bloomberglcome to businessweek. why the irs is demanding $2 billion from caterpillar. and the interview with the san francisco fed president. finally, what went into making the sign of the summer. it does not mean we will talk about justin bieber. all that ahead on "bloomberg businessweek." we are here with megan murphy. let's talk in the politics sector. heard donald trump was not

going to touch social security. turns out there are going to be a great deal of cuts. this is going to hurt some of the people that supported him. is a perfect issue to look at what he said on the campaign trail and promised versus what is actually happening. is partd be clear this of a budget that is unlikely to perceive. you hear a lot of rhetoric about disability insurance and disability benefits, being something that is subject to fraud. when you place it out, looking it out, look at this, a lot of the areas that have the highest proportion of disability recipients is counties trump carry. that is because so many people who claim disability benefits

are workers forced out of manual labor type jobs. coal, tobacco, textiles. those are very taxing jobs. people have used disability benefits as a bridge to get affordable health care. of the 20 counties with the highest share of adults benefits,disability 17 voted for trump. one of the administration -- what is the narrative the administration is going to try to communicate? it will be up to representatives to make the case these cuts do not happen. when you look at the compelling logic of this, it doesn't stand up in terms of the fraud is so prevalent that it accounts for this level of what is called disability insurance manipulation. it is important to point out in many cases it is used as a

bridge to medicare. for twoualify for it years, you can go on medicare. root and cause of the high numbers is frankly the access to affordable medical care. access tonot get affordable medical care if they are not employed, have injuries, or are sick for long times. them so manyays on of them have used this route to get into medicare. oliver: i wonder how the representatives from those are they trying to get ahead of the budget plan? are they saying, pump the brakes? megan: there is one thing to say about older people. they vote. the turnout in numbers that are higher than millennial's, higher that age cohort of

30-49. that is why social security has always been a lightning rod. among conservatives, republicans who believe in less government, social security and cutting back the benefits is core to what they want to get done. it is one of those entitlement programs, if you scratch it, wait until you see the people who care about it rear their heads. story aboutature caterpillar. what did you find to be the most compelling angle? megan: i am from illinois. long they ran an elaborate tax scheme out of switzerland, and i love a good whistleblower story and this is one of them. oliver: for those details, we talked to a reporter in chicago. you talk about one

individual, and accounted at caterpillar. he is the center of the story. tell us who he is. >> he was a tax accountant, cpa. he has a law degree. joined the company in 1992. he opened caterpillar's first overseas tax office in brussels in the mid-1990's. then he went to geneva and work there, and then came back to the peoria. -- by around 2007, he started telling his losses and offshore structurehore tax in geneva might run afoul of the law. that begin five years back-and-forth which ended in him filing a whistleblower report.

he later settled with the company and they parted ways. megan: there were two bank sets of books for the company. one for the public. there was another one internal ly in which bonuses were based on numbers. inse two ideas were conflict with one another. >> this all came out in a hearing at the senate, permanent subcommittee on investigations. shifted profit allocations to switzerland, they did not switch any parts making or parts handling. the inventory was mostly handled riathe u.s., either near peo or other warehouses.

the reason for not shifting that, there are business divisions where managers are incentivized within that division. if you start moving their work to another country, they could stand to lose those bonuses. that wouldn't be very good for the managers. cat continued to pay those people based on what they called accountable profits. this came out in the report by the subcommittee. while at the same time, the public books allocated 85% or roughly that of parts profits to the operation in geneva. oliver: this is the discrepancy he dug up. what was it about his memoranda, the many pages, that brought something distinct and worrisome enough to the irs to where they revisited their own sort of approval after several audits? what made them go back and say, something here is a mess?

>> we don't really know, because the irs does not talk. we don't know exactly what he gave them. we do know he kept years worth of the emails. his main problem with the swiss tax structure was the tax law requires -- when you do a restructuring of this sort, it cannot just be for the purposes of lowering taxes. it has to have some business purpose, some economic substance is the term. of circuit a bunch court decisions and came to the conclusion the tax structure did not have economic structure. cap did. he did not think so. with the united states

has to lose by not being a leader in climate change. tell us how you navigated the new surrounding the paris climate accord. >> we knew it was worth writing about. the consequences of pulling out have a lot of implications when it comes to business so we decided to make it the cover story. oliver: it is very striking, but also very straightforward. >> we did not know exactly with the decision was going to be, but we knew it wasn't looking good. what the princes about is the consequences of leaving the accord. i like the fact you have very little text. you wanted to look like, we are standing alone. classic iconography of worst-case scenario climate change. smog and rising sea levels. doing it in a quiet, dark way. we didn't want to be too specific but wanted to get

straight to the point. liver: up next, the gate keeper for one of president trump's most trusted cabinet members. ♪

oliver: welcome to "bloomberg businessweek." a former staffer and lawyer -- this is aust of story you have about a little-known figure in the administration. inat is margaret peterl who works with secretary tillerson. become one of the most influential figures in the

administration and certainly one of the most powerful. she has become rex tillerson's most trusted aide. where we have seen her influence lately is on some big hiring decisions. the head of policy planning, she brought in the guy who is leading that. she introduced rex tillerson the man who would become the deck repair he -- deputy secretary of state. probably know more about secretary tillerson than me. he seems like an old-fashioned guy who gives his trust out, not exactly hand over fist. peterlin was identified to help shepherd rex tillerson through the nomination process and confirmation with the senate. she quickly gained his trust their. this was a time when she was

helping him navigate his financial disclosure form. there were a lot of ethics concerns about how he would divest himself from his financial stake in exxon. she also managed how his response to senators would go. oliver: let's talk about the crux of the story. it is causing some ripples throughout the defense department. tell us what is happening internally. >> there are so much happening at the state department, so must form oil. i tried to answer the question, is it rex tillerson or margaret in as a team keeper? desmond style his

from exxon where he keeps a tight single. this creates the impression he is isolated and clijsters -- cloistered. oliver: there are a lot of people there. what do they want tillerson and peterlin to do differently? when you go into a meeting, it feels like you are siri. a question and expected to give a response. people say, if they are going to win the hearts and minds of the state department, they have to have more of a free flow of conversation. more of a back-and-forth. politics, isis. while world powers are getting closer to defeating the group, the future of syria remains unclear. your team and the politics section looks at what is happening in syria and the

ongoing turmoil and what it could mean in the long run. how did you choose to look at the situation right now? matt: we have been talking about the fight to rollback isis for a couple years. now that they are basically surrounded, their capital, the capital of their self proclaimed caliphate is surrounded. they are being pushed increasingly out of territory. they are surrounded by some of the strongest military forces in the world to read the russians are there. the turks are those five and of course the iranians -- the turks are close by and of course the iranians. isis not a question of if will be defeated but one. and then the bigger question is, who controls what is left of syria? and how much of a vested interest does president trump feel he has to stick with the post isis plan?

stick toe pull back in campaign promises not to engage in a wider war? oliver: let's start with those baseline comments. the first thing is crushing isis. president trump has phrased it different ways. as you point out, where president trump has not quite vocalize much on is what happens after. you say he doesn't want to get into it prolonged war. how can we interpret that as to any kind of move? interesting pivot that seems to be happening here and the question and tension right now, if he is going to it here to the campaign promises he made about not engaging in a wider war two/isis, to work with --he usedd to vacate - the example of the war with iraq as an example of a policy gone

bad. when he was in saudi last week, he pledged to gulf allies to help rollback iran. iranian influence across the middle east, across the persian gulf. in syria, rolling back iran means rolling back assad who is backed by iran and russia. begs the question, how do reconcile with what he said on the campaign which is not to engage in a further struggle? he has been increasingly clear iran is not the bigger issue, especially if he is trying to make deals with his sunni allies in the middle east. up next, the new way to control inflation. french ex-pat who quit

his job to hand out political leaflets in montréal. this is bloomberg. ♪

oliver: welcome back to "bloomberg businessweek." you can also catch us on the radio. a.m. 960 in the bay area. and in london on the bloomberg radio plus app. the san francisco fed president centrale can help the bank and improve its aim. we are talking about its target on inflation. inflation.e about that was the approach you took? >> i talked to the president of the federal reserve bank in san francisco, john williams. he put out a paper speech on the

idea of highest level targeting. you know the federal reserve has an inflation target of 2%. that the vastelow majority the time since that target was set. is, should we be allowed to go about that, above 2%? his theory is, yes, what you should target -- instead of being the rate of change, the level of prices. a consumer price index, the absolute level of prices. imagine if you had inflation running at 1%, but you would be getting further and further behind the expected trajectory of prices. strategy, awed his you could do a little catch up. until youo above 2% got back onto your intended trajectory. oliver: how does aiming for a price level, which would then provide some degree of

flexibility if you go over it, is it just a function of where you move the goalposts to some extent? >> is a tricky thing. rune is a risk here if you below for a long time and then you said, we are really going to catch up now, you could have really high inflation which would scare the pants off of people. fried markets. interest rates would soar. businesses would be disrupted. he did not want that, obviously. he is a sober central banker. but he says is we have a problem what he says is we have a problem. when you are near the lower bound and interest rate are close to zero, they cannot go any lower, we have seen the fed to unconventional monetary policy. a way, an additional

tool for the fed. if you convey to markets that you are setting a level price instead oft, inflation rate, everybody will understand you are just tried to get there. this is where we are trying to get. believe us, folks. this is not just talk. we are going to let inflation run a little high. the market has gotten so used to inflation being low, they don't even believe it when the fed says they want to percent. percent.- want 2% oliver: we have more on the strategy used to leeward french expatriate voters. showingde a very strong on the french presidential elections. now, five weeks later, there is going to be an election in

the legislative states. essentially, their version of our congress. it is very important for him to win a majority, which is by no means assured. he has really exploded the political system there. there are two long established parties. the republicans, and the socialists. there is also of course the front nationale. he has created the brand-new party. inhas to get all his people office. geter: this boils down to policy done. the way it works in france is slightly different. he can encourage people to go out and apply for these positions. 19,000 people applied online.

526 were selected. his selection committee made a big effort to come up with new people, so 50% of the people had any have never political office. 50% are women. it is a very diverse group. oliver: is that because he wants to sort of solidify this party he is leading? is it because he wants to appeal across the aisle? what does he accomplished by bringing in that diversity? >> he certainly wants his own people. he sincerely believes in citizen engagement. he wants new people in the government who can bring new ideas and refresh the system, which many people has become -- feel has become sort of stale in france. this brings us to an interesting fellow.

he is the son of leftist parents. his father was a journalist for communist newspaper. his mother was an organizer for the french transit system, which is constantly on strike. he decided at the age of 50 to quit his job to campaign for the macron movement. the other interesting thing is he is an example of these extraterritorial congressman. he lives in canada. he has got canadian citizenship as well as french. if he wins, he would be one of 11 people around the globe who represent the 1.3 million x-pats, french ex-pats who live outside of france. how to make etf data

purr. we will explain ahead.

oliver: welcome back. still ahead, white london is why london in banking on a boom, not a bust after brexit. and how justin bieber helped repel a song to the top of the charts. top ofel a song to the the charts. all that is coming up. with "bloomberg businessweek" editor-in-chief megan murphy. let's talk about companies. interesting purchases by chinese

companies moving into the health care space outside of china. i feel like it in with the broader themes. chinese companies looking for ways to diversify. this is a sector that has been really hit hard by over demand, over indebtedness. what several groups are looking at now is moving into the sort of health care market, beauty market. there are two big reasons for this. one, there are significant incentives for them to invest in land and used for health care services. the second thing is they can also put up residential towers which can attract a higher premium because there is close access to health care. this is a company i have covered a long time. the rise and fall of noble has been interesting to watch. once asia's largest commodities

trader, the boom and bust has affected them. this has been particularly interesting in that they have had negative re-church -- research come out, what somewhat described them as a short seller play. tale of did they move away from the markets? did there things they differently than other companies? this was named after the famous book, "noble house." by --d theer: the basically had same issues facing them, macro wise. it is sort of the way they are kind of storing things. there were certain things happening very unique. there is no mistaking that.

megan: i am not sure we have heard the end of noble group and what happened with their accounting and finances. the company said it would not be able to secure further indebtedness without tapping into some of the physical commodities. that market has seen such a huge trailing off as china -- even though china is still growing robustly by comparison, it is going a little slower. that sector has been so hard hit. that super cycle stopping, the end of the gravy train for some many companies including noble. changing regimes to read in a future story, a good piece on london. this is an important story. countert is a intuitive story. i am a u.k. citizen. this is the side of the debate you did not hear enough of every there was so much talk -- i want

to be clear, so much talk about immigration and fear. european bureaucracy. there wasn't as much focus on sort of the cadre of people, innovators, entrepreneurs and executives who made the case actually brexit would make england much more attractive to investment by some companies. it would allow technology helps to be created. it could make it a much more competitive center tax wise. by doubling down on some of the things that made it such a globalist place to begin with, it is so attractive that they could exacerbate in some ways post-brexit. theer: a great take on my situation. >> you write about the city of london and whether it is going to survive. talk about the tacky took on this.- tack you took on

>> we are now a year past the brexit referendum. there are still a couple of years to go before an actual brexit occurs. one of the things that has economy,s london's international investment in london, and london's attractiveness as a global hub is certainly not completely undamaged but still very significant. if you walk around here, there are skyscrapers under construction. big tech goodies like amazon and big tech companies expandingn and google their presence. the article makes the argument london has some bumps ahead, but with the right mix of policies and ideas, it can survive and thrive. >> you write economic apocalypse is nowhere near.

just think after world war ii and how it had to rebuild itself. the rise of canary wharf. it has become a big part of london and successful. >> i think that is important historical parallel to look at. 30 years ago, 40 years ago, london was nothing like the help particularly of finance it is particularly of finance it is today. that had to be built. all of which is to say, if it can be billed once, it can be built again. there are huge challenges, there are ways to go forward from the brexit result. >> talk about the policies. which people are thinking might take london, keep it successful, keep it viable, keep it is a place where people want to do business. what kind of policies are people talking about mighty necessary? >> a big one is taxes.

the corporate tax rate in britain currently stands at 19% and is headed down further. that compares to 30 plus percent in a lot of countries including the u.s.. another big one, and something governments are eager to talk about, is infrastructure. if you compare london to new york, london is a city with a very modern airport in heathrow. a very modern underground system that is being dramatically extended. there is more of that to come. those are also big things. one, isr one, the big going to be toughest for politicians deliver. that is immigration, making sure businesses can hire the right people they say they need. that remains a thorny issue. >> is such a part of london's culture. how people like to do business from london, not necessarily a great place to do business in,

but it has become a place where people are all different countries like to funnel their investments through. >> yes, that is right. i have joked if you go to a there might york, be 19 americans and one canadian. where is in london, you could easily have 15-20 passports in that room. this is the most global city in the world. the question is, what happens to that. currently, the immigration system is extremely open if you are european. if you are from elsewhere, the u.s., japan, china, it is more stringent. what a couple more liberal exit brexit supporters have suggested, the system should be liberalized so there is an equal basis on which people can be evaluated. oliver: up next, how norway became an electric car in a and

then, tidying up the final frontier. ric ar mecca. and then, tidying up the final frontier. ♪

oliver: welcome to "bloomberg businessweek." runs ony, the economy oil and gas, but not the cars. happening in norway and why are they pushing to the electric vehicle? >> it is a combination of incentives that have been around and cars like's viable secondming cars for people in the last five years or so. norway, with a population of i million, has more electric cars on the road than anyone besides the u.s., china, and japan. oliver: they have a higher number of cars per population.

what made it amenable for them to get ahead of the curve and push for incentives? >> a number of things that make it hard to replicate. norway has a lot of cheap hydropower renumber two, vast oil wealth that the government uses to subsidize electric vehicle purchases for people. electric vehicles have been exempt from sales tax, the special car levees that can cause as much as 100% on the price of cars. oliver: if you are buying a regular car, it is sort of a double tax. you buy one car for the price of two. perks, electric cars don't pay tolls on most toll roads. town further out from

all glow where one in every five cars is electric because the told to get in or out is $18 u.s. oliver: is it just about the fact that it is a smaller country, fewer people, easier to get around on a battery? what is there that we can take away from this and applied to countries that need to sort of get moving on the electric and nonfossil fuel omission cars -- emission cars? >> the biggest piece aside from tax breaks is the infrastructure. in addition to make it easier for you to pay for, they are making them easier to use with the total exemptions, they can use carpool lanes or bus lanes whenever they feel like it. also, the vast majority of municipal charging stations are free to fill up. oliver: you have an example how

convenient they have made it, transforming into a giant charging station. >> a 14th century fortress, most of which is sort of permafrost ed underground, which used to be a place for soldiers to hideout, is now an electric car station. oliver: also ahead, cleaning up the space trash. companies looking to clean up the junk orbiting. in do pretty cool profiles things going on in terms of cleaning up space. >> one of the things about space is it is getting to be a crowded environment in terms of pollution. there is a lot of debris that is circling the globe at high speeds. that can cause a problem if you are a satellite operator and

your satellite happens to intersect with one of these objects. megan: it has been around for decades. are there a lot of companies that are looking at the issue of clearing out that space junk? >> there are some come out but it is not an active effort at this point. we are talking about an issue, it has gotten worse in the past decade but the same time this is not something anybody sees as a acute cute -- a real problem for 10, 20, 30 years. it is a long-term issue that companies are starting to think about, but it is not getting a full research push. oliver: there were so many problemt sort of solving options here, which means if there is an incentive to do it, there must be at the end some money behind it as

well. tell us what seems like the most promising solution. >> there are a number of different approaches. this problem has gotten creative thinking. grandsons at texas a&m among them. students at texas a&m among them. you can't launch a satellite to solve this problem. it is too expensive. what is going to happen probably isn't a the long-term there was going to be a permanent craft where you can maneuver it. one companies the can about applause but engine -- a plasma engine. you can do multiple missions in space where you can drive the craft toward larger objects. this is where this comes from.

space-basedind of a activity, not one where you see a lot of different satellite launches. a roomba inof like space to rate is about getting it to burn up in the atmosphere, that is the end game. get it so it degrades in the atmosphere. the real issue is, how do human new and rendezvous with this junk? the larger the object, the more incentive there will be. probably be more money there will be. the bigger the object, the higher the risk of a collision. i think the initial focus is going to be on the large, old satellites that are really large. payingwho is going to be

for it? is it the government? >> it is probably going to be private companies under some u.n. type regulation about what you need to do with satellites when they reach their end of life. for theite historically last 60 years we have been doing it, you put it up and there are no rules about what happens when it is no longer viable. i think we are going to see a change where if you are launching, you are going to have to have a plan so it does not become more junk in space. oliver: up next, lessons and back testing.- in cats cand based on make the fortune. ♪

oliver: welcome back to "bloomberg businessweek."

you can also catch us on the radio. am 1200 in boston. 960 in the bay area. in the markets and finance section, if you want to beat the street, you might want to consider your pet cat. you had some fun with a cool story that expands on your coverage. factor.about the feline >> it is the new hot thing. the premise is a little bit silly. someone builds and investing strategy that is very quantitative trip, you build in all the rhythm, -- an algorithm, you have some rationale. my intuition was people love cats.

they are on the internet. people love cats. i built a trading model that in thatpanies with cat order. i ran a five-year back test on it and it returned 800,000%. you are looking at a newly minted billionaire. >> how do you explain that? it sounds random. and theyed to quants, said, it really doesn't work. to explain the crazy returns, what happened was, i picked up a caps.of micro there was one company that went pennyrading less than a

to two cents. they were micro caps, but it is nothing you can actually invest in. putting it under the microscope, which can be illuminating on the flaws involved in methodology. what are those sort of cracks within the methodology you guys went to exploit and bring to light? >> the first one is the idea of economic intuition. there is supposed to be a reason why it works. there is no economic reason why a company with "cat" in its name. this is where you go in and manipulate the data to make it look better. wild, itrun it in the doesn't actually work. for an example of that, i am a

a dog person. when you run it with dog, one of the companies it picked up was called junkie dog. all the dog companies did not do well. , which workedcat great. economic rationale is where people get into trouble. you might say something like a value stock or coveting with a certain type of alex sheet is an economic intuition. -- of balance sheet is economic intuition. what you are saying is these are not always well adhered to. >> i am glad you chose value as an example. it is called overvalued when you make things look really good.

no matter what metric you choose, but the sales, anything will make the value factor worker with cat -- by you factor work. work.ue factor cap, itnge the market does not work. which means it is not robust. i picked up on something random. oliver: bilingual remixes and collaborations with justin bieber. those are the ingredients of the song of the summer. >> tell me the most popular song in the world. it is by two puerto rican pop stars. they have been around for some time but they have never had anything like this. it was already a pretty big hit on its own and then justin

bieber discovered it and did a re/max that has some crooning -- did a remix that has some crooning. that number one anywhere has a music chart. it is already clearly the front runner for song of the summer. oliver: this was a popular song before. it is about taking it to the world stage where the artists are getting a much bigger profile. >> we are seeing the music industry, you have an international pop song that gets adopted to a local audience. i think we are going to see it more and more. signedhave these artists throw the world. there may be a rapper in france who does well locally. all of a sudden drake drops a verse on his album and then he

is big everywhere. there is synergy record labels are interested in. one direction is another big pop group. they have a colombian singer-songwriter who has done a re/max. a i think -- who has done remix. status is the first language song to hit number one in the u.s. for a long time. it is interesting considering we talked about it from a consumer perspective, the importance of the latin american listener or customer. >> it is kind of amazing when you think about it. we were talking about it in the newsroom in l.a. i was surprised macarena was the most recent. a lot of the big hit makers have been in english. the ricky martins.

it is very rare for a foreign language song to hit number one. oliver: more bloomberg starts right now. ♪

>> welcome to "the best of bloomberg markets: middle east." the major stories driving headlines this week, the gulf has been rocked by a deepening spat between senior nations. qatar's simpthi remains -- the remains under -- foreign reserves falling below $500 billion for the first time after 2011 after the