with 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. 600, $50urope, stoxx

entering the bear market today. david: a lot of talk about bears. the nasdaq is close as well. i would not be shocked to see the nasdaq entering the bear market. lisa: is this a freak out? can we blame high-frequency tradeers. is this a lack of liquidity year and? or is it more protracted? -- year end? david: what is causing this? hear economist saying, numbers are good but the markets do not reflect that now. 10:00 eastern time, personal income and spending data for november as well as the consumer sentiment index. all eyez on me today as we near the deadline. on congress today as

we near the shutdown deadline. the winter solstice begins. the shortest day of the year, at least of sunshine. time for the first take. we are joined by vince, bloomberg macro strategist, as well as peggy collins, heading the bloomberg u.s. investment coverage. let's get back to equities. lisa has got the chart. this is the chart below that shows how bad s&p is now, set for the worst month since 2009, worse december since 1931. not a good time, as i recall. vince: i can almost recall it. [laughter] lisa: you recall right. vince: it is a bad time. a short walk on why this is happening, and the beginning of october we saw oil prices falling. falling because of worries in the global economy, reflecting

the china trade issue. if you look at the s&p and crude, they have been walking in tandem since october. >> i am sorry. crude reflecting the same issue the s&p is, which is slower growth ahead. is that another proxy for the same story? vince: it is and that is why they are moving together. they are normally not that tightly correlated. when you look at slower growth and a future look, it is to the economy going forward. that is what the reflection is now. it looks like it has further to go. peggy: i think investors are not going back in. if they are going in at all, they are nibbling. one of the things that is happening is with changes in terms of fed policy, there is price discovery going on and people are saying, are we at real valuations not propped up by low interest rates and liquidity in market? do we have farther to go in terms of settling?

david: fairly simple. the central banks pump money into the economy, driving up asset prices, now they take it back out, prices come down. vince: investors are not coming back in on a practical basis. pm's to market approaching year end, they cannot sit there and hold as the markets fall. against that benchmark, performance looks weaker than peers. they will capitulate the ride into january and we will see as january, deep into the new year, whether or not portfolio managers will step back in. as to the volume point, yesterday was the busiest day of the year. there is a lot going through markets, which is maybe a bad sign we are lower on high-volume. shakeupow there is a within the administration as the secretary of defense, jim mattis

decided to resign. eight paragraph letter, two pages. it said it all. "youperative sentence -- have the right to have a secretary of defense whose views better align with you. i believe it is right for me to step down from my position." he withdrawal from syria, talks about going after russia, it is clear the president had a different point of view. vince: the president had his agenda. it all comes back to campaign promises. everyone i talked to always comes back with, he is very much committed promises he made on the campaign trail and he feels his back is against the wall. lisa: we have known this for a long time. this is not out of the norm. we have seen disruption at the white house.

there has been a ton of turnover recently. why is this different? peggy: it involves the security of our country and troops abroad. those are people's lives. i thought it was interesting that he used the word, respect, multiple times. we often think of strength as pushing people around. he was saying respecting our allies is one of the things that makes us strong. in some ways, the market may react badly. anotheressentially adult in the room that is leaving. david: coming back to markets, this was the same day the president did a 180 on whether to shut down the government. if you are in the markets and you have other concerns, you are not sure where this president is on any given day. vince: the keyword is uncertainty. markets do not like uncertainty. everything happening in the last week is adding to that.

why am i involved in these markets when there is almost an impossibility to predict what will happen next? if you are short, this is tradable bounce. take some profit. going forward, do i want to be wary of this position on january 1? contrarian,y the the wildcard is china. china came out of a meeting overnight saying they will further stimulate the economy. they will cut taxes. they will potentially take other stimulus measures. we are looking at the trade gap with the u.s. and china. it has steepened, regardless of the tough rhetoric that president trump has had about trade tensions. peggy, this is the wildcard from investors who i speak with. what happens if china comes out with an amazing stimulus package, increases growth dramatically and boosts the global economic picture way more

than expected? peggy: a lot of investors i speak to are saying, china has the ability we do not to say, this is what we are doing tomorrow and pass tax cuts. it is almost like the end of year last year where we saw the tax bill go through. they also have other options besides us in trade. we are seeing the emerging power, china and the established power, the u.s., having an influence war. china is building up allies in asia to fill the gaps for the economy. david: it sounds good if china will ride into the rescue. relied we cannot be upon? vince: it is harder for china than people think. there domestic economy is not mature enough as we could in the united states. it looks more like desperation. they are cutting taxes. they put together another

medium-term lending facility. that has no clarity whatsoever. they are running monetary policies liquidity programs at the same time. we do not know what maturities, how much is in it, it is like throwing a lot of things at the wall. lisa: it feels binary. perhaps they can come to the rescue. if not, world trade organizations with bloomberg yesterday, when you look at leading indicators, it almost looks like death from 1000 cuts. no big change but boy they are starting to add up. we have seen this again and again with the forecast for growth from wall street continuing down. peggy: globally people are thinking, in the u.s. we have warning signs around credit. brexituarter next year, will come around the corner. we have warning signs flashing around the globe, making investors worried, which is why

they are not plowing money right back into markets. people have cash on the sidelines and could do it. we will see what happens in first quarter. david: looking for half-full of the glass. lisa: i gave you that. [laughter] i will double down. david: we have the stimulus from tax cuts, which helped growth. could the president looking at 2020, decide he wants another fiscal stimulus, backing off on china, declaring victory. what would that do to markets? vince: what will happen with china is we will have -- lisa: come on. vince: [laughter] lisa: i think the market would like it. david: peggy is with me. peggy: i am sure they would. vince: it is in the best interest of both countries. politically for trump, it will

take time. we may see capitulation with trump, negotiation with nancy pelosi on putting together the infrastructure package everyone thought would happen. they are fighting like cats and dogs but they have a tendency to come together for political will for both of them as we approach elections. that will start closer to the summer of next year. david: a brave prediction by vince. nancy pelosi and donald trump. lisa: we cannot wait for that photograph. peggy: [laughter] david: vince staying with us. you can find all the charts were used and more by running gtv on your terminal. browse features and save our charts. coming up, market meltdown. the pain across equity markets continue. this is bloomberg. ♪

lisa: the pain across equity markets continue. s&p on track the worst december, get this, since 1931. the worst month in nearly a decade. vince. us now, lori and lori, why are we seeing this? [laughter] [laughter] david: good question. lori: there are lots of factors. whetherical tensions, it be china trade dispute, the border wall. lisa: it has gone on for a year. lori: for the first time market

disciplines are worrying this could get into the real economy. you are seeing repricing of risk in this environment. david: to what sense is this reflecting what happened with powell? it was not a shock. we will be withdrawing from the market. we will not support asset values, the way central banks have for the last 10 years. the market say -- oh my goodness. lori: this started in october when we got signals from the fed , they were going to be more hawkish. he never said that. they were going to be data-dependent. they would be measured. they had signaled it was on the table. there was a back-and-forth about moving too fast, too forward. now we are in a place where people are starting to try to divine, what does he mean? lisa: another aspect is

positioning. a lot of people were expecting one thing, for him to say, just kidding about the balance sheet. they flipped out. how much is positioning concentrated? vince: short-term, that was a big part of it. we do this all the time. i don't know why. they think the fed things like traders do. they do not. they going to every meeting, saying the bush, august -- dovish, hawkish -- then they are neutral. traders went into the meeting overly, overly confident the fed would be dovish. he walked the middle-of-the-road like he has been. we had this selloff which came because of positioning. david: isn't the fed right? if the fed were responding to the market, they would be all over with monetary policy. every month would be different.

looking at underlying fundamentals of economy, what do they show us? lori: they look good. slowing and growth but good earnings forecast. consumer is healthy. slowing growth is hardly recession. the challenge people are having now is, the fed is navigating a delicate balance between responding to what is going on macro environment that feeds into fundamentals versus reacting. lisa: i wonder whether the tax stimulus that happened in u.s. will expedite downturn in markets? they gave a sugar high to markets, propped them up, now we are seeing markets fall more than they otherwise would have an companies did not use much money to invest in real programs. lori: there is certainly an element of that that is true. year-over-year markets versus drawdown from the high, we had a huge ramp up in third quarter

and then crash. lisa: and you see the u.s. lagging behind. david: the white line is the united states. the blue line is em. they have done well. lori: they had gotten beaten up early on and not participated in the run-up the way u.s. markets had. this gets back to the follow-through. company say they are looking to invest -- companies say they are looking to invest or do stock buybacks. we would see this as a cautious entry point. lisa: do you think we will reverse everything next year and see rallies? want to move into em and out of the dollar -- i would caution as we approach the end of quarter, and of year, we have seen a big u.s. selloff and equities. that people are stepping into em and selling dollars to set up for january, they will suffer

pain going into the first part of the year. david: you were a trader. you still are in your heart. lisa: he totally is. david: go through the next 10 days. we had enormous volume. vince: it's february. -- since february. david: through the holidays, what do traders do? lisa: they have dinner. david: then they come back in? vince: pretty much dinner. there are a lot of trivia games played. whatever your customers are asking you to do, if someone says sell $100 million for me, you sell. you do not keep. for the fx and fixed income markets, the books on the banks are closed. no upside to trading in the last few weeks. a good mark to your peers in the market and s&p

performance at year end, holding while markets fall, you see your performance markdown. you do not want that either. you have 2019 to start. starting the year off on a down note, which i have done many times, is an unpleasant thing to have to dig your way out in january. it is a wall you have to climb to early on in the year. traders avoid that like the plague. david: thank you for being here, vince. lori staying with us. coming up, jim mattis resigns. the sudden exit from the white house and what it may mean for foreign policy and the markets. this is bloomberg. ♪

david: citing differences with the president, james mattis announced his resignation from the cabinet yesterday.

right toyou have the have a secretary of defense with use better aligned to yours, i believe it is right to step down for my position." eli, thank you for joining us on the phone. give us a sense of how important this is. is this more important than others? >> absolutely. what he is saying is not, i disagree with you on a policy like with the carter administration and the iran hostages. disagrees on fundamental values with the president. and is, respect for allies a resolute opposition to adversaries and a commitment to america being the anchor of the

liberal international order. these used to be noncontroversial things in washington, whether democrat or republican president, you would generally agree on that. james mattis saying i do not share your views on this is extraordinary. only will be, not important consequences for national security, but it will be a political shock to the system. it will be difficult for republicans to stand with him in the same way they were before. lisa: that is where i wanted to go. how much does this cause a problem for president trump in his own party versus u.s. allies who could start conflict? : there are dangers of both. point, there is a strong populist base in the

republican party and they may be will like trump even more for this. there still is an institutional side of the republican party. they are more prominent in the senate. mitch mcconnell was critical of this decision. look at this in the context of policy wednesday. mike pence heard an earful from republicans in the senate on the syria pull out and the way that was handled. all of this is having a snowball effect politically. i would look at lindsey graham, susan collins, ben sasse, even john cornyn. you will start to see, the math matters. the white house is assuming there will be something in the house, then it goes to the

senate, and you need to have 67 senators convict. republicans become more important. we are not there yet. i do not to go too far. this is a body blow to the confidence that the institution and the republican party have in this president. david: it did not happen in a vacuum. the president was doing a 180 on the shutdown. it did not seem to be the mainstream republicans on the hill. it was the freedom people. at what point did this start to erode republicans on the hill domestically and internationally? eli: we are still absorbing the news. notquestion is -- it is just the decision on syria. it is the way it was done, so quickly, no real interagency process and at a moment when kurds who were fighting

alongside the united states for three years against our mortal enemies, isis, are about to be you know attacked by the turks, we sell turkey missile batteries. that is a green light to slaughter our friends. if that happens, i think trump will have, not only a political crisis on his hands. he will have a moral crisis on his hands and it will be harder and harder for him to hold on to populists ine most the party. that will be difficult. his success, in terms of governing has been the ability to keep the republican party together and at least have enough support that people like lindsey graham and mitch mcconnell are still with him. syria, all ofon,

that is combining for a potential political crisis. david: thank you. eli reported today. time,with us, lori, over the street has tried to ignore washington. right now, is there a direct connection between what we are seeing with jim mattis and the shutdown and what we are seeing in equity markets? lori: absolutely. there is no stability in geopolitics now. it is not clear when statements are made in washington, whether it is rhetoric and bargaining or whether it will result in action that could be devastating. this is what the market is struggling with. how do they interpret geopolitical risk? trump tweeting on the shutdown saying if democrats do not vote for the

wall, there will be a shutdown that will last for a very long time, people don't want open borders and crime. are you concerned about a government shutdown? markets don't seem to be responding. lori: anything is a shock. we have had this threat in the past. they usually work it out. ultimately things get worked through. the challenge in this environment is it is hard to know where common ground can be found. is it a standoff? you do not know what the long-term consequences are. david: if you wwatch the exchange with president trump and nancy pelosi and chuck schumer, you did not get a working warm feeling. we have a debt ceiling coming up in march. lori: exactly. david: the markets were not enjoy that. lori: everyone presumes these are negotiating tactics and at

the end, we will not have the nuclear option. the problem is, in the era of uncertainty, no one is willing to put money against best outcomes. david: you are staying with us. lisa: a check on markets. europe,oss the board in entering the bear market, stoxx 600 lower, the dax lower, the % evenai composite down .1 though the government is planning stimulus next year. the nasdaq flirting with a bear market ahead of the open. update on headlines. david: outside the business world. emma: the u.s. planning to withdraw 7000 troops from afghanistan. that represents half of the country's forces on the ground, this in the wake of james mattis resigning from his post and as president trump tries to fulfill promises to bring forces home.

the war in afghanistan is the longest terry conflict in u.s. history -- military conflict in u.s. history. the catholic church says the church will never again cover-up sexual misconduct cases. he directed his speech to victims, saying this has caused a crisis of confidence in the catholic hierarchy. in the u.k., gatwick airport reopened today. officials are still hunting for illegal drones that forced the airport to shut down for 24 hours. 150,000 travelers had plans disrupted. authorities are not sure if drones will return. 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. i'm emma chandra, this is bloomberg.. thanks.

barclays is out with the global lookok 2019, comprehensive at where assets are. the subtitle for me says it all. lowered expectations. barclays head of macro research to take us to the report and lori is still with us. it is quite a report. we will start with a graph from the report that has to do with projections on gdp growth. they have come down and down and down. and layer of production projection comes down more. >> the rest of the world has come down a lot. --ted starts, can expect united states can expect to slow down but still the growing above trend. it is not a growth level we sneeze at. david: this is an important

point in the report. it is. coming down we are not going into a recession. growth.ill positive ajay: i do not see recession in 2019. lori: we are in the same camp. slowing is not a cause for concern. corporate remain strong. lisa: you were saying earlier that the selloff is a good buying opportunity. ajay: i agree. we recommend buying investment-grade copper, fixed income or global equities. that was two weeks ago, 10%. at this point equities look attractive. with ae to be brave but six to 12 month rising -- lisa: which equities? ajay: broad. given how much earnings have done well over the last

quarters, i would step in. david: global trade plays an important role in your analysis. where are you? we had the wto warning us that growth in global trade is trailing. you have a graph indicating that. how big a risk is that for your projections? ajay: the impacts are not that significant. what tens matter is -- what tends to matter is uncertainty drags on. things are good, build a factory. then wait, wait, wait. that starts you have an impact. i would no longer dismiss it. lisa: what is your view on china stimulus? how much could that effectively support further growth? ajay: the worrying thing about china is that it slowed down more rapidly than expected this year before the impact of trade.

year was half of the frontloading off exports, so that trade tariff impact has to hurt. we are still talking disappointing numbers. lori: absolutely. all eyes on china. we are worried about the trade dispute, there is debt in china, there are fewer policy tools, the policy tools are more constricted. currency is a mechanism to help rebalance. that is not a core call but that is one we are looking at. lisa: that means the yuan weakening to more than 7 per dollar. we have entered a new phase of the trade war. david: what does that tell you about em? every kind of emerging-market, all year 2019. em wes point the only

look at our debt markets in certain areas which have dollar debt exposure. like emerginge asia, not local currency debt or equities. element isurrency one of the wildcards next year. people are saying, the dollar could weaken. we have seen the peak. where you fall on the dollar bet? lori: we think it will be well supported. higher interest rates in u.s., growth trajectory looks good. we do not think the dollar will appreciate much from here particularly if the fed slows down the pace of hiking. david: the phenomena with inflation is limited inflation despite growth. we will put up a chart from your report indicating 2019 inflation. ajay: re-think wage inflation.

it goes higher in the u.s., on a whole it remains contained. pushed into more aggressive hiking, i do not see that. that makes these weeks all the more surprising in equities. lisa: here's the conundrum. wages are rising. that is great for the underlying economy and it is a problem for companies. people are increasingly looking at how this will eat into profitability. where are we on that? lori: they are starting to rise but it is not alarming. companies still have opportunity to invest. there has been a lot of talk about investing in capital improvements. they have not followthrough yet. a positive grey swan is that they start to invest and that tamps down overall cost because they investing capital, not just

people. david: you think the fed may raise faster than what the markets think and that leads you to short treasuries? ajay: two-year treasuries which are pricing in no hikes in 2019 makes no sense to me. 30 basis points higher? that is where we fix values. lisa: inverted yield curve? ajay: no. we are not talking big numbers. 10 year treasury yields, two months ago, you know, yield curve will be flat. lisa: how high can 10 year treasury yields get during this cycle? ajay: they will not go above 3.5%. all of those people telling you rates will go much higher, they tried it in the last three years and here we are. david: should we be concerned about the credit cycle? we hear reports of cracks. lori: we like investment-grade,

high-grade, high quality. we stay away from certain sectors more leveraged. we think it will matter. lisa: the biggest ever one-week outflow from loan funds overnight, over the past week. the biggest bike in high-yield bonds overnight since 2011 -- the biggest spike. is this a time when we are overpricing the chance of recession, is this a buying opportunity? ajay: you think we compared notes. we did not. [laughter] lisa: you had a powwow. ajay: we like tight credit for fixed income, 3.4% total returns in 2019. that is not bad. lori: ajay of barclays and of state street global advisors, thank you for being with us. the city scrutinizing goldman sachs.

more on singapore's expanding criminal probe of the bank. that is next. this is bloomberg. ♪

emma: this is "bloomberg onbreak," coming up, bloomberg markets. this is bloomberg.

chandra with your bloomberg business flash. mexico's cancellation of a planned airport project will not be cheap. will result in a 5 a $5 billion loss for the country. japan, carlos remains behind bars after being hit with new charges for financial misconduct. detained for 10 more days -- he can now be detained for 10 more days and possibly longer. in india, farmers are not shielded from distressed sales. this could impact the president.

moreomised returns of 50% of the estimated production cost on many crops. farmers say a lack of proper infrastructure is to blame. we turn now to wall street. things wall street is buzzing about. goldman into the probe. goldman was sued by malaysia earlier this week. then good news for hedge funds. as the industry suffers, post gains, the fund hits the $1 million threshold. wei opens its doors, using a charm offensive. david: joining us is peggy collins. i have never been prosecuted by singapore but it does not sound

good. lisa: cold. ajay: -- peggy: this opens up another battleground and a front for goldman in this scandal. our banking team has been doing a phenomenal job of covering. it is to be determined how broad this will go. david: singapore was looking into the 1mbd thing but now they are saying, that money you got for fees, how much went to the sub? peggy: if so, how can we potentially prosecute you for the fees? lisa: to defend goldman, how much is this pile on by governments saying we have a whipping boy. let's go after them? peggy: it is unclear. it isto be determined if

with two rogue traders or if it was something more systemic on compliance front at goldman. david: that is what i am hearing off the record. the question is, was it just a couple people rogue? there is nothing you can do about it. or, was there real structural problems? lisa: news this morning about cqs, based in london, the founder will be stepping down. he has named a replacement who will be taking over january 14. what i find interesting is that michael will become the chief investment officer, going back to his roots, managing money. this is something we have seen with a number of hedge fund founders. they want to get back to the nitty-gritty. peggy: a number of succession plans across the industry. a lot of the leaders are aging out. for some firms, the succession

transition has gone well. for others, it has been a struggle. david: we have heard a lot of trouble from hedge funds. some reports are positive now. bridgewater starting their chinese fund, now over $1 billion. lisa: they have no problem attracting money. peggy: our colleague reported yesterday that bridgewater has raised $1 billion for the china offshore version of the risk parity fund. it is not the onshore fund that they got a license for in china this year. they are trying to run funds out of china for china investors. this offshore fund is for foreign investors who want more exposure to chinese equities. $1 billion out of the gate is not bad. how: we have any sense of

this 2.8% got delivered? peggy: stellar, compared to hedge fund returns we have been reporting of late. the guy who runs the firm is a value investor. one of the stocks that was his biggest holding as of september 30, was 21st century fox. that closed with disney in august. againstfter bidding comcast. that is real value. lisa: how much is just luck? not that you couldn't foresee it but -- david: with stock involved? lisa: i find this compelling. big hedge funds are still attracting money. david: time to find out whether huawei can be compelling. they are going on a charm offensive. they have brought in international journalists. they are showing the diary of a

woman and how tragic she reacted to various things going on in the world. peggy: they seem to be on a marketing campaign. the company is trying to export 5g technology around the world. doors are closing in some ways. they are trying to say, we are a good company, a nor the headlines about the other things, it is about the u.s. and china having a rift. lisa: the announcement yesterday at the southern district of new york, the federal prosecutors and the fbi director saying, there has been state-sponsored actors from china trying to steal intellectual property in the u.s., is actually directly situation.the huawei the allegations are increasing that they built 5g technology and prowess technologically by stealing some information and data from u.s. companies. peggy: that is a separate allegation.

thee were violations around iran sanctions. david: that is why she was detained. it is not just that they may have used our i.t. to do this. also that there are backdoors being built in so there could be further hacking in the future. it is not just the united states. throughout europe, you may be leaving a way for them to get in. lisa: which is the reason countries are pushing back. peggy: and the reason they have gone on this charm offensive. talking about how they were so good to people in japan after the earthquake several years ago, trying to improve their image. david: i'm not sure about the response. lisa: it is a diary. david: we are nice people and we compromise your national security. coming up, brexit plan b. theresa may working on a secret plan with top advisors should

the deal gets scrapped. that is next. if you have a bloomberg terminal, check out tv . interact with us directly. this is bloomberg. ♪

david: this is what i am watching. brexit. plan b. this is playing high on the terminal. lisa: do you start to tune out when you see brexit headlines? david: i have to resist that temptation. it has been going on for so long. so many directions. over the holidays, theresa may it appears is secretly meeting with her cabinet saying, what can we do if this does not work? they have come up with alternatives. postpone the whole thing. call the whole thing off. lisa: she has pushed back on that. my favorite part of this segment

of brexit saga, is one senior minister quoted winston churchill saying the conservative party on brexit puts me in mind about what winston churchill says about americans. you can always count on them to do the right thing after they have tried everything else. [laughter] classic. brexit ortponing calling a new referendum. we talked about that. one of her cabinet members saying that. she said absolutely no way. plan c is a general election which would be risky. you might get jeremy corbyn as prime minister. lisa: the concept of a no deal brexit is compelling. is that equivalent to y2k? the whole world will go to pot. the economy will crash. et cetera. is that a political tool and

overstating? four is this -- or is this consequences? david: ships backed up in the channel but the airlines are concerned. rights to fly back and forth. that could be serious business. coming up next, we speak with kevin, greenwich associates head of market structure. lisa: talking high-frequency trading. is it the reason everything is going haywire? david: wouldn't it be nice if we could blame it on that? live from new york, this is bloomberg. ♪

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equities continue to sell off with the s&p heading for the worst month since 2009. the euro stoxx 50 floating with a bear market. where is the risk rally? the general has left the building. jim mattis resigned after president trump reverses course on shutting down the government, bringing uncertainty to the markets. chinese taxes to the rescue. cutssing significant tax to fight a slowdown as the wto warns of further trade problems on the horizon. welcome to "bloomberg daybreak," on friday, december 21. alix is off today. winter solstice. lisa: quadruple witching. david: you can see that at the white house. jim mattis stepping down. in a letter he distanced himself from the president. lisa: to be clear, there has

been turnover in this white house. a lot of analysts from republicans to democrats are saying this time is different. general mattis brought a stability to the national relationship, internal relationship as well as with allies. david: a tough piece of casting the president has in front of him. we are looking at the capital where the congress is about to shut down the government at the president's insistence. republicans thought there was a deal. yesterday, he had a meeting and said, no deal. it is 25% of the government. not the entire government. the president is on twitter. democrats doay if not vote for border security." everyone is waiting to see what will happen with the government and the defense department.

lisa: no guidance to the market or confidence ahead of the u.s. open. red across the board. s&p futures down after already being poised for the worst december in years and possibly the worst quarter since 2008. crude lowest since last year. dollar gaining a bit. stocks in europe losing. stocks europe 600 losing. stoxx 50 poising for a bear market. emma chandra is here. discussing, were president trump met with republicans to fight for border wall funding. tweets, he urged to push through the stopgap. the president said democrats would be to blame, tweeting that border security is desperately

needed. he said the shutdown would last for a long time. he double down by proclaiming more. -- doubled down. jim mattis will retire at the end of february. in his resignation letter, he cited differences with president trump over alliances and military strategy. the decision to move troops out of syria surprised the pentagon. jim mattis is the mission over there was not over. a diplomat currently detained in china is being denied a lawyer. his arrest was in response to beijing's anger over canada's move to arrest someone from huawei technologies. 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.

i'm, genre, this is bloomberg. emma chachon drug, -- ndra, this is bloomberg. david: the pain continues. s&p on track for the worst december since 1931. we welcome denise from boston, fidelity head of sector strategy, and romaine bostick. welcome. denise, sometimes the hardest questions are the simplest. why? denise: history can offer insights to the why. what data sets have been predictive of a decline, it tells you what to watch going forward. we have seen credit spreads widened in the u.s. not nearly to the same degree as we have seen a severe defensive rotation in u.s. equities and

what that tells me from historical perspective is that data that is week is outside the is outsidees -- weak the united states. juxtapose this with europe. leading indicators and industrial production are in contraction mode and have been for the better part of the last couple months. that is the area of the globe we need stabilization in. credit spreads in european banks are the area to watch. a lot of the news flow we are talking about and i look at has not been predictive in history of the declines we have seen. that area has. what are you recommending, are you recommending clients buy? denise: it depends on the timeframe. i study when the odds have changed. when you have betting odds in your favor. i use that in one year time

horizon. i cannot say you should spot buy now but from a european perspective, we are not there on all indicators i see that would shift odds to higher than 70%. even 70% is not 100, but you go from 30% odds of equity market advanced to excess of 70%. i would want to see worsening data to suggest near bottom and higher quantifying valuation spreads that is suggestive of fear. david: it is only december tony first. is the year over? -- december 21. romaine: it is effectively over. the large asset managers have closed out positions for the year. today is quadruple witching. effectively this is the last day of trading for a big chunk of the market. what you saw is a lack of

confidence over the past couple days. there is a lack of confidence over the global growth story. the diversions between the u.s. and the rest of the world that helped lift the market has broken down. lisa: denise highlighted this, things are looking more attractive. we are not there yet. do you have a sense of what it would take for investors to step back and? --in? romaine: the growth story people have been sold on, this idea that the u.s. will post double earnings growth, the economy will go along at 3%, there is a lack of faith that will continue. once we start getting more data in january and the earnings season in february, if the numbers bear that out, you will see returns. between now and then, what do you have to hang your hat on? we will shut down the government in 12 hours.

a trade war is intensifying. the data out of europe -- i don't know, if you are equity or bond trading, it is not encouraging. david: at the same time, are we talking ourselves into downturn? there is fundamental growth. in 2019,re won't be but it would be growth in another year that you would take, as substantial. can we talk ourselves into downturn? history suggest no. downturns come from credit. from the odds perspective, the u.s. can take the globe into a recession. the rest of the globe has rarely been able to take the u.s. into recession. lisa: we saw the biggest one-day increase in high-yield bond spreads yesterday since august, 2011. we see credit cracks in the u.s.

biggest one week outflows from leveraged loan funds here ever. how bad could it get? are we starting a default cycle? denise: you see different parts of the credit look go different ways at different times. you would not expect all credit in all areas of lending to be getting better in early, mid or late cycle. usually what drives correlations is a recession. you could see deterioration in loans. i do not to see it across the board. residential real estate or commercial real estate, so far those areas of bank lending have been solid. could it be the start of a credit cycle? sure. usually you have time to see the data before you see deterioration. perspective,change what you should watch in 2019, that might be that catalyst, is as much as we are focused on

energy price declines being bearish,, when i look at history that 35% decline, usually provides impetus for a tax cut to the consumer both on consumer spending and historical market odds and more importantly, the shift we have seen this year and inflation accelerating is very likely to shift downtrend next year. those declines pretend 10% odds of inflation acceleration. with deceleration, the fed will shift and will likely shift more outside recession, which you cannot discount an advanced, that tends to bolster the market. lisa: thank you so much. denise, staying with us. steve mnuchin blames. he hits out at high-frequency trading as a reason for recent market stress. we discussed. kevin joins us.

from new york, this is bloomberg. ♪

emma: this is "bloomberg daybreak," with the bloomberg business flash. facebook working on cryptocurrency that lets you transfer money on whatsapp. the social network will focus on the indian market to minimize volatility to develop the stable going. -- coin. the company is far from releasing the coin as it develops blockchain strategy.

today, xavier will take the reins on january 14. the former head of the london will exchange growth -- he stay on as the senior investment officer. china top policymakers implementing significant cuts to taxes and fees in 2019. the government deals with slower growth at home and uncertainty over trade with the u.s. termal was dropped as a from the monetary policy. lisa: one culprit for market volatility. tove mnuchin attributes this high-frequency trading and the volcker rule saying "market structure has led to more volatility. part of this is a combination of the presence of high-frequency traders combined with the volcker rule."

kevin and denise. argument?you buy this i love the treasury secretary talking about market structure but he is off-base there are so many factors impacting the market. we are at the end of a 10 year bull market. the market has been on edge. the volcker rule impacting liquidity, it certainly has, but that hit five years ago. the market has adapted. lisa: i am sorry to cut you off. the market has largely adapted over time in which the federal reserve has been pumping liquidity into the market. this is when we would see the most dire consequences from a withdrawal of bank balance sheets that used to cushion

price swings, no? kevin: you raise a great point. 2019 will be the first test of the new market structure across a range of regulation that has come into effect since the crisis. if we are talking about liquidity, the market is moving dramatically. as macro factors. that is not a lack of liquidity. david: let me defend the secretary. maybe it is not causing it, but might it be exacerbating it? we have a different market structure today than we did 10 years ago. we have not had a significant downturn in the last 10 years. algorithms, passive investing, high-frequency trading, the challenge to the volcker rule, might it exacerbate this? denise, sorry. denise: i did not mean to interrupt.

perspective,ical if that were true, i would expect something in the data unprecedented. i do not see that. i see rare events. it is not unprecedented for the vix to be at sustained levels this high or see quick selloffs for equity defensive rotation. i do not have anything to point to. what i can say is that the 18 months into this year was unprecedented in the sense that we had low volatility. peak to trough correction was less than 5%. that happens 8% of the time. that was the rare event. i am not convinced that what we are seeing is a new normal. it might be the normal we are react omitted to. to -- reacmiting

climating to. lisa: to stave off reductions from the federal reserve. kevin: we should take a volcker rule and high-frequency trading as separate things. the volcker rule is preventing inventory holding less than they would have in the past. they were never in a place to catch a falling knife. we should not expect the banks to catch those for the sake of customers if they don't think that is a good business decision for shareholders. i agree with denise. conversationhis for years about high-frequency trading. the markets react faster than they would have in the past. i would argue, the fact that there are high-speed market makers that have different incentive structures than the banks, that can make liquidity on a different cost basis

ultimately help. we have evidence looking back to volatility in october and the treasury markets that there was increase in volume from high-speed traders through that volatility which likely helped to keep the market tight. lisa: what about algorithmic trading? the idea that you could have algorithms programmed the same way in the same direction during market selloffs or rallies? kevin: it is certainly possible. what is great about volatility and what we are seeing now -- the uncertainty means there are more folks going in different directions. the last 10 years the markets have been correlated. that is changing. the algorithms should work better as we have these quantitative investors trying to figure out what is going to happen. we will have people positioning differently, which is how a market works. that should be good overall. david: thank you so much, kevin,

denise. coming up, 90 rebounds. the company surges in trading after a year-long slump. -- nike rebounds. this is bloomberg. ♪

david: time for the bottom line, where we look at three companies worth watching. health care insurance as a group. decision coming out of texas striking down the affordable care act. it affected health care insurers. this is extraordinary. composite.ine is the purple is cigna. yellow is anthem. blue is united. there is uncertainty about what

happens to insurers if obamacare goes away. lisa: i am looking at facebook. the bad news keeps coming. it makes me wonder when it will create a base. when are we going to be done with information trickling out? the story highlighted in the new york times, showing facebook highlighting and sharing information with other companies , could it violate a settlement it struck with the euro trade commission -- the federal trade commission that prevents it from sharing data without the permission of users and doesn't this bring up the specter of additional fines for the company? david: they have to make some big change. a stake in the ground. it just gets worse and worse. the third story is nike. shares rising after reporting second-quarter results

yesterday. -- erinoined by aaro murphy. she has an overweight rating with price target of $92. welcome. tell us what happened yesterday. initial reports came out, this is about colin kaepernick, and then, it sounds like it's more about digital. >> thank you for having me. yesterday's quarter was a perfect storm of everything going right. the company is at the forefront of innovation from product perspective. you are seeing that with a solid topline beat and growth beat. when you slice the data, they talked about digital. this is a channel they are very focused on and investing behind. from shopping online to clicking through the sneakers app, a big

piece of their mobile platform. that rose significantly at 41%. you are getting a better margin and much closer to the consumer. we think this is positive for quarters to come. lisa: i have to wonder how much this is investment in digital and fundamental changes, how much is the colin kaepernick campaign getting attention? >> when that came out it was polarizing at the beginning. this is what nike does best. historically back to the 1980's, the 1990's, very vocal with the aids campaign, vocal with talking about gender equality. picture, theyger are known to be a socially responsible company. when you think about their corker sumer -- there core consumer, young male or female,

18 to 35, those, that was, the collin campaign was something that spoke positive to the consumer buying more. david: first sports figure to make more money off endorsements. he is not playing. >> thank you. david: coming up, the latest read on the economy and a preview of the busiest shopping day of the year with laura, investment chief u.s. economist. lisa: will you be shopping tomorrow? david: [laughter] i thought i had it all done. i did not. this is bloomberg. ♪ ♪ there's no place like home ♪

argh! i'm trying... ♪ yippiekiyay. ♪

mom. ♪ lisa: this is "bloomberg daybreak." let's get you caught up on markets ahead of the u.s. open. it is red.

worst poised for the december in nearly a decade for the s&p 500. the dax down. the shanghai composite, i thought this was so interesting, china is potentially adding stimulus but is also losing. nasdaq futures lower. two-year yield is lower. commodity index is continuing its decline, led by oil. ye dollar gaining against the uan. -- we are getting some breaking data. david: we have third quarter read gdp, which is down just a tad. personalized consumption is down 0.1 points.

consumption was up a little bit. lisa: is this like confirmation bias? confirmation to a slowdown. this does not come at a particularly good time. david: looking to someone who has no confirmation bias whatsoever, lara rhame. still with us is denise. welcome. what do you make out of this? lara: we have seen strong and robust data out of the consumer. i think right now if we get good news, people disregarded because they have pessimistic expectations going forward. if we get that is, it seems like confirmation of those expectations. growth probably get 2.5% in the third quarter. as we look at the softer

than expected consumption data, i am struck by the fact that the consumer has given this economic recovery. how much longer can they do that? >> it is interesting from a predictive perspective. looking at history, gdp and personal consumption expenditures are not very predictive of the stock market. if i had a nickel for every time a poor olio manager asked me if you just tell me what gdp will do, and i will know what to own. he does not work historically. when we focus on u.s. economic data, we forget the global profit stream, which drives stocks, is global in nature. stocks are a discounting mechanism. when we talk about that second derivative slowdown, when i look historically and say we will take the next leg down and decelerate on gdp next year, is that bad for stocks or bad for consumer stocks?

not consistently in both of those areas. i think we also have to consider where we are in the business cycle. the fact that we are in the late stages of this expansion, people forget this is a natural story, recurring story. you have costs starting to creep up. all these things that drove robust profits this year and at the end of last year, these things are starting to fade. when you think about it at the most macro level, you have the overlay uncertainty of china, the budget. none of these things are helpful. we are also seeing a more classic late stage profit leave. lisa: we talk about all the negatives. does this mean recession imminently? or does this mean things will not be as good? lara: that is the point i am trying to make. we can have slow growth without

contraction. it is in uncomfortable deceleration for equity investors, but the reality is there is no reason why we should have a recession. the government will still be contributed positively to growth in 2019. the consumer is not over levered in the same way it has been in prior expansions. there are a lot of reasons to think this expansion could continue for quite some time. david: you make the powerful point that the stock market is a matter of future earnings. part of that is the discount rate. how much do they think they will actually be able to sell? how much of it will not be worth as much as it were because the discount rates will not be worth as much as the market thinks the fed said they were going to go up. >> you asked a couple of questions. i will take it in a different rate for discount rates. from a nominal interest rate perspective, what we find is higher interest rates are positive predictors of stock market advance. the reason is more often than

not, higher rates are a reflection of growth. what has been the clear deterrent is real interest rates historically. odds for theged stock market and cyclical sectors like consumer discretionary technology and financials. rates,s of real interest is that trajectory and inflation i talked about earlier. inflation will continue that subversion trend that we saw in the economic data, that downshift might increase real average hourly earnings and provide that potential stimulus to the u.s. consumer to keep spending next year. lisa: when you were talking about muddling along, a government that will continue to support the economy, this implies deficit widening in the u.s. and relatively low benchmark treasury yields.

borrowing costs stay low. the government continues to stimulate. what that does not happen? what if you get bond vigilantes who say, we are not going to accept superlow rates anymore because you are increasing your deficit and not being fiscally responsible. then what? you talk about u.s. long-term yields, they are the highest in the developed world. i get a lot of questions about these trillions of dollars, not just u.s. giant federal bank balance sheets, but globally enormous balance sheets. there are not many hangers for the fear crash. when you think about diversifying outside of u.s. bonds, i would argue they are probably as diversified as they can get. look at europe. u.k., these the markets are not perceived as safe, and their interest rates are lower than our own. that puts a natural cap on how high long rates can go. david: are we going to contain

interest rates in the u.s.? where are they going if they cannot come to the u.s.? >> that is a good question. the key data point is bond vigilantes. what do bond vigilantes historically react to? inflation. that is the critical driver in 2019. the indicators i look at suggest strongly we will see that shift, which would make that less likely. i want to get back to some of this consumer data and the context of a weaker consumer. you said it does not look like people are particularly overleveraged. we are seeing weakening in auto loans and student loans. indicate ant is that profound weakening if this growth does not continue? lara: in 2019, the consumer trends to look at our how to consumer reacts to interest rate

sensitive markets like autos. the market is slowing down lately because of interest rate increases. housing as well. wealther factor is the effect on consumption. we saw on the way up through this enormous stock market appreciation, the consumer more reticent to engage in spending when the stocks were very high. on the other side, it remains to be seen if this regime shift in the wealth effect is going to be maintained. on the way back down, if consumers are going to respond by retrenching or look at the job market and say still good holidays. david: we talk about how much the economy is affecting the stock market. what about when the stock market might affect the economy through the wealth effect? should we be getting concerned about that? >> history tells us historically

you see much more net worth decline to be predictive of an economic recession. we are not there yet. could that potentially be an additional factor making the potential recovery much worse? we saw that in 2000, although it was a light recession and a big stock market decline. that just the position between -- juxtaposition between the economy and the stocks. it can be predictive, but the magnitude is not a very good translation. lisa: whenever we talk about the consumer, one thing i am struck by is the widening wealth gap. this has influenced delinquencies and defaults at the lower end at a much faster pace than the higher end. could there be a disproportionate effect this time around on the high-end?

they have actually been supporting the consumer creditworthiness throughout the cycle. lara: i think there is some of that. we see that on the lender side. letters have been more controlled this time around. they have been looking more at credit worthiness, credit rating. you look at the average credit rating on the auto loans, they have stayed higher this time around. going forward, it is going to depend on the wage gains we are seeing in this tight labor market. we are seeing a move higher in the lower wage jobs. manufacturing, there is a lot of positive momentum. if we can start to bring back some of those middle income jobs, i think that is what drives the health of our economy. to laraany thanks and denise. we had to emma chandra with

first word news. >> the u.s. is planning to withdraw 7000 troops from afghanistan, about half of the forces currently on the ground. james mattis resigning from his post as defense secretary as president trump seeks to deliver on long-standing promises to bring u.s. troops home. an exposure in the czech republic coal shaft has killed 13 people. mine in theat the eastern half of the country died after methane exploded nearly 3000 feet underground. one person remains in critical condition in the hospital. in barcelona, pro-independence demonstrators rallied over anger over spain's holding a meeting cabinet holding a meeting in barcelona. 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. i am emma chandra. this is bloomberg. david: thank you. coming up, artificial intelligence and quantum computing take center stage in 2019. that is according to the ibm research coo. he will be with us next. this is bloomberg. ♪ bloomberg. ♪

>> coming up in the next hour, btie.n emmanuel of this is bloomberg.

now to your business flash. more trouble for danske bank. estimates by more off $200 million, capping the year in which the bank landed at the center of europe's worst money laundering case. goldman helped raise money. authorities are investigating whether any of the $600 million raised float into the investment banks subsidiary in singapore. the deal struck between the president of mexico and bondholders this week to stop construction will still result in a $5 billion loss for the country.

that factors in money previously spent on the project and the cost to demolish what is already built. david: thank you. itsresearch is out with intelligence year in review. they focus on three key features for the future. they focus on ai and quantum computing in 2019. we are welcoming dario gil. upput these three elements that you have identified. take us through them briefly. causation and correlation, learning to trust ai, and quantum computing. dario: we looked at the progress we have made, and one key aspect has been the ability to train neural networks where we give them examples, and they learn the patterns and give us better prediction. we can make better fraud

prediction. david: they just look at the pattern. dario: if i give it well labeled examples, it gives me a prediction. of, we given the example you denied me credit. why did you do that? we want to understand why. that is where causation comes in. it could be in a medical decision. we asked the natural human question of why. it is not just about correlation, but you have to tell me the cause. lisa: the trust aspect is interesting. the algorithm and computer programming or the human beings behind it collecting data? dario: that is a great question. if we look and unpack that, you have the element of the training.

who trains it matters a great deal. if the people who train it don't .ave the right methodology lisa: for the motivations. dario: yes. you have to make it fair, explainable. it has to be secure. subject to attacks. ai can be attacked in particular ways. haveyou have to be able to traceability. later, when we ask how that decision was made 10 months ago, we can go back and see. david: what i know about quantum computing you could put on a microchip that is very small. is it fast? dario: more than fast, is it is different. it exploits the loss of some physics to compute in a

fundamentally different realm from classical computers. classical computers work on zeros and once. that is not the fundamental building block of information. that is the qubit. you can compute in a very different way. lisa: when you start talking about artificial intelligence and the cloud, a number of people glaze over. i think the concept of what could potentially be done with this is missed. we were talking about this the other day. here it is. >> let's just take these cloud companies. mobile 10y look like years ago. they are in the second inning of a nine inning game as corporate america has to convert to the cloud. you could argue that if we get into a mild recession, demand for their product goes up

because it cuts cost. lisa: can you paint the picture of what the cloud could do for us in the next decade? dario: what it is able to do for us is it is a way to develop new applications and programs with much greater agility. now havey of it is we a reach of confrontational power that is not just in our businesses. it is also public. imagine a vast network of computing power that we can program in a much more uniform fashion. the idea is to have the cloud as a computer. as a result of that, the ease with which we can connect data and create applications is different from what you can do today. david: let's condescend to the particulars and talk about a particular application. you were talking about fingernail sensors.

fingernail pressure indicates help in some ways. dario: that is another trend, the novelty of ways in which we can collect data that was invisible to us. in this example, we have a miniaturized sensor that you attach to your nail. it can communicate to a smart watch. it turns out the nailhais indicative of health issues. the amount of movement might be in the micron's. 50 times smaller than a human hair. sensor to a detect that micron movement. you can detect diseases. lisa: do you have them on your fingernail today? dario: i do not. [laughter] lisa: thank you for being with us. dario gil, ibm research.

coming up, vice, pot, and vaping. this is bloomberg. ♪ ♪

>> here is what i am watching, vice. betting that marijuana and vaping might be driver for decades of decline in tobacco. if you take marijuana and put it together with vaping, what do you get? a good time. lisa: people have been putting smoking because it causes cancer. now they are trying to get a softer image. david: the deal itself is a lot of money and not even to buy the whole thing. it is just buying a stake. $600 milliond put

in the earlier. --earlier in the year. hoping that the law may change in the u.s. and make it legal. emmanuel withian jonathan ferro. he has a lot to cover today because there is a lot going on in the markets. the markets have not been to pretty going into this christmas season. lisa: understatement of the year. david: live from new york, this is bloomberg. ♪ is bloomberg. ♪

place, the xfinity xfi gateway. and it's strengthened by xfi pods, 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. jonathan: from new york city, i am jonathan ferro. the countdown to the open starts right now.

coming up, the equity markets struggle continues. the s&p 500 heading for its biggest monthly drop since 2009. even if china were to stabilize a weaker policy, tax cuts, signaling weaker monetary policy. government hours away from the partial shutdown. good morning. futures unchanged in the treasury market. yields lower two basis points. weakness market, euro for you. 1.1411.lar heading into 2019 with just one certainty. >> uncertainty. >> uncertainty. >> raising uncertainty. >> we don't know what's going on with brexit. >> major uncertainty. >> uncertainty about global growth. >>