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Dow Suffers Massive Selloff; Aired 10-10:30a ET

Aired August 24, 2015 - 10:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


[10:00:01] POPPY HARLOW, CNN ANCHOR: Here with me in New York, Richard Question, Alison Kosik, Christine Romans.

I want to begin at the New York Stock Exchange.

Cristina, we saw a loss of 1,000 points at the open, pulled back a lot, down about 500 points. Now the selloff continuing.

CRISTINA ALESCI, CNN MONEY CORRESPONDENT: That's right, Poppy. This is really fear taking hold, panic taking hold of the market. A lot of investors really looking at bad numbers across the board, across the globe last night and trying to make sense of what that means for U.S. stocks. And it seems like there's a lot of correlation here and that is what is concerning investors at this point.

You know, the focus point is China. The focus point has been China for a long time. And investors have known that the growth out of China hasn't been as strong as they would have liked it to have been, but now it's starting to show up in their stock exchange which has officially crashed. We're talking about a 40 percent drop from the peak, that is just enormous. It's got investors questioning whether or not China can be the global economic driver of growth, and that, of course, has impacts on oil prices because China is a huge consumer of raw materials, commodities, oil, and that is causing even more panic, so you see how this cycle can easily build on itself, and that's what markets do.

They don't really care too much about the fundamentals at this very moment. That's why people are waking up this morning asking themselves why they're seeing such a big plunge because the U.S. economy looks good, it looks healthy at least by the numbers that we've been measuring it against by job growth and housing prices. So a lot of people scratching their heads but they have to understand the markets don't care about fundamentals. They're looking forward, they're looking to see what panic and what crisis could lurk behind the corner, around the corner, and people are pointing to the Asian financial crisis, you know, of -- in the mid '90s.

You know, we're not there yet. I'm not saying that, but they are drawing comparisons, and it's all of this fear and this talk of the bubble bursting in China that's really driving a lot of anxious selling this morning -- Poppy

HARLOW: Sure. And let's remember, right, Cristina, as you've rightly been pointing out to people throughout, where we're coming from. We're coming from an extraordinary bull market. We're coming off six years of a bull market. We're taking some of that off the table. We're down 4 percent. That's not the 6 percent we were down in September of 2008 when we had about the same point loss. The percentages are very important here.

And I want to throw this on the screen because this is going to give you some historical context, if we could pull this up on the screen. OK. Here is what you're looking at just back in relatively recent history. Dow down 700 points in October 2008. Dow lost 777 points in September 29th of 2008. So we're not there yet percentage wise.

Richard Quest, to you, what's your read on this?

RICHARD QUEST, CNN BUSINESS CORRESPONDENT: What you have -- let's put aside the actual market movement this morning and last week and actually look at the fundamentals and what you're dealing with. You're dealing with the U.S. economy that's growing moderately by the Fed's definition and seems to be OK for the time being. You're dealing with the eurozone that's got QE being pushed into the market.

So there's a huge amount of stimulus going in from the ECB. You've got emerging markets where currencies are under pressure and current accounts are under pressure because of commodity prices, and you've got many countries like Nigeria, Venezuela, Russia, India, that are going to have certain difficulties as a result of the fall of the price of oil. That is the macro global scenario within which you are taking this market fall, and for some reason best known to itself, it chose a random Friday in August last week to decide to head for the door.

ALISON KOSIK, CNN BUSINESS CORRESPONDENT: And China really was the catalyst. You know, I think the sort of the -- the biggest catalyst at least on Friday, and you talk about this in random, it was that manufacturing report coming at a time --

HARLOW: Worst in 77 months.

CHRISTINE ROMANS, CNN CHIEF BUSINESS CORRESPONDENT: That's right.

KOSIK: Yes. So, OK, so you saw -- you saw Wall Street latch onto that report and say, wait a minute, we know that China orchestrates its data anyway, but it looks like it's having a problem engineering this data and making it look good, so you've got investors scratching their heads and saying, well, wait a minute, if this data looks this bad, are they really -- is China as really well off as it says it is?

I'm talking about economic growth, and investors are thinking, wait a minute, maybe China -- maybe China knows something that we don't know. I'm going to get out of the stock market because my company that I happen to invest in, you know, invests in -- or sells its goods in China and if people in China aren't going to buy those goods, it's going to hurt the company.

HARLOW: So let's go to China, Hong Kong, Andrew Stevens live in Hong Kong for us.

Andrew, so much talk in the U.S. about China. Many, you know, American investors, people who just have their savings in the market, saying I -- you know, why are we being so affected all of a sudden by China when the slowing isn't new. This has been happening in China.

[10:05:01] ANDREW STEVENS, CNN ASIA-PACIFIC EDITOR: Yes, that's a really good point. I mean, this is -- the only new thing is, as you were pointing out, is that much worse than expected manufacturing index report, but we know China has been weakening, and we've known that for a long time. We've known the emerging markets have been weakening. They've got real currency issues there. There is no sort of direct correlation to Asia financial crisis at this stage. The economies in this region are in a much better shape than they were back in the turn of the century.

But another thing to be important to realize here is that there is no real correlation between what's going on in the economy of China and what's going on in the stock market of China. Think about this, the China market went up about 160 percent while the China economy was going in the opposite direction. It was -- it was coming off its highs and quite significantly, too. So this is -- the two aren't related.

What we're seeing in China, yes, there is an economic slowdown. Yes, it is -- smart money would know that it's actually being worse than most of the official readings. The official readings have the economy growing at about 6.87 percent. Most people I speak to here say -- who look at things like electricity consumption, cargo moving, et cetera, et cetera, they say the economy is growing perhaps 5 percent, some say maybe even 4.5 percent. That's quite a big difference.

The central authorities have the wherewithal to boost that economy up significantly if they so choose. They have the financial firepower to do it much more than any other economy. They haven't pulled that trigger yet. They would pull that trigger if they felt that the economy slowing down was getting out of control because if it's slowing down too fast and you're losing too many jobs, you get social unrest. The communist party, the leadership, will not tolerate that because that will directly undermine their own authority, so that's very unlikely to happen.

So this is what's going on. People do realize that the economy is slowing down. I'm just -- what flummoxes me is watching -- watching those numbers today when Wall Street opened, you get a 1,000 point selloff, I find it very hard to believe that China manufacturing number from last week is responsible for that sort of thing. Particularly when fast money or hot money knows that the actual stock market performance in China doesn't bear a lot of relationship to what's happening in the real economy.

HARLOW: Yes. It's a very important point. Andrew Stevens, thank you so much. Appreciate it, as always.

Joining me on the phone, someone who has such important perspective in all of this, renowned investor, former CEO of Pimco, chief economic adviser at Allianz, Mohamed El-Erian.

Mohamed, are you with me? MOHAMED EL-ERIAN, CHIEF ECONOMIC ADVISER, ALLIANZ: I am, Poppy.

HARLOW: You know these markets better than anyone. What do you make of this? Is this nervousness? Is this about fundamentals? What is this?

El-ERIAN: So in the short-term it's about the lack of a policy circuit breaker. People are worried about the slowdown in global growth. They know that this is coming from the emerging world, and therefore the Fed and the European Central Bank are not in a position to provide the circuit breaker, and they're disappointed that China hasn't done anything.

Longer term, Poppy, it's about prices of assets that have gone far above what would be justified by fundamentals, and people now realizing that the world is having enormous difficulty generating enough economic growth.

HARLOW: So when you look at this, isn't it very important to put it in context in terms of the remarkable bull market that we're coming off of? Could it be viewed as a good thing to see this market in the U.S. perhaps coming a little bit more back to reality, Mohamed?

El-ERIAN: Yes. Longer term, this correction will be a good thing. It will be a good thing because it's going to bring financial markets closer to what's justified by fundamentals and therefore there will be less of a risk of a financial collapse down the road, and, secondly, it will be a good thing because it's going to provide some genuine investment opportunities for people who want to put their savings and pensions and investments. But you know what? Short term it's going to be incredibly volatile.

HARLOW: Right.

El-ERIAN: And the key thing for investors is not to be pushed into doing the wrong thing. Do not panic at this point. It's better just to sit back and let this play out, and then look for attractive opportunities.

HARLOW: Again, on the phone with us if you're just joining us, Mohamed El-Erian, a renowned investor, former CEO of Pimco, one of the biggest bond funds in the world. Chief economic adviser at Allianz, someone Christine Romans, Richard Quest, Alison and I all go to when we want to know what is driving this.

Christine, you have a question for him.

ROMANS: Mohamed, Christine here. I just wanted to ask you a little bit. You point out now is not the time for an investor to do something. You know, you're down 2,000 points basically in about five days in the Dow Jones Industrial Average.

Let me ask you about what this means for the Federal Reserve. You say there isn't a policy circuit breaker. A lot of us expecting the Federal Reserve to raise interest rates in the United States in September, maybe in December. Will a move like this and concerns about China mean the Fed will not raise interest rates in the near term?

[10:10:08] El-ERIAN: Yes, it will be very difficult for the Fed to raise interest rates in September unless the markets calm down quickly, which is unlikely. They had a window. They had a window when the domestic conditions were favorable and the international conditions were neutral. That window is closing for September.

December is still an open question. Why? Undoubtedly the U.S. economy is going to be impacted negatively by the slowdown in China and by the financial turmoil. However, let's not forget that it will benefit from lower oil prices, and it will benefit also from lower interest rates. So the September call -- the September call I think is clearer. They are likely not to go forward with an interest rate hike. December is still open.

HARLOW: All right, Mohamed, stay with me. Just obviously when you have a market like this and an election cycle, here come in the politics. So I just want to read for you two tweets we've gotten from two presidential candidates. Donald Trump just tweeting this morning, "Markets are crashing all caused by poor planning and allowing China and Asia to dictate the agenda. This could get very messy. Vote Trump."

I also want to read you what Bernie Sanders said. We don't have a full screen but I'll read this to you. Bernie Sanders said, "The results are in, unfettered free trade has been a disaster for working Americans. It's high time we ended our disastrous trade politics."

So we're going to get into more on the politics of this right on the other side.

Mohamed El-Erian, stay with us if you can, my friend, important analysis as we continue to watch an extraordinary day unfolding on Wall Street.

There you have it, the big board improving actually a lot from the 1,000 point dip we saw at the open. The Dow down 465 points.

Back in a moment.

(COMMERCIAL BREAK)

[10:16:10] HARLOW: All right. I'm Poppy Harlow in New York. Live team coverage of the huge sell-off we're seeing on Wall Street right now. Dow Jones Industrial Average off 425 points. I've got to tell you, that is a lot, but it is a whole lot better than what we saw at the open when the Dow sold off 1,000 points.

This is building off the selloff we saw last week. This is building off just a horrific night overseas in Asia trading and European trading.

Let's go straight to MJ Lee to get to the other side of this, which is the politics of it, right?

We're already hearing, MJ, from some of the presidential candidates? MJ LEE, CNN POLITICS CORRESPONDENT: That's right, Poppy. It seems

like the economy might finally take center stage on the 2016 campaign trail. As you know, so far the economy really hasn't been a focus for many of the candidates on a cycle that has been largely dominated by issues like immigration, issues like ISIS and national foreign policy, rather.

We are hearing from some of the candidates this morning responding to the extraordinary -- you know, markets plunging this morning, several hundred points or close to a thousand points. Donald Trump, who has been leading the Republican field, he is using this as an opportunity to talk about his own issues. He tweeted this morning, "Markets are crashing. All caused by poor planning and allowing China and Asia to dictate the agenda. This could get very messy. Vote Trump."

Someone else that we're hearing from on the Democratic side of the field is Bernie Sanders, who has been really nipping at Hillary Clinton's heels. He said, "The results are in, unfettered free trade has been a disaster for working Americans. It is high time we ended our disastrous trade policies."

So, Poppy, as you can see for each of the candidates, this is going to be an opportunity for them to talk about their own issues. For someone like Trump, he has talked about the issue of China and Asia and how he believes that other countries are taking advantage of the United States. For someone like Bernie Sanders, free trade and the free trade agreement has been a big issue for him and something that has actually put someone like Hillary Clinton in an uncomfortable spot.

So I think, you know, for the first time maybe during the cycle we are going to see the candidates really focusing on the issue of the economy and the markets.

HARLOW: What do you think this does, MJ, for a Donald Trump or a Carly Fiorina, really the only two candidates who can get up there and say I have run a big business, I know how this market works?

LEE: Right, this is a huge opportunity for folks like Trump and Fiorina who have had the private sector experience and who really have labeled themselves as business leaders and who have had experience and understand the markets. I think so far they really haven't had the opening to talk about issues like that as much as they could maybe this week because the economy has been actually, you know, on a bit of a roll.

The unemployment rate is down at 5.3 percent, as you know, and I think criticizing the Obama economy hasn't been as easy as maybe it were in the 2012 cycle.

HARLOW: Right.

LEE: So now is their opening to really go after the president and his economic policies in the way that they want to.

HARLOW: Well, let's remember, you bring up those fundamentals, the U.S. economy, much lower unemployment, et cetera, and guess what? Those still exist even when the market is selling off like this. Those still exist. So let's not lose sight of that. MJ, thank you very much.

With me on the phone, someone who can help us put this all in perspective, Mohamed El-Erian, formerly the CEO of Pimco, one of the biggest bond funds in the world, now the chief economic adviser to Allianz, and a globally renowned and respected investor.

Mohamed, to you. Your take on this in terms of the fundamentals versus nervousness and what investors at home should do right now.

El-ERIAN: So this is a financial issue, not an economic issue. The U.S. economy is still in good shape. It will continue to produce jobs. It's not at its key velocity but it's doing a lot better than elsewhere.

This is a financial issue. It reflects that we have over-relied on central banks and central banks cannot deliver genuine growth. They can buy time for politicians, but they cannot deliver genuine growth. So this is right now a financial issue as oppose to real economy issue. It becomes a real economy issue if the circuit breakers are not triggered.

[10:20:11] HARLOW: Richard Quest, question for Mohamed.

QUEST: Good morning, Mohamed. Richard Quest here. Sir, you talk about the wider issues at the moment for emerging markets, currency imbalances, commodities, low oil prices. How concerned should we be that the emerging markets could lead us towards a 1997 scenario again?

El-ERIAN: So 1997 and 2008 were very particular scenarios. They had to do with shocks to the plumbing of the system. The plumbing of the system is in much better shape right now. Having said that, we mustn't forget that the emerging world now accounts for about half of global GDP. That we have relied on them as an engine of growth and we have relied on China in particular as the locomotive.

And now they are exhausted. They no longer have the ability to pull the global economy along but they have nobody to hand off to in terms of global growth engines. So yes, we should worry. I do not think that we are looking to a blockage in the plumbing system, but we are looking to a re-pricing of markets that had fallen in love with finance and now have to price in fundamentals.

HARLOW: Christine also has an interesting tweet from Larry Summers.

ROMANS: Yes, Mohamed, Larry Summers just tweeted that as in August 1997, '98. 2007, 2008, we could be in the early stage of a very serious situation. Do you agree with his concern?

El-ERIAN: Yes, I think that it is not going to be easy to turn around the emerging world, and the reason why is simply it's very hard to function in a global economy in which the advanced countries over-rely on their central banks. It's a complicated issue to explain because it's so technical, but

fundamentally think of it as follows. In the advanced world, we are supposed to be responsible. We're supposed to be mature. We provide the global currencies. We provide a global system. And for the last few years our politicians haven't stepped up to the responsibility of comprehensive economic policy, so we have over-relied on central banks.

And now the cost and risks of doing so are becoming apparent. So, yes, it's something to worry about in terms of global growth and the emerging world and anybody else, even well managed companies find it very hard to navigate a world in which the advanced country politicians aren't stepping up to the economic governance responsibilities.

KOSIK: I'd like to jump in and just ask you -- this is Alison Kosik on the set as well. Is there a lesson in here for central banks because a lot of this I think, and tell me if you agree or not, a lot of this is driven by central banks stepping in to prop up economies.

El-ERIAN: Yes, we should feel sorry for central banks because starting from 2010 when they realized that other policymakers were paralyzed by political dysfunction, they stepped in to buy time for the system to heal, and they were hoping to hand off to the politicians, but the politicians didn't respond, so they got in deeper and deeper using untested instruments and getting more and more uncomfortable. So central banks stepped in for the good reasons but they made the wrong assumptions. They made the assumption that they would hand off to responsible economic policy making by politicians, and that has not materialized as yet.

HARLOW: Mohamed El-Erian, such important insight. From me, from our entire team, thank you, my friend, for calling in and helping calm some of the nerves.

Before we get to a quick break, I just want to pull up the big board again because it's just important to put this all in perspective. The Dow off 300 points, nowhere near the 1,000 point drop we saw at the open. Off less than 2 percent.

We are coming back here, and that is a good sign as we are just about one hour into this trading day. Much more of our live team coverage next.

[10:24:16]

(COMMERCIAL BREAK)

HARLOW: Welcome again to our viewers around the world and here in the United States. I'm Poppy Harlow in for Carol Costello today as we watch a huge selloff on Wall Street. Guess what? It's getting a whole lot better. The Dow down 330. It was down 1,000 at the open. I want to show this to you.

Christine Romans, my friend here, chief business correspondent, this is broad based. ROMANS: The Dow is 30 stocks. When you look at these 30 stocks we

can show you exactly how they're all doing. You see the red arrows sort of everywhere, but these -- if you're just tuning in now this looks terrible but if you have been tuning in with us for the past hour and a half, this is much better than it was before.

HARLOW: Yes.

ROMANS: But every stock in the Dow Jones Industrial Average, all 30 of them, are lower.

HARLOW: Right.

ROMANS: The S&P 500 is the broader gauge, it's probably what your 401(k) is based on. That's about at a -- I would say a 10-month low right now.

HARLOW: All right.

ROMANS: So we'll have 10 months of gain.

HARLOW: So important to say. Richard?

QUEST: What's fascinating about looking at this, though, what's fascinating is there's no rhyme or reason to the spread.

HARLOW: Absolutely not.

QUEST: You've got a major manufacturer like Caterpillar just down 1.5 percent.

KOSIK: Which has bigger exposure to China than let's say --

QUEST: Exactly. Exactly. And then you've got Goldman Sachs.

KOSIK: You know, Verizon.

QUEST: You've got McDonald's which is at the cheaper end than --

HARLOW: Apple.

ROMANS: Look at Apple, though. Apple is only down half a percent.

QUEST: So it just shows me that for old war horses like me --

KOSIK: It's an excuse. It's an excuse.

QUEST: Pardon?

KOSIK: No, not that. I'm saying that part of this could just be an excuse to --

QUEST: Yes.

KOSIK: Create a little more volatility. Look, the reality is, is that you think about who is trading these stocks. Investors kind of like volatility. They don't kind of like it. They love volatility because it's in the huge dips when they can make a lot of money.

HARLOW: No, but these are day traders we're talking about. For everyone that it matters a lot for their 401(k) they don't like that.

KOSIK: The explanation as to why there's no rhyme or reason.

QUEST: It's a completely different market.