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tv   Whatd You Miss  Bloomberg  September 23, 2016 4:00pm-5:01pm EDT

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closing bell. global stocks and bonds retreat on this friday, after yesterday's post-fed rally. this is bloomberg. i am scarlet fu. >> i am joe weisenthal. >> i am matt miller. >> u.s. stocks closing lower, but the best week for equity since july. the question now, what did you miss? a this week, the fed induced global rally in stocks and bonds, with equities retreating and the dollar rising. twitter might be up for sale. the company working with goldman sachs and having informal talks with several buyers. columbia university professor joins us onman options pricing. we look at in-flight volatility before and after 1987. scarlet: down across the board for u.s. equities, with the dow
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losing 100 points. the stock market rally we saw the previous couple days fizzles with energy and tech companies the big laggards with oil selling off. we had a pretty intense three-day stretch leading up to the central bank decisions, and today we saw that fizzle out. downoo dramatic, but 129 on the dow is something. matt: one thing that is fairly dramatic. in my terminal, as far as stocks that move. take a look at apple. scarlet and i were on tv around 1:45, when apple just took a dive down. intelligence firm came out and said the iphone 7 sales may be disappointing, a big drag on the market. look at industry groups that were laggards. as scarlet said, energy the biggest losing industry group, but tech was a laggard as well
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and financials falling. energy still the biggest drop, on concerns saudi arabia will not join any production cuts to help boost the price of oil. scarlet: let's take -- joe: let's take a look at the government bond markets. pretty quiet, unchanged on the 10-year yields. so much attention over the last few weeks on the long end of the curve, but not much happening there. a little decline in the two-year yield, keeping with the general risk-off sentiment of the day. scarlet: in currencies, focused on the pound, under pressure here at a five-week low versus the dollar and euro. foreign secretary boris johnson gave the clearest timeframe yet on when the uk will start to leave the eu. he says they plan to trigger article 50 in early 2017. previously, the only suggestion we got was it would not happen this year. he suggested the entire brexit process would take under two years. investors are concerned because an accelerated timetable could
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spark more volatility in the pound. the loonie is a big mover, weakening against major currencies on disappointing data, retail sales for the month of july and august inflation. according to our currency strategist, any combination of a miss for canada or u.s. gdp could lift odds for the bank of canada to cut interest rates. thelet: the risk -- joe: risk off sentiment was seen in the commodities market. crude was the big story of the day, that tumble, after declining optimism there will be any sort of strong opec deal in algiers next week. the nymex crude below $45, gold down a little bit, and cotton, there are reports for a weakening demand in soft commodities, so one of the big losers on the board. yesterday everything was up, and today everything went down. scarlet: those are today's market minutes. we'll take a deep dive into the bloomberg. you can find all the charts
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using the function at the bottom of the screen. that came data out of europe. today is joe's third favorite day of the month, flash pmi day. germany's economy stumbled in september. the blue line you are looking at, that sharp drop relatively speaking, is germany's composite pmi in september. as goes germany, so goes the rest of europe. there is the get in european union pmi as well, at a 20 month low. there was a pick up in france, this white line here gaining for a second month. although as recently as june, it was below the 50 mark, which indicates contraction. according to bloomberg intelligence analysts, the message all this sense is that britain's decision to leave the eu has yet to have a significant impact on growth or the economy. it will take time to see the effect of the vote. joe: there is a really cool chart, we mentioned waiting to see the effect of the vote, and that continues to be the big storyline. matt: i will go ahead and tease the chart i will show at 4:30,
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which i ripped off from neil d hutta. the question is, why do we care what these 300 purchasing managers say anyway? we should have a digital tease on your three favorite data points. joe: send an e-mail to the producers. the s&p 500 sent to me by alpine woods capital, a way of looking at trends and trendlines and moving averages. on this chart, the s&p is the white line you see, and then these faint blue lines. a blue halo around the white lines. and these redlines. the blue lines are short-term moving averages, like one week and two week and five week, and the red lines are long, slow moving averages like five-year moving averages, two-year moving averages. youe says, if you watch, if , when the blue moving averages, the short-term ones are fallen below the red ones, which we are not actually that close to
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happening, that is a sign, it happened in 2008, can be a sign of a major turnaround. if you have a bloomberg, check it out. 3771. this is basically aggregating a bunch of averages, the slow and the fast, to see the general trend. scarlet: otherwise, you are cherry picking. joe: exactly. matt: that is a chart that looks really good on the terminal. i recommend checking it out. 3771. i want to show you another chart about correlation, and how strongly correlated we are in asset classes. looking at european and u.s. stocks. you can see the correlations between the stoxx 600, basically their s&p 500, and our s&p 500, are at the highest level since 2012. we have come off a little bit, and deutsche bank is warning slower global growth will be slower growth in the asset classes, especially equities, on
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both sides of the atlantic. but it's interesting to see, we're moving in such close correlation. scarlet: all right. here with us to help wrap up the week is stocks reporter oliver running. we were thinking, a global central bank induced rally, but now we have hit the skids a bit? oliver: we had a solid rally after the news from the the. since you bring up correlation, i did not bring up a correlation chart, but glad you brought that. stocks and bonds, that has become more positively correlated, the price of bonds and stocks. today it might have jumped a little bit, but i'm glad you brought that up, because that has been a big part of the rally. what's interesting, you bring up u.s. versus europe. maybe jump ahead to look at them s msci versus s&p 500. what you're looking at in terms of valuations, an interesting thing has developed, were even
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earnings are getting pretty weak everywhere but holding up decently in the u.s. perhaps one reason why we might start to see the correlation breakdown. it is still high, but maybe it will break down if investors take money out of the richer parts of the equity landscape around the world and move them into the u.s. right now, you have valuations elevated pretty much everywhere, europe, across the americas, looking at very high p/e's. interesting to watch. scarlet: this chart compares the s&p 500, and where strategists forecast it would end. oliver: this is interesting. normally, strategists are very bullish. looking at the last 10 years, 83% of the time the s&p 500 is below strategist estimates. so generally, you look across wall street, and you say the s&p will go up. since july, that was not the case. they were calling for a small dip in terms of average, around 2150. we have been above that the last few months, and in the last week we had a handful of people,
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today in fact we had ryan bel ski and jpmorgan both moving up their targets. not exactly bullish, but less bearish, and a lot of that is because of what we have seen, the dovishness from central banks. joe: these were strategists, where were they before? oliver: he had been calling for a bit of a correction. not a big correction, but a small correction, up to 2100. he says, we will not see a huge drop-off because earnings are starting to pick towards positive. overall, you have the no alternative situation that will bring people to stocks, but they are still fairly highly valued, so that will put somewhat of a lid on top of it. bran belski from bmo is more bullish, saying we will get to 2250 by the end of the year. joe: where was he before? oliver: 2150, so up 100 points. joe: this fed decision, the dovish hold, hawkish hold, i
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don't really know what it was, people are using it as an opportunity? is that cynical? oliver: it is not cynical, but there's a certain truth to that. generally, what we have seen in the last, two months, where the average strategist estimated below the s&p, i don't know what you want to call it, dislocation, that usually doesn't happen. 83% of the time they call for an increase. there are still questions about what was going to happen in september, even though the fed futures were so low. a lot of people who we talked to who said there was a 20% chance. if you look back to june or so, there were more expectations, and people put them down even though they knew in their heart of hearts that probably wasn't going to go. joe: before we get back to correlations, i want to talk about u.s. stocks compared to global stocks. they are cheaper. oliver: that's a big point. what you are looking at here is them sci trailing p/e.
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this chart basically flips if you look at forward p/e. the u.s. has held up better than the rest of the world. on a trailing 12 month basis, it looks pretty cheap. if you look at pretty much throughout the americas, the mexican bolsa is trading at 25 times. the bovespa in brazil doesn't even have a p/e right now, it is so high because so many earnings have gotten alliterative. the same is the case with a lot of europe, where earnings have gone bad so p/e's are really high. over the next 12 months, there is so much growth assumed around the world, even more than the u.s., that those p/e's come down, so it is very subjective at this point. matt: you mentioned the correlation between bonds and stocks, so i ran an hs screen on the u.s. ag index and the s&p. check out the third panel here, the correlation. scarlet: wow. matt: talk about a positive
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correlation, and a move. oliver: you are, this is pretty similar, exactly what i was looking at, but i know for a fact that the s&p and the u.s. 10-year are at the most highly correlated in the past decade. you are showing the same thing. pretty impressive. matt: if you unzoom that, the taper tantrum, was that the last time they were so correlated? oliver: that was one of them. matt: december of 2015, that they were this correlated? back in 2013 was the last time. getting pretty close. we talked about this a lot. you had stocks and bonds together. where will they diverge? what happened this week, a lot of bond proxies in the market still led the rally on the back of the dovish fed. utilities leading. real estate doing well. these are companies that benefit off that, and there is no sign of that breaking down until december. ck a: oliver reni
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bloomberg news, thanks very much. scarlet: shares of twitter doing well on news of a possible takeover. we look at their potential partnership with goldman sachs. this is bloomberg. ♪
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emma: let's get to first word news. u.s. intelligence officials are trying to determine whether one of donald trump's foreign-policy advisers has opened up private communications with senior russian officials. that's according to a report on yahoo! news, citing multiple sources. officials are reportedly trying to determine if the discussions included the possibility of lifting sanctions if trump wins in november. a spokesman for trump said the
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advisor had no role in the campaign. professor alan nickman, who correctly predict it every presidential election since 1984, has said donald trump will win the white house. the american white house -- american university professor makes his productions based on 13 variables, including factors such as party mandate, strength of third-party candidates, the health of the economy, and success of current foreign-policy. the united nations security council adopted a u.s. draft resolution calling on all states to end nuclear weapons testing, a move likely to anger republican lawmakers in washington. three dozen gop senators wrote to president obama, fearing he would go to the u.n. to sidestep senate opposition. an international monetary fund report is painting a bleak outlook for greece, saying on employment will stay in double digits for more than three decades, and the country's
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fiscal targets are still unrealistic. the imf says that greece needs deep reforms and debt relief from its european creditors. global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. this is bloomberg. matt? matt: thanks very much. what did you miss? new details about twitter's possible sale. bloomberg reports the company is holding informal talks with several potential buyers and is working with goldman sachs to help with a possible deal. earlier today, we spoke with a senior research analyst and bloomberg news's tech reporter on the twitter, goldman sachs pairing. >> goldman is the banker that twitter retains for a lot of in-house banking needs, but this is something different. this is trying to figure out who might buy twitter, and for twitter this is such a momentous piece of news because this is a company that has moved on sales
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rumors for about a couple years now. we constantly hear about, you know, google potentially bidding, news corp. potentially bidding, and this is the first time we have seen real action. >> it kind of makes sense google would be interested in buying twitter. google has tried to get into social in the past with limited success. what about salesforce? what is the best there he that would explain how twitter would sync up with them? >> i think you have to start by giving the benefit of the doubt to management, that they have a view on what they would do. i can imagine what that would be, because it's really not as obvious, it's not as synergistic. we know there is a good chunk of salesforce's business that is directly attached to twitter and other social media properties. they have one of the more important social media monitoring tools, and they bought a company doing social media management, and exact
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target is what they call their marketing clout. week could argue the -- we could argue the synergies are limited, because it is going deeply downstream in terms of owning an actual media property. but what you could argue, and again you have to use your imagination to think what they are thinking, is what is the exact target the marketing clout cloud is focused on? the customer journey. can you better track the customer journey if you focus twitter towards your needs, trying to figure out how customers use and think about brands? can you tie that data into your crm system? some of it is a little fantastical. some is a little willfully optimistic, let's say. the other more practical piece, there's two others, ad tech and marketing tack and digital media blur over time. adobe and salesforce are pushing at it from the marketing tech side, and google is pushing more
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heavily into marketing tech. it doesn't get enough attention. i might be the only analyst who covers all these names, just the way we divide up the universe, we don't look at the world similarly. but google is pushing harder against those guys, so there is a blurring of the line between these. the last idea is the idea that benioff wants to incubated, sees promising technology and once to give the environment -- wants the environment for a to grow. scarlet: salesforce is more of an enterprise company, and twitter is consumer didn't -- driven? >> but who pays the bills for twitter? advertisers. we think about it as the consumers, but the customer is the advertiser. scarlet: put on twitter, it is where people build their personal and professional brand, right, where people are trying to make their voices heard, trying to network in their careers, where people update where they work. so if you think about, why salesforce would acquire twitter, it's a lot of the same
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reasons why they bid for linkedin earlier this year. they lost out to microsoft on that. twitter has a lot of the same data, when you think about it. there are celebrities, business people, the media, all these people who are trying to get noticed, what they are doing in their industries via tweets. wieser: that was brian and bloomberg's sarah frier. coming up, we asked bloomberg customers to send us their best charts, and we show you the top three. this is bloomberg. ♪
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scarlet: breaking news. we have president obama saying he is vetoing the bill that would allow september 11 victims to sue saudi arabia.
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he vetoed this measure, which would have carved out an exception to sovereign immunity. the reason is that obama doesn't want the u.s. to get retaliatory lawsuits in foreign courts. the president is vetoing a bill that would allow us encumber 11 victims to sue saudi arabia -- september 11 victims to sue saudi arabia. we will have more information as we get it. we ask our customers to send in their favorite charts. my chart today is on the decline of deutsche bank, in one chart, courtesy of "die welt." the white line is deutsche bank's market cap. you can see it starts here in 1997, at the same point as jpmorgan, yet jpmorgan recovered nicely, at about $242 billion, whereas deutsche bank is at $17.7 billion. citigroup i just threw in as a point of contrast, $137 billion. it is hard to believe, back in 1997 deutsche bank and j.p.
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morgan had the same market cap, and now deutsche bank is worth 1/14 of jpmorgan. joe: it's incredible what happened to that company. scarlet: lack of growth strategy, legal liabilities. joe: endless piles of -- scarlet: european banks under pressure. joe: especially deutsche bank. didn't someone go on a sort of tweet storm about the vulnerability of deutsche bank? scarlet: he also talked about the credit default swaps rising, and of course when it comes to, for instance, a $14 billion settlement the doj is requesting, any kind of settlement that deutsche bank would have to pay off is probably worth more than what it set aside, and the concern is they would have to raise capital by selling shares, diluting shareholder stakes. joe: i am looking at the potential wipeout that would be faced by owners of japanese government bonds in the event of a sharp increase in interest rates. this chart was sent to us from ben emmons.
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the white line is the japanese 30 year yield. the blue line is the coupon payments you would have to accept to compensate for a 1% rise in rates. so this summer, around july when it hit the lowest level, if interest rates went up 1%, you would have to collect coupons for 600 years before you made your money back. so when you think of government bonds as risk-free assets, and they are, just as long as you are willing to sit around for 600 years to get your money back. but if you are, they are totally risk-free. it will just take a while. so it has come down quite a bit. now 50 years. matt: that is amazing. a mere 50 years. i almost used the chart from ben, too. you have to tell us if you send both of us charts, because we will use you in every chart instead i this chart because i o
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see what you thought about it, joe. i don't know why people care so much about these 300 purchasing managers. what do they know that we don't? the purchasing managers, and this is a composite of services and non-services manufacturing industries, is down almost at 50. meanwhile, industrials, s&p industrials, are rising. so how could this be the case? one of these things has to give. something has got to give, right? joe: pmi has been debunked by one chart. [laughter] matt: i didn't mean to make you mad. joe: i am very defensive of the pmi. it's interesting there is a divergence. scarlet: there's lots of questions over any survey-based numbers. matt: it is only joe's third favorite, not the number one. scarlet: coming up, we speak with columbia university professor and author emanuel derman on the evolution of the wall street model. this is bloomberg.
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emma: let's get to first word news this afternoon. ted cruz says he is voting for donald trump. the texas senator said in a statement on facebook he is keeping his promise to support the republican nominee, and called the hillary clinton presidency "unacceptable." the former presidential candidate was booed off the stage during the republican convention for withholding an endorsement of trump. top new jersey lawmakers are reportedly considering impeaching governor chris christie over the bridgegate scandal. members of the assembly are deciding whether or not to bring articles of impeachment against kristi -- christie.
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testamentkers say his indicates he had more knowledge about the lane closures than he led the public to believe. a white house spokesman says he is not sure whether president obama would sign the budget bill introduced by the senate's top republican this year. josh earnest says mr. obama is disappointed the bill does not include money to help flint, michigan and other cities. senate majority leader mitch mcconnell unveiled the bill thursday to prevent a government shutdown. cheers arrested as lights began to flicker on across puerto rico. the u.s. territory has struggled to emerge from a island-wide blackout. a fire at a power plant caused the aging utility grid to fail. about 75% of homes and businesses served by the utility had electricity restored earlier today. the majority of puerto ricans will likely have power by saturday. global news 24 hours a day, powered by 2600 journalists and
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analysts in 120 countries. this is bloomberg. scarlet? scarlet: thank you, and the -- emma. let's get a recap of market action. a retreat in u.s. stocks. energy producers and apple were the big laggards. the s&p did finish high on the week, from what the fed did earlier, a hawkish hold, but some people think it was a dovish hold. the dow, s&p, and nasdaq all giving back some recent gains. joe: wall street has changed radically over the last several decades. stock market crashes, financial crises, new technology, and a changing revelatory -- regulatory regime raise questions about the future of the financial industry. here with us is emanuel derman, a former theoretical physicist who joined goldman sachs in the 1980's at the start of the quan t revolution. his latest work is a textbook on modeling options.
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thank you very much for joining us. emanuel: still a theoretical physicist. [laughter] joe: i assume once a theoretical physicist, always. you joined goldman sachs in the mid-1980's. extraordinary changes have taken place on wall street since then. as you look at the industry's right now, -- industry right now, there are some he questions. is the business model profitable? will it inevitably continue to shrink from where it is? what is your assessment of the current state of the industry? are these profitable businesses that can thrive? emanuel: it's getting much harder. when i started on wall street, complexity was the thing that people tried to cater to, in the sense of options products. mortgages. long before that, building complicated products and trying to make them out of simple things and sell them. then we have gone through a change. the market is electronic. there's no more open out cry to the same extent. so now i would say, simplicity
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and speed and the quiddity have become much more important. that is one change, of the track training, algorithmic -- electronic trading, algorithmic trading, prices that are accessible. and the rise of the buy side against the cell site -- sell side. when i started, very few people went to the buy side. now i run a program at columbia and most of the students go to the buy side, asset managers, hedge funds. and there is so much more regulation and compliance people have to undergo these days. a lot of people spend their time doing reports rather than working on trading. matt: so this is how wall street changed since you left the street to join academia. i'm interested in how it changed in the 1980's. how did a theoretical physicist up atg at bell labs end goldman sachs? emanuel: it was kind of a natural move. i was early, but i wasn't the
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only one who did it. interest rates went up very high in the late 1970's, and i can remember when you expected to earn 17% for lending money to the government, and wall street and investment banks had a lot of inventory in fixed incomes but they had not experienced that risk before, where risk fluctuated so much. they started hiring physicists, mathematicians, to handle the math involved in mostly fixed income and then in equities. a lot of the mathematics in finance is very similar to the mathematics and physics, although i always like to say, the semantics are not the same, it does not work as well. matt: so that was the beginning. when you first came to wall street, was it hard for you as a physicist to interact with, you know, the guys that are trading bonds? they were kind of more salt of the earth brooklyn guys, i am guessing. emanuel: they were. it has changed a lot. everybody is a lot more numeric
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now. quant has become a good word. the title is drawn from "my life as a dog," a swedish movie. quant is now a condom entry artm, which is -- compliment term, which is strange. scarlet: i like a story that i have heard, which is, in the 1990's you would go on the trading floor, and the review bunch of guys, a small club of people. you knew each other. you would talk about the yankees, and what happened to that group of guys. now it is about debating things, show me the math, show me how you got to this conclusion. emanuel: in my book, i mentioned when i first came to work at goldman, i was very excited about what i was doing, and it was interesting. i got in the elevator with a friend of mine, and started saying some think about duration, convexity, properties of bonds, and he got very embarrassed and said, what did you think about the yankees last night?
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[laughter] book,n your first you talked about one thing you focused on was overall risk management, being able to assess all the risks at any given time. in your view right now in 2016, do the people at the top of the banks have a good feel for the risk they are taking? have they been able to wrap their heads around complexity, or are there still time bombs, hidden things lurking out there, that you think these banks maybe don't have a feel for? emanuel: i think there's a much bigger focus on risk management now. people, there's a little bit of a p/r aspect in that people have to do it because that's what investors require of them, but they are also much more serious about it. that said, almost any risk model tries to make assumptions about what happens in the future, and the world is always surprising you, so you can't for see everything. scarlet: do think there is -- you think there is too much faith in quant models?
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you can't model human behavior, people's tendency to panic or follow the crowd unexpectedly. emanuel: that's exactly right. you can apply as much math as you like. sometimes you have to do it, because there's something sensible about it, but you always have to look over your shoulder, because people can do mathing they like, and the sometimes gives you a false sense of security because you have two decimal places, but the model isn't really right. matt: i feel like you could model human behavior, right? when you started, didn't you assume you would be able to figure out through mathematics what these traders could not figure out, a theory that would master the whole market? emanuel: i did. i wrote once in my book, i imagined i was going to build a grand unified theory of trading, and of instruments. but i think it's not really true. the inanimate universe is stationary, and once you figure out the rules, they stay that way. but when you deal with people, they learn from experience.
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my book "the volatility smile," is about things have changed after 1987. the world did not behave the way it did before, in equity index options, gold options later, so you can't find one solution that works forever. scarlet: investors don't work the way you expect them to. central banks don't work the way you expect them to. emanuel, you are staying with us, because up next we will tackle options pricing, new models trying to reconcile theory with markets. this is bloomberg. ♪
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scarlet: time for a look at the biggest business stories in the news right now. the relationship between big banks and commodity holdings could become prohibitively expensive. the federal reserve is proposing
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a role requiring banks to put up more capital to support investments in physical commodities. it is estimated the proposal would require $4 billion in additional capital for firms with current activity. askingair group is for more time to review its proposed merger with virgin america. they are still on track to close the deal in the early fourth quarter. the airline did not specify how much time they are getting antitrust officials to review the proposed tie up. teaming up to test the use of drones to make deliveries in remote or difficult to access locations. they will gather engineering and cost information, and work with ups to see where drones can add the most value to ups's extensive network. that is the bloomberg business flash. joe? joe: we are back with emanuel derman, columbia university professor and author of a textbook on modeling and valuing
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options titled "the volatility smile." thanks for staying with us. this is the book. it truly is a textbook. you can see, it's very thick. "the volatility smile," it refers to a phenomenon happening in options markets after the 1987 crash. explained the lasting impact of the crash on markets. emanuel: before, ok, what options do, people who buy options, what they are really interested in is what the future volatility of the underlying stock in the market will be, and options are a way of getting a handle on future uncertainty, on pricing future uncertainty, and before 1987, if you look at the options market, it sort of told you that, whether the market went up or down -- joe: very flat. so this is a chart of s&p 500 inside fidelity prior to 1987. -- volatility prior to 1987. almost no change in the chart. emanuel: it is saying, the
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uncertainty of the market moving down is the same as if the market moves up. joe: let's bring up the chart after 1987. there is a permanent change in the landscape. people pay more for downside protection. emanuel: having witnessed the crash, people learn from experience and pay more for downside protection, and it has been that way ever since. that's called a "smile," it is a skew, but in currency markets it is more of a smile. joe: you would think the idea of protecting against a crash would always cost more. but that 1987 incident was so dramatic, it permanently changed things, and it also meant that the existing models for valuing options really didn't work ever again. emanuel: that's right. my textbook is about, together with my coworker michael miller, is about trying, for the first half, about the principles of modeling, and we try to take a very down to earth approach, a lot of mathematics, complex mathematics about how to build reliable models with as little
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assumptions as possible. and the second half is really about trying to look at explanations for the volatility smile, and extensions beyond the classic black shoals model that will accommodate what's going on. joe: i can get to about 40 pages in the book before the math is over my head. but you have a great expedition about what is a financial model. we say it all the time, but people don't really know what that means. when we talk about financial models, what are we doing? emanuel: well, two things we're doing. first you are trying to make an analogy between the financial system, between something you understand better. is example, black shoals based on assuming the uncertainty in stock prices is based on the uncertainty in smoke coming out of a cigarette, and it will wave around. that is an analogy, not necessarily accurate, but it gives you a sense of what's going on. the second thing you are trained to do with an auction model is figure out how to value
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something illiquid and a little peculiar like an auction, in terms of liquid things like a stock or bond, so you are trying to build an engineering mechanism that tells you, how can i manufacture an option out of a stock and a bond? it's a little delicate. you wanted to go on? it's a little bit like a fruit salad. if you want to know what to pay for fruit salad, you want to know the price of fruit, sugar water, canning. if you want to know the price of an option, they explained how to manufacture it under a set of assumptions. joe: so when you got to wall street, you started looking at bond options, options on bonds, a little different from black shoals. now there is the post-smile era. let's go to today. what is an interesting problem and financial modeling that people are working on? emanuel: 12, one problem -- well, one problem is negative interest rates, which nobody really expected to see in a lot of models before. it matters less for equity options, but if you wouldn't bond options, interest ratet
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swaps, swapions, suddenly there is no lower bound. joe: emanuel derman of: the university, and the author of "the volatility smile," thank you very much. fascinating conversation. appreciate you coming in. scarlet: coming up, turkey's central bank cut a key interest rate for a seventh straight month, extending the longest losing cycle. president erdogan tells bloomberg exclusively that he supports this unorthodox policy. this is bloomberg. ♪
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matt: turning now to turkey. in the wake of july's attempted coup, president erdogan faces renewed pressure to spur growth. he set down with bloomberg editor in chief john nickel
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plate in new york -- john mickelthwaite in new york. president erdogan: i see the central bank cuts as a study, careful -- steady, careful, balanced cut. because it is not right to make some moves up or down that could contain some violence, that could create a tremor in the economy. but i believe it will be beneficial to continue this steadily, and right now this new administration of the central bank, since they took office, they have been carrying out the cuts, taking into consideration especially the interest-rate policies of the government. is an important signal, especially for investors . my hope is that the other banks will take this signal that the
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central bank has given, that they also heeded, and accordingly they open the way for investors. john: you are an economist. surely you are a little worried by inflation at 8%. is that truly a time to cut interest rates? when you came in inflation was much higher, 70%, but it percent is still a lot higher than other countries. surely cutting interest rates is a little dangerous. president erdogan: actually, in turkey before we took over the office, we had seen inflation over three digits. when we took over the office, the inflation was very high. 30%.s around
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and the interest rate used to be around 3%. -- 63%. after we took over, the official inflation rate started going down, and throughout the process the interest rates reached 4.6%. at thatinterest rates, and the real interest rates being at that level hold inflation down. let me say something. i don't see inflation as being inversely correlated with interest rates. it is exactly the opposite. i see inflation and interest rates as being correlated. if you raise interest rates inflation will rise that much. so however much you cut interest rates, inflation will start to fall with that. in my 14 years as prime minister and then president, i followed this, and i have seen this. when we have seen banks raise rates, inflation has gone up,
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but when we cut them, inflation has gone down, and even now, when i look at the measures being taken, if inflation is falling, it is because interest rates are falling. otherwise, these things about the basket and so on, these are not things that impact this issue so much. this is my belief. john: that sense to me as if you would like interest rates to come lower still, if you think lower interest rates get, the lower inflation gets, so it would be better if interest rates go down further. i know a lot of economist disagree. is that what you think? president erdogan: on going to give you the most outstanding example in that regard. if we consider interest rates giving -- having a different nature from one country to another, that would be a wrong perception. looking at interest rates in the united states, it is around
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0.5%. and when you look at the european countries, the interest ands are around 1% or 1.5%, in japan the interest rates are negative. in these countries, if interest rates are that low, why should rates be 13%, 14%, 15% in turkey? however how you hold interest rates in a country, you get that much investment from a country. in a country where there is no investments, we cannot talk about development. we can only talk about development in a country where there is investment. we have been pushing this issue, but we still have not seen the speed and stability in investments that we wish to see. if interest were low, investors would get credited immediately and start to invest. when interest rates are high, they cannot invest.
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this, our despite investors are making investments . i say, let's look at america as an example. europe, japan, and accordingly let's bring interest rates as low as possible. matt: that was turkey's president erdogan speaking with bloomberg's editor in chief. scarlet: coming up, what you need to know for next week. this is bloomberg. ♪
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scarlet: you can see the turkish
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lira plunging in value versus the u.s. dollar after turkey's moody's cut credit rating to junk status. we will continue to monitor that. next week, i am focused on chinese industrial profits, coming up monday night and 9:30 p.m. matt: don't miss us home sales monday morning. this is a market we are watching closely. it have shown soft -- it had shown softness, and now a rebound, will that continue? joe: i will look at the revision for u.s. gdp on thursday, economists looking at 1.3% for the latest second quarter reading. le data, but still interesting to dive into. scarlet: everybody has been talking about second half weakness. joe: there have been signs august has not been great. we will see. scarlet: that is all for "what did you miss?" joe: see you back here on monday.
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have a great weekend. this is bloomberg. ♪
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>> welcome to "with all due respect". ther days of protests in streets of charlottetown on north carolina, please have not released a video of the shooting of keith scott. nbc news discovered video. the video was taken by scott's wife, her telling police or husband has a traumatic brain injury. she pleas with her husband to obey with authorities and pleas with the police t.


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