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First Move with Julia Chatterley
The CEO Of Cathay Pacific Resigns Over The Hong Kong Protests; GE Denying Allegations Of A $38 Billion Fraud; Reports Suggest The President Would Like To Buy Greenland. Aired 9-10a ET
Aired August 16, 2019 - 09:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
JULIA CHATTERLEY, CNN INTERNATIONAL ANCHOR, FIRST MOVE: Live from the New York Stock Exchange, I'm Julia Chatterley. This is FIRST MOVE. And here's
your need to know. Departed: The CEO of Cathay Pacific resigns over the Hong Kong protests. Fighting back: GE denying allegations of a $38 billion
fraud. We speak to the accuser who says it's worse than Enron. And from Greenland to Trumpland, reports suggest the President would like to buy it.
It's Friday, let's make a move.
Welcome to FIRST MOVE once again, there is a sea of green today across global markets. Perhaps we can hold on to this, so we'll dedicate it to
the not so happy citizens of Greenland right now.
U.S. markets are higher as we speak premarket. Take a look at what we're seeing right now. It's wrapping up a very volatile week, of course today
for U.S. markets, a noisy week for trade negotiations and headlines, too, or non-negotiations.
Right now President Trump saying he and President Xi could chat by phone soon. It's clearly good to talk as far as investors are concerned. We're
also hearing noises of China working on fresh stimulus to help the retail sector and consumers.
The U.S. majors managing modest gains yesterday and the Down the S&P closing their session high. That feels important given sentiment right now
for all the swings. We are just -- and I use the term carefully -- down some two and a half percent for these majors.
What clearly lent support yesterday was what we got from the consumer, the retail sales data earnings, of course, from Walmart, amid all the broader
recession talk and the warning signs that we've been discussing this week from the bond market, as we've been saying all week though.
Right now, the data doesn't fit with the stampede that we're seeing into assets like U.S. Treasuries, the safe havens. Incidentally, the best month
for U.S. bonds since 2015.
Moody's, the rating agency also saying the U.S. economy could see growth of 2.1 percent this quarter. That would be better than expected. Remember,
the Consumer Services is two thirds of the economy in the United States. The manufacturing sector, as much as we talk about, it's less than a fifth.
And it's that part that feels recessionary.
Now, in that vein, machinery giant, Deere cutting its four-year forecast. We're seeing its shares down premarket. More details on that very shortly.
Key for the farming sector, of course.
But for now, take a look at what we're seeing in Europe. Stocks are higher, brewing expectations there of a stimulus package coming in from the
European Central Bank in September. Good for stocks, also good for bonds it seems, too. Lots to discuss.
Let's get to the drivers. John Defterios joins us now. John, you can take your pick, quite frankly, whether it's recessionary warnings, S&P, of
course, the rating agencies giving a higher probability of a U.S. recession, a flood into bonds. And yet, for all the concern, we slipped
off two digits year-to-date for the U.S. majors. I feel like we have to hang on to that here.
JOHN DEFTERIOS, CNN BUSINESS EMERGING MARKETS EDITOR: Yes, that's a pretty good performance despite all the chaos we've seen this week, and we often
talk about, Julia, relief rally, I wouldn't say it's a big rally, but there certainly is some relief in the air that we're on firmer ground after what
we've seen.
That S&P report kind of coincides with what we saw earlier the week from Bank of America that the chances of a recession is sitting at about 30
percent. That was a survey of fund managers. So this is all starting to add up a little bit here.
And what a volatile week it was with major gyrations of one to three percent with a highlight of course, that eight point drop that we saw in
the Dow Industrials.
I want to bring back up that big board with all the stock markets because we have this recovery in Asia in the major indices, and then the U.S.
futures rising as well, and this gave support to Europe overall. So that's the positive.
You talked about the China stimulus. If you dig deeper into this. It's the state agency, the planning agency, talking about right now just talk of
trying to help the consumer to boost domestic spending in the end of 2019 and 2020. Nothing definitive.
But what I did find interesting is that we see other economies in Asia -- Thailand, announcing a stimulus package, $10 billion -- that is pretty
sizable for a small economy.
The Financial Secretary in Hong Kong doing the same 24 hours ago, but also saying it is going to be very different to avoid a technical recession.
Then I see long-term bond yields in Japan collapsing, like we've seen in the United States and the U.K.
[09:05:08] DEFTERIOS: So Japan may need to go back into Abe Economics to stimulate, and the overarching concern remains. That dark cloud -- U.S.
and China -- the czar for trade for Donald Trump is Peter Navarro. "The Wall Street Journal" Editorial Board, again, bringing up this issue of the
Navarro recession. He is being too tough.
And he was on CNN in the United States denying the fact that this is going to lead the U.S. into recession. As you noted in your lead in there,
Donald Trump wants to talk to President Xi. President Xi is not making gestures, returning the idea of pick up the phone and I am ready to sit
down. We see dialogue, but nothing concrete yet.
CHATTERLEY: Absolutely. And it could have dramatic political consequences, of course, for the President, too, and that's only getting
closer and closer.
Let's bring in the broader sweep here then. We've talked about plenty of stimulus. Central Banks around the world weakening growth. What about the
European Central Bank here too, because you do feel like there's a domino effect going on in Central Banks around the world getting in ahead of the
Fed here with their own packages of easing. Big implications for the Federal Reserve as well, and the timing and the decisions over future rate
cuts, too.
DEFTERIOS: Well, I think it's eerily quiet in Europe. But I'm glad you brought it up for a point of discussion, because you look around the
landscape here in Europe right now. It's not positive.
The number one economy -- Germany -- contracting this week, 0.1 percent. We're expecting the same in the third quarter, so a technical recession
going there.
The number three economy, the U.K. announced that contraction of 0.2 percent. Number four, Italy, we have the turmoil with Matteo Salvini
making a power play here that will cause some turmoil.
And we're going to be in the same position with Brexit, as we were at the beginning of the summer. That's going to come crashing into us very
shortly, which will probably force the European Central Bank and the Bank of England to take some action to prop up their economies right now.
And then it leads us all the way back to where, Julia? Jackson Hole, Wyoming with the Central Bankers, when they get together a week from today,
we're going to want to hear from Jay Powell who is going to give indications that the U.S. Federal Reserve is ready to act and any sort of
language at all, coordination within the G-20 or G-7.
The G-5 economies of the world are suffering right now. And I think the markets would like to hear the fact we're ready to act, and perhaps define
what that means going forward as we see the U.S.-China trade dispute really looming very large over this market after a very tumultuous week.
CHATTERLEY: Yes. And Jay Powell confirmed to be speaking next week. So that's going to be an interesting one next Friday. Popcorn to the ready,
John Defterios. Thank you so much for that.
DEFTERIOS: Terrific.
CHATTERLEY: All right. Let's move on. Cathay Pacific CEO Rupert Hogg has resigned following weeks of protests in Hong Kong. Andrew Stevens joins us
on this story.
I mean, you can take your pick of the challenges here, quite frankly and the criticism of Cathay Pacific's handling of their own employees that
perhaps who are thinking about joining the protest. Pressure from the aviation regulator over in China as well.
But for me, what's most interesting here is the shareholders and the influence here at Cathay Pacific and perhaps who may have given the nudge
here. Talk us through it, Andrew.
ANDREW STEVENS, CNN ASIA PACIFIC EDITOR: Well, I think it's clearly a case of Beijing just exerting its economic muscles, its financial muscle over
Cathay. Julia, 50 percent of Cathay flights fly through Chinese airspace. Nearly 50 percent of all tickets sold by Cathay goes to Mainland Chinese.
So when the Chinese want something, Cathay has no choice. It's an economic survival for them.
And what happened is that basically, Beijing was incensed when it emerged that staff at Cathay Pacific had been joining these demonstrations here in
Hong Kong. And they basically sent an ultimatum to Cathay and said, "You will have to ban every staff member from any flight in Chinese airspace who
has taken part in any of these demonstrations."
It was all part of a series of measures that Beijing wanted to see, citing security concerns, and Cathay basically said, "Yes, I really have no
choice." So they agreed to the banning. They then said that there will be a zero tolerance, they would sack anyone who is involved in what they've
termed illegal demonstrations.
And then, just a couple of days ago, Julia, they said that two pilots who have been involved with the protests were both being fired. Apparently,
though, that wasn't enough. And Rupert Hogg, the CEO since May of 2017, announced his resignation today, saying it had been a challenging few weeks
for Cathay and that he was taking responsibility for that.
Interestingly, the Chairman of Cathay had a statement as well. Just let me know this to you, Julia. This is John Slosar. "Recent events have called
into question Cathay Pacific's commitment to flight safety and security and put our reputation and brand under pressure. This is regrettable, and we
have always made safety and security our highest priority. We therefore think it's time to put a new management team in place who can reset
confidence and lead the airline to new heights."
So that's Cathay basically clearing the decks. The Head of Commercial has also gone. They've put in a new CEO who is known to have the good links
with Beijing. And Cathay is now as a matter of survival, hoping the worst is behind it, that they've done what Beijing wants them to do, and they can
get on with it. It is difficult enough as it is with Hong Kong, with tourist arrivals down. They don't need Beijing breathing down their neck
anymore.
CHATTERLEY: Yes, fascinating. Andrew Stevens, thank you so much for joining us on that story. All right, let's move on to our next driver. GE
shares bouncing a little bit here following an 11 percent fall yesterday, after the firm is accused of being a bigger fraud than Enron.
They were accused by a renowned forensic accountant, someone who blew the whistle on Enron years before regulators caught up to it, of course, and we
saw the collapse. Paul La Monica joins us now. Quite fascinating to see what's going on here and the broader accusations that are being made here?
That's a pretty bold call that this is a worse situation than Enron and a $38 billion fraud. Talk us through the details, Paul, here. What do we
know?
PAUL LA MONICA, CNN BUSINESS REPORTER: Yes, Harry Markopolos, who I know you're going to be talking to later in the show, he also compared it to
Worldcom, another company that got brought down by accounting.
But here are what we know right now. According to Markopolos and his team, they are alleging accounting issues in the company's insurance business as
well as with Baker Hughes GE, the oil subsidiary that GE has a majority stake in.
The company is disputing all of Markopolos' allegations saying that there is no truth to them. Larry Culp went on to say in a separate statement
that this is market manipulation, pure and simple. And Culp is putting his money where his mouth is, so to speak.
He bought GE shares yesterday, according to the company, and earlier this week, several other insiders at GE have also been buying shares this week
as well. So as far as the company is concerned, there is nothing here that is remotely true. And they're trying to back it up with these insider
purchases.
CHATTERLEY: Yes, it's interesting, isn't it? I mean, if we look at the value that was wiped off, the market cap of the company yesterday, we're
talking some $10 billion. If you compare that to the accusations of a $38 billion fraud, investors are kind of giving them the benefit of the doubt
right now.
But you know, I go back to what you and I were talking about earlier on this year and a $22 billion write down in the power business, and I just
think when you've got a short seller and accusations like this, unfortunately, GE has opened itself up to perhaps accusations like this,
because we've had shockers with them in the past -- and recent past.
LA MONICA: Exactly. I think it is obviously very fair to be extremely critical of GE's books right now in what they've been reporting, but there
is a fine line between accounting issues that may be are flirting with being maybe inappropriate and being outright criminal, which is what
Markopolos really seems to be alleging here going so far to compare them to Enron and Worldcom.
In GE's defense, you have to keep in mind, too, Larry Culp was brought in as an outsider after the years of Jack Welch and Jeff Immelt and John
Flannery, he is cleaning house. He has not been afraid to sell off assets, get rid of some of GE's sacred cows.
So I wonder -- and this is pretty speculation on my part -- is Culp already taking a hard look at the accounting and while maybe not agreeing with what
Markopolos is alleging, is going to do what he can to make GE a streamlined company that is simpler to understand.
We know that they're trying to pare down a lot of the complexity in GE with some of these asset sales, and really have it focused on just a couple of
core businesses, namely energy, healthcare, and you know, the other businesses that GE has been known for. They're still looking to sell off
the electric -- the core light bulb business that gives GE its iconic brand name.
You know, and I think Culp is going to do everything it can to make it a simpler company for Wall Street to understand.
CHATTERLEY: Yes, absolutely. We should make the point as well that he is working with an unnamed hedge fund that's gone short. He will benefit if
indeed we see significant share price fall. So we'll make that point as well.
And, as you said, Paul, we're going to be talking to the accuser later on in the show. So, stick around for that. In the meantime, Paul La Monica,
thank you so much for that.
[09:15:10] CHATTERLEY: All right. Let me now bring you up to speed with some of the other stories that we are following around the world.
South Korea says it is analyzing new missile launches by Pyongyang. Official say North Korea fired two short range missiles Friday morning that
crashed into the sea. The North later declared it would cut off dialogue with Seoul. The move that came after South Korea's President pledged to
reunify the peninsula by 2045.
President Trump has expressed an interest in buying Greenland from the Danish government. That's according to sources, who also said that the
White House counsel's office had been looking into the possibility.
Joe Jones joins us now from Berkeley Heights in New Jersey. This is a fascinating story, Joe, a chockful of resources, strategically, geographic
location as well and of course home to a U.S. base. There's just sort of 56,000 Danish citizens that might, you know, dive into the water and swim
away if this actually took place. Talk us through the details.
JOE JOHNS, CNN SENIOR WASHINGTON CORRESPONDENT: Right, well, okay, let's start with the airbase. That's Thule Air Force Base. It's been in
Greenland since about 1951. Now, I know this sounds a bit outlandish. In fact, the former Prime Minister of Denmark, who just left office a couple
of months ago, Lars Rasmussen tweeted that it may sound like an April Fool's joke, totally out of season, but it's not a joke.
Now, not only does the United States have that Air Force base there. Greenland has been seen as strategically advantageous, particularly during
the Cold War. Now, there's a listening post there, a very good one, where the United States would be able to monitor intercontinental ballistic
missiles, should they start heading toward the United States from Russia. It would also put the United States in a pretty good position to respond.
President Truman, in fact, tried to buy Greenland back in the day and at that time, he was rebuffed as well. So not really a joke. Interesting
also, the President will be traveling to Denmark later this month. We'll see if it comes up then -- Julia.
CHATTERLEY: We absolutely will. Joe Johns, thank you so much for the context there. All right. We're going to take a quick move here -- quick
move -- a quick break here on FIRST MOVE. It's clearly Friday. But coming up after this, a deer in headlights, John Deere gives a downbeat outlook as
the trade war impacts U.S. farmers.
And Genron, fraud or fantasy. I speak to the man accusing General Electric of the biggest con in American history. Harry Markopolos joins us later on
the show. Stay with us. We're back in two.
(COMMERCIAL BREAK)
CHATTERLEY: Welcome back to FIRST MOVE as we count down to the final session here on Wall Street and we are anticipating a stronger open this
Friday.
Tech stocks actually outperforming premarket, that was of course hoping to recover some lost ground following Wednesday's three percent drop where we
saw that brief. And I think it was about 10 minutes actually, inversion of the U.S. yield curve. We are seeing Treasuries firming up today. We've
got the 10-year yields ticking up to 1.55 percent; 30-year bond yields are now back above two percent.
Again, the big question remains -- what is the likelihood of the United States tipping into recession here? A lot of people weighing in. S&P, the
rating agency putting the risk of recession next year at 30 to 35 percent. They've raised the likelihood.
Hedge fund giant, Ray Dalio says he sees a 40 percent chance recession over the next two years, but Carlyle Group co-chair, David Rubenstein said
today, a near-term recession is not likely in his view. Wow. It's tough to gauge.
Lori Heinel is the Deputy Global CIO for State Street Global Advisors. Let's get your wisdom. Great to have you with us.
LORI HEINEL, DEPUTY GLOBAL CIO, STATE STREET GLOBAL ADVISORS: Great to be here.
CHATTERLEY: What are you seeing right now? Because I've been saying all week, there's a risk that we talk ourselves into it here.
HEINEL: Well, there certainly is a risk always that there's going to be a recession. But we're not in that camp. We actually think that the
underlying fundamentals are still pretty strong. Consumers seem to be still spending. Retail sales we saw was pretty good.
We're starting to see a little bit more wage growth, and that's really a positive. So we think that there are still a lot of risks out there. But
we don't think recession is imminent.
CHATTERLEY: Can the United States remain resilient in the face of what we are clearly seeing, slowing China. Europe talking about more stimulus
again. Asia Pacific, seven out of eight nations there, seeing their PMI's, their business surveys declining quite significantly, can the U.S. remain
an island?
HEINEL: So we have been the engine of growth for the last couple of years. And again, on the back of very strong consumers because there again, you've
got unemployment remains quite low. Consumer confidence is good and lower interest rates are boiling certain sectors like housing.
So, there clearly are vulnerabilities, but we still think that the domestic economy is in good shape.
CHATTERLEY: Talk to me about the disconnect, then between the signals that we've been chatting about all week in the bond market and the flood to the
safety of bonds. The underlying data, which you're seeing here in the United States looks pretty good. And even equity markets where we saw that
sharp pullback, but we're still some six to seven percent off of record highs. So I feel like everything is disconnected, quite frankly.
HEINEL: We had this exact debate a couple of days ago that you have the bond markets and the stock market sending very, very different signals in
here. And we think that they're both kind of wrong in the sense that the underlying economic growth is probably going to be a little bit north of
two percent here in the U.S.
So that certainly doesn't justify a one and a half percent 10-year for example. On the other hand, equities have benefited from rerating not
necessarily core earnings growth, so we think there's a little bit of vulnerability there, too. So no recession, but both markets are a little
bit at extremes.
CHATTERLEY: You remain overweight. U.S. equities --
HEINEL: We just shifted that slightly.
CHATTERLEY: You, too.
HEINEL: So if you include our read exposure, we're still about equal weight equities to our long-term strategic allocation. So we've tempered
our enthusiasm a little bit, but we're still certainly not in the bearish camp.
CHATTERLEY: Yes, REIT, real estate just to be just to be clear. You have upped your holdings of gold, which I thought was interesting.
HEINEL: We have, yes.
CHATTERLEY: Talk to me a bit about that as well because that's an interesting one, I think for our viewers.
HEINEL: Yes. And no, absolutely. So certainly gold is a nice safe haven asset that had done quite well in here. It's also an asset that benefits
when you have negative real rates, which we're starting to see here as well.
So we think that now's the time where you don't give up a lot of income by holding gold, and you actually get some pretty interesting protection
properties.
CHATTERLEY: What proportion of a portfolio now should be in gold? Because it's safe haven, we just want to get a sense of where the allocations in
aggregate should be for a good looking portfolio at this stage.
HEINEL: Well, right now, we've only got about a three position -- a three percent position ...
CHATTERLEY: Three percent.
HEINEL: ... to gold and our sort of diversified portfolios, but there are other diversifiers. We still like long bonds as a hedge because it's one
of the few things that will do well if you really do get a recessionary or even a worse than kind of an environment.
[09:25:08] HEINEL: But we're looking for other places to find some, you know, opportunity here besides just fold in long bonds.
CHATTERLEY: What do you think of emerging markets at this moment? Because I think that's also I think, shaken investors. We had the huge selloff in
Argentina, obviously, that was a specific Argentinian story. But the moves in the markets there, even notwithstanding summer market trading volumes,
felt dramatic. What are you saying to investors here about that?
HEINEL: Yes, look, emerging markets in the short term is going to be in a lot of trouble there. You know, clearly, that's the area that has the most
exposure to any kind of trade uncertainties, and while there are some economies that should come out the other side in good shape, especially if
the Chinese-U.S. relationship deteriorate in the short term, that's just going to be a volatile market. We've seen a lot of massive concerns and
Central Banks in those areas are starting to really cut rates aggressively.
So we think that the combination of just all the uncertainty, as well as lower currencies, it's going to really put a little bit of a dampener on
EM.
CHATTERLEY: Recession risk. Do you think that there's recognition in the United States that this trade war could ultimately have political
consequences in 2020, and actually, that might facilitate some kind of deal?
HEINEL: Like the big risk all long has been that these trade talks continue to come back into the real economy and we are seeing that in terms
of business investment.
In 2018, it looked like businesses were getting more confident. They were starting to spend some of that tax benefit in investments. And now, you --
CHATTERLEY: And now, they're holding off.
HEINEL: You're starting to see that pull back again. So you know, they're still in terms of, you know, consumer and small business seems pretty
optimistic, but larger international conglomerates, not so much.
So that's the big risk here, is that this goes on and it feeds back into the real economy.
CHATTERLEY: Yes, self-fulfilling prophecy. We're already seeing that. Lori Heinel, fantastic to have you on as always. All right. The market
open is next. We'll be back in three.
(COMMERCIAL BREAK)
[09:30:00] CHATTERLEY: Welcome back to FIRST MOVE, and we are off the final trading session of the week. It begins what an exhausting and
volatile week it's been, but right now we are in a positive territory. The question is, can we hold there?
Futures have been pretty stable all morning, I have to say, and we have been in positive territory and that is a positive sign, too. We're also
keeping an eye on Fed Speak. We've been talking in the show about the fact that Jay Powell is set to speak next week.
We've had some Fed Speak before that. The St. Louis President Bullard saying that this week's yield curve inversion wasn't long enough to be a
bearish sign. Like we were saying earlier with Lori Heinel, 10 minutes in fact. We're also keeping an eye on what's going on in energy prices here
as well.
Oil mixed after a volatile week there as well. OPEC, lowering its 2019 demand forecasts, again. It sees an oil surplus next year. It's also
again, raising expectations that they will keep supplies tight, perhaps for longer hereto. It fits with the broader narrative. If the global economy
is slowing, all demand will be lessened, too.
All right, let me walk you through today's global movers as well. General Electric, moving a little bit higher here rebounding from 11 percent fall
in Thursday's session. The company fighting back against the allegations as we've already discussed on the show of fraud from investigator Harry
Markopolos. I'll be talking to him later in the show to get his take and why he is accusing them of this monster fraud. Right now, the share price
bouncing some four percent in the session.
NVIDIA, also in focus. The revenue of the chip maker coming in above significantly lowered expectations. I'll make that point. It has been
driven by demand. The new high-end graphic chips designed for video games up some six percent in the session so far.
And Deere & Co. also in focus. The maker of the farm machinery revising down its 2019 profit and sales forecast. Third quarter earnings missing
expectations as the trade war hits demand for equipment, up some 1.6 percent.
Clare Sebastian joins us now. Clare, a lowering of forecasts for the second quarter running here for John Deere, well and truly, again caught in
the crossfire whether it's demand for products, farming products, uncertainty over tariffs, export demand for the underlying commodities as
well. These guys are really in the thick of it.
CLARE SEBASTIAN, CNN BUSINESS CORRESPONDENT: Yes, I think we've used the phrase "perfect storm" a couple of times in the last week, I'll say, Julia.
But this really does describe the situation for John Deere.
It's not only the trade wars, although, they do say that concerns about export market access. That's the words of the CEO, of course, many farmers
postpone major equipment purchases. There's also been issues for farmers this year with weather, flooding has affected many of the growing regions,
especially for corn and soy producers.
And this week, another blow. We got data from the U.S. Department of Agriculture that showed farmers that actually planted more especially in
terms of corn, many were expecting and that led to a drop in corn prices, which of course is something that is a negative for these farms especially
when they're looking at making big capital equipment purchases, like equipment from John Deere.
So all in all, a lot of headwinds facing this company, although they did say that the overall economic conditions remain positive. And we certainly
see some strength in their construction and forestry unit. But this is a big exporter, Julia. This is a proxy for the trade war.
If we look at their stock so far this year, it hasn't benefited from the overall rally in the S&P 500. It plummeted in May when those talks broke
down. And it's fallen again this month after we saw those new tariffs announced and China cut off U.S. agricultural purchases.
So this is a company as you say, really right in the middle of all of these macro headwinds.
CHATTERLEY: Yes, another trade war barometer here, and only really echoing what we heard from Caterpillar as well, too, but I loved that you pulled
that out because I also spotted that. General economic conditions remain positive, construction, forestry, I think that's important to underlying
what is a noisy trade war filled rhetoric here; underlying conditions remain strong.
The other thing of course for Deere is that they have got caught in a political crossfire as well. They've become a rod for the President to
beat the Federal Reserve where it's not about the trade war, of course, it's all about the Federal Reserve not cutting rates quick enough. Talk us
through that.
SEBASTIAN: Right, exactly, Julia. Singled out in some presidential tweets last week. I think we can pull this up. He basically said the Fed's high
interest rate level in comparison to other countries is keeping the dollar high making it more difficult for our great manufacturers. As you
mentioned Caterpillar. He also singled out Boeing and John Deere.
Now, he does have a point. They did talk about currency impacts in this earnings report. They said the negative foreign currency affected about
two percent. It is being factored into their guidance for this year.
But look, the headlines from the CEO don't mention the dollar, again, he said a high degree of uncertainty led by concerns about export market
access, near-term demand for commodities, and overall crop conditions. He doesn't mention the dollar.
And of course, we know that the Trump administration has stepped in to try to help farmers, but that clearly hasn't been enough to mitigate the
general uncertainty that is causing them to put off these capital equipment makers.
And then of course, the bailouts are going to go so far. They're not going to step in and help the equipment makers here. I think we see the kind of
trickle-down effect of not just the traditional, the direct impacts of the trade war, but the corrosive uncertainty that we see in the economy.
CHATTERLEY: Yeah. Bingo. Uncertainty. Clare Sebastian, thank you so much for that. All right, we're going to take a quick break here. But up
next, the man accusing General Electric of committing a $38 billion fraud. We speak to Harry Markopolos, next. Stay with us for that.
(COMMERCIAL BREAK)
CHATTERLEY: Welcome back to FIRST MOVE. Shares in General Electric are up over six percent in the session so far, that follows an 11 percent drop on
Thursday.
GE was once America's most valuable company. Now, it is fending off a highly detailed accusation that it is perpetrating one of the biggest
frauds in American history.
In a statement, the company said, "The claims made by Mr. Markopolos are meritless. The company has never met, spoken to or had contact with him.
And we are extremely disappointed that an individual with no direct knowledge of GE would choose to make such serious and unsubstantiated
claims."
After that huge share price drop on Thursday, GE CEO, Larry Culp bought almost $2 million worth of stock, while the Chair of the Audit Committee
said, "This is not the GE that I know."
Joining me is Harry Markopolos, the man behind those allegations. He is a certified fraud examiner and best known as the Madoff whistleblower.
Fantastic to have you on the show.
HARRY MAKOPOLOS, CERTIFIED FRAUD EXAMINER: It is great to be here.
CHATTERLEY: You have credibility where spotting anomalies, significant size fraud is concerned. And yet the share price is bouncing. I'll make
that around $5 billion worth of loss wiped in the last 24 hours. It's a lot less than $38 billion. What do you make of what we're seeing already?
[09:40:16] MARKOPOLOS: I look at the long term, and we'll see how solvent they are at yearend and see if they make it into 2020.
CHATTERLEY: Is that how swiftly you think this could unravel?
MARKOPOLOS: Worldcom and Enron, they ended about four months after the frauds were publicized. So we'll see how long GE has.
CHATTERLEY: I mean, we've been seeing the write offs of the power business. Reserves against the insurance business, which is at the heart
of what you're saying is the problem here ultimately, why now? Why choose to investigate now?
MARKOPOLOS: We were doing another case last year against a long term care insurance company, and then we spotted all the losses from these insurance
companies landing on GE's books. So we switched focus to GE because the fraud was so much bigger here.
CHATTERLEY: So you're saying that the $15 billion that they've set aside saying, "Look, people are living longer. It's tough to get high interest
rates to set against what we're seeing in this business is simply not enough."
MARKOPOLOS: Correct. They took $15 billion. They need to take $29 billion more.
CHATTERLEY: I mean, that's a shockingly huge number. And to be fair to GE, they've said, "Look, in a worst case scenario," in their annual filing,
they said, "We would have to write down another $12 billion." But it's still, you know, significantly short of what you're saying.
MARKOPOLOS: They've been nothing but negative surprises for years, $22 billion for Alstom in November; $15 billion in January 2018, a long term
care. $773 million this quarter for energy grid. They have big surprises. They're always negative. They should have been taking them all along in
smaller chunks. They wait to the last minute and they hide things from the market.
CHATTERLEY: They're not going to have to do this straight away thought, even if we're somewhere between zero and $28 billion dollars, and I admit
that's a huge art here. The regulators would give them a number of years, surely, particularly where accounting -- the accounting changes -- because
$10 billion worth of this approximately is due to accounting changes. That at least would -- they'd be given time to adjust for that.
MARKOPOLOS: Yes. First quarter of 2021, they need to take a $10.5 billion GAAP write down. It's a non-cash charge, however.
CHATTERLEY: It's accounting, yes.
MARKOPOLOS: Right, but an $18.5 billion immediate cash charge whenever the Kansas Insurance Department request it, they had a $15 billion write in in
January 2018, but they had no cash to pay it. They had to spread it out over seven years.
That's the problem with GE. They are cash poor. They say they have over - - almost 17 $billion in cash. The problem is their current liabilities are $60 billion. So the cash is nowhere near enough.
CHATTERLEY: I mean, on Page 2 of your report, you say that only 14 percent of GE's long-term care claims have come in. But don't the reserves that
they've got against it account for 86 percent of the claims to come?
MARKOPOLOS: There's 86 percent more about to be filed in the years to come. So 14 percent of the claims led to a $15 billion write down. What
of the 86 percent remaining? What are they going to do to GE's balance sheet? That's the question.
Prudential is taking proper reserves. Prudential has reserved much more deeply than GE. GE just to catch up to Prudential would take $9.5 billion.
So who is doing it right? Prudential or GE?
GE's losses last year in long-term care were 527 percent loss ratio. Prudential made money. Their loss ratio was only 81 percent. So they made
a ton of money, and GE is losing a ton.
CHATTERLEY: So you're basically saying, look, this is not rocket science. We are literally just comparing to others that operate similar businesses
in the industry. This is what they're doing and GE simply isn't.
MARKOPOLOS: GE says they want to be number one and number two in every industry, well they are. Last year, they certainly were in long term care
for losses. Their ERAC insurance unit, 527 percent. Their Union Fidelity Unit, 280 percent. By comparison, UNUM was at 90 percent, Prudential at 81
percent.
CHATTERLEY: Let's move on and talk about Baker Hughes, because this is one where some analysts who cover this very closely have said, look, they have
said, once their stake in Baker Hughes gets below 50 percent, they'll make a write down. $7.4 billion is what they're saying at this stage.
So they do provide greater guidance on what's going on, and they have been clear about this. Admittedly, the share price for Baker Hughes has dropped
significantly. So likely, the write down will have to be bigger, but they're not being as unclear as you're accusing of them in this part of the
business, arguably.
MARKOPOLOS: They were aggressive. They should have taken the $9.1 billion market to market loss noncash in the 2018 yearend financial statements,
they did not. They're going to move that loss into this year, and they're going to take in cash from Baker Hughes. That's fair. They did not follow
the accounting rules though.
The GAAP rules 50.4 percent is their share ownership, but they don't control or benefit from Baker Hughes cash flows. So under the Variable
Interest Accounting Rules, they should have not consolidated last year, and they should have marked it to market because it was asset available for
sale.
CHATTERLEY: So you're saying fine, even if they are now being transparent, it's just -- it's massaging. Its ugly accounting. And this is basically
what you're saying, and this is what many analysts have been saying that it lacks transparency, it's not clean.
[09:45:05] MARKOPOLOS: Their books are very unreadable. They keep changing their accounting formats. They don't put in expenses. They don't
tell you a lot of information, you're left guessing.
And that's -- you should never have to guess with a company that size as this has pointed so negatively for so often.
CHATTERLEY: What are regulator saying to you? Because arguably, if you are right, then this is huge negligence similar to Enron by auditors, by
the regulators here. How has this been allowed to go on if what you're saying is right? Is true?
MARKOPOLOS: I can't comment on our discussions with the regulators or law enforcement, but they're going to be ongoing, I'm sure.
CHATTERLEY: So they all still looking at it. I mean, they're looking at it, they've been looking at it since we saw the write down in the power
business.
MARKOPOLOS: Yes, the SEC is probing GE civilly. And then you have the Department of Justice probing them criminally. So they do have some
accounting issues.
CHATTERLEY: Talk to me about what you gain by doing this? Because the obvious criticism here is that you handed this information over to a hedge
fund. Can you which hedge fund?
MARKOPOLOS: I can't do that. They wanted confidentiality. It's a U.S. based East Coast hedge fund, a very reputable company, not normally known
for shorting actually, but they are paying a percentage of the net trading profits for early access to my report, and I have two other means of
payments. One is the SEC Whistleblower Program, and the other is the Department of Justice whistleblower program.
CHATTERLEY: Where did they go short? Can you tell me that? What level did they go short?
MARKOPOLOS: They never told us what they're trading. I'm assuming it is shares. But don't tell me what or when. I just do the report. I'm a
fraud examiner. I do not trade on Wall Street any longer. I left that business 15 years ago.
CHATTERLEY: But you are arguably trading this because you benefit -- you're taking a cut of the winnings here. So --
MARKOPOLOS: Indirectly, I have tangential benefit, correct.
CHATTERLEY: All they still short in whatever they're doing.
MARKOPOLOS: I have --
CHATTERLEY: So --
MARKOPOLOS: No idea.
CHATTERLEY: Because a lot of people will look at this and say, "You came out, you made this big splash. You accused them of fraud. You have
credibility in spotting these things." These hedge fund now could have benefited if they were short -- the shares of an 11 percent drop yesterday
taken profit and they walk away.
MARKOPOLOS: I look at this as a month-long endeavor, and we'll see how long GE lasts. If they make it into 2020, that would be great for them.
We'll see.
CHATTERLEY: Who would you want to see prosecuted in this case? Because you're arguing that this goes right back to Jack Welch. This was a
consistent scam effectively to mismanage the books and to effectively hide the underlying performance of the business from investors.
MARKOPOLOS: GE has been cooking books for many decades. Jack Welch acknowledges that in his autobiography. I'd give you the page reference.
I'd you the direct quote, and it has continued to this day.
As far as prosecutions, the statute of limitations is six years, anybody who signed false financials, or who helped prepare false financials would
presumably be brought to justice, we will see.
CHATTERLEY: How long does it take -- you mentioned by 2020? But right now investors are giving them the benefit of the doubt. A whole host of -- I
mean, I've got a list of them of people that have come forward and said, "Look, we believe -- we believe in GE. We believe what they're saying.
The CEO bought two million shares." What do you think of that?
MARKOPOLOS: If people want to drink the Kool-Aid, great. If the CEO wants to buy into an accounting fraud, great. Let them. Everybody gets to vote
in the capital markets. I'm looking at this long term.
If they make it to 2020, then can they make it through 2021? They are one recession away from Chapter 11.
CHATTERLEY: That's how close you think this is.
MARKOPOLOS: Their balance sheet is in tatters. Their current liabilities are $60 billion. Their current assets are $40 billion.
CHATTERLEY: Is that why you're comparing it to Enron. You said it's worse than Enron and Worldcom put together, simply because you're looking at the
sheer scale of the losses here versus the market cap of the company.
MARKOPOLOS: Yes, so let's take a look there. They are cash flow negative. How long can you burn cash? And lower interest rates actually kill them.
It hurts their investments on their long-term care reserves, and it also hurts them on their pension liabilities.
Their pension liabilities have increased so much with long-term rates so low, less than two percent. Their pension liabilities have ballooned from
$27 billion to who knows what they are today?
CHATTERLEY: Could you have made a mistake? Because your point this is sensitive to a market environment? We're talking about such huge numbers
here. It is 174 pages. Could you have made a mistake?
MARKOPOLOS: Yes, we are probably too low in our loss estimates, but we're trying to give them the benefit of the doubt.
CHATTERLEY: So this is you being conservative on loss estimate.
MARKOPOLOS: Yes.
CHATTERLEY: And to those that say you're a profiteer, you're a market manipulator. What's your response?
MARKOPOLOS: I'm not, I'm a fraud examiner. I'm a seeker of the truth. If I see accounting fraud, I go after it.
CHATTERLEY: Will you come clean about the hedge fund, the name of the hedge fund at some point, or do they have to do that?
MARKOPOLOS: They would have to do that. I would certainly hope that they would, but it's up to them.
CHATTERLEY: But you think, the share price effectively is going to go to zero. You think this is a broken company that's going to go bankrupt?
MARKOPOLOS: They have minus $20 billion in working capital. It's hard to see them surviving that. Their cash flow is negative this year. If we
enter a recession, they're done.
CHATTERLEY: Harry, and no doubt, we will talk to you again about this. Thank you so much for joining us on the show. Harry Markopolos there. All
right, still to come. From online bookseller to the maker of the world's most popular listening device, more on the age of Amazon, next.
(COMMERCIAL BREAK)
[09:52:07] CHATTERLEY: Welcome back to FIRST MOVE and a look at today's "Boardroom Brief." Banana Republic is joining the clothes rental market.
The fashion chain say that will launch online rentals for women next month. For a subscription of $85.00 a month, you can take home up to three items
at a time. The company says the men's rental service is in the works, too.
A failure to launch in London. A technical glitch hit the London Stock Exchange halting trade of shares in some of the U.K.'s biggest companies.
The outage hit the FTSE 100 and the FTSE 250 with both indices opening more than 90 minutes late, that's 9:40 a.m. London time. Other parts of the
market began trading as usual.
Better late than never. Now, the 007's most iconic car. This 1965 James Bond Aston Martin DB-5 was sold for $6.4 million at an auction in
California on Thursday. It is fully street legal with a few gadgets you probably shouldn't use on the road like tire-slashing knives, rotating
license plates and forward firing guns. I hope they're not loaded.
Now from humble online bookstore to one of the world's biggest retailers and a giant, of course, in the tech world, we are truly living in the age
of Amazon. Listen in.
(BEGIN VIDEO CLIP)
UNIDENTIFIED MALE: Hey, who are you?
JEFF BEZOS, FOUNDER, AMAZON: I am Jeff Bezos.
UNIDENTIFIED MALE: What is your claim to fame?
BEZOS: I am the founder of amazon.com.
POPPY HARLOW, CNN ANCHOR: What began as an online bookstore --
BEZOS: A millennia from now, people are going to look back and say, "Wow."
HARLOW: Has become a virtual Empire.
UNIDENTIFIED MALE: Amazon really is arguably the most successful company in the history of business.
HARLOW: Wow. That's saying a lot.
UNIDENTIFIED MALE: This is the beginning of e-commerce.
HARLOW: You guys didn't even know if this thing was going to work.
UNIDENTIFIED MALE: We had a pretty good instinct.
BEZOS: If you make the best service online, people will come.
UNIDENTIFIED FEMALE: This is a company that wants to control the infrastructure.
UNIDENTIFIED MALE: As computers continue to get cheaper, we will layer innovation on top of that.
UNIDENTIFIED FEMALE: It's plausible that Amazon will know you better than you know yourself.
UNIDENTIFIED FEMALE: Alexa --
HARLOW: It's in our homes. Should people trust that it won't be used against them in some way that they don't authorize?
UNIDENTIFIED FEMALE: Absolutely.
HARLOW: At our fingertips.
UNIDENTIFIED FEMALE: Amazon Web Services took over the web basically in a decade.
HARLOW: does having that much power give you pause?
ANDY JASSY, CEO, AMAZON WEB SERVICES: That's significant responsibility. We're aware of that.
HARLOW: And now, it fuels our economy.
UNIDENTIFIED FEMALE: Amazon is America second trillion dollar company now.
UNIDENTIFIED FEMALE: The company is now worth almost as much as the entire economy of Australia.
HARLOW: Is Amazon too big?
JASSY: I don't think Amazon is too big.
UNIDENTIFIED MALE: I think they have monopoly power.
UNIDENTIFIED MALE: Amazon has become an invasive species.
HARLOW: So you think that Amazon should be broken up.
UNIDENTIFIED MALE: Oh, a hundred percent.
[09:55:10] HARLOW: A journey.
UNIDENTIFIED MALE: It's a business miracle.
HARLOW: And a leader unlike any other.
BEZOS: This is Blue Moon. I ask people at Amazon to come wake up every morning, afraid. Wake up terrified. Be afraid of our customers. Those
are the people we have to pay attention to.
(END VIDEO CLIP)
CHATTERLEY: Fascinating and you can watch our Special Report, "The Age of Amazon" later on Friday at 9:00 p.m. New York time or 9:00 a.m. on Saturday
morning in Hong Kong.
All right, just as we wrap up the show here. Let me give you a look at what we're seeing for the U.S. market at this moment. We are some half an
hour into trade right now. We are higher by more than one percent for the NASDAQ right now. The key question is can we hold on to those games taking
back what was coming into this session, some two and a half percent losses on the week for all the volatility.
We'll be back in a couple of hours' time, of course, on "The Express" to track these changes. But for now, I'm Julia Chatterley. You can listen to
our podcast, too, on cnn.com/podcast. But for now, you've been watching FIRST MOVE, time to go make yours and have a great Friday.
(COMMERCIAL BREAK)
[10:00:00]
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