[closing bell ringing] u.s. stocks closing lower and volume on the s&p, 42% below this moving average. joe: the question is "what'd you miss?" can you still do value your wage growth? -- whating world that the fiscal situation means for global economies going forward. scarlet: and the biggest risks in 2016. you'll hear what they feared the most as we bring in the new year. we begin with the markets. after closing out with big gains, we have given back some of that. there's not a lot of catalyst to go on as everyone on the street takes the week off. joe: we did have a bit of the selloff that not dramatic.

the markets did come back once again and i think it might be a harbinger of 2016. oil got hit hard earlier in the day. down, i thinkts that's going to be a big story. industrial profits that chinese companies disappointing analysts and investors. that's one reason they have had a hard time getting going. had news about saudi budget consolidation and seeing the ripple effect of oil. speaking of oil, i want to look inside the bloomberg terminal. we got the dallas fed manufacturing survey -- i really ugly reading of -20. this is how manufacturers in the dallas fed region for -- perceive the future.

oil is a big part of the texas economy. for anyone whoe believes this part is stabilizing -- this chart would suggest otherwise. scarlet: as we get ready to close out the year, some perspective on how equities are faring. we have a seasonality chart of the s&p 500. blue line is what we have seen so far this year. there's the big slide down. the green line is 2014 where the s&p 500 rose 11%. iss orange and yellow line where the s&p 500 gained 30% for the best annual performance since 1997. we are pretty much flat and bloombergto our

gadfly columnist, it is unusual to have that for two years in a row. i want to bring in our guests for this afternoon, the founding managing partner at westwood capital. joe: thanks for joining us. when you look ahead to next year, we keep having leisure's were people say this is going to be the breakout year and people are excited about fact gas prices are plunging and we will unleash the consumer. 2016 looks like every other year since the crisis. not that great. do you see anything lifting is out of the funk next year? dan: i don't think there's anything we can target that will lift us out of the funk.

recently, the devaluation earlier this year and the inclusion of the chinese currency in the basket of currency, you will see more pressure. europeans are not out of the woods yet. the euro is sneaking up a little bit because of the fed's decision as you see the curve flattened. go the otherthat direction. things will be a problem next year. if you come inside the bloomberg terminal, we've got the spread and we have been steadily flattening. that's the flattest yield curve since january. is a flattening yield curve a

surefire sign of recession the way it used to be? dan: if it were, we would be in recession. practical matter, medium-term rates are unwinding but if you look at where the 10 year bond is, it is exactly where it was a year ago. fedof this talk about the raising rates and the heating up turned into an expansion of long rates because man for enormous sovereign equality bonds from all over the place. capital glut not translating into new facilities because there's an oversupply of production. is it's not likely to change. : we still see upward

pressure if you look at the two year yield. -- the short end is affected by fed policy. -- how manyghts hikes does the fed get it next year? in: i thought they would get .ne ceremonial hike i don't believe the economic data -- you just showed the dallas fed manufacturing index -- it's not the only one. the economic data is not going to justify a steady stream of rate hikes. if the data between now and then is not the word of of that, i don't think the talk will materialize. add to that the inflation story. the fed has been saying inflation was transitory. when did they say that mark a year ago. that price is falling to

multi-year lows. you are seeing a huge drop in exports and a huge increase in imports. , prices of trend imports have been falling. as a practical matter, you have to look at these factors that have supported the inflation number up until now. medical took a nosedive and came back up. housing has been steady all the way. at some point, you can pay the rent anymore. notcan see wages are growing and incomes are not growing on a per capita basis. it is going to create a real problem going forward and that

will keep a lid on inflation. what is your view on the labor market? some people say this is where full employment is. others point to the participation rate. there atink we are full employment? dan: i think we are a long way from full employment. number andth that start looking at individual cohorts within that headline number and what you see is people in their prime employment cohorts, the34 labor force participation rate has been falling. year, butzed this when you compare that to the baby boomers, their labor force participation is higher than ever. andof the problems we have,

this is a big problem people with higher levels of education because we are producing college degree people that cannot get jobs, people on the older end of the spectrum are not giving up. they cannot afford to retire and the problem is going to be exacerbated as we move forward. what was the stat -- half the population less than five grand fustian mark these are impossible numbers. scarlet: is it a global phenomenon? dan: it is in terms of supply. the ones willing to be a factories for consumptive americans and a jobs are not coming here -- really broken cycle of capital. we have china and other companies -- other countries building up reserve.

there economies are slowing and -- they still have to keep their factories churning out stuff. scarlet: making stuff no one needs. dan: and they expect us to consume at all and there's no dollarsransforming the because you have the supply of labor. coming up, we will discuss more on the -- discuss more with dan, including whether there's a rate cut will stop -- rate cut. ♪

scarlet: i'm scarlet fu. "what'd you miss?" ramy: a cleveland grand jury has convict an officer. they say was indisputable he was drawing his weapon. >> rest the afternoon, he would pull the gun in and out of his pants like robbers do, according to a friend who was with him at the recreation center on the day of the shooting.

family accused the prosecutor of abusing and manipulating the grand jury votess to orchestrate a against indictment. in nigeria, at least 60 people have been killed in attacks conducted by boko haram. attacked the city with rocket propelled grenades and suicide bombing. they intercepted 10 suicide bombers but dozens of other people were heart. in iraq, government forces are claiming a major victory over islamic state. islamic state overran the city last may when u.s. defense secretary ash carter criticized iraqi forces, saying they had no will to fight. airport safety, the transportation security administration is increasing random checks of airport and airline employees. employees have taken advantage of restricted entrances to smuggle guns and launder money. airport workers are permitted to

skip security lines after a background check and obtaining a special badge. 2400l news powered by our journalists in more than 150 news bureaus around the world. scarlet: we are back with our guest from westwood capital. about thealking ceremonial interest-rate increase by the federal reserve earlier this month. i want to point you to the work function in the bloomberg terminal tabulating what fed thisfutures tabulate -- first column here. after the fed finally raise rates, new column was added. that's the probability of a cut. unlikely, but it is still there. 6%ple are betting there's a probability of a cut in january. but the likelihood of an actual rate cut?

dan: when rates were zero, you and as a have a cut practical matter, you now have the possibility of one. i don't think there's going to be any meaningful rate cut but having said that, if you look at economic data and put yourself in the mindset of two years ago and say would the fed be raising rates amidst what is clear deflation, amidst weakness in the manufacturing your, amidst a continuation of a low labor force participation rate, no one would have said the fed was going to raise rates. anticipating girl be multiple additional rate increases in 2016. thisi want to go to inflation-deflation outlook question and go to the terminal here -- you mentioned clear deflation and the fed was incorrect about it being transitory.

by several measures, there are signs of forming. true measures that try to ask who outliers, the cleveland fed up 2% in these alternate measures heading up in the right direction. when you exclude energy, could it be that actually be inflation measures are not as bad as some people think? dan: the true effects are generally good predictors about two years out. but they are only predict a couple of points. matter, people tend to look because we understand the good sector has been deflating for two years. the price of goods is falling dramatically in the price of services has been moving in an upward direction.

now you are seeing a few other sectors percolate in and out of positive to negative. you just can't continue raising -- people eventually can afford to pay them. ishad huge absorption which pushed rates of because people are going back to work. out intart to peter terms of the rate of job growth, we have in a moments -- an enormous abundance and look at the proportion of housing starts are multi family. you are looking at a tidal wave of apartments coming on in 2016. that demand is going to be met. to anye landlords -- go website to look at rentals in manhattan. monthserage fee, two free rent. it's winter, it is the slow season, but you did not see that

last winter. i don't like an inflation number driven only by one sector. the second thing is if you look at goods, especially imports, keep in mind a lot of the services sector is devoted to support of trading goods. the price of the stuff is aopping and so the cost business is finding itself spending is rising. how long are people going to do that? it should not be sustainable. get yourys great to perspective. thank you for joining us. up, we will find out if exchange rates and trade flows are connect it. the boostbeen cut in

it should from the weekend. -- from the week yen. ♪

scarlet: i'm scarlet fu. "what'd you miss?" has been a year of disconnects -- a weaker currency is supposed to lead to a rise in exports but is globalization imfging that dynamic? the research department jeff -- us.ty division chief joins exchange rates do matter, so

quantify that relationship for us. daniel: in the report, we found a 10% fall in the exchange rate boosts net exports by 1.5% of gdp. that's quite a wide range around that. would be aboutd .6% of a gdp boost, countries like the u.s. or japan that are relatively closed to trade. the netherlands or belgium, those are really open economies. you mentioned japan and people point to the fact that the yen has been week for a few years but it hasn't resulted in a way -- in a raging boom for the japanese economy, but that's not a reason to disconnect the effects of fx and trade? bigel: it looks like a

puzzle. there's been a 30% depreciation of the yen and exports have not grown that much. why is that? it's not such a puzzle if you think about what happened after the 2011 crisis and the earthquake. a lot of exports that used to be produced in japan worship overseas. the production was offshore done that took a big night out of japanese exports and happened at the same time the yen was depreciating. weighing downg japanese exports has been the slowdown in the growth of some of its trading partners. have got a boost from yen depreciation. i want to read you something you wrote in one of your reports. global value trade has increased

through the decades and appears to have slowed in recent years. -- bulk of global trade parts imported from overseas currently averaging 20% across economies. that was surprising to me. other countries have gone truly global like hungary and romania and thailand. is that a better model? daniel: it's not really about whether it is desirable or not. what is true is the scattering of reduction across the globe inns less is being produced this country and that means the exchange rate doesn't matter as much. has been gradual and so countries like the ones you have mentioned are not representative. or think of the smartphone.

most trade is still sourced mystically so exchange rates still matter. joe: the growth has been slow but there is growth. would you expect it to slowly disperse over time as the supply chains get more complicated? daniel: that is an important point. this was looking like a one-time technology change with a scattering of reduction and actually slowed down. down in somed countries like china and they are seeing production coming back home.

exchange rates do matter. thing by do the right devaluing its currency in august? daniel: we'll look at whether something like that was desirable but china's exchange rate has been appreciating in real terms. that is important to bear in mind that means exchange rates still matter. daniel lee, thank you very much for joining us. scarlet: coming up, world that is on the rise but do you need to be worried? that's coming up, next. ♪ bring your family and friends together

to discover the best shows and movies with xfinity's winter watchlist. later on, we'll conspire ♪ ♪ as we dream by the fire ♪ a beautiful sight, we're happy tonight ♪ ♪ watching in a winter watchlist land, ♪ ♪ watching in a winter watchlist land! ♪ xfinity's winter watchlist. watch now with xfinity on demand- your home for the best entertainment this holiday season. tand that's what we're doings to chat xfinity.rself, we are challenging ourselves to improve every aspect of your experience. and this includes our commitment to being on time. every time. that's why if we're ever late for an appointment,

we'll credit your account $20. it's our promise to you. we're doing everything we can to give you the best experience possible. because we should fit into your life. not the other way around. scarlet: i'm scarlet fu. "what'd you miss?" the first word news. shootingother police has raised questions of the city's use of lethal force. officers shot and killed two people during a domestic disturbance, both were black. last month they launched a civil rights investigation of chicago police after video showed an officer shooting a black teenager 16 times. in the race in the u.s. republican candidate for president, a challenge from jeb bush to donald trump. he called on trumped to debate him one-on-one. when asked what he would say when he walked into the room,

"i'll take you want one-on-one anytime, anyplace, you name it." they will both take part in the next debate in charleston, south carolina. thousands of air passengers trying to get home. nearly 1400 flights have been canceled across the u.s. and another 2600 delayed, all because of a large storm system moving through the middle part of the country. nearly half the cancellations were at chicago. many others came from dallas-fort worth. basketball's greatest ambassadors has died. meadowlark lemon of the harlem globetrotters made fans worldwide for 25 years. he was 83 years old. global news 24 hours a day, powered by 2400 journalists in 150 news bureaus around the world. scarlet: thank you. let's get a quick recap on how

u.s. markets closed this monday, the monday after a long weekend. not a whole lot of trading activity. volume down by at least 1/3 from the 10 day average. we were down by a lot more but we cut our losses. joe: pretty much all last week was pretty quiet and this was also pretty quiet. weakness in energy continues to be the main story. the one thing that is not quieting down is oil. earlier, iting seems like oil will be the story for a while, and until that stabilizes it is hard to imagine markets taking their cues from much else. scarlet: in the meantime, countries that rely on oil have to make adjustment. we're looking at saudi arabia and its budget. in a release the 2016 budget tight,and it was fairly reducing spending on subsidies because of falling oil prices. 4, their budget deficit was about 2% of gdp, the lowest

in the world. tumbling, it oil has widened to 15%. than what the imf projected, which was 26%. 42016, there is still a lot of unknown. marksese are big question so we won't know how much it costs, but one economist does predict this budget shortfall will be equivalent to 11% of gdp. joe: and we are talking about whether china will continue to devalue its currency next year. one of the huge questions is what happens with saudi arabia's real, and ultimately that is all about using the fiscal tension. we are seeing them try to ease it this way. scarlet: everyone is looking for a way out. the pressure on public finances, record low interest rates across the developed world has led to a binge on debt. are we finally reaching the 45

year end game? let's welcome mark faber, who joins us by skype. also joining us is frank relage. let's start with you, mark. rates in the u.s. are rising but ever so slowly, and we do expect the same eventually for the u.k. in japan they aren't likely to rise. do you see real risk for default of the developed world? i don't think that the u.s. will continue to increase interest rates. infact, given the weakness the global economy and the d acceleration of growth -- the d ofceleration growth, the fed will cut rates once again. i don't think that rates will go up a lot, and i'd just like to

mention that the u.s. treasury in 2016 didn't perform particularly well, but they didn't lose any money, because d market -- the government bond market was relatively steady, so you had a return that was satisfactory, particularly if you measure in euro terms. joe: frank, if you look at debt levels across the developed world, the u.s., the u.k., japan, obviously there are a bunch of charts that go up into the right, but people have been warning about this situation for a long time. the japanese government debt market, for example, is famous d onlyoling investors, an to see yields continue to grind lower despite the massive debt. why should this change anytime

soon? >> i think it is clear that during this period of great deleveraging that we supposedly have had, the structure has risen quite precipitously. for example, japan has a debt to gdp of about 604%. today the 650%. japan is probably the poster boy world, and wee can see our future if we continue on the trajectory. china, i think, is another good example. gdp ofey had a debt to about 320%, and today they are somewhere around 450%. debt is a very interesting thing. it creates rate instability. it is almost like a seesaw in that everything looks pretty stable on the downward side of the seesaw, until someone puts a

couple ounces at the right time on the other side, and things sling violently in the other direction. issense is really the fed reactive, not necessarily a cause of some of the issues. the politicians are really to blame in that they build up a high debt level and leave it to the federal reserve to eventually monetize that debt. is they don't i think they will have a fair level of default, but historically if you go back 5000 years on the currency that is not anchored by gold or another currency, historically the politicians are taking the opportunity to monetize. the debt burden right now is more like someone running a marathon with a bag of rocks. joe: mark, you heard what frank says, but i still want to get to

this question of what will make its way. even if the argument is that monetization is what's keeping the whole market, keeping everything in place, why can't that persist for a long time? what would be the snapping point, that suddenly causes the debt to be a problem? >> actually, i have to laugh when i hear you, because we just came out of the worst financial crisis since the great depression of the 1930's. 2007,cession of caused by excessive credit growth around the world, excessive leverage. joe: particularly in the private sector. >> of course they matter. that is why we have a very anemic global recovery. the situation today in the world is such that debt to global gdp

is 30% higher than it was in 2007. it's one more point that i think people overlook when they talk beut debt -- credit can divided to productive credit and unproductive credit. in the 1960's and 1970's, south korea had a highly leveraged economy because they borrowed money to build infrastructure, to build factories, to acquire equipment. the borrowing was for capital investment. unproductive debt is when the government borrows money to hand out benefits to people that don't work and to retirees. this is unproductive debt. were when you take on debt for

consumption instead of capital spending. joe: you talked about the dangers of when the currency is not anchored to something like gold, and while it is true as mark pointed out that we did just have a huge global financial crisis, we have also recovered fairly quickly. we did not have societal collapse or anything like that, most of the economies returned to growth really quickly, in part because it would seem aggressive use of monetary and fiscal policy. why is it that a good flexible exchange rates was able to prevent everything from coming unglued? is going to what change the situation. i think you have to look at declining interest rates, which has enabled an enormous amount of debt increase. we had 21.5% on the prime in the united states, we have a succession of declining interest rates over that time period.

at the same time, debt levels have risen astronomically, and that debt has been served just by declining in -- has been serviced by declining interest rates. that point in my opinion is as you approach the zero bound, there is a limited level below the zero bound, below zero interest rates, that rates can go, and at that point, the ability of the government to lighten the load of the debt levels through more interest rate becomes mitigated. it is at that point, and we are probably close to that, that when the economy weakens -- be forced to monetize. joe: frank, you will be staying with us. scarlet: in the meantime, breaking news. a headline just crossed. carl icahn is offering shares for pep boys, after bridgestone

had been $17 a share and pep boys agreed. said he was willing to only been a maximum of $17 but is no willing to raise it to $18.50. he's an activist investor that owens 12% of the company and has made it clear that he is willing to go up to $80.50. pep boys raising. we will be right back. ♪

scarlet: i'm scarlet fu. "what'd you miss?" it's time for the bloomberg business flash. enhancing his

offer to buy pep boys. he has gone up to $18.50 a share. bridgestone had increased its offer to $17 per share on december 24. icahn owns a 21% stake in the company. the executive chairman of mac moran is stepping down. e will resigned as chair and leave the board of directors on thursday. this announcement follows the recent revelation that carl icahn has taken a huge stake in the company. gerald ford will become nonexecutive chairman. and a demand for women's clothing gave a boost to holiday sales. early spending figures say they rose 29%, excluding autos and gas. november and december, sales were up at her than expected. and the latest "star wars" movie

broke the $1 billion mark before china could even see it. producers anticipate it will play very well in the world's second-biggest film market. it opens in china on january 9. "star wars: the force awakens" took two weeks to earn $1 billion. the previous record holder was "jurassic world." and that is your bloomberg business flash. k, skating inis mar from thailand. also joining us is frank. i want to look ahead to see what investors should look for in 2016. mark, wished investors place their money? >> well, i just read the other not one strategy was

negative about the stock market in 2016. i think the u.s. stock market will go down in 2016. i think 10 year u.s. treasuries are quite attractive because of my outlook for weakening economy, and believe that we are already entering a recession in the united states. then emerging markets, as you know, have underperformed grossly since 2011. i think it may still be slightly premature to make the major commitment into emerging markets, but they are moving into buying range. then i like real estate in the countryside and portugal, spain, italy, and in indochina. indochina is essentially vietnam, laos, cambodia, leon

myanmar, thailand. i think the vietnamese stock market is very attractive. the economy continues to perform exceedingly well. frank, where do you think commodities are headed. that will determine how many things will perform. >> i think they are under pressure right now because of the debt levels. you have a slowing world economy, a lot of questionable statistics are come out of china, but i think you can look at the commodity prices as a pretty good indication of what's going on in china. i think china is a function of its customers. you have debt laden japan, debt laden united states, debt laden ofozone, and i think all that debt is putting pressure on commodity prices as production slows down.

from the initial term, commodities will continue to stay week. -- stay weak. the debt burdens of the world are really going to put us if not in a recession, at a very slow growth trajectory. but there is going to come a point -- and a lot of economics are predicting people, and that is where it becomes difficult -- but i think there will come a point where the slowdown in the economy will force another qe, and maybe this time something of a more direct nature similar to what australia did in 2009. of $900 forcheck every man, woman, and child below a certain income level, and that bypassed the reserve banking system. if things down enough and commodity prices get low enough, you can probably see some more direct monetization. to youwant to go back

calling out the persistent optimism. stocks usually do go up every whereas people who are perpetually negative are usually on the wrong side of things. even though occasionally stocks do go down, isn't a general optimism the right way to think about things? >> i think the right way to think about any investment is to think realistically, and realistically, u.s. equities are expensive, the median pe is hi gh, the market hasn't performed well. and has been driven by just a few shares. the funds stop, facebook and netflix, amazon and google, particularly strong, but the median stock is in performing well. scarlet: mark, thank you so much for joining us.

we will be back. ♪

scarlet: among the headlines we saw in 2015, the u.s. unemployment rate dropped, global oil prices tanked to levels not seen two 2004, and the federal reserve raising interest rates for the first time since 2006. where does this leave us for 2016? we asked our guests what they got the biggest risks were heading into the new year. the 2016, whatt is the single biggest risk? the biggest risk in the economy is further deflation in much of the world economy.

we have this thing called divergence. ande are diverging policy, that in my opinion is the biggest risk. >> convergence between geopolitical risk and the socioeconomic risks that i am most worried about. that will be difficult for leaders to deal with. >> a significant upturn of u.s. inflation. >> there is a very large number of companies that have used low interest rates to fund themselves, in some of that funding has not gone to the right places. >> the big game changer for us in 2016 is if the fed achieved to a pointke to get where investors pay more attention to balance sheets. >> i think the big risk comes from the united states. raise ratesal rac and we have a dollar overshoot, that will bring out the chinese rmb.

joe: what if the economy weakens? >> we don't have the political will, i think, to have fiscal stimulus or go back to qe. >> i think the biggest risk falls under the category of lack of cooperation. >> iraq is probably the biggest risk once more. if you look at the government, it is huge. it is being underappreciated by the markets. >> if you look at what china has rate trom quasi-exchange o now 6.4% with a lot of noise in between, that is not growth -- that is not a natural growth. >> i think we understand how important it is that we as an international community cooperate. >> iowa worried that this time

hopefully the engine of the car is turned over, but if it doesn't, i don't think we are prepared for the downside. >> it is a challenging environment for investors that over the last six years, it is really were pick yourself up. ♪

scarletscarlet: i'm scarlet fu. "what'd you miss?" tomorrow, economic data out includes the home price index and then :00 a.m. overall, housing market is looking fairly healthy with home prices rising more than 1%. economists estimate the price is in 2016 will be lower. at: you also want to look the consumer confidence number

that will be out at 10:00 a.m. tomorrow. you really want to dive into the numbers and not just look at headlines, because consumer answers have been all over the map, consumer confusion is very high. you really want to pay attention. scarlet: thank you for watc

nicole: i'm nicole wallace. john: and with all due respect the peyton manning, we have nicole. in our lineup tonight, curses home visit. but first: the home stretch. donald trump has been the republican front-runner for so long that he is moving on to the general election. weekend, the bathroom fitting, going after bill,