francine: asian stocks tumble. europe stabilizes. u.s. futures trade lower as brent continues its fall. how will the oil price play into this afternoon's ecb rate decision? and christine lagarde weighs in on the recent turmoil. >> in a way, having a summary of volatility is all right, and it is compatible with this market-driven principle that china is enduring.

when you say government can manage volatility, if volatility becomes excessive, yes, but intervening is limited. francine: good morning, this is "surveillance," live from davos. i'm with tom keene. we have had a busy morning. we talkedpanel -- about yuan devaluation. tom: and a fabulous backdrop to a second day of turmoil. here we are with some really -- that was a backdrop to what we heard from it on lagarde. francine: we've been trying to explore the theme of whether central banks have ammunition or something were to go wrong. i think there is a lot of conversation that is needed to reverse the hike. tom: i'm not there yet, but there is a discussion about u.s. banking policy, given the lack of tools left in the toolbox. francine: and nobody can answer

the question of when and where we find a fault on will. -- on oil. tom: daniel juergen yesterday wrote -- he's adamant to that we don't know where the bottom is. francine: let's get to the bloomberg first word news with vonnie quinn. vonnie: good morning. it looks like it is going to be another rough day for stocks. u.s. futures indicate they will be lower at the open. the benchmark indexes and china are down around 3%, and european shares are higher after they fell by the most since august. probably approved the murder of a former russian spy, announced today by a british judge. he was poisoned in london 10 years ago by two government agents. he was a critic of the russian president. the court says it is likely he signed off on his order.

the secretary of state john kerry and his russian counterpart sergei lever of couldn't reach an agreement over who gets to sit at the table. they can't agree on which of the belligerence in serious civil war should be labeled terrorists. meanwhile, senate democrats have blocked legislation that would have delayed thousands of refugees from coming to the u.s. it would have required officials from three u.s. agencies to certify that each refugee didn't pose a security threat. obama has said he wants to admit 10,000 syrian refugees this year. a blizzard tomorrow is expected to dump two feet of snow on washington. the national weather service says it could create life-threatening conditions. forecasters say smaller amounts of snow will all on new york city and other parts of the east coast. global news 24 hours a day, powered by 150 bureaus around the world. tom: thanks so much.

we did a lot of data checks yesterday and we will repeat that today. let's look at equities bonds, currencies commodities. what a historic day here in switzerland, futures at negative seven. they have been all over the place, but with this went to the churning,e euro it shows you the bounceback out of where we are. the second board, please. 30 printhere, we had a earlier with the equity markets down 500 points. everyone from the united kingdom watching a weaker sterling. and wrubel, the data point -- and ruble, do whatever. francine: we're looking at ruble, and the ecb is expecting to at least have mario draghi

address the volatility. it is stabilizing a little bit, but if you look at brent, it is stuck at $28. this is what we were talking about, calling the floor. no windows and it exacerbates turmoil because they are concerned about deflation. tom: what is important is the global litmus paper, dollar-yen. as is very, very important, a general signal of where we are. if we were to see yen strength that would be another moment of caution. we have so many good guests for you on economics, finance, investment. we have been doing international relations for years, and we begin today with james should be evidas. he is at tufts university.

i have eight ways to open this but i think what all americans want to know, way back in the atlantic charter, and what we did through the 1960's and nato thise state of january. >> i think it is a larger question. it's the state of europe. nato is the security plank within europe, and i think from our side of the atlantic we want a strong, unified europe. that is under real pressure because of the refugees coming in, because of the weakness in the schengen agreement, because of stutter stop in nato in terms of syria. the idea that a unified europe is geo strategically critical is under pressure. francine: the way to fix the refugee crisis, in many ways, is the ways to fix the middle east. where are we in the fight against the islamic state? >> in the fight against the islamic state, we are one third of the way to where we need to be. we have a long way to go.

it will require not only the hard power and short game but the expensive long power. the thing to focus on are the talks that have just broken down about the syrian crisis. on one hand, because of sunni shia pressure, we can't get iran and saudi arabia together, but more important we can get the u.s. and russia in agreement. until we saw syria -- tom: do viewers know who russia is, if we know who saudi arabia is? a handlehink we have on the interesting dynamics with tehran. what should be our tone as we speak to this new iran? >> we should be hopeful but skeptical. we have an agreement on the nuclear concerns, we have a step forward, although i have some significant concerns about the verifiability.

we have seen the seizure of american sailors in the arabian gulf. we are going to see a pressure point. we want to go into it hopefully but with a healthy dose of skepticism, because things will not change overnight. francine: do we really know who russia is? we know -- we think we know -- what vladimir putin is thinking, but every day -- tom: looking at the ruble -- francine: right, and the price of oil. does that change is foreign policy, as sanctions are still there? will he cooperate more to find a solution? >> i think there is no question that the sanctions, the fall in the ruble, the depression on oil prices, limit his ability to really expensive things -- to do really expensive things. tom: i notice the raging discussion of budgeting for a new submarine. you're an expert on it -- are we budgeting and modeling defenses and offenses from another time and place? should this be a tom hanks movie?

what is the new military that you see the united states or the united kingdom needing to project? do support all, i the continued ability to do the undersea nuclear power piece. this is high-end war fighting, and we need to be prepared. but will tell you three things that really dropped the military war;ber, and new wave of special forces; and unmanned vehicles. those will be the big changes in the military that we will see unfold. francine: does that mean the u.s. navy needs to shrink? >> the u.s. navy does not need to shrink. we have shrunk from 600 ships in the 1980's to 270 ships. tom: did you see how his voice changed? [laughter] tom: i look at the challenges and the wonderful foreign affairs summary of their technology articles over the the new years -- does technology and the speed of

media with our international relations -- >> here we are really talking about the social networks, where so many different initiatives move essentially instantaneously, and diplomacy has to struggle along. tom: ken john kerry keep up with the use of tunisia or kyra or tehran? >> he cannot. no diplomat can. as a result, our diplomats are in a scramble to catch up, as rf are industries. the technology to watch i think is bio. we are not hear enough about bio. it will have military invocations, huge economic applications -- that is the next wave. tom: thanks so much. stravidis, fletcher school. coming up, the ceo of the year. who is his front man internationally? we speak with john rice, an

annual visit of the new general electric. stay with us from davos. ♪

francine: this is bloomberg's "surveillance." it's day two of the world economic forum. we are keeping an eye on markets, but are having great conversations that link the deflationary pressure back to central-bank action. tom: in perfect weather, as well. a gorgeous day. francine: it is. let's get to the bloomberg

business flash. vonnie: thanks. there is a battle over the struggling japanese electronic maker sharp. they are offering $5.1 billion. it is leaning toward a cheaper rescue. job cuts are on the way at pearson, the british educational company. they had to cut about 4000 jobs. the company is struggling with demand for textbooks and dwindling collagen roman. last year, pearson sold off to media titles. is biggest bank in norway forecasting oil prices will double in the second half of the year. they see the price writing to $65 per barrel after falling below $28 this week. it's the largest exporter in western europe. back to tom and switzerland. tom: very good, thank you. it's an annual visit with an

industrialist, john rice out of hamilton college in new york. vice chairman of general electric, and he has had a tumultuous and many would argue successful year. ge is the transformation of 2015, and john rice joins us now. what are you going to do in 2016 to top the accolades you have received across all of the ceo land? >> will finish what we started in 2015, and i think the next big thing for us is the digital industrial convergence. this is where the game is going to be played for the coming decades. we have a lot in motion, and we want to make sure it is right. tom: does jack welsh know you are ge? >> i think you would. you would understand that the work we did in the 1980's and 1990's, which was right for that time, is not necessarily the work right for this time.

the changes we have made are changes that position us to compete in the 21st century, not the 20th. notoriously's difficult to do business in certain european countries, where structural reforms are behind. how do you navigate that political landscape? >> well, you have to be in brussels and smart about what's happening there, and be on the ground. i was in the czech republic and hungary before i came here. we were close with the local governments to make sure that we are active and engaged with their agenda, but also operating in a manner consistent with what comes out of brussels. francine: what about france? are you confident you can do business there that you want to do, or is there too much interference with protective labor laws in a government that wants to have it say all the time? you worry about regulations and protective labor laws in lots of countries, but what we love about france's human capital. we have some exceptionally

talented people that build gas turbines that allows to compete all over the world. we think we have the foundation or a very competitive business. tom: two important questions, the first on the markets. the distortion of low interest rates, and how industrialists react to this massive allusion of lower nominal rates. how can ge plan to prevent distortion? >> we plan our investments on long-term business. we don't look at currency rates, we don't look at labor rates. all of those fluctuate over time. we look at long-term prospects, the access to human capital that i talked about before, and try not to let short-term market distortions guide thinking. tom: here is some long-term planning -- a magical evening in june when the yankees play the red sox at fenway park. you and john rice will have boxes on the first-base line, because they are moving to boston.

we will be there. [laughter] tom: you can come in. with all the excitement in the shock of this move, a short distance from connecticut, i thought the late tom menino of onton encouraged industry the seaport area. what was the tipping point decision for global ge to relocate to boston? >> there is never one factor that goes into something like this, but we see this as an opportunity to redefine what headquarters does. this notion that in the 1970's, the headquarters was a place where all the senior people were, all the big decisions were made, that worked when we were in 30 or 40 countries but we are in 170 now. we have senior people all over the world. what happens at headquarters has to be different. when we make this move, we will rethink and redefine what it means to be a headquarters. francine: john rice, thank you for joining us. tom: john rice with general

electric. our interview of the day -- robert roger. he went on the public service in india and is presently the second bank governor for the r.b.i.. stay with us. ♪

francine: welcome back. i'm francine lacqua with tom keene.

we are in davos, day two of the world economic forum. we are speaking to policymakers and ceos. we can't quite get to the bottom of why these margins are selling off. people are worried about central banks. tom: yesterday it was the most dysfunctional day i have seen in 12 years. there was the illusion of central banks and low interest rates -- but that is changing today. the fragility in the market today, i am starting to hear more ceo talk on where is oil, and shock and all, the ruble moving. francine: they don't really know what the ramifications for inflation or deflation is. let's get to vonnie. vonnie: thank you. brent extending its drop-down another five cents today. supply is weighing down the market, among other things. joining us now is the head of commodity market strategy, harry tillage or. thanks for joining us.

were aboveeek, we $30 per barrel -- what is tracking oil lower this week? is it purely market sentiment or is it actual fundamentals? >> hi, funny. -- hi, vonnie. i think it is a combination of both. futures look weak. the second thing of course is sentiment. there are a lot of jitters around china's economy. currency isay the behaving in people's expectation around the devaluation. they are impacting equity markets, and there is a lot of correlation between risky assets and equity markets. a combination of fundamental weakness and risk aversion is pushing them down. --nie: harry, energy aspects bringing about 325 barrels per day to the market -- when do you anticipate it and how are you pricing it in? >> i think the return of iran has been flagged a long time in advance.

the uncertainty is how much they will be able to add to the market. the iranians have been escalating their rhetoric, say that they could immediately produce 300 million barrels per within sixother years. i think the reality is different. we don't know whether the infrastructure is ok, or if the crews are there to man the production. i think there will be a progressive turnover, 300,000 day over the course of three to six months. we see them probably reaching the pre-sanction level of production at the end of this year. vonnie: i want to bring up a quote from the wall street journal about markets scaring themselves. it talks about the investments, the capital expenditures from energy producing industries, 5% of totalonly spending on equipment and

structures is down from the recent drilling boom, but not far from the historical average. we could escape through this without too many more layoffs. is that a reasonable assumption? >> i think it is a little difficult to say that right now. the oil price is certainly leading to scale back spending and investment. ultimately in the end, we will be looking at, come the springtime, a predetermination, really, of the value of oil and gas reserves. at that point, with the low oil price, i think we could have further reductions. vonnie: harry, we have to leave it there. thank you. coming up, we will head back to davos and will be joined by the walgreens ceo. ♪

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you've got the power, to turn on the light shape the best sleep of your life. sleep number beds with sleepiq technology adjust any way you want it. the bed that moves you. only at a sleep number store. tom: good morning, everyone, from a beautiful day in switzerland, the second day of the world economic forum. francine lacqua and tom keene. you need to go back to new york

city with our first word news. vonnie: thank you. it may be a not-so-subtle signal from china -- military exercises off the chinese coast near taiwan, days after taiwan elected a president from a party that supports independence. five egyptian police officers are dead after an attack. the islamic state is active there, but there is no claim of response ability so far. the combination of fighting the islamic state says airstrikes are taking a toll. the coalition says 5500 militants have been killed the last three months. the uss the militants may have up to 30,000 fighters. the sanctions have been lifted and iran will sell an extra one million barrels per day. top environmental officials say the end of sanctions will also boost their attempt to curb fossil fuel emissions. he says iran will back up with wind and solar power. today, the obama administration

announces new visa rules for some european travelers, those who are citizens of iran, iraq, sudan, or syria, or those who have visited those countries in five years. they make it more difficult for europeans to into the united states. quinn -- francine? francine: thank you. it's time for the morning must listen, and i spoke with christine lagarde after our debate on china. we talked about yuan, renminbi, the fed devaluation -- tom: she was forceful. francine: she was saying -- we just have to take a longer-term. there wase time, obviously with the ins in the process for -- her term ends on july 1 of this year, and there have been a lot of countries throwing their support behind her.

this is what she said about a second term. me find those countries that have eliminated me -- i very honest, very flattered, said that i was prepared to consider running, but that it was up to the membership. francine: it was a very interesting conversation. she is always so very correct, and i asked about it in the panel. she said i don't really want to talk about the second term, but in our interview she said, if i have enough support i would be honored. tom: i think she comes here with somewhat of a victory lap. that means a lot of different things to people, but her -- i remember her speech a good two years ago, which was shocking at the time but it is not shocking anymore. she had the rout, her

thoughts about janet yellen -- tom: did she say something today? francine: she said something and was backed. linda was saying they are giving advice to janet yellen to be more hesitant and not hike rates too soon. tom: well, that was a wonderful panel. francine: yeah, it was fun. tom: we have a special treat for you -- talk about a culture moment. the merger of goods alliance with walgreens,. the chief executive officer says a boots alliance -- what name do you use day-to-day for the merger of these two? >> wba. tom: wba? [laughter] >> it's not a good name, i know. tom: hire someone in the valley for a gazillion dollars to come up with a new name. tell me about the cultural challenge and all the criticism of taking a more flamboyant, british, and european name, all

the skills you have had in your career, and bring it to the on one of the most iconic conservative names in the american media. >> when we did this merger, one of the reasons why we did the merger was because we thought, on both sides, that our fundamental values were the same. our culture was not so different. there were some substantial differences, but not at the bottom. we put the customer, the client, at the center of our business. so yes, there have been many, many changes, but we also have many, many mergers and we are used to put people together. one of the things we are able to do is to get people of the world together, and help to create a

new identity, which of course has to be the merger of the two kinds of identities. part and youne want -- tom: right. francine: this is one of the most difficult things to get right. you also mentioned in the past that one of the areas you are interested in is vertical integration. does that mean, and how it you apply it to your company? >> i would say that vertical integration is something that lot of sense of the u.s. the u.s. is a complicated structure for drugs in patients. the health plan, the distribution,the u.s. is a compd

and there are a lot of, let's say, this synergies. -- disynergies. if we could compact the chain and make it, let's say, more integrated, we would save a lot of money. tom: i could ask if you are involving the boots alliance to double it, because everyone else is moving to dole it. but you are folded into this valeant debate, this idea of the new pharmacy, new drug distribution. where will valeant and your industry be in five years? >> well, in five years, i believe we will have much more integration, and a different partner of the industry. the money factor, we continue to different.ly of course the deductible must be independent because they have to

be free to prescribe what they believe is the right thing for the patient. i believe that the cost of all these organizations in the u.s., and even out of town, is exploding. --will have to tom: will it mean higher prices for the customer? >> it should be the country, it should be lower prices for the payer at the end of the day. much, greatly so appreciated. wba? >> wba. tom: walgreen boots alliance. coming up, we begin our discussion on economics. posner.us, aadam we look at the economics and international relations of davos . stay with us. ♪

francine: welcome back, this is bloomberg "surveillance." date to of the world economic forum. i'm francine lacqua, in tom keene has the weather. tom: it is never quite right. although this is the least icy davos. i have seen no one fall down yet.we have the annual tamils davos cast when someone falls down. i've got the bloomberg terminal on my cell phone, which keeps the linkedin to these markets. francine: like most of the participants. they are brooding over oil.

tom: and i should also mention the recovery in yen. francine: they are looking at where the havens are. just a year ago, the swiss central bank abandoned the cap, and people are still talking about it. if you look at the currency wars there is something to it. let's get through the markets. vonnie: we are seeing a little volatility, but let's begin in asia. the shanghai composite is down %.25 it had been a little bit better at certain points during the session. the nikkei, 2.4% lower, both in their markets yesterday from their 2015 peaks. as you mentioned yesterday, the msci is also on the brink of a bear market. hang seng also fell below the value of its net assets for the first time since 1998. let's move to europe. germany as positive, investors

rating mario draghi's press conference, and the s&p 500 futures are pointing to the open, futures down 75. weing to our currency board, have the dollar-yen. we have been speaking about it, close to the 170 mark. 1.4145.ling, not much time for guilds -- all the bond market action seems to be in south korea. we believe the south korean 10 year bond is a safe haven at the moment. close to is at 1.99%, the u.s. 10 year yield. ie, with that snowstorm on the east coast, are you going to work on friday? vonnie: well naturally. i can work from home if i have to -- to send a camera crew. [laughter] tom: it will be interesting.

i always assume the markets stay open, but with the news -- it's a real debate, should markets open? francine: i think markets might mind being closed but i don't think it will happen. our meteorologist says -- pull, a loton the of ceos have been talking about that storm. so many ceos were concerned about how to get back to new york. tom: it's such a shame. coming up, our interview of the day. and of course, the central bank governor for india will join us. we will speak about the rupee , about the indian economy, and the fault lines of a global tool. stay with us. ♪

tom: good morning, everyone. day two of the world economic forum. right away to new york city with our business flash. vonnie: thank you.

have ae bank expects to $3.4 billion loss as they set aside more money. they are also taking a charge for severance and restructuring costs. by 2018, they plan to cut $26,000, one fourth of its workforce. we are getting more details on the cutbacks at barclays. it will cut 1000 jobs around the world and will stop operating in several asian countries, according to people with with knowledge of the matter. they are focusing on their most profitable businesses. general motors, meanwhile, is taking another step toward becoming a big player in the car and write a booking business. .hey are buying maven it will start in ann arbor, michigan and expand to new york and chicago. they have already taken a half

billion stake in another ridesharing company. back to davos. francine: thank you. day two of the world economic forum, and we are looking at the market turmoil. bloomberg news editor in chief is here, and we are joined by the reserve bank of india governor, speaking to us first. thank you for joining us. when you like and market volatility, the turmoil, all the uneasy questions about china, what comes next, and what does it mean for central banks? >> first, i think the markets have reached a level where people are asking, when does correction, and on what basis? i think china is a trigger. oil prices are a trigger. put prices are trying to find -- but prices are try to find an appropriate level. you did have some volatility. a lot of people have been telling us to expect volatility. the question is at what level does it settle? news coming out from

china hasn't changed significantly over the last few weeks. of course there was a certain change in the renminbi fix, but chinese authorities have gone out to explain that this is not renminbi,eciating the but really about adjusting to the new basket. i think once you take that add value, i think oil prices is another issue. who are the level players who are exposed? what happens to the countries that are exposed, because of the low prices, because we know that countries like venezuela already have problems? so what about countries elsewhere. there are uncertainties, but i think we are already privy to high-level that asset prices. tom: can i ask you about china? china?n i ask you about what kind of numbers do you expect china to grow at? what is the number you are looking at? is, do you focus

on the numbers or the indices people are putting together? my sense is that there is underlying growth in china. it is not falling off a cliff. >> an official ratio 6% to 7%. >> i would go with that. but the real question is what does this imply for the various commodity markets? in terms of the quantity of growth, there is still a lot of growth coming from china, in terms of dollars. of course, percentages are falling over time -- that is naturally to be expected of an economy growing richer, and therefore will slow. i'm not excessively worried about chinese growth. the big question is where is the growth and where does of it with leverage. francine: how can we be sure that the chinese won't devalue the yuan? recover this every day, and this has a direct impact on your day job. >> you are the 1 --

>> absolutely. let me first say that the chinese move to a basket is understandable, because the dollars, the yen and the euro, are weakening. so clearly, some of the actions that have been taken to weaken currencies do have effects elsewhere. one should see the chinese move to the box as unrelated to what is happening. tom: you and i did a magical panel in asia. in the heart of the financial crisis, we saw the fault lines. you were roundly criticized by many economists, including larry summers. he is out now with the secular stagnation, out now with a real mandate to say we need to maintain confidence. how do the developed countries maintain confidence and avoid secular stagnation to assist emerging markets? >> growth would be good.

we would love the industrial countries to grow faster. the real question is how we can make that happen. my sense is slimming monetary stimulus has run its course. exit is an issue. once you're in the situation, how do you get out of it without creating an abrupt change in asset prices? that is what we are grappling with today. but broadly speaking, i think the hand answer has to rely on the underpinnings of growth, the structural response we all know and love. i think we need to figure out how to make that happen. tom: john, one of the things in the panel this morning is the illusion of low interest rates. my worry is that -- the

whole point of really low interest rates is to energize both the investment as well as spending for fuel by borrowing. point -- that my we don't seem to have succeeded because the cost of capital doesn't seem to be the stumbling block. there is something else preventing investment, something else preventing consumers from going -- >> you mentioned earlier, the issue of structural reforms. in india, you have been waiting quite a long time to deliver these structural reforms, many of which are stuck in parliament. >> i think one tends to focus on the big, iconic items. like in india there is now a goods and services tax, which is likely to unify the country. that is stuck in some parliamentary discussion between the opposition and the government. hopefully it will be done sooner rather than later. but there is a lot going on on the ground, which is less obvious. theyxample, last week,

inaugurated a program called startup india, which is about eliminating the bureaucratic hurdles in starting new businesses. new businesses had to register with 20 different authorities, including a pension fund, with one employee. whitey need a pension fund at that point? the idea is to make it simpler to start and remove inspections. three years, no inspectors. i think these kinds of reforms are really building on each other. there is a big, vibrant private sector in india which is taking off. internet marketplaces, fantastic new development. what india doesn't have is cheap land. you can't build stores everywhere. but if you build a virtual marketplace with warehouses storing goods, you can connect small-town households to the big market. you can connect small home manufacturers to the big market. francine: i want to talk about

the rupee, but can india afford to have janet yellen increase rates? we are trying to fight deflation, and it is no easy task. >> it's not. and i do understand the difficulty that industrial ies'central banks have. there is a debate about how is deflation is good and how much is bad. we have a lot more efficiency and commodity prices falling tremendously. the fact that there is a lot of supply of commodities has to be broadly good rather than bad. to the rise in interest rates. i think it is normalization. we don't have a problem with normalization. if it goes up to far in advance of economic, that would be a phil. francine: what is fair value for the rupee? >> what it is. [laughter]

you must have a target. >> we don't have a target in mind. what we do want to ensure is that we don't get excess volatility. that means when money is really pouring in, hand over fist, we try to buy up a little bit. with money is pouring out, we try to sell dollars to accommodate that. in general, we don't stand in the way of adjustment. >> there is that says in india where you havare seen as the beacon of reform, who can guide india to brighter futures. that business community, when i talked to them, they still are pretty angry about the level of regulation, notwithstanding things like start of india. -- startup india. are you happy with what the politicians are doing? >> let me put it this way -- the direction is the right one. the level is wrong. wronge too much of the

kind of regulation and too little of the right kind of regulation. we don't need to hack away at this. it doesn't happen overnight. but we are doing it. we do recognize that we over regulate, that business needs a better environment. at the same time, there are whole sets of new businesses coming in that we have to find ways to deal with. for example, online lending. how do we deal with what happens in a downturn? tom: by book of the year this year was one of india's great economists. he spoke of humility and hubris. what have you learned about the humility to certitude of chicago microeconomics and macroeconomics -- what have you learned about policymaking that has brought you to a new humility about your models? [laughter] francine: in 20 seconds. [laughter] >> really, one has to be pragmatic. but i do think that you can't

abandon basic principles. you can't say everything is different because the environment is different. when prices go up, demand goes down. broadly true. yes, there are special cases, but let's work as far as possible with markets. i stood by that from chicago. [laughter] >> at the same time, i think this trust in economists, this is the -- >> you talked about the west. do you see a division between europe and america? when you look at america, you saw more vibrant, a better chance of success than europe? >> i'm not sure i would say that. there are many areas in europe which are really vibrant, and of course the european way of life is something that many people aspire to in the united states. i think lots of good things are around. i think best of all, is what we need to try and achieve. francine: governor, when we talk

about inflation, we talk about the risk of deflation. oil is at $30. does that change your inflation outlook? does that make it more likely you cut rates? >> certainly, lower oil prices helped india. we import a huge amount of the stuff. at the rate decision is based on something more complicated than the price of oil. it is an input. it goes in the direction of being more accommodative, and a whole lot of other things. francine: a survey i was reading this morning, the fair value for rupee -- close? >> pretty close. nobody really knows the value within a ruppe oee or two. what is true is that over the years, the effective exchange rate has remained fairly flat. over a year-and-a-half. broadly, we are in the right ballpark. francine: all right. governor, thank you so much.

what is one thing about you -- when we talked about the rupee what, is one thing you are concerned about getting wrong? >> we are in the process of cleaning up the bank balance sheet in india. it is something that i think will pay a dorm is dividends if we do it right, has to be handled carefully. the government stands behind the public sector banks, the private sector banks, but this is something that we are working on, and if it works out, we will have a bank sector which is ready to go. tom: governor, thank you so much. hour, we in our next will continue our discussion on economics, financial investment. two economists who get along with the governor will join us in the peterson institute. ian bremmer of eurasia group -- we will talk to him about his risks for davos. much more in this hour from the world economic forum. this is bloomberg 7'7"."

collapse is different than volatility as markets continue to be challenged. thereby desert their bottom -- thereby our market is our bear you know inequality when you see it. robert schiller this hour. good morning, everyone, this is "bloomberg surveillance," live switzerland, wednesday, january 21. -- live from. post. it carries lot of

over because the markets are trying to figure out the low for oil prices. what does it mean for deflation? are in up the day in. davos. in. posts futures are indicating a lower open today for u.s. stocks been vonnie: there was another slump in asian markets. are higher after they fell yesterday by the most since august. investors on the continent will be listening closely when european central banks announce its latest rate decision and we will bring met you this morning at 7:45 a.m. eastern time. vladimir putin probably up and did murder of a former russian spy which is the ruling announced by a british judge.

he was poisoned in 10 years ago by two government agents. he was a critic of the russian president. it's likely that vladimir putin signed off on the orders. secretary of state john kerry could not reach an agreement in the zurich with syria. sides cannot agree which combatants should be labeled terrorists. democrats blocked legislation that would have delayed thousands of syrian refugees confirm coming to the united states. the bill would have required three u.s. agencies to certify that each refugee did not possess a security threat and president obama wants to admit 10,000 syrian refugees this year. washington is expected to get up to two feet of snow tomorrow. serviceonal weather says that heavy snow could is conditions.ning brock after say smaller amounts

will small in new york city and other sections of the east coast. byhours a day news powered 250 reporters around the world. tom: it's a convicted day here. my glasses are fogging up for the first time in five or six years. it's a gorgeous day in switzerland. let's take a data check. there is civility in the market relative to yesterday. the 10 year yield is below 2% and the euro is doing nothing and nymex crude is a little weak. to our esteemed guests this hour. the vix is showing the attention of yesterday. sterling is $1.41. the ruvell is the lead story,

$.84. this is my data check. stocks are stabilizing a bit. the dollar-yen gives you a nice idea of sentiment on the market. brent is below 28.6. that brings us back to deflationary pressures. let's bring in our two guests. of -- in with the bank adam posen and ian bremmer. rumor is you will rewrite the book. adamposen, why should economics and finance worry about the world of international relations? >> saudi arabia, everyone talks

about oil and the direct effects of the much a wash. geopoliticallyt and saudi arabia is the potential for sharp regime changes. and as a behavior, it is high brazil and venezuela themselves into a huge hole. it was not determined by commodity prices but by living too long on commodity prices but political reasons are why they cannot deal with it. anger in the political system, why do we care about that nominal gdp? >> the fact that you don't have the growth in an environment where people have the ability to say they are discontented, you will have much more pressure on these regimes. this is a year were you don't have elections in emerging markets. peru arepines and the only place you have elections.

in brazil, they will be demonstrating after hitting 10% unemployment. the rio de janeiro olympics will not go so well. i cans the first davos remember where the first theme actually matters. it's the fourth industrial revolution, the idea that technology will hollow out these countries and they will be politically unsustainable and that will have a knock on economics. it is already hitting in the middle east but in saying that technology has made oil the one thing they have a value no longer of value. have they had themselves to deal with this? not one bit. we have not touched on market volatility. janet yellin needs to be much more hesitant in increasing interest rates because of the market turmoil. >> i think that's wrong.

there is a reason for the f moc interest rate hikes having to do it lower inflation. the asset markets are not a justification. that peoplerap worry about it it's possible for asset markets to correct without it being terrible for the rest of the world. francine: will the dollar start feeling off? on yen-dollar and it's about flight to safety. i don't see any world in the next six months where the dollar goes down a lot. how much does it get that further by the safety concerns? flow set --s centers around christine lagarde. you have come out in defense of her imf. what is she doing right that others cannot do? >> she is telling the truth.

when you have the necessity of a haircut of debt to make the bailout work, the germans were not willing to stay. may have made it unpopular and it could have cost her. this is a world where people have to get away from politics. you have to have someone who has to say this is what is going to happen. she says it's not popular. angela merkel has to back off rityy day that her popular has backed off. tom: let's listen to christine lagarde. in a way, having a certain degree of volatility is all with and it's compatible this market-driven principle that china is adhering to.

when you say governments can match volatility, if policy becomes excessive, yes, intervening is legitimate. also asked her about whether she would like a second term. she said of the members of her, she would be happy to continue. will she stay on? >> i think she should and will get a second term. i'm a big fan of her and the imf because the team she has put together in the monetary , they are all screwed tellers and they have tried to the boat around. -- they are all tellers and they have tried to in the boat around. they need a european and the job and she can lead in it has nothing to do with her. she deserves a second term. >> we will have the conversation

about the u.n. and they say it's time for a woman. the position is irrelevant in the u.n. in the case of the imf, you really need someone that matters. our guests have cottage industry skill sets and one of them is dr. posen. you are one of the nations experts in germany and their domestic culture. what do people need to know about the changing germany that chancellor angela merkel is dealing with? >> i think she deserves huge credit for her courage in standing out on the migration issue. what you are seeing is not so much change as resistance to change. thanmuch less volatile france or even the netherlands. the historical legacy is still there. they are scared to go to the right. there is a huge remembrance of all the turkish workers who came through have assimilated in many

ways and our great german citizens. it's more like the u.s. that racists this class of xenophobia people who are there and they are the ones pushing for deutsche land and they are not the majority. you are talking about 11% and they have no leadership. i am not worried that you will have france-type approval for populism. was aiolence in cologne tipping point in angela merkel have to back off. you cannot lead when there is no one behind you. the united states was there for angela merkel in the wall went down but they are nowhere when the walls are going up. tom: we will have more. is 7:45rate decision a.m. new york time and then we go on to a news conference. we will have that live at 8:30 a.m. new york time.

we continue with our guests from davos.

morning, everyone," bloomberg surveillance power co. the ecb meeting is coming up on we will give you full coverage of the announcement and the plus conference later this morning. here is neil r when writing an "of the new york times."

that would be an understatement. things are moving away. how do economists and their models and their humility deal with proto-first and second derivatives? >> brutal second derivatives are the worst. it's because it's not just the direction but it's accelerating rates and you don't know what to do. -- the job of economists tom: that was a shameless plug. it's puzzling because part of the job of economists is to say, down, markets have their own dynamic, they are not always

right, here are the fundamentals. there is an understandable cognitive biases will a suspicion now that small things can leave -- can lead to big bad outcomes. the fact is, four out of five times when something small happens, it only leads to small outcomes. we focus on the mistakes and people have to come down and understand china is not that bad and people are overreacting. countries may be unstable but it's not the whole deal. francine: what do sankar -- central bankers do? do we have to look through turmoil? >> i think the disappointing markets thing was a disappointment it self in december. i think i was on with you in december and i said you should not expect as much as the ecb as people keep talking about. as much as mario draghi wants to

react -- tom: he will become strained. be constrained. give us an update on the experiment. experiment but the one that is failing is the one that is supranational, the idea that people will step outside the individual national identities and they will be loyal to something bigger. that is going away. it has been tested and it's failing. i don't think it's going to get rebuilt. the other risks that people are piling out of the idea that the reddish will leave the union. londont the mayor of will be in favor of staying. they will close back down. probably will not last a year is what i read. there is nobody to replace her. when you look at places moving

away from democracy and rule of law like hungary and poland and greece, this is not revolution. it's not violence in the streets. it's countries that look like turkey. it's sad but it's not a disaster. francine: you are pointing to probabilities that may be 20% in the making but they are still possibilities and probabilities. how does mario draghi look through that? >> he has to frankly keep his mouth shut. it's not his role. anybody reasonable wants the u.k. to stay in, having the eurozone represented and talking about internal politics, feeds the opposite. i think where mario draghi is trying to be a statesman is how the ecb responds to the migration crisis. that's really tricky but he has to do something there. henry kissinger's book of a

few years ago i thought was remarkably good. kissinger looks at migrants and refugees and the scale of the moment. it's centuries in length. tell me what the leaders face this migration? >> everyone is talking about this issue and no one has a solution. i think there is a solution but it's not my problem. the american say is not my problem and the swedes have already said this. less than 10% of the 5 million refugees made their way to europe. the walls will go up in the borders will get closed most of those syrians will stay in the middle east. of: what does that scale problem in international relations mean for our economic system not just in europe but in the western world? >> i think it's a lost opportunity.

there is no question that if you can imagine some form of that it's a huge potential opportunity for germany and italy and demographically challenged countries. taking the short-term prediction , you have to think about aggressively supporting turkey and jordan. they are the ones bearing the burden of the refugees. francine: where is u.s. foreign policy? how do you fix the middle east? it's not a global crisis. the united states does not see this is something they have to fix. obama understand it's not getting done under his term. that means you cannot fix syria. everyone is trying to get a syria discussion for next week and they are ready to do it as long as you don't invite the syrians. it will probably not work.

situation will get worse in a worse economic environment and the middle east will get to stabilize but we will not talk about it as much. >> i think doing an agreement that doesn't have syrians is fine. it's the early the of century world of partitioning. -- it's the early t of century world of partitioning. 20th centuryly world of partitioning. came out and said vladimir putin was implicated directly in an assassination. there is no agreement to be had. the democrats are being soft on international politics but you have to get into diplomacy with russia and iran to get syria done. need to beoes assad

out? part of the solution we are part of making that happen. tom: the backdrop here in the single data point from oil is the quadratic move in the ruble. help me with russia and their reserves. it's a shock that upset the apple cart. >> i think this is an example where we are projecting too much. makea has two things that it not as bad for the rest of the world. the first is they are not that connected with the rest of the world. they are not very globalized due to sanctions. even kazakhstan has been moving in a slightly more requested direction. spillover except for

the poor people in ukraine and russia are not a factor. thats also been argued they've done a better job managing their internal reserves and savings than people realize. vladimir putin has not been a responsible with saving so they can ride this out better than people think. geopolitically, russia is in a better position than they were a few years ago. the europeans are increasingly saying that ukraine is a frozen conflict so let's find a way to stop sanctions. by the end of 2016, russia is less of a problem. tom: oh we continuing this discussion for four hours? saudi arabia and iran, have you fix it? >> they both have reasons to want to escalate. the iranian supreme leader feels

concerned that the deal that has been signed will erode his power. for the saudi's, everything that is going wrong is going wrong and they are in the middle of their own transition, a 30-year-old deputy prime minister and a deputy crown prince wants to be king before his father can't do it. those things coming together will hurt the potential for 70-iran getting resolved. arabia-iran getting resolved. francine: coming up, we have great conversations. we talked a lot about china and there's this angst in the market. we will bring it back to america in the coverage of the ecb and i want to talk to robert schiller. he has written about it.

we will continue our discussion on finance and its linkage into wall street. gormanrsation with james , an interesting guy, the ceo of morgan stanley and we will have that on "bloomberg ." there are many challenges on wall street. from the world economic forum meetings in beautiful, perfect day in davos, stay with us. ♪

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davos. we've got a wonderful guest to talk about. when he to go to new york and our first were news. egyptian place opposite is are dead after an attack in the sinai peninsula. the islamic state's active but there is no claim of responsibility. the coalition fighting islamic state in iraq and syria says airstrikes are taking a toll. 6400 militants have been killed by raids in the last three months. there may be up to 30,000 militant fighters. a top chinese regulator says depreciating yuan is not an effective way to boost the economy. the vice-chairman of the regulatory commission spoke d avos. >> there is no motivation for china to depreciate the currency. 65% growth.ve

a 6.5s not -- we have percent growth. critics of the michigan governor say his office played a blame game in the event or crisis. it shows how rick snyder reacted. the governor's top aide said agency should handle the crisis. governor says enough is enough. she is urging authorities to end the occupation at a federal refuge by armed groups. the militiamen took over a building 19 days ago and officials have taken a wait and see approach. tom: thanks so much.

time to get a read on the markets. up a chart tog get everybody's blood going and move through a careful conversation about where we are now. this is the russian ruble since the beginning of the year. that legeed to know is up is a huge deal moscow. we are not seeing that in the regular vanilla equity markets. breifeld is a success at nasdaq. .onderful to have you here get away from the hysteria but where are we with a correction in your market? >> there is a lot of emotion attached to the market. calm.d urge if you look at industries, they were where they were roughly six

months ago so we are going through a correction. these corrections happen many times and the market will seek its level and grow from there. tom: in your history, you actually held real jobs and industry before you went into wall street. we have become afraid of a bear market. they are evil could you and i know they are normal. 4% alarm andt to percent hysteria? thinkmessage is we should bearurgealm and recognize markets are part of the cycle and you look at markets over long does of time and there will be cycles and we have to ride it and have a belief your convictions when you come to investing. tom: we have those like you to talking normal ca. that your world

is removed from me and oil collapses and i am saying that's not in my textbooks. we are linked to all these other markets. the dysfunction is low interest rates. the nasdaqappen when and everyone else's faces normal interest rates? >> i don't think we will face that for a while. there are so many different factors that come into play with market psychology. happened in china and with oil, i think oil going down is a good thing for the overall industry. you have to realize these factors play in different times and we cannot ignore the animal spirit in the marketplace. the marketplace came back from the holidays and had a different psychology than december. no fundamentals have changed. you've got to ride through the cycles. your investment these is has to hold. tom: we turn around and we look at this spectacular view and we

are searching for unicorns. give us the uproar of the facebook ipo which is ancient history. give us an update on the capital markets and the need for american technology to use them? >> with respect to unicorns, there is a difference between a public market valuation and a private market valuation. tendte market valuations to be bilaterally negotiated and don't move up and down. we should not equate the two together. the unicorns are doing great things and represent the future. you see tremendous innovation coming on the technology side. what we witness in the last 10 years will be surpassed by what we see in the next 10 years. the treasury secretary in america is talking about a linkage in economics. what you need from washington? >> with respect to washington, we have an engaged sec and we

need them to be with decisions with respect to the markets. is nature of the commission fractured and it reflects a fractured congress and that has a result of slowing down action that happens with market structure. it would be our hope that that could pick up pace. how does wall street reattach into a dialogue with the rest of america? what is the to do list for you and mr. moynihan and mr. dimon to get you up sync with an angry public? >> here's what we have to do better. i am proud of the fact that we have these entrepreneurial concepts and are able to bring capital to that. the best time i have is the ceo of the nasdaq was bringing an ipo of a biotech company.

these companies are solving diseases that were not solvable. their visions would not have survived except for the fact that this company was able to raise capital and bring the drug to market. we've got to communicate that more effectively to the public that the capital markets matter. it matters where health and well-being but also for the growth of the economy. tom: i need your comment is a new york boy, the idea of general electric after an international search moved to boston. it was fun for you and me from the outset but what is the significance to other cities when they see boston when that trophy? >> it's important to recognize that governments have to compete. we have to compete with other sovereign nations and states need to compete. the dynamic in the public sector is similar to the capital sector and it's a good thing and

hopefully connecticut takes that as a wake-up call to make your they are competitive companies want to be domiciled in that state. let the states compete with each other. there will be a great outcome. tom: thank you as always. coming up, i am looking forward to this interview. robert schiller from connecticut university about the polarization we see across all of our politics. schiller on america's good society. stay with us. ♪

fromgood morning, everyone diverse, switzerland. vos - davos, switzerland. draghiive to the mario press conference. cadillac is named after a michigan city and will roll out in a factory farm the united states. general motors opened a factory nearild cars in china shanghai hamilton at 160,000 sedans pretty or. ford and lincoln will be on the sidelines during super bowl 50

car commercials will dominate the game anyway. a 32nd spot goes for about $5 million. known for its pricier cap writes, they can use uber. businessh group says travelers eu's more than rental cars last year. for it is time for an annual visit with robert schiller. this is a single best chart. this is my chart of the year a few years ago. it's unfortunately a chart of the year we can run each and every year back to the time of lyndon baines johnson. median household income adjusted for inflation in the united states, the optimism of our good society of decades ago and then something has changed.

it's wonderful to talk to robert schiller. many people talk about few think but very right and do as professor shiller does. give us an update on the state of american inequality right now. >> as you know, your chart shows graphically how alarming the new trend is. why is this happening and what can we do about it? isimportant part of it change.sed technical is the theme of the world economic forum, we call it the fourth industrial revolution. it is happening and it's a powerful force for the whole world. tom: the political belief is that many are being left behind. i think of a wonderful article years ago, should waitresses learn calculus? should waitresses learn to code but the answer is no. what should we do with

disaffected americans? >> that is a deep problem and i'm not sure we will solve it. tom: you are supposed answer the question can >> my proposal is we need to think now about how we will deal with it if it gets much worse. advance.to do it in if you wait until it happens, you will develop rich people have power. the blood deals better with things in the future, things ,ike this which are conflicting -- psychologists call at the temporal construe will theory. how will you react 10 or 20 years now to hiring quality? people are more idealistic and generous than they are about right now. speaking --? lose

this is jack lew speaking and you and i grew up in a time where was believed the middle class and brought america could be aspirational. have we lost that? >> not all of us. the middle class is shrinking. the number of people who have that -- tom: it's been argued there are two americas, looking at one system of economics. it's not just america. what is your policy prescription within your book? what is the prescription to amend a nascent plutocracy in america? for what it's worth, not sure it will happen, it's to change the way the tax system works.

make a plan for the income tax system going out many years in a plan that has it automatically adapt to inequality. that way taxes on the rich go up in such a way to preserve the inequality we have today. i'm not proposing we redress it. we have agreed it's gone far enough. do you develop trust within the republican party of to much taxes when you look at the aggregate sum of many taxes and even if i give them my tax dollars, they won't know how to spend it? these are ancient traditions. >> if i talk to republicans, tom: bob schiller talks to republicans -- we've got that. >> i have a free market side to my personality. insurance,develop

free market insurance vehicles to protect people against inequality. we already have that. to some extent. life insurance, fire insurance are all engines protecting us. burn down andd to you are poor and now it's not true. we need to expand the scope of our insurance industry. i think we should start ensuring livelihoods. tom: did you see the movie "the short?" >> it's on my agenda. tom: i want to talk about the big short but we will come back with bob schiller. an annual conversation is coming up we will talk about coca-cola when we come back and we will talk about water and coca-cola. this is "bloomberg surveillance

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tom: markets were wild yesterday but a little bit, today. we do this from davos. i will call this a respectfully fragile. it's nowhere near what we saw 28 hours ago. nevertheless, some caution as the dollar-ruvell is the story of big moves as the ruble gives way to family weakness. we welcome you back to economics, finance and investment, in davos, robert schiller. o see the movie of "the big short." they do touch on irrational exuberance. better with

irrational exuberance now? >> we could deftly have a repeated. irrational exuberance reflects certain basic human personality overconfidence, attention anomalies, and that would attention to the same thing and collective memory. we focus on certain facts in this regard the others. 1990's, i call it the millennium bubble, the internet was just in and there was a gold rush attitude. it can feed on itself and it goes out of proportion. this is a psychological phenomenon. we might be able to deal with it better. banks are better capitalized and things like that but it does not mean the problem is solved. we were talking about the bank of india earlier.

larry summers believes need to have a respect for confidence as important within our economics. what is the state of our confidence in economics and business systems? >> it's kind of obvious that it is weakening. it is fragile. things that ought to be good news like lower oil prices are disruptive in the short run. theme are over focused on in valuing long-term assets like stocks. by thesets are driven perceived important facts. i think china is not as important to the u.s. economy as it appears. one thing news media people have to do is resist some of the over-.

hyping. tom: we try to do that. there is a photograph of you as a newly minted phd. there was a time in confidence in our economic growth. there is a yearning for that animal spirit of a better nominal gdp. how do you teach economic growth at yale? what makes for a better economy? trustworthiness is eight that is underestimated. in our own lives, we have to present an example of people who are not only after the money but we have the bills and values. -- but we have principles and values. is janet yellen going to do it?

is jack lew going to do that? i don't know how anyone can control such a massive social phenomenon as confidence. i like animal spirits better because it is more broad. confidence suggests i'm not afraid. animal spirit suggests i will go out and do it tom: do we wait for technological progress to jump conditions? can the policy makers make the system better without a jump in technology? >> the important thing is to react to crises quickly. tom: we learned a little about that. >> we did fairly well in the 2008 crisis. the new ben bernanke a book is about this courage to act. it's the theme of that book. rulebook,followed the

we would not have reacted fast and up. tom: thank you so much and we are thrilled to have you here in davos. our coverage of the european central bank rate decision will happen at 73 5 a.m. new york time in full coverage of the news conference at 8:30 a.m. and i will do that with michael mckee. davos, wetomorrow, in will have more guests. stay with us from the world economic forum meetings in davos, this is "rumored surveillance." ♪

francine: you are watching "bloomberg ." it's a bright beautiful

day in davos. stephanie: we are going to be speaking to some of the most extraordinary people here. and thebett is with us morgan stanley chief james gorman. martin gilbert will be here and we will have full coverage of the ecb decision in revived minutes. at 8:30 a.m. eastern, mario draghi's news conference. david: let's go to matt miller in new york on the markets. it's nasty and i want to start off by showing you what we went through yesterday. it was fairly insane. the dow dropped at one loss of five through 65 points. -- 555 points. it was a 500 point swing in the