things deteriorated. -25 right now. is 1.0733.kness

west texas, that is american crude with it making new lows. vix has a 19.220. we have not rolled over down to the two dollar level. mario draghi's headache. that will be our terminal chart coming up in a moment. reallylar canada indicates how things have changed since new year's eve. vonnie: huge news yesterday. this looks more like an fx check. investors are trying to assess the outlook for the bullish economy and they are worried about china. there because we

saw huge moves. usc one index. i want to show you the pound, it is declining against the u.s. dollar after we had the services. tom: a lot of focus on fx. the wire says foreign exchange is a deep market, deep in pros and equities. bonds at equities look to foreign exchange. here is something else they look at. -- down we go, negative yields. we break lower and we come back. this rollover is what we have seen in the past couple of days. the disinflation. vonnie: it is not looking so good.

tom: we have a lot to talk about this morning. we do.e co let's get back to the top story, north korea. hour is thethe founder and managing director at pimco. when we woke up this morning, there was a sense of, hydrogen bomb. initially, based on the market reaction there was an immediate uptake of shock and surprise. but the more we talked to experts, the more skepticism we are seeing. if you look at the vibrations and these isaac impact, it looks right now much smaller than we would expect a hydrogen bomb, they doesn't mean it is not a hydrogen bomb, but we need to agency.

ifthey have developed an -- they have developed a hydrogen bomb, that would be very developed. but the market reaction right now in korea, after the initial selloff that we saw, actually now it is normal. is still a huge announcement, even if they haven't done it because they are claiming it to be. the relationship with china is very interesting, the president has been forthright about trying to keep north korea on board. it puts him into a difficult position. if we see more and more calls for sanctions on north korea it -- itut president could put the president into an awkward position. he will not be happy about this.

north korea is now in a position where it can tweak its nose a little bit if you like. tom: within the sources you have talked to, scott snyder and the good people at chatham house, is this event this morning enough to get a unified effort by the five nations to take away north ?orea as the six nation can they get together off this event? john: i think it is unlikely. china is not going to gang up with the u.s. against north korea. moves look at the market and i guess this is under the category of expect the unexpected. interpret the volatility and unexpectedness of these first days of 2016? wasinie: actually think it

a little bit expected in the sense that the markets were a little bit on steroids last year. know,ity support, as we we have some pretty major changes on the way. we have been raising rates and we have something with this energy crisis, the refugee crisis and terrorism. we are putting geopolitics at the heart of a lot of discussions and that is creating fractures and fragmentation's. you can see the koreans are an add-on to that. maybe that will fuel more tension in asia, particularly around japan and china, and i think that is something to take into account. john: to add to that, an important point to make is that investors don't like this. korea ishat north

interested in shows of strikes. ironically, i think what we would be more worried about are the signs of weakness in north korea. one thing that would really -- what would happen if you saw a weakening of the regime in north korea? syria a smaller kettle of fish. i'm surprised over the last few days, we have had the issues with saudi arabia and iran. and now we have this. what would it take for markets to react to geopolitics? isolated events are perceived as random until the moment when people see a pattern into them. and i think you know that the saudi move over the weekend is another one. and i think we have to see how things link up.

but clearly, what happened in saudi arabia is creating more uncertainty. isisially revolving the issue. as far as korea is concerned, we have to realize that china is a strong mediator for the leaders. whether we want it or not. place, new regime is in they have been a little bit more cold in that relationship and in my view, that means we can't depend on china as much to help with the north korea issue. hard,something that is this young leader is trying to make his mark. francine: thank you so much. and johnmaisonneuve fraher. we will be asking about the volatility we have seen over the last few days and

we will be asking about the divergence between onshore and offshore yuan. that is at 5:30 in new york. ♪

kong lookingong north to north korea and the korean peninsula this morning. i guess there is not a ligature in the finance certainly within the politics of china. we say good morning and good to all of you in hong kong. let's get to the bloomberg business flash with vonnie quinn. vonnie: one of folks like top executives has made a direct apology to the american people. said that the issue with the diesel engine is nothing to be proud of and he is truly sorry. -- the company could face

legions of dollars in fines. online sales soared over christmas. up for johnan made lewis is decline in store-based revenue. a tweet with 10,000 characters? familiar,to a person they may be raising the character limit to the thousands. that is the equivalent of a 20 minute speech. they expect most tweets to remain short and conversational. tom: that is a big deal. i think it is very misleading, and what you will see on twitter according to slate is still the 140 characters. you won't see essays. but underneath that, if they want to steal some vonnie quinn, they will cut and paste your

article into twitter. vonnie: a good point. they have already taken away the limit on direct messages. tom: that works perfectly. francine: we are going to get direct messages from tom keene that are over 1000 characters. i'm looking forward to it. brent and crude have dropped to an 11 year low this morning. javier blas.n how significant is this? year: cash -- javier: they are sending a

message that they are increasing spending in 2016 as compared to last year. the u.s. shale industry is , thising against opec time with the help of wall street. tom: what is the event that will trigger more spending? at a fancy study that shows the stability of oil is because there isn't any new bout of selling. what is the news that will drive it lower? javier: we will see more shale produced in the u.s., like pioneer, in 2016. iranis an indication that will hit on the market and that is only a few weeks away. prices, wewill bring will be in the 20's. keep on putting

out the research notes that say it will be $30 a barrel in the coming months. virginie: the key thing is that not everybody is there is on oil. we do have an increase in production. we have a high cost producer in a different situation. so you might have some supply coming out as well. and clearly, part of the oil price is going to be the volatility in the oil rice, on one hand, it is longhand but on the other hand, morville agility in the middle east will create spikes in price. they could be difficult to handle. help me here with this cfa question. if a good oil company is cap percent-50% goodwill on the balance sheet, what will be do with the goodwill that becomes that will?

will?omes bad virginie: a good question. thatlimate change issues we have, that is the right way to look at them. gas,u look at oil versus that is an issue. what i'm talking about is the volatility in price and the potential, unexpected spikes around the middle eastern news that it is cutting production because it is below $40. tom: very good. virginie maisonneuve is here with us this morning. javier blas, thank you very much. roach, whatstephen a day to see him on. stay with us on "bloomberg surveillance." ♪

francine: welcome back, i am here in london, a nice live shot, it is foggy. a pound fell against the dollar. a little bit worse than expected. time for the morning must read. waiting for tom, i picked something. in the london times, we are talking about brexit.

she says, there is some evidence that female voters are instinctively more euro septic been mend, they are also more risk-averse and so may be more nervous of voting to leave the eu. we are talking about issues that affect women voters in the eu. david cameron is arriving in bavaria. -- or make their own move. the chancellor still believes that david cameron's decision to pursue this strategy of holding a referendum is a mistake. angela merkel is willing to help him up to a point, she can't wring the rest of the party, let alone the rest of germany and europe along with her. youcine: how concerned are or how much talk is there about er being weakened politically?

a issue onlearly has her hand. 4000 new refugees a day. she wants an upper limit on the refugees but angela merkel has said she will not accept that. eventually they have to have some sort of agreement or falling out. aree attacks in cologne really dominating discussion here in germany. there are more victims coming out. e-mail victims on new year's eve, they are saying they were , up toed or raped by men 1000 men of north african or arabic origin is causing a big public outcry across germany and across political lines. francine? francine: thank you so much. when you look at the geopolitics with the refugee crisis, it is about factions in politics.

what worries use -- what worries you the most? virginie: given the fragmentation that we are seeing in france, germany is under pressure and i think it is a very difficult argument. for investors in geopolitics, it is tricky. you have to think about being sensitive to price. francine: thank you so much. virginie maisonneuve stays with us. coming up, we are talking to jonathan fenby. this is bloomberg surveillance. ♪

tom: we welcome all of you to london and new york. this is "bloomberg surveillance." new york was very cold today.

we have so much to speak of. in the next hour. jonathan fenby coming up. here is vonnie quinn. the u.s. and china have condemned claims that north korea has used a hydrogen bomb for the first time. they say the test was carried out safely. the fourth time that north korea has exploded in nuclear device. it mayle, skeptics say not have involved a hydrogen device which can be thousands of times more powerful. the obama administration reportedly expects syria's president to stay in power well into next year. is is it documents saying he won't give up power until march 2017. a year after president obama leaves office.

the administration says russia intervention is hurting efforts. shows thes in germany impact of refugees in europe. more than 400,000 refugees are from syria. other major groups were iraq and afghanistan. germany has taken in more refugees than any other country on the confident -- on the continent. in venezuela -- first time in 16 years. they are working to get political prisoners freed and to get out of a recession. the president says he will work to have -- removed from office in the next six months. and a member of the armed militia occupying a refugee -- a refuge in oregon says they are working on a peaceful refuge --

a peaceful resolution. global news 24 hours a day, powered by our 2400 journalists. i am vonnie quinn. francine: thank you. let's go back to the top story of the morning. north korea's nuclear bomb test. they say they have successfully tested a hydrogen bomb. the regime says so but there is skepticism around that. now, let's welcome jonathan fenby and also with us is virginie maisonneuve. at north korea and the two sides, do you believe north korea? or do you think that we have to be skeptical? jonathan: we have to be skeptical with north korea. there is no way of their find this kind of thing. before theay just

young leader said he was giving himself a birthday present. what it does, it reinforces the concern. the south focused on china sea and china and japan. but you have north korea there, perhaps the most dangerous. this area is essential in global growth picking up. we have a downturn in china. we have uncertainties in japan. politicalreally big and global economic story. the relations between the north and the south, could they get worse? jonathan: they could get worse. they are deeply embarrassed by this. north korea is meant to be the little brother. but china can't exert the kind of influence that it wants to over this small, pretty poor

nation. tom: let's first look at the yen reaction, bring it out. this is the intraday. we moved down. that is a stronger yen, that is around 10:00 p.m. last night. jonathan fenby, i like a you mentioned the linkage between china and north korea. let's take the idea of tension it ist important city -- an important geographic moment. rivers the tension on the between china and north korea? jonathan: it's funny, it is a mixture of things. the chinese don't want north koreans to come over the border. on the other hand, they want a free trade zone.

nothing much has been done last year about that. basically, where beijing is stuck is that it doesn't like what north korea is doing, it wants to control north korea. it doesn't want to use the pressure of sanctions because it is afraid of a collapse in north korea. in the words of your doorstop, will china dominate the 21st century? it is a fabulous short book. read it on an airplane. can china lead here or does it follow the five nation group trying to deal with this ruler? difficulty is that china and japan can't get along with each other. sitting downhem and shaking hands and cooperating? no.

playing this are for everything they can. they are experts. tom: at 11:00 this morning at the united nations, jonathan fenby is going to parachute in and tell the obama administration what to do. i don't understand here. what is the step forward? the only step forward is through beijing because it is the only country that could bring economic pressure to bear on there. what they are afraid of is that a the regime falls, it will united korea and you have u.s. troops back on the ground. what we haveen just discussed, it points again to the strength. virginie: yes, the volatility in the region. we should not underestimate china's ability to mediate. is role as a mediator

different than where it was 10 years ago. appears that it the chinese security chief who is in jail for life, he was the go-between with north korea. killed, hele who was was another pro-china person. china lost its linkage. i just want to mention that in a presidential debate in september of this year, a discussion on american troops on the river is not something the american people are envisioning. jonathan: exactly. is that it is-up extraordinary how many destabilizing events will take place. iran, saudi, arabia. north korea. you have it everywhere. the to that point, can brookings institution -- two

days ago. ken pollack was as gloomy as i have ever heard glenn pollack. had saudiwe have arabia-iran. we have had north korea. concerns coming out of china. and we haven't heard from russia. spacerank the perceived and how much damage they can do to the economy? virginie: it is very tough to forecast. the markets are supported by liquidity. china, they will be supporting when the u.s. is raising rates. however, the geopolitics creates fragmentation that is difficult to price. is a year of volatility in stocks but also in currencies. and stock pickers who can navigate through that, keeping

, theyviews and conviction will be able to make money in the market but it will be volatile. a 34 handle on west texas intermediate. oil is breaking down this morning. international relations is unfolding into our economics finance and investment. will join usonery and stephen roach later as well. stay with us, worldwide on "bloomberg surveillance." ♪

markets are affected by finance and deflation at international relations.

vonnie quinn will keep you abreast of the news. right now, a data check. down.p futures are joints branch down, that wasn't true two hours ago. the handle is one dollar away. let's go to the second board. two-year, -0.38, nowhere near the lows it yielded there. the dollar canada, if you are in the nhl and you are paid in canadian dollars, you are not happy. you want a trade to the new york rangers. francine? francine: thank you. it is all about the data check. we talk a lot about data, that it actually translates. in the last hour, i spoke to the man behind the gloom and doom.

in china, it was evident already for two years that the economy was slowing down. optimisticrnally aren't managers who have to advertise their products to make money, they remain bullish about the chinese economy. francine: i know it was a depressing interview. he told me basically that asset markets are crashing and china might have a hard landing. to's put these questions jonathan fenby and virginie maisonneuve. he was saying that there is a continuity between what we have seen in the markets but fundamentals could get worse. virginie: my view is that it should be at work .5%-5%. the economy is moving towards a

more service-based economy. continue toals decline, but the service continues to do well. and that is the story. still, many people believe it should be at the .5%. 6.5%.at this is what is happening. on the path of recognition, global growth is smaller and the pie gets smaller. it will be a difficult transition. that doesn't mean you shouldn't own any china stocks. you have to be extremely careful. francine: we saw some huge and thes in the yuan spread between the onshore and offshore. at what point does it become uncomfortable? jonathan: it is already becoming

uncomfortable. had an attempt to make up for that, they keep going into the market and they are trying to control the currency. want to control this and the trouble is, the market is pushing and moving away from the idea of a single rate. so we see continued depreciation. in the currency and through this year, probably ending up at 6.8 -6.9. tom: let me ask you a question. to read ae a clue how balance sheet of a chinese company? or the sovereign debt of china? is there a balance sheet that you can trust? i'm talking about the stock, the value of the debt on the balance sheet? jonathan: i will reply,

mischievously, it's depends on which of the balance sheets that you look at. there will probably be several. it is difficult. if you are looking at quoted companies on the index, 70% of those are ipos by state-controlled enterprises. are --ooks and numbers to say the least. good luck. observation, and i , when youarl weinberg have emerging markets implosion, it is always a surprise about accounting. that is what i'm waiting for. francine: you are right. it is about accounting, it is about the dollar denominated debt that any emerging market company has. we had a guest on earlier saying that only 10%-15% of the credit

kind -- the credit crunch is in china. virginie: it is case-by-case, you have to see that there is a balance sheet but they are also spending a lot of time getting to new companies and seeing what you have. on the debt crisis, i think a large part of the new debt that has been taken on by companies and governments since the last crisis has been in local currency. we are in a better spot that we were in the last crisis. of course, you have to pay attention. it is a case-by-case analysis. tom: there you go. virginie maisonneuve is with us. markets are substantially on the move, we will continue this discussion in the next hour. stanleyy at morgan where he changed economics,

stephen roach for an extended conversation on the six nations looking at or korea. ♪

tom: you need a data check.

we are looking at all markets, equities, bonds, commodities. weaker, not that much dollar strength, it is ugly out there. the canadian dollar is very weak. a big news is that west texas is joining brent. brent is finding new lows this morning. i think that is enough of a data check. we will do them through "bloomberg surveillance" this morning. vonnie: intel is branching out. they have made deals with espn and new balance and red bull. the products will be used to give audiences more information about the sports they are watching. pharmaceuticals will name a new ceo while -- is recovering from pneumonia. for now, the appointment of the

replacement is meant to be temporary. the stock is down more than 50% since august. asres of gunmakers rose president obama's announced his own safety. gun sales surged in december after talks of new limits in the wake of the san bernardino massacre. that is the bloomberg business flash. francine: thank you so much. the federal reserve will release minutes today of the december meeting when rates were raised. let's bring back virginie maisonneuve and jonathan fenby. it seems like there is a difference between what the market expects and what the fed tells us. virginie: clearly, what we need from the minutes is to understand what they're going to look at. any are talking about

increase, unemployment clearly has come down a lot, but there are factors of why it looks so good. so the devil is in the details. it is possible that part of the reason why we had the increase was the pre-election cycle. it is possible that we have some mistakes taking place although we want organization. ishave to see the economy still doing well, but it is slowing down. we have to see what happens in the rest of the world at how much slower it could go or how much stability we could have. i think the key thing is the theme for 2016 is credibility of leaders and decision makers, central bankers, in a world where growth is slow at the pie is shrinking, we need decisions. a futures basis, the dow

is down 7.8% from its peak. you are legendary for grown-up investing of blue chip stocks. do i hold them this morning? are you building cash? virginie: i think you should expect volatility. you should have enough cash that when you have volatility in the time and roomve soact within your portfolio, the long-term growth companies climatentified -- change, specific pharmacies, specific consumer stocks all around the world -- that has to be the strategy for 2016. you want enough cash. tom: i want to rip up the script. you have written numerous books -- i am stunned by the lack of construction energy in france.

what does the next president of france need to do to create anglo-saxon energy? what do they do to jumpstart paris? jonathan: we have been talking about this for a long time. aat you have to do is rip up lot of the regulations and the labor laws. an hourlys, on productivity basis are among the most productive. the trouble is, they only work 35 hours a week. lacquaat is a francine week. that is perfect. francine: that is genius. i would say that we could just get rid of the french. jonathan: but look at the think the president won't do much. he has a better chance of being

reelected because some people on the right might make some kind of change at they are scratching each other's eyes out. and we are still stuck in the old story. tom: come back for more. jonathan fenby, i can't say enough about his book on china. virginie maisonneuve, thank you so much for the wisdom. in the next hour, stephen roach will join us on china at how the five nations are dealing with or korea. special note, edward morse will join us. stay with us, "bloomberg surveillance," and more data checks. ♪

tom: in an active so-called self-defense, north korea

perfectly detonates a "hydrogen doubt.experts it may have only been an atomic bomb. texascrude may slow west in the next hour. stephen roach of yale university. good morning, everyone. this is "bloomberg surveillance ," live from our world headquarters in new york. i am tom keene. in london, francine lacqua. today is truly a morning of expect the unexpected. francine: we go from geopolitics to data. the key to all of this, look at yen. the chinese stock route, currency movements. tom: we will get to that with an extended data check. edward morse will join us from citigroup in a number of hours.

let's get to our first word news. here is vonnie quinn. vonnie: north korea's claim of a successful hydrogen bomb test is prompting alarm and skepticism. the government on tv network showed kim jong-un signing the order for the test. korea's spy agency and nuclear experts say even a failed hydrogen bomb would have caused a stronger earthquake than the one detected after this test. we will have much more on this story coming up just ahead. the u.s. reportedly sees syria's president bashar al-assad staying in present -- staying in power for at least another year. document outlines the best end to the syria war. the white house sees it as key to ending the fighting. new figures from germany show the impact of the refugee crisis on the country.

the interior ministry said germany has accepted 1.1 million asylum-seekers last year. more than 400,000 of them were from syria. iraq andre from afghanistan. germany has taken a more refugees than any other country on that continent. ted cruz says president obama's'executive actions on gun sales are not worth the paper they're written on. the president is expanding background checks to gunships -- to gun shows, flea markets. the national rifle association says the president's actions are rife for abuse. will vote today to repeal obama care. the bill will not reach the president's desk. the senate already passed the measure. the bill would defund the planned parenthood. president obama would veto it. the house has voted 61 times to repeal the affordable care act. global news 24 hours a day, powered by 2400 journalists and

150 euros around the world. bureaus around the world. have two esteemed guests on asia. -23,es deteriorate, -20, -27. brent,st texas joins 35.02. on to the second screen. canada, 1.40 one, something for mr. trudeau to think about. quickly, francine, what do you have this morning? francine: if you look at european stocks, there is concern about china, about geopolitics. that is also after china sucks to a five-year low. i also wanted to show you the

pound. i agree with you on cable. that is a surprise in early 2015 -- in early 2016 to say the least. we will get to stephen roach later in the hour. michael mckee will join us on monetary policy. this is what lawrence summers talked with me about in dubai a week ago. we just roll right over here negativebound of new yield. that gets my attention, to say the least. , onie quinn has the news north korea. you look at the experts in the world who can provide true political and economic and even military perspective on this. john nielsen right is out of oxford and the johns hopkins university. he is at chatham house, head of their asia program. news, whatard the was your first reaction away from the debate about a hydrogen bond? was, iy first reaction

think a recognition that this is what north korean does -- what north korea does. this is a leader who wants to consolidate his home, and therefore i think he wants to demonstrate to his people that the north has military keep abilities. of course he wants to try to get the international community around the negotiating table. it is highly questionable. tom: my reading of this as an amateur is they have multiple resources. how should the obama administration provide comfort and support to the people of south korea and japan? john: the first strategy is to issue a clear statement condemning the north korean and seeto also convene whether the security council can

put together a clear statement of condemnation and to look to economicallyasures on the regime. it is not clear that is going to change north korea's behavior. this is one of the big problems that the world faces in dealing with north korea. it is a regime that is so isolated. the only country in a position to put pressure on the north is china, and china remains reluctant to do that. how telling is this for china? this is also kim jong-un trying to assert more independence. john: chinese are extremely irritated by this announcement. as recently as october when they send the chinese leader to count pyongyang for- to the anniversary of the workers the chinese are going

to feel very frustrated at this increasing publication by a country that is, after all, their ally. tom: thank you so much for joining us on short notice this morning. i cannot convey enough the chatham house, under his leadership. lucky. stephen roach was scheduled with is about eight months ago and this is the one day he is not speeches at yell university. he has decades of work on china and joins us this morning on north korea. i heard the news, and i thought of your book "the next asia." the really cannot be a next asia and when you have a so-called hydrogen bomb on your doorstep. how is the calculus -- how has the calculus of all asia changed as we go into 2016?

stephen: the next asia i laid out spoke more of a chinese-led economic renaissance rather than a renegade country disrupting the region. can north korea disrupt that renaissance? stephen: i do not think they can at all. the development underscores special role that china plays in producing the leverage against north korea. to the extent that the u.s. and in the process of developing this new special great powerful relationship. president obama needs to put power on xi jinping to squeeze them. , "i made unique skill it this far as the mandarin square in central hong kong." stephen roach has gotten there. have you --

: i was there last summer. tom: the length of that border with china is something we do not understand. stephen: it is winter break right now. tom: i want you to explain to us the china relationship with north korea away from beijing, away from shanghai, away from hong kong. it is a tenuous relationship in the north, is that? stephen: the chinese have old fears about instability in the peninsula leading to massive flow of people and destabilizing further security between the korean peninsula and china. i think those fears, quite frankly, are overblown. they really are a relic from the past, where the korean war was a destabilizing, potentially destabilizing threat from china.

those days are long past. china is in a very new place in terms of its own security issues, it's military prowess, and i think it needs to update containing this renegade country. francine: when we talk about reclusive north korea, it makes us think of other road countries. -- other rogue countries. what are others that are the most dangerous and most unpredictable in 2016? stephen: i am not an expert, but i worry about the middle east, especially the saudi, iranian issues that are now boiling over right now and what this means for the syrian issue and how we are going to do with it. tom: should the fed have raised rates? stephen: yeah, the fed needs to get rates back to more normal levels. tom: stephen roach with us at the yale university.

michael mckee joining with us as well. eurasia group's nicholas consonery will join us on asia this morning. stay with us. worldwide, "bloomberg surveillance." ♪

francine: welcome back. this is "bloomberg surveillance ," and you are looking at pictures of a foggy london town. services did not grow by as much. let's get straight to the bloomberg business flash. here is vonnie quinn. vonnie: shares of apple are lower pre-markets on word that the company will reduce phone production. iphoneill make 30% fewer 6s-plus models because

they are more expensive overseas. volkswagen has issued a policy to americans for the company's cheating scandal. ,erbert deese, the ceo said he is truly sorry about the pollution issue. the w could save billions of dollars in fines. will twitter get wordier? change itsht character limit from 140 into the thousands. that would roughly equal a 20 minute speech. that is our bloomberg business flash. tom: they are going to keep it the way it is, 140, but underneath it is going to be, you know -- everybodylm down, come on this. tom: if they make it more like facebook, i am going to use it

less. i went to the michael mckee school of tweets. vonnie: speaking of michael mckee, the federal reserve will release minutes today of the december meeting. now. with us it was a unanimous decision to raise rates for the first time in years. what will we learn from the recorded details of that particular meeting? michael: let me see if i can explain it in 140 characters or less. the fed forecast suggested they will do four rate increases this year. the markets are pricing two. they are looking to bridge that gap but figure out what is the reaction function. what is going to trigger the fed to move again? nobody really knows. the minutes may give us a clue as to at least the way a large number of them are thinking about the economy right now. about: so a lot of talk inflation expectations. is that the way the first to the -- is that the way they refer to the financial markets?

michael: janet yellen said they are looking at actual expected projecting of their goals. there is no actual inflation, and with oil prices falling, look at this is suspected -- look at this expected inflation. people do not think we are going to get inflation. tom: mark, i want to go to you and to dr. roche on your on yourl -- dr. roach wonderful chart. michael: the yellow line is the ite-chip consensus for what is going to be in the fourth quarter. the orange line is the atlanta , and it showsr what they are calculating gdp to be. tom: larry summers emphasized the point of confidence. nobody talks about it.

michael: there is a lot of confusion about where the economy is going. there is no clear sign about what we are going to see. the best you can do is muddle along. , is this aach normal process now? relied: the fed has repeatedly on a variety of models that led them astray with respect to producing -- with respect to predicting inflation. you have to ask yourself, are there deflationary trends all over the world? ppi indexes for all major economies are in a contraction mode right now as we speak. -- clingingis clean inflationtiquated model. why are they targeting inflation in this inflationless world?

tom: i would suggest mark carney has done a better job of communicating this than what we have heard out of washington? i love the way stephen roach put it because this is what we were talking about yesterday with the inflation -- with thisope inflation figure in europe. stephen roach, given what you just said about inflation, reducing their forecast on u.s. growth, and given all the talk about a possible recession in the u.s. this year, do you see a reversal in the rate hike that chair yellen put in december? stephen: people are talking about possibly unwinding the rate hikes, but i guess i am asking a deeper question, and that is, are we making a huge mistake in aiming the arsenal of monetary policy at an inflation

lesset, in an inflation world. in doing that, we are repeatedly using monetary policy as an instrument to encourage risky asset markets, asset bubbles and credit bubbles, rich we learned andfully in 2007, 2008, 2009, bringing us into a wrenching crisis. by misdirecting the arsenal of monetary policy in a way that fosters more asset and credit cycles, that is the risk that worries me the most. tom: stephen roach with us from yell university. michael mckee and i will continue this discussion this morning. on industrial america, mark fields, the ford chief executive officer, this afternoon on "bloomberg markets." futures are

-34. this is "bloomberg surveillance ." good morning. ♪

francine: welcome back. im francine lacqua in london. tom keene is in new york. you are looking at live pictures of the hong kong skyline. now it is time for the morning must-read. vonnie: thank you so much, francine. martin wolf writing in "the financial times" is typically a

little bit gloomy, but he is optimistic today. stephen roach disagrees. tom: stephen was all upset. vonnie: he quotes three reasons why -- roach, before i go into the other details in the op-ed, explain why you disagree with this idea. i have great respect for the deep thinking erudite martin wolf, but the idea that disasters do not happen a lot is pretty much a no-brainer, which is really all martin is saying. but that type of complacency would have led many -- and martin did miss, like most journalists, in celebrating the

brilliance of central banking -- the crisis of 2008 and 2009. vonnie: sure, but the point he's making that -- this includes the financial crisis interest. stephen: it does, but it leaves that in manynts cases are man-made. i believe the crisis of 2008 and 2009 is a reflection of serious policy blunders. if we take this complacent view of the world for granted like martin is saying, that it will keep growing forever, that encourages us to experiment with reckless and dangerous policy. i am not a big fan of this piece at all. francine: where do you see the biggest risk? is it a china policy mistake, a credit crunch in china? or is it a spike in oil? stephen: the biggest risk is the

world economy is growing very slowly, below trend, and thereby lacking in a cushion that it periodicwithstand surprises that can occur in the middle east, that can occur in north korea. and i think that the sluggish ,ost crisis and global recovery with zero interest rates and expanded balance sheets, leaves us with very little ammunition to withstand the periodic blows that always seem to come from time to time in this interconnected world. tom: stephen roach with us from yale university. nicholas consonery will join us with eurasia group. futures, -32. stay with us. ♪

francine: it is a risk off for a third day in a row with european stocks down. futures are down.

brent atmovement on 35, as investors are trying to assess the outlook on global growth. pound, 1.4651. now let's get straight to bloomberg first word news with vonnie quinn. of jubilations today after north korea claims its first hydrogen bomb test was a success. the government run tv network shows kim jong-un signing the order for the test. japans., south korea, and are condemning it. this is the country's fourth nuclear weapon test, said to be a hydrogen bomb. south korea nuclear experts say that a failed hydrogen bomb would have caused a stronger earthquake. -- ofn accused of buying selling the rights -- buying the rifles used in the san willrdino terrorist attack

be in court today. he has not entered a plea yet it has said little at previous court appearances. a membered of the armed group occupying armed -- occupying property in oregon -- the authorities say they are working on a peaceful solution. the group says they will leave when federal lands are turned over to locals. call it the "you're fired" debate. the issue of banning donald trump from the u.k. will come up later this month. more than half a million people signed the petition, saying they do not want trump in britain. news 24 hours a day, powered by 2400 journalists. i am vonnie quinn. 141 percent on -- ,he -- one of the indications with my tilted bow tie this morning.

is it a morning must-read. scott snyder owns korea watch in richard haass' council on foreign relations. if you want to read one thing on north korea, read scott snyder's five or six page treaty. tom: read scott snyder this morning. as well, look at eurasia posco group.-- at eurasia's i want to talk about debt restructuring in china, which i know is sort of boring compared to north korea. but you put it front and center. who restructures the debt?

there is no sec, just six guys in beijing. who restructures the debt? finance andtry of the people's bank of china have an active role. is one of their top priorities for 2016. they made an explicit statement at their economic work conference in december that these supply-side reforms would be a primary focus and that restructuring is front and center. tom: are you with reinhardt that this is a combined public debt and private debt challenge? nicholas: absolutely. if you put the corporate debt together with banking and government debt, we are looking today. of gdp it is a major challenge for china. they are taking it more seriously but there are no easy answers. francine: what worries you the most about china? we talked about imbalances and currencies, but there is so much

unknown about bad loans in banks. is this the real thing that we need to get a grip on? nicholas: when we look at the global economy in 2016, we are concerned about the gap between the perceptions in the global marketplace in terms of international geopolitics, what china can and should and will do and what is going on in the crowd in beijing. we are seeing that playing out with this huge market volatility over the last couple of days. on the one hand, you see the chinese government that has the capabilities of managing the downside risk, but they global market uncertainty about their ability to do that is so high. roach, you have been a china optimist. do you have an optimism that they can work out their debt challenge is? all, the debt,of you have to be more granular than what we just heard. the growth of debt in the last seven years has been concentrated in state-owned enterprises.

this is an issue for the management of the company's -- the companies that china -- tom: can they extend maturities like greece? off the they can split good loans from the bad loans, as they did the last time they had difficulties in the banking area. but do not mistake the state-owned enterprise debt overhang. there is still solid growth and an increasingly violent -- and increasingly vibrant, strong economy in china. tom: joe stiglitz loves to trot this equation out here in a lot of these smaller economies do not have the inherent growth to grow themselves out of the debt crisis. you are stating that china has the little small g to grow their way out of debt challenges?

stephen: we debate endlessly on hard landings and soft landings in china, but the chinese economy is growing a lot more rapidly than the hard landing crowd would lead you to believe. do not state volatility in the chinese equity markets for culpable volatility in the economy. this is a services-led economy. his services led economy is growing at 8.5% annualized, much larger than the manufacturing sectors combined. the fixation in the markets is on an economy that is now being marginalized by the rebalancing consciously put in place by the government to shift from exports to internal private consumption. this is good news for china. thedo not pick it up in equity market volatility. that is a market-specific issue that we saw painfully again this week. love to getwould your thoughts on the spread between the offshore and onshore

because this comes at a time where chinese leaders are trying to do everything they can. this joyous attention to the restrictions of free capital flow. stephen: -- this draws attention to the restrictions of free capital flow. stephen: we are asking too much out of the government to move immediately to a free-floating convertible currency. they made an important shift in the form exchange regime last august. the currency depreciated somewhat since then, relative to the dollar. from a broad trade waiting basis, which they are emphasizing much more, which is far more relevant to the chinese economy. area, youroncert theme -- nicholas consonery, tell us about the alliance of the united states to the pacific. is it a hollow alliance? nicholas: i think the u.s. is going to be more focused on asia in 2016.

the obama administration has viewed that as one of their legacy issues and where they have more bandwidth to focus this year. at the end of the day, its administration is happy with locking in the gains they have made through the course of their eight years in office. when you look at asia, the question is what is going to happen in the presidential election in the u.s. in 2016. what will that mean for asia policy? whoever wins, republican or democrat, they will be more engaged on asia strategy and economic issues. at china, andlook if you were to say we need to get smarter on china and study china, what area is the greatest mystery to americans? to look at what is going on with the economy rochep or i thought dr. was optimistic. the harddebate,

landing debate, that side of the argument is clearly winning right now. we continue to get currency depreciation and that is the focus. when do we get to a point of a new equilibrium and a better understanding of what is going on with the economy? francine: we are trying to figure out the hard landing and growth. will we see further declines? stephen roach is pretty bullish on china. what is your take? expect to see 5% to 8% against the dollar through the course of the year, so there has been more space to let the currency grow. that will reduce their need to intervene and drawdown reserves, but we still think there is significant bandwidth to do that and they will do that in a managed way. nicholas consonery, thank you so much. stephen roach, you wanted to make one further comment. stephen: just to the hard landing-soft landing -- the hard growingschool of china

is much stronger than expected, nothing could be further from the truth. urban job growth through the first three quarters of this year is running at a 14.4 million annual rate. that is above the 13 million of the previous two years, and well above the targeted increases in the last several years, the 10 million a year. how can china be slowing its gdp and doing better on employment? it works when you understand the , job,to employment labor-intensive services. 30% more jobsre than does the old economy, manufacturing and construction. doing a change to a sector that generates more jobs, this throws nothing but cold water on the

hard landing story in china. china is a transitional story. you cannot look at topline gdp and conclude about where china is going hard or soft. you have to look at the pieces, the mix, and the mix is far more constructive than the china bears would lead you to believe. francine: we appreciate you reminding everyone about that, but are we witnessing some kind of capital outflow, or even a capital flight from china? stephen: foreign exchange reserves are down roughly $500 billion. you will 7 -- you will definitely see more two-way flows out of chinese markets as they continue to open up the capital account as they promised to do. it is quite possible you will see in some quarters capital flow out, and in other quarters there is a currency expectation change and capital will flow back in today. tom: stephen roach from yale university.

korean markets, -33 right now. one of my favorite economists will be on today. he is wonderful, whether you are right, left, or in the middle. james galbraith. today on bloomberg. ♪

francine: look at this. ims stealing tom keene's lexicon. -- i am stealing tom keene's lexicon. get to the bloomberg business flash here is vonnie quinn. vonnie: slightly higher ticket

prices are in the air at major u.s. airlines. several u.s. carriers are boosting round-trip domestic fares by six dollars. it started with delta, and the announcement came from american, united, jetblue, and virgin america. netflix viewers will see more movies produced by green works. he gives netflix -- by dreamworks. some trader joe's customers think there is something fishy going on at the grocery chain. a class-action lawsuit says the company does not sell its five ounce cans of tuna all the way up. the company is not commenting. that is the latest bloomberg business flash. tom: there it is. the tape a little bit better this morning, the -30 up to -31 this morning. single best chart and

bring in stephen roach of yale university. this full didn't to the theme of -- this full into the theme of the year. folds into the theme of the year. this brutal mood of disinflation is the yellow line, which is the moving average. beneath the two previous bouts of disinflation back 20 years. this is a big deal. how does mario draghi deal with this without unified physical response? stephen: i am in the school that this is beyond the scope and purview of monetary policy, especially at zero interest rates or negative rates, in the case of the ecb. it is an aggregate demand problem, and policy needs to be directed, especially fiscal policy.

aggregated demand in europe, in the united states, in japan, and elsewhere around the world, we have too much supply, too little demand. tom: that is interesting economics. how do you spur aggregate demand? new?e waiting for the new stephen: again, we need more public sponsored infrastructure. that is what larry summers is saying. tom: why can't republicans do that? why can't john b taylor of stanford university agree with lawrence summers of harvard that we need a unified infrastructure response bordering on the depression era? stephen: there is certainly more to the story than just infrastructure. that is necessary but not sufficient. we also have a deal with the private sector aggregate demand, with the american consumer, who

still hasost crisis an interest in paying down debt rather than stepping up on discretionary spending. we are coming back with stephen roach to get final thoughts. we like guests on this show that can drive the conversation, like stephen roach. edward morse will be on bloomberg radio this morning. he has been dead-on on petroleum. bloomberg radio across the nation. washington, 99.1 fm. ♪

tom: interesting, to say the least. the foreign-exchange report, yen driving ever lower. euro weaker. 141 -- 21.41 earlier. to 1.41 earlier. we have the privilege of starting the year with stephen roach from yale university.

let's talk about the fractious middle east. really, the comment of the week that i heard from an esteemed guest was saudi arabia is essentially a generational shift of a 30-year-old deputy crown prince as the new guy on the block. these are shocking changes. how would you suggest we adapt our political economics to the changing saudi arabia and the format within the middle east? stephen: it is tough. tom: which everybody agrees. stephen: we have been closely forned with saudi generations. it has been the linchpin, together with our commitment to israel, of a bifurcated but hopefully -- at least we thought -- balanced policy to the middle east. that now appears to be starting to unravel. -netanyahu frictions on

one hand, and now saudi-iran on the other hand. this is a region that is obviously rife with instability for years. be far moreit could unhinged in the year ahead. francine: i am surprised that it takes a lot of things to go wrong in geopolitics for markets to take notice. are we -- are you concerned that we are in an environment that feels that sometimes markets investors are numb to these political risks? stephen: investors are always told that geopolitical risks are events, getne-off off them, these things will pass through that was the point of

martin wolf's article that moved vonnie quinn to mention it earlier in the program. the world is a fractious place, and the bottom line is, as i tried to say in the earlier segment, the global economy is growing very slowly after a 2009fic crisis in 2008 and , so it does not have a cushion to withstand the idiosyncratic risks. tom: this reminds me of the work of richard berner from morgan stanley years ago, the corporate reaction to what dr. roach is talking about. fiscal it is a responsibility more. governments are not able to do it either, so what are we relying on, a shift to a services economy globally? stephen: that is a deep philosophical question. what are we really relying on?

my biggest concern, and one that i wrote about at morgan stanley and i have worked on since i left and have gone to gail is that -- going to gail -- that i have gone to yale is a central banks, by using up all their ammunition in one crisis are in one crisis or another, are now coming up with these balance sheets tools and asset purchases. they have set the world up in a zero-interest rate environment for periodic bouts of financial instability. they do not seem to want to go back to the old way of doing things. vonnie: we have to bring up the emerging markets, francine. francine: how much are you worried about brazil, the fact that we are questioning the independence of the central banks? stephen: brazil is another example of an emerging economy that seemed to come back after

decades of hyperinflation but now has lost its way once again. even australia, new zealand, and canada, are caught up in a china-centric commodity cycle that is unwinding big-time as china has moved away from commodity intensive to more services commodity -- tom: thanks for starting us off. stephen roach will continue on bloomberg radio as well. all i am going to say is we have stabilized a little bit, -30. 2.42.tures at negative a weaker euro as well. "bloomberg surveillance," next on radio. ♪

stephanie: rebound, chinese markets come back from two days of losses after the government weakens the yuan. european stocks are down yet again.

they will beike opening even lower. meanwhile, oil is not been this low in 11 years. , north koreae exploded something, but was it really a hydrogen bomb? ♪ stephanie: good morning, welcome to "bloomberg ." david: we have had a lot of news in this new year. stephanie: we have, in one direction -- lower. the dow down to 50. i'm going to call this guy the grim reaper. jonathan ferro in from london. david: you will fix it all for us. jonathan: i will try my best. david: welcome to bloom