crasher, the premier in china going to trade talks. the hedge fund firm bridgwater raising 14% last year. and its main fund had its best performances 2009. the new powell put, the fed chair listening to market and highlights possible flexibility. did he help equity find a bottom? david: welcome to "bloomberg daybreak." it's monday, january 7. i'm david westin with alix steel. the record is -- alix: 21. david: saturday was the record. alix: look at that shot. it looks like independence day. the idea that yes, we know the government shutdown does not do anything for gdp and markets, if people do not get a paycheck, what happens? david: 800,000 people on friday

not getting a paycheck. and people will start not ticket tax refunds as well. a lot more than 800,000. alix: you could say banks like, come to us, we will loan you money. looking at them markets, the risk on that we saw on friday, a little bit of pause with futures off by 1/10 of 1%. blackrock said clients are reducing allocations to equities. euro-dollar is up. german factory orders fell, but domestic demand and orders in europe improved. and it is a weaker dollar story. 10 year yields lower by two basis points. buying on the back and there. and crude is up nearly 2%. why? we could not tell you. oversold rally, maybe opec perry back risk. david: take it where you can get it. now for the morning brief. we are looking at the entire week ahead.

a u.s. delegation has been meeting in beijing on trade issues. and the vice premier liu he surprised everyone by showing up. on wednesday, the fed releasing minutes. and on thursday jay powell will be speaking to the economic club of washington dc. on friday, getting u.s. cpi data. and friday will be the first day that the federal workers will not get their paychecks because of the shutdown. now, it is time for first take. we are joined by gina martin adams. and michael mckee, our international politics correspondent. the top story of the chinese delegation meeting with the u.s. delegation. to get a sense of how difficult it will be we will put of the issues they have to try to address. it is a long list. intellectual property, by china 2025, it goes on. michael: it will be hard to reach a deal. 52 days left in the 90 day

target for getting something done. there are some signs of progress. the fact that the u.s. delegation, the fact that the u.s. sense of this delegation suggests maybe they want to make progress, because of a thing before has been a competing faction of u.s. officials from the administration would talk more about who was up, who was down and who was at the meeting, rather than what they were talking about. david: these are sort of worker bees. and if you want to get a deal done, you said in the worker bees. and -- isn't a worker bee. michael: maybe it is a sign that china wants to be serious about this. there is a palm b -- a fallback plan to scale back on intellectual property theft that was going on. and i were the most recent people's congress there was a new draft law that would implement this.

whether they go as far as the trump administration wants, or not, the chinese seem to be moving in the direction of making some concessions. alix: it will donald trump go to davos if the shutdown continues to happen? if you are going to look at rhetoric from china and the u.s., what is the one thing that would make you say, i feel better? or more calm? gina: i think it is a number. what is happening in the market now is uncertainty as to where are the tariffs going, will we have the tariffs, will it be the existing mix between 10%-20 5%, or will it ultimately be 25% on goods from china? that uncertainty alone is more important than anything else. businesses cannot plan without a certain number. that is what we are seeing manifest itself with the economic data, with weakness in for guidance, weakness in ford estimate revision, businesses

cannot give us any sort of ideas to where things are going. so we see that play out through many sentiment surveys, and the guidance numbers, where there is uncertainty. it 25% tariff on all goods from china is not going to destroy the economic outlook, nor the earnings outlook. but the unknown is a certainly deteriorating the outlook. there is no planning going on. alix: if you learn something on friday, maybe it is jay powell watches the markets. this is what he said in atlanta. jay powell: we are always prepared to shift policy and we would not hesitate to make a change. if we came to the view that the balance sheet normalization plan or any other aspect was part of the problem, there is no preset for policy. we will be patient. alix: you were there, the market

interpreted that as a support or a less hawkish fed. was that the right interpretation? michael: absolutely come he was trying to send a message to the markets. he was reading a statement, it was a question from neil irwin from the new york times, but he went to a prepared statement. he knew that this was coming and he wanted to send a message. what did they say? the same thing they said a couple weeks ago on december 19, but the ephesus was different. this time he said, we are looking at inflation, inflation pressures are muted so we can afford to be patient. he did not say pause, but we can afford to be patient. and he said, we have always said we can adjust the balance sheet is it binds on the economy. i have spent a lot of time in atlanta talking to fed officials, none of them think it is binding on the economy. i spoke with another

representative. >> it is not the fed's balance sheet runoff that is affecting liquidity conditions in the market. if that was the case and our assessment changes, we would reconsider, but that does not appear to be the case. that does not mean, however, i think that some of the markets disregard the balance sheet changes, the changes in our balance sheet -- it is part of the economic environment. michael: privately they will tell you it is not a problem, but the market heard what it wanted to hear. david: part of the market that is not responding is the jobs market, because it was not just jay powell on friday, before that we had jobs numbers that came out that might make you think that the fed is ok raising rates. gina: the market on friday had its cake and a it to. -- and at e it too. we had the fed, the market interpretation was, maybe the

fed has are back and they will be more flexible with policy, which is a good contrast privileges summer policy statement, right? and a big difference in interposition of balance sheet, just think is really key, the key difference between january and december. because in december, jay powell was clear and said that this was on autopilot. that was the moment that things truly melted down. then he said come ok, maybe we have folks ability and it made the market feel better. you are spot on with friday, which was, we will celebrate growth and celebrate an easier fed. and we will have to figure out which will sort of outweigh the other. alix: which takes us to our third story, did the market bottom? come inside to look at the rsi, see how oversold we were. were sod prong is, we oversold and of bar was very low for a relief rally. gina: i think that is true to some degree, because the day

before was a rough day and we had a massive downdraft in stocks. they just made it back on friday and then a little bit more. i think we were so oversold on december 24 that was likely the consequential bottom and we are finding our way higher in the interim, but bottom is all about sentiment. areou are right to say that we oversold or extraordinarily oversold, you look for those big bar days like december 24 or on thursday, the great major bottoms. "ut whether or not this is "the bottom will depend on policymaking in the interim. david:. it has to go back to fundamentals. that has to be price-to-earnings ratio in earnings, and we are about to start her knees and season now and they will have to support this to keep the market up. michael: we will see the economy flow, the fed has made that clear, but we are not going towards a recession, we're going somewhere around 2%, that is still have to keep the earnings growing, just not at the same pace as this past year.

a lot depends on the trade war, because of the higher tariffs companies have to pay and it will compress their margins. and we are looking at wages rising. we will see of businesses absorb that. so a lot of issues about how much companies are going to make and how much stocks are going to go up, but no reason they cannot continue to rise based on the fundamentals. 600 point to 3000, a swing. just the point of we one i have clarity anytime soon. michael mckee of bloomberg news, gina martin adams, thank you very much. for more on our charts. coming up, we will have more jay powell appeasing the markets, whether we have reached a bottom. the longview economics chief strategist will join us.

this is bloomberg. ♪

alix: "bloomberg daybreak." this is "bloomberg daybreak." your business flash. eli lilly has agreed to buy lots of apology for a billion dollars in cash, representing a premium of their closing price on friday. it was based in connecticut and developed cancer drugs. sears preparing for a possible liquidation that could cost tens of thousands of jobs. the chairman's plan to buy several hundred stores at a

bankruptcy fell short of qualifications. sears will focus on getting ready for liquidation sales to begin as early as the middle this month. worriedbernanke is not by the recent selloff in recent stocks. in a panel, he said that it is not wait out of range of relatively normal behavior. he pointed to what he called uncertainty about trade, the global economy and the near-term pass of the u.s. economy. that is your business flash. david: stocks have gotten up to the worst new year's start of the year and came roaring back after powerful jobs numbers on friday and jay powell saying he was paying attention, showing what is happening with the bounce back, basically it shows every time it goes below 30 rsi, it comes back. welcome from london chris watling, chief market strategist at longview economics. i understand you think it is time for something of a leaf

rally. chris: i think that markets around christmas time got to a deeply beaten up level, and there are lots of ways of showing that. investors putting downside protection in their portfolio to cover further downside, stocks have deeply oversold at all sorts of levels, and risk appetite was heavily beaten up. we were ready to go and we started over christmas time, and really the second piece of the puzzle with comments from jay powell kicked in on friday, the signaling the central bank is listening to markets, as you said, and is prepared to adjust their stance. now we can rally for quite a few weeks, even a couple of months out from here. not that it means it is all over in terms of downside, but yes, we are positive from here. david: if we keep going for several weeks from here, what will drive it? is it growth, u.s. growth and global growth? is it anticipation of what the

fed will do? chris: it is a combination of the fact that many people will be short, they are will be positioning changes in portfolios because people have become too defensive, so they chase the rally and momentum guys chase it as well. at the same time we will get a number of central banks increasingly giving those jay powell type signals and we will see the fed shifting in its stance. and if you look at financial markets, you know, they have been leading the fed the hallway. and they are not pricing -- whole way. and they are not pricing in cuts for 2019. so the fed will keep moving toward that position and it provides extra liquidity, extra momentum to keep going from the oversold position. alix: that was part of the conversation earlier. one thing that stood out on friday when he spoke was what he made of the balance sheet tightening. jay powell: we would not

hesitate to make a change. if we came to the view that the balance sheet normalization plan or any other aspect was part of the problem, we would not hesitate to make a change. alix: but the fed has stood by its idea that it is not quantitative tightening that is hurting the markets, what the you think? think in a sense -- i that was almost the most important line of what he said, because in the mid december meeting the market was deeply disappointed that the balance sheet remained on automatic. and he has now signaled that they are prepared to stop that and consider other options, if needed. this is the beginning of the move from the fed to stop in the balance sheet tightening. and putting it on hold for an extended period. i think it is encouraging and i think that was the key line, the shift in language from mid-december that was on friday. so i was encouraged by that. david: one of the things you

have a focused on is m1 and other money supply and the way it has been treated globally as a percentage of gdp. i will illustrate that. is that simply the fed going into quantitative tightening, or is there something more going on? chris: that is global, as a part of that is the fed, absolutely. if you look at m1 in the states, it is one component. it has been slowing in the states as well. a big part is china and europe. it is across the globe, we have seen slow money growth. the fed is a big part, but it is a global phenomenon. and it is telling you that central banks have overdone it. we need to step off of the brake, and put a little on the accelerator, maybe. alix: if that turns out to be right, do you load up on defenses? i mentioned that morgan stanley has a 600 point swing in the s&p all over the place this year. how do you deal with it? chris: it depends on the timeframe. if you are a traitor who --

trader, i would run up on risk and run it through -- well, the fed might be march, maybe a tiny bit longer. you have to watch the models. if you are an investor, i would be slower to put your foot on the risk. i would use any rally to watch the global data, watch central banks, and maybe actually in a month or so become a little more defensive, depending on your time frame. it is about your time frame. david: that make sense for the point of view of the markets, or the central bank, how do you layer over that the geopolitical risk? we have a regime in washington not always protectable. we have a brexit that is -- predictable. we have a brexit that is pending, in addition to a chinese economy that is slowing. chris: that is true. my main rule of thumb is generally ignore geopolitics. it does not tend to influence the markets. but i know we have a couple of

big incidents at the moment and you mentioned both of them, but the markets are pessimistic on brexit, so i think on balance there is upside risk. wecould be a positive and could get something better than what the market expects at the moment. and equally on the trade, i am not sure how much of the market is focused on that. we got more encouraged overnight with some comments over the weekend, but really i think that most of that constitutes primarily a little bit of upside risk from here. isid: ok, chris watling staying with us. hedge funds may be struggling overall, but bridgewater is bucking the trend, big-time. that is coming up next. this is bloomberg. ♪

alix: bridgewater's big returns.

it rose over 14% last year, according to documents seen by bloomberg. overall hedge funds have lost an average of 6.8%, john down by a drop in the s&p. still with us is chris watling. it is always dicey to compare hedge funds to the s&p, but they is, the kindgist of bets for 2019. chris: you have to get the big bets right. obviously, pure alpha strategy has gotten the bets right in the last year. -- if you're asking me what i think the big bets are, i think that the market will selloff rallies, then into q2. i suspect somewhere in there it will be a very big upward real inflation. alix: how do you wind up playing volatility? you look at the 10 days, it has

been the highest since 2015. i mentioned morgan stanley earlier, the 600 point swing, how do you hedge? how do you hedge your vol? chris: i think chris has been good for the last six months. it varies. so treasuries has been a way to play it last six months. and from here on out i would head it by buying risk. david: let's get even more risky, do you bet on vol right now or against it? chris: against it. i think it will flatten. as unicode the vix moves the opposite way to the s&p, broadly speaking. it is not perfect, but a pretty good correlation. alix: how does earnings play into this? will earnings be the fundamental driver for a bottom, or will it be another catalyst for the downside? chris: i think that given what has happened in the last six months, earnings is a bit like

the economic data, it is slightly behind the market. the market is ahead at the moment, telling us that money has been too tight. you got eclipse of that a real economic data the other day. and lagging data like earnings and weight market data is lacking, that looks reasonably good because it is looking in the rear premier. what companies say about the outlook will be important and there is no doubt the u.s. economy is slowing. in my opinion, it is not falling out of bed, it is slowing at a reasonable rate and it will grow in 2019, but we are not going into a u.s. recession if the central banks get their act together and address monetary policy -- adjust monetary policy. david: most economies say that the u.s. economy is slowing, but it will still be growth as you be, but could earnings disproportional to the downside because he what i have the tax cuts figuring in? the economy is one thing, but growth in the bottom line is

another. chris: absolutely. you get the base effect that has an impact and earnings tend to move to the upside and downside, more than gdp growth, say get exaggerated growth and earnings when you see them in the economy. some segments will be hit harder, housing an obvious one. i think the only scrotal will be weaker. alix: you will be sticking with us. back to the table, u.s. and chinese officials resume trade inks since the truce september. we take a look at how the challenges play into the talks. that is next. this is bloomberg. ♪

alix: this is "bloomberg daybreak." i'm alix steel. the monster rally on friday after a more cautious fed is reversing today with the dow jones up by 1/10 of 1%. we were down lower, so this is a

good sign we are off of the lows of the session, but what will we see? we have question marks going into earnings season. u.s. equities are off by 1/10 of 1%. and factory orders missing in the dax, however the domestic demand actually held up. so this is an external story. in other asset classes, weaker dollar story. euro-dollar is up for tenths of 1%. and in the u k, they are back, the brexit talks are back. will the contingency plans happen? will there be a vote? down by about four basis points there. and crude up over 2%. could be the longest gain for oil in 17 months. no doubt helped by a weaker dollar today. will it last? david: making headlines outside of the business world we go to viviana with first word news. >> president trump says he may

declare a national emergency of the next few days. a controversy move that would allow him to circumvent congress on border funding. and get a will on the mexican border. it would probably trigger a court fight. meanwhile, democrats say there has been no progress in the government shutdown. is close toportedly deciding whether he will run for president in 2020. he has been telling allies, he does not think other potential democratic candidates can defeat president trump. the times says that he will likely decide in the next two weeks. and in the you could come a lawmakers calling on the prime minister to roll out a no deal brexit. more than 200 lawmakers from her conservative party and opposition factions is stepping up a campaign against an outcome that threatens the livelihoods of voters. a letter to pry minister may says thousands of jobs will be at risk if there is no brexit deal. global news 24 hours a day, online and at tictoc on twitter, powered by more than 2700 journalists and analysts in over 120 countries.

i'm the baby on our condo -- viviana our condo. this is bloomberg. david: face-to-face trade negotiations started today for the first time since xi and trump announced their 90 days for an agreement. they have a lot to sort through. we are now joined by diana choyleva, she is from enodo economics. welcome. we put up a list of these issues and we have at least seven of them. there is a lot to sort through, whether it is intellectual property or what is going on with the various companies, how can they get through all of this? have time tothey get through this, but actually they will not be going through this whole list, because some of the points you have listed, the chinese are not prepared to negotiate on. that is of course made in china 2025 and also 5g.

where i see likely progress is in any type of deal that lowers the trade deficit, but importantly, actually, also on intellectual property rights. china is willing to make concessions on those fronts, as well as continue to open its financial sector. but, what we have to realize is even though there is likely to be progress on the trade war front, the trade war is morphing into a tech war. and this one is much more serious. david: that takes us to something like 5g, which you mentioned, but neither side gets what they want in trade negotiations i have saying, so on the other issues will they get something that says at lease

there is some movement so the president can say, i have a victory? diana: even if donald trump comes with big went on and electoral property rights, or china opening up financial services, on the chinese bank, anything and everything from america, also as well on technology transfer, this will enough for him to claim some sort of victory. and the chinese are willing to offer those wins. however, the made in china 2025, even though now that term has disappeared from the chinese commentary on this issue, is something that is nonnegotiable for xi jinping. and america understands that clearly. so, what we saw with the arrest of wanzhou meng, the executive

in canada, those types of events and a very concerted effort on the u.s. side to ramp up its cybersecurity and ensure that the supply chains, especially with respect to critical technology, are secure, this is going to be the theme of 2019. alix: when you take a look at the u.s. and china, which country is going to be under the most domestic pressure economically, or market wise, to come to the table? chris: i think the answer is undoubtedly china. it seems clear to me that the chinese economy and the private sector is under pressure. and my favorite chart on that is looking at m1 money supply, which has slowed its growth rate since 1989. so 30 odd years of the slowest growth rate in money supply,

which i think has a really strong message to it. no doubt as they tried to tighten up money in the private sector, there is a lot of pain being felt across many parts of the chinese economy. so the u.s. is slowing, but still growing. china is slowing rapidly from a very good growth rate to something that is not good enough for that economy. so there is a lot of pressure in china and i think that the leadership is probably feeling that. and i think in terms of had a lotns, we have a ha of signals, where they are prepared to give ground. i am encouraged and i think that china are the ones that are pressured the most to get a result from these trade negotiations. david: talk about the strength where weaknesses of the chinese economy at this moment. we have put up a chart of m1. i will put up a different chart of pmi's. my question is, how much of the drop off is because of the trade

conflict, and how much is independent from the trade conflict and puts pressure on china in these negotiations, because they have a weakening economy anyway? diana: some of it is definitely the trade conflict, but also it is a combination of sweeping change in the way that china's economy is now being run under xi jinping. and i would actually argue that that has been the key driver in terms of dampening domestic confidence. it is very clear, in the middle class -- and the middle class has now understood, that the china they are living in under xi is 180 degrees opposite to that up to that point. xi has thrown out of the window almost all of the old ideas, in particular to get rich is glorious. he is determined to not have

house price increases. the deleveraging has made the situation hard for private companies. so the competition of all of those has been dampening growth in china. and the trade conflict has come on top of that. externalway, as an confirmation that this is a very different world china and the chinese will be living in. alix: so, if you are looking forward and taking into account what you have heard from the u.s. delegation and chinese delegation, what do you need to hear from both sides to give you confidence that this could be moving forward in a more constructive way? well, it is difficult to answer this question because one of the strongest convictions i have in terms of where the world economy is going is that it is de-globalizing into american and

chinese spheres of influence. we are in the end of the start of a new digital cold war. so, as i said, i am cautiously optimistic that on some of the trade issues there will be significant progress, not least because it is in china's interest to make concessions on intellectual property rights, as they now expect to be having reaping thosed intellectual property revenues themselves. but when it comes to raceegical, technological going forward, there is no way that the two sides can find a compromise. not impossible for me to imagine something coming out of china and the u.s. of that will alleviate those fears i have, that we are in a tech war. and that tech war is the much

more important one. david: if in fact we are heading toward deglobalization, can the world afford it? what does that do to synchronized global growth? chris: it creates more challenges, as you drive deglobalization you unwind the extra zip the world economy has had. it is another headwind that the world economy has to deal with. and the sort of walls that go up with deglobalization in all areas like digital technology and so on, means the less -- means the world is less productive, but it does not mean you do not have growth. it means it is taking a bit off the top. it is not a positive, but it is not a complete disaster. ideal, though.ns david: that was chris watling and diana choyleva.

handcuffed with a rope tied around his waist, that is how that x news on chairman -- ex nissan chairman will appear in court on tuesday. this is bloomberg. ♪

>> we are in the hewlett-packard enterprise greenroom. coming up, robert shiller, yale university professor. ♪ alix: -- >> bloomberg flash -- bloomberg business flash.

elon musk was in shanghai for a ceremony, the first factory outside of the u.s.. having a plant there will shill to them from tariffs. there foret shrank the first time in two decades. and a new deal. apple will begin offering itunes movies and tv shows on samsung tv sets. the arrangement demonstrates the shift toward developing into a media services company. and activists on star board value have built a position and dollar tree and urging to sell one of their units. they have learned to the hedge fund has nominated several potential directors for the board. star board also wants dollar tree to explore charging more than a dollar for its products. and that is your bloomberg business flash. alix: thank you. the reason i feel like star board wants to do this is because of tariffs and trade. david: at the same time, this is

one sector that has been doing well. alix: it is even more valued now. so now we turn to wall street beat. three things that wall street is buzzing about. ubs succession plans. they say there has been early discussions over who will succeed sergio ermotti. and then hedge fund winners and more winners. bridgewater seeing big returns. and ghosn gets his day in court. he will appear in court on tuesday it was be publicly for the first time since his arrest. david: joining us is jason kelly, the new york borough chief for bloomberg. we listened to what he had to say about succession planning. >> we are at the early stage of those discussions and do not want to front run any of that, this is part of our normal run the bank operations. it is not going to be a change to bank operations, it will not happen --.

we are not driven by the clock. david: just moving along. but on friday we reported that they were in talks with christian meisner, former head of bank of america merrill lynch. >> that would be an interesting move, given where christian came from, the bank and the fact he is an investment banker. that has been such a struggle with all of these big banks, especially the european banks, where do they focus? i feel like the head of credit suisse is still trying to answer that question many years into this turnaround. so we will see what happens at ubs. obviously, with the european banks there is so much focus on who will be left standing. - wetalking last weekwe - were talking last week about consolidation, so you never know. david: they have other strengths, but at the same time we already heard about christian last year with deutsche bank. >> deutsche bank has a whole set woes itself, at

a time where the u.s. banks are stable. alix: and there was a great isicle that point out, it not just one person. they said they will reduce costs, they will lean toward a their costs have actually risen and it will be hard to do with the kind of growth they have seen when you have quantitative tightening. so there are many issues in regardless. >> absolutely. and there are big macro issues around europe to begin with. we are in the year now of brexit, presumably. we will see what that entails in terms of where the banks decide to put people into the dealmaking that ensues. alix: our second story is hedge funds. we have done about how bad hedge funds are, but we have some positives here. you had de shaw, you had ray dalio, and these guys made big

money in 2018. >> what i think is funny about this, especially looking at brevan howard and bridgewater, these are two of the biggest names and i felt like we spend so much time saying the days of the star manager are over, and notably for bridgewater, this is the pure alpha strategy, 14.6% gain versus 6.7% loss in the hedge fund index. that is outperformance to say the least. david: one question is the boom and bust thing. bridgewater has returned over 12% since its inception of this fund. hadsn the other hand, chri gains, but some pretty bad years too. >> bridgewater standout. we cover, things that bridgewater put daylight between them and competitors. bridgewater certainly has. and notably about ray dalio, he

is not really running the firm anymore. he has stepped back with david mccormick and eileen murray running the show. alix: to your point, for brevan howard, most of the profits last year came in may. it was a good may, then a better year after that, but not because they were great in all of their positions all through the year. >> we will see if macro continues to be the strategy in 2019. this year will be a tough one in terms of where and how to make money. david: now talking about a tough year we will go to carlos ghosn. he will get 10 minutes to talk to the court. they say he will have a rope around his waist and be handcuffed, because that is the way they do it in japanese courts. >> i think we are all learning -- alix: a lot about japanese law. >> yeah, it is incredible. thedetention periods,

inability to speak with lawyers and family. i'm sure you have seen the interviews with his kids, his family, in terms of their inability to speak with him. and a lot of speculation that this is part of a larger, essentially coup that was happening at nissan trying to prevent him from cementing an alliance between renault and nissan. the imbalance of power between these two companies and carlos ghosn at the center. there are some cinematic elements and you do not know where it will end. david: we think of japan is like us, and the courts work the same way, but it is radically different and it comes from a different history. there,n you go to invest you have to take that into account. alix: they of 20 minutes, the lawyers have 20 minutes to talk to the court and ask for a bail. they want to know why he is

still being held, only 20 minutes. >> keep in mind, right before the turn of the year, it looked like he was going to be released on bail, many positive vibes. then they were, then he was charged, or they brought different charges against him and so we will see what happens. david: it seems like the answer is, this is the way we do it. it is tradition. alix: which might be the case. do not get yourself arrested. >> he is a larger than life personality. globally, in the car industry as you know, but also in japan because he did something that nobody thought could be done, was bring nissan back to prominence. david: jason kelly, thank you very much. tune in on bloomberg radio to hear jason kelly. shutdown fallout. from missed paychecks, to delete a tax refunds, more on what is

at stake as the shutdown enters days 17. that is what i am watching. ,lix: and check out tv interact with us directly. send us your questions. this is bloomberg. ♪

david: i am watching the shutdown, as i guess many people are, particularly 800,000 workers who will go without paychecks. this friday is when they will miss their first paycheck. that will be the new record for the longest shutdown ever. you talk about davos, it is hard

to meet with people there and say, my government is not working. alix: maybe not the best optics. david: exactly. and the state of the union address engineering 29, -- state of the union address on january 29. and there is a debt ceiling coming up on march 1. those do not include tax refunds coming in in february. and we have a census that has to go on, we have to do in this year and all of that stuff is stopped. alix: there was an article that talks about banks. jpmorgan waving checking fees for individuals hurt by the shutdown, loan modifications happening. and goldman sachs saying, if you are affected by the shutdown, we are here for you. so capitalistic. we will make opportunity and make business off of the shutdown. david: i start to wonder whether people will think apart from the

policies of the president, can he implement the policies? when it came to nafta, he got that done, the regulation done, but at some point do you say, can the government function? alix: especially going into the debt ceiling. david: that is something scary. alix: something extremely important that can affect credit ratings and economic data. coming up, the head of the u.s. equity strategy and robert shiller, a yale university professor, talking about optics. this is the guide to go to. -- guy to go to. this is bloomberg. ♪

alix: the trade crasher. the chinese vice premier attends

trade talks. and a steel barrier, president trump threatens to declare a national border emergency. the impact of a day 17 of a government shutdown with no end in sight. and jay powell listening to markets, highlighting flexibility. did he help equities find a bottom with earnings season of around the corner? david: welcome to "bloomberg daybreak." it's monday, january 7. i'm david westin with alix steel. things have been up and down. alix: it is like a song. and morgan stanley, we know that they have been bearish, talking about the 600 point swing for the s&p this year. quite a swing, 2400-3000. david: saying equities are overpriced and coming down, but

if there is that white of a spread, are they coming off of that? alix: it is the volatility that we will see permeate. and we had the monster rally on friday, fall through today with markets relatively flat, will we see the follow-through into the open and close? that is still permeating. euro-dollar is up for tens of 1%. germany's factory orders fell. the dxy under pressure. goldman sachs says sure the dxy right around the 100 day moving average. and buying in the long end of the treasury curve, the curve continues to flatten. and crude up by 2%. you could see the longest winning streak for oil since 2017. talk about some whippy. action. david: did it goldman take -- didn't goldman take their estimate down on oil? alix: yes, they took out or they lowered of the forecast for all commodities, especially copper and oil.

everybody is like, buy gold. david: we will take a look at the entire week ahead. a u.s. delegation has been meeting on trade issues with the vice premier liu he making an unexpected appearance. on thursday, jay powell will be speaking to the economic club of washington dc. on friday, u.s. cpi data. and friday will be the first day that federal workers, 800,000 of them, will not get their paychecks because of the shutdown. and now for in update on headlines outside of the business world. we have first word news. viviana: the u.s. and china began talks today aimed at reaching a trade deal. tariffs willy that begin in march if they do not strike a deal. many things on the table including sharing sensitive technology, and the stealing of intellectual property.

the trump administration rethinking withdrawing from syria. john bolton says they will remove troops in a way that ensures the islamic state is defeated for good. plus, forces will stay until turkey promises not to go after kurdish allies. president trump said that the islamic state was defeated, last week. and joe biden is close to deciding whether he will run for president in 2020. according to the new york times, he has been telling allies he does not think other potential candidates can defeat president trump. the time says he will likely decide. in the next two weeks -- decide in the next two weeks. global news 24 hours a day, online and at tictoc on twitter, powered by more than 2700 journalists and analysts in over 120 countries. this is bloomberg. alix: have we found a bottom or is this another pause? come inside the bloomberg, you can see the s&p and where we are in terms of rallies and selloffs.

the bottom is that address i -- the bottom half is the rsi. lori.e with us lori: we probably have seen the bottom. other things like a valuation, we may have a little more to go. but bottom line i think we are higher at the end of the year. alix: the question is, will earnings provide a floor and help us bottom, or will they make things worse? lori: we need the earnings washout, we do not quite know as an investor community what the right e is, so it is hard to make claims about valuation. we need to see how bad things were in 4q, how companies are thinking about capex, how rattled have they been and will affect ford behavior -- ford

behavior. david: i was up with a chart that alarms me. i used to operate a business. the white line is a sales, going up. the fuel line is earnings or earnings per share, trailing off. the blue line is margin, which is what you really need to worry about. if this is right, look at that say about what we are looking forward to this year? lori: i interpret it differently. i like the fact that the margin data has come down. i like the fact that earnings numbers have come down. i am worried about the revenue number. demand is going to be really at the forefront of investors' minds. if you think about how we have had 4% of companies' reports so far in 47% of them have disappointed on sales. if you look at growth expectations versus last summer, we are up, but earnings and margins are not. david: what has taken those margins down? is it jobs or wages?

lori: the number one issue is wages and labor, after that it has been raw material and commodity costs. we know that the commodity cost pressures are less than november, so you have gotten a little bit of relief on part of the margin pressures. alix: you mentioned earnings revisions, we had a chart up earlier and most every sector has seen this come down with the exception of utilities, so how much more revisions to the downside do we need to see? lori: we look at the percent to the upside for the s&p 500, a great way to think about sentiment around earnings. i think it was at 37% on revenues and earnings in december. if you are not in a recession, that bottoms out in the high 20's or low 30's, s it looks like this could be that earnings washouto, assuming we are not going for a better session. alix: how do you position into earnings? we have seen a lot of money coming. it looks like a lot of people

are sitting on cash. lori: it is really tough right now and i spend a lot of time on these sector issues, but i am trying to find a barbell at this point. we have picked our favorite cyclicals. on the cyclicals side, energy and financials are giving you the best valuations. financials are interesting, because you have not seen the downside revisions. those estimates are holding steady. energy, we have had a massive decline in commodity prices, but i am finding when i talked to investors that they are interested in the energy sector. financials is tougher to get a conversation going right now. energy, a sense of that that value has been a marked, i think that people feel there is a dislocation to take advantage of. david: back to margins, we have a viewer question saying, are there certain sectors affected more on the margins compared to others? lori: a lot of different sectors are being affected on the margin

side. industrials is one i think may have more downside risk. the margin expectations have come down, but they are still high, 80%, maybe it of 5% of companies still anticipating expansion for this year. so the damage has not been terrible, maybe there needs to be more. technology is interesting because the 2018 margin expectations had been holding up well until recently. you look at technology revenue expectations, the margin expectations, the earnings expectations, they have been big relative to other sectors. alix: because we have seen revisions, with earnings coming down, is that going to be a rally to the upside in that the -- if we meet, is that good enough? lori: you cannot just look at earnings. it felt like we had a rough start out the door and 82% of companies are beating, that is not good enough. you have got to give people comfort on the top line. so you have to beat on the revenue side. and i think also that investors

will be thinking about what is going to happen going forward. so they will be focused on guidance, especially on the demand side. isid: ok, lori calvasina staying with us. no end in sight, the partial government shutdown injury its 17th day now. we will talk about that, next. this is bloomberg. ♪

viviana: this is "bloomberg daybreak." eli lilly has agreed to buy

loxxo for $8 billion in cash. connecticuted in and it develops cancer drugs. sears preparing for a possible liquidation that could cost tens of thousands of jobs. bloomberg has learned the chairman's plan to buy several hundred stores out of bankruptcy, it fell short of qualifications. sears one-off focus on liquidation sales to begin as early as the middle this month. and president trump considering several moves as the government shutdown has moved into its third week. issays they ministers and planning a steel barrier on the mexico border, rather than a concrete wall. the white house hopes it could attract democratic support. he also says he will not rule out announcing a national emergency to circumvent congress and get border funding. david: we are not in the 17th day of the partial government shutdown, and although leaders

met through the weekend, there is no ned insight -- end in sight. how made this change as time drags on? we still have with us lori calvasina, rbc's head of u.s. equity strategy. is it affecting the markets? lori: i think it is a bit of a sideshow. the pattern seems to be conforming from a market perspective, you fell off a little in the beginning, then bottom before it concludes. it is a bigger drama. there is elevated policy uncertainty. that historically turns into higher volatility in equity markets, so it will keep things challenging. david: it is not just the policy, but whether it can get implemented, because there is a clear policy from the president at the border. lori: i am not think it about the border wall itself, but the dysfunction in washington is something that is unsettling the markets. we do a survey every quarter, and we ask investors what is the

number one thing keeping you up at night, and several surveys in a row it has been donald trump. alix: we have a nobel laureate joining us, robert shiller. we are talking about psychology. a government shutdown may not have material impact on gdp, but psychologically how long does it go on and what is the impact? robert: the psychology is affected by the government shutdown, which is a longer saga of polarization in our country, but it is also affected by -- we cannot forget that the stock market is a longer-term vehicle. people are looking ahead to the possibility of a recession that my last for awhile. they are thinking that this been might be over - -boon might be over. they have been coming into the market and trading kind of wildly. david: you are a student of expectations in the marketplace and that affects the economy as well as what goes on with the

markets, so how quickly are these changed a how stickynd -- and how sticky are they? robert: the spirit which expectations change is highly variable. it is a question of when you get people's attention and focused -- and how focused they are in the market. the focus this year became more intense. time is sped up. it can happen within one day, major change them as we know from history. it depends on the kind of talk we have. it seems to me that this market is determined by a different atmosphere, a different kind of talk. alix: if that is the case and we are talking about hitting bottom, do you want to buy equities, what would your answer to that be? robert: well, i think there is a bit of insurance at this point. i am not bailing out, but i am

thinking that there is a risk of a big decline, because we saw that a couple of times this century. and it can happen again. often what happens is, the , people haves imagination for what will happen next time. it is a risk that we will see it further declines. ,avid: one of the risks ultimately we could conclude the market was overvalued and we have had a lot of cash in the global marketplace. what is the valuation as you see it? wayow that you like the cap of measuring it. robert: it is just the ratio of current real price to the 10 year average of real earnings. that has been quite high recently, it was up over 33 sometime in 2018. now it has come down quite substantially.

recently at 27. ad it will fall even more in couple of quarters, because of the -- we are losing the fourth quarter of 2008 in the 10 year average, which will bring the denominator up. the ratio is no longer screaming overpriced so much. alix: except when it comes to defenses. when you are walking this forward and it is hard to have sector clarity, consumer staples versus the s&p, utilities versus the s&p, the valuations are high. what do you do? lori: we like to look at sectors relative to the broad market and i would argue that staples is one of the better valuation stories. it looks pretty cheap on price to cash flow. and when we look at things like utilities, health care, we do not find metrics that show that

they are attractive anymore. health care and utilities have been creeping up toward past ties. and -- highs. and if you look at price to fso, that was not looking great it couple of months ago, but now it is looking better. you can pick your spots in defenses, but you have to be careful and very valuation sensitive. david: we want to turn from the stock market day-to-day to the larger issues of the federal reserve. markets were waiting for jay powell's remarks at the economic association in atlanta on friday and he did not disappoint. >> we are always prepared to shift policy and we would not hesitate to make a change. if we came to the view that the balance sheet normalization plan or any other aspect was part of the problem, there is no preset path for policy. we will be patient as we watch to see how the economy evolves. the markets are pricing in downside risk. i will say that we are listening carefully to that. david: professor shiller, you

are in atlanta, as i understand it, what did you make of what he said? was it an about-face? robert: what i encountered was the markets really reacted to something that we just said. and it is always a surprise when that happens. i think that jay powell is among the most carefully chosen word person that i know. a very reasonable man. and the idea that that would swing markets is a sign of over excitement of some sort. he just said the most reasonable thing that we are going to wait and see and we will adjust. the recent adjustments they made were in-line with expectations. i think that what is driving the market is a more broad, long-term narrative that is not encapsulated by anything that jay powell has said. david: but was there one part of

what he said, that was different? the so-called autopilot, the role of the balance sheet. the liquidity in the marketplace hewasn't that a change, when said we will take a look at that? it does not sound like we are on autopilot anymore. robert: i think that going back to janet yellen, there was always this reasonable statement that we will adjust as things change. so they backed wording is not my department -- the exact wording is not my department. but there is a sense of crisis developing and it is on people's minds, it is making them remember the financial crisis of 10 years ago. alix: that is a severe backlash. you definitely have ptsd if you are trading in 2008. aer we going to expect -- are we

going to expect more volatility? will that set us up for this year if the markets are responding so emotionally to a benign statement from jay powell? robert: we are talking psychology now. this is something that the economists have difficulty forecasting. w are not very goode at forecasting the market. we can forecast volatility, volatility has been much higher. we were surprised a couple years ago that it was so low it couple again.nd now it is high what can we forecast but volatility? in the past crisis, we had two big market drops in the century, one at the beginning of 2000 and one at the financial crisis, those are memories resounding in people's minds. we tend to think of the last crisis and wonder if it will repeat itself. it depends on feedback, this

does not mean i can predict it. millions of people are judging others' reactions. david: but there were underlying reasons, bubbles, something that was pretty close to a bubble in both instances, one in the tech area and the other with housing, do you see those sorts of situations in the economy right now? robert: we have seen big increases in housing prices and in stock prices. index has shown one of the biggest boons in history. the third-largest housing boom since 2012. aboutis some ambiguity exactly that, but that is more or less a direct statement. and the stock market boom since 2009 has been also quite

dramatic. this set this up for an atmosphere that wonders if this is substantially speculative. generatingndering is all this market turmoil right now. david: professor robert schiller ler and lori calvasina are staying with us. announcing it will do a deal with the samsung to allow for its services to be seen on samsung televisions. this is a big go because apple has always a said, we want people to watch our devices. earlier deal with alexa to listen to apple music, now they are making a pivot to services. alix: the enemy of my enemy is my friend, or something along that line. david: so let's go to services. alix: sears here.

toheard about the bid operate stores falling short. this could be the biggest retail bankruptcy yet in the apocalyptic world of retail beard david: -- retail. david: 16,000 people will be out of a job. -- 68,000 people will be out of a job. alix: and offices for kmart and sears. this is not good for the job world. david: southern company we are watching today is g.e. rick sutherland is here, our -- brooke sutherland is here. >> they are reportedly, according to a bloomberg's group, in talks of looking at selling their jets unit to apollo. it has been talked about as a departure for ge. john flannery said there was optionality around this business

and they get inbound calls all the time, but this is not something he put on the table formally for sale. this is evidence of larry called accelerating the break up into looking to raise cash anyway he can. david: i had thought that this was a business that was doing fairly well. dilemma, the the stuff that people want to buy is the stuff that is actually valuable to culp. >> i will say, there has been an increasing number of questions around the valuation of that business. this has always been thought of as the crown jewel of assets, but there is a competitor to milestone that went bankrupt not long ago. and i believe we have a chart, pulling of the stocks of air cap and air lease, those others in the space not doing well. that raises questions about the ultimate evaluation of this and

whether you might see a situation like what we saw with baker hughes, where you are selling at the low point because you need the cash. this,but an analyst said all is in, from here you can only have upside. this will still be money. >> i think we may have a little bit more of bad news to get through. he is expected to have this event where he will layout strategy and set the baseline for earnings. i think that will be the time when you get all the liabilities in the open and reset the bar. alix: brooke sutherland, thank you. back to the table, coming up. resuming trade talks between china and the u.s. more on that, next. this is bloomberg. ♪

♪ alix: this is "bloomberg daybreak." the huge rally we saw on friday, what kind of buying will we see? dow jones up, s&p unchanged. a little bit of soggy mess in

europe. factory orders for germany coming in light. domestically, the eurozone holding up pretty strong. potentially more of a trade story than a european economy story. the dollar continues to get weaker, sitting on that 100 day moving average, euro-dollar up by 5/10 of 1%. brexit drama continues to unfold. end.tors buying the long yields down by four basis points. crude getting a nice boost over 2%. opec production potentially coming and come but also the weaker dollar doesn't hurt, decided -- despite downgrades from goldman sachs. david: the the on a is here with first word news desk viviana -- viviana is here with first word news.

reporter: president trump says he may declare a national emergency or the next few days to circumvent congress on border funding. it would probably trigger a court fight. democrats say no progress has been made to end the shutdown. u.k. lawmakers calling on prime minister theresa may to rule out a no deal brexit. stepping 200 lawmakers up a campaign against an outcome they say threatens the likelihood of voters. a letter to may says thousands of factory jobs will be at risk if there is a no brexit deal. tomorrow in tokyo, former nissan chairman will speak for the first time publicly since his arrest. a lawyer says he will declare his innocence. his legal team was an expedition for why he remains in jail. global news 24 hours a day, on air and on tictoc, powered by more than 2700 journalists and analysts in more than 120 countries. i'm viviana ortado. this is bloomberg.

tradetraders -- david: negotiations are underway in beijing, and u.s. markets have been in turmoil. markets have been flashing yellow, most recently indicated in the falling off of purchasing indices. we are joined by mike mcdonough. they have really fallen over the cliff, the pmi's in china. what can we say about the chinese side of this negotiation? >> the pressure has always been there. we are now just starting to see it. the sectors that really drive growth were delivering more than the sectors they really wanted to the lever. what you have this year is the culmination of that deleveraging cycle with the headwinds from tariffs coming on board. they are not in the shape they would like to be during these negotiations. david: they have to rel

ever? reporter: yes. things were going well, but the problem was the deleveraging was occurring and they basically tried clamping down the shadow lending sector, where it turns out most of the corporate were still getting their lending from. that was a bit of an issue. david: the rrr rate has gone right back down again. reporter: and is going to go down more, probably, as the year progresses. but the backdrop is not only different for china. the backdrop is different for the u.s. as well. when the trade rhetoric first started, the economy was doing very well. markets were rallying. investors wrote off what was happening. the bar may be lower on both sides of this negotiation. we spoke about just that. strategicalomes to

technological race going forward , there is no way the two sides , so itd the compromise is not down impossible for me to imagine -- so it is die on impossible -- it is nigh on impossible for me to imagine that we are in anything but a tech war, and that tech war is an important one. reporter: there is something to that. the tech is very complicated. the intellectual property stuff is very complicated. i don't think you are going to find a short-term resolution to that. eu, theack to the complaints trump had against the eu. without a couple of hours, they had a surprise deal sorted. look at nafta.

is said one of the main nonnegotiable points for the u.s. was the name change, and in the deal week got what look a lot like nafta. you see markets going down. you see some legitimate concerns that growth could be slowing, and you are able to pin this on china, you're going to be more willing to come to a deal. this is the sixth round of negotiations i think. i think at the end of this, by baseline scenario as they continue to agree to talk. maybe we hear some positive on the fringes. we have a more holistic conversation later that maybe a more concrete deal comes out of where we have some short-term advancements that look like some of the other trade deals we had around the trade deficit, agriculture, autos, with some promises to do more on some of these more complicated matters as time goes on. and of course, look at president trump, still attacking europe at some points, still going after some of these other countries.

so the rhetoric will always be there, but the key of the matter is to get back on track where investors feel there is less uncertainty in the future. alix: let's get to that. robert shiller of yale university, markets like promises. good enough for them? isi think that skepticism something that rises and falls through time. we are entering a more highly keptical -- last year we thought the boom in the market was a triumph for our president. .ow we are starting to wonder even trump supporters are wondering how secure this boom can be. that point over the longer term, at least medium term, what would be the consequences for the global economy and u.s. economy if they were something of an iron curtain in respect to check between -- to tech between china and the united states? guest: that is a major

narrative. angry claims's that have been stirring things up and harboring international relations, these are big parts of the narrative that is upsetting the market. it is hard to predict where it will go. psychologicaly and patriotic elements that are brought in by this conflict. alix: on an actual basis, as you look at companies that have exposure to china, they've been underperforming. what do you do with that? >> i think they are underperforming for a good reason at this point. i think that companies also -- it is a little bit opaque as to the geographical revenue exposures for a lot of companies. tech is caught in the crosshairs of this issue as one of the sectors that does disclose that china exposure. you can watch tech is a bit of a proxy. we are seeing that the broader sector still doesn't look that

cheap, hovering around neutral on our models, but we are starting to sense interest in the semiconductors from investors that are willing to be patient. it is not so much that they are pounding the table, saying that done soon, but you can feel better about china. tworter: let me make points. on companies, the one thing we saw if you go back to the zte example, not allowing them to buy u.s. inputs, that would potentially bankrupt the company. there is still a lot of dependency on u.s. components, so that is something to keep in mind. on what professor shiller was saying, i agree. one of the things the trumpet ministration did particularly well was to bring back a sense of animal spirit in the markets. that is gone now. for the first time during present trump administration, if

you look at economic surprise index, survey data is negative. it is showing an erosion of the confidence people have in trump's economic agenda, which will translate into bad news for markets and the economy. wayd: professor shiller, back in ancient history last thursday, when we had the ism's come in that were so disappointing, half mentioned tariffs and trade as the reason why they were coming back -- they were cutting back on orders. no one mentioned interest rates. >> tariffs and trade is a very stimulating meredith because it is conflictual and raises our fears of china as an emerging power. offeeds into a general sense what other investors are likely thinking in their emotional thinking.

keanes invented the idea of animal spirits, but much of market movements are generated by our perception of other investors' perceptions, or other investors' perceptions of other investors. so we have that complicated feedback that is narrative driven. it is not logical. alix: professor, what is the narrative? if you were to describe the narrative for the market in one sentence, what would it be right now? >> there's always multiple narratives, but the federal reserve stance is one. the trade situation is another. the government shutdown is another. the general polarization of our politics is another. these are all leading into a stew which makes people look at each other to try to decide where are we going. david: professor, to what extent

do all of those narratives come together under one heading, which is can the government run itself and the country, whether it is the shutdown or the president criticizing the federal reserve? it seems like we are sort of hydra-headed right now. how do markets react to that when the government can't get its act together? impeachment of the president is being talked about. that leads to a deep uncertainty. it can surprise us. just like president trump's election surprise dust. it can surprise us on the positive side. these things are not logical. what we can forecast is volatility, more than we can forecast the direction. alix: just to wrap it up in looking ahead to china in the next 48 hours, if you were to

come away from these low-level talks feeling better, what would you need to see? what tweet or statement would we need? i think we've been getting the tweets. we need something tangible scheduled, a next round of talks. any details that are positive, plus a commitment to continue talking. alix: all right. robert shiller and mike mcdonough, thank you. lori will be sticking with us. we will dig more into underperformance in 2018 after president trump was elected. and some breaking news as we had to break, elliott is buying qep in qep, a a 30% pop national resource play -- a natural resource play.

it is a pure evaluation any energy space play after what we have seen. david: it is a bargain now. obviously you are not going to sell when you are up 50%, and yet we have seen it. this is bloomberg.

♪ today,r: coming up later american action's foreign president -- american action forum's president. is "bloomberg daybreak." two years of wildfires could

lead pg&e to file for bankruptcy protection. shares are plunging in premarket trading. the company is considering bankruptcy because of the billions in liability it may face from wildfires its equipment may have started. that may lead the state legislature to come up with a rescue package. shares of general electric higher in early trading. apollo global management is trying to line up financing to unit, which leasing could be valued at up to $40 billion. it would raise considerable capital for ge am a but a deal is not imminent. apple and samsung have announced a deal that until recently what have seemed unsuitable. the iphone maker will begin -- unthinkable. the iphone maker will begin offering content on simpson -- on samsung devices. that is your bloomberg business flash. alix: thank you. turning to the market, what do you do with small caps in 2019?

small caps of underperformed the s&p. with us is lori kelsey me -- laura keller the sen -- lori calvasina. how do we think of this sector? guest: we like the valuation story and small-cap a lot. when we do a little bit of housekeeping on the negative earners, we find evaluations look as cheap and small relative to large as they did back in the middle of 2016, right before they had that big ferocious rally on trump's victory. we like the valuation set up here. we do think there's some fundamental challenges. there's a debt problem. margin expectations are coming down. we think this is well-known, and at this point much priced in. alix: what would make you nervous? we have a long-term debt of small caps. why wouldn't you go positive yet? guest: we think the debt issues

are are investors' minds for the time being. we are starting to see overall debt levels get paid down. anecdotally, i've heard that lenders have got me message that investors don't like debt, but it might take a little time to communicate that. you might want to get -- you might not want to get bullish before the next reporting season. but i think you can start thinking more long-term about this space. david: you studied this overtime. our small caps getting squeezed out as you get more and more concentration in the u.s. industry? does that leave enough room for small caps to play? guest: what we've definitely seen as a rotation from actively managed into passively managed small-cap funds. you've seen that across the market sectors, but it's been a little bigger of a problem in the small-cap space than other areas of the market. i think it makes it a little bit challenging at this point.

you tend to see when there are big moves, everything goes up and down together. if you can take a longer-term approach, active management is a great place to do small-cap at this point in time because you can avoid those companies with the big debt problems. you can avoid the companies with the massive negative earnings. you really do need an active manager at this point in time to sort of go through and find the best bids. alix: we talked about sales margins and earnings estimates. you are worried about sales. what about small caps? guest: when we look at overall performance of the small-cap space, and i think revenues are a better way to think about the health of small-cap generally, we find small-cap stocks are generally more tied to gdp trends. if you look at the s&p 500, the correlation between gdp and s&p performance is just as tight with asia-pacific gdp as with u.s. gdp. small caps actually make a lot

of sense from that perspective. david: what about tax policy? before the tax cuts were enacted, it was speculated small caps would benefit more because they have fewer tax deductions. guest: they have if you actually look at the effective tax rates. it just falls off a cliff, and that is a good thing. it freed up all this capital to do things like pay off the short-term bearable debt that has been raised. i don't think investors are paying attention to that part of the story, but i do think that was a very good developments that can help the balance sheets of these companies over time. alix: what sectors? is at the same kind of allocation you would look at for large-cap? guest: mostly. andgs like financials energy have more of a valuation story. there are some areas like communication services which we really don't like in big cap, but find them very reasonable and under owned in small cap, starting to work after a decade of not working.

the other one at really jumps out is consumer discretionary, which oddly enough, in large cap, even when we kick out the internet retailer companies, still doesn't look good from a valuation perspective. but in small cap we find a much better valuation story. we have more of the brick-and-mortar retail, more of a value play. but there are more interesting sector pockets right now. alix: moving forward, we will -- will we see any m&a catalysts? guest: what we've seen in this cycle relative to past cycles is that private companies are taking share as m&a targets. i lunched on small-cap back in 2007. in that timeframe, small-cap managers use to tell me about all the takeouts they had at the end of the year and how much it helped their portfolios and was good for their performance. i don't hear those conversations anymore. public companies generally are getting disadvantaged as m&a targets, and small caps have unfortunately been at the center

of that storm. alix: so good to catch up with you, lori. coming up, a potential california showdown. pg&e tells lawmakers help us or risk the largest utility in the state going insolvent. go --erg users go to gtb go to g tv to look at the charts from the last couple of hours. this is bloomberg.

♪ pg&e stock totally getting destroyed in premarket. the company potentially hinted it could declare bankruptcy. this is the company in the epicenter of the california wildfires. could be on the hook for whether

their agreement was liable for the wildfires. david: this is the second year in a row they've had this problem. last year they went to the legislature and asked for help. in november we had a california as an woodman saying we would vote on that in the new year to issue those kind of bonds. you i find interesting is can't let the biggest utility power provider go bankrupt in california. that's exactly what pg&e saying. alix: what will they do? is issuing bonds, helping the liabilities?will eventually come down to taxpayers ? david: you can't let them go bankrupt, but you can change the board, your manager, your structure. things like that. you lose a lot of control of your company in a situation like that. alix: the broader question is who is going to pay for climate change. bloomberg has done a lot of good work on this. you could have a grid that is

more localized, power lines underground. that all costs money. yes, the upfront cost is ridiculous, but you avoid having huge power lines that connect large swaths of area. david: you have the overlying structural issues such as what you are saying, and there's some misconduct issues. remember they had that pipeline that blow up? they have criminal liability potentially if they violated the consent decree. alix: true. and they could still be on the hook is nothing went wrong. that is it for "bloomberg daybreak: americas." up next, the open with jonathan ferro. this is bloomberg.

for new york city, for our viewers worldwide, i'm jonathan ferro. the countdown to the open starts right now.

coming up, trade talks begin. the dollar index falling to a two-month low. and the shutdown deadlock getting to affect the economic report. the most burning data points this week. gain, a touch softer, down to on the s&p 500. the yield by three basis points with a dollar weakness across the euro-dollar. the markets reacting to the federal reserve, leaving it better than the chairman himself. >> the market has done a good job pricing the fed on hold. >> the market has read patients. >> it