francine: the ecb president says the policies have been a success, but gives no clues on the tapered timeline. the accident the law. donald trump threatens to shut them a government unless he gets his way on the mexican border wall. and marketing mystery. shares in the world's largest advertising company plunge. good morning. this is "bloomberg surveillance" and i'm francine lacqua in london. we have eurozone pmi figures,

57.4. the forecast was 56.3. better, bothng in for manufacturing -- actually, services a little below estimates that 54.9. we will hear from mario draghi, speaking in germany. he says forward guidance is a useful instrument, but the effectiveness can be improved. let's listen. it's easier to explain to the general public. clear.change is insider change. saying, when the facts change, i change my mind. what do you do, sir? for policymakers, it's not

that simple and research helps us to decide whether a change deserves a policy response, or as we say, we should work through it. fourth, when the world changes, as it did 10 years ago, policies, especially monetary policy need to be adjusted. that's true for most people, but not for everybody. such an adjustment is never easy. it requires and i'm prejudiced, a new assessment of the new realities with clear eyes, ofncumbered by the defense previously held paradigms that have lost any explanatory power. fifth, we mus tbt be aware of te ours that remain in or knowledge.

the mainstream macroeconomic knowledge has little to say about the institutional impact economices on how performance can be affected. policy actions undertaken in the last 10 years in monetary policy have made the world more resilient, but we should continue preparing for new challenges. the -- it's not a lesson, but a remark. the changes often hinge on one fundamental idea. the natural question to ask is whether such an idea sprang out as a response to a specific policy problem, or was previously conceived in a mentality different, unrelated, intellectual

environment? it's a question that is especially relevant in economics when previously held consensus use change. -- consensus views change. it is also a question unlikely to have a precise answer. i'm going to use the 1939 words of the first director of the prince institute for advanced study, soon to be joined by einstein in the post war time. lmost every discovery has a .ng and precarious history thus, onward until the pieces fit together. today i have had the privilege

of addressing such people, geniuses, who piece the business makeher and may decide to contributions. thank you. francine: that was mario draghi speaking before he goes to jackson hole. when the world changes, as it did 10 years ago, policies, especially monetary policy, need to be adjusted. it was never easy. he did not give much in terms of how he will paper, but it was a nice framework to get us thinking about what they have done, the policies they have taken over the last couple years. let's begin with guy stear and ashok shah. thank you both. what did we learn from mario

draghi? lipped when it comes to tapering? >> it was a nice speech. the purpose of the speech was to say thank you to the academic for the research they have done. he said it has helped us to explain those decisions to policy makers and to the public. it was quite a humble speech as well, because he said there is a lot that we don't know. he said we don't make policy on the hoof. we live policy as well as we can come about we don't know everything. we make policy as well as we can, but we don't know everything. experience of last time, the indication, was that they wanted to think about tapering. tightening.a and then an undershooting of the inflation target one year from now.

it is very likely he does not want to repeat the same mistake now. it is difficult for him to give any further guidance. i think enough has been put on the table. we have an economy that is doing very well, which is still strengthening, and in that sens promote any tapering further because that will exacerbate the problem. the euro, which is fairly valued now, is likely to get a lot stronger and that in turn is going to get the 2% target harder to get to. i think he is boxed in right now. francine: but guy, it seems he did try to taper -- he gave us an indication as to how the ecb ngth.that euro stre >> they are impressed by the

growth situation. it has been better than anybody expected. they are still grappling with the lack of inflation pressure. it's clerar that central banks want to taper. they just don't know how seriously to take the lack of inflation pressure. we are moving into a tapering environment and we look at smaller increases. we will see progressively smaller central bank activity and quantity of easing for the ecb. francine: let me bring you over to my ecb balance sheet chart, thank you, hillary clark. there's a breakdown for the different asset classes, marginal lending. how much does he have to taper because there are not enough of the german bunds to buy>? >> the either have to taper or

change the promoters of the policy to find other things to buy. our view as a house is we think when they extend it, they will extend it to a smaller amount. they will extend it over the first six months of next year. then, they will be a further extension of the program in the second half of next year. yes, we will get tapering. they think even without, will have to be somewhat imaginative in terms of the program, in terms of the flexibility and in terms of buying and more changes, in terms of the parameters. francine: ashok? >> we are running out of the bunds to buy. the only outstanding options remaining are to purchase more of the italian government bonds. all of a sudden, the ecb is then crossing the line, which is very close in terms of financing the

government, and then you will get opposition from the german politicians that this is a no-go area. it is changing the mix. area where a bit toe help can be given accelerate the strengthening of the banking systems in europe to help them down the line, which can change the economy growth rate into a much more sustainable trajectory. francine: thank you. mario draghi and janet yellen speak at the jackson hole summit thursday and friday. plenty is coming up. including, president trump threatens to shut down the government if he does not get his boardwalk money. wpp shares plunge as advertisers slash their

spending. this is bloomberg. ♪ francine: this is "bloomberg

surveillance" and i'm francine lacqua in london. let's get straight to the bloomberg business flash. wpp have aes in fallen by as much as 12% after the world's largest advertising company cut the full year revenue forecasts as clients cut marketing spending. the company says like for like revenue and sales growth is expected to be between 0% and 1% in 2017.

companies are getting more worried about the economy and feeling less confident in spending money and hiring and investing. the employment of federation says economic conditions have fallen to the lowest levels this year. all those they are still looking to hire, the confidence has diminished. the securities and exchange commission has privately signaled to financial firms it is working on a fix to allow u.s. brokerages to sell the analysis to european money managers. that practice is under threat because of two regulations due to come into effect in january. after seeming hesitant earlier this year, sec staffers are engaging more with firms and have intensified efforts to find a solution. palmer is teaming up with google to allow shoppers to order by voice -- walmart is teaming up with google to allow shoppers to order by voice. they can use voice-activated

google home speakers to purchase hundreds of thousands of items for delivery. the collaboration is the latest example of walmart finding a technology partner as a tries to catch up with amazon. that is the bloomberg business flash. francine: president trump went on the offensive at a campaign style rally last night. he threatened a government shutdown of congress, which his government party controls, if you does not get the funding for his border wall. donald trump: believe me, if we have to close down our government, we are building that while. -- building that wall. let me be very clear to democrats in congress to stand in the way of border security. you are putting all of america's safety at risk. francine: the president also hinted he might terminate the north american free trade agreement at some point. his comments sent futures and the mexican peso lower. let's get more from stephanie

baker. guy stear and ashok shah are still with us. stephanie, if you look at the upcoming debate on the debt ceiling, usually the president tries to get this through. how did his comments yesterday play into everything? >> it is remarkable the president is calling for a shutdown of the government. looking at what happens next, it is unlikely that democrats will support him on the plan of funding the wall, or frankly, every other aspect of his legislative agenda, given his response to charlottesville. unlikely to be seen as supporting the president's agenda. he needs democrats to pass the budget and lift the debt ceiling. so, it's very unclear how he is going to get that done. i would point people to a really interesting story and "the new york times" about mitch mcconnell, the senate majority leader, about how he told

friends and aids privately that he does not see how the trump presidency will survive, that the presidency is unwilling to learn the basics of governing. if he cannot even work with party, it iss own unclear how he could get democrats on board. francine: if you look at the debt ceiling, it is all in the president's interest, that the dbet ceiling happens. >> i think the big issue is who gets the blame in this if it does not go well. and i think he is trying to park the blame firmly at the seat of the democrats, calling them obstructionists and and they will be blamed going into the midterms in 2018 for not getting his legislative agenda through, or if worst comes to worst, shutting down the government. francine: what about his comments on north korea? >> this is another example of

how you are getting mixed signals coming out of the trump cabinet. i mean, the state department said we are far off from being at a point where we could start any dialogue with north korea. rex tillerson said the opposite, and he was hopeful, given recent events, that we could begin a dialogue. so, mixed signals. i'm not quite sure what that means. you have a divided state department with the leader of the state department saying one thing and the rest of the state department saying something else. francine: stephanie baker, thank you. guys, what do you make of this? it seems that it is getting more toxic. before, we were talking about charlottesville. his comments were very badly taken. naive about the world, but i believe it will be possible to have a small amount of money allocated for a small

bit of war, which is basically meaningless. and everybody can save face and move on. i agree the worst-case scenario would be shutting down any bit of the government for this relatively unimportant reason. pretoria is the more work -- north korea is the moruy issue. someing i think one interesting thing in the way markets have looked at this is, they seem to be taking every individual shock less seriously and they begin to us them that nothing will happen for the next four years. maybe that is naive or overly optimistic, but i think in the absence of anything else, that is how we are looking at that situation. francine: is it naive? or is it levelheaded? you just need to cut out the noise -- and there is a lot of noise. >> there is a lot of noise, but what is quite clear is the current administration is

becoming unimportant. now, you really don't now what to trust and what not to trust. i think effectively the market is going to give less and less emphasis. what we are seeing, is the market moves are going to be smaller and smaller. effectively, it will not have much direct influence on the market and how it is progressing. he might have infighting, which could be continuing, and try to get back to the people supporting him. but i think the situation at the end of the day is the economists are doing relatively ok and we are in a season of double tightening, so it is up to the fed to ride the market. impact ons and less the market. francine: thank you so much, ashok shah, guy stear, and

stephanie baker. wpp shares plunge. more on that next. this is bloomberg. ♪ francine: this is "bloomberg

surveillance." shares in wpp have plunged this morning after the world's largest advertising company cut the full year profit forecasts. we are now joined by the bloomberg marketing reporter. first of all, the stock is down 10%.

at some point, it was down 12%. what is going on? >> the market is reacting negatively to this cut announced this morning. there have been concerns about wpp this year. there is a confirmation that the pressures feared, such as cutting back on spending by the biggest clients, have hurt wpp. francine: you just got off the phone. does the tone that he set out feel different to his tone in the past? reporter: certainly, he is seeing this challenge of the big clients like unilever, cutting back. his tone is very much, it is difficult for wpp to respond, but what can you do when your biggest clients are

cutting back on spending? francine: are they doing better or worse? reporter: across the industry, it ihas been difficult. it's across the board, this difficulty. wpp's response has been going out, buying more companies, investing in more digitals, getting ready for the future. francine: thank you very much. up next, rolling back on the red line. why theresa may is backing down on the european court of justice ahead of brexit negotiations. we will be talking about brexit, the pound, the papers published this week. this is bloomberg. ♪

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which is why comcast business delivers consistent network performance and speed across all your locations. fast connections everywhere. that's how you outmaneuver. francine: you are watching "bloomberg surveillance." let's get straight to the bloomberg first word news. here's nejra cehic. nejra: ecb president mario

draghi has been defending the policies of global central banks. he said forward guidance has helped steer market expectations of future short-term rates. draghi also says the empirical evidence that policies have supported the economy inflation in the euro area and the united states. president trump is threatening to bring the u.s. government to the brink of a shutdown to pressure congress into funding his mexican border wall. trump attacked democrats who have objected to his plan. >> we have to close down our government. we are building that wall. let me be very clear to democrats in congress who oppose the border wall and stand in the way of border security. you are putting all of america's safety at risk. nejra: the yen strengthened and u.s. equity futures slipped after trump said he may end the

north american free trade agreement. the president said canada and mexico had taken advantage of the u.s. under nafta. german chancellor angela merkel has rebuffed the caricature of her party as obsessed with debt. she said that her budget record is an act of generational justice. merkel's chief of staff told bloomberg that germany has a vital interest in preserving the diesel automotive industry. >> i'm optimistic that we will overcome and the german car manufacturing industry will come out of this situation stronger and safer as it has before. nejra: trading on the hong kong stock exchange was suspended as authorities announced the highest level storm warning for the first time in five years. the severe typhoon caused hundreds of flights and trains to be canceled. all schools were closed for the

day. global news 24 hours a day powered by more than 2700 journalists and analysts in more than 120 countries. i'm nejra cehic. this is bloomberg. the u.k. will release a crucial brexit position paper later addressing the jurisdiction of the european court of justice. prime minister theresa may, who declared the u.k. would take back control of its laws, has conceded that e.u. law will influence britain after it leaves the bloc. a new report says british companies are becoming more worried about the economy and feeling less confident due to uncertainty. stear, heads, guy of fixed income research at societe generale, and ashok shah. when you look at the brexit debate, we're going into the , whenof autumn negotiations start about the e.u. position. how do you rate this so far?

ashok: what is clear is that the fear that we are heading for a very hard brexit has been a late somewhat. we've seen numbers that indicate the u.k. is prepared to compromise on some critical issues. it allows the progress to be made. two years is a very short time to get everything in place. hopefully we have a set of policies sooner rather than later. what we have seen has been a willingness on the part of the u.k. to give a reasonable amount of ground and see how it goes. it is part of negotiation tactics, so we need to be careful that this may not be the final picture. a lot of the concentration that people were worried about, though saying we're going to fall off a cliff or hit a brick wall, i think those fears have been allayed. francine: what is your take, guy?

it kind of depends whether we crash out of anything or have a transition agreement. guy: what defines the difference between hard brexit and soft brexit is what kind of trade deal gets signed. the limitations of a trade deal is movement of people. there still is a very broad gap between what the u.k. government thinks people voted for and what they want, and what the european union is prepared to accept. while i agree that there have been some conciliatory steps, i think the mood has improved between the two sides. there still is a gap between the way the two have interpreted what is happening. francine: where do you see the boe going? baseve a chart of the u.k. compared to the cpi. the concern is that the inflation has to do with the fall in pound. do you look at brexit negotiations or just the

fundamentals? guy: the fundamentals you probably focus on more are the growth figures. some of the survey data is suggesting that people are feeling less optimistic. i think the real concern now has to be that that starts to feature in growth figures. i suspect it is going to be in the u.k. francine: do you agree with that? ashok: absolutely. what we've seen is a cycle that is updated on the fed relationships. we've got now the real rates falling already. the underlying economic momentum, the trajectory, is going to be much calmer than the last year. there was buoyant consumer spending. we can't repeat what we have done. the short-term concerns about

the high inflation rate, there's a lot to perhaps discount. the sterling, that basically washes out after a year, year-and-a-half. inflation is naturally going to fall below 2% coming into 2018. francine: because we don't know what kind of trade agreement we get with the e.u., we could be stuck with some kind of big inflation that is actually proper inflation. unlikely, i guess? guy: i think the worst case muchrio is, you don't have trade, so you limit in terms of trade. weaker,d may be even but i would say you don't have

much domestically driven inflation going on because you have weak growth. francine: why was mark carney saying he could hike sooner than the markets were expecting? ashok: i think the growth momentum in europe is good. inflation has been strong as well. it is indicating the policies have been successful and it is time to reduce some of the accommodation. it is still going to be very accommodating, but less so. francine: we are going into jackson hole. that starts tomorrow. did you believe in the central act, this kind of general hawkishness from the main central bankers, and what will we get in jackson hole? guy: probably nothing explicit. i think they are -- i think the u.s. looks less at what everybody else is doing. i think mario draghi is looking over his shoulder at what the

u.s. is doing. that is true in terms of the u.k. i think the real issue for europe is trying to understand how the u.s. deals with the desire they have to normalize the balance sheet. that u.s. inflation really isn't going anywhere. i think that is going to be interesting. the single most interesting thing to see potentially out of jackson hole is some sort of clarity on how you balance the situation in terms of inflation. francine: stay with us. guy stear and ashok shah. stay with "surveillance." plenty coming up, including china's crackdown on offshore deals. this is bloomberg. ♪

francine: you are watching "bloomberg surveillance." let's check in on your markets. here is mark barton. mark: wpp chart ready. my --t timing, as i chew what a day it has been. down by 10.6%. did fall as much as 12%. biggest decline since 1998. 2.1 5 billion pounds wiped off the share price. the world's biggest advertising company cutting its full-year revenue forecast, clients slashing spending. particularly noted in the consumer goods sector, like for like revenue growth expected to be between 0% and 1%. wpp did say it didn't experience

any significant loss in revenue from clients or the data from that cyber attack in june. it is all about that change in the revenue forecast. draghi just spoke in germany. this is the taylor rule, which gives an estimate what a central bank interest rate should be. #btv 3 622. the eurozone is a lot of countries. to take on some of the estimated rates is quite comfortable. poland, 9%. -1.3% for the periphery. ireland in between. fantastic chart from queen of charts. u.k. government getting more worried about the economy feeling less confident according to a new report by the recruitment and employment confederation. it said its index has fallen to

the lowest level this year. this is industrial metals versus the rest. it shows the disparity within the commodities space. this is in the last year. look at how industrial metals have fared. compare it to precious metals. agriculture, energy, all in the negative. there's a big divergence. it isn't all about metals. francine: it isn't all about metals, but a big chunk is about metals. now let's turn to china. abandoned plans to buy a plot in london for 470 million pounds. this is the latest example of chinese firms aiming to avoid overseas investments. thee regulators are worried acquisitions could destabilize china's financial system, weaken the currency, and create more debt, repeating japan's mistakes. still with us, guy stear and

ashok shah. look, you are going to china in a couple of weeks and you are head of emerging markets. we have a perfect lineup of guests. what do we learn about china in the last couple quarters? guy: most recently, the chinese government is trying to discourage outflows of capital. they've been very clear, saying there are good outflows, mediocre outflows, and that outflows of capital. the things they consider to be good are linked to the belt road project, and i'm not sure that buying land in central london could be construed within that sort of area. i think there is more of an effort by the government to steer where companies deploy their capital. what is clear from the

statements we've had this week about auto company purchases, they would like to be buying firms in the u.s. and in europe, but i think it is the government which has the deciding power. francine: what do you worry about in china? we know about the stress in the financial system, the debt. is there something that we don't understand? guy: for me, the canary in the coal mine is the property market. if you look at what the macro property data has been in terms of china in the 70-city survey, we tend to weight that a by the populations of the cities. what you've seen is a steady deceleration in the month on month increases in property prices. they were extraordinarily strong. they've come down to relatively modest levels. where not seeing a period they are declining in terms of

month on month. if we go through a period where prices are declining month on month, that would be the tip of the iceberg in terms of bigger problems. francine: you need to find this canary in the coal mine, right? ashok: it is always on the excess liquidity in china flows into the real estate market. one of the reason why the central bank is very reluctant to cut interest rates is simply that it makes the property bubble become even bigger. there have been a whole range of administrative measures they've brought in, and that has effectively controlled the price rises in the cities. the speculation is then moved on to tier three and four cities. situationu are in a where the whole property market in aggregate is at a level where it is pretty much fully priced.

i think the question for the government is to make sure the bubble doesn't burst. ofrein lies the conundrum whether it is the interest rates side or the fiscal side or the liquidity side and how to manage it to keep the growth rate going at 7%. that they'veis been fairly successful in terms of making sure the liquidity transmission mechanism works through properly in terms of the nonperforming loans. there's a lot of debt to equity conversion going on. large percentage of this problem are the state owned enterprises, which can be supported by the central government. the central government debt to gdp is reasonably low. there's a lot of good news out there. i think expectations of the growth rate between 6.5% and 7% can continue for the next couple years. francine: do you agree with

that? does it actually matter? because of chinese demographics, because you have smaller growth in the working age population, you probably have less need for growth in terms of employment growth. that is definitely true in the medium-term. i think it is going to be difficult judging the growth of salaries and trying to explain to people why your nominal rage -- weight growth is beginning to decelerate. we've certainly moved away from five years ago. i'm still quite concerned in the medium-term about the growth of leverage in chinese corporate's. if you look at things like the dollar-denominated e.m. corporate bond markets, about three quarters of the net issuance this year has been

chinese companies. chinese companies are borrowing much more than emerging-market corporates anywhere else in the world. there is a lot of leverage which continues to build up. francine: guy stear, head of fixed income research at societe generale, and ashok shah, thank you for your time. how the sec is working on a plan to sidestep european regulations. this is bloomberg. ♪

francine: you are watching "bloomberg surveillance." let's get straight to the bloomberg business flash. have fallens in wpp by as much as 12%. that is after the world's largest advertising company cut its full-year revenue forecast as clients slashed marketing spending. the company said like for like revenue and sales growth is expected to be between 0% and 1% in 2017, down from an earlier 2% forecast. u.k. companies are getting more

worried about the economy and feeling less confident. the recruitment and employment confederation says an index of economic conditions has fallen to the lowest this year as a greater proportion of respondents said that although they are still looking to hire, their confidence has diminished. john watson, who has led chevron since 2010, is planning to step down. according to the "wall street journal," the company has not made a final decision on its successor, but vice-chairman michael worth is seen as a candidate. the paper says an announcement is likely to be made next month. francine? francine: this is what you should be watching today. french president emmanuel macron starts a tour of central and eastern europe. at 2:30 u.k. time, whole foods holds a shareholder meeting over its takeover by amazon. we also get some u.s. new home sales data. the data is pretty small

compared to the event that is jackson hole. friday, we hear from mario draghi and janet yellen. the securities and exchange commission has privately signaled it is working on a fix to allow u.s. brokerages to sell analysis to european money managers. the practice is under threat ano european money managers. despite being a european law, it is having global ramifications. one of those is impact in the u.s. markets. u.s. banks provide research.

it is consumed by people all over the world, including european money managers. there's a question about a conflict between these new rules and laws that date back decades. francine: so the u.s. is looking at ways of being able to circumvent mfid? >> it is basically clarifying a conflict between the two sets of laws, so that essentially u.s. brokers and banks that provide research around the world can continue doing so, and money managers in europe can continue relying on it for their investments without running afoul of long-standing u.s. laws. it has really percolated in the last few months, becoming one of the last thorny problems before this european law starts in january. is at an if the u.s. advantage compared to european companies, can you change regulations are not?

>> i think changing at this point is pretty hard. this has been years in the making. the legislative process in brussels and at the various regulators take quite a long time. , it only four months to go is very hard for brussels to make this change. it is kind of left in the sec's court. francine: thank you so much. we will get you on to figure out what this means. our financial regulation reporter. "bloomberg surveillance" continues. david gura will be joining me out of new york. we will be talking jackson hole, trump, and brexit. this is bloomberg. ♪

francine: ahead of jackson hole, mario draghi says central-bank

policies have been a success, but they must remain open-minded. back against the wall, donald trump threatens to shut down the government unless he gets his way of the mexican border wall. he also says he might stop nafta. theresa may confirms that eu he situation long after brexit. i'm francine lacqua in london. and david gura is in new york. i know we have to talk about jackson hole and politics. david: this was a campaign style rally in phoenix last night that went on for 75 minutes. a lot of people wondered if he would talk about what he raised in his speech tonight before. he talked about the border, the debt ceiling, and really moved markets last night. francine: i think a lot of markets were unprepared for that, the debt ceiling. here's taylor riggs.

david,r: francine and president is threatening a government shutdown is needed to get congress to pay for a border wall with mexico. the president spoke at a rally in phoenix, promising to pass some form of a spending bill by september 30. he wants $1.6 billion to begin building the wall. the u.s. navy as responded to a series of accidents by firing the admiral in charge of the japan-based seventh fleet. they relieved the vice admiral, saying they had lost confidence in his ability to command. this happened days after the uss john mccain was involved in a fatal collision. there have been four accidents under his comamnd, two of which have been fatal. research shows that quantitative easing and forward guidance have been a success. mario draghi spoke in germany. >> forward guidance has gutted expectations of future short-term rates. qe involved direct intervention

by central-banks through large-scale asset privileges to influence the yield curve. reporter: he gave no clues as to when he might end monetary stimulus. he's begun this friday at the jackson hole summit. -- he speaks again this friday at the jackson hole conference. theresa may is conceding the eu will influence the u.k. long after brexit. a new paper out today says the u.k. wants direct jurisdiction, aimed at speeding up brexit talks. global news 24 hours a day, powered by 2700 journalists and analysts in more than 120 countries around the world. i'm taylor riggs. this is bloomberg. david: a quick check of the data on this wednesday morning. i mentioned the market moving nature of that speech last week. i am looking at the dollar 17.77. right now,

we have seen some move in the dollar-mexico. 58e bloomberg dollar index, 11 and the u.s. 10 year yield at 2.22. francine: the euro is standing out as the gainer. we had pretty strong economic data boosting confidence in the region's gold. donald trump provoked another bout of investor caution. wpp had to cut their forecast for the future. i'm looking at this because of the mario draghi comments. i think the figure out where tom keene is. he was addressing 17 noble laureates in germany. tom was listening.

this is a picture of the balance sheet of the ecb. it is a complicated chart, but it goes back to the crux of the matter, something we were trying to get out of our guests on radio, when you are asking if draghi has a problem going forward, which could be forcing his hand when it comes to tapering. david: i'm looking at the central bank here on my bloomberg for the meeting in jackson hole we have later this week. looking at the central big policy divergence, you see them targeting the upper bound. this is something we talked about in detail with alberto gallo yesterday, where the fed is versus the other central banks in the u.s. they are proposing an exit from quantitative easing. president trump went on the offensive at a campaign style rally in phoenix, threatening a government

shutdown if congress does not approve spending for the border wall. donald trump: believe me, if we close down our government, we are building that wall. let me be very clear to the democrats in congress who oppose the border wall and stand in the way of border security. you are putting all of america's safety at risk. david: president trump hinted he might terminate the north american free trade agreement at some point. his comments send the mexican peso and the s&p 500 lower. for more, kevin cirilli joins us from d.c. let's start with the nafta comments on the heels of the first round of renegotiation talks with the u.s., canada, and mexico. is it fair to say this was an unscripted remark from the president? it certainly scared market participants. it seemed like the process was underway to have a coordinated renegotiation of that free trade agreement. anin: this was totally

unscripted moment regarding nafta, but it was very much in bageling what he said on the campaign trail. just last week, it was said he was going to go president trump with regards to the renegotiations of nafta. when he spoke at the opening of the nafta summit in washington dc. inside a little bit of the market reaction with regards to that. i can tell you that behind the scenes, most folks working on nafta are anticipating there to be somewhat of a quick wrap up on that, simply because you have got mexico having elections, the u.s. having midterm elections, and everyone working on it is anticipating that as of now, there will be eight wrap up -- there will be a wrap up early next her. david: this is a piece from "the new york times." this is from one of your colleagues from politico about

the relationship between president trump and the senate majority legal mitch mcconnell. uneasys once an government alliance has curdled into a feud of mutual resentment and sometimes outright hostility. the lawmakers who are on recess now come back to washington at the beginning of september and have a very busy agenda. how much is this president going theeed to rely on majority leader? kevin: there is not that much communication between republican leadership and this white house. last week, as i said on bloomberg television, the speaker of the house had not spoken with president trump following his response to charlottesville. i mean, that's kind of -- let's just let that hang. a republican-controlled congress and the republican-controlled white house and they are not talking. last night's speech was

interesting for a variety of reasons. number one, it was a flashback to the campaign trail. but number two, when you look at what was on the line for the month of september, raising the debt ceiling and getting the tax reform -- that combativeness when they are not even talking in the republican party big the question whether there is any legislative strategy to get through the end of the year. francine: is he trying to already put the blame on someone? first of all, i have never really seen a president say, if you don't do this, i will make sure you don't get the debt ceiling passed. but is this trying to put the blame on democrats? is he actually campaigning for 2020? great francine, that is a point. because what i think what he did last night in his own t rumpian way to lay down the battle lines in the markers. we talked about the border wall funding, democrats versus republicans, but let's be blunt.

most moderate republicans don't want to have a government shutdown heading into 2018 midterm elections. the ruling party always gets the blame for any type of government shutdown. let's also be more blood. folks watching on wall street and main street and business leaders understand the nuances, what really is at stake with the u.s. government not making good on its debt, and they understand the policy war is between ultra conservatives, the moderates and the republican party, far more influential than democrats versus republicans. francine: kim is really, thank you so much. andng us now, eric lonergan jonathan bell. eric, i'm not sure what you make of these trump comments on the debt ceiling. i always was told the debt ceiling was huge because you had to get it through to get tax reform. now he's campaigning against himself. >> you have to this come in

a here between what actually matters and what is trump. trump so far has been a lot of sand and fury signifying very little. could the debt ceiling manner? it could. you could make a circumstance where it matters. does trump matter? the evidence is much less. what we have learned about u.s. political institutions is the presidency is extremely constrained. the republican party is not really united, 70 can't legislate. -- not really united, so he can't legislate. i think trump toomey has been predominantly a non-event. he is the first celebrity president and has been good at creating headlines and generating noise, but if you look at the world and ask if anything has changed, i'm not sure if anything concrete has mattered. francine: but is there a danger in writing him off?

he is still the commander-in-chief. something unexpected could come when it comes to internal politics. >> we expect him to be president for a number of years. he certainly matters. negotiation is always to threaten to walk away. what we saw last night, in terms of nafta, if we don't get what i want, we will walk away and in terms of building a wall, if we don't get what i want, i will walk away from the debt ceiling. this is his style of negotiation. it does matter and it is a shame to take the u.s. that feeling again to the wire. it i-- take the u.s. debt ceiling again to the wire. been a movehere has forward with discussion over tax reform. there has in progress and this is just trump speaking at a rally and to doing what he always does when he is talking to his supporters.

you here, me just ask jonathan, who you listen to and washington on issues on trade in particular. asked, do you listen to president trump are the treasury secretary? how much credence to you give to the president here, as opposed to wilbur ross? >> you have to listen to what the president is saying because you have to know what he is going to agree to, but you've got to deal with both houses and party, weepublican have a republican party dominating congress. they have the ability to pass rules and laws. so, you have to listen to both sides. francine: thank you so much, jonathan bell and eric lonergan. coming up, we speak with princeton professor and nobel laureate chris sims. this is bloomberg.

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reporter: this is "bloomberg surveillance" and i'm taylor riggs. shares of the world's largest advertising company fell by the most in 17 years today. wpp cut the full year revenue forecasts as customers reduced spending. wpp says that ad spending on consumer goods has come under particular pressure. in germany, chancellor angela merkel's chief of staff says the country has an interest in diesel preserving technology. >> i am very optimistic that we will overcome this and the

ar manufacturing industry will come out of this situation stronger and safer at as it has been before. reporter: chancellor merkel says he wants to restore trust in diesel cars. that is your bloomberg business flash. francine: thank you, taylor. janet prepares what might be her last speech at jackson hole on friday. said there was a similar backdrop for alan greenspan back in 1999. like greenspan before her, she to to decide how much weight give each issue as she tries to keep the economic expansion back on track. jonathan, when you look at janet yellen and mario draghi, are we

expecting too much from jackson hole? i know it is important and draghi gave a big speech in 2014, but we don't know where we are yet, do we? >> i think we know where we are heading. we are heading towards the federal reserve reducing their balance sheet and ecb tapering purchases. the question is, how much they can hint to that in what they are saying in the next couple days. janet yellen, having just had president trump saying he is prepared to take the u.s. to a ceiling to the wire makes it difficult for the next fomc meeting. that makes it hard for me. but overall, i think you will hear from mario draghi. you will want to say something that stops the euro goigng up, that hints at the tapering, but

will highlight this big interest rate differential. you still have big interest rates in europe and that will continue. monetary policy is still very loose in the eurozone. janet yellen is in a different position because we have got a tightening slowly happening in the u.s. it will be pointing to the fact of financial stability and that the tightening will be very slow. francine: this is a morning must-read. let's bring it up to see what exactly we picked out. he says a lot more work is needed to understand the consequences of persistently low inflation. until that happens, central bankers might be advised to stick with what they know, rather than and up with a future financial instability that undermines prospects for growth and prosperity. understand if the films model curve -- if the philips

model curve is broken, or just a sleep at the moment? >> i think we do. in terms of the underlying rate of inflation, largely the structural break over the last 30 years has been the deregulation of the global economy. we have also recognized for quite some time that the central bank has been in control of short run inflation dynamics. they can highlight big shifts in the inflation rate, if you generally have coordinated money printing of some sort, they can shock the system. other than that, they don't really control inflation over a one or two year time horizon. there's an intelligent debate here to be had about the issue of financial stability. that's probably what they should be focusing on in jackson hole. i'm not very optimistic that they will. i think interest rates are no longer fit for purpose.

that's pretty clear and there needs to be a genuine rethinking. there has also been a lot of innovation people are not been focusing on. things the bank of japan have been doing are far more important than qe. they are not really being talked about. the need to focus on their contingency plan. david: what is this trade-off, and is there anything we can do about that? >> there are a couple inflation targets themselves. john williams of course, is reevaluating the 2% target. is it worth translating that into something more practical? >> it is an academic exercise and not practical. if you can't meet your current target, how can you possibly claim he will meet the higher target? it makes no sense. to get to the higher target you have to get to her current target first.

i think the change in the target is a complete distraction. it works in economic models, for very obvious reasons, because it changes interest rates, but in the real world, no. people do not have these type inflation expectations. there is an -- artificial degree of precision that is being implied by those kind of ideas, frankly. francine: eric and jonathan both stay with us. we will have much more on both the market and currency swings. this is bloomberg. ♪

francine: we are back in two. let's get back to eric lonergan and jonathan bell. jonathan, first of all, we are seeing a little movement on the euro-pound, 0.92. army going to get to parity? -- are we going to get to parity? been stronghas against the dollar and as a result, you had the pound weakening against it. personally, i think the euro strength has gone far enough and therefore, we will not hit parity. i think people will realize there is a big difference in monetary policy between the u.s. and euro, which will stop the euro strengthening. as far as the pound is concerned, it is all about the brexit. at the moment, the brexit news is heading towards better news. francine: eric? >> that looks like a pretty

strong trend to me. the fx market in the short run is trending. i think there's value in stirring -- value in sterling versus the euro. francine: thank you, guys. it is impressive because we are back to 2009 levels. we will be talking about china next. we will also be talking about risk and risk-taking. coming up later, the must watch of the day. ceo.week's guest, the ibm that is at 9:00 p.m. in they are -- in new york and this is bloomberg. ♪

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>> an hour away from sunrise. i am a david gura in for tom

keene and francine lacqua in europe. david, francine, last night, president trump sent a message to congress, spend the money for border wall or else. me, went trump: believe have to close down our government, we are building that wall. let me be clear to democrats oppose a border wall and stand --the way of border security you are putting all of america's safety at risk. until: congress have september 30 to pass a spending bill. the president has asked for $1.6 billion to begin the wall. president trump is suggesting that the country may be moving closer to kim jong-un on. is president said that kim starting to respect america. rex tillerson said north america

have not carried out provocative -- since thethe u you in pass resolutions. d- since the un passe resolutions. it isals have argued unrealistic that thing pakistan has control over the group. over in germany, angela merkel is rejecting the christian democratic union party as being obsessed with -- she said public debt is a burden on future generations. merkel's challenger wants to send -- wants to spend more on education and infrastructure. he had of the european central bank said quantitative easing has been a success. mario draghi spoke. >> forward guidance has shortened rates. qe involves direct intervention

through large asset purchasing. taylor: he gave no clues on when he might end monetary stimulus and streets again this friday at the jackson hole conference. global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries, i am taylor riggs. francine: thank you. a crucialill release brexit paper addressing the jurisdiction of the european court of justice. theresa may declared that the u.k. would take back control of his laws have not conceded it will influence britain after italy's the bloc. -- after it leaves the bloc. a report said british companies are more worried about to the economy and less confident due to uncertainty. joining us now is jonathan

portes and is still with us is eric lonergan and jonathan bell. great to have you on the program. we spoke about two or three months ago and quietly optimistic while cautious about what brexit will bring. worse or better? jonathan portes: we have basically made very little progress in the last two or three months. from that standpoint, it is bad news. we are running out of time. what we are seeing in the position paper released today and in some of the others out of the last week or two is the really station of the part of that theyovernment will have to make compromises and back away from the red lines on the european court of justice if they want a deal and they recognize of theresa may's claim that no deal was better than a

bad deal was just a slogan. there is less than a 10% or 20% chance of a crash out? i think it iss: less than one in three. not the most likely outcome but ifis still quite possible politics get in the way here. the prime minister has to take her government which is bitterly divided on this issue and the country appears to be bitterly divided and a so far, she has not been very good at doing it. helmet understand the utility of the position papers. how are they likely to be received and brussels? jonathan portes: i think brussels will say it is a start and the kind of papers and language we were expecting and

we would have rather had it in three months ago. it at least provides the basis for a sense of the discussions. i think they will be welcomed, but the eu is very clear we have to sort out the article 50 issues that are citizens' rights and northern ireland border and most difficult and important is the financial obligation of the eu before we can move on to talks about a future trade deal. i think the eu will become very impatient if the u.k. talks about, well, this is what we want and the future trade agreements while of not engaging in the difficult positions like a financial settlement. david: part of the motivation seems to get things going. ,hen you look at the timetable how behind do you think the uk's is in these negotiations? ilio -- jonathan portes: would say we are two or three months behind.

the timetable was always going to be tight, but it has slowed to further as a consequence of theresa may's rather botched general election. we originally hoped that by october or so, we might be in a position to move on to the next stage of the negotiations. that is not a possible but it looks unrealistic at the moment. the european side is talking up potential delay of a couple of months or so. francine: what looks unrealistic at the moment? his inflation your biggest concern? >> what i think that jonathan portes has written among the best stuff and i agree with almost all of his things. i have to stand back is the cyclical significance, structurally, it is a negative into the medium term. caused,an the variables

most of the economic data in the u.k. disturbed by sterling and that is the dominant driver because consumer behavior is mostly individuals. it has a whole series of effects. trade wind to sterling will be pretty flat year on year. those will start to dissipate. unemployment is the lowest since the 1970 and that's phenomenally good outcome. iom a cyclical standpoint, think brexit effects will start to dissipate and they have been modest. englandwill the bank of , to some extent, brexit has to be parked and should they be raising interest rates? francine: nothing happened and we do not know and we do not know what is it looks like. what if we do not get a trade agreement? or what if we get a rubbish trade agreement? disagree that the

brexit effects are dissipating. we have not had much otherwise because there has been uncertainty of people wondering what is going to happen in next. i entirely agree it is getting delayed. what will it end it is transitional. the more it gets delayed and the more the transitional arrangement ends of looks like something where we are today. david: let me follow up. we're hearing that story -- sterling is the big driver of what is going on. what about uncertainty? how big of an and factor is that you?- an x factor is that sorry, it is to jonathans. arehe real economic effects almost entirely driven by the exchange rate and we have not seen that uncertainty, through so far as many economists

feared. i think there's beginning to be some evidence it is coming through now. that is a consequence because as time ticks away, we do not know what the transition deal is likely to look like. people, businesses are going to see it is more and more of a reality and not just uncertainty but real uncertainty and some investment decisions are being delayed. david: from one of jonathan to another, do you agree with that? we all saidl: yes, the same thing, sterling up until now rather than sentiment. i think sentiment is falling back. the question to me is essentially, if we will feel softer brexit, maybe sentiment can recover again. >> i think it is the biggest risk for brexit, it is -- we focus on an obvious single variable of their other things

that will influence and that is the challenge putting it in the context of everything go, the fact that depreciation and the global economy and what is happening to technological innovations. and unfortunately, a lot of contingency planning meaning in efficient capex. -- of theyou are problems of how you look at the economy are similar to what the bank of england have to do. do you look at brexit negotiations blow-by-blow every week or just sterling? eric lonergan: i have to stand back. you cannot predict how these negotiations will go. you can follow rigorous analysis. as a practical investor, i have to look at a probability distribution. you can i know each stage for the bank of england had not that -- cannot set hypothetical.

they will taken into account and a whole lot of other factors and is they do not see effects, they will ignore it until it causes something significant, which it may order may not do. finalne: jonathan portes, word from you. what will you be looking out in the next two or three months? we are hearing that the eu is not prepared for this. is there any truth in this? jonathan portes: on not prepared, that is partly fair and unfair. civil service have done in lots of on the basis of what ministers have done. and lots of work in detail. what does not happened is ministers in prepared to take the big, strategic decisions. for example, yes, we will accept the jurisdiction in some some respects post-brexit. is that beginning to happen? maybe.

if so, we will see quite a bit from the u.k. government and of the details underpinning work has already begun. what we have not seen and what is the big question whether ministers are able to take decisions across the board, in particular on the u.k.'s financial settlement with the eu. the u.k. will have to say, yes, we will pay this part of the bill and no, we do not want to pay this. they have not done that yet and that will be a big political moment. francine: jonathan portes of king college london and eric lonergan and jonathan bell will stay with us. we will week with the gary shilling at 6:00 a.m. in new york and we will speak to another laureate. this is bloomberg. ♪

david: i am david gura with francine lacqua in london. this is "bloomberg surveillance on bloomberg. a londong plans to buy trademark and this is one example of chinese trying to avoid government scrutiny. shanghai composite is edging toward key 3300 level. and back to eric lonergan and jonathan bell. jonathan, let me start with you. thathrust of the city note the thrust of the citigroup note -- how mature is this market and how interesting is it to you? jonathan bell: it is not a -- perhaps i will

pass it over to eric. bond marketn: investing is not that complicated. you look at the starting point of yields and china is no different from the rest of the world. in real terms, very little compensation. in terms of currency and credit risk, it is low risk and a balance diversified bond exposure. you would want to include investment and liquidity. in terms of yields, not impressive. you still have a standing fundamental structural question marks over china that have not been resolved. note of outflows, how good is china doing at curbing them? the enticement to get into the chinese bond market, is it doing enough to curb the outflows? : i think it is a

bit of a sideshow and they are ok periodically constraining because they have a big stick with which to threaten people. the problem with capital controls is they do not work historically. capital controls have tended to work and when they have not, they have turned a blind eye to them. the big question is i think they should be floating and it is a problem in terms of micromanagement now and now firms, they are giving a heads up to sort out balance sheets and they should be brave enough and that would free them up for more monetary like helicopter drops. francine: at the same time, they seemed to be doing a good job of stabilizing which is almost impossible to do, outflows and currency in the reserves. i do not know if it's juggle or keeping all three activate -- all three at bay. jonathan bell: how do you manage

those flows of capital? and manages economy were debt is growing significantly? it is an easy deal to look at someone investing in real estate outside of china and say let's stop that, no real business commercial but he worth it -- commerciality towards it. real estate investment is easy for them to stop stop -- to stop. as they are successful when they can see there is no benefit while allowing companies to invest. francine: what does it mean, index,hina's stability is it a good way of looking at the future? is china the biggest risk? -- it isrgan: it is significant because it has been a recurring problem. we have this very clear set of

circumstances where periodically the can make celebrates in china and usually driven by debt. it is difficult to determine if it is private or public. they slow things down. every time, you get stimulus, it appears to be exacerbating the core problem, the problem of liability. they have a macro economic policy which is analogous to what we face and the west. there are two key points. the bears ignore the fact that the big difference between private and public sector debt. china, the bull case for a lot of this problem is sin of public liability. -- is semi-public liability. i think they're hurt by the exchange rate and fundamentally, there should be a much bigger public policy debate. why don't they flow?

they are big enough, strong enough and they should be confident. what is this, the second largest economy in the world? francine: a lot of people are like, at least they are keeping it stable. that is eric lonergan and jonathan bell stays with us. you could watch us using tv and ask questions directly to other and our guests using the clicking. there it is, a very active eric lonergan. and we are back in two. this is bloomberg. ♪

francine: this is "bloomberg surveillance." welcome, i am francine lacqua and david gura. working on a fix to allow u.s. brokerages to sell to you at -- u.k. -- and it is under threat. it comes into effect january 3. let's get more with bloomberg

financial reporter and still with us is jonathan bell. philip, great piece. why now? why is the u.s. looking to it? coming andng and started several years ago and starts january 3. the run up to the beginning, there are all kinds of questions about how sort of broad it spreads across of the world and there are lots of last-minute issues that are rising the one --about the issue of francine: how big is it? this is sort of over the course of the year emerged as a big issue in one of withast major problems this research issues within mifid. trade groups for asset managers

and brokerages or banks around the world have gone and made the case around the world including in washington to raise awareness and to ask for a fix from the securities and exchange commission. dave: let me ask you how this is playing doubt for you and your for -- out for you and your firm. it goes into effect early next year, how is it playing out in your firm? jonathan bell: it involves a lot of work. we have to work out for each custodian how we will handle the reporting. each one isn't doing it in different ways for you sometimes the custodians doing transactions and sometimes going through a different brokerage. we are having to speak to our clients. -- each one is doing the in different ways. -- sometimes the custodians are doing transactions and sometimes going through a different brokerage.

across really big issue our company. francine: thank you, both. silla brush and jonathan bell, staying with us. coming up in the next hour of "bloomberg surveillance," we speak with nobel laureate chris s aheadd this is two day of jackson hole. concerning data out of u.k.. the euro is higher. i am also looking at the euro pound. we are not at parity, we are closer to parity and this is bloomberg. ♪

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policy has been a success -- monetary policy has been a success. president trump threatening to shut down the government unless he gets his way. theresa may continues that the the u.k.ll control after brexit. this is "bloomberg surveillance ," i am francine and next to david in new york. we have a lot in economics and politics and filtering through some of the markets. extraordinary speech by president rally last night and talked about a lot of issues of economic importance including the wall of the u.s.- mexico border. we saw movement in the markets. francine: let's get more with taylor riggs.

taylor: president trump is threatening a government shutdown if needed to get congress to pay for border wall with mexico. the president spoke at a rally in phoenix. the president wants $1.6 billion to begin building the wall. the u.s. navy has responded to a rash of incidents -- accidents by firing the admirable in charge of this seventh fleet. the navy released joseph aucoin said he lost evidence in his ability to lead after the uss john mccain was involved in a fatal collision. there have been 4 accidents this year and 2 have been a fatal. the head of the european central bank said that recent shows quantitative easing and forward guidance has been is yes. -- has been a success. involved direct individual

's central banks and markets through large-scale asset purchases to influence the yield curve beyond the very short term. taylor: draghi gave no clue when he might end want to take is ease him and he spits on friday at the jackson hole. british prime minister theresa may once to take back control of the country's lost from eu. todayposition paper out will say the u.k. wants to bypass the european court of justice's -- court of direct intervention. global news 24 hours a day, powered by more than 2700 journalists and analysts in over 120 countries, i am taylor riggs. this is bloomberg. francine: thank you. when it comes to brexit talks, they have not started, or they will not start until next tuesday.

this is all about strong european pmi data. ,t may be a double edged sword for example, the dax. stocks aree european down. the stronger the euro, the more andicult for the exporters i had to put the wpp, the world's largest advertising company is down 12%. david: a dearth of data in the u.s.. futures are down 6%. weakening of new mexico last night on the heels of the comments made by president trump. president trump went on the offensive and a campaign style rally in arizona. he threatened a government shutdown if congress does not approve funding office proposal wall along the mexico border. president trump: believe me, we

have to close down our government, we are building that ball. let me be clear to democrats who oppose a border wall and stand in the way of border security -- you are putting all of america's safety at risk. david: the president also hinted he may terminate the north american free trade agreement. let's talk about the wall. president trump in a border state and he's said -- and he was in yuma, arizona. what role is the border wall playing in a government funding in washington right now and will lawmakers get back in town? kevin: a huge one. this is something that could have the possibility to shut down the government. republicans and the president urging it to be in the funding bill and have to be passed by the end of december or there will be a partial government shutdown.

that is something traditionally the ruling party and office has got the blame for like there was a few years ago and republicans getting the blame. feeling thatmp democrats will get the blame for it because democrats saying they do not want the wall funded as part of the government. there's a piece in "the morning musts," my read and a right and all out clash between mr. trump and mr. .cconnell would play out help us understand the contrast as you have observed, how have they approach the government differently? kevin: i feel like i am playing political shrink. they are not talking, they are not talking to each other. speaker ryan not speaking to president trump and senator mcconnell not speaking to president trump.

if you look at the legislative to do list in the month of september mother so much they have to get done, they have to pass the funding bill and raise the roof of the debt ceiling to make good on american payments and get something like tax reform. they were unable to be successful on health care. the dysfunction in washington that president trump renick is is this one.sts in francine: markets seem to ignore it and you look at the debt ceiling, what will president trump the advised today? was it seen as a mistake close to him? right.you are absolutely the markets have not very much reacted significantly to the rhetoric coming out of washington. i think there's a little bit of movement. very small movement after the president's speech. most investors and business policy looking of the and that is why the president's

comments on nafta were so interesting because he threatened to withdraw. pennsylvania, you are looking at this, it resonates for you. many workers filling nafta was unfair to them. they are negotiating nafta in washington and negotiations still underway. many experts anticipate it will be renegotiated next year. david: kevin cirelli and that speech started at 10:00 and it not wrap until after 12:00. joining us is gary shilling. good to have you with me. francine mentioned the fact the markets have ignored a lot of the political rhetoric, did anything changed last night? speech thatut the the president days and he invoked trade and the debt ceiling, how much can you play on those comments? gary shilling: not too much, he is very much at all with the leader -- odds with the

leadership. you are wondering, if the guys will get their act together because there is an election next year. the house and one third of the senate. republicans have controlled now and they cannot blame anybody else. i think it will be interesting is and how they get their act together -- is and how they can -- if and how they get their act together. very true not, it is that may not get anything done. this is a comedy as pointed out in the swamp. and i last you spoke, there was a chill in the air and you were not optimistic we would see tax reform. was -- iling: no, i was very hesitant initially when everybody thought there was this revolution and we

would see tax reform and fiscal stimuli and deregulation and so on and so forth. that was a lot of over enthusiasm and subsequently, events have shown there is no great speed. the one thing i think will happen sooner or later is fiscal , every because politician is feeling the heat from voters who have not had meaningful increase in there's bending power for over a decade. in theirne thing -- spending power for over a decade and that is one thing. francine: what is the big unknown? the debt ceiling? tax reform? fiscal things or tax reform comes to or three years from now, what does the economy do in the meantime? goodshilling: that is a point. they have to deal with the debt ceiling and trump's holding of

the wall is a hostage and so on. i was told years ago by some very wise people in a congress that congress is a very conservative organization. they only do what is necessary, knows her than necessary and we see that with things like social and only when things are necessary and we see that with things like security. the probably will deal with debt ceiling but there's is a desire for cliffhangers in washington. they seem to like those kind of things. .avid: gary shilling with us free in the next hour -- this hour rather, university professor and nobel laureate chris sims will join us. we will get his thoughts on the speech that mario draghi delivered earlier today. this is bloomberg. ♪

>> the actions undertaken in the last two years in a supervision have certainly made the world resilient.world more speaking mario draghi at the is set to speak and a jackson hole. christopher sims heard mario draghi's speech in person. his theories are seen as influencing monetary policy and he joins us. great to have you on a day like this and thank you for making time to speak with us. is mario draghi right that all

of this unconventional policy actually works? umm, my view is that the unconventional actions that the federal reserve took him in the early stages of the crisis were extremely effective as major lender of last resort actions. the subsequent quantitative think wasdo not harmful, i think it may have been somewhat helpful, but it has not been a major powerful instrument of monetary policy. i don't think that draghi had many options or using other methods, but i am not sure these methods were very effective. francine: are you concerned about central-bank's not really knowing what caused the lack of inflation? thisu put your comments on stimulus helping got the margins

and this great inflation conundrum, what does it mean with what the ecb should do next? ball isms: i think the not really in the ecb's court. one of the things that impressed me about draghi speech was complete absence of fiscal policy and that is not really a surprise on the part of a central banker. since you do not like to talk about the extent to which their effectiveness is limited over not fiscal policy. but, i think to get off the very low inflation environment we are in now in europe and peoplely also in japan, have to start thinking about how fiscal policy plays into that. david: the u.s. in particular about passing the baton from monetary policy to fiscal policy and will saying that handoff fumble over the past few months.

how do you ensure it cap is most effectively -- it happens most effectively? is veryms: i think it difficult. it is hard to understand why the reaction of politicians and the public to a crisis tends to be fiscal contraction and concern about deficits, when in fact, the appropriate response would be fiscal expansion when our inflation rate is too low. -- we really needed to have a wilderness on the part of policymakers and even central bankers to talk about -- a willingness on the part of policymakers and even central bankers to talk about their ability. david: what do you make of the comments that mario draghi made about the way central bankers communicate? it with of a deficit is

the way they communicate their thinking? that, it isi think true, they have, they tried to communicate the wilderness to keep interest rates low -- willingness to keep interest rates low. one way monetary policy had some effect was by demonstrating they had a commitment to expansion and that helped to back up their assertions about long periods of low interest rate. i think that communication did work and did have some good effect. francine: professor, i know you spoke a lot about japan and the need for japanese fiscal policy to be linked to the inflation target and this was pretty explosive in japan. do you stick by that? do you really think it'll work?

until you hit at inflation target and should that be the same in europe? chris sims: i think, fundamentally, that would be good policy and europe as well as japan. you encourage people you are willing to do rapidly.should grow the problem in europe and there is no single fiscal authority that can credibly signal such a shift in policy. authoritiesy fiscal and you have to get them to coordinate if they are talking with the different messages, it is going to be very difficult to get markets to understand there is a commitment to fiscal expansion to meet and inflation target. francine: what do markets fundamentally misunderstand,

whether market participants or the way treasuries are reacting to monetary policy? both in the u.s. and also in europe? : i don't think marcus misunderstand. i think marcus understand quite well. -- i don't the markets misunderstand, i think markets understand quite well. understanding of the connection of fiscal policy to inflation is not controversial. it is only when i talked to academic economists that it becomes controversial. economistsg academic for the sixth annual meeting and delivering of paper tomorrow i'm a we thank him for his time. is still with us. i want to get your take on what s had to say and

mario draghi. mario draghi saying it is useful. gary shilling: let's admit he is not going to say what we did did not work. there are two basic problems. the central banks have been very poor forecasters and forward guidance and evolve forecasting and they have way overestimated inflation and the time we were going to raise rates. and the fed and other central banks as well. thebasis of four with guidance forecast, they have been very poor. secondly, we have researched this. 1993, 1994, the said raised from 3% to 6% in about seven months, double-dip, quite -- double it quite out of the blue. we looked at the volatility of

notes and bonds versus what has happened since december 2015 when they had for guidance and only goal of 100 basis points. the volatility was less than it has been now. there are other factors, obviously. forward guidance, i don't think has really dampened volatility and if anything quite the opposite. francine: gary shilling stays with us. later this week, while we are live in jackson hole, we will kaplan.her and robert michael mckee will bill the ground and this is bloomberg. ♪ -- michael mckee will be on the ground and this is bloomberg. ♪

francine: this is "bloomberg surveillance" with francine and david. let's talk about china. a company abandoned plans to buy a loan to the plot. this is one example of china companies avoiding government scrutiny. gary shilling is with us. if you look at china, they bounds the act of controlling the out lows while taking control of reserves. what do they need to focus on in 2018? is ashilling: china top-down economy and when they are trying to control the currency and capital outflows in the currency reserves, is a very

difficult problem. if they allow free money to flow out for one thing, president xi once control on -- wants control on that. if the money does flow out freely, that means they are in effect, they are buying dollars and selling and the central bank has to buy them. it floods the money with currency into the economy and they end up with a severe problems. david: gary, we will come back in a moment. another laureate at 9:30 a.m. in new york and 2:30 p.m. in london and you do not want to miss that. this is bloomberg. ♪

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francine laqua. taylor? taylor: last night in phoenix president trump sent a message to congress, come up with the money to build the border wall with mexico or else? president trump: believe me, we have to close down our government. we're building that wall. let me be very clear to democrats in congress who oppose a border wall and stand in the way of border security. you are putting all of america's safety at risk. taylor: congress has until september 0 to pass the spending bill to keep the government in operation. the president has asked for $1.6 billion to begin construction of the wall. meanwhile, president trump is suggesting the u.s. may be moving closer to talk's with north korea's kim jong-un with the nuclear arsenal. kim is starting to respect america and maybe something goodwill come out of it. rex tillerson said north korea

hasn't carried out any provocative acts since the u.n. imposed more sanctions. and the trump administration is calling pakistan to adopt a different approach to ending the 16-year long war in afghanistan. secretary of state rex tillerson said pakistan must play a essential role in getting the table to the negotiating table. it's unrealistic to think pakistan has control over the group. over in germany, chancellor angela merkel is rejecting the portrait of her christian democratic union party with being obsessed with debt. she said public debt is a burden on future generations. merkel's challenger in next month's election, he wants to spend more on education and infrastructure. global news 24 hours a day powered by more than 2,700 journalists and analyst in more than 120 countries. i'm taylor rigs. this is bloomberg. francine and david? david: thanks so much. the relationship between president trump and mitch

mcconnell has disintegrated and mcconnell expressed uncertainty president trump can salvage his administration after a series of summer crisis. joining me is marty, our senior executive editor for international government and economics. let me start with my morning must read and i cited a few passages and this is by jonathan martin in "the new york times." the rupture between president trump and mr. mcconnell comes at a high point for republicans who face a number of deadlines when they return to washington next month. tick through a few of them. what do lawmakers face when they get back in town? >> they have to pass the budget and the debt ceiling has to be raised. those are two small things that have to get done and it's a chilly relationship between mitch mcconnell and the isn't is not helpful but not the only relationship that counts. david: especially in historical terms. is it reputable, are there

indications to move and at the center of this piece is elaine chao, the secretary of transportation, mitch mcconnell's wife who plays an interesting role in the small tempest. marty: sure, it's true. what i was referring to is there are sort of two presidencies at work here, the one donald trump is operating in and then there's his staff, the gary cone, steve mnuchin camp whose relationships with congress are actually quite good. when the time comes on the debt ceiling and the budget deal, i think it's those relationships that are just as important than the one with the president. francine: how would you explain the president threatening the u.s. government shutdown while at the same time reviving this threat on nafta. is it actually him campaigning for 2020 or is he maybe trying to put the blame if the debt ceiling doesn't get passed on the democrats? marty: i think you can overanalyze this. this is just donald trump

hitting his comfort zone. and look, i think what he does, he love this is idea of uncertainty and maybe in foreign affairs that is helpful but in domestic policy, it is not. and especially the markets don't like uncertainty. so what he's done is inject a threat that is probably not going to actually happen. i think that if he gets a debt limit bill and a budget that congress sends him, he's going to sign it. francine: i feel like i'm a bit schizophrenic because i ask you if this is the new president, new face of the president and will he stick on prompt and then who will he listen to, will someone take him to one side among his aides or people he trusts and say don't talk about the debt ceiling like that? marty: you know, he sort of has mocked the whole idea last night. he didn't mention the senators' names and he said people around me told me not to mention it so here i am not doing it.

i think on policy matters, and afghanistan is a great example, he will listen to the generals. and he has a general who is his chief of staff. so i think the key thing is what -- on policy issues, he seems to listen to reason. but on personality politics, he's his own man. david: great to speak but, marty, joining us from washington, d.c. let's get to gary schilling and company. we were talking about the prospects for radical reform a few moments ago. how about something like raising the debt ceiling or short term spending bills. how inured is the market to pace of things. nobody talks to regular order when it comes to budgeting. gary: these cliff hangers happen almost every year. david: we're used to them. greg: the markets take it in stride and assume this will happen, that congress will do the necessary and the president will go along with it. the idea of government shutdowns, we've seen it in the past and can be pretty debilitating and can get people

thrown out. the republicans tried that some years ago when people didn't get their social security checks, that was bad news. so you learn that the hard way. this is kind of the usual charades, the washington follies if you want to call it that. david: have we signed too much to washington, looking at this historically, how much power does washington have to influence the u.s. economy? gary: that's a good question and washington, i include the fed as well as the fiscal side in monitoring fiscal policy, i think surprisingly little. we did a study some years ago and we looked back and tried to find instances where decisions by the president really affected the economy and the only one we could find was the gulf of tonkin resolution when l.b.j. basically escalated in vietnam but other than that we couldn't find anything, this is judge mccall admittedly, but

couldn't find anything that made a substantial decision a single decision. policy does over time but to say there will be a big change instantly, you know, it makes good press. francine: gary, not even tax reform? you know, when during the campaign we spoke to me c.e.o.'s who were ready to overlook anything president trump was saying as long as he got tax reform through. gary: there's always a tendency to try to emphasize the crisis of the moment but to say in the greater scheme of things, that's what i think my job is in terms of the forecaster or economic consultant. i'm trying to look past the noise and say weas the reality? what things are important out there and what things are not? francine: is there a danger we overlook it too much and we speak to fund managers and consultants and they always say

don't take care of the noise, what if the noise becomes reality, for example, in geopolitics, what if something ugly happens with north korea? gary: you can't overlook important things. when back to 2006, 2007 you had all this nonsense going on in the subprime mortgage market and there was a tremendous amount of overlooking that and we happened to be on top of it. but the mass majority of forecasters including bernanke and the federal reserve, it's no big deal. there are times you do need to get excited but not quite as frequent as i think we might gather from the media. let's put it that way. david: we'll come back. gary schilling joining us here on set in new york. coming up later tonight on bloomberg television, make sure to watch the david reubenstein -- this is bloomberg.

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taylor: this is bloomberg surveillance. i'm taylor rigs. let's get to the business flash. wal-mart and google are teaming up in an attempt to catch amazon.com by the end of next month. wal-mart customers will be able to use voice activated google home speakers to buy hundreds of thousands of items for delivery. by next year the service will include groceries and allow shoppers to pick up orders at wal-mart stores. sales for scott com has raised their forecasts. the company showing confidence the expanded lineup of cloud based software will keep

attracting business. sales forces are pouring money in marketing tools, artificial intelligence and e commerce services. and home improvement team lowe's posted second quarter earnings that missed estimates. net sales came up short. lowe's hasn't capitalized on the renovation boom as much as home depot which has been forecasting better sales growth. sales of lowe's are falling in premarket trading. that's your bloomberg business flash. david and francine? francine: the u.k. is due to release a crucial brexit paper addressing the jurisdiction of the european court of justice. now the prime minister, teresa may, who seven months ago declared the u.k. would take back control of its loss now conceded they will influence britain long after it leaves its block. the climb down accel breakthroughing divorce talk is what we think is going on. we're joined by you're bureau chief along with gary schilling. emma, thanks for joining us. we need to make sense what is

going on. we understood teresa may was willing to give in on e.c.j. to speed up divorce talks but now there's an interview she's done with sky suggesting otherwise. emma: basic i the u.k. made a concession on an issue that was shaping up to be a major obstacle to a brexit deal and made the concession on something systemic important to the brexiteers. what teresa may is saying nothing has changed. one of her ministers said there would be an arbitration mechanism and the u.k. will keep half an eye on european ase law. we'll get the details of what it means but it could facilitate a deal with the e.u. because in order to have access to a single market the e.u. says there needs to be an

arbitration mechanism and they want it to the e.c.j. francine: has the tone changed as soon as you talk about teresa may willing to speed up the process, it seems that she really understands the urgency of the time ticking, march of 2019. emma: i think that's right and it's also fair to say the e.u. has been saying that it was looking on -- likely that talks would move towards trade in october as the u.k. hoped and the u.k. wanted to crack down on trade from the beginning and continue to bang that drum, we need to talk about trade as the same thing as the exit. interesting to feet here is the pro brexit bit of the conserve pitch party so far have been quite supportive of this misconcession and we expected them to come out and in rage that this concession has been made but they've been pretty supportive. in "the sun" newspaper which is

pro brexit is saying teresa may is sticking to her guns. david: how dry is the ink, i think of the skeptics that will be dissatisfied with a they read, but is it a starting point for further negotiations domestically and with the e.u.? emma: it certainly is a stopping point. it's certainly the u.k.'s position. they're going into the next round of talks next week. and the devil will be in the details. david: what do you expect the backlash to be like here? we talked about the timetable and how behind the u.k. government might be and how is the backlash likely to manifest itself? emma: among the pro brexit conservatives, so far they've been quite supportive. reese said it's nuanced and as long as the e.c.j. doesn't have jurisdiction, then that's fine.

so far the backlash if you like here has been from the remainders, the group that wants to remain in the e.u. have come out and said if you're going to have soningsly e.c.j. jurisdiction then why leave the single market. francine: where is boris in all this? we haven't heard from him. emma: bore cities quiet and has been quiet much of the summer. when may went on holiday, hammond is more soft brexit came out and started talking about a longer transition and at the end of july, i think he first sort of mentioned the norway model. norway has the s accord which basically arbitrates between the e.u. and the other members. hammond raised that as a possibility. boris has been completely absent as there seems to be a consensus forming in the cabinet about a definite transition and perhaps now the e.c.j. thing boris has been notably absent. francine: any other papers coming this week, this is the

biggest one. emma: this is the most important and we either go into talks next monday or tuesday. david: thank you very much, emma, in london talking about the brexit paper we expect in about 15 minutes' time. check out tvgo on the bloomberg and watch the interviews we've conducted. christopher sims, the nobel laureate we talked to in germany and beneath the screen there you can ask guests we're talking to questions. this is bloomberg. ♪

francine: this is "bloomberg surveillance" and i'm francine laqua. we have david westen and jonathan steele. i'm looking forward to the program, what are you looking forward to? alyx: i'm looking forward to what we have to hear from a expert who likes small cap over large cap and seems to be the

trade the next few months and what does she see as the new catalyst? and also, global earnings are $30 a share according to one of our experts. we'll get reaction to that as well and cover all the geopolitics and everything out of d.c. as well. david? david: thanks. ime for the single best chart. gary schilling and company joining me on set and it sets the stage for jackson hole eetings and mario draghi and how will they find their way out of this. a piece was written this morning about the persistent problem of lowflation. how flux oxed -- flummoxed are they. gary: we looked at history from 1749 on, if you divide the between wartime and peacetime

and what you find in wartime the wholesale prizes wore 8.2% and if peacetime declined half a percent per year. why is that? in wartime you have government spending, very heavy spending on top of a fully employed economy and more demand than supply, prices go up. in peacetime you tend to have enough productivity you have deflation. if we're at peacetime and we have skirmishes but i think we generally can say we're at peacetime and you can expect deflation. these people have grown up aen in inflationary era and think that's the way god made the world but it isn't, it's quite the hops. and the other question is why do they want inflation anyway? you know, they all have 2% inflation target. david: let's talk about it, more than one and less than three. gary: i never heard a journalist say why do you have 2 worse, draghi or yellen or anybody else. i think it's because they fear deflation. they want a cushion. but they all have 2%, as a herd mentality and they never really

explain why. and to me, i think that's the simple answer. they fear the deflationary expectations and we see it in japan, that's the poster child where people wait to buy because they expect lower prices and then inventories build up and excess capacity pushes prices lower and suspicions confirmed and people wait longer. that's what they really fear. david: great piece on the bloomberg comparing jackson hole today in 1999 when alan greenspan was going there and he faced a booming stock market, low inflation, low employment. the difference was wage growth. how do we get out of the low wage growth we've seen in the u.s.? gary: that i think will take massive stimulation. we've written about this in our monthly newsletter insight and you simply have too much capacity. you have pressures. the jobs being created are low income jobs in leisure and hospitality, retail, not in

manufacturing and i.t. and things like that. you have unions which are depressed and tremendous excess capacity in labor on a global basis and you have to look at the world on a global basis and that's a mistake the central banks a lot of forecasters make. there's many, many reasons i think wages are being constrained and probably will be. and you know, another thing, you haven't had productivity growth. and employers say hey, i'd love to play "er wages but we don't have productivity if there isn't more output per work then it will come out of profits so you have this tug of war and there's very little ability to raise prices in the world we're in today. so i think you have a tremendous downward pressure on wages and of course that's what's made voters mad as hell in europe and north america and that's what was really spawned populism in my view because people have had -- most people

have had no real income growth, no purchasing power growth for over a decade. most of them, except the top tiers declined and they really want action and i think that's where we'll have massive fiscal stimuli. francine: when you talk about the herd mentality, what if we're too optimistic. the largest advertising company in the world today saying they have to cut their forecast on weak spending. what if that was a sign? gary: well, yeah, i think we are in a slow growth era. you know, i wrote a book on this in 2010 called "the able of leverages and investment strategies for slow growth and deflation." and i think we're still in that era. you know, the thing i think will get us out of this is massive fiscal stimuli because everything else is the same. you don't have big capital spending because you're at excess capacity and you don't have the ability to pay higher wages because you can't pass on

the costs. 's sort of in a self-feeding situation. and of course monetary policy is completely impotent in getting us out of this. you have the situation they knock interest rates down to zero and nothing happens, they flood it with quantitative easing and what happens? the creditworthy borrowers don't want to borrow and the banks don't want to lend to the rest. nothing happens. david: great to speak with you. gary schilling of gary schilling and company. joining me are guests from wyoming. look for those interviews later this week on bloomberg television. this is bloomberg. . ♪ got you outnumbered.

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>> trump threatens to shut down the government if he doesn't get funding to build the wall across the mexican border. president draghi -- in his speech. the u.k. gives up more ground to the european union. says european may law will influence the u.k. long after brexit. get you set up for market action. here it is. strong gains on the s&p 500. features softer this morning. foot, up byfront 2/10 of 1%. manufacturing data. treasuries stable. we go nowhere. thefferent picture in european bond market. alix: in italy, yields up about