scarlet: stocks flipping days before the fed's key policy decision. joe: the question is "what'd you miss?" week and we are doing the countdown. we have the charts that lay out the stakes. scarlet is there anything not oversupplied? joe: brazil's debt hangover. brazil announcing an austerity plan. scarlet: we begin with u.s. markets. stocks falling ahead of the fed decision. about 25% over the 20 day average. nine out of 10 industry groups are down. that goes back to the idea that it has shifted when the fed

would shift rates. joe: this is a quiet day. the market was lower. not very dramatic. people have been talking about the pre-fed wall in the action and there was nothing you could point to that was particularly exciting. august: it felt like in trading day. >> it felt like the days when we are on vacation. is the pe of did cap's. -- of big caps. thater or not you believe was too high, they have all started tumbling down. stocks have recovered a little bit but that is not a very nice line. let's get rid of that line and show you what happens if we max it out. stocks are not cheap by historical standards but the

debate is still is the secular bull market for stocks still in place? stocks still appeared to be expensive by historical standards but they have come closer to a people think might be there fair value. i want to go into my bloomberg terminal because we got eta from china that confirmed the same story we have been hearing for a long time -- slow down. this is fixed assets and building stuff. you can see the red line -- we have not seen a number this week since the beginning of 2001. almost 15 years ago was the last and the pace of growth success was so slow. it's part of the story of the slowdown stop stocks in shanghai fell over 2%. scarlet: i love the fact that you pick this economic data point rather than industrial production. digging buddy the surface. joe: this one was just so ugly

and i like the red line. the decision week and with us to look at the thursday meeting is the chief u.s. economist from barclays. is the fed going to go this week? michael: we thought they were ready to go on the august 11 decision. it did rattle markets and we think it led to a tightening of financial conditions within the u.s. we use that opportunity to say that the fed won't go, partially due to the concerns you just wantoned -- do you really to be tightening rates into that? we think they will skip this meeting and not raise rates. scarlet: when you look at the economic conditions in the u.s., the bloomberg survey found that most in the u.s. leave we are not due for a recession until 2018. having said current expansion

would last nine years. give us your take on the linkage between the stock market and recession. if they are steep enough, there is a wealth channel where wealth supports consumption and real estate valuation supports consumption. if you had a sharp decline in equities that led to a large drop in wealth, that could create recessionary conditions. we have in in a long expansion and its reflection of how far we fell. we think equities are fairly valued at this point. we're having challenges because growth in the u.s. is so slow. joe: when people weigh the merits of a set hike, people say that it is missing on the inflation side. today date -- we got a a showing expectations are getting

further away from where the fed wants it to be. is this a good reason for the fed to wait a while? michael: when we moved off of our september call we moved to march. that wehe reasons was think inflation data is softer than we expected and we advised our inflation forecast a little lower. commodityalling prices and that is starting to weigh on inflation expectations. i think the fed will message this week that every meeting is live but it may push it past this round. scarlet: what is it in inflation that consumers just don't see? michael: i think the fed would wouldghter labor markets support their view. in practice, there's not a lot of evidence that suggests inflation is moving higher. it's a decision based on

historical trends from the fed's point of view. joe: a chart from wells fargo shows the fed's labor markets getting tighter and shows tightening cycles in terms of available label -- available labor versus the total labor force. do you buy this idea that as the employment market get stronger, inflation won't necessarily pick up? i know people are questioning the premise. michael: the evidence so jess -- the evidence suggests at it is weaker than it has been in the past few decades. we would say the coefficient is smaller, meaning you have to drive labor markets tighter to get the same boost in wages and in elation. productivity growth is quite low so wages are dependent on more than just slack in labor markets stop productivity growth is weak, so it's tough to get a lot

of wage growth. there is evidence that it is weaker than it has been in the fast -- in the past. when it is all said and done, what will the reaction be on china's economy and the markets? are conditions to fragile for an interest rate increase from the fed? michael: i would suggest what is happening there is driven by their own internal dynamics. that rebalancing is difficult. scarlet: long and painful. michael: the past dollar deflation has contributed and you could argue that the fed moving rates keeps pressure on the dollar which would keep pressure on the yuan. warningshave these that a fed rate hike would hurt emerging markets. we have already seen this huge selloff will stop is there more pain to come because of a

possible rate hike eschewed mark michael: i would agree and it is the third domino. this to me is the third followthrough. china is feeling it right now and we are arguing about the pace. if it is a slow, gradual cycle, i would not say there was a tremendous amount of more difficulty. but if the fed marches faster than people expect, that is where you could get your downside. scarlet: what is it that keeps you up at night? michael: it is china that keeps me up at night. scarlet: what specifically? michael: that you get a slowdown and it becomes problematic for other countries in asia. countries in the asia region are describing it as a trade recession.

it is not so strong that we are fully immune to what is happening in china. and itolumes are slowing is a drag on growth everywhere. what keeps us up tonight would be that hard landing. scarlet: and you just cut your china forecast. michael: we think you need a lot of policy support. come back, in the annals of inequality, which standard bearer for the left which just assumed a position of real power suggested that there ought to be a maximum wage estuary that answer, when we return. ♪

scarlet: m scarlet fu. joe: i'm joe weisenthal. "what'd you miss?" which politician suggested there ought to be a maximum wage? jeremy corbin was referring to the u.k.. is fascinating -- this intersection of new media and radicals being elected all over the place will stop -- all over the place. you have been out front on this from the get go. let's get to some top headlines. we begin with bernie sanders, surging to double-digit leads in iowa and new hampshire. a new poll shows him 10

percentage point ahead of hillary clinton and he has a 22 point edge in new hampshire. joe biden ist third in both states even though he is not officially in the race. joe: facebook says it is stepping up efforts to target racist post on its website. posts andargeting monitoring suspects will hated -- hateful posts. scarlet: and a traitor sent to jail is appealing his conviction. tom hayes was found guilty of relating libor while working for ubs and citigroup will stop a london judge must decide whether to let the appeal go forward. i want to bring in our next guest, mark tao. ow.mark d

volatility in the markets has been the scene this week. but you look at the volatility swings inies, currencies are at a seven month high. talk to us about how investors are positioned with less than 72 hours to go before the fomc announcement. mark: a lot of investors are nervous. they were expecting the fed to peopleut the backdrop is expect to see a stronger dollar over time. direction, but they are afraid to hop on the train or continue with the trend to the extent they have been before because of the odds the fed does not hike this time. if the fed does hike, what does that mean for global markets? do you think they will and what

kind of ramifications would you expect to see? mark: there's a big issue people have not fleshed out and that is the crisis, the strongest advocates of aggressive monetary policy have been disappointed with the input on output. the largest attractors have not seen the impact on the currency and the negative impacts they have been anticipating. everybody has been left hanging and we realize the effects of the fed on output inflation are much lower than they used to be. a lot of that is because the transmission on monetary policy has changed and complicated the world for the federal reserve enormously. byay, people lend securitizing the assets and don't need the fed to take risks.

what matters more than the fed stance is their risk appetite. if they don't have that risk appetite, they are not going to be stepping out. look at 2006. people were falling all over each other to lend and borrow but today, the rate is at zero and nobody is transacting. channels two different through which the fed is having an impact, certainly people calibrating the fed of the 80's and you have the financial guys in poland can watch the brazilian interest curve in real-time and react to the chinese stock market even if we can't play in it. the financial channel has become more powerful in many respects while the real channel has become less powerful and the fed is mandated to the real channel,

not the financial channel. now they have to figure out how to calibrate this financial channel in a way that does not undermine the real channel even though it is not part of their mandate. they have two targets with one tool in their feeling their way through this. of the stories that has been the big theme of 2015 has been the everything flood. it seems like we are up to our ears and everything. what is driving it and what will turn it around? supply story the has been overstated. but they say nothing cures high prices like high prices. there was a speculative surge that started back in the early 2000's -- they allowed electronic access for a lot of traders to trade commodities in a way they could not before.

, anyone could trade if they had the right electronic set up. that and consultants telling us we needed commodity allocations in our portfolio to diversify led to a lot of people building speculative positions. on top of that, we had emerging markets liking into the grid and china takes over the world story. everyone thinks commodities got built up by a fed bubble but they forget that $150 barrel oil happened in 2008 before we even knew what qe was. a lot of it is unwinding speculative excesses of that time. high prices did you about a supply response, notably in shale oil and that has led to a glut. it might be a supply response but a lot of it is the unwinding of speculative positions. then you say that 10% allocation

the consultant told me to have, maybe i should have a 3% allocation. joe: we're going to talk about brazil after the break. scarlet: speaking of a glut, which of the super savers is swirling away a remarkable percentage of their earnings? ♪

scarlet: i'm scarlet fu. joe: i'm joe weisenthal. "what'd you miss?" scarlet: before the break, we asked which unlikely group is sharing a large share of their earnings and the answer is millenials. joe: almost 20% of a millenial savers in the database save 15% of his or her salary in a 401(k). scarlet: and if it includes a company match, it is 11% of earnings.

they tend to earn more than other one eels, which makes sense, but do they trust the stock market? joe: supposedly they still don't. scarlet: brazil announces austerity plan that reduces government spending by almost $7 billion and is expected to boost taxes. reportpany is hoping to a -- , a: joining us is mark dow former economist at the imf. economistnother imf came up with a radical way to solve the brazilian mess. he says they cannot implement policies. the whole thing needs a cleanse and a quick way to do that is to get the imf. the point is austerity measures imposed by the imf would give

enough political coverage to enact unpopular perform -- unpopular reforms. mark: brazil is in a bit of a box. the holy grail has been to get yourself into a strong enough addition where when the next crisis or recession came, you could use countercyclical policies to transition out of that bad time. that means when bad times hit, you don't have to hike interest rates anymore and tighten the budget to instill confidence. unfortunately, resulted not make it to that point. what they are doing may be necessary but it will have a deleterious effect on output. not the government, but the private sector. everyone believes brazil has been led to exporting to china but that is not the case. it has been a domestic credit boom and they have to get out of that slowly but surely. joe: one of the charts you are

looking at is the chart of the real versus the dollar. swap spread -- what does this chart tell you? mark: one of the reasons i have argued that this time it is different -- is bad but it is different because emerging markets have fixed a lot of the problems that have altered them for many years. the government is no longer borrowing in foreign currency and that mismatches what they call the original sin is largely gone. now in brazil, have asset managers and tension runs and insurance. what you see is in 2002, we saw a spike in the currency which was risk averse. then we have the next shock in 2008, the global financial

crisis. the shock was not as big but rates to go up to 17%. in the real shock ever -- as big as the one we saw in 2002 but interest rates have only gone to 50%. you could argue they are about to go further but they don't go thely as far because tourists are no longer the only game in the brazilian financial market. that will lead to less disruption for external shock than there were in previous cases. 20 seconds or less, what keeps you up at night? is it brazil or something else? and idisorder in china would watch capital outflows.

65 percent of chinese say i want to make my money and get the hell out. that can only be stronger now. so their task is to keep people happy and we will see if we can do it. it's going to be a slow process. scarlet: slow and her hats sometimes painful. thank you very much. joe: we will be right back. ♪

scarlet: i'm scarlet fu. joe: i'm joe weisenthal. "what'd you miss?" scarlet: don't miss this -- retail sales out tomorrow for august. it's the final look at consumer behavior before the fomc decision. we know that decent auto sales should feed into a healthy again. joe: and the consumer is everything.

i'm also looking at capacity utilization tomorrow. that feeds through to inflation as industrial capacity tightens. i will be watching that tomorrow. scarlet: that's all for "what'd you miss?"

emily: investors grow even more cautious about china's economy, but -- but could its growing internet industry give beijing a much-needed boost? i'm emily chang and this is "lumber west." alibaba fights back against the critical article. want to build a self driving car? tom-tom says no problem. and preparing to take san francisco with dreamf