estimate. italy,wer of populism in 2.4% in a win for the five-star league party causing chaos in the market. the next crisis, hank paulson ones that lack of tools to fight the next financial crisis and worries about financial managers like lack rock. welcome to "bloomberg daybreak." i'm alix steel. this is a live shot of capitol hill in washington, the scene of partisan contention as part of the confirmation hearings for brett kavanaugh for supreme court. david westin is in chicago. what is next now? i don't how we go forward. david: chicago is riveted to the tv screens yesterday -- was riveted to the tv screens yesterday. republicans say they are going to have a vote this morning on

this nomination, which i would've said just watching that , you would think just wait they are going with it. we deal with that was senator flake and senator collins? they talked about how they interpreted it yesterday and how to go forward. there will be less trading going on in some cases. david: they can only afford, the republicans, to lose one vote. you just named three senators who are up in the air. anyway it comes out, you have to think about changes made in the supreme court. if he does become a supreme court justice, what will be his attitude toward the media? in the senate, i don't think they will be able to repair the relationships. alix: the american bar associated wanted a delay and the drama keeps happening. you are in chicago here i hope

you had a deep dish pizza, you have a blue shirt on, and things are getting crazy. also had an interview. david: we sat down with hank paulson last night's win night. we talked about the last financial crisis and what could happen with the next. the mostne of important thinks he had going for him was political will and the unity in congress and bipartisanship with the president. we talked about with that happened this time given where congress is right now. had a financial crisis, how would washington handle it? alix: that is an ugly question we will discuss. in the market, italy, italy, italy wreaking havoc on other aspects of the market. it is all 2/10 of 1%. in italyyear yield up 33 basis points, the biggest btp's. on record for

this will be a bond story throughout the day. david: time for the morning brief. we will get u.s. pce personal income and spending data for the month of august. at 9:30, after a dramatic day of testimony, the senate judiciary committee meets to vote on brett kavanaugh's appointment to the supreme court. a deadline for government funding. in england, the conservative party congress begins as prime minister may seeks to defend her government. alix: i am looking forward to that. -- away from awake brexit talk. we are going to go to michael mckee and flynn mcroberts joining david in chicago. .he 10-year btp yield what is the ramification on a fundamental economic level in a

market level? michael: you want to look at seven year because that is the average for italian debt. if it goes over three, then people say the markets have to worry. we are seeing a tiny banks? bad loans as fast as they can. this is suggesting they are not going to be able to, investors shying away. what does that mean? lending, slower economy, less ability to pay back debt. dual-boot be haps a for the italian banks and that creates investor worries. this is a problem going forward for italy, not yet for the eu e.u. they could find italy, but they probably will not at the moment. this will put pressure on the italian market and we could end

up with another set of elections. flynn, is it any wisdom for italy, for europe or is this an ongoing "crisis" and you muddle through? in illinois, we have gone year after year looking and the political consequences have been stark in terms of four illinois, the market still wants to buy bonds. we have finally reached some fiscal discipline. we have a governor's race coming up. democrat goingar against an unpopular republican. this could push it out further after november. david: tesla, big news and the sec announced they will proceed against tesla to get elon musk out. you can see what happened to the

stock and trade in the aftermarket and premarket. the most remarkable thing is what the sec had to say when they announced, they said the way he picked the figure for the infamous tweet had to do with marijuana. people like to smoke marijuana i am told on april 20 and he was trying to impress his girlfriend. is he asking to be fired? flynn: it seems like it. this is not unlike the early days of the fourth quarter company and federal regulators were trying to remove ford. tesla is based on elon musk being able to carry out his vision. this is a huge hit to his credibility that is why the market is concerned. alix: david, 420 you had to know that, come on. you know me better than that.

of thehis is one craziest things someone has done for their girlfriends, but the issue is coup would actually fired musk? what is it going to take? i would think you would get a settlement out of it rather than the sec following through. if they did, he would be barred from running any public company. with his involvement in so many different things, that is a problem for your he was going to settle, and they canceled it at the last minute. it is a hammer to get him back to the table. not only the sec but the market. same thing with italy. cutting the price for tesla. you're getting big reaction by people in the markets. the third story comes out of the interview with hank paulson. he said, we are in better shape

than we were but he is concerned whether we will have tools to deal with the next crisis. hank: today when you look at it, we are seeing a situation where are better capitalized, we have much better regulatory oversight. i think there are fewer gaps. we have a better set of authorities. there is less what i would call dry tender. risk.is less all these things are unpredictable of having a major financial crisis. on the one hand, there are important new authorities, what some things we relied heavily on have been taken away. i wish we had a few more protections. david: flynn, what hank was talking about they relied on, yet a special fund at the treasury for stabilizing the d y

dollar and he referred to that. there have been ramifications of use of those vices. he is concerned they will not be available next time. flynn: even if they were available, he imagined if we did have a crisis, congress and the president came together last time. after what we saw, can imagine lindsey graham and dick durbin sitting around in working out a deal? that is the concern. alix: mike? michael: that is a big concern. how does congress react if they have to go again? he does not often take a firm stand like this, but chairman powell said the same thing that hank paulson did. they have taken away the ability to lend to nonbank which was --t they used to get the dryr concern is tender that does exist that hank paulson is talking about in the

-- non-bank sector, known has power over that. if we have to go to capitol hill , what happens? david: it is great you raised that. one thing we talked about was huge asset management companies and pools of money outside of the banking system. hank thought there should be orderly liquidation authority applied to those, not just banks. if you had a huge company go belly up, there would be an authority to sort it out. michael: it does not look like we will get that. there is debate whether they should continue to be orderly liquidation authority in place for dodd-frank for commercial banks. they like the ola and they wish it was stronger. a lot of pushback from the banking lobby on that. some say it probably wouldn't work anyway. we hope we don't find out.

there are a lot of people participating in the financial industry that do not under regulatory at this point -- regulatory authority. not just authority but disclosure and seeing where the problems are you are there are things to worry about, even if the banks are in better shape. much thank you both very and stay with bloomberg. we will bring more from david westin's conversation with hank paulson. all ofder, you can find the charts and more. .o to tv on your terminal we will feature them all day about the program. coming up, more on plunging .talian lori heinel will discuss that.

alix: italian assets plunging today after the populist leaders agreed to set the budget deficit to 2.4% of gdp, a move that could breach eu budget limits and lead to a downgrade, wreaking have it on banks, bond markets. join us is lori heinel, state street global advisor. what is the exposure of the bad loans? lori: we are seeing the budget come in much higher than expected. how that plays out over the next couple of weeks will be critical. we are cautious. if you freaked out whenever there was a crisis in

you played that way, you got hurt. in that context, it feels like by italy story based on history can why would this be different? lori: the question is entry point and what value you get. we are seeing spreads at wide levels, the whitest since 2013. there will be a lot of back and forth. since 2013.t there will be a lot of back and forth. alix: if you come into the bloomberg, an increase of 275 basis points. nowhere near what we saw in 2013 and 2012. how much more risk premium, or what is the correct risk premium for the spread? lori: there is so much uncertainty. breakdownhe potential of coalition, elections next year. there is other uncertainty in the market. this is a backdrop where global growth may be precarious.

this is the real issue. what are the implications as global growth slows further? hard germany getting hit as well. where does that leave the rest of european banks? lori: we have been cautious in that region because we have not seen them deleverage to the same level that u.s. banks have post crisis. david: what extent is the phenomenon spreading beyond banks in italy to spain and portugal and the entire eurozone? there was slowdown in growth already we have seen. lori: we have this rowing existential crisis whether europe will survive for years now. it is one more stress point. electionsve other happening in europe next year. if we come to october and we agree on italy and we get relief , and we get into next year, we will set ourselves up for more existentialrolling

threats. david: we have had these come up in the netherlands, germany, france again and again or does it affect the underlying economy and businesses or is it the geode the lyrical risk -- geopolitical risk? lori: it never tackled it structural issues. it has labor markets that are in flexible. you have brexit as an overhang and hang in trouble in terms of not deleveraging. there are lots of things to be worried about. this is the backdrop or policy makers have very little tools for the next financial crisis or recession. wouldn't you want to jump in otherou have all these big issues? our answer right now is no. alix: we have had $43 billion of outflows in your and equity so far this year. morgan stanley played out that most of the btp's are owned to my strictly.

-- domestically. at what point does it become too attractive? are always looking for an attractive entry point. one would argue that with these spread levels it might be the case. don't look for the big hit. there will be volatility and slowing global growth and we would be cautious. alix: much more with lori heinel on state street level advisors after the break. tensions between u.s. and china could ring baggage to the baggageity -- bring up to the hospitality industry. we are going to talk to arne sorenson, coming up next. ♪

the trade war has hit china. others may follow.

top $30 each year has million. arne sorenson is president and ceo of marriott international, the largest hotel company in the world with 6700 properties, 30 brands, operating in 130 countries. great to see you. thanks for being here. arne: thank you. alix: what is the effect of the trade? arne: so far, quite little. there are people moving all over up your you talk about china and where they are going. last year, chinese travelers outbound were up 6%, 135 million roughly trips across national borders. the u.s. took -- and grew much smaller than the rest of the worldpay where chinese are going, they are going more and faster to places like europe than they are to the united states. what are the issues and how are we extending invitations to travelers abroad to come and

vacation here and leave their money here and go home? david: what you said was so far, little effect. as the dispute with china lingers, could it permanently change patterns? i talked to hank paulson yesterday about that and this is what he said. we don't pay enough attention to be dangerous long-term impact. companies and countries want to do business with the united states because we have reliable, stable economic policies. is -- ision really china going to start looking for markets for which they are going to buy soybeans, brazil, africa? are they going to be concerned they need to protect themselves if there is another tariff war and they need other suppliers? david: whether it is soybeans, manufacturing chains or tourism, at what point if it lingers in

two years could permanently damage u.s. relations and trade? there are two ways of looking at this. where do chinese travelers go to? we are in global competition today. resources are allowing them to see the world. many of them, maybe all of them know of the united states and would like to come to the united states because they have seen so much in movies and other cultural things. if we lose that competition and they go summer else, the likelihood of getting them back to the united states is more future.t in the that is an issue only about our industry. the broader trade portfolio come what happens to economic growth because economic growth drives demand for travel. lessmpanies are investing in china or chinese investing less in the united states, are there other parts of the trade

pattern a closet gdp to grow slower and the chinese united states, it will have an inevitable effect on demand for hospitality. fact that mention the you talk to the white house fairly regularly about these issues. does the president appreciate what you said? does everyone agree with better trade practices with china? arne: i don't talk to him all that much. but i talked about and by to the united states, where the u.s. is clearly losing share. one of the things i said to president trump was, your voice around the world when you talk about immigration can be viewed that you are not welcome to come to the united states. that is not necessarily what we think you are trying to say. we are not suggesting that we compromise security. travel is not about immigration. it is about where people take vacations or doing commerce. isn't there a way to extend a

welcome to the rest of the world, even as you pursue your agenda around security issues and immigration? alix: what did he say? arne: he was open to it and he understood how the boys could be misinterpreted around the world and was open to set targets to see if we could grow our share better in terms of international arrivals. alix: what would it take for you to change capital allocation and where you put your money in terms of countries? arne: this is one of the things about our business that is helpful as it relates to the impact to us from the trade war. we are not investing capital in we are opening hotels -- we have 315 open in china today. we are probably opening a hotel every 10 days or so, or every week. we are doing that always with chinese partners. they have the expertise and understanding about the chinese real estate market. our business in china, while

branded with marriott brands, is integrated in the chinese economy. alix: it feels like the conversation of how can china respond and does china become punitive for u.s. companies operation -- operating in china? do you feel like you are still at risk? arne: there is still plenty of uncertainty. it would be too much to say we are protected. our business is highly nuanced in using american is this is an chinese businesses and global business and the hotels are owned by chinese investors and the economics in china are disproportionately benefit chinese companies. the second thing that is important is that in every hotel in china, even in the most international city, shanghai, the majority of guests are chinese, employees are chinese. you end up with, what exactly would be the trade implication of being focused on the hotel

business for example? the other thing that is important is we are not terribly strategic. industry a finance that sometimes has a national interest associated with it. globalyou mentioned growth or domestic growth drive your business. how do you see that right now? is global growth breaking down? where are we in the cycle? arne: we are continuing at a steady pace in the united states. the bad news is, if you look at our business and industry, we for the u.s.lt economy with the stimulus and tax cut, we have a trillion dollar deficit in spending helping with the economy. todaymand levels we see in our business are not that different from demand growth we were seeing a year ago or two years ago.

the good news is, it is still positive and we are still growing, modestly but steadily. we expect that is going to continue for the foreseeable future. alix: part of that growth is the merge with star and move into technology. walk us to the opportunity set. it has been two years since we merged with starwood i. we have a lot of work to do to integrate the platforms. the most recent thing we did was on august 18 come we got one loyalty program. watching it from the inside is a sausage beinging made. you have a whole bunch of systems that need to come together, billions of data files transferred from one to another. we have it to the point where customers can earn point across the entire portfolio. we are excited about seeing the impact of that. alix: what is the biggest risk

you see for next year? arne: trade is the thing we worry about. the stimulus in the u.s. economy is more powerful today and the from trade.gative it is also worried about sentiment. companies,oo many too many individuals get cautious because of the sentiment around trade, that is a place where we can see gdp weekend. alix: it was so good to talk to you. sorenson, marriott international ceo. there is where we stand. we are risk off thanks to italy. european equities down. equities and banks off by over 7% and also spreading to overall european equities. how will the italian banks offload bad loans now, and what about the banks with exposure to

those bad loans currently? asset classes, italian drama warming its way in other asset classes and euro-dollar of by weight 5% and how much political -- by .5%. how much political risk is there? 10 year yield in the u.s. a safe haven after a week auction in the seven-year, down two basis points. commodity market calm. it is permeating through the commodity sector. let's get an update in what is making headlines outside the business world. emma chandra is here with first word news. the judiciaryfor committee to get a vote this morning, day after cap not end the woman who accused him testified. kavanaugh denied the accusations while christine blasey ford said 100%as 100% person --

certain he was the attacker. the sec is suing elon musk for his controversial tweet about taking the company private. they say he misled lenders. they want to bargain as a director of a public company. he is calling it unjustified. jet crash landed in the water in new york city, a boeing 747 landed in a pacific lagoon after missing a runway on a remote island. there were 47 people on board, and all survive. the plane was flown by aaron new guinea. dozens -- air new guinea. dozens of boats came out to rescue the people. global news 24 hours a day, online and at tictoc on twitter, powered by more than 2700 journalists and analysts in over 120 countries. i'm emma chandra. this is bloomberg. david: it has been 10 years since the great financial crisis. i sat down with hank olson,

former u.s. secretary of treasury. -- hank paulson, former u.s. secretary of treasury. hank: what i faced was a situation where going back decades, the government failed the american people because the financial system had not kept pace with the modern financial markets. in protections that were put place after the great depression to deal with panics were focused on banks, protecting depositors with deposit insurance very meanwhile, -- insurance. financial markets changed. when i arrived, half or more of the credit was falling outside of the banking system. we do not have the oversight we needed, we do not have regulatory authorities to deal with it. where thereituation was a great deal of leverage,

and a great deal of risk. today when you look at it, we see a situation where the banks are better capitalized. we have much better regulatory oversight. .e have fewer gaps we have a better set of authorities. there is less what i would call dry tinder. there is less excesses and less these things are unpredictable of having any kind of a major financial crisis. there is some important new authorities and some of the things we relied on heavily have been taken away. i wish we had a few more protections. david: another way the financial system has changed is the growth of some money managers. blackrock is over a trillion dollars. you a lot of, money outside of the banking

system outside of regulatory structures you talk about. hank: we still do, but not as much as we did. you named a couple, and there are a couple more. moreld like to see protections. we have ordered the liquidation of authority to wind down an institution which is failing. i wish we had that to deal with lehman brothers. we don't have the authority we need as broadly as we need them system.of the banking the thing that would be most concerning would be some authorities we used to stop the , the stabilization fund and treasury we used to guarantee the money markets. trillion a run on $30 , in the moneyon

markets and the money markets were funding short-term borrowing from many of the biggest companies in the world. when the money markets began to implode, the commercial paper market dried up. big companies started cutting back on short-term funding. this would move quickly to suppliers and a smaller industrial companies. .t could have been disastrous we stepped in and use the same as stabilization process to stabilize the markets. we no longer have that authority. the authority the fdic used so theageously to guarantee unsecured liabilities of bank holding companies. dodd-frank took that away. we don't have some protections, but we have some important new ones. david: when you lost some of the

legal provisions, what about political? one of the things you had going for you and it was difficult and not in a straight line, but you got congress. do we still have the same political capital or confidence given what happened last time? hank: yes, that is a key question. i want to begin by saying when i 2006, president bush was in a low point of his approval rating, high 20's. it was a very poisonous atmosphere in congress. i had a president that really encouraged me to develop relationships with democrats as well as republicans. fortunately, i had a year to do that before the crisis to get some things done, stimulus with nancy pelosi and with john boehner and to some trade deals and so on.

i developed a relationship with the president. congress come together in a bipartisan basis to give treasury unprecedented authorities for fannie and freddie and for tarp. i am proud of that, and i am proud of the policy cut moving across administrations. i am never going to bet against our government ability to do that in the future. ability to dos that in the future. t out the worst in some respects, but in the end, people came together. i would like to believe that if we had another crisis like this, the country could come together. but you are right, the things we did or so unpopular that i think it is going to make it even more difficult for our successors.

david: you spent a fair, a time on china. talk to us about china-u.s. worldions order china- relations. our wheat risking relations with china and with china's relations with the world? hank: there is a lot in what you just said. first of all, we are dealing with a different china today than a few years ago. economicnow an competitor to the united states. it is using its capacity and capability to exert influence in --ars of u.s. influence of u.s. influence. china is a most a $14 trillion economy, and it has not opened up like it should. china toenable for

continue to say, the world should keep their market open for chinese equities if china isn't going to open up for foreign companies. there is a lot going on. i really believe that this trade doesn't benefit anyone, and the tariff impasse is a serious issue. david: knowing china the we do, is there a more effective way to get open markets? they have a lot of pride. hank: i do not think there is an easy way, but i think by far the best way to do it is to work with our allies to exert pressure and to exert pressure that way as opposed to tariffs. not only is it the public confrontation issue, but the

other thing about tariffs are people focus on the short-term impact, which is a tax on the american consumers. we don't pay enough attention to long-term impact. companies want to do companies -- business with the united states because we have reliable, stable economic policies. is -- ision really china going to look forward to markets for which they will buy soybeans, brazil, africa? are they going to be concerned that they need to protect themselves if there is another tier four and they need other suppliers question m? will foreign companies want the u.s. to be a supplier if they think the united states is going to come in and break up the supply chain? is a foreign investor going to want to come in and build a

plant in the united states if they are worried about being in the middle of a tariff war? there is potential risk here. i applaud the objective of opening up the market. past efforts have not been as successful as they should be, about the long-term impact. was my exclusive interview with former treasury paulson. hank he called dangerous impacts of changing the world if we continue with the trade dispute the way we are. was a great interview, and he gave a good response to that. that if you goer back to the 1970's and we had a 24-hour soybean tariff on japan that created busily been -- created the soybean industry in

brazil. that tariff was unsafe for 24 hours. imagine if it is longer than that. david: it was important for me to have someone who ran goldman sachs and was a treasury secretary in a pivotal moment. he has both the washington and new york perspectives. alix: still with us is lori state street global chiefrs ceo -- deputy investment officer. lori: trade has been in the crosshairs for a while. the u.s. needs to do something about china. largest the second economy in the world, and yet is the fourth most closed economy. about the tactics

versus what needs to ultimately happen here. alix: short-term, how do you deal with investor allocations? favoring the u.s. because the us has economic momentum behind it, you are seeing organic growth in the u.s., and it creates uncertainty outside the u.s. in emerging markets in europe and they were underweight because we think the short-term risk is heightened by the trade war. alix: thank you so much for sticking with us. coming up, life is too short to valleymall, silicon disrupted. more on that, next. this is bloomberg. ♪

>> this is monday."

i am emma chandra in the hewlett-packard enterprise green room. coming up, investment chairman and ceo live from chicago. this is bloomberg. -- this is "bloomberg daybreak." >> three must-read stories and bloomberg is this week. why the president's aluminum tariff is bad for america and great or switzerland. funds inmillion putting's ambitious others on alert. .hey treat corporate emergence join us is carol massar. good to see you. carol: good morning. i am a little nervous because this is your world. and aluminumel

reporter does an amazing job. this took him 12 months to do and it will files the company responsible for the steel and aluminum tariffs. carol: they take you into the of smelters. we are down to six in the united states. it is difficult, it hot, difficult to make aluminum. what we have seen over the years is it has been exported to other companies where energy is less expensive. we imported 85% raw aluminum into the united states. that is the backdrop of where we are. in march of 2018, president trump comes out, and this is his first fire and when it comes to the trade war. he put tariffs on steel and a 10% tariff on aluminum. this cut everybody's attention

-- this caught everybody's attention because everybody in the industry did not want it. we are talking about american century. as is fascinating. this company had been lobbying big time the trump administration for this tariff. they have three smelters in the and they owned three of them. the big part is, you have to look at glencore owned this company but still owned 40% after it sold it off and had seats on the board. century is lobbying the trump administration for the tariff on raw aluminum imports. glencore at the same time was buying up aluminum and stockpiling. we have pictures in the magazine. they are stockpiling outside of new orleans. when the tariffs and the thinking was stockpiling in the the tariffss was if

went through, the stock becomes a lot more expensive. that is exactly what happened. glencore made a lot of money on that. alix: 100%. david: let's go to the second story. road andof sandhill venture firms by changing a 30 two 100 billion in the g550 over the gulf. carol: he worked on the aluminum story for a long time. masayoshi son does not do a lot of interviews. he did this and he said $100 billion because life is too short to think small. great heot think small is very bold in all he does. in 2000, he had a 20 minute our bet on alibaba which was worth

$20 billionllion -- bet on alibaba which was with 60 billion of the time. he is upending the industry. they take lots of positions in companies. as a result of taking big positions, he is driving up valuations which is making it tough for others to participate. david: another big shakeup is merger arbitration hearing a used to be thought that the risk you are trying to assess is antitrust competition. now it is nationalism. carol: on corporate mergers are seen as weapons of industrial policy. we are seeing pushback around the world. the committee on foreign investment has to review whenever a foreign company buys a u.s. company. they are getting tougher with regulations, and we are seeing

pushback in the u k and in the european union. k. and in the european union. we are moving into a world of digitize a should of information. a foreign company buying a u.s. company has a lot of information and that foreign entity gets that information. you are seeing a push back or slowing down with prosperity deals. alix: i feel like i'm highway make money now? you verysar, thank much. i appreciate it. it.ted i david: big news with tesla. is there gordon. we had -- eric gordon. suesec said they wanted to

elon musk. i am surprised they moved so quickly. >> we were surprised. we knew it was coming sooner or later because this is too big for the sec to ignore. david: in the complaint, they have very specific allegations about how we got to the number 420 and how he involved his girlfriend. they couldn't have a specificity unless they had evidence i they hav.ki: upki: they have been digging stuff and some of it came from the company. this all came from his crazy tweet about the funding being secured. david: elon musk made no secret of the fact that he did not like

the short positions against his stock. we can put up a chart about before the tweet and that they went down when the tweet came out saying he was taking it private. they have been working their way back up. is that circumstantial evidence that there was motive for the tweet? out things about the burn of the century coming in three weeks. it took about five weeks, and then it came. it looks like a suspicious coincidence. walking forward, the question becomes, how much money could be at risk here? it is personal with the sec and elon musk, but not with investor losses. how do they pressure tesla to sell and what would the amount be? erik: you are exactly right. the big bucks will be in investor lawsuits. there are already been some files including a class-action from one of the shorts who really got burned here that will be big danger. those lawsuits are class actions

and against tesla the company is just against musk. other than the fear that the value will plummet if he is tossed out. david: how long would that take? give us a sense. are we talking years or how long will there be a court ruling saying, mr. musk, you can no longer be ceo? erik: i don't think it will take years. this is not like the antitrust cases where you have to dig up economic spurts and do surveys and tons of boring stuff. a lot of the stuff is on the record. chart about good the stock prices. i think they can move to try out quickly. the only thing they have is what was going on with the fund that supposedly was going to finance it. company, perhaps

a more normal company, the board would have a serious problem with mr. musk, but given the nature of this board, are they locked in with him? they are you cannot saying they supported him. erik: there was a piece on the terminal that said basically the board, his pals come and his brother, and if it were anybody else, i think it would have already said he is stepping aside, at least temporarily. last evening, they said we have confidence and support him. the could change because if company faces liability, we still have the department of justice doing an investigation. that could be a criminal case, and because the company confirming his tweets, they could be liable. david: thank you for coming to us from ann arbor. alix: it would strike me with the 420.

it was because of his girlfriend . he thought it would be funny. how can you literally ignore the dumbest thing somebody could have done for his girlfriend? i don't know how you sit there and not take action. david: i would say the dumbest thing so far. there were a lot of things so far, but the board did not seem to see it that way. john rogers, chairman and ceo and founder of aerial investments alix:. a look at some of the bass and work performers on the s&p this quarter. this is bloomberg. ♪

musk's high estimate.

sec sues him and wants to bar them from running a company. what is tesla without musk? the power of populism. the five-star league party win causing chaos in the markets in italy. hank paulson, trade war is dangerous here he warned of long-term risk and says companies and nations could pull back from doing business with the u.s. more on mark's interview with the former u.s. secretary. i am in new york, that all eyes on capitol hill and you're looking at a live shot of washington, the seen a partisan contention as part of the confirmation hearings for brett kavanaugh to the supreme court. david westin in chicago. it was quite a hearing. it is not seen it to be over. david: it was painful to watch, i must say it was very compelling. they are going to go ahead with the vote. i find it difficult to believe,

and presumably they will do it if they have the votes. one of the things that is striking is the senate is supposed to be the collegiate one. this is senators going at each other in a very personal way. alix: we talked about the? marks.on react to chaos in washington? david: the markets are saying, we will wait until it is all said and done and decide because they did not know how to react. alix: you are in chicago, and you spoke to hank paulson who spoke to that dysfunction in washington as well as how and what it means for the next crisis moving forward. david: one of the things he said was ultimately, what happened was there was a partisan support in congress. it was sometimes messy but they got there with the president,

george w. bush. that was key to bringing us out of the last crisis and we talked about if it would be possible the next time. resentment there is and regret about what happened last time and a lot of partisanship. he hopes it is going to happen but is not sure. alix: italy having ramifications across the market. futures dow s&p down triple digits. that is italian risk premium settling through different asset classes. euro-dollar staying stable, it down .5%. the self on the bond market in italy, the worse decline on record is up 33 basis points. italian banks were halted at one point because they reached their limit. a brutal day. it questions the banking system in europe david:.

e. david: we will get personal spending data for the month of august. after a dramatic day of testimony, the senate judiciary meeting will vote on brett kavanaugh's nomination. in england, prime minister may six to defend her government. alix: italian assets plunging as a populist leaders agree that the budget deficit is two point 4% gdp, move that could jeopardize state finances and reach eu limits. joining us is bloomberg economy editor from europe coming to us from rome. what is the markets a word about this morning? -- market worried about this morning? >> they are worried about how italy will pay for it and the reaction of the european union. we have 2.4 deficit figure, but not another -- a lot of other numbers.

they are nervous and waiting for further details. alix: where does this leave the blanks? -- banks? be the outflow from europe will be less than it was before. is that what you are hearing on the ground should mark kevin: that is what we are hearing. bank stocks down today, and there have been warnings there. eventually that will take care of itself. alix: we are seeing the risk being priced in. what does the italian government need to do to calm the risk? kevin: the italian government needs to convince people that this plan will work and will increase prosperity and will get growth going again. that could be a tall order, and the european union will be looking over italy shoulder to see exactly what will be going on. alix: thank you very much.

turning now to another issue weighing on global markets, and that is trade. i spoke with hank paulson, the former u.s. secretary of to sayy, and he had this over the long-term. we don't pay enough attention to the dangerous, long-term impact. companies want to do business with the united states because we have reliable, stable economic policies. is -- ision really china going to look for new places to buy soybeans? are they concerned they need to protect themselves if there is another tier four and they need other suppliers? john rogers,come ariel investments ceo chairman and founder. we will talk about ariel

investments specifically and your track record since the crisis. you heard hank paulson say he is concerned over the long-term that it could do damage to u.s. trade but also u.s. business. how do you look at trade? i have a lot of respect for hank. i believe this is a short-term problem. talks buffett always about our capitalist democracy is the best system ever invented. the dow went from 66 to over 11,000. to war wars, a great depression, and several recessions. we will get through this. our capitalist democracy is the best ever invented. david: you are a bottom-up investor. you take a long-term view the way warren buffett does. isn't this different from the last century? we have a china that is about to overtake us if they haven't already has the largest economy in the world.

we are looking at second-class position. what might that do to growth opportunities here as you look at investment in the united states? ahn: i think this will be temporary problem. i have faith and confidence in the united states that we will get through this one way or another. we will ultimately have a new administration someday. some of this think it will happen sooner rather than later, and we will get back to normal and people will regain the confidence they had in the united states over this long period. david: we are looking at italy with 2.4% of gdp deficit. one of the issues we talked to hank about was the u.s. fiscal deficit. in the long run, couldn't that do damage to the united states, its economy and investments you are making? john: i don't think so. we have had deficits before and we have gotten through it. orhave had times during war

you had to get resources to keep our army strong and our military strong. this is something that will be temporary. it will be a problem we will be able to resolve and solve, and we will forget this crisis we are living through. david: this sounds good so far. politics.it about we have seen a germanic play out of the kavanaugh hearings. i talked to hank about the need for political will when there is a fiscal crisis. we had at last time here we got congress with george w. bush, the president, to vacuum. given what is happening in washington right now, do you have confidence? listen to what hank had to say about his concerns. financial crisis brought out in some ways the worst in america in terms of greed and problems in regulatory systems and so on, but at the end, people came together.

i would really like to believe if we got from it had another crisis like this, that the country could come together. but you are right, the things we did were so unpopular, that i think it will make it even more for our successors. david: hank would like to believe we will come together. what we are seeing in washington would not tend to suggest that is possible. when you make investment decisions, do you have to adjust for hyper partisanship, i think it is fair to say in washington today? john: we do look at it and think about the crisis and the short-term turmoil it can cause. when you have real turmoil in the united states, we had the civil war which was the worst thing that could have happened, it brought us a great leader, abraham lincoln. we will have another great political leader out of this to bringat will help people together in a constructive and positive way for the country. david: john rogers, ariel investments ceo will stay with

us heard will look at how he rebuilt ariel investments after the last crisis. live from chicago and new york, this is bloomberg. ♪

>> this is "bloomberg daybreak." i'm emma chandra. elon musk forng his controversial tweet last month about taking the company ride it. regular say he misled investors by saying falsely he had lined up something for the deal. they want to bar musk as serving as a director of a company. musk calls it unjustified. the us has expanded pharmacy business, united house has company. buy a

bloomberg has learned that united health will pay the billionequity firm $2.5 . kkr and blackstone are among potential buyers for extracting in anressing and it interest investment that could total $3 billion. that is your "bloomberg business flash." david: it has been 10 years since the financial crisis and many agree it is more secure now than before. wall street's biggest names way in and this is what they had to say. >> we probably have another 18 to 24 months minimum in the cycle just on the back of the adrenaline rush from trump's policies. >> from the u.s. economy perspective, the chances of

something happening in the next 12 to 18 months is low. we have 15% to 20% as you get , and the months chances go up materially. >> despite the rally, the market is pricing in more risk david:. . is johnoining us rogers. you saw the last one and it was not pretty. give us a short synopsis of where we were and how it got to where we are. e.ik it was an extraordinary opportunity to buy bargains because so many stocks had gotten crushed and people had given up. says, usefett always maximum pessimism. we had that. inevitably, the economy came

back to store narrowly strong and it was because we're making the right decisions. max pessimismt again in the next crisis? the next crisis will not be nearly as severe as the last one. so many invest looking through the rearview mirror. i am a number of investment committees, and people are making plans for the next crisis like the last one. you will have an overly conservative and cautious, and the next one will be modest and will be a great opportunity to buy and have the inevitable downturn. see tohat do you need to be interested in buying in the market when there is a shakeout? of financial a lot services companies, particularly fee-based companies. we think investment banking firms with international and global investments will do extremely well. wessel also have a restructuring arm that will do well in a down have a -- we also

restructuring arm that will do well in a down economy. global pension funds and endowments are investing in private equity and companies like kkr are in a good place to benefit. how you got where you are today. ariel investments had a hard time. you are now number one among to only people rated. -- 101 rated. you can bet better than a lot of peers did, why? john singleton said by when there is maximum pessimism. we felt there was maximum pessimism. we talked and read about how great investors make great decisions during crises. david: you did not buy the index? john: know, we bought the stoxx. hank: ho

cks. john: live a great team at ariel and we have been together for a long time. and their homework management teams, we found great companies. david: there is so much information on the bloomberg and elsewhere today. how do get an information edge? we think because we built a reputation of being long-term investors, folks like having us as investors. quickly our phone calls and we get our visits and meet with management teams. we are able to buy great companies like royal caribbean at the bottom. we knew the ceo and that he was terrific, and we bought that company at a real bargain price. the media stocks were getting crushed. theyre buying stocks and got downgraded. finally, the real estate services companies like cb

richard ellis were great bargains. we could see over the horizon that real estate would come back and people would lease and buy property of again. commercial real estate would be a great place to be. alix: the difference next time will be the massive private equity money and leverage in the system. do you have more on petition this time than you had 10 years ago? john: i don't think so. most public companies have been really reasonable with debts. they do not want to make the same mistake as next time. that is another reason we are confident about the next time the market declines. we think our companies are much more financially strong. we think private equity is kind of a floor and is stocks get cheap with so much private equity dollars of their, those companies will be able to be picked up at bargain prices and go private. david: john rogers from ariel

investments will stay with us. we will look at three companies worth watching. that is coming up next. this is bloomberg. ♪

david: welcome back to "bloomberg daybreak." i'm david westin. i'm in chicago. we are talking about three companies to watch. we are talking about tesla. what do think? leveragey have added and what a problem can be if something goes wrong. i clearly made mistake, and it seems like they will be under enormous pressure for quite a long time. how does a bottom-up investor like you look at these high momentum stocks that are betting on the future and not margins of production? how do you look at an investment like that? john: we want to buy bargain

stocks. this stock is one that everyone is convinced will go up and the indexes will be cautious. have aompanies will terminus collapse, most of them, some time over the intermediate time. viacom has not been a high flyer. viacom generally people are skeptical about the future could why are you interested in viacom? john: we think they have done a good job of reordering -- reprioritizing the orders. in global movement, they are doing an enormous amount of work to get content global. at the same time, locally, the paramount picture studios what do a wonderful job, not only like wonderful movies like the last mission impossible, but creating product for television. there is so much demand for content now. was over theership

top. at viacom, they had dora the explorer and mtv, and it lost a lot of those brands. does he have the wherewithal to re-create brands like that? john: i do not think they will build new ones, they will strengthen the old ones. things like nickelodeon can be a popular product. they learn how to stream it. they have terrific brands that can be utilized better. david: how about msg? john: we think it is a great company, owning the next and rangers and someday the next will come back to be world champions again. david: is that right? when is that happening? john: i think it is in a few years. job.ll do a good people have to watch those games on television and local broadcasting powers will be very

important. alix: that was the story a year finedat it was can be because you have to watch live sporting events on tv. then we saw subscribers seeing events go to twitter for example pay what is the disruption possibility and investment like msg? john: we do not think there will be disruptions for madison square garden. they have the rights for more than 15 years in the future to be able to broadcast the knicks and rangers in new york. those are great rands and have loyal fans, and people -- great brands and have loyal fans, and people will be able to go and watch and they will win again. these stocks are so cheap because of the fear, less than 10 times earnings. an enormous amount of cash and they have revenue and are doing things to get the product over the top. we think the fears are way

overblown and it is an opportunity. lazar? why was why do you think they will do well? more deals will happen and the consolidation of worldwide businesses continue. because they do not have conflicts that some of the international banks have, it is a. investment bank giving advice for counsel for ceos. they diversified so effectively. we think it is great to have restructuring the business along with international and global and emerging markets and money management business. you have a nice am a three-pronged platform. what about the big investment banks getting constricted in loans they can make. how do you view that in light of the global leverage story? john: we decided to stay away from the traditional banks,

traditional investment banks, as they are not as interesting to us. depending on transactions and research, we think the model is outdated. it is not as profitable as the private equity firms. a great pleasure to have you here in chicago here john rogers, ariel investments ceo will stay with us. alix: moments away from economic data. what the fed it looks at as a risk off day as italian budget deficit woes percolate throughout markets in europe as well as in the u.s. this is bloomberg. ♪

>>

♪ this is "bloomberg daybreak: europe geoeye m alix steel. where 40 seconds away from the latest economic data here in the u.s.. s&p futures off by about 10. the european budget deficit

percolates. take a look at that. italian banks off right 8% because they moved too much. euro-dollar lower. selling off in a big way. a little bit of safe haven buying here in the u.s.. economic data dropping right now. you.is what we can tell personal spending coming in 3/10 of 1%. sequentially over line with estimates. quiet 3/10y on par, of 1%. missing a little bit on the estimates. and one we always watch -- the core pcp a new year. it is what it is. target rate is at 2%. steady as she goes. want -- i don't want to speak for other people, but it looks like chairman powell is on it. alix: something to look at, too, is u.s. spending is cooling a little bit while inflation stays

near the fed goal. the question is, will there be any ease through in tariffs into consumer goods to affect demand? that seems to be the question we pay attention to. is that what we are seeing now, or is it just that people didn't feel like shopping in august? david: obviously wages are always key. they are not drying up inflation yet. -- driving. kroszner is with us. so put your old fed hat back on if you would. how do you interpret this data? we right on the 2.0 number. a set a target and they will hit it. doing a they have been very good job of raising rates in anticipation of inflation. in the past, central banks have often been too late. inflation heats up. they start raising rates.

the fed has been doing that and interpretation of the inflation, and i think they have done a good job of getting the balance right. david: how much more anticipation do we have coming? december looks likely this point. where are we? theall: that is going to be most challenging time because it is pretty easy to keep getting us up to 2.75%, 3%. just being kind of balance. that is going to be the question. will they go beyond that? david: what happened to the neutral rate? powellds like chairman is saying, you know, i'm not sure where it is. randall: that has always been the case. he has been more straightforward. that is one of the things people talked about on the markets, is that powell has a different way of speaking because he is not an academic. thingsh he says the same substantively that janet yellen or ben bernanke might say, he says things in a way that are --

that is more straightforward. alix: randy, we have sound from fed chair jay powell talking about just that. he is very straightforward. here's what he had to say on wednesday. >> this, perhaps inadvertently, goes to where we have widespread tariffs that remain in place for a long time in a more protectionist world. that will be bad for the u.s. economy and american workers and families, and also other economies. alix: that was actually more about trade. is, higheruestion rates heaven heard yet. tariffs haven't heard yet. randall: of course that is the uncertainty going forward. go too far?d

economy goes down, and part of that is because the central bank has been he hind the curve and it jack separates. ratesjack's -- it jacks up rates. david: john rogers, you referred to warren buffett. he says if there's one thing i want to know, it's where rates are going to be in five years. how important is it to you? what are your thoughts on where rates are going to be? we have a strong view that rates are going to continue to go higher overtime, and we're trying to make sure we are investing in companies that will do well in that environment. and of course, there are those that will suffer. we think wage inflation is becoming more and more severe. to help putg pressure on interest rates. that playave seen

out, but with different reactions from different sectors. homebuilders were crushed, but that is a different story. industry but not other industries may be affected. can you lay out winners and losers for me? some winners could become things like northern trust. they are a world-class bank. they get paid in management fees. higher rates will be good for them, and that would be one of our favorites. we have others that we think will do well. we try to stay away from companies that will have any real problem with residential real estate. those sectors we think over time will get worse and worse, and anything that touches them could be problematic. david: as the fed makes its decisions, randy, what about the feedback loop? what are we going to do about the housing market? randall: sure. so the fed is laser focused on one of the most important assets

that american households have. the fed fully understands that as those rates go up, there will be headwinds into the housing market. a bit of a headwind into your typical american household's wealth. they have been moving gently and gradually, but they also worry about the potential for invasion -- four inflation. at the same time, there seems to be a consensus here. if a recession comes, it will be because the fed went too far, too fast. how do we ensure that they are being prudent without falling into that trap which a lot of feds have? randall: first off, i do not think it is only the fed's fault. as i mentioned before, sometimes when the fed has had to raise rates rapidly because inflation has gotten to five, it was.

-- gotten too high, it was. tore could be shocks inversion markets. i just returned from argentina and turkey, where there are a lot of shocks. also in thailand where they are doing much better. if the fed goes too far, too fast, that is a problem. i think jay powell is focused on that. janet yellen was focused on the. will he be successful? i don't know. what about a downturn, john? to what extent do you take that into account in making investment decisions? john: we try not to get too caught up in the short market bounces that are notable. but we are moving more and more toward a seventh inning. we had an extraordinarily strong recovery. the momentum is still there. but it is inevitable, because as we get higher wage rates, we get

higher inflation, higher interest rates. that will ultimately sort of doom the recovery over the next 18-24 months. alix: what is the biggest risk for both of you heading into 2019? randy, go first. itdall: so for me, i think will be some of the instability in the emerging markets. and that could somehow bleed into something like italy, and we are seeing a little bit of evidence of that right now. in argentina, a lot of concern is on the fiscal side. i worry about that sort of ricocheting around the markets, including china because they have a budget problem. david: john, biggest risk going into 2019. john: if rates go higher quicker, that will be the major problem. higher rates are tough on the markets. and johnndy kroszner rogers, thank you both for being here. out. headlines outside the

business world. emma chandra. emma: senate republicans are pushing to confirm brett kavanaugh early next week. the judiciary committee will cast its vote one day after kavanaugh and one of the women who accused him of sexual assault testified in a daylong hearing. christine blasey ford said she was 100% certain that kavanaugh was her attacker. mexico was hoping for a naphthyl deal -- for a nafta deal. it will be ahat trilateral deal. the u.s. and mexico have reached a deal, but president trump says canada refuses to budge on key issues. a scene reminiscent of the miracle on the hudson when a jet crash landed in new york city. a boeing 737 landed in a pacific lagoon this time. there were 47 people on board, all of whom survived.

to rescue the passengers. global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. i am emma chandra, this is bloomberg. alix: my greatest fear. we have u.s. consumer spending here rising in august at the slowest pace in six months. not really moving markets that much because all of that is very much of a risk up kind of situation when you look at the futures here. dollar at the highs, and buying coming in. up, we will take a look at climate change and investing. joins us next. this is bloomberg. ♪

♪ "bloomberg aim break. coming up in the next hour, brian belsky. this is bloomberg. david: i sat down with hank paulson in chicago, and we talked about an address it -- an issue he has been addressing for a long time. i asked about the paris agreement and where we stand in meeting the goals. son: they can all have plans, but being able to execute them is different. -so i want make two - to make two or three points here.

governments don't have that is, howo the key thing do governments put in place policies that attract private capital to get the job done? this is where green finances so important. this is where putting a price on carbon is important. david: will it pay for itself, that investment? aulson: over time, it really does. the thing that is so perverse about climate change is, let's compare that with a financial crisis, ok? to begin with, financial crises are unpredictable. the climate change risk is very predictable. it will happen with certainty. we deal better when we have an immediate crisis than longer-term. we deal better on a national

basis than a global. so it is a very pernicious but i am focusing a lot today when i talk in the u.s. about the here and now and resilience, because just take a look at florence and, you know, harvey last year. last year the oceans were the warmest in recorded history. that means more evaporation. storms will be more frequent and intense. so these things, these climate events, are hereto stay. to stay.re and you have a different bailout. much more popular than the things i needed to do, because one, one industry or area gets hit hard and the government comes in like it should. we all pay. to me, the lesson is that we

need to build the right kind of infrastructure. florence, youa need to harden your hospitals, your roads, your bridges. your businesses oh it to themselves to protect their economic security in terms of where they locate. a matter ofhis is protecting our economic security. i'm it change is ultimately an economic issue. -- climate change is ultimately an economic issue. know -- good to have someone we know -- good to have someone who know so much about climate talking about those issues. alix: all week we have been looking at climate change. today, we are looking at the effects on climate issues and investing. so what is that? here to discuss, former cornerstone capital group ceo and founder erika karp, as well

as jessica milano, calvert research and management director. jessica, walk me through what an es g investment is. jessica: sure. we have a three-part process for thinking about how we review companies. we are a research process guided by our principles or in sponsor bowl -- for responsible investment and financial materiality. we look to situate companies within their peer group, and look how companies are managing their long-term structural financially material, environmentally social governance opportunities. next, we look at services and whether or not they have a benefit to the environment and communities. and then, finally, we look at a

theymstantial score, how are actually managing risk through daily monitoring of circumstantial events, regulatory filings. alix: erika, is that how you look at it? erika: pretty much. you cannot make a fully informed decision without looking at the most material es g factors. i would argue have to go beyond some of the data because the quality of the data is not what we would like it to be. it is not as consistent as we would like it to be. data, youeyond the look at the nuanced issues. the complexity of problems we are trying to address. like hank paulson says, we are talking about trillions. this is not just for climate action. it is for education, a pair, infrastructure -- anything you can think of. i remember trying to get

of green bond segment on air four years ago, and no one would talk to me. growing, ande this does that hurt or help you? jessica: it helps. every little bit helps. that said, we have definitional problems. back a few years ago nobody knew it green bonds were. but now everyone thinks they're esg or sustainability. so we have a problem with identifying, you know, what is real or what is market-agreed. david: when you manage a business, you either can or cannot manage it. to make an intelligent investment decision, you need to know about esg. is there any standard way of measuring it? erika: what we have is the global recording initiative -- global reporting initiative. in the united states, we have that as the -- we have says

be. we are trying to get better to makee disclosure projections based upon it. we do not have the quality of data we would need yet, which is problematic. alix: the question then becomes, who are the investors, jessica? i think of old millennials. is it just them, or is that spreading out to other generations as well? jessica: absolutely not, it is not just millennials. we are seeing interest across the spectrum. as a matter of fact, we have a survey coming out of finance with pfizer's where they are clients0% of their across the spectrum are asking about responsible investment products. in the same survey, they identified over 85% of financial of pfizer's saying strong esg research is critical due to -- of financial advisors saying

strong yes g research is critical due to several factors. do you filter this through and esg lens first? tosica: we really look situate companies within their peer group and identify what are the material environmental and social risks. you may put strong emphasis on governance characteristics, and on product safety. transportation, environmental risks carry much greater weight. are they appropriately managing the transition to a low-carbon economy? erika: what i would add is, in g, e, the s, and the governance is first among equals. if you do not get that right, have a problem.

that's what hank paulson's talking about with governmental infrastructure. so if you are getting governments right, it implies you are looking at the material, environmental, and social issues. alix: how are the returns different? that: what we know is evidence shows you do not do worse by looking at esg factors. why would you want less information as opposed to more? we do have to look at both risk and opportunity. erikathank you very much, kaprp and jessica milano. what everybody else is going to be watching. elon musk. more on what he did for his girlfriend. this is bloomberg. ♪

♪ here is what i am watching, and that is no shocker. tesla. you had stock to sell, lowering the price circuit by $100. barclays came out and said there is a fee on elon musk premiums on the stock. david: for how long, alex? it is funny. -- asently evidence june recently as june, it turns out they have a new problem. , andlked with john rogers he connected those two earlier. john: it shows that when you have added leverage if something goes wrong, clearly, elon made a mistake. it seems like they are going to be under enormous pressure. so you said, if something

goes wrong, does it? alix: it is a pleasure to have you in chicago. waspaulson interview spectacular. that does it for "bloomberg daybreak." chief strategist brian belski will join jonathan ferro. all in by the way, here are some out performers. the dow up a whopping 10% over the past four months. small caps not leading the way. be careful for today. it will be choppy. in italy, the focus of the news. this is bloomberg. ♪

♪ from the city of london, i am jonathan ferro. this is the countdown to the open.

tesla stock rolling over. the sec seeking elon musk's removal as ceo. the markets give it a huge thumbs down. and wrapping up a quarter dominated by trade concern. the s&p 500 heading for a solid re-month game. quarterly gains and a weekly away from the up and the dow with the future of negative eight points on the six 500. of 116.th 183. fort on the bond markets treasuries by two basis points. 3.03% is your yield on the 10 year. gets battered in the premarket. the sec bringing civil charges against the ceo, elon musk. taylor riggs joining us from