>> the bears approach. european markets fall. the nasdaq narrowly avoids closing in bear market territory. the shutdown looms. investors fret as the chancellor u.s. government shutdown rises. the clock ticks to tonight's deadline in washington. plus mattis resigns. the u.s. defense sites

differences and -- with the president in policy a day after trump abruptly called for u.s. troops to pull out of syria. welcome to bloomberg surveillance. i'm matt miller in here for san -- francine lacqua. after a terrible week for stocks, both for the u.s. and in europe, we will take a look at what is going on. almost 7/10dex down of 1% area 2018 the worst year for the stoxx 600 since 2008. the euro now at 114.43. brent is trading at $56. the 10 year is right now below 2.8%. as far as u.s. stocks, it's been a disastrous month for those who are invested long. all of them down. more than 6%.

small caps got hit even harder. the russell 2000 index is down more than 10%. it's been decimated in december alone. it has not been a good time for risk assets. news get the first word right now. we go to new york. >> jim mattis retiring at the end of february. he cited differences with president trump over the direction of u.s. foreign policy. the presidents of the successor would be named soon. decision to pull troops out of syria was seen as a clear rebuke to the former army general. democrats quickly weighed in. i am shaken by the resignation of general mattis is what it means for our country, messages into our troops.

indication of what his view is of the commander-in-chief. the u.s. will dramatically country blows in afghanistan, this coming year after he said he did pull forces from syria. the pentagon will draw about half of the troops in afghanistan which would fulfill trump's long-standing promises to bring military or snow home. the u.s. house of representatives have increased the chance on a government shutdown by voting to give president trump's wall. the bill goes to the senate where it is certain to be projected -- rejected. notpresident said he would sign a bill with of the port of money after the white house entity would accept it. at one of europe's busiest airports have been suspended following numerous

sightings of an illegal drone. incoming planes are diverted to other airports. it's one of the years busiest travel times. zynga spores set to expand its terminal probe to include goldman sachs. they are trying to see if there was legal activity. bank said it acted in good faith over the bond sale. pat bonin 2700 journalists in and listen more than 120 countries, i'm viviana or tonto -- ortado. matt: it's been a brutal month for stocks as we have been showing you. equities fell across the globe. the nasdaq briefly touching him bear market territory.

volatility at its highest level since february. stocks down modestly in europe today but will likely be a december and the year that investors would rather forget. unless of court, they were short equities and long bonds. join us now is the head of european critics said that strategy at credit suisse and are equities reporter. let me start, michael, with you. how bad is a been for european stocks? said, it's thee worst since 2008. trading days left submitted are some hope that it won't be as bad as 2011 but very help -- little hope. seems like a selloff in most sectors. most sectors are in the red. especially the sectors hit

during the year. wants investor to do it this point? will we continue down or have things been priced low enough that we can go in and try to buy stocks again? i'm not the equities strategist but on the other hand all the work i see in how suggest that we have improved valuation pretty dramatically across the globe. in europe at all closed onto growth call. we are both consents is on growth. i think is a measure of panic but some bigea wheels are in motion. you have to treat this with respect. our view is that value is building fast. matt: what does the credit

picture look like to you? it's been a concern for american investors. our european investors on alert as well? dynamic it's not quite as that is happening in the states. some very large monetary wheels are in motion. one of the things that is really not helping the u.s. market has been the rotation of asian investors. we're just starting to see some of that money at the margin coming into european credit. but you start to see real distress opening up, which is increasingly looking like the market is calling, it's a function of growth. broadly, we think we see quite a lot of the worst by now but it depends on the growth call. that in turn depends on world

trade outlook improving and we think it well. matt: what are you hearing from investors about european stocks? we have a lot of the damage behind us. ablearmakers are finally to deal with these new omissions test. it looks like exports are still a great business for european companies. the employment picture looks good, draghi talks about wage growth. our european stocks at this point after a drop in the highs a goodbye? buy?good fast we've been hearing for months that european stocks are cheap but they're getting cheaper and cheaper. some are trading at less than six times estimated earnings. growth and all about what the global growth is going to be.

yes, a few things are behind us. you're talking about tougher emissions, regulation, but the problem is you had all those seenngs from the german that they are not considerate about next year. and probably cheap most of the damage behind us with so a lot of caution. -- behind us but still a lot of caution. thanks ray much. william porter you will stay with us. i have some breaking news out of china. the government has been pushing back on rumors it won't be helpful with monetary policy all morning. now we're seeing china dropping toward neutral from its monetary as they sayiption

fiscal policy should be more forceful and efficient. it's going to be interesting to see if we get more help from governments, china command economy and different than the story we see in the u.s.. even the ecb a little bit more dovish as the fiscal pursestrings are loosen. a tumultuous thursday in washington as the risk of a government shutdown is back area i believe it's friday actually in washington as well. and a surprise resignation from defense secretary mattis. bring the breakdown as the clock ticks to the midnight deadline in the shutdown zika. this is bloomberg. that theunate president wants to shut down the government, that we have a trump shutdown as a christmas present to the american people. ♪

matt: recapping a breaking story we have at this hour. china is going to adopt more significant tax cuts as well as the government dropping neutral from its monetary policy description. looks like china is going to get more and more behind the economy as rumors swirled this morning that those tax cuts could fall away. to repeat, china is going to adopt more significant tax cuts and get generally looser with its fiscal policy. very interesting news indeed for markets as the ftse lossessitive from earlier in trading. let's get back to the bloomberg business flash with the the on or tonto. viviana.

isthe former nissan chairman suspected of transferring his personal investment losses to the company. he denies any wrongdoing. simeon capital has taken a 3% stake in a bank. he sees significant value potential. they have previously called it an underperformer which lags behind and profitability. dansk a bank has cut its forecast for 2018. it's ending a year dominated by scandal on a decidedly bleak note. proper for this year will reach 15 billion kroner's down from previous forecasts. the comes as they deal with fallout of multiple money laundering investigations area

after reporting strong sales in north america and china, earnings for $.52 a share. beating the forecast by fear -- $.56. there and campaign featuring colin kaepernick. the ads have given up take in traffic and engagement. the shutdown finds back on. the house increase the chances of a partial shutdown by going to give president trump funds for his proposed border wall in a spending bill the senate is sure to reject hours before midnight deadline. ae house vote came during tumultuous thing which trump surprised fellow members of his party by insisting he won't sign a bill without money for the border wall. that was after the white house had hinted he would actually accept it area and to -- except it.

and secretary jim mattis has resigned citing different since and policy with president trump. here's how the departure played out in washington. >> i am shaken by the resignation of general mattis. for the messages since our troops. of whatthe indication his view is of the commander-in-chief. >> they have a good relationship. we expect them to continue to have a good relationship. the president has a great deal of respect for secretary mattis. he will stay on for another couple of months. that's a great indicator of the cooperation they have. william porter is still with us. jim, what is the reason behind the mattis departure? the actual reason or

has this been building for a long time? if you look at general mattis's letter, it suggests that tensions have been building for a while. his letter talked about the importance of alliances and the general need to act responsibly as a global citizen. especially when you are the world's only superpower. syria was, as i'd say, a catalyst to bring it all down. as far as the shutdown is concerned, donald trump said over and over again the mix it would pay for this wall is he really now willing to shut down the government if the u.s. taxpayer doesn't fund it? have plans change for who is going to pay? you i'm sorry to disappoint but if anybody actually believe

that mexico would ever pay for the wall, if anybody believed and then candidate at the time have a leverage to make that happen, well, i'm sorry disappoint you. time. very strange we had a couple days ago in the reporting suggested that he was giving up on the wall. at least in this cycle. news andpundits on fox talkedces from his base about what a disastrous retreat would be any change his mind. what we are seeing in washington is very unusual and something in my can't recall seeing professional lifetime covering in following politics since 1980 in the reagan administration. we have a very erratic president is under a lot of pressure.

notably from the mueller investigation. him and his family are under the legal gun in your seen all sorts of lashing out and scattershot moves. consultationort of with either his government or his congress. as many of his most trusted advisers are leaving the government. thanks for joining us, jim there in washington as carefully as washington. william porter still with us. the government shutdown, the idea of the government shutdown, does it concern you? should it concern credit investors in the u.s.? godiam: the problem is if is situation where we been here before. the analysis icing of the shutdown is that it will be pretty limited. it's over a holiday anyway.

so no, i would say not. clearly if there is some dysfunction going on that's a driver in the market. if he continues. we will keep u.s. because is more to talk about. this market and the developing story out of china and the fall we've seen over the recent months. it something we need to continue covering. william porter still with us. betting against the pound, we will look at the big winners who correctly prevented -- productive brexit while the rest got it wrong. this is bloomberg. this is bloomberg.

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matt: economics, finance, politics area this is 'bloomberg surveillence.' largest crash the of any major currency in modern history. some traders to bet against the pound may have benefited from the actions of then u.k. leader nigel farage. premature concession to the remain people before the points are tallied help drive the pound to its highest mark all year. just hours before it plummeted because leave one. at least two close associates of

farah's, both by his side, in tradingprofited and betting against the pound. joining us now is cam simpson. he's investigations reporter. tell us how this relates year earlier investigation earlier others whof his and were secretly working for hedge funds around the brexit vote. >> we reported there was a group of hedge funds, relatively small group of hedge funds, that had higher the top pollsters in the country to provide them with nonpublic information either about market moving polls before the polls were published or broadcast to the world or about how britons were voting on the day of the referendum. secret exit polling data that was being streamed and would have been illegal for pollsters to get to the public. some of those hedge funds made tens of millions or hundreds of millions of pounds in a matter

of hours. the financial conduct board is looking at this and trying to amounts tohether it market abuse, market regulation, insider dealing and whether there's a way for them to cut this off in the future area what we've done is strongly the circle closer to nigel himself. as you mention, he gave multiple concessions that helped drive pound to its highest level all year, just ahead of the biggest crash in history. we brought that circle tight around him inside the room. thanks her a much. cam simpson. story onead the full bloomberg.com. this is bloomberg. ♪ ♪ there's no place like home ♪

argh! i'm trying... ♪ yippiekiyay. ♪

mom. ♪ unstopand it's strengthenedting place, the by xfi pods,gateway. which plug in to extend the wifi even farther, past anything that stands in its way. ...well almost anything. leave no room behind with xfi pods. simple. easy. awesome. click or visit a retail store today. matt: economics, finance, politics. this is "bloomberg

surveillance." you can see the world map at a european headquarters in london. we are down across europe. treading water in the u.k.. the losses on the continent are getting worse throughout the session. we are also expecting some economic data out of the u.k.. we are looking at third quarter current account deficit of 26 and a half billion pounds. that's more than the estimate which was for 22 billion pounds. not exporting quite as much in the third quarter as had been asked acted. the economy in the u.k. grew 0.6% in the third quarter and that was not revised from the previous estimates are that will relent -- remain in line. net 126.61.ade the first word news. >> jim mattis is retiring at the

end of february. in a two-page letter, he cited differences with president trump over the of u.s. foreign-policy. a successor will be named soon. the president's decision to pull troops out of syria was seen as a rebuke to the former army general. democrats pouncing with criticism. >> i am shaken by the resignation of general mattis. for what it means to our country, how it affects our troops, and what the indication is of what his view is. the u.s. will dramatically cut troop levels in afghanistan. this announcement coming one day after he said he would pull forces from syria. withdraw 7000 of about 15,000 troops from afghanistan and would fulfill mr. trump's lost any promises of

bringing military forces home. china will make significant cuts to taxes in 2019. it's a signal for easier monetary policy. china describes approach as proactive. the u.s. house of representatives has increase the chances of a u.s. federal government shutdown by voting to give president trump the money for his boardwalk. -- border wall. to the u.s. senate where it is almost certain to be rejected. president trump says he won't sign a bill without the border money. this was after the white house entity would accept it. london's gatwick airport has been reopened. a limited number of airports scheduled for departure. all flights had been suspended since wednesday night. this following numerous sightings of an illegal drone. passengersd 120,000

during one of the years busiest travel times. singapore reportedly has expanded its criminal probe to include goldman sachs. see if moreking to than 6.5 million in fees close to the subsidiary. the bank had previously said it acted in good faith of the bond sale. news 24 hours a day pound them with and 2700 journalists and analysts in more than 120 countries. this is bloomberg. there are fewer than 100 days until the u.k. set to leave the european union. the path forward is very uncertain. it's likely parliament won't sign off on prime minister's brexit deal. ministers may enter

are adamant that her deal is the only one available to avoid potential chaos. a behind closed doors, the idea of sitting the question back to the british public is gaining ground. referendumn a new where could mean new national elections. reporter whos a covers brexit in london. william porter is also with us. chances?at are the there are a couple of different scenarios that could play out. all of them kind of involve pushing the actual brexit date past march 29. emma: yes, that's true. whatthey were came over might happen, a lot of options lead us to extension which is something the u.k. can ask for and the eu would have to unanimously say yes. what we've heard from brussels of the last couple of weeks and

months is that if there was a clear shift in the domestic politics that would justify an extension in they would probably say yes. if they see it is just the way of extending and buying time to strengthen the uk's negotiating position the answer would probably you know. theresa may has made a that already there is not time to hold a second referendum before march 29. that would involve an extension. if there were a general election will be have in brussels would also be quite open to extending time given a new government might come in with a new policy. manythe realization within that the deal does look almost certain to fail. when it comes back to parliament in january. matt: what is a credit investor to do? is certainty seems that gotten

more and not less. william: i think what a credit isestor is supposed to do put this whole thing in context. i don't want to go into too long of a discourse about the u.k. constitution but the question that has always been in our minds, and now we're up with a sharp bend so it is very real, is what can you get past parliament and how? in what time frame? it come up with about a 40% chance of everyone coming down and thinking about it over the us miss recess in the deal actually going through. bite creating a permanent customs union. we see approximately a 30% chance of some political-based deferral. and some sort of chance of following that of out right

revocation of the article. chance of the1% brexit with no deal. nothing is zero and we argue between 1% and 5%. we think british investors should take reassurance from that and i think the chance, even though is the default option, of no deal is pretty low. the problem is getting there is going to involve substantial political moves. mi, what is the mood like? harder for you to judge from such a remain or political position in london. what is the move like in the u.k. if there were to be another referendum today? emma: when we have gone out and gone to the public, recently we voted toed town that

leave in 2016. they want to get it done, they want to stop talking about it, they want politicians to talk about the things that led to brexit in the first place by than continuing to talk about brexit. data,nk from the poll people are not particularly keen on another general election we should be the second general election in as many years. take us back to what you can get through parliament only talk about referendum, we need to agree on the question. if you speak to someone who voted leave, you either leave for the deal or you leave no deal. no, we vote to remain, didn't understand what leaving meant. this is what leaving meant. the sizeto reconcile of for you have a referendum. originally thought that was where we were going for

other reasons. i kind of hope it's not. i hope parliament can sort it out. but it's going to be volatile. matt: thanks for joining us. we imported, thank you as well. coming up on bloomberg, we speak to international ceo and former u.k. secretary david miliband. 5:30 p.m. u.k. time. get tucked in and watch a little bloombergtv. tell you theill latest on the markets. a down december for stocks. this is bloomberg. ♪

matt: economics, finance, politics, this is "bloomberg surveillence." we are looking at european markets down across the board. the ftse is now down again about a quarter of 1%. the cac is down almost one full percent. there has been some positive news for people along risk assets out of china. the top policymakers said significant cuts to taxes and fees will be enacted in 2019. they also signaled an easier monetary policy stance is the government tries to put a floor under the economic slowdown awesome part by the trade war with the u.s..

join us now from hong kong is jack. -- jeff. what are we hearing today specifically as to china getting more accommodative? the headlines are still rolling in. the state news organization is still publishing the conclusions that the policymakers have come to our the last couple of days in beijing. what we have seen so far is more or less what expected. that's a continuation of targeted but relatively limited stimulus that will be rolled out throughout next year. going to bey further taxes. probably further accommodative monetary policy from the pboc. cuts are the more reserve ratio or as we have seen, more targeted measures. what has been the concern

for the chinese? there were rumors swirling yesterday and this morning that they may not be as accommodative as markets had hoped. the yuan creeping back toward seven. it's one ofjeff: the main concerns. if you announce a similar package maybe it turns around sentiment on growth. as we have seen, the currency has taken a beating. it's so fragile. not a lot of room to really expand the monetary base in china right now given the currency constraint. the other major concern is the debt campaign for the deleveraging campaign. that's not going to be very easy to continue in the course of a very large stimulus. but the government has been andng to do, is really try

aid transmission. get money to where it is needed in the economy instead of just flooding the zone. matt: thanks ray much for joining us. jeff black on this developing story. he covers chinese economic news for bloomberg. tightening financial conditions are among the drivers in the u.s. for the worst december since 2009. those looking for a powell put this week we disappointed. fed is not paying much attention to the market route but that could change. >> people in the market should understand that the fed doesn't care about market prices were themselves. but how itare affects the economy, the unemployed and rate, and inflation. they are not there to take away the markets pain. to createhere

sustainable employment and price stability. they doubted back a little bit. they went from three hikes to two. they answered some language in the statement that suggested maybe they will do as many rate hikes. they of the issue of financial conditions being a factor. and they out of the notion that they are watching what is happening with the global economy. valid back asn't much as the market would have liked. but they did not back. >> back in february when you ask him to bloomberg, it had a big downdraft. at the time you said this will not affect the fed. have had ahen, we steady decline not just in the u.s. stock market and it seems to be celebrating. a global start market selloff.

-- stock market selloff. making as in danger of mistake is the not taking these market signals seriously. i think sharon paladin's press conference many query is thinking about it. the fed is taking it on board. -- also saidas financial condition tightening has to be significant and long-lasting. day, what is the fed's outlook for growth? what's the consequence of that outlook for unemployment? saying is that despite the selloff of the stock market, despite the slowdown in global growth, the economy is going to grow at an above trend pace next year. what would you say to people who may be don't understand what you have just said?

is there a point where a stock market selloff -- >> of course. absolutely. if this went on much farther for much longer and hedge --, a would've changed -- longer, it would have changed the fed's view. they need to see payroll employment gain around $100,000 a month and then seeing gains much better than that. they are saying they to slow the economy down. somewhat tighter financial conditions are the bad thing. they're probably a necessary thing for the feds achievement of objectives. fed president bill dudley speaking to us. let's check in now what's going on the markets. just about now are in 48 minutes

into the trading session. coming to about 4/10 of 1%. after are accelerating bouncing between green and red. futures are now down 0.6%. the seat of the top this green, the stoxx 600 index is now down 0.7%. .t's down 16% of its high the dax index is down 22% from the january 23rd, 2018 record. firmly in bear market territory. the cac is down 1% as is the euro stoxx 50. this is bloomberg. ♪

>> we may not have the strength to respond. at the imf important to fix the roof of the sun is shining. to try to put off that downturn and make sure it's not a severe one. economics, finance, politics, this is bloomberg surveillance. i'm matt miller in berlin. to draw your attention to a

couple of interesting charts about we'vetory seen this year in european equities. first off, this is a chart that shows yearly losses or gains going back to 1999. 2018 is setting up to be the worst year racing for european stocks 2008. that's a pretty serious superlatives but i also want to show you a valuation chart is pretty interesting as to what we've seen going on in europe. show you the fact that european stocks are now valued at less than they've been since 2013. in fact, if you look at a dividend payout, is higher than spent since 2012. the question is, is a cheap enough now to get back in? let's get the business news flash. >> japanese prosecutors have

the former nissan chart -- chairman on more serious charges. he is accused of transferring his personal losses to the company. he denies wrongdoing. reported strong sales in north america and china. .t beat the forecast this is the first earnings report since the controversial ad campaign featuring colin kaepernick. nike ceo says the ad has driven an uptick in traffic and engagement. that's the bloomberg business flash. let's get a check on some of today's biggest stock movers. sebastian: let's kick it off with the big move the day which is in the food delivery space. takeaway.com taken over delivery heroes german business. a billion dollar deal.

sacrificing profitability to take over market share. the stock up by its most today. aceto competitor also getting a boost. the market is little less busy now. pie european companies selling some assets. clearly the day to do it. to get ride process of their offshore business is underway as well. finally, danske bank. it goes from bad to worse. profit expected at about 15 billion crowbars, this comes as the scandal. the stock takes another dip lower. down 49% on the year. matt: a look at some of the big

intraday movers in today's session. we continue in next hour. nejra cehic will join tom keene. to a big be talking deal guest. abby joseph cohen. senior investment strategist at goldman sachs. that is an interview you don't want to mess. this is bloomberg. ♪

tom: this morning, the new slow

overwhelming. gatwick has reopened. his aviation forever threatened by drones? the response by airbus and boeing. markets cannot find a bid. a clear and present danger of shutdown in washington. in the room, adult the last of his generals. republicans shaken to their very core by the terse resignation of general mattis. i am tom keene in new york. nejra cehic not at gatwick. maybe francine lacqua is stuck there. this is serious. tell us what you have learned. nejra: as you say, it's as reopened. -- it has reopened. this mystery intrusion by drones is the worst ever. flights willber of

take place this morning according to gatwick. we have also seen the effect of this travel disrupted for more than 120,000 people and no guarantee that the devices are gone. the worldwide response, we will do this in a bit. with our first word news, here is viviana. >> you mentioned jim mattis february.t the end of the president tweeted a successor would be named soon. the president's decision to pull troops out of syria was seen as a clear rebuke to the former army general. he had argued their mission was not over. democrats pouncing on the criticism. >> everything that indicates strength, knowledge is leaving this administration. general kelly, general mattis, so many others. mcmaster. exactly. this is chaos in

administration. this week was one of the most chaotic weeks we have ever seen in american government. >> chinese policymakers say the country will make significant cuts in 2019. the term neutral was dropped from a key policy document. china describing its approach to fiscal policy as proactive. gatwick airport has reopened. a limited number of aircraft scheduled for departure. all flights at the airport have been suspended since wednesday night following numerous sightings of an illegal drug. this disrupted 120,000 passengers during one of the year's busiest travel periods. global news 24 hours a day, on air and @tictoc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. the markets, thank you. let's do a data check. extraordinary day yesterday.

interesting volatility in the afternoon. futures continue weak may off the shutdown news. futures at -12. -118.tures at with euro stronger, i will show yen in a moment. 4586 on american oil. the vix 30 brand on yesterday. points ats down 600 one point. futures at -1.22 right now. , and what am i really watching? i always watch dollar-yen. it finally moved a day and a half ago. stronger yen.

we really saw a shift in the last 48 hours. on thei am focusing dollar. i put in the bloomberg dollar index. a great question asked today is whether the fed should be listening to what happened to the dollar this week. it is heading for its worst week. what does the dollar tell us fed? the it has not been a good week. it has not been a good week for european equities. interesting that without divergence in european core yields against the 10-year treasury yield. yield movesbund higher. we just that interesting news about easing measures from china, boosting tax cuts, easier monetary policy. we will deftly have an international perspective in the next hour.

this is the high-yield etf, the retail response in distress paper. this is coming on at the end of september. these are what are called cases. these are really elegant. at standardk deviation, which is basically the size of the move. this is 3.8 standard deviations. deviation isandard the rule of thumb. standard deviations is where you start to use the p-wor d. get thererting to with three .8 standard deviations on the high-yield etf. nejra: 5:00 a.m. all about the standard deviations. i am also all about the vix. it is on its way for the biggest jump on record. the s&p 500 is actually more volatile right now than

emerging-market stocks. tom: very important. political news and the news at gatwick, but let's look at the markets. we are thrilled to bring paul donovan of ubs. first, from dublin, mark cudmore. great respectith for your use to use the bloomberg, what are you looking at on the terminal right now? >> there are two things i'm going to name. first, the china news. i think they are coming out with a strong measure today, removed neutral policy, and emphasized they are going to continue to stimulate the economy in the new year. that is a good sign for global equity markets. if global equity markets are going to continue in 2019, they need china to move the other way. market isof the oil affecting everything.

tom: what do you see in correlation? strengthening of the last two days. it seems we are really beginning to correlate. >> i think that is absolutely right. we are seeing rising correlations across asset classes. dollar-yen is one of the final steps to come into that. it was holding back a little bit. many people have been disappointed that supposedly they haven traits have not worked as well. some of the old correlations have broken down across markets. now we are seeing that come back together as we move into this low liquidity christmas period. traders are fragile. are quiteeople constructive on the market, but no one wants to buy the dip. there is no risk appetite. that makes it a very difficult environment to trade, especially when market makers are stepping back to window dress for the year-end.

they are providing less liquidity. nejra: stay with us. i understand you are with us from dublin because you missed your flight from gatwick. we can see the fallout from this even without our markets team. alternative from ubs is with me on set. as we head to the end of the week, we still see this selloff in equities and try to figure out what exactly the fed could have gone wrong. what is one of the big mistakes given more nuance on the balance sheet? >> the markets have misjudged the fed. morearkets think they are important than they are. the federal reserve exists to sort out the economy. the economy is doing just fine. in 2018, the u.s. economy has done exactly what was expected to do. 100%. it has been astonishing. if you look at the ubs surprise index, it is a flat line this

year. there are no surprises whatsoever. the fed is responding appropriately. they told everybody we are going pause. pause, hike reactedets suddenly surprised because they had a temperature from and thought the fed was going to -- temper tantrum and thought the fed was going to ride to the rescue. nejra: referring to dollar weakness, does the dollar weakness tell us something other than what the equity markets are telling us in relation to the fed? >> the dollar is not week. it is strong. it is stronger than fair value. it is 10% stronger than it should be at the moment. it is overvalued. they aresure why surprised that an overvalued currency has a bias to weakness.

singlelar is not a concept. what we have seen is slowly the ,cb getting its act together starting to tighten policy good i would not see the dollar signaling a problem with the fed. i would see the dollar signaling a problem with the current , and over time, i don't think it is going to move dramatically in the near term, the dollar should be moving down. tom: i want you to discuss this strange keynesian view of output versus price. if we are having a global aggregate demand slowdown, doesn't a decrease in output manifest itself before all the different price mechanisms? >> we are>> not seeing a growth slowdown. tom: that is critical. a lot of people disagree with

what you just said. >> what we are seeing is a slowdown in the pace of growth. we are not seeing negative output. companies are not cutting production. they are cutting production from an unsustainably high level. the global economy was performing largely because of the sugar high of the tax cuts that we had in the states at the start of the year. sugar high is by definition temporary. we are slowing down from above trend growth to trend growth at the moment. that is not something which is going to lead to dramatic shifts in pricing. tom: sugar high is talk for leverage. what is the leverage exposure in the various markets? the broadern economy, the leverage exposure is exceptionally high. we have had a very extended credit cycle, which is now turning in many markets around

the world. not just developed markets, emerging markets. i cannot agree more wholeheartedly with everything paul said, not just on the fed, but the dollar. i think it is crazy to see the dollar move this week especially since we are within 2% of the 15 month high. if the dollar is going to be lower next year, it is hard to have any short-term conviction. i agree completely with paul. there has been a sugar high. it is going to come off at some point. nejra: we are all in agreement. all, let me see if you are in agreement with cameron crise. here. this chart cameron argued that the markets are getting scared of a monster they traded themselves because what they view as qt is the result of procyclical fiscal easing.

>> i think it is difficult to describe what the fed is doing. it is tightening quantitative policy. i agree with cameron, which is possibly a first. when we look at what is happening in the u.s., the , the demandiquidity for cash has been coming down. that is the whole point. the fed is responding to that by withdrawing the supply of liquidity. that is not really tightening. that is balance. tightening is when you are pulling money out of which the market still needs. i don't think that is what we have the moment. tom: interesting calculus with paul donovan. mark cudmore this morning. thank you for some serious lack of sleep in dealing with gatwick . coming up, we continue this discussion with mr. donovan.

then we move on to abby joseph cohen of goldman sachs. we are thrilled to bring you abby joseph cohen, the synthesis of our financial system with our economics. stay with us. this is bloomberg. ♪ this is bloomberg. ♪

>> this is bloomberg surveillance. japanese prosecutors have on furtherrlos ghosn charges. he is suspected of transferring his personal investment losses to the company. the prosecution retains the right to hold ghosn for 10 more days.

ending a year dominated by scandal. now profit will reach 15 billion kroner. as dotsit warning comes deals with -- danske deals with investigation. thank you. china's top policymakers said significant cuts to taxes and fees would be made in 2019. the government tries to put a full under the economic -- floor under the economic slowdown. is this going to be enough? paul: it depends on how aggressive trumps trade is going to be. if we get a fairly benign approach coming through to the u.s., and i think we will because the taxes are starting to hurt the u.s., then what you are seeing is this managed slowdown. the chinese don't want growth to go off.

they wanted to go down. they know this is dangerous. they wanted to come down. the long-term trend is 5%. managing the slowdown, it is about the speed of the client, making sure there is not too much disruption. i think if you get stability on trade, the sort of trade and we had in the first half of the year combined with stimulus, growth in china will be lower next year, maybe six point said that 6%. the is in line with what chinese have said. suggests macros policy has shifted from lowering long-term risks to boosting short-term demand. should we focus on dropping the word neutral? >> i think that is appropriate. you are basically saying we have had exports, we need more domestic demand and government

spending. i think part of the problem that a lot of commentators have with china is we tend to view china through the prism of our own experiences. we obsess about the fed, the bank of england, and even the ecb. with the pboc, it is different. neutral policy is not so significant because this is very much a command economy. tom: that is right where i wanted to go. i am going to go a little mathy. .t is a command economy some would say it is a totalitarian regime out of beijing. curvdo they move the i.s. if they want toe jumpstart things? advantages of totalitarian control, whether you are probably

allocating capital. in the long-term, i would argue we are seeing misallocation's of capital in china, which don't orect the cycle this year the next year or the year after, but they affect the trend rate of growth. i am saying it is about 5%. the allocationup of capital, you could be talking about a 4% trend rate. these are not small differences. i think it is about the longer-term we have to worry. they can control it in the short term. as always, where is the direction of travel in the long-term? nejra: paul donovan stays with us. we look forward to that. this is bloomberg. ♪ ♪

tom: bloomberg surveillance. huge news flow. we continue to look at the markets. euro stoxx extends losses. i am going to look at the bloomberg to see the core elective the facts. correlative effects. all donovan with us from ubs. early commitment to research on china decades ago

with anderson. you guys were out front on the china that nobody looks at. go in from the shore. go in from the three cities we are looking at now. what is the state of president xi's china? >> we are at an interesting stage. china is aging. we are seeing a declining population in china. we know that changes things. that changes the performance of the economy. it raises questions about distribution of living standards, wealth between the older generation and the younger generation. this is the paramount thing for the next 10 years. the model that china used to grow over the last 25 years will not work anymore. we have come to an end of that model. supply chains are becoming shorter. less complex. localization of production is coming in. that is the critical issue for

china in the coming decade. tom: we're going to continue with paul donovan. the news flow is extraordinary. we are looking at markets. future deterioration down -17 in the united states. including aws, tangible chance of shutdown in washington, and of course, general mattis resigns. he is out in february. that is a bombshell for republicans in washington. this miliband of the iric, is bloomberg. ♪

tom: good morning. nejra cehic and for francine lacqua. i'm tom keene. here is viviana. isiana: james mattis

retiring at the end of february. he said differences with president trump over the direction of u.s. foreign-policy. the president tweeted a successor would be named. the decision to pull troops out of syria is seen as a rebuke to the general. u.s. plans to dramatically cut troop levels in afghanistan, coming just one day after president trump said he would pull forces from syria. the pentagon would withdraw 7000 of 14,000 troops. trump'sfilling mr. promises to bring forces home. washington is turning up the , accusingijing officials of a espionage campaign to still intellectual property from dozens of companies. the justice department issuing indictments against two chinese nationals accusing them of being part of a hacking operation.

the chinese foreign ministry saying the government has never participated or supporting individual stealing commercial secrets. global news 24 hours a day and at tic toc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. i'm viviana hurtado. this is "bloomberg." tom: thank you. story that has exploded across washington. it iseeing reports saying the largest story of the administration. republicans in shock. we hear the comments of lindsey graham as well. democrats comment as well. here's the future speaker of the house. i am shaken by> the resignation of general mattis for the message it sends to our troops and for the indication of what his view is of the commander-in-chief. on jimncy pelosi

mattis. right now, another gym in london. this is the son of a former marine, marine or, -- he is the definitive intellectual. there are 7000 volumes in the library. the intellectual wore out with this president, didn't he? is nothing if not a creature of convention, a lifetime soldier, a creature of the pentagon and can you imagine a tougher fit than someone who has risen to be a general officer of the army and donald half his daysnt tweeting. the mission he saw for himself but at a certain point, the straw broke the camels back. tom: let us have a civics

lesson. global audience does not understand the position of the secretary of defense. it is usually a suit and tie job, rarely is a general in that position. secretary fit into the pentagon and 1600 pennsylvania avenue? jim: the thing you've got to understand and what made the experiment revolutionary 200 was the founders established civilian control of the military. that is where the secretary fills in. the secretary is typically a civilian, is not a military person. past fewback over the years and you had was i intellectuals and policymakers, number crunchers, but you did not have a general.

you had generals like general again, one of the things that makes the u.s. unique is civilian control of the military which invests the power in the commander-in-chief which is what causes concern around the world now. nejra: does his resignation put the president and the presidency in a paradoxical position? jim: it is backwards there. one of the reasons you are behavior outratic of the oval office is the legal from theamped up special counsel and from federal prosecutors in new york state. that is weakening trump politically and you saw evidence

of that with the near passage of the budget bill that would not have funded the wall. he is needing to find ways to assert his authority and inform policy, he has virtually -- and in foreign policy, he has virtually unlimited authority. peoplethe reason some say this is such a sting is it is not about policy, it is about values. who is left to restrain some of the president's isolationist of impulse -- impulses. jim: that has been the wisdom is that mattis was one of the adults in the room. we had rex tillerson, others but there has little -- but there has been little evidence that anyone has acted as a restraint on president trump. as the legal pressure mounts, i think we are going to have to erratic for some more

and unexpected moves. nejra: thank you so much. tom, let's take a look at the data and the markets. we are ending on a down day for european equities. the stoxx 50 is set to enter a bear market. japanese equities in a bear market and oil. the 10 year treasury yield has been moving lower. for theeen a weak week dollar. taking a look at a weaker yuan following moves from china to be stimulative. this is "bloomberg." ♪ ♪

viviana: this is bloomberg surveillance. is surging after strong sales in north america and china. the fiscal second-quarter beating the forecast. this is its first earnings reports since its ad campaign featuring colin kaepernick. saying the ads are driving an uptick in traffic and engagement. staffers setting to be getting a $2 million bonus as part of the deal to take a stake in the start up. 's purchase of the cigarette starter. qualcomm has scored another victory over apple, gaining a

ban on sales of some iphone models in germany. apple is infringing qualcomm intellectual property on an energy-saving feature. up devices will be available till christmas and qualcomm would have to post a bond of about $700 million to recover losses if the ruling is reversed. that is the business flash. tom: thank you. data on the move. let me go over the markets. i want to show the correlations that were mentioned earlier. yesterday,wn, 600 -400 on the down. -17 moments ago, -13 now. stability has turned into curve flattening. 10 basis points would be a big deal. weakness, euro strength and with that, yen strength. i will get to that.

story, is part of the 66 on west texas intermediate. a breakdown would be a huge deal. yesterday, vix at 30, we are at 28. that is a big deal. the getting to see tension yesterday, maybe stability now. .he 30 year bond down i use that as a long-term benchmark, almost like a heel in a sailboat with the u.s. financial system. i am looking at the yen, 111. the dollar weaker against the yen for something like six days. the dollar index higher today. i'm not sure if we should read something into the dollar weakness. we have had answers saying no. , it, gatwick airport

reopened its runway to traffic yesterday more than 24 hours after a drone brought flights to a standstill and stranding thousands of passengers. bloomberg'sd by senior executive editor. pictures are extraordinary when you see the chaos and this is unusual. what,it goes to show you how much chaos you can cause devices. is low-tech they managed to paralyze one of the uk's most important airports. we do not know who is responsible or how many are involved. these people are flying below the radar and authorities seem incapable of reassuring as this will not happen again soon. it is not just airports.

you canhappen this -- imagine the same thing happening at sporting events or people in the public and it goes to underscore the fact that regulators and authorities do not know how to deal with this. nejra: how do they call back credibility from here? john: difficult. they are taking this importantly. if we look at regulators are trying to do, they are dealing with it. at a broad level, the pace of technological change is so fast that regulators struggle to keep up with it. tom: within our research, the team of people looking at this, in transportation, how far up in the air are the drones at the airports? john: we have little information on that. these drones cannot really go that high but they can go to a

enoughhat is dangerous that there is the fear that one of them flies into the engine of a plane on approach. in tijuana airport, last month, we saw those striking photographs of that airline that had crashed into a drone and landed safely. need to go so high as to hit a plane on arrival. tom: what is the immediacy of this in europe? we knew we would get to this point. i am sure there are plans or theories. what is the immediacy of those plans or theories? an immediate not enough to guarantee this will not happen again over the coming weekend which will be one of the busiest of the year. this is an issue that has been around a long time.

this is not the first airport. dubai was closed in 2016. the same happened in new zealand. policymakers are aware of the risk that the pace of regulatory change is so slow that it is unclear when we will have plans to fix this. people know it is a problem but there is no solution. nejra: paul donovan also still with us on the london set. some of the latest data, consumer and business sentiment tumbling. does in the event like this exacerbate sentiment as we head toward a potential brexit? paul: it might. it is becoming increasingly divorced from reality. this is the media. as we have moved into the cycle where there is more media , what we are finding

, when they are survey, give the answer they think they should be giving and there is clear evidence from economists that we can see this happening. i think you are seeing companies coming out and saying it is disastrous and brexit and chaos and bad news, knowing that will be picked up by the media and that will influence the government and try and achieve their own objective. you've got consumers seeing these happening and i should say things are bad. nejra: this is interesting. i love the risk we are getting from paul donovan. our contribution to the news flow in the outlook for the u.k. if we take away the news flow, the noise around brexit,

everything we are talking about, what should the bank of england be doing if you're just looking at data? paul: if you looked solely at the data, the bank should be raising rates. exit get the negotiated that is most peoples pay scale, we will see the bank of england raising a couple of times -- case, we will see the bank of england raising a couple of times. you have had an increasing credit and we do not need interest rates this low. mortgages, we do not need interest rates this low. they can afford to go up. the tipping point given the markets? we are down. as a general statement, we are hyperventilating somewhere between a correction and a bear market. , do bankerst down

sit up and pay attention? paul: it depends. falling because there are concerns about growth companiestlook and if are reporting a collapse in demand, a 3% move and central bank should be paying attention. if you have got a correction caused by trade taxes or shift in sentiment, not so much. the relationship between equity markets and the economy has broken down. companies are not using equity markets to raise capital in the way they used to. companies happen doing the reverse, doing share buybacks. people earn equities today. only 55% of americans own equities and most americans do not own much. the housing market is more important.

the feedback between the equity market and the economy is not as great as they used to be and if the equity market is moving on sentiment, valuation, or something like the trade taxation policy, central bank should not be paying too much attention. ijra: paul donovan, appreciate your sentiment of our coverage. i also appreciate john giving us the update on gatwick. paul stays with us. close,up, the california's state teacher retirement system at 3:30. this is "bloomberg." ♪

catalalive pictures of n's independence group protest. extraordinary pictures there. paul donovan is still with us. let's talk about the outlook for 2019 for the eurozone.

data a little soft for the third quarter. stoxx 50 heading for a bear market. for european equity investors, it seems money has not wanted to flow into europe on growth concerns but also politics. we'll either of those improved? paul: the -- will either of those improve? paul: the politic should. --have the protest of process of brexit. that fades as an issue. the french situation does not go on indefinitely. we are seeing the number of protesters diminish. italy is italy. but you know what? people except italian political turbulence, governments which change every year. the italian stuff will be pushed to one side and the confrontation with europe has diminished.

does go down risk and the underlying economy in europe is trucking along well. compared to the united states, europe is doing pretty good. living standards per person has been comparable to that of the united states. one of the things that surprises people, you are more likely to have a job in europe than in america. nejra: the 10 year bund yield, where should that be? paul: that is difficult because bond markets are rigged, manipulated, controlled. in a perfect world where economist ran everything, the 10 year would be 3.5%. --are not in that year nor we are not in that world nor are we going to get there. it should move up a little as we move through 2019 but we are not going to be saying anything close to economic fair value.

nejra: i'm getting the sense that paul donovan is saying a economist should be -- saying economists should be running everything. paul: that would be nirvana. tom: thank you so much. we are going to move to the next will join us,en a perfect time to speak to her about fed policy. we leave you with a data check, improving tape, negative 17 on the futures out to -11. very good. stay with us. this is "bloomberg." ♪

tom: this morning, markets

cannot find a bid. the end shows risk off strength. the powell put even operates. -- the yen shows risk off strength. the powell put even operates. the fear of drones? aviation forever change. adult in the room, exit the last of his generals. republicans are shaken by the resignation of general mattis. good morning. this is bloomberg surveillance, live from new york, i'm tom keene. nejra cehic in for francine lacqua in london. gatwick is open. mark had to shift his flights, delayed. , where to our audience is gatwick in comparison to heathrow? nejra: heathrow is more to the southwest of london. gatwick is to the south. there is a battle between the

two airports over a runway. the pictures say it all. thousands of people, complete chaos, disrupted travel for more than 120,000 people. gatwick said it is still on the hunt for the illegal drone that buzzed the hub for almost 24 hours. the mystery continued, one of the worst ever. this smacks of the question of whether authorities have the credibility to deal with this and it puts the credibility in question. tom: i emphasize to an american audience, this is not chicago. it is not look warty and in new guardia in new york. the news flow extraordinary. here is viviana. jim mattis retiring at

the end of february. and the letter, he cited differences with president trump over the direction of u.s. foreign-policy. the president tweeted a successor would be named. the presidents -- the president'ss decision to pull troops out of syria is seen as a rebuke to the general. >> everything that indicates strength, knowledge, is leaving this administration. general kelly, general mattis, so many others, and mcmaster. there is chaos in this administration. this week was one of the most chaotic we have seen in government. the u.s. house of representatives has increased a chance of a shutdown by voting to give president trump the money for his border wall, the spending bill to keep agencies open goes to the senate, almost certain to be rejected. trump's surprising republicans by insisting he will not sign a bill without the money, after

the white house hinted he would accept it. china's top policymakers said the country will make innificant cuts to taxes 2019. the term neutral was dropped after a key planning meeting in beijing, signaling easing monetary policy. china also described its approach as proactive. global news 24 hours a day and at tic toc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. i'm viviana hurtado. this is "bloomberg." tom: thank you. in get ontothe data charts, a high-yield chart showing a huge standard deviation stress. futures at -11. a little bit of curve flattening. watching onars support. the vix, yesterday was a big deal, 30.

right now, 28.39. there is the close, dow futures 22910. yield, 2.96 at the worst yesterday. which gaveng the yen way significant -- which gave ways to significant yen strength yesterday. nejra: the dollar has been weaker against the yen for six days. it was heading for its worst week in 10 months. it bounce back, up .25%. equities in europe cannot catch a bid, the stoxx 600 is lower. we have got a number of things in a bear market, the nasdaq closing just shy of that bear market, down 19.5%. the 10 year bund yield moved higher. we are seeing a bit of yuan

weakness against the dollar on policy easing. tom: for those of you on global wall street, a must watch is real yield. i cannot say enough about learning and understanding the debates in conversation around the debt market. let's go to the bloomberg. chart ithe most elegant have got on this distress, out of september and october. this is the high-yield breakdown, etf hyg. down we go. the second derivative extraordinary and this is a standard deviation study out to 3.8 standard deviations. i defined the beginning of panic is four. we are not there yet but we are getting there. nejra: that is extraordinary. spoke to asset management

early and they have got a conviction call of liking high yields. let's look at volatility. the biggest annual jump on record. this is a comparison between s&p 500 volatility, the vix, and emerging-market volatility. who is more volatile? u.s. equities. tom: we will talk about washington and general mattis in a bit. william lee with the milken , wonderful to have you here in conversation this morning. do we blame chairman powell? the markets are blaming chairman powell for flubbing his message. we hear the data are getting weaker and we know the trajectory has to be lowered and we are going to be pausing.

he said we are on autopilot with the balance sheet and we are basing our judgment on models. a guy who denied models, this was a shock to the markets. tom: i mentioned there the high-yield retail in etf with a standard deviation move are we getting near that four standard deviation panic or do we pull away? peter: i do not think i see much optimism. the way i look at the markets is similar to 2000. between the end of august and the end of 2001 markets, the s&p collapsed by 50%. we are looking at something similar. i would not want to say the history would repeat itself. markets arense that seeing positive news and they will go lower. nejra: great to speak to you. you talk about powell flubbing

the messaging. which bit does he need to work a more nuancedve view of the balance sheet reduction? william: that is what the market was expecting. there is no reason why they have to touch the balance sheet. the balance sheet is going to start shrinking. they would calm markets if they said we are considering all options in dealing with policy. that is all they have to say and the markets would be the datading dependency comes in first and not autopilot. nejra: are the markets overreacting in terms of quantitative tightening? peter: yes and no. that it wanted -- the quantitative tightening, markets are right to react.

there are a lot of other things which is prompting markets to sell. fed concerns are adding to those problems. it is not the driver. i do not think the fed has got it wrong. been a sense that has not as clear as the markets would like. markets have dined out on the fed for the last 10 years and it is payback time. tom: the idea of financial stability and the pages on leverage. now?e system leveraged william: i used to be one of the editors of that. -- warninganting that one of the big threats with low interest rates is real ever, particularly corporate america. the corporate debt to gdp ratio is the highest it has been. to composition is shifting leveraged loans which is vulnerable to higher rates.

where thesituation corporate sector can be in a precarious situation if rate increases were not steady and well understood. powell's job is to make sure everyone believes rates are going up slowly. nejra: you were saying that equity and bond markets have been dining out on the band -- on the fed. the dollar weakness we saw yesterday was to do with the dollar telling the fed it is making a mistake. others are telling me the dollar needs to come down. peter: the dollar is overvalued and on a technical basis, there's downside for the dollar over the next few months. i do not know if the dollar is telling the fed a lot it does not know. is caught in the backwash of other asset classes bouncing around. the focus is equities. tom: peter dixon, thank you. we are going to continue this

discussion, much to talk about. with us, peter dixon and william lee. abby cohen joins us later. this is about 25 minutes from now. abby cohen of goldman sachs. what a wonderful set of voices. stay with us. this is "bloomberg." ♪

viviana: this is bloomberg surveillance. i'm viviana hurtado. japanese prosecutors have rearresed carlos ghosn on more serious allegations of financial misconduct. prosecutors saying the former chairman is suspected of transferring his personal investment losses to the company. it gives prosecutors the right to detain him for 10 more days.

he denies wrongdoing. danske bank has cut its forecast for 2018. it blames the slump and ending a year dominated by selling. net profit for this year will reach 15 billion krone for the year. the profit warning comes as danske deals with the fallout of multiple money laundering investigations. nike surging after reporting strong sales in north america and china. 2 sensei share,.5 -- a share the fiscal second-quarter beating the forecast. this is its first earnings reports since its ad campaign featuring colin kaepernick. the ceo saying the ads are driving an uptick in traffic and engagement. that is the business flash. tom: before we go to washington, i want to show the emotion in resignation ofe

general mattis, the secretary of defense. up to speed on this, it is a huge deal in america for republicans and the future democratic speaker of the house. >> yes, i am shaken by the resignation of general mattis for what it means to our country, the message it sends to troops, and for the indication of what the view is of the commander-in-chief. tom: there was mcmaster, kelly, and mattis, and they claimed career as well. the committee to save america was the phrase used for the generals. we are in washington. there are no general's, are there? anna: what you saw yesterday was unsettled feelings.

it feelsdays where like everything is happening and you cannot get a grasp on where this administration is heading. mattisu saw from general is that the adults in the room can only go so far to influence this administration. the president is going to do what he wants. tom: the president is going to do what he wants. we are waiting for the first presidential tweet. on this fridayt for this lonely president? all, congress needs to fund the government. the senate passed their bill, the house passed a bill that included funding. the president has to decide where he is going to stand on this. if the senate cannot pass the bill, is the president going to hold firm and veto whatever comes back. tom: i'm glad you bring this up. could do aent

partial shutdown at midnight friday, right? anna: that is right. it is 25% of the government that has not been funded. it is not just the concern of not funding these agencies but looking forward, if you do not have general mattis, general kelly, are you going to have more of these events where the president appears to have struck a deal and the ends up walking that back? -- and he ends up walking that back? tom: our washington correspondent. we are thrilled to bring you from chatham house, leslie. , the newsaordinary flow. i think anybody could view the images of speaker pelosi as she said shaken. we heard from schumer, graham as well.

where does this go next? synthesize how you get to a new secretary of defense? leslie: this is the question and we are focused on this news which is disturbing and unsettling because people had so much respect for the fact that mattis was thinking strategically about the role of the united states globally and in the middle east. who comes next? that will be consequential. over the last several months, the president has put in place people that are in line with his thinking as he expressed it on the campaign trail. the fear is that it will be somebody that is not looking out strategically and thinking about and aboutpartnership america's longer-term engagement in the region. this decision to pull out of syria is something the president had wanted to do.

the fact he stayed in had everything to do with the advice he was getting from people like the secretary of defense. wrote that america's domestic dramas matter and this latest news serves to confirm what you wrote in october. next,ms of who might come i am almost taking the devils advocate in saying, how much does it matter who replaces general mattis if it is true that the president will do what he wants anyway? mattersof course it because the other thing we know about this president is that he does not have his eye on the ball every day of the week. policy is about turning up every aboutbout the detail, giving orders to the bureaucracy. it is about implementation as well as strategic thinking. for a president who is pulled back into the questions around

the investigation, into any number of issues having strategic thinkers is critical. you can see that john bolton have an influence on a number of policies. those appointments are essential and will drive strategy to an extent. this is the puzzling thing, even has been offside with some of these decisions. it matters and that a certain point, it doesn't. nejra: thank you so much. great to have you. day for equity markets, the stoxx 600 is lower, , thefutures pointing lower nasdaq ending short of a bear market. we do see the 10 year bond yields and higher. this is "bloomberg." ♪

nejra cehic in london, i'm tom keene in new york. equity futures did a little better over the last 90 minutes but you do not see that correlated across assets. nejra: let's talk a little more this.eter dixon about equities cannot seem to catch a bit. making a policy mistake, what is it going to take to bring markets up? peter: a good question.

look at the etf numbers. not asey are trading, bad as 20 years ago, i would argue that is a signal markets are overvalued. consolidation, further declines in prices to get markets back into line on a valuation basis. there may be not a lot anyone can do. we have had a fantastic run in many ways. markets have outstripped fundamentals, they have been rising even though the fed has been tightening policy. maybe it is time for the markets to cracking go away. -- to crack and go away. nejra: should investors be moving out of the u.s. and into em? convinced emot

would be a good place. em will fall. the volatility question is interesting. the last 12 months, we had a spike and a long period of flat volatility. since around late october, it has been spiking up. it is in line with historical precedent, suggesting they are pricing risk better. nejra: peter dixon of commerzbank with us. ellman.p, christopher this is bloomberg. ♪

tom: good morning. bloomberg surveillance from new york and london. nejra cehic in for francine lacqua.

i'm tom keene. a mixed tape right now, the market looking for a bid, the equity market a bit better. with our first word news, here is viviana. viviana: there is one less general and president trump's cabinet. the endis retiring at of february, noting differences with president trump over the direction of u.s. foreign-policy. the president tweeted a successor would be named soon. the decision to pull troops out of syria is seen as a rebuke to the general. he had argued their missing -- mission was not over. >> everything that indicate strength, knowledge, is leaving this administration. general calle, general mattis, so many others. kelly, general mattis, so many others. there is chaos. this week was one of the most chaotic we have seen in government. viviana: the u.s. plans to cut troop levels in afghanistan, coming just one day after

president trump said he would pull forces from syria. the pentagon will withdraw half of 14,000 troops. this fulfills mr. trump's promises to bring forces home. king has accepted the resignation of the , just issued from the belgian royal palace. london's gatwick airport has reopened. a limited number of aircraft is scheduled for departure. were numerous sightings of an illegal drum. planes were diverted to other airports. it disrupted 120,000 passengers during one of the busiest travel period. s. global news 24 hours a day and at tic toc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. i'm viviana hurtado. this is "bloomberg." tom: thank you.

abby cohen will join us in a moment. right now, some insight from william lee, helping milken institute. i want to talk about the solid economy of the vice-chairman, the economy of the chairman. solid is the december word. what is the forecast for a solid economy? william: it means anything above 2%. are staying at 3.5% growth rates. it will slow down. what i'm looking for to remain solid is that investment spending continues to pick up. that is the key to the tax reform package, supplied side efforts -- supply-side efforts. confidence that corporate america can adapt to a real interest rate if not a high interest rate? they adapt, don't they? william: you put your finger on

it. they are adapting the wrong way because of uncertainty being thrown at corporate america because of trade wars and the reaction of the chinese. that is causing corporate america to put industrial plans on pause. all of this stimulus and tailwind from tax reform is by thisoffset uncertainty being raised by the international situation. investment matters, so do jobs. what is your prognosis for the job market? market seems to be running high. the research is showing that the bad boys were the private equity firms. what i discovered is that ipo's backed by private equity are growing jobs at a faster pace

than those not backed by private equity. in the composition of the high-tech firms coming out backed by private equity are big job creators. there is a glimmer of hope that the composition of changes are going to be good for america. nejra: i'm glad you brought up wages. when we talk to people, we talk about the outlook for growth and inflation. the bondif you look at markets, there is not fear about inflation in 2019. what is your outlook? william: that is the switch. the fed is driven by the phillips curve, and aggregate model. if you break it down, you are seeing the composition of job changes is shifting. jobsd to be most of the are in retail, hospitality, and health care which are low-wage sectors. where productivity gains are small.

if we can shift toward investment boosted productivity gains, wages can go up at a faster pace but we can have real productivity gains. that is why these headwinds coming from trade are dangerous because it puts investment on a pause and that is where we get inflation pressures building. nejra: the risk of higher inflation pressures coming from trade wars, let's go back to the fed. is it on the right course given we are not expecting to see runaway inflation? william: the fomc is on the right course. chair powell's message was so pathetic that it was taken badly by the markets because he kept focusing on this autopilot for the balance sheet and the fact we are basing decisions on model analysis. tom: this is so important. mentioned we saw a pathetic press conference, may be a

pathetic statement. is this a chairman comfortable with a rules-based approach or can he get to discretion? william: the rule can have discretion. in the face of high uncertainty, the rule should be we pause. all he had to do was say that would be at ease. instead, he said we are going on autopilot and model-based analysis. in and acquired religion the wrong way. , mr.you darkened the door bauder with us a few days ago. return to asizing a phillips curve model. i will buy it. when? 2025? william: that is where i differ. he has a lot of faith in models and that might come back but because of these changes i talked about with higher

investment spending and changing composition of labor force growth towards more productive jobs is what flattens the curve and may cause it to flatten permanently. just to go back to how the equity markets reacted to the fed, i understand how you say the messaging might be off. theare markets taking guidance so too hard given that we have heard that the fed is going to be data dependent? shouldn't the markets just be looking at the data and nothing else? william: the markets have been spoiled by free money and quantitative easing and now that has been reversed and what we have is a generation of people who have never seen interest rates go up. they have never seen a world of real interest rates above zero. that is where the market is uncertain because when you have an overleveraged corporate sector dependent on leveraged

loans that are indexed where the rates are. tom: william lee with us. he will stay with us as we join in moments with abby cohen of goldman sachs to give you conversation on this friday. the news flow extraordinary. please stay with us. this is "bloomberg." ♪

viviana: this is bloomberg surveillance. i'm viviana hurtado.

juul staffers said to be getting a $2 million bonus as part of deal to take a stake in the start up. atria's purchase of the cigarette starter works out to about $1.3 million per person. qualcomm has scored another victory over apple, gaining a ban on sales of some iphone models in germany. apple is infringing qualcomm intellectual property on an energy-saving feature. the devices will be available up to christmas as qualcomm would have to post a bond of about million -- $760 million to recover losses if the ruling is reversed. william lee still with us. we are pleased to bring you abby cohen. i want to get to your paper on the gilded age but all one to

know your belief in this equity market. can you acquire shares this morning or dare i say, can you hold shares in the s&p 500 this morning? abby: it is nothing like putting me on the spot at 6:30 in the morning. the answer is based upon the outlook for the fundamentals and whether they have changed dramatically and what the valuation looks like. i am not making recommendations about what to do today, tomorrow, this month. it looks like are you wish in, which was stretched -- like valuations, which was stretch, has come back down to levels supported by the fundamentals. the question investors are asking is how queasy should we be about the fundamental outlook in 2019? there is deceleration underway

in housing. seen deceleration in other economies and hours. some of that may be temporary, an easing of the trade wars could be helpful there. the one thing we have going for us is that our corporate sector is strong. more importantly, the consumer, which is two thirds of u.s. gdp, consumers are benefiting from wage growth, the unemployment rate is low. one of the big concerns for labor markets is whether we have enough skilled workers in 2019 and that is where immigration policy comes in because this administration is batting down illegal immigration and have discouraged legal immigration. tom: you worked at the federal reserve system. speak to the distort

of fx of a political process -- effects of a political process. is chairman powell overwhelmed by the politics of the moment? abby: i believe the happiest woman on the planet right now is janet yellen. i have jerome powell who think is doing a solid, credible position andicult one of the things i scratch my head about is the following -- i am not sure mr. trump was the fed as hebone was looking to find somebody to blame it on. if you have a scapegoat, the fed is always good. a lot of people do not understand what it is they do in the fed is not popular popular views, among people who

are not into the weeds as we are with regard to economic policy. weeknk the fed was ok this in terms of what they said. i believe that the markets reactions, some would say overreaction, would have been different if not for the rest of the context and the background of what has been going on in washington over the last few weeks. i love the question you posed over whether markets, how queasy they should be about the fundamental outlook. we talked about the strength of the job market. you have done an important work on the underlying picture of the job market in the u.s. how queasy should chairman powell be? abby: i think we should all be concerned as citizens. there has always been differences between urban cities

, small cities, and rural areas. our work, we looked at every county, shows this gap has widened since the financial crisis and the recession which followed. for example, we have seen job growth of about 14% in the largest cities over this time but rural and small cities, job growth has been less than 3%. there has been a significant widening in average wages in workers. per capita median income in cities in the united states, most recently 2017, about $60,000 per annum. $30,000 peras, only annum. we also needed to look at some and one ofr factors the things we discovered is that

the average resident in a large city is better educated, more likely to have a college degree by about 10 percentage points than people who live in rural areas. we also know those populations are more diverse, about 30% of the population in our cities are foreign-born. in small cities, it is under 5%. we are seeing significant international migration at upper scale jobs into large cities. tom: let me frame this correctly. the divide is 2.7% in rural growth versus a double-digit in urban growth. this is not just from the dakotas arkansas to new york city or washington. is the distance from queens

new york over to the halls of goldman sachs. you did that. where abbyet back to joseph can move forward like you did? raising one of the most interesting points from a policy perspective. it is underappreciated. one of the things our work showed is there are differences in educational attainment but also industrial composition. the success back to of new york city over the last 10 years, people like to point to the enormous growth in high-tech jobs, in jobs and high-level medical research and so on. the fastest job growth in the city of new york has been at the lower end of the wage scale. mike bloomberg, when he was mayor, took over a few weeks after 9/11 and he recognize

there were people in our city who were being left behind. there was an analysis done in terms of how could jobs be created, opportunities created for people in those categories. we have seen growth in things had 63urist trade, we million tourists which means demand for hotels and restaurants. we have seen growth in people coming from the new york metro area into the city. this creates a jobs at the lower end of the education and wage scales. i'm going to disclaim that he is also a member of the television and radio network. jump in here with abby. i want to go back to what you studied, my conversation with the nobel laureate, it is 2018 and all of us are dealing with his -- with this technology

overly. are we misjudging productivity inamerica or the polarity rural versus new york city? william: one of the great success stories in america is a urbanization and the research is pointing to that. what happens when you urbanized, these schools in the large cities have to prepare people for highway jobs, not low-wage jobs. schools liked high stuyvesant, that is the key to social mobility and getting higher wage jobs. the opportunities they present to give a high-tech education to urban america, that is the biggest are two productivity going forward. what does this say for investors who might be looking to the u.s. versus the rest of the world?

everything we have spoken about, are investors less likely to favor the u.s. over other markets, emerging markets? abby: wonderful question. when we were speaking to international investors as recently as six weeks ago, they were thinking about something of a rotation into other markets in the argument was more valuation than anything else. the u.s. had performed well and investors were looking at lower p/e markets. the u.s. is likely to be among the fastest-growing economies for corporations. one of the things we see now is who are exhausted this week, are planning to come back and take a look at the new relative valuations. it is hard to tell now how that will play out.

it is more than just arithmetic. one of the things we are more from our international clients and u.s. base clients who invest internationally is how confident they are in what is going on in washington. the government shutdown is viewed as a big deal. these changes in the cabinet are viewed as a big deal. everyone wants to take a deep breath, revisit the numbers, and then the certainty many people felt as recently as six weeks ago, that is no longer in play. case, our clients bracing themselves for more volatility? we have talked about the vix. that as a concern or an opportunity? abby: it depends where they are. one of the things that has changed because of the financial regulatory adjustments, i am not

criticizing finreg. wouldve many firms they have been able to use their balance sheets to step into volatile markets on a trading basis. they are not comfortable doing so anymore. that safety net we have had in previous times does not exist. you are asking the right question and that is what will portfolio managers do? the market action tells the story. whether or not that many players seem anxious to attack this falling knife. many are waiting for things to slow down so they can reassess. tom: my chart of the year is the of the wind deficit, looking into where we are going. of the twin deficit, looking into where we are going. the twin deficit vector is ugly. do we go back to the reagan

years where fiscal and trade deficits overwhelm the discussion? abby: it is ugly. there are all kinds of statistical variation right now. many u.s. companies were importing in anticipation of tariffs so those numbers are weird. aboutveryone is uncertain is what the new relationships will look like in 2019. the other issue on fiscal policy is not just the number. $1 trillioning for a dollar federal deficit and what did we get for it? what are we spending it on? the answer is we are not getting much. that went to corporations do not seem to be reinvested for growth. it is going in the form of dividends and repurchases.

going back to my paper, we have seen a redistribution through that tax change away from the fastest growing cities in the united states and they are not being redirected to the slow growing cities. tom: we are going to run out of time. lee, ween and william appreciate your attendance this morning. we are going to drive forward this conversation with markets and data checks. jonathan ferro and i on bloomberg radio. we do this with futures, still looking for a bit. the tape is better than it was. this is "bloomberg." ♪ ♪ there's no place like home ♪

argh! i'm trying... ♪ yippiekiyay. ♪

mom. ♪ ♪ david: waiting for santa claus.

withies selloff with s&p the worst month since 2009. where is the end of the year risk rally? the general has left the building. jim mattis resigns as secretary of defense after the president reverses course on shutting down the government, bringing uncertainty to the markets. chinese taxes to the rescue. china winds up the meetings on economic policy promising significant reverse of slowdown. welcome to bloomberg, friday, december 21. alix is off today. >> let's get to the markets. it has been ugly and it is noised to be again today, s&p futures lower. that index on track for the second-worst december on record. the dollar strengthening.

stocks,