we consider aing new subpart path to economic growth and disinflation. madame lagarde says europe convicts the italian bank. a select few disagree. day one is so done in cleveland. mrs. trump is the only one on script. this is bloomberg "surveillance." i am tom keene in new york, guy johnson in london in for francine. sort of an odd day but a

recalibration of where economic growth is heading. guy: and more evidence of what we have been talking about, low economic growth coming out of germany right now. this is investor expectations going forward and it is the expectations line that really catches my eye. the survey, 51.8. the expectations, -6.8. a significant miss going forward in investment expectations. tom: one of the big mysteries is euro over the next months and we will be looking at the bombshell morgan stanley report as one of our themes this morning. right now to our first word news on germany. : police shot and killed a man who attacked passengers on a train with an ax and a knife. the attacker was described as a 17-year-old room afghanistan who applied for asylum.

the president of turkey says he narrowly escaped death in the coup attempt. he left the seaside resort just minutes before the coup stormed in. he also said renegade soldiers took over the istanbul airport hours before loyalists maintained control. theresa may says her government must not be defined either decision to leave the eu. she told senior ministers that all of them will share responsibility making the departure a success. the obama administration is asking the supreme court for a second chance on immigration. asked thestration has court to reconsider the issue once a new justice has been confirmed. appears top's wife have lifted some of her campaign speech from michelle obama.

there were striking similarities. overshadowed the plans of a trump campaign to reach out to new voters. global news 24 hours a day, powered by our 2600 journalists and analysts in more than 120 countries. i am taylor riggs. this is bloomberg. you, convention day one last night, a1 is always a traditional lighter, looser moment. for somebody like taylor, it was extraordinary. it was extraordinary for me as well. i have never seen a day one like we observed. guy: it was fascinating to watch. here.tory resonates over when i think europeans find strange is we do not expect to hear from theresa may's husband.

that is a curious one. tom: that is a very good point and that is a real tradition within american politics that jewelers -- end ures. futures decline negative six and yields came in with a vengeance, 1.54% on the 10 year yield. 1.110.o will not budge, stunning 12.76 and sterling cannot figure out what to do with itself this morning. we are watching renminbi as well. guy: let's talk about the equity story, down by around a percent at the moment. negative as0 year you can see still, and the yield has moved a touch lower.

you want to buy an investment property in new zealand you have to put 14% down. the turkish lira, the economy minister saying we will get through this. the market into nice disagree with that story, the lira up just a touch. tom: a lot of housing data in the u.s. and i know you have the same dynamic in london as well. 30 years of rent year over year, down we go. and then the plunge into thousand eight down to actual rent deflation. in 2008 down to actual rent deflation. year, rentyear over increases. you wonder where this goes given the struggle for economic growth. guy: a lot of properties are

chasing people to rent them in london. that nintendoory had overtaken sony. we thought we would add something to it and that is netflix, netflix expected to ofp but the market cap nintendo and netflix are roughly exactly the same. .etflix is going to drop if you want to keep your portfolio above the plants in line you bought the fang, google. maybe not so much now, and intended showing how -- nintendo showing how difficult it is to make money. let's talk a little bit about what is happening with these markets, you talked about the low growth economy. rocks thek with black when -- ewen cameron watt.

this is investor expectation. the actual -6.8. wen: i think there might have been a referendum in between that changed them. the ecb said there was not much change before and after june 23, so a bit of a mixed picture. forward expectations are very reserved at the moment in most areas. guy: as the market being too pessimistic? >> i think it has been inflated by the financial market. looking at the way the market is responding to corporate earnings, it is really punishing things that mildly disappoint like netflix. how long has this

cycle been going and do we deserve a good old american recession? ewen: we are in the eighth year since the financial crisis. we are still in a period a very low to moderate growth. no audio] lending, it is difficult to see employment access. , verys this long, flat dull and challenging cycle. tom: that gets us started for the morning. we will be looking at this thrall five hours this morning. ellen zentnerur, will join us. from london, from new york, this is bloomberg. ♪

guy: i am guy johnson in london with tom keene in new york. that's get you caught up on what you need to know. taylor: we are looking at more problems for airbus's military transport plane. been held upnt has because of a faulty gearbox and crash caused by an engine failure. airbus may take a right down in its next quarter. past bullthe ftse 100 hsbc is thed -- most bearish of the seven prognosticators surveyed by bloomberg. shares and mcdonald's in japan

rose as much as 23%. donald has started giving away pokemon figures with its happy males. pokemon go still is not available in japan. that is your bloomberg business flash. the let's talk turkey in wake of the attempted coup on friday. there central bank will -- their central bank will slow the -- theirs cut -- could cut rating to junk. benjamin harvey joins us from extendable. the significant depreciation in the currency of big banks are in the thinking today. benjamin: it should be. significant depreciation mostly happens on friday evening before the outcome of this coup was clear.

the lira has one back about half of its watches -- losses. before the co attempt the expectation was that they would cut 50 basis points but now they expect for the central bank to be on hold or make a more moderate cut of 25 basis points. guy: how will the administration view what the federal bank does today? message would be administration like the central bank to communicate? if they cut heavily, that may signal panic. how will the president view the story? benjamin: it is no secret he wants lower interest rates but i think given the extraordinary circumstances now, the government seems to be allowing the central bank to do whatever it wants. we had the economy minister

saying he would understand if the central bank kept on hold today, and he has been one of the biggest advocates for faster and deeper rate cuts. change seems to be almost out of control. give us the scope and scale that you observed in istanbul about how serious the president is about detaining 18,000 people. some of the photos have been shocking. what is the dynamic on a tuesday of the word "purge" in turkey? purges have been quite extensive and you can break it into two parts, people they are detaining, about 7500 have been detained. another 14,000 or so have been ,ismissed from their positions removed from their jobs so there are two different parts. it looks like it will continue. tom: i understand there is two

different parts. are people walking around the streets of istanbul being afraid to be picked up? at all.: not you would hardly know that anything extraordinary had happened. life is normal. extraordinary thing is that supporters of the president are out in the street celebrating and holding vigil as he has requested them to do, until he tells them to go home. tom: benjamin harvey, thank you so much. now, ewen cameron watt of blackrock. emerging markets have been discussed more frequently. event way does the turkey derail your enthusiasm for e.m.? ewen: i do not think they do and they remind you there's a reason

why you get the ultrahigh carry related to u.s. treasuries for an emerging market debt. some of the old headwinds for emerging markets, china, places like that have become tailwinds and it is still an under owned asset class, and it has outperformed this year. thatone of the things stands turkey out from others is this big current account deficit the country carries. now we have a tourism sector under considerable pressure. will the depreciating currency do anything to alleviate that? ewen: mild. remember that a lot of turks have deal currency deposits so inside a turkish bank they can hold dollars and they can switch immediately. on monday, patriotic movement

from dollar to lira deposits going on, and this is where the achilles heel lies. there and with the dollar death of the corporate sector. tom: coming up, a look back at conversatione's yesterday, really quite interesting and nuanced. later today, her economist is now at the imf. global economic updates, this is bloomberg. ♪

tom: good morning, everyone. , guylondon and new york johnson in london for francine. the morning must listen, christine lagarde. what a treat to speak with her yesterday, and i love how she addressed london and the united kingdom within the spectrum of what it means for europe. britishagarde: the decision to exit the year in our view the need to consolidate the eu, to give a strong message to the european people about the benefit the euro can deliver for them. us. ewen cameron watt with i was stunned how she twisted this around into a review of what her france and europe should do. if christine lagarde was to call

anyone in europe, who what she call? ewen: i think angela merkel who has said much of the same thing. this is going to be the focus of the councilman's meeting and september. it is going to be, the brits have preferred to go, what do we do next? more europe or less europe? one of the reasons the referendum failed from the european point of view was a positive aspect of europe simply was not solved. tom: i am fascinated where the dialogue comes from in the coming quarters from prime minister may and her team, who do they talk to? guy: we will find out tomorrow because theresa may's first .oreign visit happens tomorrow she is going to see angela merkel in berlin. at this point, theresa may has

tried to create political stimulus -- stability to make sure there is no id -- no ambiguity that the brexit happened. let's talk a little bit about how she is setting the u.k. up at the moment. clearly she understood the political paralysis was causing huge problems for everyone and tried to take that off the table. case,that is already the how do she then go and talk to brussels and particularly to berlin? ewen: i think it is a case of saying, how do we do this in a way that will not upset you, europe, and us, the u.k.? it will be a negotiation where you are really bartering terms and conditions for access. is where ie brexit

think theresa may's negotiation position will settle. guy: she has made it very clear that brexit will happen. ewen: if you are not in the eu you can be in the eea. guy: do you think she is being disingenuous? this is a wide dispersion of use within the cabinet as to what brexit means. do you think she can say this is the plan, guard list of what you guys think this is what we are going with? that is of course why article 50 has not been triggered because once you do that, there is no room for negotiations. i think they are trying to feel what can genuinely be accomplished and at the counselors meeting in december, i then we will know. tom: what on from there? i think the thing that is curious for market participants

is the idea of, does this get 60ved in 24 months or in months or 72 months? i think the economic affect, the business effect are 72 months. the substance and the form, i do not think the brexiteers in the conservative party will let this thing go beyond the beginning of next year without triggering under article 50. there is up to a two-year process. we have to remember that the election clock will start taking because the next general election is in may 2020 and we will have to be clear where we are and where we are going by then. this is going to take years to really figure out rather than a few months. tom: i have to do a trade this morning on the dollar. dollar,ok at strong

weak euro, or is it euro stability moving forward? think it is euro stability and the currency to look at is the yen more than the euro. guy: coming up we are going to -- audio] conversation talking about where these markets go. or fiscalnk policy policy one of the key conversations we need to have. london looking lovely, we are having the hottest day of the year we anticipate. live from london and new york, this is bloomberg. ♪

london,m guy johnson in tom keene in new york. here's the bloomberg first word news. taylor:attack on a train in ger.

police shot and killed a man who attacked passengers with an ax and a knife. he was described as a 17-year-old from afghanistan who applied for asylum. more missile launches from north korea, as they testfired three missiles. that is according to south korea. they called the launches a reckless provocation. hillary clinton calls donald trump the most dangerous candidate to ever run for president. the likely democratic nominee spoke with charlie rose. >> when i gave my first beach based on what he said in san ,iego, i followed it of course but even i was surprised when they began pulling together all the information. let's return to torture, i will order the american military to

commit war crimes. this kind of talk which some people say, he cannot possibly ifn it, maybe on one thing he had said it six months ago and then have listened to people who knew more than he ever will melt. maybe so, but not now. the mostid out dangerous, reckless approach to being president then i think we have ever seen. you can watch all of that interview at 7:00 and 10:00 eastern time on bloomberg tv. global news 24 hours a day, powered by our 2600 journalists and analysts in more than 120 countries. i am taylor riggs. this is bloomberg. tom: thank you so much. she has been a great service -- a great service to bloomberg "surveillance" over the years, ian shepherdson. i thought your last report, it

was cpi grinding higher but. what is the but for the global economy, for the american economy? ian: the funny thing is i would be inclined to say there is not much of a but for the u.s. it could've been brexit but the market recovered very quickly from it. the dollar has strengthened a little bit but has not gone off the charts. i am looking forward to an economy that in sharp contrast to asia and europe and the u.k., has quite a broad positive outlook on some of the things that have been a drag over the past couple of years like the big collapse in capital spending in the oil business. tom: frame for us this morning what good gdp is. 3.3%.d to be 3.2%, those days are gone.

that yellow circle is where morgan stanley is over to the right. they are decidedly subpar. after the british open, what is par for u.s. economic growth? had some pretty good rounds in the open and i think we have got some pretty good gdp numbers coming as well. i think for the second quarter we will get close to three but the real interest for me is what happens in the second half. i am pretty bullish, i think we could get three or both of those because we are losing the drag and gaining a bit from the consumer being stronger. we have seen a clear pickup in export orders. some of the export services really picked up since january. putting it all together i am feeling more cheerful about growth than i have in a while. we could easily hit three in the third and fourth quarters. read on u.k.a .5

inflation this morning. how high does that number go? ian: that goes higher. 3% by the end for of next year and it is striking if you look at the core services sector are, that is now back to normal levels. are talking about deflation but focusing far too much on goods prices which are a small component. u.s., it is the mostly services, mostly about wages, and the u.k. labor market is not as tight as the u.s. the bank of england is promising to cut rates at there's going to be a limit of how much they can do since the weaker pound will be pushing up imported goods prices. they do not have as much room for maneuver as the markets think and when that realization dooms, things could get pretty

not -- pretty nasty. seen a chinese investor come in and buy london hotel for 40 million pounds, the long -- largest property to be sold since brexit. our u.k. assets cheap? ian: they are and are not. the movement has made them look cheap compared to where they were but you are taking a gamble on the performance of the economy. a substantialsee flow of tourists because it is a cheaper place to go on vacation. for the broad economy as a whole, you are looking at foreign investors, have to take a close look to where they think the domestic outlook will be and they have to gamble on the post trading arrangements with europe. at the moment that is completely unclear so it is a market for

gamblers rather than long-term investors. tom: what we love about "surveillance" is the difference of opinion. my head is spinning and i would respectfully suggest chair yellen's head is spinning as well. a pantheon economics economy, how far behind is our federal reserve? ian: this is the catch. they are somewhat behind already in terms of the label market and the inflation. by the end of the year it will be north of two and a half and if they do not act by the end of next year it will be north of three. are obsessed with short-term data points and i would like them to take a step back and say, we have made substantial progress and we need to act and not be swayed so much by the immediate data reviews.

a lot of the numbers they are relying upon are not that reliable and i would much rather they took a longer-term view. monetary policy is set to deal with the end of the world and that did not happen in 2008 and certainly is not going to happen now. tom: ian shepherdson, we thank you so much, with pantheon economics. this is what i love about it is amazing" the difference in view of ian shepherdson versus ellen zentner . it is a stark contrast. guy: two sides to make a market. when i think is really interesting is this long-term downward church accurate and bond yields that has confounded absolutely everybody. positive, negative view on the world, and the big story is where do we go from here? tom: we are watching the markets, a bit of a churn this

morning. a little weight to the market after a few very good days. in our next hour, she does not agree with ian shepherdson. ellen zentner of morgan stanley. this is bloomberg "surveillance." ♪

guy: i am guy johnson in london, tom keene in new york. let's talk about what is happening with the financials right now. the italian banks still front and center. watt. with ewen cameron buts depressing for banks more depressing for some than others. let's talk about what we saw --

what we have in europe. are we going to use the famous european political word fudge? the point of the italian market, if you are going to let the bonds go that is a problematic moment. the second issue is, is the european central bank going to allow italian banks to be europe's lehman? and essentially being put out of business, i doubt that as well. the answer to the question is bring on the fudge. billion the price tag for bringing on renzi in the referendum? ewen: that is certainly the price that is losing. i think this is a really interesting political calculus

right now. but you can say that this is a material, for italian households, and for europe as a whole. tom: when i look at the linkage of the financial system and economics, when i go back to the than goodn a better u.s. growth, is it even feasible that a banking system can "fix" itself given such soap our growth -- subpar growth? ewen: you have got to define fix. if it is from an american banking point of view, no, of course not. if you are talking of a vix -- a fix from a standstill like a japanese bank outcome, yes, it is plausible. it is a question of getting enough risk bearing capital in

place that is not pulled on the funding side. tom: where does that capital come from? ewen: this is the issue, it cannot really come from full on state aid but at the same time, the european central bank allowing italy to be lehman, i do not think so. have got the asset quality review coming up on the 29th of july which i think will give a pretty clean bill of health to most european banks with the exception of some of the italian. does that iceberg take the whole thing down? where is the spread between where italian gdp would have been had we not joined the euro and now? ewen: it would be even worse. how much worse, one does not know but you would have clearly had a major currency change.

you would that a very weak lira, a current account deficit. circumstance he might have had a different shape of growth but i would guess you would have lower growth and more financial instability. tom: let me show this chart which i think says it all. a shout out to joe stiglitz who years ago wrote about this. in the economic equation, there is a small g which is growth and that rate of growth. , theis the italian gdp white line had a run right of 4% nominal gdp and now it does not. for portugal,rce italy, and some of europe is the economic growth is not bayer. -- is not bayer. re.the is a i think there

long-term issue with pension liabilities in europe which have to allow for the taxes to rise or real benefits to be cut, and that has a drag on economic benefits as well. tom: is it just a great slog forward? listeners, just assume a further europe slog. i certainly did not hear that from a down lagarde yesterday. she wants it fixed and fixed now. europe'sre are two like two italy's. germany, the economy was fine and people were pessimistic and in italy it was not and people were really optimistic. there are some sensible stuff in the renzi reform programs which is thet important, what

outcome of the constitutional referendum in october. referendums are not predictable because i think there is some stuff about resetting the way the economy works and i think it is one of the better programs one has seen from italy and a number of years. tom: there is the keyword "incentive." we will consider this fascinating discussion on where the european banks go. christopher whalen, we will talk to him about european banking and also about this idea, the path forward for italy. this is bloomberg. ♪

tom: good morning, everyone. from london, guy johnson in for francine lacqua. in new york, tom keene. in washington they are looking to cleveland. us fort talev will join day to festivities. right now we have a festivity of a bloomberg business flash. second quarter earnings fell 2% at novartis.

they are having to deal with falling sales of their cancer medication which faces competition in the u.s.. they were hoping to offset that with a new heart rob and treatment -- a new heart drug .nd treatment of psoriasis honda is takata's largest customer. they are trying to restructure after faulty airbags led to the auto industries biggest recall forever. netflix has stumbled in the way to create the first global tv network, cutting subscriber growth to 3%. investors are focused on user especially overseas where subscriber growth badly missed estimates. that is your bloomberg business flash. tom: i canceled netflix. do you use it more and more? taylor: i do not use it.

tom: i have been predicting this just from what i see at home. challenging netflix, to say the least. it onst witnessed bloomberg "surveillance" with ian shepherdson, radically different from what we will hear from ellen zentner. michael mckee is here. michael: standard models that economists use are breaking down . if you take a look at the economy, and ian shepherdson is right, things are looking better. the economic surprise index measures the difference between the data we get and we thought we would get in the channel is moving up. we have a much better job report. tom: that looks a lot like the two year yield. michael: now we are going higher but that is not convincing the markets. which using up slack

should mean more inflation. take a look -- tom: you have another chart? michael: have overlaid inflation with citigroup. somewhere there is a fed decision and that should not be happening. we are seeing slack up. then you look at the markets and the markets are saying, forget it, fed. the 10 year note is moving to all-time lows. 10 year yields have tumbled since the brexit vote. we are not even at our average for the 10 year note, the year to date average. ewen: let a take you back five years. where was the fed predicting the economy would be now and what is the spread from reality? michael: they were looking at a terminal fed funds rate well

over 3% and the market says that has never been correct. they are pulling their rates down but the fed is still close to 2% but is nowhere near the market is saying. that's what makes it hard for anyone to model what is happening. fed saying thehe economy will be in 10 years time? say three years, we will be well over 2% growth, inflation at 2%, and interest rates to and half to 3%. we have,jumble that and i heard that yesterday with my down lagarde as well yesterday, the a jumble that we are has got to be because of the artificiality of the rate structure. not so much negative rates but all rates, led by negative rates , it is a distortion, isn't it? michael: if you talk to people at the bond market they will say

they do not know what real prices are anymore. and boj,the fed, ecb, the buyer of last resort so there is no price that gives you the value based on inflation and term premium. guy: given the artificiality that michael has described because of central-bank action, how do you build a model that accurately reflects where the economy is going to go? ewen: we spend a lot of time looking at what the data is telling us, the net surveys. it is telling us the you -- the u.s. economy is ok, not great, not bad, but ok right now. that does not change where the rates are, not because of the action but because of the boj and ecb action. tom: this is a hat trick of brilliance from michael mckee.

minutes.me, no extra economic surprise index up. go to the next chart. am i right the white line is the same on two charts, this inflation and inflation? michael: that is the feds five-year forward inflation. tom: explain this once more, what is the red line? michael: that is the brexit vote and you can see the plunge since then and the blue line is that average yields for the 10-year note. tom: consensus is that it is not going to go back to average, right? michael: it may not get back to average this year and morgan stanley has a bold call. tom: where are you, do you want to raise, back to average?

you have major asset confiscation programs going on and demographics. those factors has to change for rates to rally back up and a has to be a taper of purchase away from the u.s. tom: conundrum absolutely nails it. michael mckee, thank you so much. ewen cameron watt, brilliant. hour, she just flat-out does not agree with ian shepherdson. we speak to the fisher woman, ellen zentner of morgan stanley. bob dall will be stopping by as well, and we will speak to cleveland. ♪

tom: this morning, the economic might of america is questioned.

in this hour, ellen zentner of morgan stanley. madame lagarde says europe can fix the italian banks. a select few, including chris whalen, disagrees. day one is so done in cleveland. ms. trump is the only one on script. the morning, everyone. this is "bloomberg surveillance." we are live in our world headquarters. i am tom keene in new york. guy johnson is in london. it was an original convention last night, and mrs. trump's speech was the highlight. guy: it certainly was. it am is amazing how many columns it generated. obama.parisons with mrs. it is going to be interesting to see how that will work its way through in the political narrative. our bloomberg to first word news, here is taylor riggs. taylor: islamic state is

claiming responsibility for an attack on a train in germany. a man attacked passengers with an ax and a knife. the attacker was described as a 17-year-old from afghanistan who had applied for asylum. the president of turkey says he narrowly escaped death in the coup attempt. president erdogan says he was -- he says two of his bodyguards were killed. forairport was taken or hours before loyalists regained control. british prime minister theresa may says her government must not be redefined by her decision to leave the eu. she told senior ministers obama administration is asking the supreme court for a second chance on immigration. deadlock blocked the white house plan to shield millions of immigrants from deportation. the administration has asked the

court to reconsider the issue once a ninth justice has been confirmed. as guy and tom were mentioning, donald trump's wife appears to have lifted some of her convention speech from an unlikely source, michelle obama. there were similarities between melania trump's speech and the one given by the president's wife in 2008. the campaign says speech writers included fragments that reflected melania trump's thinking. global news 24 hours a day, powered by more than 2600 journalists and analysts in more i am taylorntries, riggs. this is bloomberg. tom? was it was in a most -- it a most original day one for the republican convention. we will talk to margaret in a bit. let me do a data check right now , adjusted off german economic data. i do not want to overplay this, a poignante six on

s&p does nothing. nymex crude struggling. great oil analyst yesterday yugely negative on the over bu of demand for hydrocarbons in america. sterling down. i am watching renminbi because i have nothing else to put in the spot this morning. guy, what do you have? guy: the stoxx 600 down. -- a negative on the 10-year. policy inential action. it is interesting, the dollar is picking up a little bit against the turkish lira. we are waiting for a rate decision a little later on this morning. tom: let me go to some economic data. housing data -- this is a chart i have not shown in ages -- year-over-year rent, calculated

cpi long-term, disinflation, a little bit of negative rent movement in 2008. 3.2% gets you back to the yellow circle. 1999. one of the features of a little bit of inflation, but then there are other views. ellen zentner of morgan stanley changed big house economics with an amazingly quiet call on what the fed would do. she says they would not act. she reaffirms that this morning, and her team adjusts. -- he is at one .00% on the 10 year. no one believes it. ellen: he does get to 1% on the 10-year in his view. found overk i have the past few days of talking this new outlook is that clients agree that the 10 year is likely

-- more likely to go lower than higher. tom: but the distinction is -- you nailed it -- the vector, everybody is on board, but now morgan stanley is saying there will be a bigger throw rate. does that signal recession when you bring the rate call back over to the economy? ellen: yields do not tell us what we used to. the yield curve does not tell us what it used to. we are dealing with global flows. once again, the u.s. is very much the best house on the bad street, a street looking increasingly -- tom: that put prices up and yields down as well. which has the biggest impact on the 10-year, the fed or the boj? ellen: i would say the fed at this point. the tenure got down to such a low yield after brexit because investors adjusted assuming that something like brexit was just

another example of the bobbles that hit the economy. they were already slowing, and the fed would need to adjust its outlook for policy. it is clearly investors anticipating what the fed will not do at this point. ,uy: given where the 10 year is that represents a risk-free rate? alan: ellen: i think no one can say with the risk-free rate is. everything is distorted and it irks the fed. getting off of zero was the start of the fed trying to discover what is the risk-free rate for credit in the market. unfortunately, they cannot go any further at this point. tom: let me bring up the single best chart. this is on ellen zentner's call. the four-year moving average of --l gdp, mourning in america

morning in america is over there. this is before the collapse. you are down subpar even before the four-year moving average. investment, government, or is it an export issue? ellen: all of the above. government, we had the rug pulled out from under us. have hurt.caps so we have not had that source of growth. consumers continue to because as with their spending. they are keeping an eye toward balance sheets. balance sheet's are in good shape, but they are not willing leveragingnd start up again. and you have the aging demographic working against it. there is low business investment, and the dollar has had this incredible rise and it peaked at a 14 year high in january. we forget that. we are still digesting that. ?om: hans redeker, where is he

trade-weighted dollar, we take his view. he has about that she has that about flat year end, but then arises in 2017. guy: the u.s. 10 year, the yield has been falling not just for one year, five years, it has been falling for 15 years and even more in certain cases. this has nothing to do with qe, nothing to do with fed policy. i just have to wonder if you extrapolate forward from here, what is it that is driving the yield story? ellen: i think some of this goes back to basic demographics and the global economy. we have an aging economy. more, and theyve have to find safe investment vehicles for that savings. so i think that is a very

long-term factor at play here. but that is not just the only factor. we have a global economy, and investors are much more quick with those lows. the u.s. happens to continue to be the area where you want to be when you are looking for safety. changingot see that anytime soon as well. this is a very slow moving thing. these factors have been in place for some time. i would draw attention back to a chart that all share on another show -- that i will share on another show with you guys that is hair-raising. go back to 1929 on word and look at -- go back to 1929 on words and look at what that deal did. what they did for decades after , and theyepression remained low for decades. ideaguy, this is the basic

of rogoff and reinhardt. things were lower for much much longer. guy: if you look at all of this and you wonder, is that the right gauge of what is happening in japan -- is that the reggae? is what is happening in japan the reggae? you look at equity , and you see the baby boom generation putting their money's to work in the safety of the bull market. you wonder if that is the right thing right now. ellen: it is a great point. you used the word "conundrum" earlier on the show. it is a conundrum. where do you go? where do you chase that yield? it is something that gets under the skin of policymakers as well. tom: we are so messed up by the way we are in the fixed income markets. but we love this debate. ellen zentner now with morgan stanley. we will turn our attention to

cleveland, the festivities last night. can they topic, day two? margaret is keeping score in cleveland. we will do the next on "bloomberg surveillance." ♪

tom: good morning, everyone. guy johnson in london, tom keene in new york. we need to talk about the day one surprised -- it was not the guy with a bandanna, it was not this or some musician or some sitcom guy from a million years ago. it was mrs. trump as she talked about donald j trump. mrs. trump i thought was really quite eloquent coming out, then an uproar over some of her language and the idea of theft from the first lady. i guess we all do that, but here

it was maybe, as the president said, "it reaches." we were raised with so many of the same values, that you work on what you say you are going to do. >> my parents impressed on me the values that you work hard for what you want in life, that your work is your bond, and you do what you say and keep your promise. tom: there it is. you have heard the compare and contrast. that is wonderful. in terms of those claims, strongly echoing the first lady in 2008, the trump campaign said, inviting her beautiful speech, mrs. trump's team took notes, in some instances included fragments that reflected her own thinking.

me here. help is this like day one it is done and we move on, or will this linger through the mist of these -- through the festivities in cleveland? margaret: it certainly was a surprise to everybody here, and it is likely to linger into the opening hours of today's proceedings because it is going to be a while before day two gets under way. we have not yet seen reaction, at least in twitter and the from two important people, either from michelle obama or hillary clinton. that they are going to scream plagiarism. they may have more fun with the notion that melania trump wants -- there is a lot that could overtake this news today on two fronts. on the one front, this is when states are expected to go state-by-state, and donald trump is expected after yesterday's

d uprising was snuffed out to get the threshold that he needs to become the nominee. then we will hear this "make america work again" theme today. we will hear from paul ryan and chris christie. there will be a lot of interest in the speakers. tom: but within this was the uproar yesterday about the rules committee. you say maybe it was snuffed out. yesterday was a surprise. will we get some more theater late this afternoon? is entirely possible. even if it does not change the ultimate outcome, if donald trump achieves the threshold he needs to extend as the formal nominee. any of these uproar is on the floor of this convention all build on this idea that despite their best efforts, that to achieve unity it is not there yet. the degree to which that happens may be important going forward. we have seen john kasich, the

governor of the state, really not participate. public spat with him. and ted cruz -- will he endorsed donald trump or go work against hillary clinton? guy: let me ask you a question. this is from a european watching all these proceedings take place. nobody can name angela merkel's husband, or theresa may's husband if they were asked. why do we care what she has to say, the potential first lady? why is this important in terms of the political debate? margaret: this is really part of american culture on some basic level. first ladies are kind of american lore. america's does not have royalty. this is the closest you sort of get to it. in hillary clinton's case, you have the weirdly inverted

situation where the former first lady is now the presented nominee. president, elected the first lady would be the first man and the next president. -president.x ,elania trump is also a model quite beautiful, 46 years old, and he has been married several times. there are many ways into the story. every candidate's wife or husband in modern american politics is subject to fascination during the convention. tom: margaret, thank you so much. early morning for you. our coverage will continue tonight if the rules committee does not get in the way. mark halperin and john heilemann with their perspective, "with all due respect," 5:00 tonight. this is bloomberg. ♪

tom: good morning, everyone. bloomberg surveillance, from london and new york as well. i spoke yesterday with christine lagarde. one of her great themes going back to april 2013 is the slowing u.s. economy, and the u.s. need to get its house in order. ellen zentner is with us, who strongly agrees on a slowing u.s. economy. everyone out there wants the u.s. as the global locomotive. the locomotive is not doing so well, is it? ellen: i think the locomotive

derailed quite some time ago, and the track that we are now on is a new reality. if you want to call the u.s. the locomotive, it is not going as quickly as a driver as it did in the past. tom: if we look at global productivity, where the u.s. is in looking at a dynamism, we have to find, where is that dynamism, or do we just give it up? ellen: i do not think we give it up, but we have to be realistic that we do not know how long we have to wait for it. there are in increasing number of policy makers admitting that. people like stanley fischer, saying that we know the real weilibrium rate is low and do not know if and when it will pick up. and productivity has been persistently disappointing. a pickup in productivity is what the fed has predicated its forecast on for the economy.

this is something that janet yellen yellen was pressed on in a recent q&a, where implicitly in your growth numbers was a strong productivity number. tom: we will talk about this later. do you amend your fed call, given this new caution on u.s. gdp? we took all rate hikes off the table until further notice. there is no argument one can make that rates need to rise further in the u.s. ask yourself, is this an economy that looks like it is overheating? does the fed need to step in and tighten financial conditions to slow us down. the answer is, no. tom: this is stunning compared to what we heard from in shepherdson in the previous hour, isn't it? guy: the difference is fairly stark, and it is fascinating to hear you talk about productivity. we have incredibly cheap credit,

yet ceo's do not want to invest in improving productivity. it is not in their interest. how do we change that narrative? are we treating debt and equity correctly? how do we fix this? producing more debt does not seem to be resolving the situation. ellen: with business investment, we have to look at, yes, debt has risen incredibly in the corporate world, and the marginal productivity has fallen off the map and picked up only slightly, but it is because companies at least for the time being are priming the pump. for productivity in the future, you have the google's of the googles ofing -- the the world building -- guy: most companies that are using debt to buy equities -- ellen: they have been for quite some time, and now we are

starting to see that shift were investors are giving the companies the stink eye if they share buybacks and increases in debt. investors are becoming wary of that, and that will change that corporate behavior. you are correct that that is what companies have primarily been doing up until now, and it is one reason why if i look further out on the horizon, and i asked myself, what domestically can grow the cut -- can throw the economy off, it would be corporate debt. there is a massive rollover. tom: i am pushing back against ellen zentner. it is at a low. coupons. coming up on the equity markets, we get him out from under the desk, robert dold. ♪

tom: good morning, everyone. "bloomberg surveillance." guy johnson in london, i am tom keene in new york. with further deterioration over

, negativealf hour, -2 three, down to negative seven. let's get to our bloomberg first word news with taylor riggs. islamic state is claiming responsibility for the attack on the train in germany. police shot and killed a man who attacked passengers on a train knife. ax and a he was a 17-year-old from afghanistan who had applied for asylum. turkey has formally asked the u.s. to extradite the islamic planning the failed coup. kerryary of state john says turkey will have to provide evidence. from northe launches korea -- kim jong-un's regime has fired three missiles into the sea, according to south korea, which says two were short range missiles and the third might have been intermediate

range. australia, welcome turn bowl has been sworn in for a second term as prime minister. his liberal national coalition was the narrow winner in the july 2 election. global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries, i am taylor riggs. this is bloomberg. guy, i think you have breaking news. news out of the eu and the antitrust cases that the eu prosecutes. eu has just issued a $3.2 billion antitrust fine, a case against the truck makers in europe. it is potentially facing hasrate fines, but man avoided a fine for cooperating regulators.

well.r all find as tom: guy johnson, thank you so much. said shut up, stay in the market, have courage, and everyone has been silenced again. he has decades of experience at nuveen, tells people to call him down and -- to calm down and have patience. one long-term trend, a two-decade trend, a little bit flatter, but the parallel nature of the last 10 years on inflation-adjusted dow is remarkable. basically you buy stuff and you hold onto it. is that a winning approach? bob: generally it is it we have been a few tough years, post the great recession where we had the recovery, and we are flat because earnings have not gone up.

we need better earnings for stocks to go higher, and we are getting a little better. tom: we are thrilled to have you here today with ellen zentner from morgan stanley. the morgan stanley call, low yields, high bond prices, how do you translate that over the equity market? bob: slow earnings and high pe 's. that is where we are. i do not like the multinationals because of their exposure overseas. we like companies that get most of their earnings over here. growth here in the u.s. is pretty slow, but it is better than most other places. best house in a bad neighborhood. guy: during that period you described that we saw on the chart, how big has the corporate balance sheet become? bob: there is no question it has put up a bunch. a lot of companies are still under levered, so if i can

borrow money at essentially zero to exaggerate and make the point and do something smart with it that will increase earnings, including buying back my stock, why wouldn't i do that in a low interest rate environment? guy: is that what the problem is here? bob: i am not so sure about a problem. i like companies with free cash flow that can invest in their business and grow some more, but if they are buying back their stock, i will take it all day long. tom: bob doll, the dow is at 18,500. that is not a problem. that is good for america, right? bob: i would agree with that. this notion that stock prices are up and something is wrong, or stocks are expensive, you need the earnings. you read theid chapter in economics 101? there was a token bob doll chapter. ellen: is it true that we can

say it is ok, shouldn't the u.s. stocks be more expensive if we are the best house on that block? bob: no question. part of the rally in the last few weeks, not only post brexit, but also interest rate structure around the world is down. that means pe should be higher. parker, our chief equity strategist, feels the same. bob: the s&p 500 has a higher yield than the 10-year treasury. nearly two thirds of stocks have a higher s&p. -- have a higher yield than the s&p. tom: dividend growth -- is that the equivalent for a higher yield right now? bob: no question. if i can get dividend growth on top of it, that is icing on the cake. guy: where does that take us? kind of back to 101, as tom was talking about earlier, we did

not grow up in a world where -- how does this work going forward? does that continue to be the story, that it is a bond market that drives up capital gains and the equity markets that drive yield? bob: great comparison. when you get a stock market selling higher, 75 basis point higher than the 10-year treasury, i will take that all day long. -- that can go two ways. i think stocks are the only game in town relative to my other choices. absolutely, they are expensive relative to history, but i cannot buy bank stocks in history. i buy them today or something else today. stocks are not great, but -- guy: within the markets, our income stocks overvalued -- are

income stocks overvalued because of the nature of the way we have to invest in a low bond market world? bob: my view is unless you believe interest rates are going lower from here, you begin the shift away from income toward more dividend growth. that is to say the dividend yield stocks are expensive relative to the ones that do not pay any dividend, and look at what has happened in the last few weeks off the brexit bottom. we have begun to get some free cash flow, low pe, low payout stocks. tom: chris whalen is going to come out in a bit and we are going to beat him up about american banking. on a relative basis, they are dirt cheap and they will deploy cash, right? bob: they are. tom: i get no enthusiasm here. bob: if they were earning more relative to the cost of capital and return on equity, i would feel better about them. tom: i want to congratulate you

right here. you have taken all sorts of criticism. you and a few others have absolutely killed this. bob doll and ellen zentner. there is not enough quality at this desk. coming up, christopher whalen on the american banks, and a small issue about the future of italian banks as well. ♪

everyone.morning, from london and new york, tom, guy johnson as well. right now we have a really special moment. chris whalen on the set with us. robert doll of nuveen, and ellen zentner of morgan stanley. to rip up the script and engage

the debate, chris whalen just put out and twitter -- put out a twitter that he respectively disagrees with ms. zentner. why can we have one rate increase and frame it as not as sector, -- as not a vector, but we just want to get off the zero bounds?-- off the zero ellen: in december they really got lucky because there was a slingshot effect of job growth coming through after having been delayed over the summer because of the global meltdown, and it allowed the data -- the data allow them to get that rate hike in in december. we do not have that kind of momentum right now building for them to convince markets to raise rates again. tom: bring up the chart on the surveillance wall. the idea here is that where the rates have been, the blue box is the length of duration of low rates.

it right now is absolutely unprecedented. chris whalen, this is completely artificial. so if they raise rates, what is the "so what" given the morgan stanley call on gdp? you arehe construct using for thinking about interest rates is wrong. low rates are driving deflation. we have had it for 30 years. there has been a secular use of low rates. it is taking income out of the system. we are looking for credit creation. it is not happening. meanwhile, we are taking money away from grandma, and we are surprised that the demand is weak. i think we need to rip up the script and stop thinking with this construct because it is wrong. guy: what would happen if we raised rates by 250 basis points? what would that do to retiree spending? chris: you do not need to do that. you need to raise rates gently to try to slowly inject income

back into the system. insurance companies, pension funds -- how many times do we have to talk about this -- are dying. banks are not earning the cost of capital. hello. you cannot keep rates too low for too long. we are ignoring those key classical insights, i think to our detriment. guy: so walk us through what you think the rates should look like . would it function if the fed acted in isolation? you still have the boj doing what it is doing, potentially the ecb doing what it is doing, and the bank of england potential he cutting rates as well. the japanese -- chris: the japanese know that it is bad. you have a trap, all of the industrial countries are essentially caught in a deflationary trap where they

think low rates are somehow going to result in credit creation and expansion of demand, but it is not happening because we have been pulling tomorrow's sale into today for half a century, and we have run out of customers, in part because population growth is so low. tom: you have to have a balance sheet adjustment. we are simply afraid of taking losses on eight years of financial crisis. ellen: this is something that gets under the skin of monetary policy makers, and many would agree with you. but at the same time, janet yellen follows a prescription of those asymmetric risks of when you tread -- when you are treading water, as we are in the u.s., or as the fed views it, you have to be careful -- you have to be careful as you raise interest rates. tom: bob doll, sympathize -- bob

doll, synthesize this together. hamilton, you did not have to go to broadway to see it. the idea here is that we are afraid of a balance sheet adjustment, so we are expressing it through the -- bob: we are afraid of our shadow. who died when the fed funds rate went from zero to 25 basis points? who willed eye when he goes from 25 to 50? nobody. we need to get on with it. itself,ollar behaves that gives the fed permission to move forward. tom: ellen, if we get their call, the dollar destabilizes and strengthens, right? ellen: there is always that feedback loop, and it can be a negative feedback loop. we saw the fed pushing on rate

hikes all of last year. what gets past the negative feedback loop? stronger growth. this has been the case in every tightening cycle, that they have been ever -- they have been able to get over that feedback top. chris: all of the factors policymakers are looking at today have changed so dramatically and are so unstable that i would argue that view that says lower rates, higher growth, higher credit creation is not going to occur. thes like einstein said -- evidence of insanity is when you do the same thing over and again and you do expect a different result. we have to up the playbook and think about how we restore income. whether we talk about banks were investors or corporate, the big problem is, our capital is revenue. that is the conundrum that faces everyone in the industrial world. thing ise unfortunate that policy makers are tearing up the playbook, except it is in the opposite direction of what you're hoping for.

going back to people like stan , iter -- stanley fischer does not make sense anymore. to paythe fisher we need attention to is irving fisher. tom: guy johnson, what do you have? day ford wayshe raised the day, ford wages so people could buy his cars. how does the corporate sector fix this problem? is it by raising wages? bob: i think wage rates are going to move up. we have employment under 5%. employment gets under 5%, wage rates go up. tom: this is what we love, a synthesis of economics, finance, and investment. we do that with chris whalen,

bob doll, and ellen zentner. we will continue with this discussion worldwide. futures negative seven, the yield 1.55%. troubledf the shock of german numbers earlier today. from new york and from london, a beautiful london, this is "bloomberg surveillance." stay with us. ♪

tom: good morning. from new york, from london, tom keene and guy johnson. let me do a forex report. -- 106.10. 105 i am watching the renminbi as well, 6.69. that has been a migration weaker in the renminbi over the last number of weeks. guy: coming up shortly, "bloomberg ," david westin with alix steel and jonathan ferro. definitely front and center is the 1% 10-year yield call from morgan stanley. we will also be taking a deep dive into tech, particularly looking at apple with gene

munster of piper jaffray. we will be talking with the cfo, dominic caruso, of johnson & johnson in just a moment. tom: bring me up the surveillance wall, if you would. this is the bob doll theory. it is shut up and buy quality. we are going to bring the chart at right now. the orange line is what you did not do -- wait, it is also what i did not do -- which is j&j was a dog for a number of years. you acquire the shares, and it outperforms in this case the s&p. bob dole, it is really not that complex a theory. bob: if we step back and look at the company's growing earnings, you can win over time. i sold a little too early. tom: buy the band-aids. bob: stuff you know that is

growing that you are using more of, that is not a bad theory. tom: there is a comfort to buying stocks, and everybody who does own stocks is feeling pretty good right now. within the tensions we talked about in the last 20 minutes, how do we feel good for all of america if we get a's in her economy -- a zentner economy, 1.6% gdp gekko ? it is occurring at the low end of the pay scale. we have had this incredible run-up in financial net worth benefiting the upper income group. the lower income groups are where we are creating jobs and good income growth for them. i think what we have to remain focused on is getting the middle, lifting the middle, where we have not been creating those middle income jobs, and where even though we have had a nice housing recovery, we still have negative equity in the

u.s., and that is hurting those people. so i think when i think about the consumer, i slice it by income group, and that is probably the way somebody looks at it when investing domestically in the u.s., when you're looking at consumer discretionary income roup matters. guy: can i just jump in and talk about j&j? it will be an interesting example here. j&j, topline stocks move as we start to see more people employed, but they will have to pay their people more money. does one offset the other? a realthink that is horse race, and some companies will and some companies will not. that is the fine line. when you have slow revenue growth, you cannot take a lot of cost pressure without having bottom line problems. that is where stock selection comes in. in j and case, they will struggle. the revenue growth is not there. power, ands pricing at the same time is able to raise wages? bob: very little pricing power.

you had to do it on unit growth. take a look at do it yourself retailers. we talk about housing doing reasonably well. people who are not buying a new house or fixing up their own house -- are fixing up their old house. chris whalen, we do not have much time left. madame lagarde yesterday said that the eu can fix italian banks. i was going chris whalen does not agree with this. what does the italian bank -- what is the italian bank solution if politically the european union cannot come back to some form of agreement? chris: the solution is new capital, not just debt equity swaps. it has to come from the states. -- germans have to remember

we were willing to bailout lehman brothers. we were willing to bailout aig and citigroup. had we not done that, we would be in the 1930's. i think the germans need to take a lesson and realize there are times when you must nationalize and monetize. they need to do that now. if they do not, we will have a surprise one morning. ellen, thank you so much. she will continue with us on radio. robert doll, thank you so much. whalen, we will see you in doubt 20,000. 20,000.w this is bloomberg. ♪

jonathan: goldman due to report earnings within the hour. viewedconnection loss shares of netflix plunging after

subscribership felt away three-year low, fueling concerns about their future growth. alix: veronica trump -- melania trump tells the world about her husband but did she use her own words? jonathan: for our viewers worldwide, from new york city, i am jonathan ferro alongside david westin and alix steel. the action happens after markets closed. alix: a little bit before. quite a night in cleveland at the republican national convention. we do have earnings from netflix, ibm, and yahoo!. david: johnson & johnson just came out with their quarterly results, topping estimates and