Asnie i have been mistaken francine lacqua. We will start by checking first word news. Moving closer to getting syrias president to extend his stay in power. The u. S. Is opposed to rushs assistance that they be allowed to compete in a president ial election. China has a warning for taiwan. Cutting ties with taiwan could collapse if taiwan refuses to recognize the framework that has governed the nation for two decades. The leading candidate in taiwan says there are other options for negotiation with the chinese government. Iraqi troops recaptured ramadi on monday. There are still some fighters there. They have launched a few attacks. Former new york governor George Pataki has quit the race for the republican president ial nomination. He is the fifth republican to drop out. In 1996 president reagan pressed for a summit meeting with the leader of the soviet union by reading a spy novel. President read the novel risingrm before meeting with president gorbachev. 24 hour news powered by our journalists around the world. I am vonnie quinn. Lets look at what is happening around the world. It is not ready unless you like the color red. We are seeing a retreat in europe and the bad day in london. The ftse is down by. 5 . Look at bond yields. Hey continue creeping higher that is off of the close yesterday. It is down off of its highs. 1. 08 for the twoyear yield. The pound and euro are doing well. Crude oil is down over 2 . That is not good news for Vladimir Putin. It hits a new low. Over 73 now. Our guest host is joyce chang, the global head of research at jpmorgan. We were talking amongst ourselves about what the stories of 2016 will be. We are having a hard time coming up with a new novel. If you were going to write a sequel to 2015 wouldnt involve anything other than china and oil . Joyce the normalization. We will have another 25 basis points every quarter, making it more complicated for countries around the world. You still have some factors from 2015. The volatility in oil prices, slower emerging markets, and the fed normalizing. Of how thea picture fed is influencing things, or when it starts to. The basis point move has not affected the dollar. It is not seem to be affecting borrowing or the economy. Joyce i dont think the fed is the most dominant factor for the countries that have been most on the radar. It will raise borrowing costs over time. I think that you will continue Market Access for some of the riskier credit will be in question. We saw that. How yield, emerging markets, have been struck. When you say it will be complicated, will it be complicated for them because the transmission in effect through the dollar . Joyce i think the transmission effect through the dollar will be the key thing to watch. We see further dollar weakness, not as dramatic as last year. You could see another move in the dollar from here. I think that transmission mechanism to emerging markets fx has stood out. You have had emerging markets fx yield, dramatically in the order of 15 to 20 more. Vonnie what are you watching in particular . Joyce china. China was more of a driver than the fed in 2015 and could be in 2016. It is one third of the global output, and for emerging markets, it is a onetoone correlation. They kicked two banks out of the country. Joyce they have allowed the country to have more flexibility. That was critical for china. Capital flows are key. They had a carry trade that had dealt of, 50 unwound. We will see more currency growth in china. Erik the inclusion of the year the inclusion of the limit chinasat ability to control its currency . Joyce over time, i think it is more positive. I do not see people adopting the currency in the same way as a reserve currency for years to come. The capital flow impact is not that dramatic over one year. China needs more flexibility. Erik if the chinese feel the need to devalue the economy over the, does the inclusion in governments interest in making it a World Reserve currency limit its ability to direct it . Joyce i think china will avoid oneoff devaluation. They learned from the mistakes in august. You will see a gradual move. That will have ramifications. We talked about the ruble being at a new low. You will be seeing the emerging marketss currency harder hit. Is still a handle on what we are anticipating. Global growth is not looking fantastic in any of them. It is a little slower, but i dont think the growth story is the big driver, i think it will be the currency effect. They will go slowly on the depreciation of the currency. We have a currency at 6. 7 or weaker. When does the currency effect kick in . The dollar has traded lower. Joyce you will see the commodity currency in developing markets. Australia is going gang buster. The ultimate commodity currency. Joyce you have to look at it over a longer time span. We see some of the precious metal prices, another 15 to 20 lower, which will have implications for the currency. You have seen oil currency have a dramatic move over the last few weeks. Vonnie how does that play into the United States economy . Joyce the stronger dollar is what to watch in respect to the u. S. Equity market. That is why we have seen a flat performance. Next year it is in the 3 to 4 return range. Our guest host for the hour. We will return to those themes. We will talk to Tony Crescenzi. It is 11 00 a. M. In london. This is bloomberg surveillance on bloomberg television. Erik you are watching bloomberg surveillance. Vonnieik schatzker with can and Michael Mckee. That is london. It is time for the Bloomberg Business flash. Wealth the thirdlargest manager and switzerland will settle claims helping americans with taxes. They will pay the Justice Department millions of dollars. Clearing the way for other swiss banks to clear similar investigations. A survey indicates Vladimir Putin needs help with economics. The russian president was given performance by one fourth of the economists surveyed by bloomberg. 2015 concluded in japan with the benchmark closing at the highest levels in 19 years. The honor of closing the bell went to a renowned conductor. That is our Bloomberg Business flash. A stunning outcome for the nikkei. Lets move to chesapeake. Now, they have been number one for a decade. It is struggling. It has already cut one out of every six employees. Theres as natural gas plunges to 2. 25 per million btu. One of three analysts rating the stock, to 10. Most of those analysts focus on chesapeakes 11 billion in says thatneiman chesapeake has assets in several areas and could offload some of those positions and three areas. That people are getting too hysterical. Chesapeake is not in the same category as some Exploration Companies with no other assets. That is why people are mildly optimistic they can pull out of it. This is a symbol of what is happening across the sector as Oil Prices Collapse and Companies Come to the end of their borrowing capabilities. They have nowhere to go. Vonnie another analyst, i want to mention, is saying bush is is announcingd bond exchange. Making it larger and larger. Plenty of appetite for that. It is now 2. 8 million. You just saw a chart of chesapeake. The stock prices were not obvious, but it was in the 5 range. At some point steins law kicks in. That which cannot continue, stops. Erik the stock still has value. If these guys are to be believed and there is room for upside, it is not a bankruptcy case. Looking at the 2023 bond with a coupon issue that five and three quarters percent, they are selling. If the equity is good, in theory, that is a great buy. Vonnie we should mention noble growth in the context. Michael their top commodity producer and they have had a rough year a tax by people like muddy waters and downgraded to junk by moodys. Noble put out a statement saying they are selling their agricultural group. That should raise them back out to investment grade. That is their belief. At this point it is a rough year for Commodity Companies. Erik if we look at commodities producers globally, is 2016 going to be the year they run out of road . Do these consistently low commodities prices, oil, gas, base metals, or in some cases, just the sheer scale of decline and Precious Metals producers they wont be able to refinance their debt and something will have to happen . Joyce i think a lot is priced in. We upgraded Energy Stocks to neutral from underweight. The highyield market, we see a default rate rising in 2016, but still on historically lower side at 3. 5 . You will see more m a activity. Given where valuations are, and where the default rate will be erik this is the worst . Joyce the First Quarter could the the worst. You will see more recovery in the second half. We are seeing value reemerged. Part of the problem is trading is at low volumes. Liquidity has been difficult. Youre in the holiday period with that it close of the year with the close of the year, and that is probably exacerbating conditions. The market is watching outflows. Will you see retail redemption from etf . Is the commodity prices, flows, and the liquidity of the market. Erik you are thinking of highyield . Joyce yeah. Joyce is ontoe something. Tomorrow, Michael Holland of holland co. Will help us wrap 2015, and look ahead to 2016. Will it be a better year . 6 00 a. M. In new york. We are streaming on your tablet, phone, and bloomberg. Com. Good morning. It is 5 20 in new york, evening and hong kong. You are looking at live pictures of the city. It looks like a decent day, even if the markets finished lower. Joyce chang is with us. She is the global head of research at j. P. Morgan. I did not realize this until i looked at your bio, you are in the fixed income hall of fame. You worked at a couple of different firms before jpmorgan. Is this like the Baseball Hall of fame . Fore it has been 26 years me looking at the market. I guess the havent been that many people. There is a hall of fame, and Michael Bloomberg was last years inductees. Michael you are in good company. When you use Michael Bloombergs market,n to look at the is it over . We got to zero, now we are going in the other direction . Joyce were expecting returns isthe bond market, but that not far from what we are expecting for u. S. Equity markets, which could read a 5 return. There is a reason to be diversified. Erik is that across the bond universe . Joyce it is across the bond universe. Some of the bestperforming bonds were not for you expected. The return on russian bonds were to 30 . They were downgraded to junk, but trading like they were already in default. If they were paid you could see returns in these bonds. There are distressed assets in the 20 to 30 range. Energy, is there better value in equities or credits on the highyield side . Ince we are at neutral energy prices. We think the First Quarter is the bottom for prices. In some of the market to have to look at opportunities earlier. You wont be able to buy them when you want to. I dont think credits have been specific. We are very barbells. Barbelled. Vik some of the double s are holding up better. Vonnie are you in russia . Joyce you have to do the credit work in russia. Our scenario is that you will have Oil Prices Recover in the second half of the year. We are looking at the supply has likely peaked. He of seen the peak for supply. You should have modest recovery. We are more pessimistic on the metal side. Erik the recovery from 37 to what . Joyce maybe middle 40s. Michael which is where we were a month ago. Joyce is it going to 25, or 40, orthe middle around 50 over time . That is the question. Michael in the credit space, is it the same as equities . Would you buy anything and energy equity, or do we need to wait for the recovery . Joyce we felt being underweight was not the way to be coming you should be an neutral. Im selecting names that look like they should the energy sectors, the rising rate environment. The exploration of production, pipeline, production, services what would you look at . Joyce i think that you still have in the exploration area, there is more distress. It is harder unless you understand the names. You have to look at the names, with something more liquid at this stage. Russia. You mentioned are there other economies you would look into . Brazil has a lot of potential, the second downgrade to noninvestment grade. The political issues are plaguing the country. There is a question on when is there an opportunity in brazil. Michael we will talk more about emerging markets and of the outlook with joyce chang. Later today on bloomberg , former Morgan Stanley ceo john mack. This is bloomberg surveillance. I am Michael Mckee with Erik Schatzker and vonnie quinn. We live in a pick and choose world. Choose, choose, choose. But at bedtime . Why settle for this . Enter sleep number, and the lowest prices of the season. Sleepiq technology tells you how well you slept and what adjustments you can make. You like the bed soft. Hes more hardcore. So your sleep goes from good to great to wow only at a sleep number store, find the lowest prices of the season. Save 600 on the 1 rated i8 bed, plus no interest until january 2018. Know better sleep with sleep number. Erik good morning. It is bloomberg surveillance. I am Erik Schatzker in new york city with Michael Mckee and vonnie quinn. Vonnie china found another way to help air pollution. The country is the Worlds Largest producer of carbon emissions. Complicating plans between north korea and south korea. This morning it was announced a car was killed in accident, raising suspicions in the south. South korean officials arent commenting. Iran was accused of conduct and rocket tests. According to the u. S. Military the rockets were fired. Some less than a mile away from u. S. Aircraft carrier. The test came weeks after a nuclear deal between iran and the west. A where winter flood threatening ina missouri. The Mississippi River has been swollen by rain and will reach record levels. They are watching the levees along the mississippi and its tributaries. The coach brothers the koch court case. E lost a namesannot disclose the of their donors to their public. News 24 hours a day powered by our journalists and news bureaus, i am vonnie quinn. Lets go to london where philip shaw joins us. Manning a quiet fort in london. Looking at the economic data, we have seen an improvement in consumer confidence. Any fracturing is still iffy. Are we seeing a two speed economic recovery, and will that continue in 2016 in the United States . A couple ofhave things going on with the Manufacturing Sector in the u. S. , the first is that the dollar strengthened considerably from the middle of 2014. Had a powerful effect on export growth. The second factor, which one could argue is more temporary, is the Manufacturing Sector has been overburdened with inventory. We are seeing in the gdp numbers in the u. S. The swing in the stock cycle is depressing growth. Manufacturers and wholesalers are selling from inventory. Ather than production lines i cant imagine that would have a continued downward effect on manufacturing and put on to the spring of next year. This the story around the world . A few in the developed world, like germany, which sell exports manufacturing seems to be a shrinking part of the Global Economy on the developed side. Philip that is a fair enough,. Fair enough comment. One of the key reasons we have seen that Exchange Rate affected is because of the slowdown in china and the structural shift in the chinese economy. Into aa is transforming serviceled economy, and more than 50 of chinese gdp is counted for by services, the Manufacturing Sector which feeds the infrastructure sectors in china has fewer orders. We are seeing that. Even in places like germany, which have done well typically. Economic growth not only in china, but in the far east, generally, are feeling the pinch. Erik what about europe. When mr. Draghi currently disappointed markets, was that because he was keeping his powder dry, or because there are flickers of stronger growth in europe and a risk to the upside in terms of performance . Philip my sense is the Ecbs Governing Council was divided over the monetary response ahead of the december meeting. I think that markets were disappointed because they heard stories coming from sources within the ecb of an aggressive monetary stimulus package being put together. It came down to it, the ecb program was extended by 60 anotherqe program by six months, and it also reduced the deposit rate by another 10 aces points. Is morewith the ecb united is assessing the outlooks with the economy. That seems to be a gradual momentum, forward momentum, and Economic Growth in most of the euro area companies. As we saw from the money supply figures this morning, credit, households, and businesses is strengthening, but it is gradual. Is going to be the big story of 2016 in the economy . Stronger growth that brings the bank of england back into play, the brexit vote, or hanging in at the top of the premier League Tables . Philip the story in the last three years has been decent growth in the u. K. Looking ahead, that seems to be there does seem to be slow down in the economy partly based in the Manufacturing Sector. The big political event an economic one is a likely vote on the referendum on whether to remain in the European Union or leave. Britishally, the population is pretty skeptical about the rest of europe. Aere is a risk that there is vote to leave. That would have pretty severe consequences in our view for the u. K. s economic prospects, given that 50 of exported goods find their way into another European Union country. Vonnie thank you for joining us. Notice how he avoided the premier league production. Did not realize my involuntary response would come out. We send you our best. Michael coming up, maybe Tony Crescenzi has a view on the premier league. He is the Vice President Market Strategist at pimco. He is with us at 6 30 in new york. Michael good morning. It is a bow tiefree week on bloomberg surveillance. Tom keene and france a lock while are on vacation. And francineee lacqua are on vacation. I am Michael Mckee with Erik Schatzker and vonnie quinn. You can look at the monitor and a c on thanksgiving everyone went home. This is the same story. 2 3 of volume at 1 2 to what they have averaged for the year. You say that we are going to see volume pick up. That leads to two Investment Advice for us . So far, the volume has been on a steep downdraft. Back in the financial crisis, 2008 2 2009, when the markets were going to zero, the volume tends to pick up. We are seeing 9 billion to 10 billion shares traded per day. As the bull market progressed, volume started to nosedive. Year, even before the volatility in august, we saw a little pickup. Shareslion, 6. 6 billion per day. A 5 to 10 increase over last years level. Some of the heaviest trading we have seen in them all market meltdown in august. It will be closer to 7 billion, the highest since 2011. And a lot of wall street Business Models are benefiting from higher volume. Trading firms, the highfrequency treater went pub lic. The heavier volume and a volatility is good for firms like that. The leading stocks in the Financial Sector have been at by section, stocks have benefited from higher trade like charles schwab. Erik so higher volume is good for the schwab, the nasdaq, their virtues. Will bring up a chart were looking at the ratio of the s p 500, the white line, of thed to the pe ratio custodial firms. Of conceive for a period four plus years tracked the Broader Market well. For most of 2012, 2014, traded at a premium. Is arch of this year there valuation breakdown. Why is the market value Asset Managers less than large caps . A mixedou had performance. A lot of the Business Models are changing as we head to more electronic trading platforms. As the models change, everyone is looking at, what is the future trend going to hold as far as what we should be looking for with respective Market Structure, trading vehicles, and market liquidity . I agree with the comments on trading volume. Market liquidity has dropped 60 . That is having an impact. Erik were talking in the basket of Asset Managers, not only firms like blackrock, but , the rowe prices traditional Asset Managers. Is there risk that those companies and businesses get displaced, not only by etfs, but the new trend in a financial technology, robo advisors . I think there is a risk and it is already happened. It has been tremendous. T rowe price is having a rough year. Active management has been a rough stretch for a while. Do you change course of little . It and add resources smart Data Products . Getting away from purely active management . It is a lower margin business. Your fees are lower on active management. In the evaluation graph, you showed that is what is being played out. If active is on this longterm downtrend, or maybe it will bounce back, but there isnt a lot of confidence that it will. Michael this is like coming out of the Great Depression were retailers didnt want to be in the markets. The company is primarily cater to the retail side. Do we see of americans wanting to get into the stock market, or are they still looking at movies like the big short . Joyce that picked up dramatically in the summer selloff. You are having greater influence is going into stock markets were there is still quantitative easing. European and Japanese Equities have been favored. In the bond markets, we have seen u. S. Corporate on the high grade side. An alltime record even in a year of low returns. We have seen m a activity. The demand for u. S. Corporate bonds remain strong. Michael im talking about the psychology. Are they afraid of the stock market . Joyce their freight of the volatility. We have seen the vix pick up. Concerned by how quickly the market moves have happened. There is limited volume. You can see the outsides move. The market, in the 1970s you had Investments Holding stocks for multiple years. That is come down to six months and less. The intraday moves have scared many investors. Michael joyces head of research for jp morgan. Michael reagan is a bloomberg columnist. It is easy to say china and oil will influence markets. What will be the surprises of 2016 . We will be joined by the founder of seabreeze partners, doug kass , with his 15 surprises. 9 60 in the San Francisco bay area. In washington on 99. 1 fm vonnie this is bloomberg surveillance. I am vonnie quinn with Erik Schatzker and Michael Mckee. There are reports apple will pay 350 Million Dollars to settle a tax fraud case in italy. Apple has been accused of abating taxes for five years by booking sales through its irish subsidiary. Apple said it pays every dollar and euro it owes in taxes. Carl icahn has won a war for cap boys. Boys. T noise pep they have 800 locations in 30 states. The Biotech Company has fired for bankruptcy. They lost two directors. The nasdaq delisted the companys. Earlier this month he was related on fraud. He was fired after his arrest. Wanting to get into stocks and psychology, these stories dont help. Michael we are here with joyce chang and michael reagan. Talking about stocks and challenges of active investing. Betty liu talked about that with the founder of vanguard, jack bogle, one of the claimants to the it you am a good picker, are a bad stock picker. There is someone on the other side of every trade. Net that needs to be scattered. Clearly talking his book. Why is it so much harder to be an active investor in todays market . Moves occur soet quickly. Looking at august 24, you had stocks down 15 or 20 in three seconds. Michael if you hold on, they recover. Joyce that not back to where they were. You can get knocked out of them at a bad moment in time. You have to be able to hold onto them and have them come back. Knowing the companies and fundamentals of those companies, taking a longer term, that is how you will find the best value. Michael what is most erik what is most challenging . Value, growth, or momentum . A fascinating story on monday about Asset Allocation ideas. Youre thinking that this is the year to be in bonds, stocks, or commodities last year there were no gains to be had. 2016,ve to think that in is there anything that will break the trend, or will we continue with the flat . Stock market flat. It is not only picking stocks, it is picking asset classes. Commodities are depressed. Of people believe that the growth of value regime will switch a note from the former jp morgan strategist, they are betting heavily that this shift will go to value this year. That growth stocks, your facebook, alpha that which used to be google they have had their run. That with very strong future earnings prospects are what are popular in the lower Earnings Growth environment. Aey believe that we will see pickup in earnings. Value stocks will ride to the rising tide of the economy. Value, there is scary how much value there is an energy and some of the big banks. That is their bet. I think that the trend of a flat market i dont see anything breaking that in the near future unless there are surprises on the upside in earnings and gdp. Michael the things stocks were the homes run. His or anything in the pipeline that you would look at saying, what i put money in that or higher in value . Joyce it is very much that line of thinking. We have seen returns for u. S. Equities and bond markets in the lower single digits. I think that your Name Selection , credit dive work analysis, credit valuations, this year will make more difference than ever. If you think it will be a flat return, why have a passive strategy . Why not do the Due Diligence and look at opportunities . Erik is it better to look for quality and a market where we expect valuations to compress and prices to flat line . Is it smarter to look for price stocks, value . Aree i dont think they mutually exclusive. You can find quality in the energy sector, big financials, and key sectors, as well as looking at distressed names. One does not need to take the kind of risk of russian investments giving you 25 returns, but we are expecting returns under 5 for bond and equity markets. Lotie a lot of a are saying you should keep more in cash. Is it time to have a reduce in cash provisions . Joyce it has been building because of the market volatility. Many started in 2015 thinking it was a easy call on the u. S. Equity market. It turned out to be more complicated. We have had outflows from u. S. Equity fund. I agree that some of the momentum trades may be more of a turning value piece of it. You have to be more specific on the sectors than the names. Michael in the singledigit return world, can you make enough by active management to make up for the fees you will pay to get it . Joyce in a single digit return world, a lot of things should be rethought. That tension were firms can return 8 . They are taken for granted. This year, what could you buy that returned double digits other than the dollar. The dollar is up dramatically. I do not think it is is much of a question of passive versus but what is the return in this environment where the Market Structure has changed and we are in a sub par growth environment. Joyce chang and michael reagan. Well be joined by tony wille joined by Tony Crescenzi the pimco analysis and market analysis. Michael china and oil drive the market in 2015 and they are driving the markets today. That is not what Commodity Companies want to hear. Two are in trouble this morning. Tony cushions he needs a good bagel and some pizza this morning. Good morning. This is bloomberg surveillance , live from our World Headquarters in new york. I am not tom keene. I am Michael Mckee. He is on vacation, as is francine lacqua. Vonnie quinn is here as always, and Erik Schatzker is joining us. We have pizza and bagels we can share with tony. No shortage of that. Vonnie give him a couple of bagels. Michael we need to share the latest news. Vonnie quinn has the first word. Our firstts get to word new spirit the u. S. Accusing iran of conducting too close to American Warships and commercial vessels. Some were fired less than a mile from american aircraft carriers in the straits of hormuz. General John Campbell tells usa today he will keep as many troops as possible in afghanistan through 2016, and he plans to ask president obama to slow the withdrawal of u. S. Soldiers. They need help to counter a resurgence by the taliban. , getting plans for improved the betweenen north korea and south korea. In north korea, a diplomat is dead. Will bepolice officers required to carry tasers, among new Department Policy announced today. A city officer faces murder charges or Jason Van Dyke pleaded not guilty yesterday in the shooting death of a black teenager. Quit the race for the republican president ial nomination. He never made a blip in the polls. To 12. Ts the gop field rescuers using infrared cameras searched a collapsed mine and found eight survivors today. Ago inened five days eastern china. 11 miners escaped. At least one was killed. Nine others are missing. Im vonnie quinn. Michael . Michael if i were to put a positive spin on the data check, i would say we are off our lows, but psychology has changed after yesterday. You can see red across the screen here today. Has been take the footsie has been taking some ftse is lower. We are still at multiyear highs for the twoyear note yield. The pound is lower. The euro is unchanged. Crude Oil Continues to fall. This may be a story for the equity markets later today. 37 now. See nymex below that is terrible news for Vladimir Putins russia and the ruble, at new multiyear lows. Our guest host for this hour, pimcos executive Vice President and strategist Tony Crescenzi. Tony, every year you come back at the end of the year and you say is this the end of the bond market rally. The fed has finally raised rates, seven years on. What does pimco see ahead . Tony as you noted, the twoyear note is at a twoyear high. Investors these days can finally get something for their money on shortterm instruments, even on treasury bills. Your tbills today are 4. 65 . A couple of months ago it was. 05 . On the short end of the curve, the rally is over. The Federal Reserve has started to lift shortterm Interest Rates. The question is whether the fed will raise Interest Rates more or less than the markets are priced for. The markets are saying in 2016 there will only be a halfpoint increase in the federal funds rate. That is going to be the big question. Finally for 2016, that the question will be whether the fed starts tapering its bond buying. People forget it is still buying bonds. If you have a mortgage, the odds are pretty good that the said holds it. These days the fed says thank you very much for making a mortgage payment, 30 billion of these a month. But we will take it and invested in a new mortgage because we as thefed want to hold our bond market will have to absorb it. Normalizing the story on rates a little bit more. Vonnie in terms of rate increases, ditch each does each successive rate increase become more nerveracking . Tony it does because there is a lack of believability that there will be many. Maybe they will raise Interest Rates only about 2. 5 , compared laste peak of 5. 25 on the these are much lower rates. When the fed moves again, markets will maybe begin to believe this is the real thing. Tim thinks there will be pimco thinks there will be three rates in s3 rate increases in 2016. It will be a little disruptive. Michael you suggest of the rally is over at the short end, but you are also suggesting a longer duration. Tony correct. The dotplot that shows where policymakers are for 2016, the leadership, meaning jenny yellen, the vice chair, they are positioned for three hikes. That is more than markets are priced four. Vonnie so far. It is only been a couple of weeks. Maybe the markets need a little longer . Tony and the economy it. Had not much umph to the assumption is that the increases will come at a meeting with the press conference. How do you decide which one to skip . If you are only going to do three increases or two, how will they communicate that . And is there the risk of sending the wrong signal to markets . A very good question now, particularly. The pressure to skip the next meeting is low. The march meeting is low. Line, justlong the to show it is not moving in some robotic fashion, they will want to skip one and to help demonstrate once again that putting in its policy statement in december, it wants to move in in a gradualter manner. So they will show up somewhere, sometime, if the markets decide. This is something that the fed can keep up its sleeve that, hey, they are pricing in too much. The fed decides that the markets are pricing in too much. Why is there such a diversions between what we heard from the fed at the last meeting, this idea that we will get at least four rate increases, and the market expectation, which is for two . Tony it has to do with the word shortfall, where inflation is relative to its 2 target. Is a big shortfall, and it has been the lowest target for six years. They would not mind if it moved quicker. Also, the world has a certain view about Interest Rates, informed by the story in japan and in europe, where Interest Rates are suspected to stay below 1 the rest of the decade in terms of the policy rates because of the lap of the lack of inflation. Because it has not shown up anywhere, despite Massive Central Bank intervention inflation, investors are skeptical that inflation will move back toward target. Michael if i could channel the tall guy who usually sits here what is actual and expected what does that mean to people at pimco . Tony i saw you and your talking about janet yellen at the press conference. Saw what that was. In 2016, that is something we will be able to figure out. Keep in mind the fed is projecting, according to its , 3 10 of a point, moving from 1. 3 to 1. 6 . Investors should be looking to whether it moves up a point every few months or so. And the impact of energy costs starts to wane. It does not look like we need to get a whole lot. Go thatscenzi from can from pimco is with us. Michael regan is with us. Coming up on bloomberg ,. Itigroups chief strategist i am Michael Mckee among with vonnie quinn and Erik Schatzker. You are looking at washington, d. C. Good morning to the nations capital. Vonnie this is bloomberg surveillance. I am vonnie quinn, with Michael Mckee and Erik Schatzker. Apple will pay 350 million to settle a tax case in italy. An italian newspaper says apple is accused of evading taxes for five years by booking sales in italy through its irish subsidiary. Apple has denied wrongdoing. Twitter is getting violent threat twitter is getting tough on violent threats and hate speech, saying it is going to be suspended or banned. 2015 trading ended today in japan with the benchmark finishing at its highest level in 19 years. The nikkei finished above 19,000 for the first time in those two weeks and gained slightly more than 9 for the year. That is the latest number is this flash. Erik it is the last full trading day of the year for european stocks, and it is a down day for most markets. Caroline hyde is with us from london. It was a rally yesterday. Why the selloff today . Caroline it seems appropriate, doesnt it . This is the last full trading day for 2015. Down goes oil and stocks. Germany is in the lower area, down 4 there for new years eve. Italy also in the red, just bracing themselves for the close next year. Gas as well. We have an Industry Group perspective, oil and gas up by. 4 . The minute you start to see a dive in brett, down 1. 75 , down goes stocks as well. We felt in the spanish economy, today we had cpi data, inflation data coming out as deflation, highlighting to investors what happens to the real economy when you have low oil prices. Erik another Swiss Bank Settles with the Justice Department over allegations it helped americans evade taxes. Interestingly, it is getting a rally on the back of that. It is coming off of its highs, but it seems it is a relief you baerinally seeing, julius settling at more than half 1 billion. Thisinvestors are feeling suddenly makes it clear as to what they have to pay. Maybe the company could start to splash the cash, a bit of m a in the future. But who is next . What about the hsbc swift unit . Erik i know you are looking back at 2015. What catches your eye . Caroline what is going to be interesting is how we sum up the german dax. Really just trying to shine a light that it has been a volatile year, but the dax has outperformed on the day. Lets check it out year to date. Over the course of 2015, 27 managede german index to hit new highs. What sort of new records were set, and how the mighty fell. Concerns about china and vw, the scandal there. Out in marketiped cap for germany, but despite the turbulence, the vw scandal, it manages to hold onto green territory. Almost 11 . That is outperforming global stocks, and the key is, many see the dax ready to go in 2016. I started to say it is going to be up another 8 next year. Erik Caroline Hyde in london. Coming up tomorrow on bloomberg surveillance, Michael Holland is the chairman of holland and company. He will be with us at 6 00 a. M. In new york city. This is bloomberg surveillance , on bloomberg television. Michael good morning, london. A little bit of bright amidst the clouds. The markets are down. 3 10 right now. Vonnie quinn has the morning mustread. Vonnie i found one in the Financial Times that is extraordinarily interesting. Asiang about financial is having made financialization making the commodities market more interesting. His point is that back in the 1990s, significant underinvestment was the result of low prices. Right now the problem is financialization, and we are almost in danger of having something similar to the housing crisis. Are beinges commoditized and being made into future commodities. Now we have low prices for commodities, and we have noble groups being the latest to be downgraded. Companies are downgrading Companies Like noble to junk. Tony crescenzi, is this going to be a wider problem . Tony it could be. It is one of the reasons why i follow nontradable commodities. As fin 80 him, which is being used for steel. I can never remember the code for it. The rout is far advanced. It has moved from 1800 to 700, meaning there is not as much drilling these days for oil and gas. Oil priceected the for west texas intermediate would raise to about 55 next year. It looks like it is well advanced. There is a turn coming. This will help some highyield names in the energy sector. Which arell up tips pricing in a very low cpi of for theut 1. 56 or so next 10 years, significantly below the feds target. , a 2 ds target pce target. The cbi tends to run about that, about. 4 points. Markets underpricing the in terms of the fed, what it wants to see. If oil stabilizes, expect commodity related names to do better, for tips to do better, for the canadian dollar, erik, to do better. That if one of the more that is one of the more liquid ways to make the play. It is not moving. Keep in mind one thing. The u. S. Economy is serviceoriented. Jobs gain,000plus per month this year, only about a few thousand, 4000 i think it is, of those, came from the good sector. It has already been an impact from the energy sector, the mining sector. A big 11,000person drop last month. On the job statistics and over the overall economy. A point beforede the show, how the months of 200,000plus prints are probably a thing of the past for this year going forward. The fed appreciates that, and that is what is all incorporated into the dotplot. Does the market appreciate that . Could we be sitting here on a friday and see 100,000 print or 90,000 print, and the market take it as a buffer signal when it is not necessarily . Tony the fed has a big model, put together by the 200 phds at the fed. It shows that the job growth was slowed from the 220,000 over the last months to 130,000 per month in 2016. Because we are closer to full employment, so it is harder to find workers to fit the jobs that are available and more people are employed. It is simply a function of the aging economic cycle, 6. 5 years old. Job growth is expected to slow by 97,000 per month in the Fourth Quarter and not moved back above 100,000 over the next decade over the rest of the decade. The fed tried to knock the markets on the head a few months ago after week job reports and said we know you are used to 200,000 a month, but will it be satisfied with 100,000 to 150,000 . Offered to continue to communicate the idea that we expected the jobs slow down and this is normal. One final point on this, labor force growth, people who enter the job market looking for a job each month has run 70,000 per month the last three years. The fed is happy with anything 70,000, 80,000 a month. That is what janet yellen is communicating. Michael michael, good to have you here. Michael regan, Tony Crescenzi from pimco is staying with us. Coming up on bloomberg , at 8 00, you will hear from former ceo of Morgan Stanley john mack. You are watching bloomberg surveillance right here on bloomberg television. We will be right back. Michael this is bloomberg surveillance. I am Michael Mckee, in for tom keene. Good morning to janet yellen. And everyone at the fed in washington, d. C. Lets get to bloombergs first word news. For that we turn to vonnie quinn. Vonnie hundreds could be threatened by rare winter flooding, already blamed for 18 deaths in missouri and illinois. Authorities are watching levees along the rivers and its tributaries. Along the Mississippi River and its tributaries. Launched. Al guard was a turkish Prosecutor Says two suspects planning suicide attacks during new years celebrations are being held. They were detained during a raid in and kara in ankara. Islamicwords about the state from hillary clinton. During a Campaign Stop last night, she called the killings of christians and other ethnic groups genocide. She said she was reluctant to use the term earlier because of its broad implications. The statehers cannot make the information public. The group plans to appeal. Global news 24 hours a day powered by more than 2400 journalists. I am vonnie quinn. Erik lets return to our conversation with Tony Crescenzi, executive Vice President of pimco. We are going inflation hunting. I have a chart i would like to refer to. The fed faces an almost unprecedented challenge right now. The white line is the Unemployment Rate. The yellow line is the core pce deflation. It shows that every time unemployment has bottomed in the last previous three cycles, inflation has peaked. We saw it here in the late 1980s. We saw it here in the early 2000s. We saw it again in the mid to late to thousands. Now we have this problem but the fed faces of a declining Unemployment Rate and nonexistent inflation. So what happens if the fed is right and we end the year with theployment of 4. 7 , and yellow line, the inflation line, does not move . Peaking, 1 s is yearoveryear, that is a problem. Because this age of deleveraging , what the fed worries about is the extinguishing of money. On the put a dollar system and turned it into eight. Imagine going into a bank to repay a loan in the bank says thanks very much for repaying your thousand dollars loan, but we are not going to replace your loan with another, were just going to hold it. It is no longer available to. Pend on goods and services that can affect goods and prices. So what it has tried to do is pumped up prices through moving up financial asset prices first and then hopefully prices of goods and services. But it has not happened. For the to be probing numbing celebration rate of unemployment. Nonacceleration rate of unemployment. The jobless rate that would catalyze inflation that is 5. 2 . For four years it was 5. 2 , 5. 5 , 5. 7 , 5. 4 . Now they had voted three times this year. Now it is for. 8 in terms of now it is 4. 8 in terms of what it thinks the bottom is. Have saiden and crew they want to see inflation pickup. It probably is in the zone of or fives. Ours there probably is a pickup in wages. We will see in next fridays jobs report a 2. 8 yearoveryear gain, the biggest in seven years. It had been in the low twos, probably because of an easy comparison. It seems to pick up in the nonenergyrelated industries. Michael let me go back to what you said about the feds economic model. Does the model correct given the changes we have seen . You could use the paul krugman, saltwater economist argument that if there is no inflation, why not just let it run . Why not raise rates . Tony the fed is doing that because it expects it to fall below what the nyro range is. If the fed raises rates, the three kinds of leadership expects it will raise rates. Significantly1 , lower than when nyro is reached. It is not taking too many chances, so it is raising rates just in case it is somewhere in the ballpark, given the lack that the fed referenced in its recent planetary in its recent monetary statement. The changes to the u. S. Economy have been so great that the nonacceleration rate of unemployment is even lower . Tony some think it could be in the threes. Then the fed should be very of the gradual nature with respect to raising Interest Rates and gradual in nature with respect to reducing its size the size of its Balance Sheet. It says it wants to get rid of them, especially the bulk of one point 7 trillion in mortgages that it holds. That that might be too much strain in markets. So the fed will want to be very careful, very slow, maybe hold the securities it has in perpetuity. Let its Balance Sheet shrink as a percent of gdp. Erik and just keep reinvesting. Michael you guys are the bond vigilantes. Are you wrong to worry too much about inflation, and should the market let the fed go farther . To start worrying about falling behind the curve if we get a big number in wages next month. Ofy when we think inflation, we put it in the global context. We think of the European Central bank and its continued effort to try to prop up inflation there. Low inflationrily rate, and the same in japan, easing the ecbs engagement, expected to last until march 2017 at least, because of the age of deleveraging and the pressures. So it is possible the fed gets behind. We would not mind it with inflation being such pimcol would you . Would Bond Investors . Tony it seems improbable that markets would allow the fed to fall behind the curve. The markets which to the markets would send a strong signal, but were not talking by much. There is probably a new range of 2. 75 , significantly below where it used to be. So the vigilante term is a less threatening one. Michael a little bit of monty python. Vonnie you had a smile on your face. Do not raiseyou rates, we will insult you again. Doug catch is going to join me, he willael regan talk about what he sees ahead, including some surprises in 2016. Tune into sirius xm 119. Am. On, 1200 washington, you can listen on 99. 1 fm. Vonnie coming back to surveillance with pictures of hong kong. Everybody just leaving for the day after the final nikkei trading day of the year. The nikkei finishing up the year at 9 . I am sure that will have investors very pleased. Lets get to the Bloomberg Business flash. The Japanese Company says it will not counter carl icahns bid for the pep boys automotive chain. The Julius Baer Group will pay the Justice Department more than a half billion dollars. The Biotech Company formerly run by Martin Shkreli is plenty for bankruptcy. Andost two more directors was delisted by the nasdaq. Bios kalobios fired him. Michael it is time for the single best chart. If you live in the northeast or the midwest, you have seen an awful lot of change in the weather. The mild weather we have gives way over the last couple of days, and you can see the impact on your power bill. We picked manhattan because all politics is local, but you can see in the chart on december 24, we saw the lowest there are two charge of the same thing. We saw the lowest average power bill for new york citys power ever. It was 72 degrees here. Look what happened does code later as the temperature goes down, a 47 jump. We hope that is not sustained, but it shows the impact of the weather, utilities, on what we pay. Tony it is estimated that the government by the government that people will save on the bill this year. Michael you came in from california. Obviously it is a change for you. But the weather in california has supposedly been terrible because everything has flipped. Now you are getting the wet. Tony chilly and low 60s there. But california always has one thing over other places. It is dry, bad these days because there is a drought. A beautiful, beautiful state. Vonnie it tends to be a weather effect every year at some point in the year. Will it have been sort of the major issue that it seems to be now . Tony it could be very disruptive to economic data. Theyre good be some there could be some positives and some negatives. Housing related data, Housing Starts might see a boost. Even housing sales could get a boost as people are able to get outdoors. Even car sales, people interested in going to car lots are able to go out to car lots. Cigarette sales are up for the first time in a number of years. Michael people are willing to go outside. Tony what does one do with perhaps they go into a convenience store. Tobacco bonds are performing well this year. Michael now we are getting into the nerd weeds with tony. It does matter whether weather hits because there are more people in the east, particularly in the northeast. So if spending rises here, it has a bigger effect than it would in the midwest. Looking on the aggregate, the u. S. Savings rate has increased. Some of it has been spent in places like cigarette sales being up. Michael are you baffled . Tony no. Think about this. If you save a few bucks on your energy bill, maybe it is an automatic payment. If you made the payment, maybe the money is just sitting there bank. But americans love to spend and will recognize the money sitting there in their accounts. Michael they have to believe it is permanent, right . Tony there probably is that feeling. Why should the money be immediately spent . Has is that pimco the u. S. Savings rate on the 5. 7 peak is a little bit lower. Vonnie we have seen gasoline dividends all year, and why and while there might have been a one time help to consumers, it has not progressed. Tony when we look at the overall economy, it has been in the low twos, and in the last quarter it has gone over 3 annualized. Some expected more. 6, michael a macro questions are the folks at pimco came up with the idea of the new normal, oil prices were at 100. That was not factored into it. You look at prices, 36 for west texas. Why is the new normal rate not hire for growth if we have seen that kind of change . Tony it seems there is a new normal for wages. What we have seen for wages for a number of years is gains in normal twos, and what is at three or threeplus when the expansion is at its peak . It will be interesting to see what it will be if the economy slows down. This is a good reason for the fed to be cautious about its rate increases. Erik why is that happening . It is a question that we ask every single day. Why is there no wage growth . , and if the fed is probing theo not know where noninflation rate of if it says made here, made there, it does not say, made in the usa, 7 billion people locally 7 billion people globally and influence the price of an item. It is work abroad making it. Demonstrated by the easing of policy, the continued easing of policy in japan and in europe. Michael more with Tony Crescenzi from pimco in just a few moments. Coming up tomorrow on bloomberg surveillance, Michael Holland delays his new years holiday enough to join us tomorrow morning. A. M. , 11 00 a. M. In london. You are watching bloomberg surveillance. Vonnie quinn, Erik Schatzker, and Michael Mckee. Janet yellen wants to know what Tony Crescenzi has to say. Erik welcome back to bloomberg surveillance. Volatility, thy name is forex today. All of these currencies have been up and down a bit, except for the ruble. Was annese offshore yuan interesting story. It had been up down by 5 earlier. It has lost all of that and come down below where it started on the day. So big emergence is between onshore and offshore yuan. The ruble is being hammered by declining oil prices. Coming up in a few minutes david, ioomberg. Will see you at nine, but you have a wall street chief with you. We do. We will also talk with john about the president ial election and the risks he sees going into 2016. We will talk about apple, a bumpy ride toward the end of 2015. One Analyst Thinks he knows what is coming up in 2016. Jimwe are joined by rickerts, who will talk about the u. S. Economy, the fed, and how to invest in water. Erik i will see you in a couple of hours. Watch bloomberg , at 7 00 on bloomberg television. Vonnie we are back with Tony Crescenzi, pimco markets strategist. Moved. Has the first hike has come and gone. Other Central Banks have had to , response in air quotes because they would not admit they have reacted to the interest read Interest Rate hike. Who will be the next to go . Tony the United Kingdom will probably be the next major nation to raise Interest Rates. Within a year. It has not seen much of a pickup in the inflation rate. By midyear, the inflation rate might pick up enough that the central bank might signal an Interest Rate hike is on the way. Looking elsewhere, nothing should be expected from the major Central Banks. In fact, more easing, if anything, from the European Central bank and the bank of japan. Here is a key point for of investing terms in equities, credit, and real assets. Interest rates are likely to stay low for the next decade. Japan europe, actually lower, i should say. Twos orthe u. S. , mid so. So long as there is continued economic expansion, investors should confidently by riskier assets when there is market volatility. The recent opportunity were speaking of was the chinese currency. In august, there was a bout of volatility that affected all markets, and now is the time to buy credit. Ge to to buy these flow assets confidently with that backdrop. Vonnie when is the new u. S. Recession, tony . Tony at least two years away. Then bernanke says it is longer than that. He was with us for our quarterly meetings in december, and dinner with him was a great honor. His book signed for me. In whaty happens usually happens ahead of a recession is high inflation, an imbalance in the Financial Sector. It seems the economy has two years to go. Australia, which has had expansion since 1991 this is what the fed is looking to orchestrate. It wants to calibrate the Interest Rate to keep the economy growing on an even keel. It can keep moving along smoothly, so the key thing in 2016 is job growth. Okis moving lower, but it is as long as it stays close to the level of Monthly Labor fort to the level of Monthly Labor force growth. Michael you are saying the bank of japan may ease more. Some are saying that it may be at the end of the throw. Tony not in the near term. Somewhere down the road. It has an enormous debttogdp problem. If there is one thing that would cause you to change your outlook, your forecast, especially as it concerns divergence and Interest Rates, what is it . Tony if consumer demand globally suddenly picked up, if miraculously there was a pickup in aggregate demand but that requires faster credit growth. Banks are not lending the way they used to. It requires a different set of demographics. It requires more investment by government. We are not seeing it. Michael Tony Crescenzi, thank you for joining us. We hope you get a good bagel and pizza. Tony and a good deli. Michael bloomberg is up next on television. We will continue bloomberg surveillance on radio. You are watching bloomberg tv. Hedge funds on the rocks. Is it a sign of the times . Ricole in paradise, puerto is running out of time in the probably default on some of its bonds. Silica and tallies silicon valleys 800 pound gorilla. We will see what next year may bring. Bloomberg welcome to bloomberg. This morning we are here with the executive editor for legal and financial regulation. Seeing as how im sitting next to my chief counsel, it will be a wonky hour. First we go to vonnie quinn. Vonnie kentucky prosecutors say it possible new years eve during a raid on