francine: china signals its six-month of deterioration. equity markets fall on the davos. february's long wait, the shortest month may prove the shortest. iowa, polls put hillary clinton and donald trump ahead to win party nominations. this is bloomberg "surveillance". i am francine lacqua with tom keene in new york.

it seems it is always angst fighting the central bank. tom: we will bring everybody up to date on the shock and all of that negative interest rate call by the bank of japan, but you are right, it pulls right on to china and you see it within the market activity. francine: let's get straight to the bloomberg first word news. vonnie: after months of campaigning, the first votes are cast today and the race for the white house. a weekend poll shows donald trump with a five-point lead over ted cruz among republican voters. they question whether trump supporters will actually show up tonight. hillary clinton has a slight lead over bernie sanders. sanders is coding -- counting on young voters. civil war in syria began in geneva today. this after eight triple bombing

killed 45 people. supporters of bashar al-assad have threatened to boycott the talks. in northeastern nigeria, at least 86 people were killed by boko her wrong. they targeted a camp for displaced persons. boko haram has killed thousands of people in a battle to .stablish islamic law david cameron has stepped up his campaign to win concessions from the european union. he met with the eu commission president. proposalscirculate for compromises in order to keep the u.k. from leaving the union. least the world's connected nations will be getting broadband internet service. cuba is limiting the pilot project to homes in two

neighborhoods and have anna. -- havana. ,lobal news 24 hours a day powered by our 2400 journalists in 150 news bureaus around the world. it has been a long week. thisand the reading weekend on the negative rate call was fascinating to see. thet now, let's look at equities, bonds, currencies, and commodities. futures deteriorating, -12 on the s&p. euro doing nothing. nymex down $.52. idea of the vix backed average looking back to decades, 20.20, yen going 1.18 to a much weaker yen. germany two years or something to watch, -0.4. further broken down

as switzerland does this morning , that two year yield is way away from where janet yellen wants it. francine: a lot of investors wanting to play divergence. index, stoxx europe 600 they opened lower and then they were higher and now they are lower. look at crude at 33.14. last week. on signs industrial activity in china, and opec pumping a record amount of crude is not helping. i put gold because it is a classic haven and look at yen, 121.19. it is more psychological than everything -- anything. tom: let's look at the terminal and go back to the core issues with asia and japan. carl weinberg nailing this this weekend with a note on the depopulation of japan. it is something to show, we have

iowa today, the rollover, and when a recovery we have seen. nominal gdp. here is japan 20 years ago going nowhere. the rollover is how you get to negative rates. francine: the question is how will monetary policy in japan fair with these negative rates. and the idea of the monetary policy toolkit being there now, they have run into the end result so what do they do with fiscal policy as well? they see there. he, it is like a haiku on monday morning. francine: psychologically, it is a race to the bottom. let's move on to china. it saw its manufacturing pmi again.r the last --

monetary policy has a huge dilemma for china. >> that is the crux of the problem. if you remember the first two weeks of this year, china spent a lot of time setting global markets to the offshore, onshore, yuan markets. they tried to close the gap between the onshore and offshore you want rates. borrowing cost to insane levels, 66% overnight. levelsall gone back to for this panic happened because they have to focus on the economy as well. should they focus on the economy ? should they focus on keeping the yuan steady? tom: robin, help me with the when of depreciation or devaluation. is there a zeitgeist and hong kong of the when of it, when are they going to act? nobody really thinks that

there is going to be a sharp, setting devaluation of the one so probably what they are going to do and have been doing, if you remember the august 11 devaluation that reminded people around the world there is a country called china that can affect global markets around the world, that was 1.86%. since then, the currency has declined 5.6 percent, 5.7%. the depreciation, which is a managed decline of the currency has been far greater of the past few months, and the feeling is they will continue doing this. at least towards the end of this year. francine: robin, thank you so much for all of that. from china, let's bring in our guest for the hour, or in a desk. this points to the fact that we

are talking about this policy dilemma in china. you help growth or you hold off easy and that may have implications for more capital outflows. what is the right solution? to haveately, they have a floating exchange rate and an independent monetary policy. francine: longer-term. put in the meantime they are doing a bit of both, easing onshore and defending the currency through the fixing all through -- probably through some significant intervention. so you are expecting a little bit more. are they wondering if they can stomach is free-floating or do we not understand what they are going to do? arnab: i think ultimately we are talking about a market determined exchange rate or a

larger role for the market, and part of that transition is getting everyone to shift focus from dollar china to the cs basket. it is a bit of a challenge and a bit confusing but i think that is where they are going in the longer term. tom: help me with the immediacy of action by these different nations. what is the urgency of china to act, or any other nation, even canada to act toward negative rates? is it a this week thing or do they have time to watch, and look for actual progress? arnab: i think in the case of .hina, the halftime reserves are probably falling but they probably still have a huge pile of reserves so there is going to be time. like robin ganguly was saying, they will move gradually. i think that is the most logical thing to expect rather than a big devaluation.

even though there is time and gradually, there are going to be shocks and volatility in the market because this is a difficult thing to deal with, and there are dilemmas and inconsistencies here between letting the exchange rate hold the exchange rate holding its level and easing monetary policy, and at the same time selling reserves because as you so reserves, the monetary system onshore is contracting. you react to that by easing monetary policy you are creating greater liquidity which can go out through the capital market. see the flow of news which is like this, like the nigerian cash call, the azerbaijan cash call, or oil nations that are beleaguered. what is the fragility of your emerging market space this monday morning? arnab: i think it varies quite a lot by country. the countries you .2, oil exporters are clearly under

pressure. importers are under less pressure. is asset class as a whole group of risky countries and so turmoil, the asset class as a whole will suffer but i think the important theme, to use that buzzword of the time, divergence. there will be a lot of discrimination we think. i think it is much stronger than that. a lot of countries are going to do significantly worse and this transition than some other countries that will do reasonably well, and the difference will be national areacteristics, whether you an importer of commodities and capital, and how much. tom: we will continue through the hour. richard haass will join us in the council on foreign relations , and that gets us to 1:00 p.m. this afternoon, the conversation

with stanley fischer. councildo that at haass' on foreign relations. stay with us. ♪

tom: what a perfect weekend in new york city. lovely winter weather in new york city as we look at the events around the world. much more on that through the hours. we need your monday morning to start with our bloomberg business flash. ryanair doubled earnings in its fiscal third-quarter but it is a warning that a drop in air is set to accelerate. fares fell 1% after the terror attacks last november.

in china, the government's official measure of factory activity fell for the sixth month in a row. think ifolicy members they can stem the slowdown in growth or avoid easing, which would exacerbate record capital outflows. another sign of deflation risks and europe, euro area factories /their prices by the most in a year, amid concerns that euro's inflation rate may fall below zero. that is your bloomberg business flash. francine: vonnie, thank you so much. february may prove the longest month although it is the shortest month for financial markets, because it lacks a single scheduled opportunity for the fed, boj to bring in -- reset monetary policy.

let's bring in hans nichols. markets will not be guided in february because we are not going to hear from them, so it will be difficult. the other argument, it is probably a good thing because we are taking a break, resetting. medication with central banks has probably not been where they want it. hans: i think both of those arguments are right, this is a february thatin we have mario draghi addressing salzburg. he has been able to move yields a little bit. you saw that when the size of quantitative easing disappointed , and he tried to clean it up in new york. one quick thing on negative rates, 49% of japanese debt is trading at negative rates. ,hat compares to 72% in germany so germany is much further along on this negative experiment and that turns into a line of heartbreak and heartburn,

concerns that some assets and bubbles are being created. tom: absolutely fascinating reading over the weekend and one of the issues as maturity of negative interest rate. the swiss 15 year note went negative yield this morning. extraordinary. this will be our single best chart in the hour. how are the swiss reacting to a negative rate? what does the little guy in switzerland do? hans: they worry about their exports quite a bit. if we have any sort of attempt to weaken the currency there, which has been the goal, it has really hurt a lot of the swiss exporters. vos, a lothis from da , ithe swiss manufacturers is difficult for them to compete in this environment. they are in kind of an arms race so they do not have the capacity

to win. tom: that is very good, arms race. optimism on the use of negative interest rates, i wonder what it means for the little guy. i do not understand how a retiree outside zurich survives. francine: this is an important question but you have to ask yourself why are central banks doing this? what brings a central bank to go negative? are you trying to reinvigorate an economy where there are another -- no other options left? arnab: i think it is a combination of all of these things. if you are a country that has a big external surplus, your country is saving too much and investing too little, or saving more than it is investing. if you reduce interest rates to a low level or negative level,

you are trying to encourage investment. some of that might be onshore and so might be offshore. in japan, they have this paradox of deflation and a shrinking population, shrinking labor force. you have this thing were real gdp per capita is keeping up with any other rich country but nominal gdp is falling because the sheer number of people is falling. they have a particular set of circumstances to deal with which might be the future of some countries in europe. tom: are not gas with us. you forhols, thank letting me still the phrase "arms race" from you. you get a royalty on that every time i use it. our next hour, what a spectacular research note from carl weinberg on japan over the weekend. in the next hour, weinberg of high egeland seat -- because

economics about negative rate around the world. ♪

francine: welcome back. these are live pictures from washington, d.c. where of course we will have a new president in the next couple of months. today we have the iowa caucuses. there is a great article by philip dwyer that says the emotional economy might sway the republicans in iowa.

what we call in europe, the greatest show on earth, how can you not be hooked on this? traditional republicans would have the american eagle to denote their patriotism, or perhaps a likeness of ronald reagan. the thep's signal when middle finger to express what his fans think about politics. ,e are not showing pictures that kind of encapsulates it. tom: francine, wait a minute. francine: we should start to get some results by 7:00 this evening, at least on the republican side. mr. trump is intensely liked but also intensely disliked. -27 according to gallup as opposed to mrs. clinton's minus four points. we talk about emotion.

this piece by dwyer says basically the two important things that iowa needs or the tpe and an influx of immigrants to fill job vacancies. both are strongly impose -- opposed by the leading candidates. arnab: i think this trump phenomenon is extremely worrying. people have been saying he will peak and crest and start to fall, but he has been going straight up. this scenario president trump is one that we do need to worry about. in the end, good sense will prevail and things will tack that to the center as they usually do in american presidential politics. tom: we say good morning to clinton, iowa where the family was a million years ago. i would suggest iowa and new hampshire are not america. they are wonderful, there is a pageantry.

as we try to get to the carolinas, you really wonder where we will be. francine: and tom, what i was reading, but this time may be different, no candidate that hampshireiowa and new becomes the presidential nominee, but it may change. tom: we will have a lot of coverage across all of our bloomberg media tonight as we look at the caucuses. in the next hour, thrilled to bring you the resident on the council of foreign relations, richard haass. us toill jump start stanley fischer at 1:00. stay with us. ♪

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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: stability on a monday morning. futures down -11. the euro has gone nowhere.

spinning around that are new buras -- numerous global currencies changing and shifting. the german two-year, i'm watching closely. -0.48. let's get to our first word news. vonnie: thank you so much. ontriple bombing blamed islamic state has killed 45 people in syria. expectations are low. two sides will not be negotiating with each other. the u.s. has expanded its fight against islamic state. u.s. forces have carried out a dozen attacks on militants linked to the group in afghanistan. the obama administration is set itbe revamping plans for how fights islamic state. more than 2000 pages of information about the deadly amtrak crash last may will be

released today. they still may not explain why the train was going twice its speed limit when it derailed in philadelphia. the engineer says he does not recall what happened. will allow a permanent space for non-orthodox prayer at the western wall. men and women will be allowed to pray together without a partition. american jews and liberal jewish denominations have been unhappy with orthodox control of the site. it is the first poll of the presidential campaign that actually counts. will trump supporters actually show up? for the democrats, hillary clinton has a slightly over bernie sanders -- slight lead over bernie sanders. sanders is counting on young voters.

francine: thank you so much. here are some of the major events we are watching. draghiwe hear from mario . then stanley fischer speaks with tom keene. then the bank of england will and give an inflation report. friday is u.s. job stay. -- jobs day. , we you look at the boe were expecting them to do something, but then you have negative rates from the bank of japan, you have the fed saying the global economy is not that great -- are you expecting mark carney to be able to raise rates? >> we are. but it depends. one of the big factors which we don't know about is the extent to which global turmoil in markets will continue through 2016. to which that spills

over into global activity. we are not expecting anything over the short term in terms of rate increases. if you look at the shape of the u.k. money market, predicting or pricing in fair chances of a the cut around midyear -- guidance that we get from the governor in his press conference will be very useful in that respect to set a couple of landmarks. francine: at the moment, you are not sure. a couple of months ago, we were talking about a rate hike is a given in 2016. philip: it is certainly what u.k. markets are pricing in. they are not really looking at 2017.ke until q4 2417 -- we have seen a rebound in oil prices.

when the turmoil around the negative rates in the bank of japan die down a little bit -- tom: philip, what is the linkages of these different nations? the basic idea of every nation for itself -- i don't buy it. there is contagion, linkages, interdependencies. how strong are those? philip: certainly, the global economy is very much interlinked. those linkages have been deepening and strengthening over the last 10 years. what we have seen, which is quite strange, is we have had periods where we have had a greater correlation between movement in the chinese equity and the ftse 100 and .he s&p will 500 -- s&p 500

you also have psychological linkages deepening, as well. i think a lot of markets are part of the same uncertain brush. tom: let me ask the ugly question, the delicate question, is mario draghi the central banker of the united kingdom right now? [laughter] carney andhink mark others might have an argument about that particular point. tom: i think he would. philip: certainly, mr. draghi is in globalential markets, as of course is janet yellen. it would help if the ecb managed to calm local nerves in the euro area. as i have argued, that would probably help to introduce a

little bit more certainty and calm global markets generally and that would help the u.k. francine: how do the different personalities play together? hasmergency brake measure been proposed to avoid an armageddon scenario with brexit. the same time, you have all these other players in the game -- where does donald tufts fit in? philip: he is a key player in the negotiations between the united nations and the european union about concessions which might be granted to britain had of the referendum, which may well take place if things go ok in june. he has got a very difficult position, given that you've got , which effectively have to agree, including the u.k., on a set of concessions.

report about, the the conversation about prime minister cameron in the u.k. -- there is some tough work. we do know that the conversations are continuing today. we will probably find out over the next 24-48 hours. francine: this negotiation could not come at a worse time. you are looking at emerging markets that are volatile and then we don't really know how to look at oil. if you are mark carney, you are in a wait and see, but you are not feeling comfortable. >> i think that's right. as a resident of the united kingdom, i have to think the british people are going to do the rational thing and stay in. i think the question of getting , foright story across

david cameron, it will be well worth while to stay in. there will be some risk of pressure on sterling if they don't stay in and the rate pressure could come in. francine: tom, you know what is incredible -- we have this renegotiation going, so the campaign for the referendum, for staying in in the eu or for leaving has not really started yet. probably four or five months away and there is no campaigning. tom: that is the big difference. many would say that the united kingdom as a leg up on us in sanity. [laughter] have ailip, do you number on sterling when things begin to unravel? if we get weaker sterling, do you have a point when things begin to fall apart? sterling rarely spends much time below the 1.40 mark.

you can point to it over recent history. calculations suggest that it is close to 1.60. much ofcasts do not see a decline from here, even in the short term. what is useful is that sterling had a couple of years where it .as riding relentlessly that has hit the externally facing industries, particularly manufacturing. the trade weighted sterling is helping things competitively. , athe broader economic sense controlled falling sterling is fairly good. tom: with the operative word being "controlled." we are going to continue through the morning. richard haass is with us in the next hour.

that is a table set for my conversation with stanley fischer. look for that worldwide at 1:00 p.m. this afternoon. this is "bloomberg surveillance." ♪

tom: on this monday, a gorgeous new york city. the chrysler building. i hope you like our lovely new view of new york city on our set. the empire state building. we are here with our bloomberg business flash. vonnie: thank you so much. google denied it reached a sweetheart deal with british authorities over taxes.

treasury called it a victory. the deal was announced -- denounced by opposition lawmakers. month's lunar new year holiday is particularly -- chinesea time for macau.n -- to visit freeze hiring and cut salaries. it is part of a three-year plan laid out by stuart gulliver. francine: exactly. when you speak to a lot of the bankers and the u.k., there is a lot of talk about moving headquarters. when you look at the global hiring freeze and the pay freeze

, this goes back to what we heard about deutsche bank on thursday. a lot of the bankers in the u.k. are thinking whether they need to jump ship and go to the u.s. banks that seem to be healthier and paying more. vonnie: that is debatable, isn't it? tom: it is a huge debate and it is fluid right now. i would say the negative rate debate does not help out right now. overd a flat rate curve the past three days. would you agree that this becomes ever more difficult for the city? francine: i think you are right, tom. they say london is the best city. here, theys to move say. if you start cutting bonuses by peopleh, you will get starting to have second thoughts. going back to the $5 billion in cost cuts by the end of 2017 for hsbc, those will affect the

consumer investment banking businesses. it is still a huge debate in the u.k. it is the wave that we seem to see by a lot of the german banks and swiss banks. it is also earning season for swiss banks. we have ubs tomorrow, credit squeeze on thursday. uisse ont s thursday. cranny spokeanus to the ceo julius baer. here is what he had to say. >> the way that the negative interest rate is charged to the -- we have the other side of the balance sheet, so the impact is not that great. weay, if you are asking me, could still absorb another

increase, which i don't think will happen. francine: i really like the fact that when you look at negative rates, you were thinking about what this means for the person on the street. for the first time, it basically means that savers are paying borrowers. that seems crazy. tom: it seems crazy, but i love what he said there. the great new wants of this debate is will the institutional reality of negative rates rollover to the retail investor and the retail saver? that is a raging debate right now. no one really knows. francine: it is a raging debate and central banks have to figure it out -- not forgetting the little person. tom: it is the rumor. at least the policymakers will try not to forget the little person. the little person is voting in iowa. later today, a special two hours of "with all due respect." it is not a primary, it is a

caucus. stay with us. ♪

francine: welcome back.

this is your data check. european stocks are now lower. they were higher, now they are lower. probably due to the fact that there is not much liquidity. china may have difficulty propping up their economy. this is crude oil. on the back of the doj going into negative interest rates at 1.128. tom: there is about zero francine look why and i agree on on.acqua and i agree arnab, what i really want to call forhether it is a

nigeria or a complete collapse of venezuela alluded to over the weekend, which institution comes to the rescue? i can't figure that out. in these situations, it that yoully the imf run two. i think in the case of venezuela, this is really going to be a political question. the right thing is often politically very difficult to do in a country like venezuela where you have this very serious problem between the president and the new congress. francine: what are the dynamics -- tom: what are the dynamics of stable oil prices or if we were than $30, what does this do to the beleaguered nations? down would be leg

another heavy straw on the camel's back. there is a major adjustment that needs to be made. it is not just about the lifting cost with the profitability, it is really about the fiscal breakeven. budgets in many oil exporting onntries have become hooked a much richer price in oil. there is an adjustment that has started and is underway. if we go down from here -- francine: they can figure it out, right? will it ever happen? or do they just want to squeeze everyone else out? arnab: it is their stated intention to squeeze a lot of people out. i think coordinating and enforcing a production cut is

the issue. there have been talks between to cutnd russia production before, but it did not really work. russia does not have an oil monopoly. it may or may not follow the edict of the government. i think it is very complicated. tom: does the debate change on oil? bring up the opec production chart. higher and higher, opec reduction -- production. does the urgency of this debate change when you see currency weakness brought on by lower rates in the negative rate gain? arnab: i think the fall and the

price of oil combined with this that is aressure, benefit in a certain narrow sense for a country like russia which has a floating change rate and imports a cheaper wrubel. le.'ubel. saudi does not have the benefit because of the pegged real. are fighting a lot of internal and external battles for social stability at home and regional dominance and dominance of the oil market. it is not just about iran. it is also about american shale. indonesia is adding on with a million barrels per day. peoplell that do for the in indonesia? will it make a material

difference? arnab: i think indonesia is relatively insulated because it is a net importer of certain kinds of oil and oil products. thee have been changes in subsidy regime, which make the fiscal problem much less than it was in the past in indonesia. i would not say that we are necessarily all that bullish on indonesia, but we are less concerned about the adjustment than many other petro states. >> what is your favorite petro state? [laughter] youcine: is there one that like as a best investment two years from now? arnab: saudi has started to do some structural reforms. in the immediate future, under the pressure of collapsing oil prices and the hit from sanctions, russian authorities have been producing, while deleveraging that the russian firms have been engaged in.

structurally, they are not doing anything to improve long-term growth prospects, but in terms of the balances, it is a better story. much.hank you so great briefing to get us started. mr. das is with invesco. coming up, a conversation with the president of the council on foreign relations. we have the conversation with richard haass about the foreign nation known as iowa. we will also speak with carl weinberg, his terrific research note. he has been way out front on the challenges of asia. stay with us. another hour of "bloomberg surveillance." ♪ ♪

tom: this morning, new lower interest rates.

it is currency, our interest rate wars. switzerland -- 15-year government bond touches a negative yield. vice chairman fisher with the council of foreign relations. this hour, we speak with richard haass. in iowa, let the voting begin. it is monday, february one. i am tom keene. with me, francine lacqua. what an interesting weekend as we picked up the debris from the bank of japan action. is alle: negative rates the rage, and it is amazing how used to it we are. we have to understand the underlying reasons. is it because they run out of policy, the bank of japan, switzerland, and others? or is it because of distorted pushing toarkets move money elsewhere? tom: here is vonnie quinn. vonnie: after months of speeches

beginndraising, americans choosing their next president. iowans will turn out at nearly 1700 caucus sites to vote. last-minute polls point to victory for donald trump and for hillary clinton. at the showed ted cruz top among republicans. marco rubio: i will be a president for all americans, even the people who do not like me, even the people who do not for for me, the people who say nasty things about me -- i will cut their taxes, too. francine: more than $150 million in advertising money was pointed -- was poured into the advertising campaign. at least 50 people died in a .riple bombing near damascus

islamic state claims responsibility. opponents of bashar al-assad threatened to boycott the talks. more than 2000 pages of information about the deadly amtrak crash last may will be released today, but it will not explain why the train was going twice the speed limit when it derailed in philadelphia. it killed nearly 200. and the justice department will investigate the san francisco police after the shooting death of a young black man. demonstrate is what the city's police chief to fired. i am vonnie quinn. tom: thanks so much. let's get through this quickly with our esteemed guest this morning. recordings, bonds, currencies, commodities. stability within the market. interest rate market stable.

on to the next screen. quickly to the vix. germany, theyield, united states, some attention there, a little bit higher, a sigh of relief on the 10-year yield. francine: this is a picture for european stocks. they are now down to 0.2%. crude, 33.1. oil's longest rally this year. we are concerned about industrial activity in china but also opec continuing to pump a record amount of crude. gold is a haven. and on the bank of negative interest rates. -- and on the back of negative interest rates. tom: over to the bloomberg terminal. animalminal gdp, our spirit back two decades. there is a lost decade in japan, a little bit of improvement. part of the tension that led to

the decision. vonnie: yeah, the three o." three o's.the tom: something about a lack of animal spirit. our guest this morning is richard haass, president of the council of foreign relations. we have too much to talk with him on about china. first, a briefing in person. there is stanley fischer -- we will do that at 1:00 p.m. this afternoon at the council on foreign relations. that will be an important conversation with the vice-chairman, with a statement before our conversation. enda curran is with us right now , our asia economics correspondent visiting from hong kong. what has changed on your plane flight? it is literally plane flight to plane flight, isn't it? enda: it is. there was a view that the

economy in china was stabilizing toward the end of last year, but this shows the challenges for the economy going forward. tom: there are these micro-challenges, ambassador, this news piece here, this news piece here. given the shock of friday and these many other changes, including nigeria of all places. richard: you add up china, russia, chronic uncertainty and instability in the middle east. you have nigeria, you have brazil. it is simply too much. the bad news is crowding out any pieces. tom: does the conversation with vice chairman fischer shift because international overtakes a domestic set of agendas? that is it. the fed indicated what it plans

to do this year, but the fed does not operate in a vacuum. it is almost impossible to say how the fed stays on its presumed trajectory, modest rate increases given what is going on in the world. in --: we did get the tax the cax in at 39.4. it is just below neutral territory. 50 would be neutral. with ais more stabilized more dramatic couple of months last year. is the economy stabilizing to some extent? there is an optimistic point that you can paint like that. the problem is that the policy stimulus is struggling to gain traction. the problem is, we are suffering severe capital outflows. stimulus, ormore

run the risk of a weaker yuan? francine: if you look at those two evils, that is the central bank dilemma for the pboc. what is the lesser of the two evils? will he choose more stimulus or less? enda: one of the biggest challenges they face at the moment is the capital outflows story. they do not want that to turn into capital flight. left chinarillion last year. not all of it was hot money, but some of it is, as people are trying to get their money out here it -- as people are trying to get their money out. you may see the government with more spending. tom: richard haass, let's flip it. foreign policy begins at home. tona has some challenges, say the least. richard: they have some challenges, and it works in both directions. the idea that china will use

foreign policy to be more aggressive to compensate for the loss of economic growth and legitimacy at home -- unlikely. they need a stable periphery. they know their problems at home. not everyone agrees with me, but that is my own analysis. the depth and breadth of the troubles at home. they are caught. control thejing dialogue with the fiefdoms around them? richard: external countries? tom: external, but even domestically. richard: i think they are genuinely worried. i think we underestimate as outsiders how much chinese leaders wake up every morning and they do not take for granted this thing we call china. they understand how economically and politically precarious it is, given the degree of diversity within the country, the demographics, and they are genuinely concerned about their future. tom: what we witnessed with the

russians a zillion years ago, where maybe we completely miss underestimate it their domestics as well. francine: we need to keep an eye on the political sensitivities within a country. the problem is that we are seeing a race to the problem. my question to richard haass -- if you look at the boj, we are told they are going to negative rates because the ecb moved. the ecb is looking at the pboc, and they are looking at the fed. it is a global race to the bottom. is that pressure, but china has pushed back in the other direction. the chinese have got to appreciate. they want to go back a little bit to export, but they simply run up against a contradictory problem where they do not want to see capital leaving. there are constraints on a pure textbook race to the bottom. what about hong kong

itself? are we seeing capital leaving hong kong? enda: we are seeing pressure right now, pressure in real estate. thought when china intervened it was afshore market, threat. i want to agree with the ambassador -- the policy in china is packed. hisident xi is balancing agenda with an international agenda. it is really unprecedented. up, ao not forget, coming conversation with the vice-chairman of the federal reserve system, stanley fischer. haass'll be an richard council on foreign relations. i will sit down to discuss the american, the international economy, and our monetary economics. look at that at 1:00 p.m. this afternoon, worldwide. ♪

no, des moines, iowa -- that is washington. but i guess it could look like des moines, iowa. washington turns to the caucuses. i have never caucused. right now i am caucusing with vonnie quinn. can we caucus? we need a little box to put a piece of paper in there. u.s. presidential hopefuls are making their last pitches to voters today. donald trump as a five-point lead over ted cruz in one poll. in the democratic race, and hillary clinton is up 45%, three points ahead of bernie sanders.

joining us to discuss, megan murphy, who is in des moines, iowa. from what i have seen over the weekend, there is such excitement. the idea that people might be worried about turnout is probably wrong. i would hazard a guess to say they would be a large turnout today. would you agree? >> i think so. i brought a friend with me today. question is whether this man is going to prevail. the issue is, we had concern about the weather. whether a blizzard would move in and affect turnout. but it is not going to matter. we have seen such excitement over this caucus, such excitement over this race in general. we expect high turnout and high enthusiasm. vonnie: i suppose if you were to go with the polls, it would be a donald trump and hillary clinton win, but there could be an upset . if bernie sanders wins on the democratic side, how does that change the equation for new hampshire?

megan: i think that the polls, especially on hillary clinton's side, it would be a real upset if bernie sanders pulled through. hillary clinton has a three-point lead in our poll, but more than that, she leads on the fundamentals that people watch in iowa. that is not to say it could not happen, and it would fundamentally upend the race. remember, hillary lost in iowa in 2008. it is a big deal for her to get this monkey off her back and go to new hampshire. with a race she is likely to lose anywhere in new hampshire. lose anywaykely to in new hampshire. tom: 20 years ago, des moines versus the northeast quarter of iowa -- how is it different? megan: that is a great question. we did a piece a week ago looking at that question, and looking at how in des moines and other urban areas in iowa, we have seen the growth of the

financial sector and other sectors. when you look at all the ads that are on here, you see tractors and farmers. what we do not talk about as community, financial other businesses and industries that have expanded here, giving a different dimension to the electorate. you see a lot of trumps supporters who say they support him because they are small business owners. they think he would be better for business. on the other side, young millennials are huge bernie backers. it is almost what they're calling the trump-sanders cohort of voters. very unusual, but an emerging group on both sides, both the left and the right. francine: help me out. i understand that ted cruz and donald trump are both against the dpp. isn't this crucial for iowa? megan: you would think that kind of issue would get discussed a

lot on the trail, but this has been an issue that has not come up because it is a little bit too new in the sense that we are trying in these last few days to get these huge themes through. whether that is burning focusing on doubling down on his base, anti-wall street, reducing inequality, or whether it is hillary making a play for leave or same-sex marriage, or whether it is trump, who is really all over the place, when voters are focusing on is less on the issues -- not even on ethanol -- and more on the message of the personality. tom: richard haass, i have eight ways to go with you. where is the establishment of the republican party on all this? are they going to catch up in the carolinas, or are they just gone? caucuses in iowa are about base.

hillary clinton has been forced to move left, and the democratic side, and the republicans have been forced to move right. mr. trump and mr. crews are anything but establishment republicans. tom: do you expect a shift in the continuum? richard: if donald trump wins in iowa, new hampshire, and the carolinas, the question is if the establishment catches up to if marco rubio has a strong third-place victory in iowa, then does second two trump in new hampshire, the question is, does the republican establishment ultimately find a candidate to coalesce around? that is the big republican question. vonnie: when do we start seeing republicans drop out? richard: no one significant will drop out after today. at a minimum, you have to get to new hampshire. tom: go ahead, francine.

francine: is a completely inconceivable -- i ask this as a european -- is it completely inconceivable that the republican party splits? we see moderate republicans being squeezed out, and then there is a race among extremists. why don't they form another party echo richard: nothing is inconceivable. none of us would have predicted where we are today. so we have to have a degree of humility. if you had someone like mr. trump, either the republican candidate, which is something that is quite conceivable, would someone challenge him on the right from the tea party? i would think it is the right side of the party that would be tempted to move away. tom: megan, besides a nap, you will need some kind of day to get to this evening. when is this resolved? will i have to wait until 9:30 p.m.?

megan: you will have to wait. it is going to be a late night. we think we might see more knowledge on the democratic side, maybe around 10:00, but not until late. tom: you are killing me. you're killing me. megan: stay up. tom: get the bloomberg map. megan murphy. giving us perspective. respect" will bring you that coverage. 5:00 p.m., inat hong kong and around the world as well. we are with richard haass. this is "bloomberg surveillance ." ♪

"surveillance" from london and new york. we do international relations, which means that the map of the middle east is being withdrawn. i understand this challenge will never go away. is there a new twist or turn for 2016? richard: sorry to say, but unlikely. i have written about the middle east being involved in a latter-day 30 years war. syria is in some ways the most intense locus of all of that. kerry posted an eight minute message yesterday that was absolutely disturbing, but in that message he posted that boost -- that boots on the

ground will not change it. richard: the united states already has considerable boots on the ground. andowing amount in syria, we will probably increase that. ash carter indicated that last week. it is not the only answer. is training local forces, or they will not come out of the woodwork. vonnie: john kerry was making the point that it is not going to solve anything. negotiation, and aid immediately. richard: but negotiation never takes place in a vacuum. it always takes place in context or john kerry only has a slim chance of succeeding if the situation on the ground begins to move in certain directions. is there this policy discussion in iowa and new hampshire? i have not heard it. richard: people do not want a lot of it when it comes to

reality, but they like the symbol of the united states as still strong, someone to push back against immigration and all the rest. it is a reflection of that. you talked about tpp a few minutes ago. people are not really drawing the directions -- people are not really drawing the connections. sanders' about bernie challenging hillary clinton. very little on the republican side. aboutnd cannot say enough the website -- i cannot say enough about the website of the council on foreign relations. on japan.t a briefing carl weinberg has been way, way out front with his excellent coverage of the challenges of the nation. we will do that next to it from london, from new york. stay with us. "bloomberg surveillance." ♪

francine: welcome back. this is your data check. s&p futures down 0.2%, quite a volatile day on european stocks. but at the moment they are

declining. china really dented investor onhusiastm that we saw friday. at 1123. let's get straight to the bloomberg first word news with vonnie quinn. theie: in iowa tonight, speeches and fundraising will stop, and the decision-making will begin. voters will make their first official statement on the presidential campaign. they will meet at 1700 caucus sites to pick nominees. with a challenge from bernie sanders, mrs. clinton is telling voters she can do what she promises. hillary clinton: someone who can be president and commander in chief and take the fight to republicans, and then after we win, unite our country to

actually get some things done for america. vonnie: $150 million was spent on political ads. bloomberg will preview the caucuses live from des moines on a special omission -- on a special edition of "with all due respect." the death toll is 50 after a triple bombing in syria. islamic state is claiming responsibility for the attack near damascus. the opposing sides will not be talking directly. at least 86 people died in the latest attacks by boko haram in nigeria. they targeted a refugee camp. boko haram has killed thousands law. effort to establish myanmar, the party is taking control, but she is not able to

take power herself. i am vonnie quinn. tom: thanks so much for it lets get to my "morning must-read." over the weekend, there was terrific reading on international economics. mmr in anding environment of limited wage -- th, price shock carl weinberg is with us from high frequency economics. derek holt at everybody thinking

about negative rates. what is the linkage of these five nations in their negative rates? carl: well, just looking at slow growth around the world, the central banks are doing the best they can, or what they think is the best they can. in the case of japan, they are not doing the right thing at all. but in the case of much of central banks, they are trying. tom: everyone wants to know from stanley fischer what the central bank of the world will do about it. can you really link jenny yellen into this debate on negative rates? carl: not quite yet. with expectations for fed tightening this year, we think the labor market is still tightening in the united states, and eventually wages will go up and the u.s. has to be vigilant. vonnie: at what points do central banks -- francine: at what point do

central banks have to reach the limits? mario draghi is saying whatever it takes, but it is quite small. they have come to the end of how they can surprise markets. am i right? carl: let's take individual cases. bank of japan is beyond its limits. they are already taking on more debt and the government is printing -- than the government is printing. tops the wrong medicine on of everything else. they are the populating and they cannot resist a contraction with their economy. resistance is futile, and it sets up a growing dependency of the government on the central bank to finance itself. that has to end badly. tom: could you be gloomier? politicians,ass, have to deal with macroeconomics. how does washington deal with policies?

richard: the politicians will not do their job. we do not have fiscal policy or serious growth policies. the only game in town because -- the only game in town becomes central banks because they are independent. vonnie: explain why it is so bad. is banks are depositing a large amount of money, they still will be charged. so it is not like all deposited -- like all deposits are taxing a negative rates. carl: first of all, i disbelieve in negative rates being good for anything. the you believe money in mattress does better than money in the bank, you depopulate the banking system. the government will not be able to get private investors that get positive rates of return. your insurance companies, pensions, funds -- they will not buy the stuff. you are not getting people to

invest. you have negative interest rates, and that is a sign of depression and deflation. of someone from the united kingdom, francine, it goes to that word "uncertainty." if it is"uncertainty," a number of reserves that is actually touched. the uncertainhave price of oil waiting to go negative, geopolitics, and this limit in monetary policy. what comes next? the uncertainty of the unknown. when you look at central banks, what is the end game? fiscal and structural reforms have to happen because they do not have that safety bucket? arl: the boj does not have safety net right now. inventingg trouble alternative scenarios.

we have been worried about this for a long time. it is going to happen, it is going to happen, and now the yield curve is negative. i do not see how the story can end well. i do not see an exit strategy for the japanese. francine: the yield curve is also an expression of inflation expectations, and i can turn pretty fast. perhaps the yield curve will turn back positive. read our high frequency economics, when you have a depopulating nation, deflation is the natural companion of the population. when the population shrinks, demand falls faster than supply and prices go down. no monetary policy in the world can turn that around. tom: was this in your textbooks at oberland? i do not think so. richard: japan is a case where

you cannot have immigration at all. the politics do not allow it. the only slight chance for the japanese economy and society is to increase the participation of women in the workforce. that is the margins. japan has hit a structural wall. it is aging, it is shrieking. so they turn to the central bank rather than to real policies. and richardinberg haass have opinions on that as well. we will continue this conversation next. at 1:00is afternoon p.m., my conversation with the vice-chairman chairman of the fed, stanley fischer. we will do this at richard haass' council on foreign relations are you can see that on bloomberg radio and bloomberg television worldwide. stay with us. "bloomberg surveillance." ♪

francine: welcome back. this is your data check. you can see european stocks down 0.2%, futures doing even worse. you can see that it boils down andhoosing between stimulus the boj and possibly the ecb. or whether you are focused on china's slowdown in the overall global markets. dollar-yen, 1.132. let's get to the bloomberg business flash with vonnie quinn. vonnie: that the fourth-quarter earnings are better than expected. the company's takeover of humana will take over -- that will close in the second half of the year. reveals ceo will turnaround efforts.

yahoo! sales have fallen in seven of the last 10 quarters. the first ever partnership paid off at the weekend box office. three" pulled in $141 million. member watching reruns of cain? huge deal.s a this may push "frozen" aside. that is a good point. it is massively global, and you can take the dreamworks property and do something like that. absolutely amazing. i cannot wait for "kung fu panda 4." francine: as a mother, i am very familiar. vonnie: you do not even need the

sound up. francine: it pulled in more money in china, right? in the weekend, it made $58.3 million in china. in the u.s., it made $41 million. from ais is keeping us discussion on international economics. carl weinberg will never show up again. how about a single best chart here? the knock-on effect. we are down to a negative rate this morning. does switzerland's 15 year yield, printed a negative rate hours ago. carl weinberg, i am sorry, that is a not-on effect in the big deal. what does that mean to a normal person in switzerland? carl: it means you will be sending your money abroad. tom: capital flows. karl: that -- carl: that is right. tom: will a japanese do that, and will that keep our yields

low? carl: japan is not switzerland. stilltzerland, people are alive and saving. in japan, people are older, retiring, and are taking their money out. it is a different dynamic between the two countries. francine: about a third of the debt issued is on negative yield. that is pretty incredible. how much do you expect it to rise? carl: how much do i expected to rise? francine: you talk about the negative consequences. how tricky will it be for everyone in europe? carl: i think it is tricky. one of the reasons the euro is cheap right now is that people are taking money overseas to get a better return. satisfied with low yields, even on long-term german bonds. making the euro cheaper -- how long that can go on with other countries, that is a long-term question. tom: we need a fiscal policy,

take the pressure off central banks. where is the fiscal policy? do you have any optimism that it amends or adjusts? richard: the only optimism in the united states is that we finally have a budget, paul ryan is the speaker, so there is some sign that washington is not mired in perpetual dysfunction. but you look at the future of the united states, tackling things like entitlements. you look at what is going on in japan, europe, it is hard to be wildly optimistic about the ability of governments to govern. tom: what is the workout for this? which institution helps these countries adjust? is it a new g-20, or is it the imf that is the last choice, the last resort? the g-20 will not be the answer, and even the imf -- i think it comes down to the su m total of what countries can do.

you cannot get global , global governance absent national governance. which is a country that will suffer the most as they are each chasing each other -- the fed chasing the ecb, or the other way around? who is the one who will lose the most? japan? carl: japan has the clearest problem with anyone right now because they have government that cannot finance itself on the market. they are entirely dependent on the central bank and there is no exit strategy. the big governments of europe can fund themselves, so they can fund -- so they can survive. pmi,but then you see china and it comes over to china. do you just assume a significant depreciation of the renminbi? carl: this pmi number is the stupidest number there ever was. the handles 49.

the last time the pmi was 49 was in 2012. the time before that was -- the economy was growing at 11%. before that, there was no pmi, so we do not know what the economy does when the pmi is 49. this is making tea without tea leaves. china as i am concerned, industrial production is growing at 7%. anyone who tells me that it is contracting is talking total disconnect from the real numbers of the world. can we count on china? carl: last year they contributed $700 billion to world gdp. clearly they are doing something that we are not. when we give them advice on how to grow better, the chinese have selfpression -- they say inspection should be conducted

three times a day. we have to look at ourselves. tom: i cannot believe i'm saying this -- we begin february. alan ruskin radio, of deutsche bank. it has been way too long since we spoke to mr. alan ruskin. sanloomberg radio, francisco, washington, new york, and sirius xm. stay with us. ♪

tom: iowa. it is the only five-domed capitol in the nation. they do five domes for iowa. but tonight, two hours of "with all due respect." will bep and mr. cruz doing wrestling at iowa state university. that did not work. foreign exchange let's do it right now. the news on foreign exchange is not much going on. the yen, 1.2140, a little bit weaker. dollar index, 99.14.

99.41. ofncine: the proportion russians who believe the country is doing well has fallen to the lowest before the annexation of crimea. let's get straight to our guest, richard haass, the president of the council on foreign relations, and carl weinberg. let's talk about vladimir putin. richard, if you look at the popularity of mr. putin, is he enjoying this popularity -- he not only looks like he is enjoying this popularity, but he has to make a decision on whether he helps the west with syria. richard: he is popular, more than any other russian politician. he represents a stronger future, a sense of pride that the world

cannot take russia for granted or dismiss it. med whatically cal they are doing with ukraine, and they hope they can get sanctions lifted by -- they are playing that game, because they are getting hammered by lower oil prices, and their economy is such a cash crop economy, they are vulnerable. i think ultimately, yes, they are likely to move in that direction. francine: so they will have to see the sanctions lifted if they want them to play a responsible role in syria? the short run, there are too many moving parts. the iranians are hanging tough. even the russians are not ready .o move away from mr. aside they also -- from mr. assad. these peace talks are not on the precipice of success anytime soon. tom: i want to rip up the

script. it is always fun on commercial break when you see two guests go out it with great -- go at it with great collegiality. austere view of the international economy. richard haass, there is an interesting. -- what cap to your attention? disagreeingwere about china. carl, why do you believe in 7%? stephen roach is with you, that many others are not. carl: the chinese have their fingers on the numbers. everybody says china's numbers are wrong, and nobody can tell you why nobody has an even anyve -- nobody has evidence to prove it. there is just a gut feeling. it might be imminent and it might not. we really do not have -- i do not have detailed information on that. i am not a micro economist.

people are getting out of the banking system. if the data tells us the banking system is stable or under control and you will say the banking numbers are cracked, that is -- are crap, because that is what everybody says when i say that. all emerging markets -- you have to go with the numbers you have. the numbers you have are the numbers they produce. until we have better numbers -- tom: one of your fellows on the council of foreign relations -- what do they say? most of the experts i know say that the chinese know they are in trouble. the idea of moving the economic model toward more domestic consumption hasn't worked. you are seeing some weakening on the currency, and they are worried about the political fallout. i think you will see significant political dislocation in china over the coming years, and i think the group running china is extremely worried about it.

tom: we will continue this discussion. carl weinberg, thank you so much for being with us today. francine, what a great start to the week. just really great. no question about that. richard haass, thank you so much. i will see you this afternoon. that will be a conversation with vice chairman stanley fischer. we will do that at the council of foreign relations after the conversation with stanley fischer, across all platforms. radio, television, internet. stay with us again. worldwide, 1:00 p.m., with stanley fischer. this is "bloomberg surveillance." good morning. ♪

stephanie: for china, the new year began the way the old one ended. the central bank is now considering the next move. deal or no deal -- debt

are about to resume. wall street's favorite, as iowa is about to vote in the caucuses. stephanie: it is monday morning. we are in new york city, bloomberg world headquarters. you are watching "bloomberg i am stephanie ruhle. my partner, david westin, is off this week. if we thought it would be a weeklong dance party, i lost that bet. brendan greeley is here. brendan: i was told there would be a dance party. i are bringing in enda curran from hong kong so he and i