Transcripts For BLOOMBERG Bloomberg Surveillance 20151215

Yellen uses. Michael it is a cliche to call something a stork but we have never been here before. So, no one knows what is going tohappen it is a cliche call something historic but we have never been here before. Francine what happens after that first hike . We also are getting some vew Investor Expectations zew Investor Expectations. It gives us a benchmark of what german investor expectation is like. Investor expectations 16. 1. It seems, despite all the geopolitics, despite the refugee crisis, investor business is still there in germany. Lets get to first word news. Vonnie good morning. Saudi arabia says it is formed an Islamic Military Alliance to fight terrorism. The coalition includes 34 nations including pakistan, turkey and egypt. A joint Operation Center will be established in riayad. The saudis say every Muslim Country is already fighting terrorism. President obama says the u. S. Is taking the fight to Islamic State with urgency. The president spoke after meeting with his National Security team at the pentagon. He says the u. S. Is focusing its firepower on Islamic State in syria and iraq. Republicans have accused the president of not taking Islamic State and the threat seriously enough. British voters are evenly divided about leaving the European Union, according to a poll for the vote leave campaign. The poll says when undecided voters are included, half the voters would vote for the brexit. The house of lords just past an e. U. Referendum bill. David cameron could hold a vote as early as next june. Shanghai ordered factories to limit production and schools to keep children indoors. The most unhealthy form of pollution reached its highest level in two years. And almost 200 countries and territories signed on to the Climate Change agreement. Already one of them wants to opt out. Greenman says it has the option still of withdrawing from the agreement. The Prime Minister says the problem is that greenland was only given the emissions quota of a minor danish city. 56,000 population. Francine it is quite a lot. Thank you so much. Lets have a look at what the data is suggested. If you look at european equities and s p futures, it is actually rising. The market consensus is that rates will rise from the fed this week heard it is unclear what happens after that. On to copper and crude. Copper leading Industrial Metals lower. Gaining a touch as we speak. Lets have a look at what european stocks are doing. Markets iserging where a lot of the action happened this morning. Rebounding to a sixyear low. Benchmark ages were up. Japanese shares sliding. Former u. S. Treasury secretary Larry Summers warns of the risks of a premature rate hike. He spoke to tom keene in dubai. Larry i believe the decision to delay rates runs risks that are easily reverse by subsequently raising rates. Whereas a decision to raise rates if it proves to have been the wrong decision is a much more difficult decision to correct. Francine lets bring in wells fargos chief economist. It is an ominous day. We keep talking about the rate rise. But this is the fed normalizing. Market consensus rate hike. What happens after that . Your earlier comment about language is key. To what extent to the altar the dot plot . When Larry Summers is talking about rates being increase, i just a one now it is rate increase and then a lot of caution on the part of the fed looking at the path of inflation, not only the year over near numbers that we will see rising in 2016, but what are their acts occasions for 2017 as well what are their expectations . Francine talking about inflation. That will really test chair yellens ability to raise rates. John we see a more limited rise thative to the dot plot the fed will publish this week. We are only thinking about two or three increases in the federal funds rate in 2016. Pretty limited. Pretty cautious. And i think a very thoughtful fed that does not want to give the projection of a sequence of rate increases that really will be out of line with what i think the fed looks at for inflation longterm. Ael Larry Summers says that the economy is not ready. You are not of the ivory towers of cambridge nor of wall street. You are south in charlotte, north carolina. Away from wall street, is the u. S. Economy ready for high rates . Readyi think it is very for it again, limited. We are not talking about 2004 or but 25, 50 basis points at the beginning for the next six months. Then another 50 aces point after that. But not a long sequence and not an aggressive fed policy. Vonnie explain the concept of a dovish rate hike. A hike is a hike, no . John going back to francines point, what is the language . Yes, we are going to raise rates but we are going to be thoughtful. We will look at how the markets react. It is not going to be a signal of the sequence of Interest Rate 2006, it unlike 2004, is going to be more of a cautious, thoughtful but dovish rate hike. Francine janet yellen and her fellow central bankers have already flagged a lot of the risk andsome of them tightly the dollars 15 rises since june equivalent to a full percentage point of rate hikes. Is that shrew and where do you expect the dollar to go from there is that true . John you are right again to focus on the dollar per se. Discussions with respect to emerging markets and the Debt Financing and those markets tell us once again that any increase in the federal funds rate will be limited overtime. Michael are you getting a raise this year . Janet yellen says what they do next depends on inflation. Whats your inflation outlook . Are we going to start getting raises or start seeing the Wage Inflation component pick up . John i think we will. Over time we are going to see the wages and salaries component, average Weekly Earnings are rising. What is happening is not only are wages rising but the hours people work is increasing. But not in the pace that is really going to say hey, labor are rising, we have to raise prices. Mike stay with us on bloomberg surveillance and stay with bloomberg tomorrow. Complete coverage of the fed decision. Tom keene is coming back. We will bring your complete live coverage beginning at 1 00 p. M. In new york. 6 00 p. M. In london. This is bloomberg surveillance on Bloomberg Television or on your tablet, your phone, and bloomberg. Com as well. Vonnie this is bloomberg surveillance. Monthlykswagen biggest loss of market share since the emissions scandal broken september. Two share of cars fell percentage point. Sales rose. But the growth rate was 1 3 of its competitors. Foris and talks with a deal with a german healthcare merger. For the first time in four months, the rate of inflation and the u. K. Has gone above zero. Prices rose at an annual rate of in november. The bank of england is not inflation to hit its 2 target. Francine investors will be counting down the hours to the fed decision. The probability that will hike is 76 . Lets get to pimco managing , geraldine, great to have you on the program. How will the fed impact dollar and treasuries. Geraldine we feel that the fed hike for december is by now pretty much prices. But communication that would give through the economic projection and dot plot will give them a chance to give a direction to the markets and impact the curve. Here we feel that is currently priced as at risk premium is not enough. And there is a chance we see a mild selloff. Francine so, what is the most attractive sargon market at the moment, treasury or european bonds what is the most attractive sovereign market . Momentne at the european bonds in the territories. New neutral you argue that forex changes, rising currency, has a disproportionate effect. It could lead to at least nominal recessions. Why . Is that a change from previous tightening cycles for Central Banks . Ldine i think it is slightly difference in the new you have lower growth and lower inflation. Nominaleal economy and norm economy is growing slower than before. Therefore the capacity of fx volatility is much less. These days fx volatility is not lower but higher because Central Banks are close to the zero and any quantitative easing decision or potential fed hike will have a disproportionate impact on fx moves. That is why we feel that fed is going to be very gradual and very cautious in their hiking cycle. Mike how does it affect corporations . They have got to be exposed to these fx moves. Is there an outside impact on corporate earnings . Geraldine absolutely. Corporations have more overseas revenues than they have ever before. And therefore, they are extremely exposed to what is happening abroad and what fx rate has an impact on their earnings prefer instance, u. S. Corporations earn a lot of revenue overseas and a lot in china. Which is a novelty now in this world where the Chinese Renminbi has finally started to float versus other currencies. This is a new era for most corporations, and this will have a disproportionate impact on the Earnings Report that we see every quarter. Francine what are you most worried about 2016 . What are your top risks . This year came out with a wow with the s p stopping that with the euro. What will 2016 bring . Geraldine 2016 for me are oil prices. We feel they will bounce in 2016. This is our best case underway. A forecast that there is a risk that oil prices do not bounce and stay at low levels. This would have impact on Inflation Expectation and credit conditions, default rates. This we will have to take into account. And the second thing that is a risk to our forecast to 2016 is the behavior of the Chinese Renminbi that i mentioned earlier. We feel that there is not going to be a major depreciation of the renminbi. Should that not be right, and we see a much more important depreciation of the renminbi, this will affect the behavior of the fed most likely, and therefore, we would have to review a number of our forecasts. Francine thank you so much for coming in. Of pimco managing director. More from tom keenes interview with former u. S. Treasury secretary lawrence summers. That conversation is up next, warning about premature Interest Rates hikes from the fed. This is the number surveillance streaming on bloomberg. Com. Live picturess over the millennium bridge. Im going to say it is a glorious day. It is not. What it is the festive season. I am Francine Lacqua, Michael Mckee and vonnie quinn. Vonnie it is very atmosphere. Tom keene is on his way back from divide. From dubai. Interviewedft, he former u. S. Treasury secretary Larry Summers. Summers allows that the fed is going to raise rates but he is skeptical it is the right move giving u. S. Financial market weakness. Lets listen to a portion now. Larry first thing i would say is that the fed, given the signals it has sent, has no choice but to raise rates tomorrow. I would certainly recognize that this is all a much closer question than it was in september when the economy was looking weaker, when there was less evidence of an increase in inflation and when there was more turmoil in Financial Markets. That said, i believe that it is in a world where error is inevitable much better to make easily reversed errors than to make difficult to reverse errors. I believe a decision to delay rates runs risk that are easily reversed by subsequently raising rates. Whereas a decision to raise rate s, if it proves to have been the wrong decision, is a much more difficult decision to correct. And i think there are still substantial questions about th, growth prospectsabout the prospect of achieving 2 inflation target, about uncertainties in Financial Markets, particular with respect to the Global Economy and with respect to emerging markets. And so, my instinct would have been to place less reliance on the philips curve theories and therefore, to have waited until there was clearer evidence that we were in danger of significantly exceeding the 2 inflation target before acting. Tom when i look at the international sense dubai reeling from Lower Oil Prices. Goes back to it china. You have written much on china. Do agree with the assertion that china drives the International Debate . Larry i think china is an extremely important factor for commodity markets. Beense demand growth has the line share of the growth and demand for many different commodities the lions share. China, according to one calculation, laid more cement and concrete down between 2011 United States the did during the 20th century. That gives the sense of the magnitude of heavy investment in china. I think those days are gone. China is working to reform its economy. Its working to maintain growth. They may or may not succeed. But either way, they are unlikely, it seems to me, to generate the kind of growth and oncel demand that they did. I think that has got important implications for commodity markets. Tom the raising of rates by ofrr yellen and the vector the presumed path of raising rates, how will that adapt or changed china, or within iron ore, how will that adapter change australia . Larry it cannot be a favorable factor for commodity markets. Some likely to add strain, substantial part of that string maybe all of it has only been felt in the sense that the increase in rates has been telegraph. I think the people who are most alarmist about increases in rates do need to recognize that these are factored into markets to some extent. So, the extent to which it will be further affects really depends upon what surprises the fed delivers down the road. Its carrying through on the commitments it has already made. Innie that is Larry Summers conversation with tom keene. We will hear more of that interview a later on. I wanted to Michael Mckee. Larry seems to think we are going to be revisiting the zero bound. Having been there for so long lessons will the fed have learned . Need to communicate better. Beyond that, it is going to take a long time until they can look back and say this is definitively what happened and what we should have done. You heard larry talk about the debate about the phillips curve. William phillips new zealand years ago the relationship between unemployment and inflation to people on the fed argue that it holds. Larry argues it is broken. It is going to take a while until we figure that out, whether it is true or not. It is an argument that they are having in england as well. Francine they are. I want to talk about the output gap. Simon kennedy wrote a great piece on the bloomberg terminal. The output gap is the difference economyse world trend rate and its actual expansion. It is so different. The last time we did this it was too soon to raise rates. Are we thinking about a reversal which is kind of what larry summons was summers was intimating. Mike it is the question of the day. Will they or will they not . Based on all of these arguments. Stay with us on bloomberg, because we will cover every aspect of the fed Rate Decision from europe to the United States to asia. Tomorrow, complete coverage of decision live beginning at 1 00 p. M. In new york, 6 00 p. M. In london. I am Michael Mckee. I will be with tom keene for that. You are watching surveillance francine welcome back. This is bloomberg surveillance. Im Francine Lacqua in london with Michael Mckee in new york. Looking at gorgeous pictures of hong kong. Michael and i think that hes gone to hong kong to break the news. Chem china chairman is meeting with syngenta today. First, lets get to first word news. Secretary of state john kerry is in moscow trying to resolve some of the differences with pressure over syria and ukraine. Kerry met with russias foreign minister will talk with Vladimir Putin later. Russia says airstrikes in syria are aimed at Islamic State by the u. S. And its allies essays they are targeting says they are targeting rebels. Saudi arabia has come up with his own coalition. It is described as an Islamic Military Alliance that includes 34 countries. Among them, pakistan, turkey, and egypt. The joint Operations Center will be established in riyad. Republican president ial candidates square off tonight in another debate. This one in las vegas. Ahead in iowa. Cruz and toddle chomp have been from a. But now that cruz and donald riend. Have the been f the collapse of iron ore has many investors barely making it. The ceo of rio tinto spoke earlier. There are a lot of producers that we believe that are hanging on by their fingernails. Thats life. They are burning up cash reserves for their shareholders. That is a decision for them. Onnie you can get more these and other breaking stories 24 hours a day at the new bloomberg. Com. Mike iron or is the canary in the coal mine for commodities. Ammodities overall having terrible time. The bloomberg commodities index, you have to go back to 1999 to see prices as low as they are. Today john silvias chief economist at wells fargo. Hes been nice enough to join us this morning. We cant say the United States is not a commodity producing country and not a commodity country given the amount of crude oil we are pulling out of the ground these days, but how much of an impact to commodities have on the u. S. Economy and the prospects for the future . Devastating for a stronger, new zealand, countries like that, but do we really care here . In terms ofe certain regions. The plains states, the mountain states are very focused all the way from texas up to north dakota and then west in utah and nevada and wyoming. That regional and impact is important. Especially when we talk about texas, a much more diversified economy then we saw in the 1980s. Yes, it has a negative impact in terms of some of those regions but they are much more diversified than they were in the past. So, not as significant. The key is it keeps Inflation Numbers down. So, what we are seeing overall is that we actually have deflation. We look at cpi commodities, there are deflation the last two or three years. Mike are we going to see that turnaround . The feds argument has been inflation comes back because last years drop in oil prices falls out of the numbers and we get that cpi later today. Does that happen or does the recent decline change that . The that is interesting in sense that mathematically youre right. The yearoveryear numbers start to improve and become more like one and a half and 2 for inflation. But there is no momentum Going Forward into 2017. So you get that one time adjustment on the base effect, but you do not have that continued momentum. It is not an inflationary process. It is more an inflationary adjustment. When . inflation and john we are seeing a 2016. We will start to see the cpi in pieces. I would say that the function, the process in the market place, talked about the Unemployment Rate we do not have the same inflationary process we had in the past. I do not think we are talking about 3 inflation. It is more like 1. 5 for 2016. Francine what is the output gap tell us about inflation . The bigger the gap the weaker the International Inflation is. That may be something that actually spurs chair yellen to reverse course if she hikes tomorrow. She willo not think end up reversing course because i think she will be cautious in what shes doing. But your point on the output gap on a global scale is very important. And we do have a lot of access applied and a lot of commodities. Example of that. And we do not have that sense that potential gdp is so high that were keeping up with real Economic Growth in such that there is an inflationary process of the global level. Francine we have a story out becausecinated me ive been studying this stuff for many decades. There is a theory that goes when the fed hikes, when people feel more confident, that encourages them to spend and that helps with inflation in the United States. The United States, i would agree. I think there is incentive that if the fed does raise the rate, there is a confidence factor. If the fed feels comfortable enough, then we must be doing ok. Lets proceed ahead and perhaps do some business investment, consumerng and spending. But i think it is a small impact. I would agree it is probably positive but the magnitude is limited. Ise we dont know what going to happen after the fed raises rates because we have never been here before. What would you be afraid of . What could go wrong with this . Hiringeven years of people that have never seen a rate increase that is the trick. When you look at a lot of the trading floors, many of the staff on the floor have never seen a rate increase. Back again to the liquidity aspect. The federal funds market today is much more limited. The repo market is much more limited than it was prior to 2006. You have a very much thinner market. It is a concern. We have seen this with respect to treasury and high yield bond trading, with respect to banks being limited in terms of the trading floors. And so you get much more volatility at the end of the curve. We may see much more volatility at the short end of the curve. And also, one more point. It may not be possible for the fed to affect the federal funds rate. They may say the range is 25 or 50 but we may only get 30 or 35. Vonnie tom had a great interview yesterday. How traders have been boning up on how this is going to work. Are working very hard. When you do not have the experience of having gone into battle, into trading with the federal funds rate increase, that is a real challenge. Vonnie will there be cooperation . The intentions are one thing that the market has to comply. John i think the market will go along with the fed. They are going to take their signals from the fed, absolutely. Francine are you concerned about emerging markets and outflows . In a lotcorporate debt of these emerging markets Energy Companies. John you have to be concerned. And that will again be a factor termsng any fed action in of the extent of any federal funds rate increase and the speed of any increase. We have seen that before when you have sort of the Ben Bernankes comment with respect to withdrawing liquidity in the marketplace, the taper tantrum showed up in emerging markets and capital flows, absolutely. I think we have to be focused on that. And also i think the fed is focused on that. Vonnie thank you so much. , we will coming up speak with the Swedish Central Bank governor. The rics bank left Interest Rates unchanged. How much more strength can it tolerate . This is bloomberg surveillance on bloomberg tv, streaming on your tablet, your phone and bloomberg. Com. Stefan they move too fast, then the economy could be stolen because of external shock. Its a mistake. Suppose they were more cautious. If the economy is too strong and inflation picks up, you are behind the curve, but you can tighten faster. These are symmetry within the risk of moving too soon or too late. You want to be cautious. People are question whether the fed should be raising rates right now. Francine mr. Doom, nouriel roubini. 2015 was the year in which we saw a record refugee flows, shocking terror attacks. What surprising event could 2016 have . We are joined by john to give us to 2016. Mists guide we are trying to figure out extremes and how investors can prepare for them. Some of the pessimists Angela Merkel resigning, cyberattacks, and oil at 100. John the lesson is that the world is becoming a riskier place. The tectonic plates of geopolitics are changing. In the back only have the fed raising rates. For a long time rates near zero acted as a fire blanket. Fed moving, investors do not have that safety by get anymore. Francine we are asking whether the fed is right to hike. You are looking at a scenario where oil is at 100. That would scupper a recovery. John if you talk to Intelligence Officers in the middle east, one of their secret concerns is that Islamic State figures out a way to conduct industrial espionage on Strategic Oil inflation is in iraq, saudi arabia. Opec is at full capacity. If you take a regional chunk of production off at the table, oil prices instead of this downward momentum towards 20 could actually turn around quickly and we could see a pretty rapid spike in the oil price. Turning the current consensus on its head. Vonnie typically the u. S. Dollar is a safe haven but in this case it may not be because positions have been built up so much. John that is right. I think in a world of sort of increasing, increasing risk one of the havens over the last few years has been the dollar. But one of the big exercises we conducted as part of these black swan events are what would happen to gold. That is one scenario that people looked at in a scenario for example if you have a maverick becoming a president of the United States. That is one scenario we talked to people about. The dollar would be interesting what happened there. Another interesting scenario is what happens to the european bond market if Angela Merkel resigned. And you sans outbreak of political instability within the an outbreak of political instability within the eurozone. Most the people we spoke to reckon that you could see a rally in bunds as investors rush to safety. A lot of counterintuitive dynamics going on in these scenarios. Francine he did not name anyone. The potential of maverick becoming u. S. President. Cyber attacks. This was one of the main risks. I guess a possibility. But it would be an attack on wall street banks. John that is one of the things people talked about. One scenario that banking executives talked about was we talked a lot about islamic extremists, there horrible terror attacks in paris. What if, for example, you had extremists working within banks himself, using their position within banks to download viruses into the Central Nervous systems of the banks. Very much a terrorist. When you talk to Security Officials in the financial community, that is one of the things that people worry about, the integrity of their financial infrastructure could beat copper mice be compromised. There is also russian and iranian and north korean hackers. We saw what they did to sony, to the pentagon. If they were to manage to break deep within the defenses of the biggest banks. Mike certain of the things are, possible others the maverick becoming president of the United States less so. One of the banks to talk to, the investors talk to most worried about . What do they think is the biggest threat of the black swan list . John one of the things that comes up over and over again is brexit, the prospect of britain leaving the European Union. Not only in the states but also in western europe, there is a lot of disruption going on within politics. The rise of marie le pen in france has been going on for a long time. Dynamics like the implosion of syria and the surge of refugees are creating this new unpredictable dynamic within the western electric. At the moment, we talked to people consensus is that britain would probably stay within the European Union but given the mood of populism and iner ithat is at large western europe, it is very unpredictable situation. The first thing we need to see is whether David Cameron can negotiate a deal with the European Union starting this week that will be presentable to the electric. But if he does not get it right, the referendum which could, as soon as june next year, will turn into a much more unpredictable affair. Francine how do you model these extreme events that could be donald trump becoming president or a could be cyberattacks or even attacks on oil driving up to 100 . John absolutely. There are scenarios that you put into an Economic Forecast for all of these different events. I am particularly intrigued by the Angela Merkel resignation possibility, because she has become now so identified with European Economic policy that any inkling that she would leave really throws up policy Going Forward. The other thing is accommodating factor. If Angela Merkel were to step down for some reason and there uncertainty with respect to european policy, then you may end up having the compensating factor that there is more likely a brexit. Those two factors almost go together. That we have to model, we have to put in an analysis. The cyber story is really key. As we know, the payments mechanism that we assume daily is going to work could be threatened. So, yes, you put these into the models and you do make significant adjustments. Francine interesting model. Pessimisticr that guide to 2016. Coming up, we will speak with it but its Central Bank Governor the Swedish Central Bank governor stefan ingves. Interest rates they left them on change. This is surveillance streaming on your tablet, your phone and bloomberg. Com. Vonnie this is bloomberg surveillance here is your latest business flash. European lawmakers have rejected the idea of road tax. The idea was proposed in the wake of the volkswagen emissions scandal. Some members have argued that most testing for emissions will be more accurate than only testing in a lab. China National Technical is moving over on with plans to take over syngenta. Withchinas chairman met syngenta last week. Investors are sharing in the airplaneof writing dividends at boeing. It expanded its stock buyback plan to 14 billion. There is concern that after a decade of rising sales, the bull market baby slowing down ma rket may be slowing down. Rfares, we have got to check in and see what hes charging. Im told we do have our chart of jet fuel prices. Prices have fallen the lowest since 2004, along with oil, but we are not seeing it reflected in falling ticket prices. It will be interesting to see how the airlines adapt. It should mean more revenue on the top line for airlines and they should be more profitable. In an industry that has never made a profit. Vonnie it should be better but we will see about that. Mike the people who sit in the back of the airlines, last class. They do not have any perks at all. Tom is not there. John silvia is still with us, the chief economist at wells fargos. We are looking forward to tomorrow. Six p. M. Wall street time, 00 p. M. In london. The Federal Reserve will announce its Interest Rate in london. 6 00 pm. We talked about whether this is a sign of confidence. A lot of people say confidence in the United States is not going to rise until people feel they are better off financially. They are not getting raises. We are seeing inequality rise. A pew study suggest the Middle Passage shrinking. Do you see any signs this turns around . Or is this a new normal . John i think it does turn the extent not to that we would have its a middleclass economic boom of 30 years ago. We had talked earlier about technology and robots. What we think about in terms of middle income jobs often time, a someone in worker, the backoffice processing forms thoseers of some type, generate a lot of those middle income jobs 50,000 a year, with robotics, what is happened in my world is yes, you are creating jobs for the programmers and the engineers very wellpaid, upper middle income people. D sometimes very rich people but that middle income group losing their jobs. Yes, i think there is going to be some improvement but we are not going back to the old days of jobs. It is going to be quite a challenge for our society. Mike do you see anybody and the political sphere and it does not have to relate to the president ial campaign but anybody moving to address the economic factors that underpin this . John i think that is really key, michael. No. Of rhetoric, a lot a lot of commentary, but the underlying economic factors, the real education, especially getting people oriented in terms of middle school and high school, more spending at the Community College level for Technical Education rather than glamorizing going to college for a four year liberal arts degree, see that. Ot there are transportation issues, moving issues. There are real fundamentals behind all of that that is not being discussed. Mike on that cheerful note silvia for being with us. You will be watching the fed decision tomorrow, whether or not we are going to see the fed raise rates for the First Time Since 2006. Stay with us here on bloomberg surveillance. In the next hour, we will talk about a central bank that did not raise rates today. And we will talk more about what the central bank of the United States is going to do. Surveillance continues on Bloomberg Television, your tablet, your phone and on bloomberg. Com francine the u. S. Central bank gets its twoday meeting as Larry Summers warns against a hike. The dollar weakens. Ceo same rio walsh has this is bloomberg surveillance , with Michael Mckee in new york. I am Francine Lacqua in london. What happens after the rate hike . Michael that is the row question. Todayappens in the market or tomorrow maybe does not matter compared to what happens thursday. Francine the do hundred obama the 200 trillion question. Lets get to bloomberg first world news with vonnie quinn. Vonnie saudi arabia says it is for me a military Alliance Forming a military alliance to fight terrorism. BeOperation Center will established and rihanna. No word on exactly what the alliance will do. The saudis say every Muslim Country is already fighting terrorism individually. John kerry is in moscow, trying to resolve differences with ukraine. Bout russia says the airstrikes in syria are targeting Islamic State, but the Usled Coalition says they are attacking rebels oust a trying to Vladimir Putin ally, bashar alassad. Or than three quarters of a Million People were evacuated from the coast, and the storm hit the philippines. Ted cruz is now solidly in the lead among iowa voters, while donald trump is widening his lead nationally. Cnn is airing the debates starting at 9 00 eastern. Bloomberg will bring you a special debate warm up this afternoon at 5 00 eastern. Respect,h all due live from las vegas. And Ground Control to major tim. He will make history today, writing a Russian Rocket to the International Space station. These are live pictures we are watching now. He will spend six months in space along with a nasa astronaut and a russian crew commander. You can get these and other stories 24 hours a day of the new bloomberg. Com. Francine . Francine and in the control room. This is the data check. It is all about the fed, what the fed will do, and align line it will use for 2016. Copper is leading metals lower. You can see s p futures higher. Gold is heading for its biggest increase in more than a week. Lets check out some of the other Asset Classes that we are bringing to you. This is a picture for european stocks. They are higher. Emerging markets rebounded from a six year low. Alsowas led by china but taiwan and thailand. Check out the pound. We also had inflation figures in the u. K. Michael our guest for the hour says there are three big issues standing between the u. S. And widespread prosperity. In his new book, reviving forica, he outlines a plan improving them all. Steve forbes, it is all about the fed. You do not like what they are doing. What is wrong with Monetary Policy in the United States, at how would you change it . Steve co inc. Steve he goes back before the crisis, a false commodities boom that led to the housing boom and bust. Since the crisis of 2008, 2009, quantitative easing of zero Interest Rates have depressed economy, not stimulated it. It hurts credit allocation to Small Businesses and households. Michael you can see the rocket going up to space with the british astronaut aboard. Not going to know the results of the Iowa Caucuses of new the Iowa Caucuses or New Hampshire for six months. You said the fed weakened to the dollar. The dollar would have weakened anyway, given the great recession. Steve the dollar started to weaken after the 20002001 recession, particularly with the treasury and the fed thinking this would stimulate the economy. They kept the dollar week long after the economy began to recover, so all economy all Commodity Prices started surging up. The same thing happened in the 1970s. When all commodities move in one direction, you have a big problem. They ignore the signals, so there was a commodities boom, with a weakening of the dollar. You had the housing boom because prices were going up and people figured they would go up more and more. That busted and led to the recession of 20082009 and a financial panic, but since then, what the fed has done, contrary to what they think, they were deflating the economy, not inflating it. Vonnie would you not argue that local and therefore Monetary Policy is now global . So they are not looking at only the u. S. They need to look elsewhere like china. Steve this assumes a central stimulatethe fed can the economy in a sustainable way. They cannot. The best thing the fed can do is have a stable dollar. A weak dollar is destructive, and overly strong dollar is destructive. It is like a watch or a clock yous too fast or too slope do not want deflation or inflation, you want to have flation. Francine they are also not here to make it worse. Steve in terms of the best thing they can do, the idea that if they crave bank reserves, that gives sustainable weight to stimulate the economy, that is a false one. Money is a measure of value. It measures value. It is like a clock measuring time or scales measuring weight. If the way you measure money keeps fluctuating, it hurts investment and it hurts capex expenditures in the u. S. They think Monetary Policy is a substitute for serious structural reforms, so you have a stagnant Global Economy. Vonnie in elaborate a little bit. You say the only reason there was a commodities boom is that commodities prices started to fall with the weaker dollar. Are you saying that the only reason china was developing was because of the construction boom, and in the u. S. Because of the weaker dollar . Steve when there is a genuine demand for more commodities, with the rise of the chinese economy and india and other countries had, you get more production. But in terms of overtime vonnie you are not saying that is purely because of the weaker dollar . Boom, 85 commodities of that was because of the weaker dollar. Oil went from three dollars a barrel to almost 40 a barrel. When volcker and did it in the early 1980s, oil crashed. Was aerage price of oil little over 21 a barrel. Supply and demand is not explain what happened in the last decade. Chart that have a shows at least the symptom, if not your diagnosis. The Commodity Index is down to its lowest you have to go back to march 16 of 1999 to see the overall Commodity Index this low. You are a freemarket guy, right . How does the fed maintain a stable dollar in a free market world where markets are going to set the value of a dollar based on all search of extraneous factors . Steve the key thing is money is a measure of value. It is like saying we should have floating clocks, 60 minutes one day, 48 the next, 96 minutes the day after. You want a fixed value for time, and you want a fixed lu from money because it makes it easier to trade with one another. When i mentioned in the book, for 180 years this country had a link to gold. We are going to have that kind of Monetary System again. That kind of stability, you have fewer financial crises. Paul volcker talked about that he year ago. The bank of england has done studies. More financial crisis, more instability. A stable value. The best thing they can do is allow the markets to operate with the real cost of money i. E. , let Interest Rates set their own level and start to pay down or run down their bloated balance sheet. When a bond comes do, do not reinvest the money. Put it to work in the real economy. Contrary i love your in view. But currencies are not like clocks because you can also have currency wars. At the end of the day, it is good for no one, but at least he gives a boost to exports in the shorter term. Steve again, because you can , like ie a currency suppose you could the minutes in an hour, does not make it right. It is very destructive. You look at countries that always try to stimulate exports by devaluation their money, they end up with a weaker economy because they got their domestic economy. Look at brazil. They thought having this false commodities boom could put off making structural changes. But you look at other countries, they thought this commodities boom was for real. They put all structural changes and they are paying the price today. Countries that have relative stable money over time to better than countries that do not. Government that a can trash its own currency does not make it right. Stable money is the road to prosperity. Unstable money is the road to lack of Economic Growth. Francine maybe it saved us from implosion, but i take your point. Steve is our guest host for the hour. Stay tuned to bloomberg for complete coverage of the fed decision. Coverage begins at 1 00 in new york, 6 00 p. M. In london. His is bloomberg surveillance on bloomberg tv, streaming on your tablet, your phone, and bloomberg. Com. Francine welcome back. This is bloomberg surveillance. Im Francine Lacqua in london. We are talking Interest Rate. Swedens central bank kept the. Ending rate at a record 0. 35 the bank also said it does not expect a rise before the first half of 2017. We are now joined by the riksbank governor, stefan ingves. You are more confident about where you are going through. Does the ecb give you a helping hand . An i mean, the ecb is doing what they have to do, and the rest of europe. If they can get inflation up, given what they are doing presently, that also helps some. The primary target is our own inflation rate. We passed the judgment this time that the right thing was to stay at 0. 35. Should by government paper at a pretty good pace for the first half of next year. How francine how much room do you have in inflation continues to if inflation continues to disappoint . Stefan by no means are we the end of the road if we have to do more. 0. 35 is not technically as low as one can go third we can do more on that side. We can buy more assets or we can all intervene in a Different Exchange market if we would have to do that. Francine today the riksbank raised its krone forecast. How much further krone strength can you tolerate . Stefan well, we are comfortable with our forecast because, given our forecast on the fx side, we will not we will get the inflation up 2 late 2016 or late or early 2017 per but if the krone number strengthens more than that, that would certainly bother us, and we would have to react to that in one way or the other. Francine this is Michael E Michael this is Michael Mckee in new york. The Federal Reserve is about to make a decision tomorrow. The riksbank raised rates in 2011 and had to turn around and go back the other way. Now you have negative rates. What advice would you give to u. S. Policymakers, the janet yellen, as they consider this decision at whether or not they run the same risk act oh stefan i do not give them any advice. They work as hard as they can on their side, and i am pretty sure they will come up with a decision that is good for them. Michael how long did it take you to realize that you had made a mistake . When itit took a while came to what happened back then in the swedish economy, the cousin given the financial crisis and all the rest of it, because given the financial crisis at all the rest of it, it was reasonable to think that the Global Economy and our economy would bounce back. It happened very rapidly in the early days, but eventually it peters out, and we had to change direction, when we had to figure out that was going on. Vonnie what will be you be looking at what will you be 2 00 p. M. Tomorrow, eastern time, in terms of metrics . Stefan everybody is going to look at what is going on in their own world when it comes to Financial Markets. I would not single out any particular metric. Whatis important to us is is going on in the swedish economy, both domestically and what happens to the Exchange Rate in such a way that ideally we should stay on track to get inflation up to 2 toward the end of next year. Francine those are very diplomatic answers. A quick final 1 how difficult inflation and headwinds from the World Economy . Stefan in the last few years, it has been pretty hard because the world is quite different compared to the way it used to be. I think that if you are in this asiness, all of us carry backpack filled with the niceties from the great moderation with us. And then we have had to deal with the world for a number of years, which ended up being completely different compared to what we expected. It comess it hard when to making projections, and it also makes it hard to get inflation up to 2 again, which is why we have ended up with the negative policy rate. One needs to be mindful of the fact that we have been around for almost 350 years. During that time period, we have had a negative rate for a couple of years, maybe a little bit more than that. So times are highly unusual. Francine the governor of the stenk, stephan in fan ingves. Stay with bloomberg for complete coverage of the fed position. Michael mckee will be at the helm of live coverage beginning at 1 00 p. M. In london. Michael this is bloomberg surveillance. Larry summers writing in the Washington Post this week michael so are we near financial instability . Tom keene had a chance to sit down with Larry Summers to discuss that very question before he left dubai. Larry in order to believe you should raise rates for Financial Stability reasons, you have to believe there is a serious problem of overconfidence, of bubble formation. It seems to me that most of the plausible bubbles are no longer plausible bubbles at this point. Perhaps you could have said there was a bubble element in the highyield on market at some point, but you certainly cannot say that today. We said that about emerging markets at some point. You cannot say that today. You could have said that about commodities at one point. You cannot say that today. The notion of raising rates today as a prophylactic against financial instability seems quite odd. I think we are much more likely to have problems that come from under confidence in Financial Markets than problems that come from overconfidence in Financial Markets. I look at the international sense of dubai right now, reeling from other dobby with Lower Oil Prices and iron ore, many say it hinges back on china and britain, much on china. Do you agree that that drives the National Debate right now . China is annk extremely important factor for commodity markets. Chinese demand growth has been the lions share of the growth in demand for many different commodities. China, according to one calculation, laid more cement and concrete down between 2011 and 2013 than the United States did during the 20th century. That gives a sense of the magnitude of heavy investment in china. I think those days are gone. Reform itsrking to economy. It is working to maintain growth. They may or may not succeed, but either way, they are unlikely, it seems to me, to generate the kind of growth in Global Demand for iron ore or oil that they once did. That has important implications for those commodity markets. Then the raising then the raising of rates by chair yellen and the bank or the vector and the presumed path of raising rates how will that a debt or change china . With iron ore, how will it adapt or change australia . Larry it is likely to add strain. Some substantial part of that strain or all of it maybe has already been felt, in the sense that increasing rates has been telegraphed. The people who are most alarmist about increases in rates do need to recognize that these are factored in to markets to some extent, so the extent to which there will be further effects really depends upon what surprises the fed delivers down the road, not merely on its carrying through on the commitments that it has already made. Michael Larry Summers speaking with tom keene in dubai. We will find out what surprises the fed delivers on bloomberg tomorrow. Complete coverage of the fed decision. We will bring it to you live. We begin at 1 00 p. M. In new york, six clock p. M. In london. Tom keene and i will have all the news from the fed. This is bloomberg surveillance. The only way to get better is to challenge yourself, and thats what were doing at xfinity. We are challenging ourselves to improve every aspect of your experience. And this includes our commitment to being on time. Every time. Thats why if were ever late for an appointment, well credit your account 20. Its our promise to you. Were doing everything we can to give you the best experience possible. Because we should fit into your life. Not the other way around. If they move too soon, the economy could be stalling, taking the policy back to zero would be a mistake. Suppose they would be more cautious, more slowly. If the economy is strong and inflation picks up, you could still tighten a little bit faster. This is similar straight this is symmetry, and you want to because is. People . Or the fed should be raising rates right now. Michael that was nouriel roubini. This is bloomberg surveillance. Mckee, with Francine Lacqua, and our guest host for the hour, steve forbes three we have not asked you yet you criticize the fed and what policies it has followed. But what do you think of the idea of raising Interest Rates now. If you want a stable dollar and economy, do you think they should be higher . Want real make you markets for credit markets. That means you need real prices. The fed has done the equivalent of rent control. Great if you have that rentcontrolled apartment if you do not have a lack of maintenance, but you do not get the functioning of building new apartments. If you want credit markets to revive, you have to have real Interest Rates. We pointe statistics out, in the last five years credit growth with the government has grown 77 . For corporations, 2 . For Small Businesses and households, 6 . That is terrible for job creation if you do not have real prices. The sooner you get prices in the markets, the better. Michael do you have to do something with banking . Steve banks are not making loans to Small Businesses, especially in large banks. Money. Costs too much the regulatory costs are too high. Community banks are being crushed by compliance costs, so the markets are not properly functioning. As soon as the fed steps back, in this case less would be more. Run down your portfolio, let markets it Interest Rates instead of mandarins in washington trying to guess what the Interest Rate should be. What the fed should do is explain this is not a depressant, it is a stimulant that should help the interbank market get functioning again and get credit markets functioning again. Why would apple borrow 40 billion in bonds when it has 200 billion in cash . And engage innot artificial engineering because of these low rates. We want to turn to vonnie quinn and get the latest news. Vonnie saudi arabia says it is innging together 74 nations an Islamic Military Alliance to fight terrorism. It includes pakistan, turkey, and egypt. The Operations Center will be in riyadh. The mission is not clear yet. The saudis say every Muslim Country is fighting terrorism on its own. A new poll shows 42 of americans favor sending u. S. Troops to fight Islamic State. That is up 31 in one year. President obama says the u. S. Is taking the fight to the militants with urgency. He is meeting with his National Security team. He says the u. S. Is focusing firepower on Islamic State in syria and iraq. Major tim peek of britain is carrying on britains great tradition of exploration. He made history when he rode a Russian Rocket to the International Space station. He will be the first to represent the European Space agency on the orbiting lab. You can get more on these and other breaking stories 24 hours a day at the new bloomberg. Com. I am vonnie quinn. Back to london and francine. Francine lets focus on retail. Reporteded firstquarter profit it expects a slight rise in sales despite a challenging economic environment. Ceo,ng us is the metro from dusseldorf, germany. Give us a sense of what you are seeing. You are beating expectations, but at the same time is there any particular segment or countries that are holding back on spending . I think in general we have met significant progress in attracting more customers to come back to us, in the stores and online. They are quite confident we can continue this trend nonetheless, we have a couple of geopolitical issues ahead of us, like in russia or the middle east. On ours some impact business. The good news is we can compensate. We are looking at a pessimistic guide to 2016. You did have a great day and you were getting back market share. When you look at geopolitics and 2016, what are your top three concerns . Olaf to keep the momentum is what matters now. And i think on this one, the whole leadership is committed. The question for us really will be do we see some consolidation of geopolitical issues, and after two years of more or less mounting challenges around the globe . That had an impact on our business. We need to be prepared for more severe impact and challenges, and as i said before, we are well prepared. On a groupgate that level, but hopefully it is something that is turning to the better in 2016. Francine how difficult is it for your company to unlock value . When you look at growth in the fiscal year, 1 is what you are expecting. 20162017. It is difficult to squeeze costs to unlock value. To iswhat we are aiming to accelerate growth, and it is fair to say yes on a global basis that we have moderate growth because of the geopolitical impact. We are doing much more with services, especially on the b2b side. We see a significant additional in,me that we can bring including some traditional stuff but also digital innovation. Electronics, almost the same but at a higher velocity. We are growing rapidly online, growing by 20 . We will hear we will hit the 2 billion mark in the next fiscal year. We are convinced this is going to drive our business to areas we have not been in before. Francine how much do you look at the Federal Reserve and janet yellen with what she will do tomorrow . Is there a direct correlation between the fed hiking rates and actually vulnerabilities in europe . To be very indirect, we have no presence in the United States, so we pay a lot of developing from a macroeconomic level in the United States. It does not have the direct impact. Nonetheless, if we see stimulus for consumption in the United States, it is good for a World Economy. We are watching it very closely. Olaf koch, thank you so much. He is saying that the fed, they are watching, but it does not have a direct impact on that. Michael certainly what happens in europe has a direct impact on the United States. Steve forbes, how concerned are you about europe, the european single currency experiment, and where we go from here . Steve very worried, and it is more political than economic. That is why we need these structural changes internally in europe. Britain pulling out of the e. U. Would be a political catastrophe. The whole postworld war ii thrust of europe has been more unification, trying to get a common economy so that war is absolutely unthinkable in that part of the world. It has been a great achievement, but now it is beginning to unravel. It took a combination of the two regionaln these elections in france to be up to beat it. Extremism is on the rise. Unfortunately, the ecb, the European Central bank, i do not think knows how to maintain the euro. Europe was suffering from a credit crisis, not a euro crisis, which is a point that we make in the book reviving america. It is not a dollar problem, it is a credit problem. , ael note to gregs it grexit,xit no to fran. We will get a report on the economy. This is bloomberg surveillance , on Bloomberg Television. Streaming on your tablet, your phone. New york city, clear and warm today. Francinevonnie bloomberg surve this is. Uber is not commenting. This says lift says it will threaten drivers privacy and increase costs on drivers and the city. Proposed because of the volkswagen emission scandal prism e. U. Members argue that those testing for a missions will be more accurate than only testing in a lab. Investors are sharing in the benefits of rising Airplane Development is airplane deliveries at boeing. It will expand its stock to 14 billion. There is concern that after a decade of rising sales, the bull market for airliners may be slowing down. That is our latest Bloomberg Business flash. Airlines, always volatile stocks. Never made a profit, over a 10year period. So dependent on fuel prices. Some else volatile, the highyield market. Here is our single best chart. We are looking at the highyield market. This is the merrill lynch, lower than triple c corporate raid corporate rate chart. It is the highest since the financial crisis or it has begun to soar in recent weeks. We have seen three funds liquidate. Third avenue, stone line, and lucido, in the last couple of days. Unless something changes, the highyield market will post its first annual loss since 2008. Watching. Ing was a lot of people are making the comparison to bnp paribas, to bear stearns funds blowing up and being a harbinger of future crises. Do you see the same thing happening today, or is this just the wages of excess . Gary i think it is more of that. You do not have the excesses by a long shot that you had in the mortgage market, the subprime mortgages. But one thing has happened, and steve was talking about this. You have those ultralow Interest Rates, and that has made investors jealous for yield, so they have been dumping money into junk bonds, and of course it took skill to default on the junk bonds in the last few years. There was so much money thrown at them. They took the money and a lot of it is now in jeopardy. I think there is probably going to be a lot more problems in the junk bond market. Michael is this going to be confined to people who should know better, professionals, and if they lose money gary you had a lot of individual investors, they have been retreating lately, but there is probably a lot more. When you have some of these funds, like some of these hedge funds, where they are not liquid what do they do . They close them down because they cannot liquidate except for very distressed prices. Francine what do you mean by a lot more problems . Have the credit markets become so it liquid and difficult to navigate for hedge funds to turn a profit . Gary the liquidity is not there, and a lot of people blame it on regulation, that the banks have excess capital, the volcker rule. I am not quite sure it is that straightforward, but there is no question that there is a lot less liquidity in markets. We saw that back in august with this problem with egf with etfs and underlying securities, where the price was way out of whack. You see that even in treasuries. I have been a bull on Treasury Bonds for 34 years, but you have seen some real big backups recently, even in the most liquid market in the world. You saw that chart. The rates are much higher than they were. But they are still so much farther from crisis levels. Gary that is right. Spreads versushe treasuries, and that is opening up as well. But again, the real question here is, how much is this going to spread beyond the energy area . Obviously a lot of these Energy Companies are in trouble, and these indices all have a big component of energyrelated securities in them. It is spreading somewhat beyond that, but that is a real question. Michael do you see this as just a cyclical action, or is this , andn by only fed policy once the fed raises rates we go through a crisis and it is gone . Steve this hunger for yield was because the fed suppressed Interest Rates and was hoping to stimulate the economy, which the opposite happened. If the fed continues to end up being deflationary, not intentionally be because the credit markets are out of whack, you will see the spread beyond just the energy markets. We are in an environment where prices are under pressure. When they are under pressure, two things happen. People with money are cautious about investing in because they clutch their cash. Also companies that have small markets are going to be tempted to cut prices, which eventually means a lot of those bonds will come under pressure. So the fed should realize, connect the dots, as we point out in the book reviving america, connect the dots between what they have done with zero Interest Rates and quantitative easing and the sluggish recovery. They are hurting the economy, not helping it. The credit markets will function just fine. The fed just as less. I am going to give you the shameless plug award of the day per you have done very well. After donald trump himself. Michael we will talk a lot more with steve forbes and gary shilling. Stay with us tomorrow. Whether or not steve forbes agrees with janet yellen, they are expected to raise Interest Rates. We will have complete coverage of the fed decision. Coverage begins at 1 00 p. M. Tom keene and i will both be here. 6 00 p. M. In london. You are watching bloomberg surveillance on Bloomberg Television. Francine this is bloomberg surveillance. It is time for the forex report. You can see this longer stretch. We had that report showing inflation remaining near zero. The japanese yen synchrony, and then the rea and then the rand is pretty much unchanged. Coming up shortly, it is bloomberg with david westin and stephanie ruhle. David, what do we have to look forward to . David it is the eve of the fed decision and we will talk about what that all means, where it is likely to go, with, among others, steve ratner. We will talk about whether funds are closing or losing money. We will talk about that with Margaret Wheaton of black rock. We will talk about the potential winners, for example, walmart. All of that coming up on bloomberg. Francine be sure to watch bloomberg at the top of the hour. Steve forms has been with us, the author of a new book reviving america. Tax, andavor of a flat says that this could bring us back to growth rates of 5 or 6 . I do not think any economists on any part of the political spectrum could be back to 5 or 6 . How can giving back to the Gold Standard achieve that . Steve because when you have a low simple tax rate, you get more investment. When you have stable money, you get more investment. When you have a Health Care Market that is topdown through party pay and give patients more involved, that will turn an into an a liability asset. Im old enough to remember the 1970s when after that terrible decade economists said we could only grow 1 or 2 and we will have a long time to recover. Eagan put in a massive tax cut inflation went down in the u. S. Enjoyed a huge boom it i think we are in those conditions again today. There is a lot of entrepreneurship, especially in the health care industry. Vonnie we are getting a lot of entrepreneurship not necessarily to replace the jobs that are going away, though. You said stable money will create more investment . Steve yes, because money is just a means of doing transactions with each other. It is like a claim check at a restaurant for your coat. When Central Banks finally recognize that it is just a means of doing transactions with each other, that works best when it is stable, you get more investing, more transactions, higher incomes. After six years of 2 growth rates, we are in for a period of making these reforms with 5 or 6 . Hael real or a nominal real or nominal . Steve real. Michael you have never had that kind of growth. Steve yes we have, in the 1980s. After the horrible recession in 1981, 1982, the u. S. Boomed. Michael we still had inflation. 12 orbut it went from 13 down to 3 or 4 . That was pretty good. As a matter of fact, this is where economists get confused. You want lower prices, in the sense of productivity. You take a flat screen 10,000, now 500. That is not deflation, that is good. Francine i want to ask this question to gary. Thee forms is talking about 70s and the 80s and the crash. The oil crash are you concerned that the slide in price in oil will be much more sinister . Gary i am on record as saying i think we are going to 10 to 20 a barrel on oil, and that is the marginal cost and that is where this game of chicken that the sayingare playing and who is going to back out first will be in deep. I think we are in a deflationary era. Michael we will watch for that as the fed moves toward its decision tomorrow. Gary shilling, thank you for being with us. s i hope are ok. Gary it is next spring when they come out that it will be interesting. Michael and steve forbes, thank you for being with us today. T is an historic week not only do we get star wars, we get a fed decision. We are celebrating a birthday today. We want to wish a very happy birthday to Francine Lacqua in london, and many happy returns. Francine thank you so much, mike i would break into song and dance, but we do not have much time with bloomberg coming up next. His is bloomberg surveillance on bloomberg tv and streaming on your tablet, your phone, and bloomberg. Com. David countdown to lift off. Crucial twoday meeting that will likely lead to the first Interest Rate hike in almost a decade. The junk bond selloffs marked the start of a broader drop in Financial Markets . Cashing in on crude. Walmart may be the big winner. We will tell you why. Stephanie it is tuesday morning. We are here in new york city. Youre watching bloomberg go. Im stephanie ruhle. David im david weston. Brendan greeley is here. Brendan hello. David today is fed eve. Stephanie it could be a day we see a rebound. At some point for every buyer, there is a seller. This could be the day where things are so ugly they start to