the president attacks the fed, janet yellen defends it. keep the faith. the company crushes subscriber estimates. analysts upgrade their price targets. sanction the hell out of saudi arabia. senator lindsey graham attacking. first, a trip to the kingdom. david: welcome to "bloomberg daybreak." i am david westin, with alix steel. all eyes are on the white house right now. president trump believes the fed is the biggest risk, but there is also mr. mueller out there. apparently he will wait until after the midterms and then wrap up at least a big parts of the collision and the of section of justice of this investigation. democrats,ear the the collective know, please, do it before the election. you want to do it before the midterms, and that is what the democrats were pushing for.

prosecutors,f his mr. mueller's, have already left. alix: we had some kind of relief rally underway. all the major indices in the u.s. were up over 2% yesterday. that is the first time that happened since march. stronger dollar story. the dollar reversing any kind of losses. a little bit of selling on the margin when it comes to the treasury market, the 10 year yield at 3.17, incurred a little bit lower as well. we were looking for good leads today. the market is looking for the same thing. morningow for the brief, housing starts for the month of september. at 2:00 this afternoon, the federal opening market committee about hits meeting in september of -- on september toy six. in canada, adults will legally inable to present pot sales

canada will be worth $3.3 billion by 2027. now we will go with "first take," joined today by stephanie flanders. and marty schenker. fairlyto talk about a important story for bloomberg. marty: it is, and we do have sourcing that says the major parts of this investigation are close to being wrapped up. obviously there was not going to be any disclosure before the midterm elections under the informal guidelines of justice. so it is going to come quickly after midterms, so we should be girding for that. david: let's get to the three top stories. the first up is saudi arabia. what is going on with mike pompeo, saying he has to hurry in part because lindsey graham took the airways yesterday and said in part, "i know what i am

going to do -- sanction the hell out of saudi arabia." there is a lot of pressure coming from the senate and congress, bipartisan. how long ago was it? >> a couple of weeks ago, but a day after khashoggi had gone into the consulate and not come out. it had not become the storm it has since become. david: as i recall, he said i know nothing about it. >> he claims he knew that khashoggi had left the consulate . i think officially there is still an alliance but he left the consulate within an hour of entering it. he said -- they said they were looking for him. people are saying this is president trump's first international crisis. does the kingdom understand how bad this is? the conference

happening in a matter of days, the number of people pulling out -- out major corporate of that major -- the corporate players, the banks, jamie dimon -- that is important for them because nbs was the symbol that didp would be the -- he promise that this was going to be a new saudi arabia, and its global business will not go along with that. he will not achieve his goal of getting saudi arabia off its dependency on oil. they realize it is a big deal, but there are conflicting signals coming from the white house. alix: that sets president trump up with congress or he is saying another case of guilty until proven innocent. seey: it is interesting to lindsey graham, who has been recently aligned with president coming out soes,

forcefully that the saudis have to be sanctioned. and personally, nbs needs to be removed if they want to have normalized relations with saudi arabia. alix: good luck with that. that is a whole different story. stephanie: president trump has a bit of an ammo of giving the benefit of the doubt to autocratic leaders around the world. alix: not the women, though, which have been highlighted again and again. speaking yesterday, president trump talked about how the fed is his biggest risk. trump: my biggest threat is the fed because the fed is raising rates too fast. i do notependent, so speak to them, but i am not happy with what they are doing. how does the fed set up

for the minutes today? stephanie: in the normal world, we focus on the minutes about what tells us about the future past. -- the future path. that crucial concept of what is the neutral rate, how much further might day go beyond the neutral rate for the economy, where you are not giving ormulus or really adding contracting the economy. for economists, that will be the main focus of the markets as well. it looks like we will have to it some to them, and pressure on the fed, making it hard for them to make decisions purely on the merits when you have this much pressure. president want a change or does he want to set up someone to blame when fiscal stimulus goes away and there is no more monetary stimulus? marty: i think he wants to do both things. the first few times donald trump

yesterday ite fed, was not. i think that was the right call, rhetoric to distance himself from -- alix: is he right? stephanie: if we start to see a lot of momentum in the economy, and you could argue that that is what we saw in the selloff of equity in the last few weeks, then we will start to see them saying do we need to go on autopilot? peoplere not that many that say that the rising -- a little bit of a pickup in wages, not much. alix: that leads us to earnings. you look at earnings. so far pretty solid, in particular with banks. morgan stanley and goldman sachs.

-- wearnings for netflix have been hearing a peak margin conversation for a while, but this might be peak earnings. stephanie: it is interesting how the earnings season is helping to lift the market at it. we are not seeing really strong momentum. it is very healthy for the market to be looking at underlying, organic earnings of companies at this stage of the cycle because that is where they will get the returns. those companies that can break up like netflix, that are economistsability -- think about the rise of superstars. if you could really go global with the various sector revenue model, itrevenue shows how good growth can be. david: you have very limited inflation, you have substantial growth in the united states, very low unemployment. traditions are really almost perfect. marty: one exception yesterday significantly

premarket. in contrast to netflix, which just lose the numbers out of the park. blew also -- which just the numbers out of the park. david: eventually it has to come down. the complete margins conversation is interesting. as an economist, you are looking at this crucial dynamic as to whether we get a pickup in productivity. if wages and other costs squeeze profit margins, that is when countries have an incentive to get more out of those workers and raise productivity as well as raising rates. that is the sweet spot. i feel like the market has been less attuned to industrials. the stocks have been hit, but overall -- stephanie: that is where you want to see the productivity growth, to help lengthen the recovery. it is also where you will see

some interesting idiosyncratic effects. alix: it is all about the fed. stephanie flanders of bloomberg, thank you very much. marty schenker, as well. thank you to both of you. go to gtb go. coming up, more on the political risks within the market, with evan brown. this is bloomberg. ♪

alixtaylor: this is "bloomberg y daybreak." boosting growth for new purchases -- new

business to the company missed estimates on quarterly revenue. ibm's revenue has been down the last -- has been down the last three quarters. the land wherer it will build a factor in china. that will be its first outside the u.s.. it will be the first time china has allowed a foreign automaker to fully own a factory there. -- facility will times it is considering options for its catering in-flight services business. the german airline may sell lsg sky chefs or combine the unit with a competitor. includesossibility selling the stake to a partner. that is your "bloomberg business flash." david: secretary of state pompeo has moved on to istanbul after visiting king salman in riyadh,

but he understands the need for urgency conducting the investigation into the disappearance of jamaal khashoggi. suzanne, thanks for being back with us. in the united states, every day that is a new revelation incriminate's, frankly, the crown prince, certainly the royal family more. how is it playing in riyadh, in saudi arabia, in the gulf? >> so far in the gulf we are not seeing much from the government being said on what happened there it on social media you do see a lot of solidarity from the saudis, who are looking at this as an attack on their country. several countries in the gulf have basically said they are standing with saudi arabia, and most of them did not address or what they called a foreign attack on saudi arabia

and its leaders. but much of this is not being debated because a lot of the media here is government controlled, and there are limits on freedom of speech, so you do not expect much in terms of other views. david: is there any indication that the government of saudi arabia is taking action to protect itself? there are pretty clear threats about the use of oil. are there any other actions they are taking in the kingdom? not seeingfar we are any signs of that. maybe they think they can distance themselves and the crown prince from this. so far yesterday, secretary pompeo was shown sinking the hand of the consulate that shaking the hand of the consulate. saying the u.s. relationship is very strong.

not see any signs of that. but there are reports that the government is trying to figure to -- a way around this, and they are assuring that there will be a thorough investigation and that everyone guilty of this will be punished. david: thank you for reporting to us from dubai. alix: joining us now is evan brown. how does someone like you look at the last cointreau days with saudi arabia? evan: we are generally focused on fundamentals and earnings, but we have a long oil exposure as a hedge in case things get a little bit out of hand. on ahas served us well broadly inflationary environment. we are always going to have these geopolitical risks. we have to focus on what we know best, which is the economy,

which is earnings. we will hedge the geopolitical risks using various other factors. interesting isnd the broader implication of how money might shift. these yellowre bars. the white bars are non-oil gdp. it shows how dependent the country still is on its oil revenue. they have been trying. investment in tesla, investment in other areas -- you expect there to be a huge capital shift if this continues to pan out? some there has been speculation in the newspapers about changing investments and tech and the like. these things are very difficult to project -- to predict, so we hedge on oil. we do not try to predict what is going to happen there. to china.'s go there is a report that in august, china's treasury went

down a bit. with a guestterday who was concerned about china's continued funding of our deficit. listen to what he had to say yesterday. >> at the moment we are not exactly penpals. there will be a competition for capital. the deficit is rising rapidly, and thank god the economy is going because you cannot spend $300 billion on top of a trillion dollar tax cut. david: as you look at investments going out with the risk of china, we are currently in a trade skirmish, not war. could that play out? evan: we are not so concerned about that. china's treasury earnings declining is more about them protecting the currency against weakness. they do not want the cny to depreciate too fast. started selling

treasuries, that would tighten financial commissions -- financial conditions domestically within china. we do not see treasury markets as a way these tensions will play out, but we worry about more tariffs. the president has made it clear he is not done yet. he says he will go through the whole amount of imports. china will run out of alternatives about how to retaliate. evan: that is correct. beyond the tariffs, you saw mike pence's speech a few weeks ago. these tensions are beyond just trade. it is about security, semiconductors. those are not going to be resolved anytime soon. we have to be very focused on this, where it is not going away. if we are focused on the november 30 g20 meeting, hopefully we will get negotiations there. alix: if china goes into a current account deficit, that is the best of things and for next

year, that is what will disrupt the entire global economy. i want to go over to you, kay. also commented, saying a slowdown in the e.u. affect could directly banks. how do you hedge that? underweight sterling. brexit is very difficult to predict. alix: putting it nicely. evan: you have the political dynamics with the e.u., the dynamics that the prime minister has to deal with. softer we get a hard or brexit, it will not be good for the u.k. economy. we think the effects will be limited on the u.s. it is more of a u.k. and europe issue. david: evan brown will be staying with us. coming up, netflix surges as

third-quarter growth shatters expectations. we will talk about that with mike olson, piper jaffray senior research analyst. that is coming up next. this is bloomberg. ♪

david: netflix announced its third-quarter results, beating expectations across the board and doing better than even the most optimistic analysts thought it would do in adding new subscribers, particularly overseas. shares are up over 11% premarket. -- mikeus is michelson, olson. he has an overweight rating on netflix and his moved his price target up to $430. it is all about the subscribers, is that right? mike: that is right. devlin's reported a strong q3. the q2 miss was just a blip on the radar. a strong q3.ported

the q2 miss was just a blip on the radar. we see the potential for further upside depending on the pace of international expansion and price increases. be heavily seem to weighted internationally. is that because of potential growth yeah oh how much headroom is there? mike: if you look at the u.s. about 60% ofix has households subscribing. internationally, it is more like -- never ask has about 6% of households subscribing. internationally, it is more like 15%. alix: when is the day of reckoning going to come, when cyber growth is not fast enough to offset the cash flow they cannot get positive? mike: we could be a long ways away from that. international penetration is only a quarter of what u.s. penetration is. we are not expecting that

international penetration will reach u.s. levels, but there is . long way to go international households subscribing could double or triple over the next several years. go, and a long ways to we think as a result they should keep spending on new content. david: a different day of reckoning is from competition. disney is coming in, espn is coming in. at&t and walmart. are they just one step ahead? big players are coming after them. mike: that is a good point. netflix is a leader in a multiyearhat includes growth potential. there will be increasing competition and unseen hurdles on the horizon. as the consumer content dollars shifts more from traditional tv toward internet delivery, we believe the market will support multiple players, and the first will be leading the way.

olson, thank you for a much, joining us from piper jaffray. do you like them? against is hard to bet tech. we got a wobble in tech with the moving yield, but as long as you are posting these kinds of numbers with this kind of guidance, this relative valuation, this rotation we have been waiting for looks like it will take a little more time. evan brown of ubs management will be sticking with us. president trump is criticizing rising interest rates. more on that next. this is bloomberg. ♪

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-- .3%. stocks are getting hit hard in europe as well. it is a stronger dollar story. the dollar index bouncing higher by about an hour and a half ago. .5%. also lower by inflation missed estimates, so rethinking any boe rate hike decisions that might have come over the next 12 months. yields in the u.s. pretty much go nowhere. is having asa may difficult time of it. alix: i would not want to be her. david: a rock and a hard place. taylor riggs is you would first word news. taylor: secretary of state mike pompeo needs to act quickly to investigate the disappearance of journalists jamal khashoggi. he is in turkey after meeting with saudi authorities.

turkish officials said khashoggi was killed inside the saudi consulate in istanbul. muellercounsel robert is on the verge of delivering key findings in his russia investigation. bloomberg has learned he will issue those findings soon after next month's election. he is said to be close to rendering judgment on two of the most explosive aspects, collusion, and if the president obstructed justice. theresa may heads to a crucial european union battle over brexit. they need to show flexibility over issues that have kept them deadlocked, the irish border. global news 20 hours a day on-air and a tictoc on twitter powered by more than 2700

analysts and analysts in more than 120 countries. i am taylor riggs. this is bloomberg. alix: how many times have you heard crucial deadlines for brexit coming? but the market is not getting any pressure. david: sooner or later it will be crucial. alix: but not if the market does not pressure it. cry from where we were bryan price it happened. -- when brexit happened. david: this is it. they are at the cliff. merkel speaking in berlin, saying germany has begun preparing for a no brexit deal. an agreement still remains possible but there must be a tangible difference between in and out and they are starting to prep. these are serious headwinds. david: you have to think she is going over to take a last-ditch stand.

she just heard from her own whip. she can't get the present deal done to her on parliament. europe is saying we are not go with the present deal. she has nowhere to go. alix: i would fill up my hands and say i'm going to the caribbean. president trump is criticizing the fed for interest rate hikes. he expressed how the fed is the biggest risk. president trump: the biggest threat is the fed, because the fed is raising rates too fast. it is independent so i don't speak to them but i'm not happy with what he is doing because it is going to fast. alix: janet yellen defending the fed, saying to politicize it is done in my something that is damaging to the fed and financial stability. presidents can speak out, but she does not think it is wise. join me is mark vana and evan brown.

you hung out at the new york fed. >> i don't think it is unique to today. sacrosanct, and they don't look influenced by outside factors. they certainly hear everything the president is saying but i don't think double influence what they're doing. alix: is he right? as the fed continues to hike, the tax stimulus wears off, libya from for the economy? evan: i think the fed is right to continue hiking. fed -- chair powell is right. these estimates of the long-term rate are very difficult to see. we need to be data dependent. the data, it is really

supportive. the fed should keep on its course. david: is it the same course? we have a new chairman and he seems to say, i don't trust these precise numbers. i think it is more vague. re: coming into a new regime over don't the same guidance going forward? mark: i think that is right. chair powell not being an economist is much work guided by the data he the. based on howt the data is coming. guidingally going to be policy a cc fit based on incoming data. the data is strong, therefore i think the fed will be biased to keep going at a relatively gradual case. even if the president believes they are hiking rates to rapidly, in a historical context they are going quite slow. times a year is really half

what the fed would typically be doing. i think the fed is right to proceed gradually, recognizing data is strong but inflationary pressures are not particularly huge. they will keep going at a relatively slow pace over time. david: when are we done? where do we end up? i will show how many rate hikes this year. 3.8. two.year, another where are we going to end up? evan: i agree with mark. this is a very data-defendant fed. the fed will stop when something breaks. when we start to see a meaningful slowing of the economy or financial conditions tightening. not just a little stock selloff we have seen just now, but credit spreads have to widen out. much larger strength in the us

economy and we are not the net. -- and we have not. alix: we also see real yields around 1%. at what point -- what is the turning point? assessment is much lower from where we are today. i believe they need to say a much more significant tightening of financial conditions. the fed does not seem bothered by the recent risk selloff we have seen. they were not deterred from hiking in march after a more pronounced risk selloff in february. i think the powell put is probably another 15 -- 15% to 20% lower than today. financial conditions, the dollar feeds into that. conditions, if you look at the bloomberg index or the chicago fed index, they remain very supportive and

accommodative, even after this recent blip in the equity market. they need to see conditions worsen before they make broader changes. david: is the driver the dollar? mark: it will influence inflationary pressures a lot. the dollar will pass through to other aspects of the economy. that is very important to watch. our strategists have a rather sanguine view. they think it could weaken as focus begins to shift abroad in terms of how quickly the ecb or the boj might adjust their monetary policies. if the dollar pressure eases, that will give the fed more license to continue with their slow, gradual tightening pattern. alix: you mentioned credit spreads. you can see the lack of reaction in credit spreads. up, but let'ske be honest. we are not seeing anywhere we

saw two years ago. do they need to be taking more risk rather than duration risk? evan: rather than duration risk, yes. the fact that we have not seen credit spreads widen signals this is less of a business cycle turning issue and more of a technical correction in the equity market. if that changes, it might change our view but really, as long as credit is hanging in there, it looks like more of a technical equity correction. we have not seen the top yet in the cycle. david: when it comes to the yield on treasuries, one factor is the amount of supply. which is that numbers out. $779 billion. it is going up, the u.s. deficit. evan: it is certainly something

i think is already having a factor, at least in the recent backup in rates we had. the elevated amounts of supply should in theory increase term premiums, just as participants need to be compensated for the greater amount of supply and a lower -- this will only worsen in the months and years ahead, especially when you think about the fact looking at trillion dollar deficits for as far as the eye can. -- the i can see. we have been expecting 3.25 by the end of the year. we think we will see rates move 3.5%tween 3.25% and between now and the end of next year. stabilizing around those levels. we expect the koeppel gradually flatten as the fed hikes rates where we think the backend should be relatively stable. david: evan brown and mark cabana, thank you for being

with us today. we will take a look inside the tesla model 3, and what may be elon musk's best and worst decisions. this is bloomberg. ♪ ♪

alix: this is "bloomberg daybreak." taylor: coming up in the next hour, alan ruskin. ♪ david: we will turn to wall street. three things wall street is buzzing about this morning. big banks wrapper earnings.

we look at the biggest takeaways from the third-quarter reports. caring apart tesla. a look inside the model 3. allen's our collection. -- art collection. alix: i want to talk about banks in light of how well morgan stanley and goldman sachs did for the equity underwriting, and citi's debt underwriting. at $120 billion. >> people were looking towards these earnings. there a little side stories. david solomon's first report. investment banking coming in very strong. people are still bullish about dealmaking and maybe some big ipo's coming on the line. uber and lyft. wanted tosaw uber

raise $2 billion in the debt market versus $1 billion. reversing that conversation. >> it is amazing how much enthusiasm there is around this. from an uber and lyft ipo perspective, these are the holy grail ipo's, setting saudi aramco aside. who knows what happens now with that given everything going on in saudi arabia? these are the big kahunas. they will set a new standard presumably next year or the following year for what a big ipo. in wall street. david: let's turn to tesla. --ettlement designs gentleman designs for assembly. he took some model 3's and took them apart. on the bad side, peaked in making a lot more money but he's making it in a very clunky way. multipleo much frame,

parts riveted together when there should be one part. says, why arelly you making the so complicated? what i recalled was businessweek had this great cover story not too long ago about how spacex is run very well and tesla is not. this goes to the heart of this. manufacturing cars -- you are a michigan guy -- it is hard and, katie and you don't have to reinvent the wheel. david: this is not about electricity. this is just the basic frame. people have figured out better, cheaper ways to do it. elon said i know everything better than anybody. we will start from scratch. alix: a literally rise with chalk on the car and says what is wrong with it? that is amazing. how many rivets you need. let's talk about another amazing feat. paul allen's art collection.

he built such an enormous amount of art. you have modern, monet. >> is an amazing collection. i think we will be talking about the legacy of paul allen. underappreciated. untimely passing earlier this week from non-hodgkin's on foam a. 65 years old -- non-hodgkin's lymphoma. occluding -- including a couple a sports team he owned. david: the art is valued roughly at $1 billion. he has got the portland trail blazers, the seattle seahawks. he bought the seahawks for $200 billion -- $200 million and now worth over $2 billion. >> these are some of the most prized assets out there for the billionaires. you want a sports team. s in twoly see two team

different leaks by one owner coming up at the same time. we talked a lot about seattle. the effect of microsoft. amazon, of course. this will be a big deal. david: you pointed those teams to stay in the northwest. he bought one of those specifically to keep it in the northwest. next?ows who comes >> it will be a very difficult choice and tough shoes to fill when it comes to the nfl and nba. alix: we could talk about george the rot -- some people like sports. thank you to jason kelly. canabis becoming legal in canada.

we will talk with the green holdings dutchman ceo. this is bloomberg. ♪ ♪

alix: marijuana going mainstream in canada. some analysts see the market reaching $3.2 billion next year and will lead the global are opod opportunity to t $200 billion. joining us is brian athaide, the green organic restaurant is an afghan it cannabis company with operations focus on medical cannabis markets in canada, europe and latin america. brian: thank you for having me. alix: the legalization. what does that mean for your business? brian: it is like the end of prohibition for alcohol. it is a huge market. the lowest estimate is about $6.5 billion. it could grow to $10 billion in canada with legalization.

that is across all different types of product forums. it will take time for the black market to convert to legal but it's an incredible day. david: an interesting analogy, prohibition. is for altering your mind as opposed to medicinal? brian: the legal market has been all medicinal higher to this. as country is rolling out -- you see countries rolling out, it will start focusing on recreational. you are looking at replacing other products like alcohol. alix: which industries can this disrupt the most? we focus on the beverage industry. brian: pharmaceuticals. if you think about opioids, they are talking about marijuana being an exit drug. it used to be a gateway drug. that's a huge disruptor for opioids in medication. stress release, epilepsy, sleep disorders, and when it comes to

tobacco and beverage at all. there is another area. they are focused on thc, that is psychoactive. but there are over 100 different you cane oils -- exports recovery drinks and other types of categories. david: what are the costs and margins? brian: no one is at scale yet. if you look at when everyone builds up their facilities, we expect our cash cost to production be below one dollar per gram. smaller craft producers obviously will be higher. the current selling cost on average is about nine dollars for organic. i expect that a come down as you have more production come online. you will see price compression but we will maintain our organic premium. alix: a hedge fund guy was looking at the next opportunity

and choosing between cannabis and blockchain. he did not look to the canada this -- cannabis. what do you feel like we need to see for those hedge fund guys to feel like it is a proven business? brian: the market already exists. i honestly don't understand bitcoin and the economics behind it, but this is a physical product. alix: does it have to come from pepsi buying it cannabis company or j&j? does it have to go home adoption and other big industries? brian: it will be a combination of both. you have a purely cannabis company that is building brands. this is like any other eras were alcohol brand. that beverage alcohol brand. other beverage alcohol brand. david: is there discounts to the value of a company because of this concern? the head of cvs said no time

soon. that is a reputational issue. is there a discount to the value? brian: for sure there is because it is early stages of the industry. you have a lot of operational risks. there are over 100 licensees in canada. for sure there is a discount. if you look at who is being disrupted, the top three pharma companies have a market cap of close to $1 trillion. the top three for beverage our all is about $800 billion. the top six cannabis companies is less than $60 billion. that is a huge disruption. the black market is not going to go away overnight. it will take a few years but the value is there. alix: the equities we have seen, are those legit valuations? brian: it is hard to look at it when you don't see a lot of revenue.

if you look in the future where this is going, this is not like.com for the measuring eyeballs on computer screens. this is an real revenue becoming legal. the revenue will be there. that valuation will prove itself. i think there is a lot of upside. alix: really appreciate it. brian athaide. definitely watching the cannabis stocks not seeing a great day so far as to get to canada legalizing marijuana. coming up, alan ruskin will be joining us. kasich of president trump attacking the fed again, and affects manipulation. will we see it in china? this is bloomberg. ♪

alix: trump says fed is my

biggest risk. the strength of the rate hike conviction. netflix says keep the phase. investors will pass the cash flow issue. -- says section the hell out of saudi arabia. president trump hedges nine. david: welcome. i am david westin with alix steel. there is talk about the mueller investigation. big bloomberg report saying mr. mueller may wrap it up, at least the parts having to do with up structure -- obstruction of justice. alix: can i ask a dumb question? david: you never. alix: how are markets going to care? it has been out there. no matter what has happened to d.c., it has been either short-term effects or none at all. what are the implications? david: i do not think markets know what to do with it.

unless you get to that ultimate issue, what difference does it make? if you read the story, a report goes for mueller to rod rosenstein and he does not have to make that public. we may not even know what is in the report unless they did -- decide to indict somebody. alix: that is a great point. the nasdaq had it 2% rally yesterday, giving up gains. of 4/10 of 1%. a stronger dollar story. dollar climbing. by 4/10 ofdown now 1%. i fail to see the why but it feels like a shakeout from yesterday of yields going nowhere in the u.s. right now we have housing stocks for the month of september. at 2:00, the federal open market committee will post minutes from its meeting on september 26. in canada, adults will legally

be allowed to possess 30 grams of marijuana. projections show recreational pot could be worth $3.3 billion in 2027. back here, netflix announced its third-quarter results after beating expectations across the board and doing better than the most optimistic analysts thought it would do in adding subscribers overseas after a big .pike shares are up 11% in the premarket and joining us now is bloomberg intelligence director. paul, welcome. growths the subscriber been for netflix? it shot up dramatically after disappointing second-quarter. paul: this is driven by subscriber momentum. and particularly internationally that is where

the growth is coming. that ahead great -- they had a great second-quarter dust i am sorry, third quarter. that is all they need. david: how long can they keep this up? still have runway particularly in international markets. people feel the u.s. market is approaching saturation of the they did at one man subscribers. the growth is coming from the international markets and they are in every international market with the notable exception of china so there is lots of room to grow. they called out india for a market of big growth. this morningducer was like india, india. did they grow in a country like india or do they monetize? need to create programming that will work in india. there are existing programming that will work. it has proven it will be popular around the world but there are locally produced programming they are going to invest in going forward and they recognize in the indian market locally

produced programming is the way to grow the business. isid: what they are proving if you spend money coming you can buy subscribers but they are spending a lot in terms of new programming. or $8 billion a year. sooner or later they have to pay for that. paul: they are cash flow negative to the tune of $3 billion. they suggested their cash burn will be a similar $3 billion next year. if you look at the bloomberg, tillsts do not forecast -- 2021. how are they financing this programming investments which will be north of the billion dollars this year? the high-yield market is open to netflix. a have come to market several times. i expect they will market soon to continue to fund the programming and the market is receptive despite the fact there are no assets to lend. there is no cash flow to lend against but there is equity supporting it. alix: rates are rising.

you can see why investors might be interested. david: we do not see disney and at&t in the business. alix: tro. -- true. once they get rid of princess sophia, netflix is over for me. strong earnings boosted major averages for the biggest gain we saw in six months. futures under pressure. the question, have we reached peak earnings of growth. american century portfolio manager and bloomberg columnist, welcome. snp and feels growth and earnings growth and see if we are hitting the peak in the second quarter and downhill from there in 2019. mike, what do you see? close toht be getting operating margins. inped up this year to 16%

terms of the s&p 500. if you look at the estimates for next year, it is supposed to go 17%. that might be difficult but that does not mean we are at a peak in earnings. the economy is chugging along. startk quarters for it to to take effect but it is starting to take effect. that is helping. if you take out the tax cuts, you have good growth. it continues next year. if your margins start coming down and your earnings growth going up, is that because of buybacks? >> that is part of it but not all of it. if you take out the tax cut part of it, you are starting to see good sales growth and good operating margin expansion this year. we think that will continue next year in if margins do not expand. we think you are going to see operating at -- earnings growth excluding stock buybacks. alix: we have heard warnings for

companies. you can see the top panel you have the white lane trailing industrial earnings estimates and the blue line earnings estimates on a 12 month basis. do feel like we rated for this margin squeeze in the industry? >> i think it depends on the company. 12%.entioned -- which has some of these shorter cycle companies, especially those exposed to the automotive cycle, especially a deep exposure to china, you see margin pressure ramp-up. some of the longer cycle companies in error, names like emerson, some of those have a little more room to run. if you think about the way the cycle is playing out, it has been strong but not strong for all types of industrial companies. you have to pick your spots. david: there is a difference

between how long the chinese trade dispute continues. -- is another that got hit hard but if you go longer cycles, how long it lasts, you have got -- lasts. >> you have got to put it in perspective. we have a deficit with china and if tariffs start to bite we export 150 billion in china. in half. they get cut we have an $18 trillion economy 70 50 are talking about billion. it is drop in a bucket. there are strong factors starting to kick in and the tax cuts started to kick in so we think we have got room to grow. >> are you worried about comments? conflicting views how this is playing out, but does that trigger -- to go down into warnings from customers when we get reports later this week? >> it can.

take ak you need to longer-term look at things. if you look at the long cycle businesses, they are not eating affected by what is going on. short-term can happen. there are ups and downs but if andlook at the companies companies that do well for a cycle, we think you will do fine. look at portfolio allocation, 17% saying to get insurance. do you feel you are more defensive or offensive? not trying to be offensive or defensive. we are bottom up as opposed to top down. pick something like industrials. where are we? we might be midcycle in the u.s.. -- has not been added in the last five years. 80% is normal in the united states. outside the u.s., more capacity has been adding and we might be at a later cycle in terms of

that. domestically, we think we have got good industrials that have on atarted to look good basis for our clients. we have been slightly underweight. we are in an overweight position not aggressively. we are starting to see value. the market is starting to price in the fact we might be later in international names even though we think domestically we are midcycle. david: take the later term and apply the bottom up. you focused on balance sheet? on issues like margins today, you would have been 2-3 years ago? >> we have always been focused on the balance sheet and cash flow. that is how we look at things. it is important to start with the balance sheet and crespo generating abilities. alix: both of you are sticking with us. toing up, we are going discuss the latest developments in saudi arabia and how it could

impact the oil and energy market. this is bloomberg. ♪

alix: the world of geopolitics centering and saudi arabia. mike pompeo in turkey. he said the saudi government understands the need for urgency in investigating the disappearance of jamal khashoggi. rhetoric heats up, all of the saga playing out in the oil market. michael liss of american century, oil and gas stocks take up 5% of his portfolio. oil, it is one. a potential for a geopolitical risk here. what do you like an oil? we like it can a lot of

energy companies, not just in production but oilfield services. we think they are out of favor from the market and so we think there is a good opportunity for our clients. mean you think the turn into a rates and pricing power is going to come back and when, because it seems like they wanted to say it climbed back a few quarters ago? mike: what you are saying is the fact that the producers are noting more disciplined and spending as much as they have been. they love to outspend cash flow. they have a dollar and want to spend it right away. the market shut them down. the ipo market and the equity issuance market has almost dried up this year. they are finding debt but they are not able to outspend what they had before in the past and so we think -- not all operators but bigger ones, certainly with the oil company you see more

disciplined come in so they are not outspending like they have been. speaking of discipline, what name i have to ask you about is very colts. what do you think about him to turn ge around? mike: we think he is. set of a different circumstances. there are days when i feel like i am the last person investing in ge on the planet. in my 20 year career, it has been the toughest. look at it going forward. what does it look like? we think a lot of what they got is in their own control. they have an incredible opportunity to cut cost among the power site. business is underperforming. the place where we are different relative to our peers and investors is we do not think the power of business is shrinking. we think it is not in secular decline. we think it is an secular

slowdown. that is an important distinction. eventually it will bottom and we will be able to slowly grow it they have and tremendous opportunity to cut cost. there were few 25 billion dollars to $30 billion margins of their 5% or lower. this should be a double-digit operating margin part of their business. not where it was before but they should be able to get it up to somewhere between 10-50% and that is where we differ from investors. >> i hear what you are saying but when you look at the heavy-duty utilization rates, that is not translating to an uptick in ge services and there has been questions about the quality of service level at a time when you have significant cost cuts. i you confident they maintain standards they have had in the past and continue to grow business? mike: you have all the spotlight because every time they do

something wrong, it gets magnified so the turbine you have had in the last month. the committee kitchen was terrible. this company has done everything wrong they can possibly do. they are running out of things to do wrong. if you look at the other competitors, they have had calls over the years to then. that does not get out there. it is not the week -- there are bowls on the stock. they can do better from here. that does not get out. that installed base is going to need servicing. it is just going to have to have it. it might get reduced in the short-term eventually. they are going to have to come back on those turbines. david: they have done things wrong they can turn around. they need to cut cost that you cannot cut yourself success. you have got to do something affirmative. you have got to grow the business. what is ge five years down the

road? while you cannot cut your way to success, you can cut your way to success over an intermediate time. ok toot suggesting it is never grow again. they have many opportunities to improve their business. they have done so many things wrong. he has done a lot of great things. and been able to trade -- create tremendous value. david: he grew that business, had an affirmative business -- vision. mike: that is why he made a lot in termsstrategically of m&a and got rid of business is underperforming and was able to do that successfully in bringing other businesses that did well. on bothot experience ends of the spectrum and he is going to have to apply those skills. >> do think you should keep the portfolio plan laid out i john

flannery over the summer? to their between dismayed? made -- tweaks made? mike: i think it has been successful. i think will be successful for ge to stay with the power business. there's a tremendous amount you can fix. when you fix it, you can always -- off into our company if you want to. it is a pretty good business that split the company where ge owns half of it and lot tech owns the other half. that is a hell of the business. people lose sight of the fact the health care business and aircraft business are dominant business with market share positions and have done fantastic overtime and have great defensive -- as well. david: coming up, we are going to talk about one of his own holdings.

this is bloomberg. ♪

david: time for the bottom line. danske bank is one i am going to look at. i do not think i see another headline. they lost their ceo because they had that money laundering thing and now they have -- put a new ceo in. that guy does not have nearly this earrings you need to run a big bank. analysts are saying they think they are going to have to go outside of denmark for the ceo of dots bank. -- danske bank. in part because of china, they dropped formula sales. this harkens back to the ceo of

the effect of the protectionism theme rising in the market. here is what he had to say. >> we are taking the view 10 years ago that the world with the globalize. we need to be prepared for a world that will be less global trade, more local and this is what consumers and politicians are pushing for. in chinat and also where they are going to make stuff in-house, they wind up having a decline in sales. .avid: we go to our third story they had earnings come out and michael liss owns the stocks. butbeat earnings per share that was good news on loan growth. mike: they continue to chug along at a nice pace. largeste fifth commercial lender in the country in terms of assets and deposits. in terms of leader

returns on capital have great returns on assets and equity. they have low levels of volatility and returns so they have a strong talents she, low levels of credit risk and they have the best credit rating among their peers. alix: look at residential mortgages, credit card loans. they all came in but what happens when you have a rate, tenure at three and a quarter? we think the market is pausing and digesting higher rates. they are not outrageous. think about 15 years ago how height emerging rates were. alix: even with that headlands. mike: we think they are a good wish for rewards. to see openings in the banks. when rates are low, you cannot own banks because the interest margins are squeaking -- shrinking. it is not sustainable.

the tenure is what? 317? look at that history. that is not high. david: it makes you think are there any bubbles around and one thing we hear about commercial real estate, are you concerned at all about loans across the country? mike: it is fun to slow down so that is good thing. things percolate and get crazy when banks are starting to pull in. if you look at their loan growth for banks, people are worried about that. it is slow but continuing to grow. we do not think the banks engage in behavior they did before the great recession. we think they did more -- have been more responsible lenders at a more reasonable pace. we do not think they are going to blow up because of extending credit to much. alix: do like big banks? -- jp morgan jc and wells fargo.

3% dividend yield for our clients. wells fargo, how do you factor in management and the continued drama and fees and lawsuits? mike: that is tough and they have taken a loss. they earned that. and have got a deposit leave and go to bank of america, because they have not had controversy, then i am going to go. they have lawsuits. we are going to go to this small bank but they cannot continue because they cannot invest in the technology bigger banks can.

away from the latest housing data which has been soggy. 132.utures italian equities rolling over.

a stronger dollar story came 6:00 and that changed the mood in the equity market. a cable rate down 5/10 of 1%. inflation missed estimates and eying on the long end of the curve. a change of the last half hour. crews get softer. housing starts month on month coming down 5.3%. a little better than estimated but down. august lower. permits missing big coming down 6/10 of 1% versus up 2%. housing starts are lower. maybe you can blame it on the weather, back to school. we usually do. , housing data going forward. down 6/10 of 1%. david: let's bring in alan ruskin, global cohead of ethics. allen, we're going to start with you. let's talk to you. what does it say?

alan: i see the real data. the little i have seen so far, the single-family. there was one piece of half decent news. we focused too much in the stocks. we had a hurricane passed to the carolinas. that being said, when you look at the big picture, it does not look great. it is remarkable. david: why is that? we hear how strong the economy is, unemployment. housing seems soft. alix: and autos. alan: the elements were a major giveaway for the corporate sector and supply-side of the economy. salt side of the things, the state and local tax deductions had a major impact on the hounding side. i would have said a year ago housing was in a nine inning game.

-- baseball game. i am surprised. i think it is going to be a pickup again. wait for it six months time, maybe a year. alix: can we talk about a strong u.s. economy with housing and auto sales rolling over? alan: normally we cannot. those of the best sector leading indicators. normally housing stocks are a fantastic leading indicator. this time, probably not. is --elements, housing real estate is going to move from gdp. it is not big enough to get the economy ticking down. david: is this an aberration or a yellow light flashing on the dashboard when it comes to housing as well as autos? mike: i think it is a slowdown and it is going to pick up. in terms of housing, you have not had the big expansion, the big explosion like in the last

cycle. we are seeing a pause. housing prices went up too far too fast. lack of supply, demand starting to come back. wages picking up for work, getting adjusted in moving into houses. you do not have enough supply at the low end. you are seeing a pause. it is going to pick up. it could take six months, 12 months. you have not had the big excesses you had in the last cycle so we are not going to see a big decline. alix: do like housing stocks? mike: i cannot say we liked any rewards in the housing stocks now but they are getting closer. company we owned was lows and that is a company that had a nice run. in, something we moved out of but we will come back if that stock comes back along with housing. david: coming out at 2:00, people are saying how far we are long in the hiking stage. where are we going? what you looking for?

alan: i think the missing element, what people did not focus on is when you look at the 2020 --, you have got to remember that of the 16 saying funds will be below 3%. the pink in the fed funds rate was 2.92,ure market something like that. it is effectively at the very dovish end of the spectrum. the fed is telling you what they think. the market does not want to listen. you are a bottoms up guy but rates are going to matter and the fed is going to matter. what kind of changes do you need to make or individual companies if you have a fed that continues to hike and get a hike on the market estimating it? mike: we are going to go with the market is leading us. is oron what the fed isn't going to do, they made it clear they are going to hike rates.

the market says do not fight the fed. on the way down, it is a big party. now that it is going up, people want to fight the fed and buy the market expenses. we're going to go where the best rewards open up and for us that is in the energy sector. that is an health care and start to become more in staples. we have better rewards as well as banks. alix: thank you so much. good to get your perspective. healthy economy and a strong start market, great job economy two things president trump really touts as success in his presidency. if you break down numbers, you might get a different picture. matt winkler did just that. he joins us on set. he is a columnist. good to see you. when we talk about the great u.s. economy, what did you find in research? californiaa doubt,

is driving this economy to exceptional performance. you see that in wages. you see that in job growth, you see that in big california companies against mollo like in the russell 3000. they are the best performance consistently. if you remove california from the u.s. economy, it looks mediocre. other economies, for example gdp growth. austria did better. we did better than japan. once you put california into the equation, we stand out. david: perhaps the grit of this piece is california has a different way of governing. their policies are different. about everything california is for, clean energy, global trade agreements, everything having to do with

protecting undocumented immigrants because that is a labor supply, those are policies that the trump administration is against and fighting in court. california, which elected , is on clinton by 61 .5% the other side of that. david: there are instances you can take away from this fact. we would be growing faster across the country if we took california. another is, whatever president trump is doing, it is not stopping california. be actions not -- must not that profound if they are keeping california from growing. >> these policies of the trump administration are essentially preventing greater performance by standing in the way of global trade for example with the eu or

the transpacific partnership. we could be further along. ifbe housing would be better the trump was not where it was. the point is california has stuck to its knitting and its knitting has been good and outperformed the rest of the u.s. it has gone its own way. alix: what did you find in texas? texas' knitting has been helped by the trump administration. >> texas is not the global trade state that california is by a longshot. are for the most part underperforming and that is partly because two thirds of texas is in the ground. it is yesterday's companies. it is fossil fuel. california is about what is between your ears. uber, which is about to go public, is going to have a

market capitalization greater than for gm combined in uber did not exist to decades ago. that is california. alix: you wounded me with the energy. yesterday's news. david: big love is in the ground. bloomberg joining us on set. raise the broader question, the equity market or growth, does that continue? the equity market is extraordinary what you are seeing in terms of the gap between u.s.'s metrics like p/e the world asked the u.s.. it is something i was looking at yesterday. it is a full-time extremes. wiseally is like pulling and you and to spit at some

point, you are going to see some sort of marriage and convergence and evaluation metrics. what drives that is it seems like the need to get the world out of defensive mode. forhe world believing in vm example again. if that starts to happen then the convergence takes place more on the rest of the world improving rather than the u.s. deteriorating. david: how much is silly because of u.s. policy, whereas monetary policy is hiking and trade policy, is it just the united states not letting em,? -- come up? to mentionre right u.s. monetary policy in terms of negative effects it has on the rest of the world. that is having a profound effect. it is not binding on the u.s. side because the fiscal side is providing tremendous boost. that marriage between easy fiscal policy and monetary

policy is part of the drive. alix: does that mean president trump is right? they continue hiking and disrupt the entire model you are talking about? going intoe probably overheating mode. i would be doing with the fed is doing. i would say if there is a big problem ahead, it is probably when the fiscal stimulus where's in and we are left with a huge budget deficit. heaven help us, what that budget deficit looks like. that would look awful. i think the fed is doing the right thing. alix: what does that mean for the dollar and yields? alan: we have an unusual situation where on interest rate side of things, good for the dollar. rates look fantastic. deficit,got the fiscal a current account deficit which will expand. not as much of the fiscal deficit that will be problematic. that is long-term.

i do not think we have reached the inflection point where the positives turning to clear negatives. that is more story for next year when the ecb's hiking and the fed, you can see the end of the cycle. maybe at that point in time, the dollar will have run out of gas. alix: david? david: time for an update for what is making headlines. we turn to taylor riggs with news. needs to actpompeo quickly to investigate the disappearance of democracy are gay. he is in turkey after meeting jamarcus soggy. -- jamal khashoggi. special counsel robert mueller is on the verge of delivering key findings on the rush investigation.

bloomberg learned mueller will issue findings soon after next month's election. he is said to be close to rendering judgment are two of the most explosive aspects whether there was collusion between russia and president trump's campaign and whether the president obstructed justice. and prime minister theresa may hands into a crucial battle over brexit. she will tell e.u. leaders in luxembourg they need to show on that issue that has negotiators. she was told her latest proposals would be rejected by parliament. global news 24 hours a day, on-air at tictoc on twitter, powered by more than 2700 journalists and analysts, in over 120 countries. i am taylor riggs. this is bloomberg. ♪ a headline now about elon musk and tesla. the headline says tesla expects it will issue and sell to elon musk $20 million of stock. alix: combined, the do with the

sec is there come -- paying a combined $40 million. a plan to take tesla private with -- private. is hes interesting is paying $40 million? $29, is thepaying stock with him? david: is total holdings is small. premarketp in the percent but it is small. alix: we have another breaking headlines. commit a $9said to billion loan for a vision fund. that is going to want to be in the collateral. that is interesting. david: prudential is said to be itst to you -- lose

designations a will no longer be too big to fail. it has not been yet -- done yet but they may well lose their destination as an important institution so that would relieve them from regulation, probably accounting for a slight uptick in the market. alix: they are like thank goodness. david: that is exactly right. coming up, the currency manipulation question. the treasury department is poised to release its policy report today. this is bloomberg. ♪

taylor: enterprise greenroom coming up later on bloomberg markets balance of power. ben cardin of maryland, coming

up. treasury department's report on foreign currencies is due later. the department staff told steve mnuchin china is not manipulating the u.n. and the treasury must follow specific criteria for the 2015 before taking action that deals with a bilateral trade surplus as well as one-sided fx intervention. the question is, does that fit with the u.n.? dollar u.s. are kissing that level that many watch. on the facts, it seems like the u.n. would not be labeled the currency manipulator. what does it mean for the dollar u.n.? an asymmetric bets. the market believes the law's report is the same as we're going to get this time around. china is not a manipulator. but aget china play

manipulator, the goalposts have moved. if the goalposts have moved, it is for political reasons. if it is for political reasons, the market is going to say this is part of the trade war side of things. that is more pressure in china. the u.s. is trying to place pressure and dollar trying to go down. it will go up on a multi-day basis. alix: what is the long-term effect? will he make had at the data? is that an indicator of anything and how does that play out? alan: it is not an indicator of anything. all it is going to do is have china under review where the u.s. treasury will take a closer look at china's foreign exchange practices which they are doing anyway. annoys me. this alix: it seems we have to

recalibrate to a world where seven might not be the line in the sand for a dollar u.n.. what does that do to the global economy? of sevench is made really. the chinese look like they are interested in protecting levels shy of seven. if we had this ongoing pressure into relative monetary policy whereby china is having pressure because the economy is slowing in the u.s. continues, that relative policy is going to be a key drive regardless of the trade situation. alix: what are the chances we see china and a current account deficit? are the higher now than six month ago? months ago?s -- alan: we are going to have to see how this plays out.

they could have a big shift on the bilateral trade in the u.s., not going to be easy with all the pressures you have. that close enough to zero negative could be deposited. david: how much of a president does president xi have at the same time he is trying to combat a problem? he is caught between two opposing forces. alan: there are problems the kids you had a message of deleveraging and now you have liquidity measures. we had chinese growth they came out last night where the money supply and liquidity measures have collapsed. that -- slowing. we have slowed too much and the orders have to come from above leverage and that is not going to be done really because you flick the switch one way, now

use -- you flick the switch the other way. that is where the tension lies. do not land and now you are telling him please lend. alix: biggest risk in 2019? alan: i do not want to say one thing. i think you have different factors. u.s. rates really, not just the short end but if there is any loss of control of the back end of the curve coming you have got the china story in terms of pretending to slow down and everything that relates to trade side of things. put italy on the side. oils right on the cusp. we cannot lose any supply from anyone else. saudi's of the big swing producer. we need all the output to keep prices where it is. we have had a big increase in prices. oil is lurking there.

-- oil is -- working there is a big factor. david: great to have you with us. coming up, elon musk plans to buy $20 million of stock after paying a similar penalty of the same price in the sec agreement. this is bloomberg. ♪

david: on tesla, big news today. but $120 million of stock from his company. that happens to be the amount of money tesla is paying. the stock is up. it is up over 2%, keeps climbing in the premarket. there is another announcement where they are going to buy land. going to said we are start building cars in china. they are going to buy land to make cars. alix: they have had a tough time. part of their issue is their margin in china are terrible.

they can build an in-house. david: one of the reasons china did a tit-for-tat is no more teslas. we are going to put tariffs on all the teslas. it is a reverse of what president trump did with autos. employer people here. now it is going the other way. alix: it will make a dramatic difference for tesla that needs to get into china. that is it for bloomberg daybreak: americas. coming up, jonathan ferro will be speaking with biggest netflix bear on the street. fact netflixlat -- crossed yesterday, this is bloomberg. ♪

jonathan: i am jonathan ferro. the countdown to the open starts now. ♪

jonathan: coming up, netflix crushing estimates. sending the stock surging. the market wide open for uber, the company upside. calml markets relatively compared to last week. investments waiting for federal reserve minutes. 30 minutes away from the opening. future stocks up by 10 on the s&p. stronger dollar against the euro. ofasuries with the smallest bits recovering basis points on the u.s. 10 year. earnings get off to a strong start. equity markets remaining restraint. people who aree significantly overweight. >> people are coming late. >> we see of you from how growth will play out. >>