For the year. Manufacturing is still expanding, just at a slower pace. We are down significantly from where we were in november. New orders, which has the highest correlation is that 57. 3 percent. It is still a good number, but it is not matching up to where we were the previous two months. It will be interesting to see how the markets interpret that. Employment goes up. A sign that may next friday we get some good news on the employment front. Prices, 38. 5 . The disinflationary trend is really in place. Overall, a reasonable picture, just not quite as good as last month. We start the year off on a positive note for manufacturing. This is our read on what percent of the economy . About 15 . This is a very long track record with Economic Growth rate. People like to watch it. The manufacturing jobs trend tend to pay more. The bull market in u. S. Equities is closing in on its 60 year anniversary. Sixth year anniversary. Rbc capital Jonathan Gollop is even more optimistic. You have been rewarded for your bullishness. You expect to be rewarded again. Yes. We were a little bit less than 1 to optimistic, but basically on target. It was a revision. We were there all year long. He much. We missed the first day. Pretty much. We missed the first day. Youve got earnings. You add up what you would expect those companies to earn and you come up with a figure. Then you have the multiple. What surprised everybody this year and surprised you what little bit was how much investors were willing to pay for earnings. One of the things we have been saying for the last several years is that because Interest Rates are so low and stocks are so attractive compared to bonds we will see valuations continue to rise. We were forecasting that we would end the year paying 16 times a years worth of earnings. That is kind of where we are now. On a forward basis. We are expecting the year to end up 17 times forward at the end of this year. We expect multiples to keep going higher. U. S. Stocks are much more attractive than global alternatives. Interest rates being low makes the value of the cash more. Stock valuations go higher, therefore. Should people caret all with the valuation is relative to trailing earnings . Care at all with the valuation what the valuation is relative to trailing earnings . It seems a little rich, maybe. You could do the work either way. You are buying future cash flows. You are not buying what a company earned. It would make logical sense and you get a slightly better reading doing it that way. Here is the key. Valuations are like a pendulum. They have gone as low as six and as high as 24. It appears to be where the pendulum is swinging that is more important. When you are going from very low toward something which is higher. Things tend to continue as long as the economy stays away from recession and we dont think we have one coming up. To that point, there is an upside and Downside Risk to both variables. What you think there is more . In the performance of companies and the profits they generate or the valuation that investors are willing to apply . If you asked me earnings versus valuations, i think there is upside risk on valuations. I think there may be Downside Risk on the earnings. Why . You are pretty bullish when it comes to earnings. A little under 8 of earnings growth. If i am looking at 13 , im expecting 5 to come from pes and 8 to come from earnings. The argument that people make is that margins are really high because companies are doing a brilliant job of managing expenses. But how much more can you squeeze out on the margins side . I think we will see margins incrementally higher a year from now maybe 1 higher. That has been the area that investors have had a harder time getting their hands around. But productivity and margins continue to defy expectations. They do. Though, trees cannot grow to the sky. Margins are about 10 on the s p. I think they will go from 10 to 10. 1 . Those are incremental increases and that is all you need to get a 1 additional increase on your earnings. We need to talk about centralbank policy. Qe is over, effectively. At some point in the next six months to a year, the Federal Reserve is likely to raise Interest Rates and some more important things are beginning to happen overseas. Today, the german newspaper quoted mario draghi as saying we arent technical preparations to alter the size we are in technical preparations to alter size and speed to react to inflation. We can debate the full unanimity, but he appears to be building the runway for quantitative easing. The reason i am smiling as that mario draghi has been saying something that looks almost like this for 2. 5 years. But not to the germans directly in one of their most important newspapers. Maybe. You cannot have zero rate policy forever. The u. S. Economy, while it may not be pumping at 3. 5 it is moving ahead in a Strong Enough way that we do not need zero rate policy. Stocks have gone up for two years after the first move and even if they started in september of next year you are talking about several more years of potentially good stock markets. How is quantitative easing in europe and that in japan going to influence the situation here . I saw a calculation that between the ecb and the bank of japan they would be pumping 100 billion per month. It is a lot of liquidity. Here is what will likely happen. If that were to occur, the euro weakens further. The yen weakens further. The dollars strength and. Investors want to get into the u. S. Market to take advantage of the s p, but also the fact that they can participate in a rising currency and that pushes for you asian sire. Valuations higher. Thank you so much. Great seeing you. When we come back, we will be talking about the minimum wage. It just drove it almost rose at almost half the states in the union. President obama wants to hike it at a national level. Plus doityourself. Is it smart for companies . We will be asking the former head of the nsa. You are watching Market Makers. Im Erik Schatzker. Half the states in the union just rose the minimum wage. Among economists, the minimum wage is a matter of intense debate, but not among voters. Since 1998, every statewide ballot measure to raise the minimum wage has passed. One economist consistently opposed his former reagan advisor art laffer. Peter coit is with me in new york city. 20 states and d. C. Some of it was already baked into the cake because the increases are indexed to inflation. A further nine states took the step. Refresh my memory and those of our viewers. Why is it that in your opinion it is a terrible idea . It is a state idea. I think states have a perfect right to major the minimum wage politically and reflect their electorate. The reason i think it is a bad idea because the impact hits the poorest, disadvantaged minorities in the inner cities, but also on the farms in kentucky and places like that they face the biggest down burden of that. If you look at like teenagers in the innercity you find that their employment to collation is really low and has been low by any historical standard and this is the only way they can come into the mainstream. They did not go to a prep school like i did or a yale like i did or get their phd. They have to get the minimum wage by earning the requisite skills to her in the minimum wage. I them from that first job, they become unemployed and then am unemployable and then hostile. This is not a good policy. States have a perfect right to do whatever the heck they want. There is a spectrum of views on the minimum wage. Where would you say art falls relative to other economists and what is the argument that the others make for raising it . Art is expressing a view that has been around for decades. It was pretty much accepted wisdom for a long time. Starting in the 1980s, people started saying, lets go look at the data and find out what has happened in places where minimum wages rose. The finding was that what the textbooks tell you does not necessarily turn out to be the case in real life. You could raise the minimum wage without having deleterious effects on the employment. That is not to say that the effects he is talking about do not exist. But the idea that you get to 7. 25 we are not seeing terrible effects on states that have gone above it. How high can we go . That is unknown. I would say that some of the places going to 13 per hour and 15 per hour, that is getting into crazy territory. But something in the rage of the 10. 10 seems like lets give it a try. Minimum wage is very different and has different impacts on populations depending upon the rate of Economic Growth and the cost of living. In new york city, a minimum wage of 10. 10 is probably half of what it would be in kentucky at seven dollars. I really think it is important that if the minimum wage does go through that it is done by the state level. It should not be a federal minimum wage. I am very concerned about the lowest echelon of the u. S. Economy especially on minorities coming into the mainstream of economics. I do think that the minimum wage has in a normally distorted the facts on the innercity and teenagers come on minorities. I really think those people dont have a chance of coming into the mainstream if they never can get a first job. That is what is really happening. Can i stop you for one second. What you just articulated, is that what you meant a year ago when you made the comment about the minimum wage effectively being a teenage black unemployment act . Of course it is. It has the biggest impact on minority teenagers in the inner cities. These are the kids who actually work at the minimum wage. They get hampered by it. If you look at the employment of those people, it is not a racist remark, it has a very, very impact by minority groups and by age. Anyone who does not see that does not see reality. I think that is a really important point you are raising. It is a tough one to deal with. You dont know what to do. Yes, we dont want to exclude people, but on the other hand, we want to dignify work by making sure that people get paid for what they do. We do have an answer. Enterprise zones in those depressed areas and dont make it a minimum wage, make it a federal government wage supplement that goes to the worker rather than having a higher wage, which would impact to the employer. These employers are not rich people. If you raise the minimum wage it impacts their business and their ability to hire. If you want to raise the minimum wage, use a wage supplement dont make a minimum wage. Thats all the burden on the employers. Im having a little bit of a trouble reconciling what you just said with the art laffer i already knew. You are advocating distorted tax policy. Everybody treated the same way . If they are in the same circumstances, of course. If they are not in the same circumstances, we have a real problem in the inner cities. I lived on the southside of chicago. That is a separate problem independent of manhattan. My proposal back in 1974 was to have an enterprise zone where we have no role tax, a low income tax, no minimum wage in the inner cities, so that we can instill private Economic Growth in those areas without burdening the employers. What the minimum wage does is it takes the lowwage employers and hammers them. Every dollar the minimum wage worker gets more the employer of the employer of that minimum wage gets less. Make it governmentsubsidized. One thing ethic we can agree on is that the minimum wage is not a cureall. There is no way that the minimum wage is going to solve the problem of low incomes in this country alone. People who are unemployed dont benefit from the minimum wage. But maybe it is part of a package. Couple it with an earned income tax credit, with vouchers for housing, with food stamps. There are a variety of pieces that are a safety net that means the minimum wage is one. I would not. This approach of food stamps, give them the money. Rather than trying to tell them what to buy and how to buy it. All these earned income tax credits. Give them the money for employment. If they are making five dollars an hour for an employer and you want to supplement that to 10 an hour, use Government Spending and not a tax system. That is what Government Spending is supposed to do. I have a simple question. If states were not raising the minimum wage. Lets say that the entire country was operating in the 7. 25 per hour minimum wage and we did not have places like seattle or states like rhode island. Where with the Unemployment Rate be . It would be much higher in places like kentucky and very low costofliving states. You will find a large proportion of the employed population working at the minimum wage. It would have very little employment impact on places like new york and connecticut, where the cost of living is high. The minimum wage to costofliving wage is much higher in new york than a livable wage in kentucky. You have to reflect costofliving differences. If you are in north dakota where the Unemployment Rate is 2. 5 cracks and rising. And rising. The minimum wage and fastgrowing areas has very little impact on unemployment. On stagnant areas, it has a large impact. You have to reflect on the cost of living and on the demographics of who is being impacted by it. This just irritates me a normal sleep when i see people talking about it at a broad scale and they dont realize who is going to bear the full brunt of this. These are our future and we are denying them the assets to the economic system. I find that offensive, to be honest with you. One thing i can always count on is getting your opinions unfiltered. Art laffer. Former reagan advisor. Peter coy. A discussion about the minimum wage. Coming up, the root of all evil when it comes to cyber attacks. We are going to take a look at whether investigators were too quick to put the cyber attack on sony on north korea. Coming up next, what happens when companies that are hacked decide to hack back . I will be speaking with the former head of the National Security agency, keith alexander. We will show you one way to help you keep your new years resolutions. Live from bloomberg headquarters in new york, this is Market Makers. You are watching Market Makers, on bloomberg television. Im Erik Schatzker. If you cant beat them, join them. Is that how companies should be picking about hacking . You take my server down, take your network down. Theres growing evidence that corporate victims are taking matters into their own hands of striking back. What if sony had responded more aggressively to some of its earlier hacks . Without a foil be attacked the fbi blames on north korea . Its a risky strategy. Who would know better than retired general keith alexander, the former director of the nsa. Today hes the president and ceo of iron at Cyber Security in washington. General alexander, thank you for joining me. If i may begin with this, at times, the United States seems so helpless against this threat of corporate cyber intrusion, hacking, if you prefer. Can you blame companies for wanted to take matters into their own hands . I dont blame them, but i dont condone that. I dont think thats the strategy we should push for. For one, while i can understand why companies would be upset, while they would want to push back, the fact is this could go the wrong way. For example, the company could escalate a crisis to where we dont want it to be. I think in this regard, its a national responsibility. The government responsibility to respond to these. Whether it is criminal, fbi, or a nationstate, Cyber Command of the nsa. You cant have companies escalate us into a crisis. I think with the administration and government has put out today is in fact, the correct approach. The companies can do more to protect their networks, thats something we should discuss. We will get there in a moment. If you are a corporate ceo these of the people you now advise, you have to share their frustrations. Should you have to wait for the nsa, perhaps, or for the fbi to respond . And if so, how long does that take . When sony gets hacked, arguably by the North Koreans, and perhaps not do you really have to wait around for the u. S. Government to take action . Know, in fact, you bring out a great point. There are three things we have to do. We have to help companies have better Cyber Security. We need cyber legislation. And we need an international set of relationships and a deterrent strategy with our realities our allies that can block this. We need a National Initiative in this area. Its not where you would have the companies do this alone. Its not where the government would do it alone. Its where we have to Work Together as a nation and with our allies. And we havent done that. Thats where we need to go, in my opinion. When you say deterrence, what do you have in mind . Its not like the cold war having a bunch of Nuclear Weapons because the russians have a bunch of Nuclear Weapons. And the threat of mutually assured destruction isnt going to stop vigilante hackers in a place like china or russia, for example. Right. We needed deterrence strategy that incorporates just the types of activity that you laid out there. You have criminal activity, you have theft of international intellectual property. Then you have nationstate using cyber as an element of national power. How do we bring all the capabilities we can, how would help companies defend better and recognize is not Just Companies that are being hacked. Over the last six months, the white house, the post office and several Government Agencies have been hacked as well. If everyone is being hacked, our strategy for defense is broken. And we dont have cyber legislation that lets government and industry Work Together. And we dont have international set of norms or deterrence strategy that we can rely on that we can put up. Remember in the 60s . There was great work on developing a deterrent strategy for nuclear war. We need to take an analogous look at cyber and say how are we going to now address this . Things are happening and we dont want to slow that down but we want to fix our defense the way our Government Works and the way industry and government Work Together. In the way we work with our allies. It raises a couple of important questions. If we liken it to nuclear warfare, these nationstates or criminal enterprises are effectively dropping Small Nuclear bombs onto the United States and other western companies right now. And we are responding with what, exactly . Its great to build a defense system, lets say like the israeli iron dome. And that may keep out some bombs, but it wont keep them all out. For argument sake, why should the u. S. Government and western nations in general take a more aggressive approach and use the kind of tools and intelligence that were deployed in say this virus, to more aggressively disable the Computer Networks and by extension the hackers conducting these attacks to begin with . I dont take that off the table. But i put that in the realm of the government and the international community, our allies so look at using, not companies to use. I would put down the table, that would be part of the deterrence strategy. What would we do, and under what conditions . How do we lay out what we will do when somebody tries to break in to some of our industries . And when does the government step in . When does the fbi step in for a Law Enforcement perspective . When does the government step in from a Cyber Command, Defense Department perspective . We have to lay that out. Lets use the case of double of north korea and the hack against sony. An unprecedented hack in the corporate world, based on what we know. Should we have responded by attacking north korea . Is that in fact what the u. S. Government did with north korea went dark . I dont know what the u. S. Government did, and i cant comment on that. Geomet to your go back to your initial question. What should we have done . We should have a capability in place that when a company like sony, or any other industry is being exploited or attacked by a, the government would know right away. And they would help defend before he got to the crisis state. This had to be going on for several months. As a consequence, sony needs a better defense needs a way for tipping the government to whats going on in their networks. Only sony can really see that. And away for alerting governments, whether its fbi or nsa Cyber Command, so the government to take the necessary steps to help stop it. None of that is in place today. That is what we need. We need a National Initiative to put all of these different Building Blocks in place and get it going. We have been talking about this for several years. Its time for action. In some cases, its hard to know who is responsible. Lets use the case example of sony entertainment. Based on what you know, im qualifying that by pointing out that you were no longer in government are the North Koreans likely the ones responsible, as the fbi said . Or did the white house jump on that one of little too quickly . Theres a growing body of evidence that suggests that at the very least, a disgruntled ex sony employee was involved. I would start back from the beginning. First, there is a lot of supposition going on around there. But if the fbi says that north korea was responsible my experience in working with the fbi is they are very conservative, in making that kind of direct connection to anybody who is involved. As a consequence, i would put a very high level of confidence in with the fbi is saying. They work just, they did it right. And they are very good. These are good people, they know what they are talking about. I think where it gets mixed up on the insider part is the hackers got in and stole credentials for some of the system of ministers. My understanding, from looking at whats going on in the press and what we are seeing, what the u. S. Service put out is they are taking those credentials, they probably got those in the june july, august timeframe. And they incorporated that into some of their tools, so they can actually exploit and pull back some of the information they had. And also go into the networks. I doubt very seriously there was an insider the got this going. I know people say we dont have enough information from the fbi to make that call. My experiences, the fbi wouldnt make that call if they didnt have that level of confidence. The level of confidence based on the information they had now, i would point to another example the hack attack against j. P. Morgan earlier last year, which was initially attributed to the russians. That was on the bases of information partly gathered again this is my understanding from government investigators. Now theres a growing body of evidence that perhaps it wasnt the perpetrators may have been in russia, it wasnt the kind of statesponsored cyber terrorism if you will, that people initially thought it might be. Different sets of conditions you have one in north korea, where you have a direct exploit an attack against sony. And you have coming out of ukraine, russia sympathizers potentially with the russian government, who may have associations with the russian government. Thats hard to actually identify. Thats probably the shortfall in what you are picking on right here. Picking up on who exactly directed it, and why. You know from some of the information that has come out on the attack against all these companies target, home depot j. P. Morgan, and others, that there was a nexus to the u. S. Policy in the ukraine. Some of that information within the urls or website locations that these hackers ported back to. It doesnt mean they werent criminals, but it does mean they may have sympathized or at least had insights to what the government wanted and perhaps some level of goahead from the government. That is supposition on my part. General alexander, im afraid we have to leave there. I could talk about this for hours. Retired general keith alexander, the ceo of said Cyber Security. It was merger mania in 2014 for some sectors. We take a look at some places most likely to see mergers heating up this year. Stay with us. 2014 was the year of the megadeal. Mergers like comcast and there are also some deals that never got off the ground, like pfizers overtures to astrazeneca. What are we likely to see in 2016 . Where should we begin . I think a lot of things people are looking fores pfizer is still on the hunt. After that ago didnt work out, and pfizers need for a deal didnt go away. It may work in other areas. Glaxosmithkline. It caused a lot of pain. The argument in favor of pfizer doing a deal is it extend to other errors in the drug industry. They have to find a way to generate sales growth. That carries over into other industries as well. Acquisitions are great way for that. Another when people are looking up is rio tinto. Basic materials. In the mining industry. They can come back. That expires in april. I could see another run of that one. This is a diminishing asset they need to supplement. Rio would be a great way for them to do that. The brewing industry has been heavy consolidated with an are bush and inbounds for example. With the belgians teaming up, what else might we see . Theres a big one. Theres a lot of logic to this. Especially in regions like africa, with a beer market is starting to pick up. Theres also tons of opportunities. It just makes a lot of sense. People are thinking 2015 could be the year. I mentioned at the outset the bid for Time Warner Cable from comcast. There is been a lot of consolidation on the distribution side. Everyone is witty for the other shoe to drop. When 21st century fox made its offer for time warner last year. That one seems to be off the table, but it has made all of us wonder if Something Else might happen. Is an area people are going to be watching. Does fox come back from time warner or other companies that could maybe take over like stars . Things like that that could get some takeover. Theres been some regulatory noise about comcast, Time Warner Cable, and comcast is taken some preemptive steps to try neutralize some of that. But again, there been times or pewrriods, where there was intense antitrust rooney. It doesnt seem like we are in that now. There is a logjam. We do have time warner and comcast at the same time as at t and directv. For well, with other was going to be three there. With sprint and tmobile, and we dont have that. That may make things easier for time warner, comcast, at t, directv. We will see what happens with that. When we pushed it back a little bit. We are still waiting to hear what the ruling will be. Things are going to be busy in 2015. I hope so. Work cell phone brooke sutherland. Of course you go to the gym everyday, or you will. Thats your new years resolution. We look at hightech way of keeping your promises. Still going strong on that new years resolution . Good for you. You only have 364 days left to go. This is a selfimprovement start of that created an act to connect you with coaches on your tablet or mobile phone. Let me begin by have you explain having you explain how the app works. You signup for a goal, then you choose for your paid coaching to support your goal. We have more than 700 coaches who were there to give you instant support for whatever your goal might be. Productivity, diet, fitness, whatever. And when you choose a coach, they check in with you every day. Holding you accountable, giving you daily direction, these are real human beings . Is a real human beings. It comes at a cost. One of our goals is to make coaching something everyone can have. Right now, its a luxury that often costs the of dollars per hour. The coaches on coach. Me are a big opportunity for people who thought coaching is too much of a luxury. This comparison is worth exploring. The kinds of coaching you are talking about at hundreds of dollars an hour, this is the kind of thing that people are familiar with at the gym. No one is going to hire a coach at 150 an hour to help you lose weight. If you think about how desperate people are to lose weight, i think people are often willing to pay quite a bit. Regardless, it is a price thats affordable. And thats one of our big goals to make coaching affordable, accessible, and easy to get basically for anyone, like making it an apt. Something you can carry around in your pocket. How long is this been around . As a starter, its more than a year old but we Just Launched the coaching. One of my new years resolutions is to get people from stop using that word in cases where doesnt apply. Xiaomi, who actually manufactures phones, just got valued at 45 billion, is no longer a startup. We are evaluation and millions of dollars, and we are five people. We are a genuine startup. Based in san francisco, we are eventually capitalists, the whole thing. You had a different name, why did you change . The thing about startups as they are constantly looking for what is the thing that is going to make them and become a business, become not a start up . That is our goal. Thats your news resolution. Exactly. When we started, we called ourselves lift but we werent sure what was going to turn into. What we found as we built the community with 2 Million People is the power of the community was in them helping each other. Almost all of the original coaches came from within the community. Like with nitro . We can get into that. For those who are member, he was on american gladiators. Why does and some buddy bring back why doesnt somebody bring back american gladiator . He does work first, hes a coach on our platform. As far as we can tell, hes the best coach. One of the things we do is measure the effectiveness of all the coaches. We get ratings from the users, we see how effective the users are, how active the users are once they are coached. And he is at the very top of that kind of coaching. How many coaches do you have . 700. In the beta, we tested the coaches on 2000 people. Who is your competition . Other startups care about this, the most established one is weight watchers. They have a similar model. More focused, but they often pull their leaders often out of successor is from the committee. Tony stubblebine, founder of coach. Me. Will be back. Live from bloomberg headquarters in new york, this is Market Makers with Erik Schatzker and stephanie ruhle. Manipulating the market. Regulators warn currency prices are being ranked. Are they ignoring bigger problems . You are going to need a microscope to tell the difference. These diamonds are forever. But some come from a lab, not from a mine. Remembering a passionate warrior for the liberal cause. Mario cuomo dies at 82. Welcome back. This is Market Makers. I am Erik Schatzker. Stephanie ruhle is out. Lisa is joining me for the hour. These are the top business and financial stories of the hour. The market is betting on more monetary stimulus in europe. That has sent the euro to a 4. 5 year low against the dollar. The euro fell to 1. 20 after mario draghi hinted at larger quantitative easing. Those remarks sent bond yields falling in italy and spain. Manufacturing cooled off last month. It is a low in december growing less than forecast. Nevertheless, factories are expected to stay busy in the first part of the year. Cheaper gasoline and a stronger labor market are likely to boost spending. According to one investor, it is not going to be the apple watch. Fred wilson has come out with a bunch of predictions for the new year. One is the apple watch will be a flop. He says people will not want to wear computers on their wrists. Economist. And the best selling author is saying no thanks to the french government because he has refused to accept frances highest decoration. He says the government should focus on Economic Growth instead of handing out awards. His book is about solving the problem of income inequality. Harry reid has broken a number of bones in an accident suffered while exercising. Reid is being treated in las vegas to injuries to his face and ribs. His office is a piece of equipment broke causing him to fall. He is expected to be back in washington next week when the senate reconvenes. Will 2015 be the year of the bond market selloff finally . With the Federal Reserve preparing to raise rates for the first time in a decade some on wall street think treasury bills have nowhere to go but up. Mike is the global head of fixed income strategy at jpmorgan asset management. Thanks for joining us. Fiveyear german yields negative already. As i was walking up the door, i thought this would be a great segment. This is what we expect to happen. Ecb is going to force people into other places like bonds and credit. We have seen this before in the United States. The feds forced everyone into the credit market. We will see this all over again. This german yield is the first sign. 2015 is going to be the year of expectations and predictions fulfilled . Instead of frustrated . If the ecb is engaging in another round of stimulus that will knock everyones socks off and justify the move we are seeing how is it u. S. Treasuries are going to rise . I think you may have been sitting in on our Investment Committee last week. It is a great question. When you look at the relative yields in the United States versus europe and japan and the continued forecast for the strength of the dollar you are going to see a lot of overseas investors looking to the u. S. Markets for bond yields and depreciation. Crossover body will keep a lid on yields here. The rate hikes will not do much to counter that. I am wondering. The consensus is june, the fed will hike Interest Rates. You have december manufacturing numbers below expectations. What is the incentive for them to hike rates with Oil Prices Dropping Inflation Expectations deteriorating . We have a couple of things going on. Improvement in the labor market, we are seeing a lift to wage inflation. We have to keep an eye on Capacity Utilization numbers. That starts to become more tight, then we need a rate hike to counter growth. The flipside is inflation. Janet yellen has said she has used the oil pass through as a transitory bit of the inflation component. And therefore, they are not looking at oil as keeping inflation so low the fed cannot hike rates. Do you agree . It is an interesting debate. We were talking earlier, we are both chicago people. The idea of core inflation versus headline inflation, people use energy and food. The way we view inflation is the inclusion of energy and food. Well gets cheaper, our cost of living is lower. The fed strips that out and looks at the core number. Excluding food and energy, that is not what we live off of. If both things you describe end up happening the fed raises shortterm Interest Rates and you still have this chase for yield and chase for the increasing strength of the u. S. Dollar, perhaps capping you know, yields further out on the curve that would suggest to me we are likely to see a flattening of the yield curve. Exactly right. Not just in the u. S. But also europe. What you will see is if the ecb comes in to purchase bonds with sovereigns, you will see a compression in peripheral. Is there any risk . We seem to be a ways off from it right now. You never know. Will we see the yield invert . That is interesting. That typically happens further in the fed cycle. We have a chart comparing the yields. It is a simple index that illustrates it does not happen very often. But when it does, the role souls are bad afterwards. What you typically see is there is an aggressive fed action happening on the front and. The longer part of the curve is anchored. You can see yield inversion. We are years away from that given the steepness of the curve now and other factors at work in the bond market. Highyield bonds, worst year since the credit crisis. Do you like them going into 2015 . Selectively. If you think about the highyield universe, we talk about what we get right. One thing we got wrong this year was we thought the high yield market would be a two minutes performer because you saw strong corporate Balance Sheets. You had a global yield grab going on. We did not realize oil prices were going to collapse 40 . 15 of the highyield sector is energy. You have seen a dramatic spread widening in the Energy Sector that has dragged down the index to roughly up 2 this year. It is up. It is not exciting. It is not bad. But if you had selected higherquality credit over energy, you could have had 6 returns. This is an active management story. Lets say Oil Prices Stay this low. Defaults will pick up meaningfully, potentially doubling the energysector. This is a fundamental concern, the move beyond the technical risk. What is the risk that could prompt defaults and sustained outflows that cause broadbased decline . I think it is an interesting story of how hard the spillover story happens. After the credit crisis everything was a contingent risk. Somebody sneezed in japan and the credit markets in europe would blow up. It feels different. If you look at greece right now, which is certainly in an uncertain situation, those yields are still up at 9 . We have seen the rest of the european bond yields come down. Markets are differentiating. I believe you can see known Energy Defaults get those out of the portfolio, and still have bonds that perform very well. The flip side is you have companies that will do better in a low Oil Price Environment that will benefit as bondholders. Within fixed income is the perceived illiquidity of the market a perceived contagion risk . We have an active debate especially toward the end of the year where things get thin. I think it depends on certain sectors would tend to be less liquid depending on time of the year. I also think it is a lot to do with retail flows. Talk about daily demand for liquidity. Versus and ability and ability for the street to provide liquidity right now due to higher capital regulations. What we want in our portfolios is portfolios people feel comfortable owning. It is not a get in and get out trade because youll hurt yourself if you going in with the ebbs and flows of things driven by liquidity, not fundamentals. What is your favorite corner of the debt market . Highheeled right now. Again, selectively. There have been bonds thrown out with the bathwater. That is where we like to do our active selection. We see opportunity. Also looking at countries in the emerging markets that benefit as Oil Importers lower oil prices. Indonesia could be an interesting play. Are their names trading cheap in energy because they have been so heavily sold off . Yes. I cannot say the names specifically. You want to look at companies that look like Energy Companies but are more reliant on that gas nat gas. That price is fairly stable relative to oil. Your earnings are not going to be impacted as much. You may have just traded for the wrong reason. I guess we will see. Highyield bonds. A lot of people are saying i dont know. We will find out a year from now. Thank you. Happy new year. That is Meg Mcclellan on Market Makers. Coming up, remembering former new york governor mario cuomo. We will hear from one former adversary. Loss, are these plus plus, are these diamonds real or made in a lab . The important thing is your friends will probably never know. Tributes are pouring in for liberal icon and former threetime governor mario cuomo after his death yesterday at 82. Hours earlier, his son was sworn in for a second term as new york governor. And the newly reelected governor spoke about his father in his inaugural address. He could not be here physically today, my father. But my father is in this room. He is in the heart and mind of every person here. He is here and here. His inspiration and legacy and experience is what has brought this state to this point. Former republican senator al damato is with us on the telephone. He served from 1981 through 1989. What do you remember mario cuomo for . Obviously, his eloquence was superlative. He was inspirational. There is no doubt about that. He was a man of great intellect and integrity. He had a very special kind of integrity. Maybe it takes you, youve got to be further away to appreciate him. I did not fully appreciate it at the time. When he made a commitment to something, he stuck by it. He did not waiver. He did not test the political winds to find out whether or not this was something the public would support or would not. I am thinking of one particular issue. That was the Death Penalty. At the time this was a very big issue. We had a high crime rate during the 1980s. Overwhelmingly, new yorkers supported the Death Penalty. Mario cuomo was unwavering in his opposition to that. He felt the importance of human life was such that the Death Penalty imperil that imperiled that. He was eloquent in his defense i felt opposite. The point was he did not test the political winds. Notwithstanding he knew this would cost him votes, he was unwavering. That was his mantra in anything he believed in. The question of womens rights etc. There were many who felt differently and strongly about it. But he expressed himself within eloquence and determination and integrity that never wavered. While we might clash on issues and we did have a number of differences. He was a man of great principle. Lets revisit some of that. Time definitely heals all ones and can resolve time definitely heals all wounds and can resolve differences of opinions. He once accused George Pataki. I supported George Pataki for a number of reasons. The governor and i disagreed as it related to some of his tax and spend programs, which i thought made it difficult for businesses and were bringing about an exit is of them. The issue on the Death Penalty was one we differed on. The issue of welfare reform. I believe strongly in welfare reform. The governor was more concerned about seeing to it that the poor and impoverished got their fair share. So we had differences. I did support governor pataki on the basis of those differences. It does seem like one of the biggest and most lasting aspects of his legacy is formal cuo mos son, andrew, who was inaugurated yesterday. In what ways does he differ from his father in terms of politics . That is another one of the great legacies of the great family man, caring about his family and community. The governor, i believe, has taken a practical approach to taxing and spending. He has opposed tax increases that some have put forth. I dont wish to revisit them. Well, i will. Mayor bill de blasio wanted to raise income taxes for those at the upper echelons to support prek. The governor said i support prek and we will do it without raising taxes. He took on the teachers unions very powerful, and capping spending by putting a 2 cap on spending because he realized what was taking place was making it impossible for people to own homes. Very different in terms of his tax and spend philosophy. Senator, you clearly view andrew cuomo on his own merits because you had differences with his father. You are a supporter of the current governor. But some people look at andrew cuomo as the inheritor of a political more than a political legacy, something of a political dynasty, if you will. They raise the same points when you look at jeb bush who may make a run for the white house in 2016 and the same with Hillary Clinton. Is there a problem with political dynasties in this country . I think people have the ability to judge the candidate on his or her own. Yeah, there is a question. By the way, you have to have a certain passion and feeling to become involved in public office. You certainly dont do it for the money. Certainly, it takes on great scrutiny, great risk, great commitment of time of energy, a family, you take time away from much more than the private sector. It is a very intrusive kind of thing. There are many people who would be qualified to get themselves out of consideration. Before we run out of time many people wish mario cuomo had run for president. Do you think andrew cuomo will . I think andrew cuomo certainly will be considered. Depending upon whether Hillary Clinton makes the race, i dont see the governor. I have not spoken to him with respect to this. But i think he would find himself hardpressed to get into the race if mrs. Clinton were to undertake that race. I think if she does not run then i think he will be one of the top contenders. Senator, thank you. Former senator alphonse al damato on the legacy of mario cuomo and the future of his son andrew cuomo. Market makers will return in a moment. We are approaching 26 minutes past the hour. We are going to talk about casino stocks. Las vegas sands and wynn are getting hammered. New data showed the casinos had their worst year ever. Revenue in the city fell 2. 6 in 2014 which includes a record 30 drop in december alone. Analysts blamed the president s anticorruption drive with weaker growth in china. You can see how wynn and previously Las Vegas Sands are dropping on this latest development. Coming up, it is wall streets journal of the fox in charge of the inhouse. We will tell you why regulators are growing more concerned about the market and default swaps. The laboratory is quicker than mother nature. It can create a diamond in little more than two months. Live from bloomberg headquarters in new york, this is Market Makers with Erik Schatzker and stephanie ruhle. Welcome back. You are watching Market Makers on bloomberg television. Here is a question. Is the cbs market being manipulated . It could be. Credit default swaps are self regulated. Dealers run the market and set the rules. Josh is sounding the alarm. He is the managing director of the independent Research Firm who just published a report exploring this issue. People remember credit default swaps for the role they played in the financial crisis. Warren buffett called them financial weapons of mass destruction. Im talking about the fact that the way credit defense is determined to be a trigger of cds like greece or argentina or caesars. A group of 15 firms get together in secrecy and make a determination about whether it was a credit event or not. Theoretically looking at the language but realistically they say that ill have to explain why. They dont have to disclose their votes. They dont have to look at president s precedents. You say this goes beyond big thanksgiving big banks giving a reduction. This could collapse the markets. How . Looks you have given them the event to determine if a credit event has happened or not. In the Determinations Committee for the americas, they have voted unanimously on every single vote for the past more than three years, which is amazing. They postpone sometimes the determination. Even where the language is clear in a contract caesars is a perfect example. The Committee Meets in private. They decide theyre going to postpone. They dont determine whether it was a credit event. They meet again on monday. It was fun again they postpone again. Get the language is clear. They dont have to explain the rationale. They have the ability to rebalance books. There is no oversight. There is no declaration of what happened. There is an external review process which has higher bars and hurdles. Notionally definitionally, the Determinations Committee is made up of 15 of the largest players in the world who are given the right to determine for every other buyer or seller whether an event occurred. It seems there is an uneven Playing Field. Lets say new mexicos Firefighters Pension plan, how does it factor into their investments . If they were buyers or sellers of protection and were certain a credit event happened in fact a credit event did happen in terms of contractual language but the Determination Committee has the majority of members decision the other way. They very well could say that was not a credit event. There is no review process. There is no process for them to recuse themselves for conflicts of interest. Most of them are conflicted in every major decision. What you say interests me for several reasons. One is up until today, my understanding is people have looked to the credit event determinations and felt as though it was an aspect of the market working fairly well. I dont think that is right. I think we will see more concern about that. We have had weve got to ask ourselves how is it possible you can have 15 firms all unanimously agree on every single credit event. What youre asking is to prove counterfactual. I am asking, why would the process be secret . No summary explanation. And who had a conflict. No requirement to disclose conflict. And no ability for those conflicted to recuse themselves. There is no government oversight whatsoever. Where should the oversight be . You would think it should be with the s. E. C. , banking regulators. Even if just in review. I think youll find if we end up seeing the investigations of this, you will find repositioning of books. You will find folks were voting the conflict. Why have there not been lawsuits . The Committee Process is fairly new. It is only five years old. Became as a result of the financial crisis where the government said heal thyself. That is the way it works. We are starting to see more lawsuits filed. We are seeing more complaints. The more you see postponements of clear credit events, the more scrutiny will be brought to this. A lot of people think after the financial crisis, the world of derivatives shrunk a lot. But in fact, it is not true when you look at interestrate derivatives. How much has the increase in volume of bets on Interest Rates changed the Playing Field and people in ways people dont understand . Look at the derivative market. People fail to say we have contracts 10 times global g. D. P. That is a staggering number. For that to be self regulated market where we dont know whether things doing that there is very little ability to get through that. Meaning the amount owed exceeds the amount. This is a question. This is not an answer. Is it appropriate the number of cdswritten exceeds the underlying debt, credit . That is a question. Whether people should be allowed to create synthetic exposure. Synthetic exposure was a huge part of the financial crisis. It was the synthetic cdos more than the physical backed dcdos that were problematic. Look at radioshack. That is another one where there is some question about why it took so long and whether they made the right decision. Again, it was unanimous. In the first great vote it was unanimous. Pimco came out voting for it. The cio said that was a ridiculous determination. Obviously, theres something askew. Is there a ringleader . 10 banks and five buy side firms. I suspect we would find the 10 banks almost always vote in block. They pull it together. They get one or two of the byside firms because they only need 80 to get a credit event determined. Everyone else goes along. I know youre going to be talking about this with the people whom you speak with the washington. What are you asking them to do . Im not asking them to do anything. Suggesting. Im responding more than asking. This is starting to be looked at. The fix is a driver for them to start taking a deeper drive on the regulatory side. On the hill, it is starting to get more of a look because of the swaps push out rule being decimated as part of the appropriations process. I think it is going to be a bigger issue to watch this year. I think we need clarity and transparency rather than the opacity that is there. Good to see you. When we come back coming up, better for the environment and your wallet . That is the argument in favor of the new ning in jewelry diamonds made in the lab. We all know the saying, diamonds are a girls best friend. What about Lab Created Diamonds . Our next guest promises you cannot tell the difference. She is the c. E. O. Of the company that makes and sells Lab Made Diamonds and gems. Welcome. Happy new year. Can you really not tell the difference at all . Even like a professional diamond assessor . They are identical even under a microscope chemically, optically, and physically the same as mine diamonds. The only difference is their point of origin. These diamonds are grown in a laboratory. They are cheaper as well. How much cheaper . 30 to 40 less expensive. This is the Worlds Largest Laboratory Grown diamond we just introduced at the holidays. When 26 of all americans are engaged. That is a big rock. How do you avoid the inevitable . Which is that some people will look at these Laboratory Grown made diamonds and say they are fake diamonds. They are not fake. They are not synthetic. They are not artificial. They are genuine diamonds. They are not cubic zirconia. They are identical to mine diamonds. How do you make them . The pure grown process starts with a diamond seed, a small case of carbon placed in a lowpressure microwave chamber. Hydrogen and methane gases are added. The reaction begins. A plasma ball eight nights. Carbon molecules rain down on the seat. Six to 10 weeks later, a diamond is finished and ready for cutting and polishing. You are doing in a laboratory what takes place under millions of pounds of pressure over millions of years underground. We dont know how long the process takes in the ground. What we do know is it takes millions of years to find them. They are not for everybody. I can imagine a lot of women, who if they got a rock from their fiance and found out it cost them 30 less and is not considered natural by a lot of assessors were as valuable perhaps, they would not be too happy. When they know all of the features and benefits of Laboratory Grown diamonds, they are much happier to know about them. They are conflict free. Nobody has Human Rights Violations placed against them. No blood diamonds. They are ecofriendly. In what sense . I have to believe the process you described involves a fair amount of energy. Diamond mining is very destructive to the environment. It destroys the ecology wildlife flees the area for years. It is irreparable to the earth. Our process is ecofriendly. It uses a small amount of energy to replicate the same process that takes place in rugged nature. Mother nature. Is in the appeal for people that they are rare and it does cost a lot of money . Diamonds are forever because it took a long time to create them. Is in the appeal that you can sell them again for a lot of money . The most important part of diamonds is the relationship and love. The love that goes into finding a diamond that is ecofriendly where nobody has been heard because it has been grown in a laboratory and is special, these are tied to a diamonds, very rare and peer type 2 diamonds, very rare and pure. 100 of grown diamonds are type 2 which makes them the most rare. Elizabeth taylor had a type 2 and so did queen elizabeth. No consumers can buy them. The sprinkle just like any diamond i have seen. There is one disbarment they sparkle like any diamond i have seen. Our diamonds are in great. They are sent to new york. Each stone has a unique identifying number. On the certificate with purchase comes that number. Are you going to buy a diamond for your wife, a Lab Grown Diamonds . Im sure my wife would like for me to be buying diamonds. When the time comes . Will she be able to tell the difference . To the naked eye . Identical even under the microscope. Thank you for joining us. Market makers will be back in a couple of minutes. Stick around. We have almost run out of time on Market Makers. Lisa thanks for spending an hour with me. Stephanie will be back on monday. I have a feeling what we will be talking about is what is going on in the u. S. Dollar. The dollar index, a basket of currencies against the dollar is now trading at 90. 928. It is about 1. 5 points off its most recent decadehigh, which was towards the end of 2005. You have the euro going back down to the lowest since one . It is depreciating quickly. Tim oneil said it was not going to drop further and probably went back up. Mario draghi came out saying we are fighting deflation. Big concern. Which is what he has been saying for several months. It was where he came out that was different this time. He came out in the german newspaper which tells you he is communicating or feels the need to communicate directly with the german people who up until now have been the most reluctant when it comes to expanding the e. C. B. s Balance Sheet and using extraordinary measures we have become used to in the United States that we forget we are slowly approaching the end of unconventional monetary policy. His word is not like janet yellen. Janet yellen is speaking with consensus behind her. Only one country. Lisa, thank you again. When we come back on monday have a wedding in your future or perhaps you know somebody who does . The website isnt spending is expanding looking for new ways to connect consumers to wedding planners. In the meantime, have yourselves a great weekend. It feels like we just had one yesterday. It is great to have another. See you monday. It is 56 past the hour. Bloomberg television is on the markets. Lets take a quick look at the major averages. The markets started the new year off in green but has given back all its gains. Stocks jumped out of the gate with the downed gaining 128 points. Now the major averages find themselves in the red. Joining is the chief operating officer at keene on the market. What is the action on the vix look like today . Happy new year. We are seeing the vix continued to move higher over 19 while futures are trading over 1850. The last day of the year was volatile with the downside move in the s p 500. Like a lot of these moves we have seen over the past few weeks in the end of 2014, it is a bit overdone. Youre seeing in saturated moves as much of the streets Vacation Time in the last two weeks of the year exaggerated moves as much of the streets took Vacation Time in the last two weeks of the year. The stock touching its highest level since generate 2014. Shares were upgraded to buy today. What is the options activity looking like today . I like bed, bath, and beyond and what we are seeing. Four times average daily option volume today. It is important to mention the stock is up 34 in the last six months of 2014. But at the levels it is trading now around 76, it is still below where it opened last year at 80. With the continuing falling price of crude, i think you will see more upside. It is a good consumer stock. Of lower Commodity Prices youre going to see increased consumer spending. I think bed, bath, and beyond with its underperformance last year is a good name to ride this wave. Any other retailer seeing more upside . Pretty slow day in terms of order flow for other retailers, as i believe much of the street is still off going into next week. You think generally overall the market does have upside even though volatility does seem to be picking up, correct . Yes. I think you are going to continue to see upside in the market through the First Quarter and into the second quarter. The big question on the minds of traders is when the fed is going to raise rates. It is kind of a given it will be mid2015. The extent to which that has already been priced into the market remains to be seen. That is what i am looking towards before i see any turn in the general overall trend in the market. You also got a trade for us on monsanto. They are set to report earnings next week. How are you setting up for the report . Absolutely. Monsanto has historically performed well on earnings. It has moved up six of the past eight quarters. Im looking to purchase the weekly call spreads for next week for about . 35. I will be buying the 122 weekly call next friday and selling the higher strike further out 124 call of the same expiration for a net debit of . 35 per contract. That means i can make up to one dollar 65 1. 65. It provides a good riskreward set up if it should rally higher. What are you expecting for earnings . They have reported strong numbers thus far. I am expecting a slight beat in terms of estimates. It is interesting. That has been a diversion between bonds and stocks. At some point stocks have to start looking at bonds and saying we are either on a bonds run. Do you think there is a relationship that will shift between the two . At some point, that could be the case. At this point in terms of all the easing we are seeing worldwide, i dont think there youre going to see that convergence in the first half of 2015. Thanks so much. We are on the markets in 30 minutes. Money clip is next. Welcome to money clip. I am scarlet fu in for olivia sterns. Heres the rundown on this friday. A brandnew year meeting time for resolutions and predictions. Take a look at some of the biggest, best kind safest places to put your money in 2015. In media, a banner year for the megamerger. In the rules segment, 59 people become refugees. We will take a look at organization taking