Brutal December for markets, closing low for the year

This is a rush transcript from "Your World with Neil Cavuto," December 31, 2018. This copy may not be in its final form and may be updated.

CHARLES PAYNE, GUEST ANCHOR: Stocks going out with a bang, as Russia rings in the new year, and a big party planned in Times Square at midnight tonight.

Welcome, everyone. I'm Charles Payne, in for Neil Cavuto. And this is a special edition of "Your World."

Investors doing some buying on this final trading day of the year, but not enough to keep the major averages from finishing 2018 in the red, this following a brutal December, the Dow, Nasdaq on the pace for their worst December since 1931.

We will dive into the numbers in a moment, but first stocks gaining on signs of a trade deal in the making with China and maybe a deal in the works to end this government shutdown.

Blake Burman is at the White House with more than -- Blake.

BLAKE BURMAN, FOX NEWS: Hi there, Charles. Happy New Year's to you, by the way.

Thursday is shaping up to potentially be a pivotal day in all of this when talking about the government shutdown that is now into its second week.

That's because, in a few days from now, Democrats are going to control the House of Representatives. And now we are starting to learn about the Democrats' game plan. They're going to try to advance legislation here starting at the end of this week in which it will essentially accomplish two things.

First, it would fund the 25 percent of the federal government that is currently shut down and do so for the remainder of the fiscal year, meaning through September. But also, secondly, it would also fund the Department of Homeland Security through February 8, kind of putting a pause on the debate back and forth between the border wall and maybe letting both sides have a few weeks here to try to figure it out and hash that out.

However, the measure from the Democrats wouldn't include new funding for the wall. And the president has said in the past that he wouldn't sign anything like that. He continued to dig in today, tweeting the following, saying -- quote -- " I'm in the Oval Office. Democrats come back from vacation now, and give us the votes necessary for border security, including the wall. You voted yes in 2006 and 2013. One more yes, but with me in office, I will get it built and fast."

So it's unclear how that stalemate will unwind. But it appears as if things are moving in the right direction for this president and for this White House as it relates to China and trade. Just last week, the president's top economist, Kevin Hassett, telling me on the FOX Business Network that the ball has been moving forward, including over the Christmas break, between the United States and China.

And then we learned over the weekend that President Trump and his counterpart, the Chinese President Xi Jinping, had a phone call. And this was the readout from President Trump on Twitter.

He said the following -- quote -- "Just had a long and very good call with President Xi of China. Deal is moving along well. If made, it will be very comprehensive, covering all subjects, areas and points of dispute. Big progress being made."

Now, a spokesperson for China's Foreign Ministry appeared to be optimistic as well, saying that China is willing to engage with the U.S. to -- quote - - "expand cooperation the basis of mutual benefit."

We will see where this takes us in 2019, Charles.

PAYNE: All right, thank you very much.

And, by the way, happy new year to you as well, my friend.

Of course, it's New Year's right now in Russia, where we are right now. Look at that fireworks display. We're seeing it all over the world. Really wonderful. Can't wait. It will be right in our neck of the woods real soon, and not a moment too soon for investors, because 2018 -- let's face it -- had a lot of investors seeing red.

So what will the new year bring.

Let's ask our market pros. Trader Tim Anderson's at the New York Stock Exchange, along with market watchers Monica Mehta and Chris Robinson.

And, guys, I'm not sure, for what it's worth, the very last minute of trading saw the market rally 165 points to the Dow. The last several sessions, I got to tell you, Monica, have been somewhat encouraging, despite the fact that it's been a disastrous end of the year.

MONICA MEHTA, FINANCE EXPERT: Well, I think you're going to continue to see volatility into 2019. And, really, it comes back to, are we going to see some level of stability from D.C.? Are we going to see the Fed ease up on rate hikes?

And I think those are going to be the two most meaningful things. If we see a lot of bickering between Democrats and Republicans, that's absolutely not good for markets.

PAYNE: Although, Chris, I anticipate there will be bickering. We already see the sort of vitriolic nature post-midterm elections. I don't know that that's going to get any better.

And the irony is, some people on Wall Street like the idea of gridlock and maybe both sides not being able to spend any more money.

CHRIS ROBINSON, CME TRADER: Yes. I mean, historical, that's been a pretty a positive outcome for the markets.

If you go back and look during the Clinton administration, during all that time, the stock market did very, very well. So, in general, that may be an underlying support. I think if you look at the overall year, though, we're down 6.5 percent year to date. It's close to close.

So, even though it wasn't a good year, it wasn't as disastrous as I think a lot of people really think. So if you weren't in and out, trading in and out, if you were in the market all year, you're down 6.5 percent, which is -- it's not great, but it certainly isn't like being down 20 or 30 percent.

PAYNE: Yes, although, Chris, here's the problem. We were on automatic pilot. The market was rallying and it was rallying, and then all sudden, Tim, the bottom fell out.

TIM ANDERSON, TJM INVESTMENTS: Right.

Well, in the last, what, three or four days, we have rallied 15 percent, 14 percent. So, hopefully, if we can get the government shutdown done, and if we can get a deal on China, there's a lot of money that's going to come chase this market again, I think.

But those are the two things. You got to watch the China deal and we need to get the government shutdown behind us.

PAYNE: Chris, what about the Federal Reserve? Because I feel like, in the last month, nothing roiled this market as much as inconsistencies from Jay Powell and company.

ROBINSON: Well, I mean, inconsistencies, I think that the way it was handled last time, there were some -- obviously, some criticisms about what they said, the way he talked after the meeting.

We will get another crack at it again. We're going to get a new unemployment number Friday. So we will see if anything changes then. The market has priced in one more hike. But I think if they can back it off and get a little bit -- a little bit less hawkish, you might see more money again come back into the market.

PAYNE: Chris, the last four or five sessions have been phenomenal. We had the greatest point gain ever, followed by one of the best intraday reversals in the history of the market, a pretty good day on Friday, and then this last spike. I don't know what that was all about.

Maybe it's a symbol for 2019.

ROBINSON: Well, let's hope so.

You got rebalancing. January -- when January starts, a lot of people will be putting money to work automatically in their 401(k)s. We will get another shot in the arm on the 15th. And I think if we can get through January with a positive move, you might see people come back into the market.

PAYNE: All right, Monica -- Monica, let me ask you, because it feels like a worst-case scenario has been baked into this market, you know, so -- and that's what I'm excited about, low expectations. I think we will get resolution on China.

In fact, I think we're on the cusp of a major deal no one saw coming. I think we will see the Federal Reserve get in line with what the Street is expecting. And I think we will see the economy do better than what people think it will do, particularly on earnings, because, again, expectations are so low. Does that work in our favor?

MEHTA: Well, I think you're right in a lot of respects.

What the Fed is doing is looking backwards. It's looking backwards in time at unemployment rates, at the GDP, and based on these lagging factors is deciding what to do in the future. And you're going to see all of this volatility play out in the numbers that come now and will influence the decisions that the Fed makes going forward.

I think you're right. Earnings -- underlying earnings for corporations are still strong. The consumer is still strong. So there's a lot of reasons to believe that we will be just fine, that this will be a hiccup.

And 10 years into an expansion, people have just sort of been waiting. Like, when's the shoe going to drop? And it dropped.

PAYNE: Yes.

MEHTA: So -- and we're OK.

PAYNE: Tim Anderson, I want to give you the last word -- 2019, your outlook?

ANDERSON: You know, I really am constructive for next year.

If you want to go back and look at a year ago, we had very exuberant expectations for the year, on the heels of a very strong 2017. Everything seemed positive. That lasted for about a month.

Right now, we have got excessive caution, and maybe even a quite a bit of pessimism going into next year. And I just think that the -- that there's a value to going against the grain at market points like this, and that -- and that, when push comes to shove, GDP growth beating expectations and corporate earnings still showing strong growth, although at not quite the level that we saw in 2018 on a year-over-year basis, that's going to tilt us in favor of beating expectations, rather than disappointing.

PAYNE: All right. Well, let's leave it there.

Thank you all very much. Happy new year. Appreciate your expertise.

MEHTA: Happy new year.

ANDERSON: Happy new year.

PAYNE: I think we're going to be OK too.

Hey, there's one bit of uncertainty, though, hovering over stocks. And that's the Mueller probe. And something former Whitewater special Ken Starr told us on "Cavuto Live" could be a sign of more volatility to come.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

KENNETH STARR, FORMER SPECIAL PROSECUTOR: I will bet you a nickel that Bob Mueller has his eye on the calendar, because he was appointed in May of 2017.

And so when we're all noting the new year and watching bowl games and so forth, I think Bob Mueller is going to be looking at mid-May and say to the team, let's get it done.

(END VIDEO CLIP) PAYNE: Former Whitewater independent counsel Ken Starr on "Cavuto Live" saying, buckle up until May. That's when he thinks the Mueller probe could be wrapping up.

To The Washington Examiner's Phil Wegmann.

Phil, everyone's playing the guessing game, but it does feel like that the Mueller investigation is running, to use a baseball analogy, in its eighth, ninth inning, and something should be happening very soon.

PHILIP WEGMANN, THE WASHINGTON EXAMINER: Absolutely.

And chances are good that we actually go to extra innings on this one, because if you look at the political drama that is the Mueller investigation, this is something that has captivated the country and has defined Donald Trump's presidency.

The one thing that the Mueller investigation hasn't done so far, though, is actually solidify whether or not there was any collusion between the Trump campaign and the Russians. And so, like we heard a second ago, when Mueller finishes his investigation in May, regardless whether or not he answers that question, there's so much drama right now that my expectation is that you're going to see House Democrats continue with their own investigations and run with this.

The drama is just never going to end.

PAYNE: Well, but millions of dollars have been spent on these investigations, on these myriad of investigations, very few answers. Nothing on collusion thus far with respect to President Trump and/or his campaign.

Would it be enough for the Democrats would say, OK, maybe we think we have got something on campaign finance, something there, some sort of -- maybe something with the violation there.

WEGMANN: Right.

PAYNE: And would that be enough for them to continue this saga, which I think the American public has gotten tired of? And to be quite frank with you, a lot of people may be embarrassed if that's the only thing they come out with.

WEGMANN: You said it a second ago. Millions of dollars have been spent. There has been so much drama behind this entire investigation.

What we need to do, though, right now is, we need to prepare to be disappointed, because if you look at what Mueller's prerogative was, Deputy Attorney General Rod Rosenstein hired him on to prepare a confidential report directly to the Department of Justice.

There's no guarantee that we're even going to see what is inside of this final investigation. And, remember, there's no law on the books right now which will require Mueller to turn over any investigations to Congress even if he finds impeachable offenses.

Of course, they could subpoena that. And that's my expectation that they will. But a lot of people will have egg on their face if this turns into a nothing burger.

PAYNE: So it looks like perhaps there's a chance this whole thing could go out with a whimper.

WEGMANN: Absolutely.

And this is what's going to be so interesting, because you already have House Democrats, for instance, the incoming chair of the House Judiciary Committee, those guys are looking at impeachment right now.

But they're looking at impeachment before they have all of the evidence collected. And I think that they're putting the cart way in front of the horse on this one.

PAYNE: Yes, it seems like some of the older, more knowledgeable Democrats are staying away from that, understanding historically that could be a huge mistake, particularly with what we have seen so far, no real justification for it.

Phil, happy new year, my friend. Thank you very much.

WEGMANN: You, too. Thanks Charles.

PAYNE: Well, we know that stocks hate uncertainty, so with the Mueller probe and partial government shutdown still in play, will investors still be dealing with this volatility in the new year?

Let's go to market watch Larry Glazer.

Larry, you know what? Up 1,000 points is nice. But it came a session after down 650. And that's not nice, right? This crazy volatility, is it here to stay, and how much of an impact will D.C. shenanigans play?

LARRY GLAZER, MAYFLOWER ADVISORS: You know, Charles, this nauseating roller-coaster ride has been around for a while. It seems like every day I turn around and there is a scarier headline talking about uncertainty in 2019, uncertainty, uncertainty.

Charles, we talk to so many small business owners, the backbone of the economy. And I got to tell you, they're used to uncertainty. They get up every day and they make the donuts no matter what circus is playing in Washington. They get up, and that is what the economy drives on today.

And I think that uncertainty that we have been seeing, small business owners know that this uncertainty is a little bit different than other types of uncertainty, because this uncertainty, Charles, is something that we can get past. This uncertainty is manmade, it's manufactured.

And the sooner we get past it, the better, so we can focus on all the good things that are happening in the broad economy that we were focused on in the first half of 2018, the record low unemployment rate, the strong small business confidence, the strong consumer confidence, strong Christmas, low gas prices, higher savings rate, all those good things that are becoming a distraction away when we start focusing on things like investigations and all the theatrics in Washington.

PAYNE: You know, and there is evidence that these theatrics that you call them are creeping.

The Conference Board confidence -- confidence number out earlier in the week, it was an interesting number because it was a tale of two reports. Current consumer confidence through the roof. Over the next six months, starting to decline a little bit.

And I think a lot of that, again, it's over a lot of these uncertain things. Some of it may be the trade deal, some of it the Fed, but a lot of it, to your point, manmade Washington, D.C., theatrics.

GLAZER: That's right.

You know what, Charles? And it is true we're trying to plan for 2019. And people had hoped a lot of these issues like trade would have been resolved before the end of the year. But because they're not, we do have a little bit of a cloud going into next year. We don't know where that sits.

We don't know how much it's going to bleed into the general economy. First six months of the year, we're a tale of two cities, right? People were focused on all the positives in the economy. Second third of the year it was all the negatives in the economy.

And I think the real economy is what we will see next year. It is still Main Street vs. Wall Street right now. And the question is, where do they meet and who wins out in the end? And I'm betting on Main Street. I'm betting that the bar is pretty low, we're going to get past some of these issues.

It's challenging and it's scary. Expectations were too high early in the year. But now they're really low. And as soon as we resolve some of the issues that are within our control in Washington, which we can do, we can get past this and focus on the real economy. And that's what's important for 2019. That is what I'm excited about, the real economy and the...

(CROSSTALK)

PAYNE: We know -- we know we're going slow a little bit, but we had record -- on the earnings side, we had record earnings.

We probably will see three quarters in a row where corporate America banked on the profit line over $2 trillion each quarter. We can't keep that going, at least not the growth, right, not the 20, 26 percent earnings growth.

GLAZER: No.

PAYNE: But is the market going to be OK with growing at a slower rate?

GLAZER: You know, Charles, again, the business community has set lower expectations.

Valuations are more in line or discounted at a historical multiple. Things were getting a little bit rich in the first half of the year. Confidence was a little bit too high. But now we have gone the other direction. Investors got a little bit scared.

There's speechless in the last six to eight weeks. They're completely speeches. And that's where opportunities come from. You see really good companies getting thrown out with really bad expensive companies. And you got to buy the good ones here, Charles, as you know. That's how you make money.

When you get this whirlwind, when you get blood in the streets, you start digging through the rubble and finding some value. Look, even if things are not better next year, and we get a slight slowdown, we might get a soft landing. Not every recession is a financial crisis.

And I think that's what investors need to understand. You can get a slight deceleration in the economy, and valuations could still be reasonable, and we could still find opportunities for investors to make money, as long as we have a pro-business environment. That's the most important thing.

PAYNE: All right, Larry, it's great hearing from you, as usual, man.

GLAZER: My pleasure.

PAYNE: Happy new year.

GLAZER: Happy new year.

PAYNE: All right.

And police getting ready to handle more than one million people who are expected to descend on Times Square in New York to watch the ball drop -- how police are keeping you safe next.

(COMMERCIAL BREAK)

PAYNE: The New York Police Department will fly a drone over a crowded Times Square tonight for the first time, this in an effort to keep people safe.

What other security measures are in place to deal with the expected one million New Year's Eve revelers while they watch the ball drop

Jacqui Heinrich is there also in Times Square with the latest -- Jackie.

JACQUI HEINRICH, FOX NEWS CORRESPONDENT: Hey there.

People have been arriving here in Times Square since 8:00 this morning. They are not thwarted by the rain. Didn't seem to dampen the mood, although it has dampened their clothes. Everyone is just covered up right now.

A million people backing into Times Square for the stroke of midnight. Organizers, though, have quite a show planned. Yesterday, they tested the ball drop switch and the 32,000 LED lights that a billion people will be watching on TV tonight.

The ball got a makeover this year too; 192 new Waterford Crystals were installed. There's been no slimming down, though. The ball still weighs in at around 12,000 tons and is 12 feet around.

They have also tested the confetti that is set to drop on the crowd in the buildings around Times Square. There are three tons of flakes sitting in position. And in a tradition that was started last year, the confetti will be having people's wishes written on them.

They submitted those wishes online and also here in person.

(BEGIN VIDEO CLIP)

UNIDENTIFIED FEMALE: I wished the health is the more important thing, the lucky, because if you want to be someone important, you have to be lucky and you have to be very smart.

UNIDENTIFIED FEMALE: To get better at soccer.

(END VIDEO CLIP)

HEINRICH: Now, we have come a long way since the first New Year's Eve ball was dropped in 1907. That ball was made of iron and wood. It weighed in at just 500 pounds, and it was covered in light bulbs. They used 25-watt light bulbs, 100 of them, to light up that ball. It's about what you would use on a table lamp.

So we have come a long way since then. In terms of security, there is plenty out here tonight. Thousands of officers are deployed all around the city. For the first time also, NYPD is using drones to back up its network of more than 1,200 security cameras, so no part of Times Square will be out of view.

Sniper teams are stationed on rooftops and bomb-sniffing dogs are everywhere. It's allowing rehearsals to go smoothly and organizers want everything to go off without a hitch tonight.

(BEGIN VIDEO CLIP)

JEFF STRAUS, PRESIDENT, COUNTDOWN ENTERTAINMENT: The first year I did this back in 1995, the ball was actually -- we used to do it by rope. Six people. There were four men on ropes. There were -- a supervisor, a man with a stopwatch.

And even back then, in the 1950s, the ball got stopped halfway during a celebration.

(END VIDEO CLIP)

HEINRICH: So even though the event will happen at midnight, the cleanup still is going to happen tomorrow. Last year, after the festivities ended, city officials hauled out 57 tons of debris.

And judging by the size of the crowd tonight, they look like they might hit that number once again -- Charles.

PAYNE: All right, Jacqui, have fun and be safe out there.

So, how serious are the threats on New Year's Eve? And what else are authorities doing to keep people safe this holiday?

Former Boston Police Commissioner Ed Davis joins us now.

Commissioner Davis, it's fun. The revelers are out there. But, of course, these make for the ultimate -- quote, unquote -- "soft targets," don't they?

ED DAVIS, FORMER BOSTON POLICE COMMISSIONER: They do, Charles.

This is the big show for the NYPD and for police departments in cities across America and in Europe. So they have to pay close attention. There are threats out there. We have to make sure that we're properly preparing.

And you should know that these plans start the day after New Year's. So there's a lot of work that goes into this.

PAYNE: What -- we're seeing drones now being employed for the first time. What else are law enforcement officials now beginning to use?

Because in the world beyond policing, we hear about artificial intelligence, data-gathering, the camera technology, so many things that it seemed like that would be applicable to keeping us safer as well.

DAVIS: Oh, there's no question. Technology plays an enormous role in what the police plan on.

The NYPD has a fusion center. That fusion center is charged with looking at intelligence from all over the world, looking at the potential threats and making sure that the plans are replaced.

The NYPD utilizes a number of measures on this really important night. They have metal detectors in place. Several years ago, after someone was injured in the crowd, they decided to pen off certain areas, so that emergency vehicles could get into this enormous crowd.

That's worked very, very well for them. So once you have the pens, you can put metal detectors out there. They have gun dogs and explosive dogs that are working the crowd.

But their biggest strategy is to use a significant uniformed presence. There are heavily armed teams out there -- they call them the Hercules teams -- that are involved in setting up what they hope to be a hard perimeter around a soft target, so that any terrorist or anybody that's thinking about doing something wrong there will be deterred from doing that.

PAYNE: And with all of that said, how important is it still for civilians, see something, say something? Is that still a vital part of all of this?

DAVIS: There's no question that the public are the police and the police are the public. That's what Peel said many centuries, centuries ago. And he's absolutely right.

We are only as good as the men and women in our communities that trust us and work with us. So the police departments across America have done significant outreach to the communities.

This advertising campaign that talks about, see something, say something, it really does make a difference. And it's -- it increases our ability to prevent crime, which is really where we want to be. You can put all the drones in the world up there, but, really, it's the people who see something that can make a big difference.

PAYNE: Commissioner Davis, thank you very much. Happy new year. And we appreciate it always.

DAVIS: Same to you, Charles. Thank you.

PAYNE: Americans ringing in the new year with a new move? Why some states are seeing loss in population, and it continues -- could continue, a mass exodus, in fact, in 2019.

(COMMERCIAL BREAK)

PAYNE: Only hours away from 2019, and 20 states are scheduled to hike their minimum wage, but who will pay for it? That's a big question. We have the answer.

We're back in just 60 seconds.

(COMMERCIAL BREAK)

PAYNE: New signs that Americans are fleeing from high taxes, as the number of states experiencing loss in populations continue to explode.

In fact, Jeff Flock is in Hammond, Indiana.

I think you're one of the recipients there in Indiana of this big fleeing of states, huh, Jeff?

JEFF FLOCK, FOX BUSINESS NETWORK CORRESPONDENT: I'm right on the border, Charles.

And, indeed, they're welcoming here at the welcome center folks coming from Illinois, which is one of the nine states that lost population to Indiana, one of the states that gained, as we said, nine states total.

And I tell you, if you factor out the states that the last year -- or this past year -- have sort of energy as a main driver of their economy, all of the states that last population were high-tax states like New York, Illinois here, Hawaii, Connecticut.

Illinois, though, was by far the biggest loser. Take a look at the numbers on Illinois; 114,000 people moved out of the state this past year. Even with births and people moving in, that was a net loss of 45,000 people. That's the size of a pretty decent sized town.

And this has been happening in Illinois, declines in population, for five years. What is the impact of all of that?

Well, no study in Illinois, but a study in California over the past 10 years looking at the impact of high tax and regulation out there. The study found that 1,600 companies moved out of the state because of taxes, deferring about $76 billion in capital, moving that out, and moving out about 275,000 jobs.

So there is an impact to this as we look at it. Illinois got big problems, people moving over across the state line. It's not far, pretty much the same weather, and whole lot less of your money taken by the government -- Charles.

PAYNE: All right, a very valuable lesson learned there.

Jeff, thank you very much.

Now to the guy who saw all of this coming.

Former economic adviser for President Reagan Art Laffer joins us now.

Of course, Art, you're someone who fled a high-tax state yourself.

ART LAFFER, FORMER WHITE HOUSE ECONOMIC ADVISER: I did. And I wrote the book on it to with "Wealth of States," which just outlines all the policies that you just described.

It's just amazing what's happening here. And it's so sad, because it's so easily corrected. But they just don't have the gumption or the power to do it themselves. It's sad. It's really sad.

PAYNE: I mean, those numbers that Jeff Flock read off, 1,600 companies, $76 billion, 275,000 job losses, those are remarkable.

LAFFER: Huge.

PAYNE: It just seems -- it just seems to be almost criminal that any politician elected to head of state would allow that to happen to their state, to the citizens in their states

LAFFER: It's terrible.

I mean, I wrote the book "Eureka," which is about eight years ago now. I was very involved with Proposition 13. But I just finally, when Schwarzenegger turned to the dark side, Charles, I had to get up and pack up.

I bought my house in Nashville. Just think of this, beautiful home in Belle Meade. I bought it with my tax savings for that year, period, no mortgage. And I don't have to be in California. Now, I love California. I think it's wonderful. But Tennessee's just spectacular.

And after three years, the statute of limitations is gone. And now I can go back and enjoy California and not pay the damn taxes. How's that?

PAYNE: That's a great deal.

So what do you make of it, Art? Do these states get to the point I say crossing the Rubicon. In other words, they have dug themselves in such a gigantic hole with their rules, their regulations, their taxes, then they become de facto welfare states on top of that, that they never have the will or the ability to restrain spending, to restrain the kind of high taxes that they need to sustain themselves.

LAFFER: It's much, much harder digging yourself out of the hole than going into the hole. It's much easier to -- when you first raise taxes, you do get more money, and that lasts for three or four or five years, and you get this sort of flurry.

And then the people leave. Then the disaster hits. And then you can't lower the taxes because then you lose the money for five or six years. You don't have any school openings. You have a terrible situation.

So it's much easier to raise taxes than to lower them. And that's what these people do. But look at Illinois. There's no way out for Illinois. There's no way out for West Virginia. West Virginia is the slowest growing state. There is going to be -- finally, one last guy is going to leave West Virginia. It's over.

And you look at Connecticut, you look at New Jersey, you look at Minnesota, you look at New York, and California is the one you pointed out there. And Missouri. I mean, Missouri is a catastrophe in the happening.

And they can stop it still in Missouri. They can stop it. But whether they have the -- whether they have the will to do it, I don't know if they do.

PAYNE: Yes, well, listen, our federal government hasn't done much better.

LAFFER: That's true.

PAYNE: So, spending more than you take in is certainly a big problem.

But...

LAFFER: Have you ever seen Larry Gatlin's phrase on that?

(LAUGHTER)

PAYNE: No.

LAFFER: If your outgoing exceeds your income, your upkeep will be your downfall.

(LAUGHTER)

PAYNE: I like that one. I'm going to have to borrow that one.

Hey, Art, a great new year, my friend.

LAFFER: Have a great new year too, Charles. Thanks.

PAYNE: Thanks a lot.

Well, a new debate over sanctuary laws after a California police officer is slain. The suspect is an illegal immigrant. But the former ICE Director Tom Homan wants to prevent something like this from ever happening.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

THOMAS HOMAN, FOX NEWS CONTRIBUTOR: Let's have a Democrat ask for an investigation on this officer and the permanent separation from his family, not a temporary one for the parent was prosecuted on the border, but a permanent separation.

Let's ask for an investigation there. But you know what? They won't have an investigation, because Kamala Harris, the senator from California, supports sanctuary laws. Nancy Pelosi from California, Ted Lieu, they all support this law.

(END VIDEO CLIP)

PAYNE: Well, that was former acting ICE Director Tom Homan on "Cavuto Live" getting fired up over sanctuary laws for illegal immigrants. This coming in the wake of the killing of a California police officer. The suspect is an illegal immigrant.

So is this going to be a major issue for 2019.

To Democratic strategist Robert Patillo and Trump 2020 Advisory Board member Madison Gesiotto.

Robert, what are your thoughts on this?

ROBERT PATILLO, DEMOCRATIC STRATEGIST: Well, of course, our thoughts and prayers go out to the family of this officer.

My eldest sister is a 20-year veteran of the Charlotte Police Department. We need to do more to protect our law enforcement officers and to ensure they have the best equipment and to stop things like this from happening.

But the idea that we want to get rid of sanctuary cities because of this, because of isolated incidents such as this, is just unconscionable. Sanctuary cities allow individuals who are undocumented to be able to be part of the work force, to enroll in school, to go to social services, to go to hospitals, and come out of the shadows.

What this really points towards is the need for comprehensive immigration reform. And while we're doing this government shutdown over the border wall funding, let's use this as an opportunity to ensure that we are putting forward a comprehensive plan to address our immigration system.

PAYNE: Robert, some would say all of those things that you just ticked off, that you just named become a very enticing red carpet, and it actually entices folks to come into this country illegally, knowing that, if they can make it to one of these sanctuary areas, they have got it made.

PATILLO: Well, remember, we started having sanctuary cities around 1985.

We had our issues with illegal immigration long before that. What we're doing is trying to have a humane system in place where people don't have to live on the streets live, in the shadows, fear ICE raids, not participate with police.

Every statistical study shows that sanctuary cities do not increase crime, and often decrease crime in those communities by allowing individuals who are undocumented to work with law enforcement to root out gangs, criminals and the people who need to be deported out of this country, while working towards regulating their status within the nation.

PAYNE: Right.

You know, Madison Gesiotto, of course, some would say that those laws actually invite the very gangs that Robert said they're trying to root out in the first place.

MADISON GESIOTTO, CONSERVATIVE COMMENTATOR: You know, Charles, I'm frustrated. I'm disappointed, specifically with Democrats right now.

We need border security. Of course we need comprehensive immigration reform, but that's only one part of this puzzle. It's time to end sanctuary cities. Sanctuary city laws in places like California prevent police officers from communicating with ICE about known and wanted felons.

We could have prevented a death like Officer Singh's death. We now have a family without a father, without a husband, without a son, without a brother, a completely preventable situation.

We need to secure our border. We need comprehensive immigration reform and we need to end sanctuary cities.

PAYNE: Robert, you mentioned your sister.

With someone who has a family member in law enforcement, are you a little frustrated that I didn't see any California really big local law -- politicians come out and say anything about Officer Singh's death. And I find that to be extraordinarily frustrating, because this is a man who died in the line of duty.

PATILLO: Well, we -- as a nation, we do very little to support law enforcement.

They often have antiquated equipment. They don't have adequate training. They don't have adequate reinforcements. They don't have adequate spending.

PAYNE: Yes, but to acknowledge that he died in the line of duty, it feels like they didn't do it because it involved their pet project here.

An illegal immigrant did this -- or is at least accused of doing this. And I just find it appalling that they couldn't separate the two.

PATILLO: Well, I find it appalling that they haven't commented on this situation. But I don't -- I don't know their motives and their reasons why they do that.

But let's remember, we had comprehensive immigration reform passed through the Senate in 2013. It was blocked by House Republicans. Let's bring that legislation back. We have a new president. We have a new Congress. We have a new Senate.

We have the details and kinks worked out in 2013. Let's push that law. Let's get it passed. Let's get it signed by the president and let's stop this from happening in the future. I think we all agree that we have to reform the immigration system.

PAYNE: Madison, considering a new composition of Washington, D.C., starting on Thursday, what do you see? What can be done with respect to immigration laws, the wall, sanctuary cities, DACA, the whole thing?

GESIOTTO: Well, there's a lot that can be done. But my concern is that it won't get done, because we have people like Nancy Pelosi who are on vacation in Hawaii and don't even take the time to comment on this.

This is a legal immigrant who was murdered, an officer in her own state. I mean, we have Democrats that I don't think seem to be focused on the right thing because of their hate for President Trump, when in reality, five years ago, many of them supported increased border security, many of them supported doubling the length of the fencing, many of them supported this for years, for decades, long before President Trump was in office.

And now that President Trump's in office and has been pushing for this, they seem to be flip-flopping on the issue. And so I'm very concerned about whether they will come forward and support what's right on this issue to protect Americans, to protect legal immigrants, like Officer Singh and other officers that could end up in the same situation.

PAYNE: Yes, juxtaposing the effort that Singh went through to become a legal citizen and then join the law enforcement against someone who was illegal and became a criminal is just -- it's just so heartbreaking.

Robert, Madison thank you both very much. Happy new year.

PATILLO: Happy new year.

GESIOTTO: Thank you, Charles. Happy new year.

PAYNE: Well, the field now starting to grow. We know it's going to be crowded. The first hat in the ring, Democrat Senator Elizabeth Warren announcing that she is forming a 2020 presidential exploratory committee.

We will be right back.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

DONALD TRUMP, PRESIDENT OF THE UNITED STATES: Elizabeth Warren will be the first. She did very badly in proving that she was of Indian heritage. That didn't work out too well. I think you have more than she does. And maybe I do too. And I have nothing. So we will see how she does.

I wish her well. I hope she does well. I would love to run against sure.

QUESTION: She says she's in the fight all the way, Mr. President? Do you -- do you really think she believes she can win?

TRUMP: Well, that, I don't know. You would have to ask her psychiatrist.

(END VIDEO CLIP)

(LAUGHTER)

PAYNE: President Trump just responding to Liz Warren taking that giant leap toward the 2012 presidential campaign, this after she announced that she's forming an exploratory committee for possible White House bid.

Is she the Democrat best suited to take President Trump?

Let's ask Wall Street Journal's Jillian Melchior from the editorial page.

I think she should have ran last time, really. I think she probably regrets that she didn't. But, having said that, we're being warned that there's going to be perhaps as many as two dozen candidates. So it's going to be a pretty big -- pretty big donnybrook over there.

JILLIAN MELCHIOR, THE WALL STREET JOURNAL: Yes, it's going to be a packed field.

I think what we saw today is the race in seriousness kicking off. I would keep an eye on Kamala Harris and Cory Booker in the next couple weeks. And then we have just a whole bunch of people who might throw their hat in the ring.

And I think with a field that crowded, one sure bet is that things will be unpredictable.

PAYNE: Well, I think another sure bet is that it's going to get ugly. Right? They're all -- they're all sort of buddy, pals.

But this process can be very, very difficult, particularly in the early stages, I think, as they're trying to attract money, some of the lesser known names. It could get pretty ugly.

MELCHIOR: Yes, absolutely.

I mean, I think what we have going on here is, in the same way in 2016 we saw fight to redefine the Republican Party, this is a fight over the future of the Democratic Party. i think you have got the far left's very progressive wing, and then you have got more traditional establishment candidates, like Joe Biden, who may be able to swing some Trump voters.

So I think that's going to be a really interesting dynamic to watch play out. You're certainly going to have that far left hammering away at the party agenda. And what concessions people make, I think that will really be important for the future of where this party goes.

PAYNE: You know, Jillian, I was reading an article last week that, right now in polling, the top three candidates on the Democratic side are older white guys, and they see that as a red flag.

I mean, does that speak to some sort of strange -- that they might have boxed themselves, in that the politics of racial division finally coming back to haunt the party itself?

MELCHIOR: Well, I think we have already seen identity politics backfire for Elizabeth Warren. And taking that DNA test was just extraordinarily ill-advised.

But I think the bigger risk here is that, as the left embraces identity politics, embraces race, gender victimhood, that you're going to be carving out smaller and smaller factions of the Democratic Party that can't get along, that view themselves as the underdog, as oppressed by the rest of their party.

And I think that that's something that really erodes public support.

PAYNE: Who do you think is going to come out on this? I mean, the far left has the momentum.

The establishment part, with Nancy Pelosi probably going to be the next House speaker, reminding us they still control the purse strings.

MELCHIOR: Yes, I mean, I wouldn't want to make a prediction about how that's going to pan out.

And I also think, when you have got a field this crowded, it does leave good opportunities for up-and-comers or for unpredictable candidates to gain a foothold, because you have so much competition and inner sniping.

But I do think, if anything, Bernie has taught us that there is an appetite on the left for those more progressive quasi-socialist policies.

PAYNE: All right, we will see what happens.

MELCHIOR: Thank you.

PAYNE: Jillian, happy new year. Thanks a lot.

Well, minimum wage hikes about to kick in. Are you about to also kick in, in your wallet?

We will be right back.

(COMMERCIAL BREAK) PAYNE: First the protests, now the payout -- 20 states set to hike their minimum wage in the new year, but will you be paying for it?

Kristin Fisher is in Washington on what we can expect -- Kristin.

KRISTIN FISHER, FOX NEWS CORRESPONDENT: Well, Charles, these new minimum wage requirements in 20 states will mean pay raises for millions of American workers.

But it also puts the pinch on their employers, many of whom are now raising prices on their products and services to try to offset the cost. The state wage hikes range from an extra nickel an hour in Alaska to a full dollar an hour bump in Maine and Massachusetts.

And where you are in New York City, many businesses will have to pay at least $15 an hour as of Monday. That's more than twice the federal minimum of $7.25 an hour.

Now, unions and liberal advocacy groups have been pushing to raise the minimum wage to $15 an hour nationwide for years. And Senator Bernie Sanders says new research shows that the Fight for 15 movement to raise minimum wage has directly led to a collective $68 billion raise for 22 million low-wage workers in cities and states across the country.

The federal minimum wage was last raised in 2009. Since then, 29 states, the District of Columbia and dozens of other cities and counties have taken it upon themselves to set the minimum wages above the federal floor.

Studies show that raises definitely help some workers, but it may hurt others whose work hours are reduced. And consumers in these cities and states, Charles, they might see prices go up, especially at places like restaurants, as these employers try to adjust to these new minimum wage requirements as we hit the new year -- Charles.

PAYNE: It's definitely a double-edged sword.

Thank you very much, Kristin. And happy new year to you.

FISHER: Happy new year.

PAYNE: Hey, folks, that will do it for us for 2018. Can you believe it?

Remember , though, you can also catch me on the FOX Business Network weekdays at 2:00 p.m. on "Making Money." Next year, I think, is the year to do it.

Meanwhile, "The Five" is next.

Happy New Year, everyone. Thanks for watching.

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