alix: north korea threatens guam and president trump warns of fire and fury. equities drop. fixed jumps. safety ofs into goals. disney cuts ties with netflix and embrace of cord cutter. welcome to bloomberg daybreak. i'm alix steel alongside david westin. today.n ferro is off it is your safety check of the day. s&p futures off by eight points. a nice boost. dollar-yen down .4% and gold getting a slight bit up by six dollars an ounce. david: the war of words between united states and north korea escalated yesterday with trump warning the north koreans of dire consequences if they kept up their threats. >> north korea best not make any more threats to the united states. they will be met with fire and fury. like the world has never seen.

threatening,ery beyond a normal statement. senator john mccain cautioned on the importance of a president talking about things they weren't willing to do. i take exception to the comments because you have to be able to do what you say you're going to do. i don't know what he is saying up i have long ago given trying to interpret what he's saying. we are joined by kevin cirilli. reporting from hong kong is our colleague who leads our coverage of east asia. i want to talk about what the president is saying in new jersey yesterday. do we know whether general kelly said at this in advance? -- invented this in advance -- invented --that --

vetted this in advance? administration who say that with regard to military strategy the president is making good on his campaign prominence in the sense that he is not looking to broadcast or forecast what his military strategy would be and that is why you are seeing him embrace this level of unpredictability. yous very different to say are going to be unpredictable on the campaign trail versus what you do when you are in office. there is no question that all of the president's ability to deal with north korea goes directly through china. china's economic relationship with north korea in terms of trade is very much at the forefront and directly tied to this dictator's ability to get any type of nuclear ambition. that's why you saw over the weekend the administration looking to capitalize on the notion they had succeeded in

uniting the world including china and russia with u.n. sanctions. david: you have taken us to east asia. let me quote something that newsweek dug out. it's what president truman said right after the bombing of hiroshima. if they do not accept our terms they may expect a reign of ruin from the air the like of which has not been seen on this are as -- birth. eerily similar. how is this being received in china right now? have been pretty quiet today as far as their reaction is concerned. over the past week they have made it clear they would support the u.n. sanctions. they kept the oil lifeline which really keeps the regime afloat. that is still going on. china doesn't want north korea to collapse.

they have strategic interest to keep a buffer state. they do want to calm down tensions. they're asking both sides to take a step back. how do threats of military action by the united states fit with the un security council resolution that the u.s. the weekendover with china and russia on sanctions back of? >> china has dramatically the weekend with china and russia on reduced its imports from north response arguably to what we have seen with this dictator. that was a big win for the global community and for the administration getting russia and china to support you and sanctions. this is a situation where russia and china weren't even labeling the north koreans use of icbms intercontinental ballistic missiles as such. they said that didn't even qualify as such.

this is a stronger step forward. this rhetoric coming from the administration on the fire and fear he is a suggestion that one military action could be the way should north korea not take a look at itself and stop doing these missile tests. david: thank you so much from washington. alix: that body language. david: i thought it was really profound. i haven't seen him all clinched up like this. it was enough to give the markets some pause yesterday. the riskier end of asset spectrum. most of the initial reaction to the comments. futures suffering a notable decline. that has carried on to today's session. joining us is david kotok. >> i think so.

accidents happen. bluster rises. you have people not talking to each other, threatening each other. risk of threat rises. markets don't like this. economics don't like this. there are so many dimensions to rising militant rhetoric. i think anyone who is fully invested now is taking on great risk. we raise cash reserves. it has been a great ride in the stock market. we have a layer of gold stocks. and you take precautions. you change. because we don't know how this dysfunctional chaotic washington gives us no comfort. it's a constant surprise. alix: what's interesting is we have charted what happened in the korean won as well as the

s&p during previous tensions. this was 2013. you have north korea getting more aggressive and detonating a nuclear device. a little bit of a selloff in the s&p. this is 2015 on in order that the army is going to prepare for war after exchange of fire. following a s&p bit. we all recovered. is there risk about taking this from market perspective to seriously? >> what do you do with an unfolding narrative, no numbers. it's narrative. and the narrative is playing day by day. yesterday when we had some notes to talk about what we were going to talk about, one of those nodes was inflation in the fed. who knew 24 hours later the top story would be a rising more risk? how do you deal with the unfolding narrative? you take defensive structures

thenatch what happens and you decide are you going to redeploye? market decisions are one thing. the same time, this is serious stuff. this is serious stuff. shooting war is serious stuff. as an investor how do you tell which is a temporary summer squall as opposed to a force three hurricane? we saw it announced when miller was going to convene a grand jury. there was immediate selloff in stocks that came right back and ours. how do you tell which one is going to last? >> the truth is, you don't know. thing, i find it easy when i talked to my clients , they said what do you think we should do?

if you don't know, admit you don't know. take a reserve. , wait. you can always realign a portfolio in a hurry. take a reserve and wait. otherwise take a speculative position on an outcome but you don't have a clue what the outcome is finally going to be. alix: there is rhetoric out today that by the dip won't prevail. people are on vacation. transports are rolling over. small caps rolling over. what do you think? gone to flat. we don't know what the other central banks are going to do. you no longer have this cushion of unlimited liquidity. it's a new game. it's a dangerous game. kotok will be staying with us. coming up, kathleen hays will be talking with st. louis fed president james bullard at 1:00

eastern time today. live from new york, this is bloomberg. ♪

david: this is bloomberg. i'm david westin. disney reported revenue slightly below forecast and earnings slightly above. the stock moved down over 3% on the news. netflix shares traded off substantially. maybe because of the other announcement that at long last disney is going to go over the top. this may prove more important for the company. they will have direct streaming services not only of espn but also of disney product. potential he bypassing cable providers altogether. him just after his

earnings yesterday and how the cable companies would respond. >> we will continue to distribute the espn linear channels. they have been good partners of hours over the years and we have managed to create a highly profitable business. the distributors and the programmers alike have been experiencing the disruption that the whole market is seeing an multiple businesses are seeing from advances in technology and changes in consumer behavior because of that and we feel we have to react accordingly. guess is distributors will look at this probably more as a threat than anything else. it's not intended to be that. we are reacting to marketplace conditions and taking advantage of the quality of our brand. the passion and the product we create and the technology that enables us to reach consumers directly. david: is this the beginning of the end for the bundle? >> i think that's maybe a little bit too strong. we have seen erosion of the

bundle. it is still highly profitable. good consumer proposition. there have been in persons on the bundle whether it is for new over-the-top providers. so we an owner of hulu know about that. there's more competition to reach consumers with multichannel services. i don't think this is the beginning of the end but it represents a continued shift in consumer behavior and the opportunity the technology provides. cbo's -- ceo makes a decision like this they have to ask, did i build it or did i buy it? did you consider buying netflix? why did you decide to build? >> we are buying a technology muchorm that's enabling us

faster than if we had built it. i'm not going to comment whether we looked at network -- netflix. we honestly have the financial wherewithal to do a number of things. the best atto be for not only the walt disney company but shareholders in terms of creating growth strategy. view which isterm really important but also addressing near-term issues which is all about the disruption created by digital technology. was disney ceo bob iger. he talked about the erosion of the bundle. cut cable to save costs. now i have netflix, amazon prime, hulu, hbo now, showtime, now and that to $150. what's the point? starting next year greg

is going to say, let's get espn. joining us with his thoughts on disney, paul sweeney. kotok who us is david knows a lot about everything. what do you think about the effect on cable? bob said they are going to regard it as a threat. is this part of a slow demise of cable as a provider of content? companies,ook at the they have been losing video 5, 6,ibers for the last seven years. the cable companies continue to areery well because they gaining broadband subscribers. high-speed internet access. those subscribers are much more profitable for the cable companies in the video subscribers are. it is a change in business model for the cable companies. well becauseg very

they are the best broadband pipe into the home and as long as people continue to consume content over the internet they need to come to the cable companies. espn is down 3% in subscribers. is this implicitly a recognition that they can't stay at this dance much longer? they've got to move on to the new world because the platform is essentially burning under them? >> absolutely. it's mostly viewed as a defensive move. we will see if they can make a big offensive play. for two years to the day almost we have seen an increased erosion in subscribers to the mighty espn. they have to pivot to the digital world. that's whether consumers are going. alix: better earnings report should've catapulted the leg lower. >> you just made the case as a consumer of one. are we going to get compression

of margin, is earnings growth rate shrinking. is that what's coming out of these types of changes. you just described a household. add 10 million other case studies. do we get margin compression? >> we have seen it certainly at espn. the media economic models built upon the bundle. everybody makes money. make money from us paying $200 a month for the big bundle. if it phrase than the economic get a little bit more difficult and distributed and people like espn with a fixed cost base in programming and sports there are seeing revenue pressures and fixed costs. david: living make the case on the other side. i used to work there. full disclosure. if any but it can do this, disney's got the brand recognition.

opening up newe vistas. new people that can reach through broadband. they have a direct relationship with the consumer directly. they can sell a lot of other things with those connections. >> when we think about going direct to the consumer, there aren't many brands that can do it. to break through the clutter. disney clearly is one of those companies with the brands. the disney brands, pixar, marvel, lucasfilms and espn. there aren't many others that can do it. to the extent there is a profitable pitch it to the -- pivot to the digital world. david kotok of cumberland, you're sticking with us. later in the program, brian wieser of pivotal research group will be visiting us. this is bloomberg. ♪

this is bloomberg daybreak: asia i'm emma chandra. there is a huge deal in the e-commerce payments business today. u.s. payments process has agreed to buy the u.k. group. pointal is valued at 10 $4 billion. consolidation has been increasing. blackstone group agreed to buy taste safe group. softbank is close to making a billion-dollar investment in the online sports store fanatic. the deal would increase the value to about 4.5 billion. it sells licensed sports apparel. in germany the country's largest renewable energy generator underlined its full-year profit outlook. it also posted profit growth that beat estimates. the company said financial debt

reduction will allow more spending and substantial growth. tomorrow we will hear from new york fed president bill dudley. we will get ppi. cpi all aboutet inflation. still with us is david kotok of cumberland advisors. your take on the inflation story. >> there isn't any. it's interesting. we had 50 people in maine last weekend and everybody is talking about inflation between one and two. and is 2 too high a target? imagine the conversation. inflation is not an issue in the put folks we gathered with. and we don't think so either. alix: we had a really strong two-year auction. if the auction was so strong it means the market is now

discounting no rate hikes for the rest of the year. >> or at least no more than one. and it looks that way to us. there's a message here. why are the interest rates the way they are. there is no fear of inflation. there's a question about a big debt expansion in u.s. dollar terms. credit spreads are tight. is verydudley's message important now. he's the one who introduced the betweensed -- pause trying to get the balance sheet down a little and trajectory and interest rate hikes. what he says is really important in this new message. our guess is they say something at jackson hole which is we are going to shrink the balance sheet. they have sort of told us baby steps on how to do it. we will start later in the year october and there will be a pause before we raise rates again. this word is the new monetary policy tool.

david: if the discussion is 1% to 2% inflation, why? trillions of dollars chasing around the same set of goods and services. we have not increased production capacity very much. we don't have a lot of democratic -- demographic shift. so what's gone wrong? >> if you take a look at the 90% ofory of employment the fall of the unemployment rate is the shrinkage or decline in the participation rate. we have not had robust recovery. mild tepid recovery. you don't have systems that come out of robust recovery. alix: you were taking on more safety because of the geopolitical risk. are you taking on more risk to compensate for lower rates for longer? >> on the bond side we have had a marvelous run. on the need of those --

municipal bond, doubly so. at this point we are becoming a little more defensive. we are changing things. because how much good do you get and at what point do you start to make transitions? the answer is we are changing in anticipation of more difficult times ahead. alix: david kotok of cumberland advisors, great to see you. coming up, jeff currie global head- goldman sachs global of commodities to we are talking china. this is bloomberg. ♪ whoooo.

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...on the hotel you want. trust this bird's words. tripadvisor. the latest reviews. the lowest prices. alix: this is bloomberg daybreak. i am alix steel. it is a safe day trade across the board. s&p futures down. the euro-dollar weaker on the

day. it is trading on a soft foot. dollar-yen getting a nice move on the upside. trades,ad on the safety you have money coming into treasury, the vix, going into the swiss franc. the dollar swiss down by .9/ crude -- .9. .5.e is up by let's get an update on what is making headlines outside the business world. emma chandra is here. emma: president trump is warning north korea it will face "fire and fury" if it keeps threatening the u.s. there is an unprecedented level of more threats from north korea. they say they now consider the missiles attack in guam. rex tillerson said he does not believe there is any imminent

threat from north korea. in france, counterterrorism prosecutors are investigating an attack on soldiers. six soldiers employed were injured when a car rammed into them. police are searching for the car and driver. [no audio] they say they will not recognize any decision it takes. the assembly will strip a legal -- community from congress and established a truth commission. global news, 24 hours a day, powered by analysts. i am emma chandra. this is bloomberg. alix: thank you. take a look at oil. not on the back but, despite the move to safe haven assets, up

5.9. joining me now -- 5.9. joining me now, jeff currie. north korea -- .9. joining me now, jeff currie. jeff: if you look at geopolitical risk, they will put a bid in oil but when we think about other places, atypically impact old because they end up recurring in the basement. this year. when you have zero medical issues, trading closer to 1200 and max political tension, like with north korea, you trade closer to 1300. we are about number six now. alix: seven years ago, we would be talking about 2000. jeff: that segues nice into talking about oil and commodities. in that time period, we developed this feeling that when markets reprice, they will

reprice big. about metals and energy. they are playing out today identically almost everyone and what they forecasted last october. only difference is oil is trading five dollars lower. for the most part, the fundamental story has played out. why was it painful over the last nine months? i think it is because expectations were for large reprice things. gold will go to 2000, oil to 100 and copper traits that 10,000. the reality is you were talking about a move at 10% to 15%. they played out but they do not feel less big because those are perceptions left over from the previous decade. alix: i have to wonder if we hit a capitulation. because we were expecting big moves that did not happen, have we capitulated in the market when it comes to underlying

commodity? jeff: i think those are the last strike others. occurred ination 2014-2015. maybe it was capitulation on this story but i think it was for the big $100 moves that occurred two years ago. david: when you talk about oil has not had the big spikes expected, how much is cyclical? how much maybe structural in the sense that technology made a difference? technologies, we don't have to consume as much as we used to. jeff: i think the technological innovation you refer to is spot on to what has changed. i think we learned our lesson over the last six months to respect the velocity of supply. this gets to a broader points and segues into the macro space. supply was always considered fixed, and even when you go to

the macro models, supply cannot move, therefore, interest in dynamics are in demand. supply can now move faster than demand and that is what has changed. velocity supply changes the way the markets trade. when you look at oil, we learned -- i think ourselves in the market learned -- three important lessons in terms of trading commodities. the first, commodities are not the tori assets -- anticipatory assets. you think about a 10 year reforming oil price, it is as much like oil prices 10 years from now, like a tenure maturity on a rate curve has to do with rate years from now. similarly when we think of oil, it is all pricing today. the mistake is the market after october try to price in opec production cuts and created storages over the curve. guess what? they responded to it and everybody was caught off guard on how quickly it could respond.

the second goes to the agriculture market. think about the good agriculture trader, they do not trade next year's crop. why? because they were not plans a lot and the story will materialize. in technology, we cannot trade oil three months to six months is that supply-side is three months to six months. together, youat cannot be trading long data to oil. that was another problem, after that opec announcement, that is 12 months to their two months forward. -- to 13 months forward. the sad conclusion them all of this for those who trade derivatives markets is volatility markets will slowly disappear. you can already see it happen. we think about a move, it moved from 52 to 42, and your points

of 2000 gold, and it was not that big of a move. in the volatility in oil and commodities -- alix: even $75 now. jeff: really big move. alix: i love the relationship to the corn and soybeans you made, that farmers are so quick to change. what i found interesting is we have a lot of interest -- independent bmps cutting their, while either increasing production growth or trimming it. , 200 million, it is also the more with less story. what did you learn from the rhetoric from them? jeff: when we think of productivity gain, we identified three areas we can get them. the first, the well level. the second, the yield level. the big one is logistics. logistics are the third phase going through this, and this is

moving commodities, oil, so forth, in an efficient pace. the power of the technology means the ability of the system to respond will be greater. this goes to a broader points. technology is far more expensive than oil activity, which gives super majors and big balance sheets an advantage over smaller players. as we move into consolidating, it means another wave of consolidating, and then you get the restructuring of capital that you end up with a continued decline in the underlying cost structure. our lower for longer view is going to play out but it will not reprice tomorrow. it will be a steady erosion. david: clay do as an economist -- as an economist, does that mean capital will flow into distribution mechanisms and out of underline production?

jeff: you still have capital devoted to production. david: that relatively? jeff: you will get better returns by moving further downstream because you are starting -- you think about the first place is the well level. the second, the field level. as you branch out, you get into logistics. alix: lower for longer, describe that price range, the low will be. what is the low that scares people? jeff: the question, unfortunately, let's go back to january last year when we hit the six. reached because we storage capacity. unfortunately, i do not think we can breach storage capacity in the near future because we continue to build midstream processes, more storage capacity, and you look at aluminum -- we know that the alumina market can go into a surplus for 10 years. why? because there's no constraint on storing aluminum. you just put it in a field and

you are good to go. as we continue to build oil storage capacity, it takes up that downside. we talk about lower for longer, we are focused on cost structure. visit warty five dollars to $50? -- is it $45 to $50? $70 to they to from $55 range, but is it really $40 to $45? time will tell. if i had to choose which side to bet, i will bet lower for longer. the key point is both the upside, as well as the extreme upside and downside, are getting truncated in the market. david: jeff currie, you will be staying with us because we will talk about aluminum next. coming up later today, we will have sheryl sandberg joining emily chang for an interview on bloomberg at 5:30 eastern time.

you do not want to miss this. live from new york, this is bloomberg. ♪

emma: this is bloomberg daybreak. coming up at 9:00 p.m. eastern, interviews of former president bill clinton and president george w. bush on the david rubenstein show. bloomberg business flash. the ceo of hertz is casting her turnaround plan after they posted their third straight loss. the ceo says they are making progress cutting down there fast depreciating cars. they posted a second-quarter

loss that missed estimates. in china, factory inflation steady in july. the last of months, the price studyrose 5.5%, thanks to demand. meanwhile, chinese consumer prices rose less than expected, up 1.4% in the last year. alix: thank you. to piggyback on china, aluminum releasing its spot as a top commodity this year. it hit a three-year high yesterday. the headline, supply-side reform from china. is it sustainable? with this is jeff currie. i want to make the link between the reflation we have seen and what china has done, which is supply of steel with supplies aluminum. talk to me about the interconnection. jeff: it goes back to the interesting dynamics on the supply-side because of the fast nature of shale.

going back to last year in the miracle that china engineered in terms of rebound in raw material prices, it was supply-side reform. yeah, there was a demand side, but the ingenuity of what they did was to focus on the supply side. l, and it in coal, stee now we will likely see it done in aluminium. in terms of inking about andinum -- aluminium, steel coal, china has about 50% to 60% of global market share. it is not like opec with a 30% market share. they can really move the price. on of the key issues is controlling the imports because that china material wants to come and take it manage of that and they have figured out ways to get around it with steel and coal. the key issue about sustainability is how they deal with it. one of the issues here is the

aluminium that the export is actually fabricated already. it does not compete directly with what we were talking about earlier. alix: aluminium, he used to live in london. david: i can speak british if you once, but talk about aluminium or aluminum. the issue is china curtailing its production now. how much is because of environmental concerns? if that is true, how much of that can be overcome by technology, as the figure out how to produce as much in a less environmentally destructive way? was: a lot of capacity installed in the boom years of the previous decade. in terms of thinking about the ability to restart these bring them back online is akin to a super fun site in the united states back in the 1970's. it is really expensive create there is the -- expensive. there is the illegal capacity

but environmental issues are key here. alix: when they run out of plans to close, what happens to the reflation? does that mean we are only dependent on demand? jeff: let's go back to what they can i gocoal, is they back work hours. there are options available. the reason why the idled back work hours is because they did not want to distinguish between the different mines that would be shocked and they were able to get around it. they have done a lot in terms of thinking about how to deal with supply-side reforms. if you think about the drag on their economy, it was the overcapacity in the old economy, by getting rid of, or that i found striking last year was i thought it was done to cut supply, prices go up, but the second around the facts -- second round affects are more important, they reduced loans on bank balance sheets, which opens

up capacity for banks to lend again. isthe rise in aluminum price the beginning of the story. what it does to bank's balance sheets is the second story. david: as you describe this, this sounds like president xi's reform agenda. is this playing out? jeff: i do not think they had the crew what would happen last year. i was sitting around in june of last year and said, ok, that makes sense. in september, i saw that second-round effects and what it did to balance sheets and i was like, wow. inre we saw a third effect january and february. much of it got to the second and third round but when we look back, it is brilliant. alix: how much more upside for aluminum? 2000, thetarget is base point across all key metals, and we are sitting that are targets now. alix: jeff currie, always a

pleasure, of goldman sachs, great to see you. if you want more aluminum and oil talk, go back and rewatch the conversation with jeff currie. go to tv on your terminal. this is bloomberg. ♪

david: this is bloomberg. i am david westin. president trump took things up a notch with north korea, and he warned that if the president did not stop his threats, there would be consequences. president trump: north korea best not make any more threats to the united states. they will be met with fire and fury like the world has never seen. threatening, very beyond a normal statement. david: all this in the wake of new sanctions imposed by the united nations on trade with north korea. the chief economist for

bloomberg intelligence has taken a look and how hard the sanctions could get. welcome, good to have you. give us a sense, how bad could this hurt the north korean economy? >> it could hurt the north korean economy more than the u.n. suggested. right after it were voted on, there was a report that it could take $1 billion of north korea's $3 billion in exports. and you look at: experts to to china,oal exports it is $1 billion. china in march stopped importing north korean coal. so as of april, north korea's exports are already down 40%. i think $1 billion is undershooting the actual impact. david: you want to put pressure but you have to be careful how much because at some point, you could trigger a response you do not like and they could get desperate. >> i agree, there are two things

that can happen. you need money for two things, to fund your missile and nuclear program, and also to appease the urban elite that are living a comfortable life that are loyal to the leadership there. if you take money away, where the cannot maintain that stability, the scenario you outlined could occur. if you take money away, they cannot continue their missile program and that is a positive outcome. china is in a tricky place. what i mean is north korea has been an unknown for china, but now they had the unknown of north korea in the u.s. because they do not know how the u.s. will react. if china is too hard on north korea, they have a nuclear armed neighbor connected to them, mad at them, and if they could anger the trump administration if they are not hard enough and it could cause a conflict. this creates complexity for china. alix: two-year points, we take a look at numbers -- to your

points, we take a look at numbers in your article. we have a screen that shows how dependent china is. coal exports to china was one third of north korea's exports. can internal reform in china hoped that -- helped that situation? michael: they do not necessarily need this coal.they have had a cool relationship with north korea over the years, one of their only sources of capital, 90% of their exports are going there. this will not hurt china, per se. they can import coal from elsewhere. the issue for them is how do we handle north korea without making them too angry and not making the u.s. angry that we are not doing enough? so far, it seems there siding with the u.s. zeroimports have gone to and that happened months ago. when you factor in other commodities sanctioned, i think

iron or, led or -- ore, lead ore. of trade with 50% china. we will see a bigger impact dollar wise in north korea. david: china must have a sense of this. it this were happening in mexico with the united states, we would be more than upset and concerned about turmoil and uncertainty. what is china's game plan? they went along with these sanctions, surprising some people. what is the game plan? if we punish them enough and give it back, we can change their behavior? michael: that is the hope. end of the game, you have to think the north korean regime is worried about self-preservation. they had been around 70 years because of self-preservation. when their back is against the wall, they may come back to the table and try to talk, theoretically. that is probably the hope. china, in a perfect scenario, would like to see north korea

take the same economic development pattern is china but that has not been the case so far. alix: great stuff. hope everyone reads michael's piece. willg up, jeff rosenberg be joining us, talking about the same he of trade and corporate debt, issuing a massive amount of $17.5 million. joins us, hisyer 2018 price target, 2800, calling that potentially conservative. this is bloomberg. ♪

alix: war games, north korea threatens guam and president

trump warns of fire and fury. equities drop, money flows into the safety of treasury and gold. disney embraces the court carter with -- cord cutter with netflix. i am alix steel. alongside david westin. jonathan ferro is off. that u.s.mp tweeting as much higher. yield down three basis points. we haveen lower, but stayed steady, down by .5. gold continuing to get that say haven good -- safe haven bid. david: that war affords between the united states and north korea escalated guestroom with the president morning them with dire consequences. president trump: north korea best not make any more threats

to the united states. they will be met with fire and fury like the world has never seen. he has been very threatening, beyond the normal state. state today, secretary of next tillerson has walked -- rex tillerson has walked back is comments. missile korea has capabilities in many directions. acem is not the only plc in threat. i do not believe there is any imminent threat. david: we are joined by our chief washington correspondent kevin cirilli. you heard alix refer to et,sident trump twe saying his first order was to our arsenal. maybe this has nothing to do with north korea, but it is a

coincidence. kevin: the president doubling fiery rhetoric as he tries to do with north korea. you just heardr rex tillerson saying there is no imminent threat directly coming from north korea. he traveled overseas and is not rerouting his trip. that said, there is a growing concern within the national community about korea. i want to pull up a chart about how north korea has utilized its military system in order to this for economic growth. you will see -- to disper economic growth. you will see in the orange and yellow, it has surpassed south korea in the last year because of its surging military program. that is growing concern for not just the united states but also the other countries around the world. it is why you have seen china, which is north korea's top of

economic partners, taken how they do business with them. -- take a look at how they do business with them. their top exporter is china at more than 80%. david: that is growth rate comparison. if you compare the size of the economies, south korea is much bigger than what korea. that is the rate of growth -- then north korea. that is the rate of growth. when we talk about potential military actions and nuclear weapons, you want to make sure you speak with one voice consistently. we thought we would get that with general kelly. it seems like between president trump's tweets and statements and now secretary of state tillerson, i'm not sure i'm getting a clear signal in this dangerous area. kevin: that is the level of unpredictability donald trump said he would do once in office,

that he wanted to use this element of surprise not forecast is military strategy. that has drawn criticism of several, including senator john mccain, who says he does not necessarily agree with the president's quote the other day about the fire and fury quote that the u.s. would meet north korea with should they continue with their fiery nuclear rhetoric. in the past several years, the north korea dictator and north korea have done several brazen missile launches, really exceeding the past year estimates, and really taking it to a new level. this is emerging as one of the most significant geopolitical risks for this white house that they feel they have to take on. david: you are for -- i want to refer to the past few seconds, president trump just tweeted, actually, we will never have

this power, referring to nuclear power, and they will never be a time when we are not the most powerful nation in the world. i'm not sure what the message is , but he is sending a lot. kevin: that tweet reminiscent of what he said on the campaign trail during the presidential debates and he was asked about the use of nuclear weapons. he essentially said the same quote, essentially that you would hope to never use nuclear weapons that he always -- but he always did not come out as strongly -- that quote was essentially what he said on the campaign trail. i will let the president's words because themselves. david: very wise. [laughter] alix: what does it mean for the market? we are talking about low volume, take a look at the vix. joining us for moore is jeff rosenberg -- more is jeff

rosenberg and a chief investment strategist, mark. , coming from a low level of volatility, it is but in this is a shock ongoing issue. ofestors need to be aware balance in a portfolio. we talked about the haven trade. if you go into a little market, low volatility market environments with a well structured portfolio, there is not a need to make to read it changes and that is the context of fixed income when you have events like north korea that it is challenge to fixed income in terms of rates, but what you see going on is why had this portfolio in some lower expected return investments because it

can offset for when you have these kinds of shocks. alix: when we hear things like selling emerging-market debt because it runs too much and then you get something like this, do you need to pare back those high-yield reaches you have been investing in? jeff: we talked for a while challenge inuation riskier segments of fixed income. you mentioned high-yield, emerging markets, bank loans. the valuation arguments have been not the main reason for owning them. historical type levels of spread across the credit spectrum. when you have a shock -- you highlighted volatility and north korea -- there is no margin for error, so you have the potential for widening spreads. the markets are widening a tiny at but it is an argument for higher quality portfolio, mainly

because the environment has been so benign and there is no room for this kind of shock in valuation. we have been talking about in quality a while. david: i want to ask about sentiment as we talk about the concern of north korea. after president trump was elected, there was a rush on consumer and business sentiment, it was positive. is there a point to when these sources of continuing disputes over things like nuclear weapons affect sentiment that can affect stock prices? >> absolutely. we had a spike in positive sentiment by way of not only small businesses but a larger company ceos and cfos and the consumer fronts. that has remained elevated. we got a report from the national federation of independent business, showing optimism, kicking back close to its 16 year high.

i think the news generally has been one of good economic conditions that foster an environment, in which company ceos and consumers are feeling good about how things look, not just in the current condition but as far as expectations. that said, that is soft data. we know the market response more directly to stop ada and hard data -- the soft data than hard data. this will bleed into actual spending that starts to it in fact the hard data and that could weigh on economic decisions and it is a self-feeding cycle, which are not be good for the market or economic conditions. i think we are a long way from that. it is premature to overreact to the news about north korea that came out yesterday. it is something we spike as a potential black swan for 2017 2018 that investors have to be wary of. the market is ripe for

correction. it is not so much it will occur, it is not being prepared for in and onceset allocation again, speaking to fixed income being a proponent to dampen volatility as part of a portfolio. david: when you take those factors together, and you talk to investors, you are looking forward to the second half of this year? mark: on balance, we are. we have seen financial conditions bali at goldman sachs and other banks showing conditions have gotten softer or more accommodative, even as the federal reserve has raised interest rates. we think that bodes well. if you look at prior situations in which financial situations that used, it leads to an acceleration in the economic activity and we are in that cycle as we speak. forcitigroup surprise index

the united states after plummeting from march through mid-june has started to resume an upward bias. that will feed into sentiment and reinforce economic activity and the were a better second half economically, which ought to be supported for corporate consequence,s support the advance in equity prices. alix: both of you are sticking with us. coming up later, kathleen hays will be speaking to the st. louis fed president james bullard. i broke the news yesterday he is a doubt, so we will have -- he so we will have to see what he says about the balance sheet. this is bloomberg. ♪

david: this is bloomberg.

i am david westin. disney announced third-quarter earnings and that next year, it will stream espn and disney products through streaming video. shares of disney and netflix moved lower on the news. i spoke with biker after the call and he explained the ship in the media landscape that triggered their new move. bob: we have seen a dramatic shift in the way that media is consumed, becoming more see with mynd i kids and grandkids. a lot of the app-based consumption is done over the top on consumer services. david: that was bob iger. we are joined now by paul sweeney from bloomberg intelligence. on the phone from minneapolis is olsenel flynn -- mike eo and has a price target of $215

on netflix. i want to start with you, paul, about what disney has announced. why did they feel they had to do it now? they recognized with media companies recognize, the consumption of media has changed over the last five years and you need to look no further than netflix. the fact that they have gotten over 100 million subscribers globally, that has rattled cages in hollywood. media companies are trying to still preserve their current ecosystem, the cable bundle, which has been lucrative, they realized they have to start investing in digital platforms to get the content direct to consumers via an app-based application. david: what does this mean for netflix? they terminated their deal as of 2019 for their movies to go to

netflix and bob iger described what they were doing as the netflix of sports. is this a threat to netflix? mark: the disney content -- michael: good disney content has been a drop for those who did not know about the service, and especially with netflix in only 2016, i the time this contract comes off, it will have served its purpose as a helpful slate of content as netflix grows, but it is not that netflix depends on a significant amount of subscriber base for the long-term. it should have a minimal impact. we definitely recommend buying on weakness. david: does the same answer hold true it disney gets followed my other producers, who say, that is a good idea and we will pull

out of our deals with netflix? michael: disney is one of the bigger suppliers for netflix and only accounts for 3% of its content. likely less than 2% of the actual amounts on netflix and less than 5% of all viewing hours of netflix on the service. it is important but not as big of viewing hours as some may think. i think you have to keep in mind that while i do not cover disney, i recognize it is a unique slater content that consumers understand -- slate of content consumers understand and other owners would have more difficulty having consumers essentially know what content is coming from that divider. there is a need for an aggregator in the space, but we would say that disney has an advantage going over any of the content provider. david: you suggest that 3% number is an indication of how

much netflix is investing in new content, and not just year-by-year but their balance sheet going forward. --that a course of concern the of concern for you? >i asked bob iger if they would spend as much and he said, absolutely not. >> the real focus for netflix has been a shift toward original content. 20% of netflix content was original last year and they expect it to be 50% in the next few years. that is the focus and helps them drive a unique library. we think disney is costing netflix around $200 million a year, which could be redeployed in 2019 on new content. david: if that is to and a million dollars a year disney is not getting -- $200 million a year disney is not getting anymore, can they make it up? >> we will have to see.

for two reasons, one, they will lose license revenue from netflix and they will have to ramp up spending at the studios to program this new is the channel. david: many thanks to michael olson and paul sweeney. -- tonyp, tony dreier dwyer. he will be joining us here. this is bloomberg. ♪

emma: this is bloomberg daybreak. there is a huge deal in the e-commerce payments. the deal is buying at about $10.4 billion. consolidation has increased in the payment industry. blackstone group agreed to buy another group. the u.s. unit has agreed to pay $98 million to settle claims in ta airbag recall.

customers are thought to be paid expenses related to the recall. private equity firms are sitting on almost $1 trillion there waiting to invest. clients will exchange funds. blackrock has been getting increasing numbers and using etf's to park money for private funds. alix: i find it interesting that it harkens to what was said about i do not want to raise money at some point because you are not a good investments in your forced to take on others. david: you make bad decisions and you make investments you would not make otherwise. alix: buying into etf's could say a lot. david: if you are a private equity, he would rather have them sit on it then put it in something -- alix: and not have the kind of returns. let's get to jeff furstenberg -- jeff rosenberg and mark puccini

-- luccini. where's the cache as we see in the sidelines? -- where is the list price as we see this cash in the sidelines? >> it is not so much that as what it is telling us about the need or income. mispriced, no, it is not mispriced because we are in a low realized mispriced environment. there was an interesting additional aspect to that story, which is you have had a tremendous increase in the interest and growth in the development of selling volatility to generate income. is that mispricing volatility or is it a reflection investors are so starved for the lack of investment opportunities, for income, that now we have a new way of generating income by selling volatility?

the process of selling volatility creates low volatility in the realized volatility because the hedging activity and people on the other side of that means every time markets go down, they have to buy them and when they go up, they have to sell them. there is a tremendous reversal rate in the market. it is less about mispricing acid is more about what financial market conditions forced investors to do. what negative interest rates force them to do. they need income and this is some of the ways we see them generate it. alix: mark, what do you see? there is an argument the neutral rate is close to where we are now, so if that is permanent, what does that force investors to do in the longer term? mark: it reinforces what investors have been doing, which is buying up dividends and reinvesting in stocks. a valuationhat take

argument off the table? mark: i think there is a little bit of that. agnostic investors have plowed into banks, or they are buying growth at any price, but that leaves a lot of other investors who need income that is not produced by the same stocks that are buying the bond surrogate sectors like utilities, telecom and utility staples. should we see every insurgence of the re-inflation trade come about, and as a consequence, washout those sectors, it it been something we have been trying to educate investors in in ways to find dividend stocks without putting together a highly sensitive interest portfolio in the event received another letter economic climate that we expect over the back half of this year into early 2018. david: in this quest for yield, at what point is there a danger we are spending so much attention at a time of the yield

we are ignoring credit risk or underline risks? >> that is now. you are looking at the levels of compensation for credit risks where it is benign. that is not a problem until the credit risk shows up. the cushion is not there. that is the consequence of a persistent low interest rate environment, forcing the richard neal -- the retreat that fed members are worried about, and that is why they are trying to raise interest rates to get interest that without taking so much risk. alix: both of you are sticking with us. the fed conversation is up next. this is bloomberg. ♪

alix: this is bloomberg. i am alix steel, one hour before the open on the u.s. market. the s&p is on the lows, down seven points. a selloff in europe.

-- euro/dollar relatively flat on the day, but the dollar down against the yen. i do not want to call it a safe haven. you want to call it more of a pause, not necessarily a fixed haven event. this is your safety board. you are seeing a lot of buying coming into the treasury market, yields down five points. we have 10 year auctions today at 1:00. will we be able to eat up that supply? it seems the market is saying yes. the vix up higher and the ftse getting a nice boost against the dollar. oil bucking the sake haven -- safe haven trade. in the chandra is here with first word news. secretary of state rex tillerson says he does not believe there is imminent threat from north korea. tillerson told reporters he thinks president trump warning that north korea would face fury

and fire was appropriate. tillerson: the president is sending a strong message to north korea, in language kim jong-un would understand, because he does not seem to understand diplomatic line which. emma: north korea has said it is considering an attack on the u.s. base in guam. in france, authorities arrested a man linked to attacks on soldiers in a paris suburb. six soldiers were injured when a car rammed into them. the area where the attack took near the intelligence agency. taking a stand against a constitutional assembly in venezuela. countries have called on president nicolas maduro to close the assembly, and will not recognize any decision it takes. the decision will strip legal immunity from congress and establish a truth commission. journalists and analysts in more than 120 countries.

i am emma chandra. david: we are halfway through what is turning out to be a very busy week for the fed and u.s. economy. tomorrow, we will hear from the fed, bill deadly, that u.s. ppi, and on friday get cpi data. still with us is jeff rosenberg of blackrock and mark to shinny -- and mark. news just broke, productivity numbers that just beat last month, as opposed to last month. they are also up from 0%, so there is a little bit of daylight. alix: unit labor costs up just 0.6%, but you had the previous reading revised up a whopping 5.4%. this is the whole deal. when do labor costs squeeze the margins? this is the number. david: this is interesting. jeff, let's go back to the cpi numbers.

what happened to inflation? our expectation is we are still in this poker where there is downward pressure on inflation. outlooker-run inflation -- the fed is talking about this as a transitory story. for the market, it is hard to look forward. our forward forecast, about 12 months out, you get back to 2% levels in terms of inflation. but the near-term trajectory is downward pressure. that is a bit of picture on the fed, on markets, work it expectations -- market expectations. we keep theis that line in terms of wage inflation, labor costs, the impact on productivity. what we saw on average hourly earnings was a good story. we are seeing wage inflation stabilizing, and potentially accelerating into the second half of the year would be helpful. we just cannot have inflation falling off a cliff. that will keep the fed able to

tell the transitory story and keep december in play. david: you already said you are looking forward to the second half of this year, and you think earnings will go up for corporations. how much of that is tied to inflation and productivity? it.: i think what a bit of the challenge to our view will be if we continue to get cpi readings like that, which you mentioned will be released this friday, which underwhelmed expectations. we are thinking the opposite. as we look through core personal consumption expenditures, the ,omponents that comprise that we are seeing a diffusion index that is pointing that upward, which is to say some evidence that inflation creep is starting to occur. if that continues to manifest by way of conditions including wage gains, that will be good for not only supporting economic conditions, it continued to keep the fed on pace to not only

reduce its balance sheet, but have in september -- raise interest rates again in december. the storyline for us is built on that reflation narrative we think will develop in the coming months. david: there is significant reflation in terms of wages -- which we have not seen yet -- what would that do for-profits and earnings? mark: corporations have done an admirable job of being able to continue the program. we are seeing earnings seasons have 80% in the s&p 500 reported averaging slightly over 5%. that has meant earnings have been coming in at a low double-digit pace, edges are markedly strong this late into an economic expansion. that wage, we think gains will feed into some margin , havingion, but margins compressed somewhat over the last four years, have started to expand again in the recent couple of quarters. we think that will likely

sustain itself over the next couple of quarters, but also in 2018 give way to some compression, and feed into as well multiple valuations -- a story that would be somewhat troubling for equity prices. that is 2018 stories, not this year's story. alix: the 2017 story is a balance sheet announcement. to be a september seems go. everyone seems sanguine about what it is going to do to the curve. are you that sanguine? jeff: i would not say we are sanguine. there is an expectation the curve is where the balance sheet will impact. there is a question about how quickly. estimates from the fed center around a 100 basis point compression in the term premium for the accumulation of balance sheet activities, going back to the beginning of balance sheet usage. there is an unwind of that. clearly, janet yellen and the fed staff are focused on the impact of quantifying how much

the term premium has benefited. what we don't know is the signaling effect, when you run it in reverse. so, how quickly does that unwind? it is a little artificial to separate balance sheets and forward guidance from low interest rates. there are challenges there. there is some uncertainty. in our outlook for interest rates, we have 25 basis points from the fed in december, relative to the earlier conversation on inflation staying stable, and a little more on the back end for term premium. 15are talking about five to points, in terms of impact. there is some of the uncertainty in there. we have never been here before. sure how the signaling effect will affect the term premium. alix: you have markets underpricing what the fed thinks it is going to do in 2018. ninearket is looking at and the fed is looking at 150 basis points? jeff: if jonathan were here, we

would maybe pull up the dot plot. alix: i do not want to hear it. [laughter] david: i beg your pardon. here you go. put it up your. this is very painful. we are talking about very different things here. alix: this is the market expectation, the white line. the green line is the fed expectation for rate hikes. you see the drastic difference. jeff: but it is apples and oranges, because what the market is the fullting distribution of potential outcomes. at the center of the green line is talking about is one path, one forecast, the federal reserve members' forecast. the market is incorporating that central case, but also the earlier part of the show -- detail risk of north korea, a confidence shark, what happens if you hit an air pocket in

confidence, a recession risk. then, you are not normalizing. you are easing. that factors into a market level. it is apples and oranges. there is a big differential. part of the collapsing of that will be what is the end of the path we go down. and jeffk luschini rosenberg are sticking with us. we have a lineup of guests. someone from unicredit, federated investors, and go. got -- and pimco. got your bases covered. ♪

emma: this is bloomberg

daybreak. coming up later today, facebook joins emilyandberg chang for an exclusive interview. this is bloomberg. i am david westin. in has been 10 years since the official beginning of the great recession. since then, investors have chased yields lower as central banks globally pumped trillions of dollars into economies around the world. mark gilbert joins us from london now. he has written a piece on this. occam to the program. take us through this. you are taking us through forms of credit. you say it is apples to pairs, but explain it to us. mark: 10 years ago, bnp paribas closed three foreign credit exposed to u.s. subprime. points in a0 basis

day. european central banks offered unlimited liquidity to the .arkets, 95 billion euros 10 years on, if you look at euro high-yield credit spreads, the gap between what european high-yield companies paid to borrow from the government, and the bond market, the u.s. treasury spreads -- it is dipping below the first time in a decade. last time that happened, that had very bad consequences. european high-yield was one of the big sufferers in the credit crisis. yields jumped as high as 20% afterward. maybe this yield chasing you referred to beforehand has got a little bit overextended, particularly in european high-yield, where spreads are so tight, but below what you get for a decade. david: i want to be precise. i do not take your piece to say you are predicting another great recession. you are raising a point about how much risk people are willing to take, articulately in

european high-yield, given the enormous liquidity in the markets. especially given that the fed has already raised interest rates. it has taken away the punch bowl from the party. mario draghi at jackson hole this month is likely to start talking about tapering. european central bankers bought more than 100 billion euros of corporate bonds. it put a backstop into that market and helped drive yields lower. thehe ecb starts following fed, tapering, i wonder whether investors have fully factored in that one of the big buyers in the market is going to start scaling back its purchases. while we will not see a big jump of the kind we saw in the credit crisis, you would expect to see some reversion of yields, some normalization of borrowing costs for european high-yield borrows, as well as the government bond market. those spreads make me a little

nervous on european high-yield, in the context of the european central bank starting to taper its quantitative easing program. david: if you were not acting as , but asist for gadfly an investor of your own money, what would that lead you to do? do not haveo glad i money anywhere in the world. i think in this environment, with what central banks have done, they have completely distorted the market. they have made it impossible to know what the true price of money is, the clearing price at which investors, free of central bank money, life support -- where would investors be rising credit and government bonds? you don't know. this experiment has been going on for many years now. looking at that life support system, the central banks have to tread carefully. ecb will learn lessons from that. the fed is treading carefully, unwinding its balance sheets.

the ecb is going to try carefully as well. i do not know what i would do, but i would be nervous. up nicely.et us if i have to put money somewhere , thank you very much. to have a drastic look at what mark was talking about, look at my terminal. this is investment grade and high-yield spreads, literally off the charts back in 2008. the white line is aggregate corporate debt and the blue line is how yields. basispreads way down, 354 points, high-yield spreads. corporate is under 300. we are seeing companies take advantage. a $17.5 billion issuance yesterday. tesla trying to price $1.5 billion worth of debt. the rumor is it could be under 5%. with us is jeff rosenberg of blackrock and mark luschini. great to have you both. mark, would you want to be buying that offering?

do you want to be buying tesla bonds? mark: i think there is a difference between want and need. i don't know i would want to chase after yields, given the compression that has occurred in that space, that has been talked about your guests and yourself already, it has obviously it leaves little room for any kind of margin of safety. the vulnerability to any modest uptick in interest rates or increase in defaults that would factored int be sufficiently to compensate investors fairly. that said, we know the insatiable chase for yields continues. ofd funds, by virtue mandate, have to buy credit somewhere, whether high-yield or high-quality corporate, in an effort to get some spread over that which they could earn in treasuries. as a consequence, you have a natural buyer, even if they have to hold their nose. is the righthat way to buy corporate credit now? jeff: let me address a couple of

things. the chart you had a earlier was what i was referring to earlier in the show about the lack of cushion for anything going wrong , as we were talking about in terms of geopolitical risk. in that kind of environment, it is tilting your portfolio to less reaching for yield, to higher quality. that is one thing you do. to mark gilbert's comments about european government rates, that is not a surprise. investors are focused on that. we have been underweight government, european bonds, corporate bonds -- we are tilting away from the areas mark's warning. this financial distortion of pricing -- you tilt your portfolios away from that. where do you go? where are areas where the pricing is more real? it is a tougher argument, because it is the highest-risk area, that it is paying you more fairly than some of the areas mark is concerned about. that is emerging-market currency debt, central banks, convergence

between yields in emerging markets and developed markets. that is one of the areas we find attractive. another thing i want to mention is, we are bringing in the conversation about fed and ecb normalization. local risk areas -- a floating rate, you think bank loans. i say floating rate, you say bank loans. there are other areas of floating rate that are lower risk. they are lower yielding, that they provide the kinds of protection without as extreme of degrees of credit risk. ,his is investment grade floating rate, front and yield curve type strategies. that is what i write about in my piece this month -- shameless like a butterfly" is the title. the interesting story is, those yields have been going up, related to fed tightening. reach for yield yields have been going down. there has been a flattening. there is still a tremendous difference. the risk reduction for going

into higher quality is something investors are looking at. and markff rosenberg luschini will both be staying with us. alix: we have a bloomberg terminal. watch us online. clique on charts and graphics. interact with us directly. on aan quick -- click chart and save it to your terminal. ♪

alix: the hot trade for hedge funds has been emerging markets. this is the yearly return for emerging market hedge funds, posting the best return we have seen since 2009-2010. however, warning signs are growing. jeffrey dunlop joins him with investors concern in an interview with erik schatzker. he calls risky assets overvalued. jeff rosenberg and mark luschini. this is the opposite of what you were talking about. where do you still see value?

jeff: here is the problem. everything in credit -- to pick one asset class out, even as pick outert does -- to european corporate bonds -- the reach for yield is apparent in every asset class. if you are going to be risky portfolio entirely, -- if you sk a portfolioe-ric entirely, that is a strategy. or if you pick areas at historic levels of tightness, it becomes a story of relative value, not absolute value. you can say that about all asset classes. what i was saying earlier, if we are going to pick areas of the market -- what areas are we going to choose? we are going to choose areas least impacted by the repression of yields by developed market central banks. those areas of fixed income, emerging market fixed income, where you have the least amount of this activity going on, you

have the most realistic pricing. does that mean these are low areas? absolutely not. they are the highest risk areas of fixed income. but where are you going to reach for that? as marc may talk about in a second, you have the same valuation challenges, looking into income in the equity markets. dividend-paying stocks are not inexpensively priced, as everyone is bidding of income in a low-income world. our argument is, in a compressed area of the world, this is one of the spaces where you are least distorted. mark, what do you say? relative value play, if you look at europe em -- are you in that camp? mark: we are certainly in the european cap. even more so in the japanese camp. not emerging markets. playing out our thesis we talked about, if the reflation trade reasserts itself, we think that

will once again advance the dollar to a new up leg. that is counterproductive to emerging markets in aggregate, articulately those that are physically challenged. that said, we like european equities and japanese, for the same characteristics. that is reasonable valuations in a world where most valuations are unreasonable. in addition, a pretty decent growth profile and an earnings curve that is steeper than that of the united states. -- weat cocktail together have been advising clients to diversify their portfolio by augmenting exposure to european and japanese equities, physically in japan on the hedge basis. we think the dollar/yen cross is going to work counterproductively to being japanese equities as a u.s. dollar investor. alix: is it regional or sector-based? are you betting on a weaker euro versus what we have seen? mark: i think we will see a

weakening in the euro from today's levels. want tomr. draghi would see that, particularly for the benefit of peripheral countries. it is a regional discussion rather than identifying a specific country. go ahead and buy a mutual fund or etf. alix: really appreciate your insights. if rosenberg of black rock and mark luschini of janney. joins us.ark dwyer his price target on the s&p -- 2800. what is he buying? ♪ ♪

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president trump warns of fire and fury and a powerful nuclear response. gold, and the vix in rally mode. equities fall for a second day. and disney cutting ties with netflix, embracing the cord cutter. world's largest entertainment company plans to sell content directly to consumers. welcome to bloomberg daybreak. -- just for you -- david: i was going to say. alix: 30 minutes until the opening bell in new york. they risk off mood. -- a risk off mood. a lot of money coming into the treasury market. tweeting this morning from president trump. yields move down by five basis points. bid,still getting a nice up $14 amounts. for a sense of the markets, here is abigail doolittle.

abigail: let's look at disney and netflix. disney falling after the company said it is planning on streaming its own content to subscribers. bloombergey of intelligence says that is not the reason we have disney so down in the premarket. they had to make that move. what has disney shares down is the third quarter, fiscal third quarter, revenue miss, plus the fact that espn subscribers were down more than expected. netflix will be just fine over the long-term, considering original content. all sweeney says this is a move disney had to make. pain today, but paul sweeney says this makes sense. turning to online travel agents down sharply in the premarket -- priceline and trip advisor down after both beat quarterly estimates. priceline full-year outlook is less than what investors had been looking for. if advisor is cautious -- trip advisor is cautious on the

second half of the year. a bloomberg analyst says problems are company-specific. one issue time both together -- spending on brand advertising. in anine just yesterday all-time high, but is set to open for its worst day in more than a year. starbucks not feeling the love, down about 1%. the analyst, david, is saying there are deeper issues, including the fact that company stores are cannibalizing existing store traffic. the ugly for starbucks, about flat on the year. my part,am doing having as much as i can. warned northmp korea of dire consequences if it did not stop threatening the united states. president trump: north korea best not make any more threats to the united states. they will be met with fire and fury like the world has never seen. he has been very threatening,

beyond a normal state. earlier today, secretary of state rex tillerson told reporters that whatever the threats, not korea does not pose an imminent threat to the united states. tillerson: north korea's missile capability can point in many directions. guam is not the only place that could be under threat. i never considered rerouting. i do not believe there is any imminent threat. david: take us through what is going through. we are joined by washington correspondent kevin cirilli. is this an imminent threat or not? morning.od administration officials, including president trump, are greatly growing concerned about how dictator kim jong-un has used his missile launches in the past several years. if we pull up a chart -- take a look at this chart. we can look at how many missile

launches this north korean dictator has done in recent years. back in 2012, he did not even do any. fewer than five. in 2017, he has done 16 missile launches, on pace to surpass of 20ear's 2016 record missile launches, plus nuclear tests conducted. there is no question that the u.s. is definitely growing concerned about this. secretary of state tillerson saying there does not appear to be any imminent threat. the president himself tweeting earlier this morning that his first order as president was to modernize the nuclear arsenal, and that it is far stronger and more powerful than ever before. hopefully, we will never have to use this power, that there will never be a time we are not the most powerful nation in the world. clearly he is doubling down on that fiery rhetoric that he said yesterday.

that did draw criticism from people like senator john mccain. david: explain to us from your reporting -- do we have a sense whether we, the united states, is on the same page with china? the president has said repeatedly that china is the key to north korea. are the chinese really in league with us about this new pressure we have put on north korea? kevin: yes and no. just weeks ago, secretary of state rex tillerson said china and russia were "economic enablers" of north korea. obviously, north korea's top exporter and importer, at 80% each, is china. over the weekend, the u.s. ambassador for the united states, nikki haley, announcing a new round of sanctions from the yuan security council to north korea. it was unanimous vote, with both china and north korea. all of that said, and taken into a broader context, despite china supporting the united states at the united nations, the u.s. feels that they will be able to

somehow pressure the chinese on the issue of north korea, with economic incentives including whether or not they should impose new tariffs. david: thank you for all your reporting today. threathe president's against north korea sent the s&p down a quick 10 points yesterday, its sharpest reversal in four months. the six-point loss was the biggest drop in five weeks. it is a modest move. many are warning that turmoil is posed to remove -- is poised to return, that this is on track for the calmest month since 1965. joining us is vincent delisle of social bank and gina martin bloomberg intelligence. vincent, do you want to do you risk on this move? vincent: on this news, obviously , the headlines are going to be in everybody's mind. keep in mind the market has been

steadily growing in recent months. a lot of calm. volatility has been low. i do not want to the risk on this -- to de-risk on this news. if you did that on every news the last 12 months, your head would be spinning. interest rates are going up. the global economy and the u.s. are growing at a decent pace. the s&p is going to have a tough time moving above 2500. sense for other reasons, raising cash, but not because of headline news. alix: that is what your talking about as well. look at this chart on bloomberg -- the bloomberg. you are looking at the s&p as the white line, and the yellow line is the advanced decline or ratio. we have seen that fall off a cliff. gina: this is part of a body of evidence that said the market was overdue for some correction. trump news yesterday

as the start for that correction in the short-term. our expectation is this is a modest correction in a longer-term uptrend. havesaid, a lot of factors suggested the market is running on fumes this summer. if you are ever to anticipate a correction in any month, august is your most likely candidate. it is usually the month stocks struggle the most. september and october, we are likely to see volatility. political headlines are likely to weigh on stocks. to createl culprits the longer-term correction do not exist now. navigate your sector strategy. this month, get a little less optimistic. a little more risk-off through sector strategy. but maintain your investment, because the long-term opportunity is still there. david: vincent, how do you see it in montreal? is this a sideways move for the market? is there further up we can realize, or danger of a down term? vincent: the danger of a downturn in the near term, we don't think so.

our view of the markets is, these are the late innings. whether it is the eighth or ninth inning, i am not sure. we have a solid global economic backdrop. you look at world pmi indexes, global gdp -- this should be the strongest in six or seven years. earnings are growing. that is the reason stocks recovered. having said that, the fed is raising interest rates, talking about unwinding qe. the ecb is on tapering. from a monetary standpoint, all the stimulus that supported us the last six or seven years is starting to unwind. what do you want to do in late innings? you want to shift sector preferences. we are focusing on value sectors such as financial and industrials. we are focusing on areas that usually outperform in the late innings. we're also looking for a weaker u.s. dollar trend to continue, which typically helps emerging

markets, commodity prices. a little bit more cash in portfolios is what we have been advising. stick with more equities that bonds. we think the risk is to the upside on yield. the more the cycle lasts, the more you want to adjust expectations. as i said earlier, i think the s&p is going to have trouble moving above 2500. we see sector shifts favoring value -- financials, lightning up on technology and utilities. that is where we think the shift should occur. emerging markets, europe has done better than the u.s. this year. we think it will continue. i think the world is overweight -- global investors are overweight u.s. assets. that is where we would take some profits. when you give indications of where would you go, what time horizon? you said to come off of tech. it has been such a driver here,

a driver of growth thus far. is that a three-month timeframe, six months? over the longer term, tech seems to be in good shape. vincent: absolutely. there is no issue. my point is not against the technology sector. what i am saying is, with what central banks are doing -- this year, keep in mind we have had a fairly -- a fairly friendly inflation environment. the inflation numbers have been low, which has enabled central banks to talk about raising interest rates, that the pace of tightening is slow. look at every piece of u.s. statistics, the unemployment rate, what is happening in housing, and the fact that rates are going up so slowly is the reason why this cycle is lasting much, much longer. the timeframe, i would say, is 12-18 months. i would say by this time next year, we will see weaker pmi's and isam's. g effect is going to

start to kick in. this bull market -- you want to lighten up on what has dominated in recent years. that is growth. that is high-quality stocks. the value, we find, is in some of the mining sectors, especially financials, whether it is u.s. or european financials. david: vincent delisle of scotia bank and gina martin adams. thank you for being with us. coming up, more on those disney results and on netflix. michael is here to take a victory lap. he had a cell in 2011 on netflix. and later, an analyst will be joining us. ♪

david: this is bloomberg. disney came out with third-quarter earnings yesterday, and investors were disappointed, perhaps with continued erosion of cable revenues. the stock is under pressure, down just under 6%. it is not only disney moving lower. netflix is down as well. disney announced it would be exercising and out in its contract with the streaming service, so it can put content into a new streaming service of its own. i talked to ceo bob iger yesterday and asked about his plans for the future of disney's sports relationships. bob: we intend to license sports ,pecifically for this app beyond the sports that have already been licensed either by tech or by espn.

this creates an opportunity for us to monetize in more effective ways through subscription revenue, as well as advertising revenue, and in all the ways a direct to consumer relationship can generate revenue. we expect this product will be in the marketplace to license more aggressively from basically multiple sports organizations, possibly even including the nfl and the nba. we have great relationships. david: i noticed in your release, you said you plan to make a significant investment in an annual slate of original movies, tv shows, and short-term content for your disney app. are we talking about investments ,rom the likes of hbo or amazon or netflix? to be careful, because netflix -- i cannot comment on what amazon has been investing, but it is widely known that netflix has been investing billions of dollars in original content. i have done so very effectively.

when you mention hbo, maybe this is more akin to that. we are going to basically produce -- we are already developing -- original movies and original television series, specifically for this disney-branded service. and it will be incremental investment, to the investments we have been making in television and motion pictures in the past. that was what disney ceo bob iger. joining us in new york is paul sweeney, bloomberg intelligence director of [indiscernible] and michael pachter, joining us from los angeles. michael has an underperform, with a price target of $82. michael, maybe a victory lap. you have been warning about netflix. what material difference does this announcement may, potentially? michael: i am not sure it is different. i think it kind of proves the point that the content owner is the king. the content owner has all of the

leverage in the relationship, and a high profile content might be the beginning of a slide down the slippery slope. what happens when cbs decides it needs content for its standalone service? i think netflix is in a race to replicate what hbo has done with original content. remember, hbo has warner universal and fox motion pictures. netflix is left with nothing new. all new movies are pledged to some combination of epix, stars, hbo, and the new disney offering. no new movies. a question whether there will be any children's content after 2018. likely, you will see others emulating disney and pulling content from netflix. it is a race for netflix to replace established content with recognizable brands, with new content of its own.

keep in mind, netflix owns very little of what you think of as netflix originals. things like "house of cards" and "orange is the new black" is not theirs. they do on "stranger things," but i defy you to name many shows that are popular. david: traditionally in television, you would pay a fair amount to produce the program, but then you would own the program and get money off of it for years to come, international and domestic. if that is not true of netflix, how can it afford to invest the money it needs to, if it does not have presold material? how can they afford to keep this up? michael: my $82 target implies a $35 billion value for this company. i do not think they are worthless or going to zero. the point is, i think investors have overestimated the value of giving them credit for leverage in this relationship with content owners. to answer your question, they

are going to have to step it up dramatically. as disney pulls content, there is less available for amazon and hulu to bid on. netflix is going to see more people bidding for less content, and that means the price goes up. rick perry's comment notwithstanding, supply and demand rules the day. challenge for the netflix. what is the challenge for walt disney company krishan mark the stock is down in pre-trading. -- walt disney company? the stock is down in pre-trading. the cable program is eroding. t-rex this is a defensive move. we are seeing it from other -- >> this is a defensive move. thecable bundle, which over last 40 years has been so beneficial in terms of increased subscriber and advertising revenue -- that bundle is fraying. as consumers go to digital

platforms, i have to make that pivot. that pivot is going to be long-term and expensive, and it is unsure whether it will work. alix: joining us, paul sweeney and michael pachter. thank you so much. later today, 1:00 p.m., after and hayes will speak to st. louis fed president jim bowler. ♪

superstar are called firms. larger and larger companies significantly increasing their share of total industry sales. a pimco global economic advisor weighed in on that yesterday, saying that technology and globalization have disproportionately benefited the most innovative firms, leading to rising concentrations of a small number of superstar firms. theirncreasingly dominate industries. joining us for more is tony

equity strategist at canaccord genuity. he says the things that could kill it are antitrust, a labor wind up, and globalization. what does that say for you? number of sectors, this perception that there is a small concentration of stocks driving the market gains -- that is true. the interesting thing is, it is no different than any other cycle, because market cap driven industries -- i definition, the biggest stocks have the biggest impact. it is actually a little broader now than it would typically be in a cycle. i kind of wanted to address that first. , we areang front neutral weight technology. it is not because fundamentals are poor in technology. it is just, when it is this good, you tend to get a pullback. when you think of the reasons technology has garnered so much investment -- i call it the slow growth trade or the no growth trade, versus the progrowth

trade. the slow or no growth trade is bond surrogates, things that are alternative to bond yields that give you a better alternative return, or areas you know will grow in a slow growth economy. that is technology. that is reversing, so we are , fangweight technology being a big part of that. fundamentally, we like it. rating,yst has a buy but we think there is a pullback coming. alix: you are buying on the dip. i can't imagine your target is without tech. tony: this is one of those things i have tried to be highly convicted about. the market peak -- so many people are talking about "the peak" and the bubble, and that valuations are excessively high. what drives a significant, sustainable drop in the market is a drop in economic activity. you need to have a recession. the market peak comes, on

average, 7.2 months prior to recession. if you look at the crash of 1987, the asian economic crisis -- all those events were not the peak for the cycle. they were a peak. we may be near a peak, but not the peak. the peak is economically driven, and we are so far from recession we are still years away, based on how credit is behaving. alix: for sure. tony dwyer of canaccord genuity will stick with us through the opening bell. we are about four minutes away from the open. equity futures down by about eight points. a little weakness in europe. a stronger dollar as the safe haven trade gets underway. ♪

alix: you are watching "bloomberg daybreak." 30 seconds until the open of trade here in the u.s. the dow jones futures up by 39 points. s&p futures on ff nine.

taking the risk of field and moving a leg lower -- off feel lower.ing a leg a relatively stronger dollar.euro-dollar in particular . down below 117 as the dollar index moves higher. money flowing into the treasury market. $23 billion within supply coming in at 1:00 p.m. what will be takedown be? yields moving lower by 4 basis points. crude holding steady. let's see where stocks have opened up now for trading. it is not really a risk off. it is a muted risk off, it feels. >> that is a good way to put it. all lower. decline, theay's worst drop in five weeks for the s&p 500. all three major averages yesterday at all-time highs finished lower.

some experts would say that is an ugly reversal, so let's see what the trading action brings today. the nasdaq has a little more of a risk off feel. some of the bigger movers on the open here. some of the bigger decliners, mylan. those shares are down more than 6%.the company cut its forecast for this year and next year . generic pressures around pressures are cutting into mylan's forecast itself. taking a look at office depot, look at those shares down 70%. they missed the top and bottom line estimates. fossil, down 23% after the company absolutely slashed it's outlook. -- its outlook. of course, we have had all these record highs.a lot of chatter whether or not it can last

. it is a very interesting chart. a long-term chart that goes back to 2000. we are looking at the percentage of retail investor or the mom-and-pop investor, their allocation to cash. back in 2000, it was pretty low, around 12% to 13%, right before the tech bubble crashed. in 2009, after the financial market crisis, it is high at 45%. the point to be made is it is closer to where it was in 2000 at about 15%. a little less than 15%. as thethese levels have occurred in intermediate-term tops. so let's see what that brings. perhaps yesterday's in today's reversal is a bearish signal of what is to come. alix: great stuff, abigail. still with us is tony dwyer. what do you think about looking at the chart and saying, look,

how much is there to invest to get us to the next leg higher? tony: retail investor is such a small part of the investment public. it is really pension plans and some of the more aggressive ponds have become a bigger part of the market. clearly, this is a market that the volatility is historically low. it has been on a record run this year. it is a market looking for an excuse to pull back. i think it is easy to say this north korea situation is the excuse to have google back, but if you thought there was going to be a war with north korea, was the market have begun 8 s&p points at the open? i don't think so. the fundamental backup is still very positive. it is a lot overbought in the near term. alix: what kind of pullback do we end up seein? question. is a great what is the difference between an 18% pullback with a fiscal

cliff or a 4% or 5% pullback that is typical in any bull market? it comes to, how close are we to a recession? you think of the fiscal cliff that created those 15% drops or the commodity crisis at the end of 2015 and into early 2016, those were perceptions you had a global economic situation that was going to lead to a recession in the u.s. that perception was not right. we do not have anything like that right now. there are no global issues currently that are masking themselves where you can say, wow, this can drive us into a recession. a war would have that potential, but clearly, i do nothing that is the case. i don't think the markets think that is the case. we are looking at a 4% or 5% correction. gone withthat have the most investment over the recent past. alix: i like that you make that comparison. we talked about jeff dunlap's call yesterday.

the bull is, if you preempt any kind of risk, you lose money. the bear case is, not losing money is better than losing a little bit of return in the short-term. when do you know we are at that pivot point? tony: there are indicators we use. some technical indicators. you use sentiment indicators. more than 60% of newsletter writers have been bullish. that is surrounding a period of more risk. the u.s. dollar has been so weak. it is likely to have a bounce. the whole problem with the bear call is that short-term call has been with us for seven years. alix: right. tony: what could have happened that hasn't happened outside of the pure recession, we have had a fiscal cliff i'm a trump, a chinese real

estate drop, a euro crisis. what else can happen? but it has not driven the u.s. into a recession and therefore sustained a bear market. that is still the back to. -- backdrop. alix: let's round it out here on earnings. feels like the fourth-quarter guidance have come a little light in the first half of 2018, particularly in names like retail and consumer staples. do you feel that is on consumers or do you expect some nice beats? tony: ultimately, it is financials and health care are two of the biggest, and technology. those are the three biggest sectors that drive earnings. retail and those areas, i am not surprised to see there is some disappointment there. we are seeing it. you mentioned office depot earlier in the show. it is tough to make the case that big-box retailers will do great. the earnings pictures have been fantastic. 12% earnings growth this quarter

with almost 9% of the companies having reported. if you take ge out, which is a drag, it is actually 13%. you have solid topline growth. you can makek a negative case out of earnings right now. ultimately, that is why we are bearish. is the market correlates most directly to the direction of earnings. so in order to be really bearish outside of a tactical trade, you have to make the case that earnings are going to go down. the only way you can make that case is a recession. david: tony dwyer, thank you so much for being with us. disney's third-quarter earnings announced yesterday disappointed, particularly on continued erosion in cable revenues and profits, sending disney shares down over 5%. when i talked shortly after the earnings call, he was focused on his commencement of a streaming atvice that will let fans

espn and disney pay for a month of disney sports and entertainment programming without going to the cable providers. i asked bob what this could be forgiven companies and if it could be the end of the basic cable bundle. bob: there have been incursions on the bundle whether it is youtube, hulu being a couple of them. we are an owner of hulu so we know about that. there is more competition to reach consumers with multi-tell services. represents a change in behavior and the opportunity that the market provides us. david: joining us now on the phone from portland, oregon, is a senior analyst. he has a celebrating on it is next up -- sell rating on the disney stock. whatever pressure there may be put on cable copies of pressure on the disney stock today. how concerned should we be about

the need for bob iger to move into this over-the-top service? >> well, i think we should be paying attention to it at minimum. the choices they have made are not necessarily bad ones. they arguably -- they are bringing the futures forward in a sense in terms of having a direct consumer offering for the disney studio related content. i think this is an inevitability for certainly any owner with a large library and a lot of relatively compelling content. whether or not the economics are better than the existing system point, but it is not the existing ecosystem they are worried about. it is the future ecosystem they have to be worried about.i think we can give them some credit for actually doing something that recognizes the way the business is evolving. frankly, the bigger problems for the quarter, and it is always a convenient time to announce a big strategic choice that does

not impact for several years when you have a backorder, advertisers were dreadful. pretty weak. not unlike discovery is corruption announcing a merger inscription announcing a merger. david: to be precise when you talk about the advertising, it was not so much the prices they were able to charge as the impressions, the number of people they were showing things to. that seemed to be much more of a problem. brian: well, you know, i think there is a misunderstanding among many people who have never worked in the ad sales or buying business. the market is fundamentally weak right now. you cannot get away from that. you can double your impressions, but the money does not change. supply does not produce demand. that is something you on wall street and even many in senior management in public companies do not fully appreciate. supply does not produce demand.

we have a weak advertising economy right now. we have a relatively weak affiliate ecosystem, if you will , for espn in particular where they have been pushing so hard on getting rate increases. the are experiencing 3% or so year-over-year declines. they can only push their prices up so much. they are being exposed to the downsides of consumers having skinny bundles and choosing not to include espn in their bundles. so those fundamentals are pretty weak for what is still the single most important part of the business in espn. david: finally, brian, as you heard yesterday, scatter is 11% higher, which is a strong advertising market. 3.5% at espn is not a matter of advertising rates. it is actually subscribers. brian: two separate things. we are talking about two different things. but to be clear, pricing in

national tv has a 28 year -- 8%. revenue is not up 8%. that is a broad industry level issue. right now, national tv is experiencing slightly negative revenue trends. not pricing, but revenue trends. david: revenue is a common of pricing and impressions. brian: yes. alix: thank you very much. brian of pivotal, great to get your perception. disney is trading at the lowest in eight months. the biggest decline since january 2016. we are right around the lows of the session after being opened in the markets for about 12 minutes. this is bloomberg. ♪

>> this is "bloomberg daybreak." i am emma chandra. coming up later today, facebook's ceo joins emily chang for an exclusive interview at 5:30 p.m. eastern. david: this is bloomberg. the war of words between the u.s. and north korea escalated yesterday when president trump warned the north koreans of dire consequences if they kept up their threats. president trump: north korea best not make any more threats to the united states. they will be met with fire and fury like the world has never

seen. he has been very threatening beyond a normal state. david: senator john mccain responded to the president, cautioning on the importance of the president's not talking about things he does not want to do. "i take exception to the president's comments because you have to be able to do what you say you are going to do." the key to this is china. that according to john mccain. joining us is tom. away taking a little time from his break, and i really appreciate it, representative. tom: great to be with you, david. david: first, let's talk about north korea. actually, nancy pelosi, the minority leader, has come out and said that we has accelerated its nuclear programs

since the president took office. what is your reaction is one of the leaders in washington? this is a really big problem, north korea. everybody knows it is a problem. what can we do about it? tom: first of all, i could not agree more with nancy pelosi. i think the president just wanted to make it crystal clear what the consequences of reckless action might be, and i think he also intended this message for china for them to understand how serious this was an for them to remain cooperative with us, which, to his credit, he has been able to get the chinese to observe more pressure and interest than any previous administration. there is a little hyperventilating in washington, d.c. thesurprising, but i think president again wanted them to understand the consequences, wanted the chinese to understand the urgency of acting, and i think he succeeded. david: one last question on this

subject, north korea. to what extent does the white house consult with leadership in congress when these things happen so we measure all of our government at least is on the same page? rep. cole: quite well, frankly. this is not a surprise. if yowe were warned earlier this year that the north koreans would achieve this capability within the president's term if not immediately. they have kept us well-informed all along the way. again, i think the president means to be blunt here. i do not think this is an accident or a misstatement. to think this has just happened since he has been president, that suggests anybody who said that sort of has historical amnesia. this has been a pretty reckless regime for a long time under successive presidents of both parties. david: now let's turn to what you will have to face when you back to washington after the recess, and that is we have an issue of the debt ceiling, a budget issue, tax reform.

what is going to be number one on your agenda as you return to washington in september? rep. cole: the most important thing immediately is to get a budget done. by the way, way past that out of the budget committee with every republican vote. i think we solved most of the issues there, but you cannot get tax reform until you get the budget.the appropriations process is well underway . all 12 bills are out of committee, frankly. 4 of them across the floor. then we will probably do a short continuing resolution and negotiate with the senate during october and november. finally, the debt ceiling. that is tricky. i think it will get done. it always gets done. this administration like every administration, democrat or republican, wants a debt ceiling. republicans of congress specifically want a sign you will do something to change the trajectory of the debt and spending. there will be a discussion about that.

i think you'll get a bipartisan agreement that will raise the debt ceiling before september 30. david: finally, part of what is of most interest to our audience here on bloomberg is tax reform. is it going to happen? when is it going to happen? we had gary cohn on last week. he is committed to getting tax reform done, passed this calendar year. is that realistic? do you think that will happen? rep. cole: i do. strangely enough, i think the failure on health care, which i regret deeply, will help tax reform. most republicans no politically they have to get this done. ofknow the broad outlines the major leadership are talking about. if you move under reconciliation, it has to be deficit neutral. in the past, they were talking about border adjustment tax. we know that is out the window now. to me, when we release the bill

in september, and that is what the speaker has pledged he will do, the question is, how are you going to pay for it? david: thank you so much, congressman tom cole, coming to us from oklahoma. we will be back live from bloomberg. ♪ -- we will be back with bloomberg live from new york. ♪

alix: it has been 10 years since the onset of the financial crisis. financial banks have pumped trillions into financial markets in an effort to keep the global economy afloat. as a consequence, investors are finding themselves chasing yields even lower. mark joins us from london. another guest is here as well. i feel like i got really old. where is the biggest issue in the market as the chase for yield continues? >> it is the chase for yield. sector.ngle even in a way markets, the most expensive sector is the staple

sector, consumer staples. why would that be? we assume a lot of that is the yield is so high. this is one of the highest yielding sectors in the market and have attracted investors into the market even though no one likes equity still. they are buying consumer staples stocks and higher-yielding stocks so it is across the board. if you are asking me where the greatest risks are, it seems high-yield market and emerging markets, credit markets have the most prospects of risk. a bit of risk potentially imploding going forward because the spreads are so low and heels are so low. alix: this is something mark pointed out before. 10 year yield versus european high-yield credit spread. the credit spread is the white line. basically canyou lend to european companies and get less than you would for the 10 year yield. that is an incredible distinction.

mark: it is. the last thing to happen on a sustained basis as the chart shows, european spreads ballooned out massively so this is a bit of a worrying signal. the chase for yields has basically compressed those. 10 years since the start of the credit crisis. a long time since central banks started pumping all that money into the economy. will raise me about the spreads is the central banks are going mestart -- what worries about the spread is the central bank's are going to start banks are going to start raising. while i would not dream of predicting anything like what we saw during the credit crisis, it strikes me that risk assets are not reflecting this changing circumstance whereby the central bank are going to only financial system from the likes that they

put it on all these years. gina: i think mark is spot on. most are in disbelief that the fed and ecb are going to start to pull back on policy. if you look at a percentage chances priced in on wirp, there is no percent chance, a very limited percent chance. markets do nothing we will get another fed rate hike until march, which is a bit of a conflict. markets are telling you, we do not think the ecb and the fed will do this. alix: in the meantime, earnings not signing such a bright light. pisney having its worst dro in months. thank you very much. this is bloomberg. ♪

>> is 10:00 a.m. in new york, 3:00 p.m. in london. mark: welcome to "bloomberg markets."

♪ vonnie: hear our the stories we are covering from the bloomberg and around the world the next two hours. u.s. stocks are lower today as investors pay attention to simmering tensions over north korea. why as the market suddenly paying attention to the latest exchange of tough talk? then, as oil prices are in focus, we look at inventories. they are due in just 30 minutes. oil is rising ahead of the release. opec says iraq, the uae, and cats extent are reaffirming their commitments to production cuts. corporatee news -- in is, disney starts what could be a massive shift. what does the will do to bypass netflix and sell content directly to consumers. we are 30 minutes into the u.s.