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Quest Means Business
Global Stocks Suffer Massive Sell-Off; Dow Closes 588 Points Lower; China Fears Ripple Around the World; Stock Markets in "Deep Funk"; Emerging Market Currencies Hit By Sell-Off; Chinese Stocks Plunge; China's Economy. Aired 4-5p ET.
Aired August 24, 2015 - 16:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
[15:57:20] RICHARD QUEST, HOST: Good evening and welcome to a special edition of QUEST MEANS BUSINESS. I'm Richard Quest in New York.
We are a few moments away from the end of trading on a day of historic volatility. Join me at the super screens and you'll see, whether it was
Asia or in Europe or in the United States, markets around the world fell sharply.
The Dow at the open down by a record 1,000 points. Just take a look and see how the trading day went as we come towards the end of closing.
The Dow is still off 503 points. That's a 50 percent gain, if you like, or 100 percent compared to what it was at the open. For traders on Wall
Street, the day has been one of terror and one of fear.
(BEGIN VIDEO CLIP)
UNIDENTIFIED MALE: The bigger concern that I have is if we continue to decline the way that we have been over the past couple of weeks is that
we could get some further margin calls and further downside.
ARUN JAITLEY, INDIAN FINANCE MINISTER: This turbulence is transient and temporary in nature. The markets will settle down.
MOHAMED EL-ERIAN, CHIEF ECONOMIC ADVISOR, ALLIANZ (via telephone): We are looking to a re-pricing of markets that had fallen in love with finance
and now have to price in fundamentals.
(END VIDEO CLIP)
QUEST: And that's the way the 30 stocks on the Dow Jones are looking at the moment. Every stock in the Dow is sharply lower. Some had been
actually positive during the course of the session. The US markets towards the close, the NASDAQ is off three and a third. The S&P is off three and a
half. And the Dow Jones Industrials.
They are due to ring the closing bell. What a day for Cash America to be ringing the closing bell. As always, they will start their applause --
not that there's that much to applaud about today.
The Dow had been off 1,000 points at the close (sic). It now looks as though we will close the session with losses of around 568 points towards
the course of the day, a day when, frankly, nobody is going to forget a market that was in full flight, from the Shanghai to London, and now to New
York.
[15:59:55] (NEW YORK STOCK EXCHANGE CLOSING BELL)
QUEST: The market bells are ringing, trading is coming toward the close, the gavel is about to be hit. They seem to be letting it ring much
longer than normal.
(GAVEL POUNDS)
QUEST: Good grief! That was a very wimpy gavel at the end of trading on Monday, the 24th of August.
Look at the numbers. The madness is over. Stocks in New York plummeted after an extraordinary session on Wall Street.
There's no escape. Markets have tumbled from Tokyo to Tel Aviv.
And in China, state media is declaring that it suffered its very own Black Monday.
I'm Richard Quest. You and I have an hour together, and I mean business.
Good evening. Around the world, trading has now closed for Monday. There's no major market that is open, and the Dow Jones Industrials has
closed with a loss of around 586 points. The Dow opened with its biggest point drop every. It looked like it was headed for a recovery as it moved
towards the afternoon session. Over lunchtime, there was even talk and possible rumors that it might turn positive.
In Shanghai, the index fell 8.5 percent, and they've called it, dubbed "Black Monday." European stocks have been down around 5 percent, and the
DAX in Germany has entered bear market territory.
And that's the way the session moved. Everybody will remember that first 20 minutes or so when the Dow was off 1,000 points. And as we wait
for the final markets to settle, Alan Valdes is with us, live from the floor of the New York Stock Exchange. Sir.
(LAUGHTER)
QUEST: What -- all right, we can argue and discuss what happened at the beginning of the day, the 1,000-point fall, we'll come to that in a
minute. But what happened later in the day when that rally over lunchtime actually made something -- myself included -- the Dow might actually turn
green?
ALAN VALDES, DIRECTOR OF FLOOR TRADING, DME SECURITIES: Yes, you know, we had a great rally today. We were up over 500 points, but still
closed down close to 600. But you know, we had a great short squeeze come about lunchtime, and that was the main culprit here.
And then that just got other guys involved, they thought OK, maybe this was the bottom, let me get back in. I saw some big funds idea would
start buying, very little, but they were starting to buy again. But mainly it was that short squeeze in the middle of the day that got the market
going.
QUEST: And so, if it was technical -- if it was technical -- then the direction of the market remains lower.
VALDES: Yes, correct. It most certainly does. And you can see, around the bell we had about $1 billion worth of stock to sell. So, you're
still going to see probably stock trickle down a little more before we get the final number.
But overall, bias is on the sell side now, at least for a while. Until we get straightened out with the Fed, until maybe China has a bottom
here on devaluation and whatnot. But overall, I think you're going to see a very volatile and bumpy session going into the fall.
QUEST: Moving to this morning, the 1,000 points. How much of that 1,000-point drop was real selling versus marking down?
VALDES: You're right. I would say there was about 50 percent markdown and the rest selling coming in from all over. Remember, we were
watching the futures overseas, so we were getting a lot of oversea orders coming in. Overall, there was some real selling, but a lot of marking
down.
QUEST: And that's the danger tomorrow as we see who didn't -- you guys, you who price the stocks, you basically start off at a lower level
than you have tonight.
VALDES: Of course, that's how it's going to work tomorrow. But I think you'll see -- you could se a little bounce, even though we did close
down 586, you could se a little bounce on the opening. I don't see -- I don't think we'll see us go down 1,000 points like we did today. That was
incredible, Richard, never saw anything like that in my 35 years down here.
But so I think you'll see probably a little bounce as guys come in saying, you know what? Let me cover some shorts --
QUEST: All right.
VALDES: -- let me maybe go long here and see what goes on.
QUEST: I want you to briefly go through some of the stocks that we saw. Obviously, I understand the oils, Exxon and Chevron, I can understand
them getting creamed, oil prices. But this -- Intel held its own for most of the session, for some reason I don't quite understand. Same with
Microsoft. What was it -- what was going on with those stocks that actually pulled back?
[16:05:06] VALDES: Well, you know, you're right. Even Apple made a little surge --
(CROSSTALK)
QUEST: It did.
VALDES: We saw a little buying in the tech stocks. Tech stocks always pretty favorable to guys down here. They got out of stuff they
wanted to get out of. I saw guys rolling out of -- like oil, they were getting out of their oil positions, but they wanted to put the money right
back to work.
They felt that techs were a good buy. Apple down 20 percent, when did you ever see that? So, they were going into Apple, Microsoft.
QUEST: Right.
VALDES: Going into the tech sector.
QUEST: Finally, we've heard people talk about China. We've heard this is the reason. Alan, you're not -- are you telling me that this
entire global sell-off is predicated because of what's happening in China? What else is in this mix?
VALDES: Yes, I don't buy that whole scenario that it's all about China. China is a part of it. But you know what, Richard? For the last
six months, we've gotten nothing but negative news, whether it's out of Greece, whether it's out of Europe, the United States here. I mean, if you
look at the United States, industrial production is pretty poor. Even the job sector is not that great.
So, overall, it's bad news from around the world. Emerging markets, of course, with the devaluation, are getting hit. So overall, it's just a
tsunami of bad news.
And of course, there's the Fed. The Fed has never made up their mind the last five years. QE's a total disaster. We're still waiting for them.
And of course oil. Oil below $40, great for us, the consumer, but bad for business.
QUEST: Alan, your calm voice of reason is just what we need tonight.
(LAUGHTER)
QUEST: Thank you very much, sir.
VALDES: Thank you, Richard.
QUEST: The global sell-off began while New Yorkers were only going to bed last night. In Shanghai, just look at how the market moved around the
world. In Shanghai, gains for the entire year have been wiped out with today's loss of 8.4 percent.
And then, obviously, you had a loss down in Sydney. The way the market moved, the way the world turns, Sydney to Tokyo to Shanghai.
Mumbai, the SENSEX down 6 percent. One emotion was driving the market, it was fear. Volatility was up more than 50 percent. Investors ran for the
safety of bonds.
As you go through Frankfurt, down 4.7. London, 4.6. The Paris CAC 40, 5.35. And then to New York, with the S&P, the Dow, and the NASDAQ.
And remember, the volatility that we saw in New York, the volume at over 3, 4 billion shares, is 90 percent more, apparently, then you would expect on
this sort of day in August. So, there was real market movements taking place.
But where did it begin? Well, it began here in Shanghai with the issues in China, and over the past week, scattered drops of bad news have
become a steady drip. Here we go. First of all, a series of moves that was involved, the idea was to prop up the stock market, get people to --
get companies to suspend themselves from the exchange, get the companies to buy their own stock, pension funds, government funds. It was all designed.
And then the next drop, the devaluation of the yuan. They said they were doing it once, on a Monday. And then on a Tuesday, they also widened
the bands. It's now more than 3.5 percent lower than it was under the official rate. And then, a slowdown in manufacturing.
The effects of these drip, drip coming out of the Chinese economy, rippling around the world. And of course, that's the ripple, the commodity
markets. The first to suffer: US oil fell below $40. There's already a glut of oil in the world, about 2 million barrels a day more than demand
requires.
And emerging markets forced to devalue their currencies, whether it's Nigeria, where the air is looking very dodgy, or its Brazil, or it's
Venezuela, or Russia, or India.
And then, the Chinese back into the ripple, became a wave. Shanghai, as you saw the number, the government's unwilling to support it any more
that we know of. And the wave continues to feed around the world with some trillions dropped off market valuations. It all leads us to the US Fed and
whether or not the Fed will raise interest rates in September.
Let's start with that straightforward question. Mohamed El-Erian, you heard my synopsis, a yes or a no to September's Fed?
EL-ERIAN: No, they will not hike in September. They would incur too much risk to the global economy if they were to hike in September.
QUEST: Do you believe, sir, that what we have seen in the last 24 hours is a wobble, a crack, or a calamity?
[16:10:00] EL-ERIAN: I don't think it's a calamity. But I do think it's a fundamental repricing of two things that then got turbo-charged by
what market participants call technical.
The first thing that we are repricing is the outlook for global growth. The downward revisions are coming from the emerging world, not
just China. China, Turkey, Russia, Brazil, Indonesia. There is a generalized weakening in the developing world, and that's going to lower
global growth. Remember the emerging world used to be the locomotive.
The second element is concern about policy effectiveness. You talked about China, China's inability to stabilize its own financial market.
There's a generalized concern about the ineffectiveness of policy. Put these two things together, you start getting movement, and then you trigger
human behavior.
QUEST: Right, but --
EL-ERIAN: And human behavior -- go on.
QUEST: But -- before we get into human behavior, I want to just go back to this growth. What is causing this slowdown in global growth in
those countries you mentioned? Is it predicated on China, or is there something else at work?
EL-ERIAN: So, you've got to go back ten years ago, Richard. The West fell in love with the wrong growth model. They fell in love with the
concept that finance was the engine of growth, and we stopped investing. We stopped investing in infrastructure, in our people, in our education.
The result of that is that the West lacks a growth model, and therefore, it has had difficulties. So, what did the West do? It started
experimenting. And that started derailing what's happening in the emerging world. They couldn't respond quickly enough, and now we have a massive
quest for growth.
And when you cannot create growth, you steal it from someone else. You depreciate your currency. That is the problem we're having right now.
QUEST: If that's the problem, what is the policy mix that you say, so far policy is ineffectual or at least nonexistent. What is the policy mix
that we need now to try and ensure the several days of movement -- of very disturbing movements don't become the calamity?
EL-ERIAN: So, we need a vision that four things can happen. One: pro-growth structural reforms in countries around the world. Two:
matching the will to spend with the wallet to spend. There's a big difference. Those who have the will to spend, like Germany, aren't
spending -- sorry, they have --
(AUDIO GAP)
EL-ERIAN: -- but they're not spending it. Those who have the will, like Greece, don't have the wallet. So we need to match will and wallet on
the demand side.
Third: we need to eliminate some debt overhangs. And fourth: we have a very messy architecture, both at the regional level and the global
level.
QUEST: Right. None of those things that you've just mentioned, Mohamed, are immediate. They are deep work that has to be done over many
years. I need you to tell me -- you're basically selling there's no magic bullet for this.
EL-ERIAN: No, I'm saying -- yes. You can't produce it quickly. So, what happens? The market then is left on its own to find its equilibrium.
And that's why you have this mix of very heavy volume, as you mentioned, and incredible volatility. Why? Because the market is searching for the
price that will bring in new buyers, and those new buyers are pretty hesitant right now.
QUEST: Is it -- is there anything that the central bankers should be doing now? I know they've had their work cut out for them, and they've
borne the load that others should have borne. But some are tapped out. Others are at wrong forms of policy. And some are at the wrong end of the
cycle. What can central bankers do?
EL-ERIAN: So, they can try to inject more liquidity. They can buy -- they can try to buy more assets. They can try, in the case of China, to
reduce interest rates. And some of this stuff will happen. But it's a band-aid. It's a band-aid until we fundamentally address the issue of
insufficient inclusive economic growth.
QUEST: Big issues, which unfortunately completely get lost in the course of the day. Thank you, sir. We needed your help tonight to put it
into the global picture, and you've helped us most admirably. Thank you.
EL-ERIAN: Thank you.
QUEST: Mohamed El-Erian joining us. Still to come, Mohamed was talking there about those countries. Those countries that have failed or
not enjoyed the growth that the rest have, that are on the wrong end of the growth model. Emerging markets' currencies are being hit hard by the sell-
off. I'll speak to the finance minister of Colombia, whose economy is being clobbered tonight. QUEST MEANS BUSINESS.
[16:14:43] (COMMERCIAL BREAK)
QUEST: Look at those currency moves. The markets sharply down, and emotion driving the markets today is one of fear. If you talk about what
the insiders are saying, Societe Generale cries that the markets are in a "deep funk" in their note to investors. It says it's "adding to the fear
and uncertainty about how central banks will respond."
Barclay's in a note issued today says, "Rate hikes now unlikely before March," and that a September rate could destabilize the market. You heard
Mohamed El-Erian say the same thing.
Capital Economics is more sanguine. Capital saying to its investors and its clients, "Volatility may be short-lived and a September rate hike
is still a significant possibility." Two very different views on that.
Market volatility and big losses in China are putting massive strain on currencies across the emerging market. The sell-off's affecting all
continents. Colombia's finance minister, Mauricio Cardenas, joins me now on the line from Bogota. Minister, each day that you see something like
this happening, it makes the situation for current account and for your currency much worse.
MAURICIO CARDENAS, COLOMBIAN FINANCE MINISTER (via telephone): Yes. All issues now point in the direction of China. And in our case, is the
impact of China on oil prices. I think it's no longer this idea that the Iran agreement with the powers changed the oil prices. I think now it's
more about where is China heading --
(AUDIO GAP)
QUEST: Are you still there, Minister? I fear we have lost the minister. I'm just making sure. We -- just one more time. Minister? No,
we seem to have lost the line there to the minister. We will bring him back and we'll talk more about that, because it's fascinating what he was
saying just then.
He was talking about China. We're going to take a closer look at one of the catalysts for the market fall, that uncertainty. It's QUEST MEANS
BUSINESS, good evening.
(RINGS BELL)
(COMMERCIAL BREAK)
[16:20:22] QUEST: The minister is back with me, Colombia's finance minister. Sorry about that, sir, but we do need to hear your views. What
do you now want to happen? What policy mix are you looking for?
CARDENAS (via telephone): Well, first of all, on the US side, I think it's important that whatever the Fed is planning to do is very explicit,
well-communicated, and very predictable. I think with the noise that China is introducing to financial markets, we need a lot of clarity on the side
of the Fed and ability to anticipate.
On the China side, I think there's been a little bit of improvisation. I think we need a better idea from Chinese authorities on what's their
economic plan and how they're planning to keep growth at rates that are at least around 6 percent.
QUEST: So, would you be looking for China to make some policy statement in the next day or two?
CARDENAS: I think we need to understand better what's going on, because we are seeing reactions on the exchange rate. The depreciation,
the decision yesterday of allowing the pension funds in China to invest in equities. They don't seem to be part of a program. They seem to be more
immediate responses to problems.
But I think the idea of having a plan and communicating that plan will be good for the world economy and for emerging economies in particular.
QUEST: Now, in the case of Colombia, as your currency comes under pressure, you've got two things you can either do. You can either let it
go or you can raise rates. Well, raising rates will be damaging to growth. So what's your preferred policy mix for your own country now?
CARDENAS: We're sticking to our model, which is flexible exchange rate. We're letting the exchange rate adjust. Of course, there's been a
lot of volatility, and the depreciation has been very strong. But I think that ultimately, that's healthy for the economy.
And we're keeping the interest rates stable because of course we're concerned about GDP growth and keeping rates low. It helps aggregate
demand here. So, the idea is to stick to the stability of interest rates and the flexibility of the exchange rate.
QUEST: Finally, sir, if we look at the wider point for emerging markets, I mean, your currency's down, so obviously, your exports become
better. But are we looking at a situation where emerging markets are now facing calamity?
CARDENAS: No. I think that's a broad statement, and I think it's too general. I think there will be -- this is an opportunity for
differentiation. I think some emerging markets are going to appear strong, able to keep economic growth, able to be important destinations of
investment and foreign capital. Others are going to have more difficulties.
But ultimately, it's about the resilience of the different economies, and the strength of their macro-economic framework. Some of us -- and I
include Colombia in that list -- can deal with these headwinds -- we can deal well with those headwinds.
QUEST: Minister, thank you for joining us, and thank you for coming back. Much appreciated. The minister talking about China, and the turmoil
today began at the epicenter with China, where state media is calling today "Black Monday."
It comes a day after Beijing tried to bring more money into the markets by allowing pension funds to buy shares for the first time. Not
enough to boost investor confidence.
Now, the Shanghai Composite was off 8.5 percent on the course of the session, and indeed the Shanghai market has now given back all the gains
that it has made during the course of this year. It's still up if you look over a 12-month period, but the gains YTD, year-to-date, have gone. Jamie
Metzl is with me, senior fellow at the Atlantic Council, and joins me now.
JAMIE METZL, SENIOR FELLOW, ATLANTIC COUNCIL: Nice to see you.
QUEST: Well. You heard the Minister there --
METZL: Yes.
QUEST: -- talking about what China -- what he wants to see from China.
METZL: Yes.
QUEST: What do you think China will do?
METZL: I think eventually China will come out, they're going to cut rates, they're going to increase -- or decrease the reserve requirements
for banks, to let banks lend more.
But I completely agree with what the minister said. China -- everybody has believed that China's leaders were magicians, that they --
these guys who didn't know much about market economics could somehow manage their economy, even though it got more and more complex.
[16:25:01] And I think what we're seeing now is that's really not the case, and there's a lot of dangerous ad hoc-ery coming out of China. If --
for Colombia, as important as it is, that's a relatively small economy. This is the second-largest economy in the world, and they really are going
to need to get their act together.
QUEST: Right. And if we look at the measures, the policy measures they took, we've had stimulus packages.
METZL: Yes.
QUEST: They got companies to suspend themselves from the exchange.
METZL: Yes.
QUEST: They got -- they bought, they got companies to buy back their own shares. And they basically have dragooned anybody and everybody about
the pension funds. Oh, and they devalued the currency.
METZL: Yes.
QUEST: Which of that makes sense, bearing in mind the crisis?
METZL: Well, a lot of it makes no sense, and I think there's a lot of madness that's coming up, because these guys are caught between reform and
stimulus. And so --
QUEST: But we want China to slow down for sustainable growth.
METZL: But the leaders want that in principle. That's what their plans say. But every time there's a slowdown, like there was when there
was the very natural correction of their insane stock market valuations, they can't take it.
And so they overreacted in July, and you and I talked about this. They came and they went nuclear in response to the fall in the stock
market, and that didn't make any sense. And now they're caught with -- they're caught kind of halfway between these two visions of the future of
the economy.
QUEST: All right, let's put China to one side and let's talk about oil.
METZL: Yes.
QUEST: Because this is another factor --
METZL: Yes.
QUEST: -- in all of this at the moment. Because pretty soon, with oil going under $40, those exporting nations are going to have current
account crises.
METZL: Yes, absolutely.
QUEST: Classic IMF --
METZL: Yes.
QUEST: -- current account. Now, balance of payments problems.
METZL: Yes. I mean, I don't have much to add to that, other than saying that I agree. And that's what we're seeing is that there is a glut
of supply, prices are going down, people were betting on Chinese demand, and China's demand isn't going to be there for multiple reasons.
QUEST: How -- OK. So, you and I have covered a few crises over the course of our careers.
METZL: Yes.
QUEST: How serious is this one? Because that's what the viewer -- our good viewer tonight is wanting to now.
METZL: Yes.
QUEST: Are we looking -- whether it's 97, 08, whatever --
METZL: Yes.
QUEST: -- are we looking at something like that, or are we looking at a bit of indigestion?
METZL: I don't think we're yet at that major crisis situation. And the reason is because China is at the epicenter, and even though, as I just
said, China's making a lot of mistakes, China has a lot of cash.
And there's a lot of cash in a lot of economies, including in the developing economies, and they're going to be able to deploy that cash to
make this crisis not as bad as it otherwise might be, and there's just been a lot more preparations.
I don't think this is the beginning of some major crisis, but I do think that the second-largest economy in the world is seeing -- is looking
far more wobbly than it's been in a long, long time, and that is a very serious issue.
QUEST: We thank you, sir.
METZL: My pleasure.
QUEST: For coming and talking about it.
QUEST MEANS BUSINESS will be at the New York Stock Exchange after the break.
(RINGS BELL)
(COMMERCIAL BREAK)
[16:30:11] QUEST: Hello, I'm Richard Quest. There is more QUEST MEANS BUSINESS. In just a moment, we'll be live on the floor of the New
York Stock Exchange after one of the most brutal trading days in living memory.
And there's more pain for oil-producing countries. The price of crude falls more than 6 percent.
Before all of that, this is CNN, and on this network, the news always comes first.
It was a brutal day on Wall Street and for shares around the world as stock markets collapsed. The Dow Jones Industrials ended down 588 points.
The major factor driving the market is the fear of a slowdown in China. Mohammed El-Erian is the chief economic advisor at the insurance
Allianz and he told me emerging markets are vulnerable and investors need to be concerned.
(BEGIN VIDEOCLIP)
MOHAMMED EL-ERIAN, CHIEF ECONOMIC ADVISOR, ALLIANZ: The first thing that we are revising is the outlook for global growth. The downward
revisions are coming from the emerging world - not just China - China, Turkey, Russia, Brazil, Indonesia. There is a generalized weakening in the
developing world and that's going to lower global growth.
QUEST: North Korea confirms its reach a peace agreement with South Korea after marathon talks. An apology had been demanded by South Korea's
president. CNN's Kathy Novak tells us that it ended up being part of the deal.
(BEGIN VIDEOCLIP)
KATHY NOVAK, CNN FREELANCE REPORTER OUT OF SEOUL, KOREA: Part of the agreement was that North Korea has expressed regret over the injury caused
to the South Korean soldiers from those land mine attacks.
We know it was a major sticking point here, and in return, South Korea has agreed to stop its loudspeaker broadcasts -- those broadcasts of
propaganda coming out of the speakers over the border.
They will stop them in just under ten hours from now - 12 p.m. Tuesday local time on the condition that there is no more of this irregular
activity they call it or these provocations.
(END VIDEOCLIP)
QUEST: The French president has awarded four men the country's highest honor for helping stop a possible terrorist attack last Friday.
Francois Hollande gave the Legion of Honor to three Americans and a British man. Mr. Hollande called them heroes and said the honor shows how grateful
is France.
Lebanese anti-government protestors are planning more demonstrations. The army's been deplyed - deployed - in Central Beruit following violent
clashes over the weekend.
Thousands of people took to the streets to voice anger about the government's failure even to collect the garbage.
The police responded by firing teargas and the Red Cross says at least 400 people have been injured.
Markets around the world from Sydney through to Shanghai, through to Moscow, through to Europe then Frankfurt, the DAX have all fallen very
sharply. Join me at the Super Screens and I will show you.
The Dow Jones Industrials has closed down 588 points. It was down more than 1,000 points at the open or in early trading. Lunch time saw a
squeeze in the market where you suddenly see the market coming back up again.
But up towards the close, -- although even here again you still see this tremendous volatility. Come and have a look and see.
These last - this last hour of trading, the market goes down sharply, then it rallies back up - (inaudible) down at least 700 points there.
Then it rallies back up again before finally deciding it was time to go home.
No sector's been spared - all 30 companies in the Dow ended in the red and some of the biggest companies have been hit harder. It's not
surprisingly oil, with the price of oil down under $40. Exxon Mobil was down 4.7 percent.
On the tech sector, Twitter which was already close if not below its IPO price, is now down 2.7 percent. The months the major consumer
companies - Proctor & Gamble is down 3.7 percent.
And throughout the course of the day, some of the financials, particularly JPMorgan and Goldman Sachs were some of the harshest and
biggest losers.
At the close, Bank of America was down 5 percent - one of the worst stocks performing of the day and also one of the day's most heavenly -
heavily - traded stocks so far. Diane Swonk is the chief economist at Mesirow Financial who joins me from Chicago.
Before we get into the nitty gritty of all of this, you've got to admit we ain't seen many days like it.
DIANE SWONK, CHIEF ECONOMIST, MESIROW FINANCIAL: (LAUGHTER). It's incredible and I'm still exhausted from riding the night out and watching
all the markets overnight.
[16:35:03] So it's - this is one of those days people keep saying, 'You're so calm, Diane.' It's because I'm exhausted.
QUEST: Right. Give us the insight to what you're telling the banks' clients and investors tonight. Give us a preview.
SWONK: Well, in this kind of market the most important things is that we have to focus on - in the midst of uncertainty, what do we know? We
know that there's a storm ahead, we know we're going to get hit by the storm because Chinese is an 800-hundred pound gorilla and it is a place we
sell our consumer goods.
They were going to be the new consumer of last resort. They're not going to be that anymore and that's effecting - because many companies make
up to 40 percent of their profits abroad, now largely in emerging markets. So I think that's very important.
That said, there is that turbulence of storm - can we get through it? We do have tailwind. The tailwind is a much stronger housing market, most
people care most about the value of their home, they hold less stock today than they did prior to the crisis as less people invested in the stock
market.
And in fact, home prices in most markets have hit their previous highs which is a tipping point. So there is a tailwind of momentum and that
extra tax cut of falling prices at the pump will help consumers -
QUEST: Right.
SWONK: -- with stagnant wages.
QUEST: However, factoring in the China aspect which of course is the dominant factor. But if you add in the emerging markets and how they not
only are being hit by what's happening from China, but also from a falling oil price and falling revenues.
You could end up -
SWONK: Right.
QUEST: -- with an ever-decreasing cycle downwards.
SWONK: You could end up in much weaker global growth. I think Mohammed El-Erian who you had on earlier really hit the head on the nail on
that one.
The issue is these are the markets that have been pushing growth higher and carrying the global economy for many years and now you're taking
that away.
You have to rely on the shoulders of the developed economies, and let's face it, growth has not exactly been spectacular or even across
places like Japan, the U.S. or Europe. And so you clearly have diminished global economic growth and that means diminished profits.
The good news is we have a lot of cash on our balance sheets in the U.S. and that's a -
QUEST: Right.
SWONK: -- cushion we didn't have back in 2008.
QUEST: So, the question though - well you obviously heard Mohammed - and he told me when I asked him what policy mix he wants, he gave me some
extremely good, strong long-term policies. But I ask you, is there anything that central bankers or governments should be doing short-term to
ensure that this doesn't become a calamity over what we've seen over the last few days.
SWONK: Well I think there are several things that can be done in the short-term. One, it would be nice to get some real clarity and some kind
of less than opaqueness out of China. I don't think that's likely.
They really have added insult to injury in terms of their policies and left people more confused than - and given more uncertainty.
That said, can the Fed take some uncertainty off the table? Yes, they can. The Federal Reserve can say we're not going to raise rates into this
kind of uncertainty in global economic environment.
And what they're worried about is lower inflation from those cheaper imports coming from emerging markets and lower oil prices although it's a
positive, it's still something that lowers inflation. And at the end of the day, the Central Bank cares about inflation.
QUEST: The scenarios that you, Mohammed, the minister - all are superb guests this evening have been talking. You're painting a global
economic situation that is of frightening complexity.
SWONK: Complexity is the right word, Richard. I mean, this is - there is no way to escape it. I think, you know, that is the hard part as
you just don't know where the house of cards is.
I think the situation in China - I'm not as confident that they can just do growth on command as they have in the past. They really have
exhausted a lot of their infrastructure - you know, built a bridge to nowhere kind of policies.
And they've got a lot of debt. Now, you know, they can't devalue too much and just export themselves out of this - that's not the kind of
economy they are anymore.
But devaluation is important for them to look like their currency is in line with their underlying economic fundamentals.
So this is a really tough situation. And the collateral damage to emerging markets around the world - on many of these consumer companies
that you noted were hit so hard, it's because those companies bet big on those being the next emerging consumer, not just emerging markets.
QUEST: Diane Swonk. Thank you very much. I know that feeling of exhaustion after days like today. But you've rallied magnificently. Thank
you.
SWONK: (LAUGHTER).
QUEST: Cristina Alesci is at the New York Stock Exchange and joins me now. Cristina, are you there?
CRISTINA ALESCI, CNNMONEY CORRESPONDENT: Richard, I'm here. It's quite a disorganized day as you could probably imagine. This was crazy - I
mean, 1,000-point drop on the open. That is the largest point drop in history. Of course on a percentage basis it's not, but just on a sheer
numerical basis as far as points go, the largest drop in history.
Things calmed down throughout the day, but still we closed 580 points down. I mean, that is a huge drop on Friday's 500 point close down too.
[16:40:10] So you had tremendous loss of value over these past few days and we could talk about all the fundamentals that you want - China,
oil, the Fed, but what it comes to and you know this well, Richard, is market psychology.
Once you start a feedback loop like this - a negative feedback loop like this - you know, you said it best earlier today - somebody - all it
takes is one person to shout fire and you've got a contagion going on.
And two things are for sure, however, volatility is back which means that we're not going to see the kind of, you know, up shot that we've seen
over the last four years.
Where we've had little blips here and there, this is going to be a market where it's going to be trying to find a bottom. So we're going to
see a lot more volatility and number two is we haven't found the bottom yet so we're going to have to see how that plays out over the next couple of
weeks.
And you'd better be sure that investors are paying really close attention to what happens in Asia as you were just talking to a guest about
-
QUEST: Right.
ALESCI: People not only are doubting the economic growth coming out of China, but they're also doubting the data -- if they could really trust
what the government is telling them in terms of growth prospects and in terms of the levers that the government can pull to stop the slide because
we've already seen China - the Chinese government - try and stop the slide by devaluing the currency.
And then we had the stock markets tank. I mean, the stock market in China has been falling -
QUEST: Right, right.
ALESCI: -- it's officially in crash territory. But, you know, I think in face of, you know, Chinese attempts to stop the slide -
QUEST: Let me jump in here -
ALESCI: Yes.
QUEST: -- because I'm looking at the chart of the Dow Industrials and you've been there all day and - there was a moment during the day when
Apple, Nike, Microsoft, Intel, a few others they went positive. We had up to five or six greens on the board.
That all was wiped away, so what prompted the rally and what do you think caused it to evaporate?
ALESCI: I think this is just a market that is - like I said - trying to find a bottom. And also, Richard, you know this well - August there's
not a lot of trading volume and that increases the volatility because you don't have, you know, the two sides of the trade lined up all the time. So
you're going to have a lot more volatility in this kind of market, the kind that you just described.
You know, once we get into September, that's when we'll have enough people back in the market to really determine what the floor is -
QUEST: Right.
ALESCI: -- but you're going to be seeing this. This is why - this is why today was so extraordinary. It's because it indicates the end of what
we've seen over the last, you know, four years which is, you know, pretty steady upshot.
QUEST: Cristina, we'll talk more about that tomorrow when we've got other days and numbers to look into. We're going to talk about the
psychology. Cristina talks about the psychology - when the market believes there's something smelly under the carpet. Then the market goes down.
We'll talk about it (inaudible).
(COMMERCIAL BREAK)
[16:45:26] QUEST: Cristina talked about volatility and there you have the volatility index. And you see just how sharply it was up - the
VIX -- rising dramatically. The Dow component - there isn't a piece of green. There was five stocks or maybe six at one point over the lunchtime
area where that went green.
But by the close, they were all sharply lower. The JPMorgan Chase is the worst of the session, and in fact, earlier in the day, Goldman Sachs
had been very sharply lower, but that managed to rally across the board.
Let's talk about this with Rana Foroohar, the CNN global economics analyst.
RANA FOROOHAR, CNN GLOBAL ECONOMICS ANALYST AND ASSISTANT MANAGING EDITOR, "TIME": Great to see you.
QUEST: How good to see you.
FOROOHAR: (LAUGHTER).
QUEST: The psychology. We've talked a lot about the psychology.
FOROOHAR: Yes.
QUEST: The reality is that nothing that we've heard about China's situation justifies a complete collapse of markets as we've seen.
FOROOHAR: Well I would say when you think about psychology, think about denial, denial - not just a river in Egypt. Denial is what's been at
play in the Chinese situation for years now.
You know, when we think about the 2008 crisis and the way in which U.S. consumers and companies deleveraged - got rid of their debt. That
debt didn't just disappear. It went somewhere, it went to China. They've been brewing up an enormous debt bubble for some time now.
We don't get good statistics from there - it's a black box - but everybody knows that that debt bubble -
QUEST: But where that debt?
FOROOHAR: Oh, --
QUEST: Because they've also - the other side of that debt box is the billions, trillions of U.S. government securities - U.S. bonds - that
they've got. So it's not as if they are without assets.
FOROOHAR: No, but they've been running down those assets at the same rate that they bought them over the last few years. They've spent $400
billion propping up the housing market, the stock markets, their currency in the last few weeks.
And this fall is basically a capitulation on the part of the government saying we really can't artificially prop up this market anymore.
We're going to have to join the real market economy and a lot of people - myself included - think they're not quite ready for that yet.
QUEST: If you're right - and I don't doubt you are - then all those measures we saw three or four weeks ago - a month ago -
FOROOHAR: Yes.
QUEST: -- they were naive.
FOROOHAR: Well they were na
sense of uncertainty. The policymakers are buoying markets then letting them fall. It's back and forth.
And you get the sense -
QUEST: Is that because they don't know what they're doing?
FOROOHAR: I think that they're smart technocrats but there's a lot of dissension in the Communist Party right now. There's a major corruption
purge going on. That's been happening for some time. There could be fights that we don't really understand that are taking place.
QUEST: Bringing you back to our own bailiwick - when you have these market falls - Sydney, Frankfurt, Paris, London, New York and so on -
FOROOHAR: Yes.
QUEST: -- they - how do we stop it feeding itself?
FOROOHAR: Oh, that's a great question. I mean, I think that the good news is that China I don't think is a Lehman Brothers moment. I don't even
think it's an Asian crisis of late 1990s kind of moment.
QUEST: You don't?
FOROOHAR: I don't. I think that we're going to see a lot more volatility but I don't think that we're going to see an unstoppable slide.
Now, I'll put one caveat onto that which is if you saw major social unrest in China coming off the back of this. That's what to watch for.
QUEST: I tend to agree with you but I'm going to throw a wobble into it.
FOROOHAR: OK.
QUEST: And the wobble is emerging markets, --
FOROOHAR: Yes.
QUEST: -- and the fall in the oil price -
FOROOHAR: Yes.
QUEST: -- because that could be the second shoe that drops. Those emerging markets are already being hit by China -
FOROOHAR: Yes.
QUEST: -- not buying as much from them or not sending as much. And now they're also hit on a current account basis.
FOROOHAR: True enough, but, again, I think that you can't look at emerging markets as a whole. Now certainly anybody that's commodities
dependent is going to be in trouble and we're already seeing that.
But the emerging market story has changed. I mean, there are some that are in much stronger positions than they were in the late 1990s -
Mexico, parts of Latin America. You know, I think that there - this is a very divergent story and you almost have to take it country by country.
QUEST: If that's the case, then for something like the IMF, the G7, Lord even help us - the G20, --
FOROOHAR: (LAUGHTER).
QUEST: -- a useless bunch --
FOROOHAR: Absolutely.
QUEST: -- that they are.
FOROOHAR: The more, not the merrier.
QUEST: Yes, the more - yes, the more not the merrier - absolutely. Would (inaudible) (LAUGHTER) - would it help if they piped up at all at
this point?
FOROOHAR: If they piped up - no, absolutely not (LAUGHTER) need fewer voices.
QUEST: With the IMF -
FOROOHAR: It's a terrible thing -
QUEST: -- we haven't (inaudible) from the IMF.
[16:50:01] FOROOHAR: Yes. Well, you know, the IMF has taken a lot of flak for how it's handled emerging market crises in the past. Frankly,
it's not money that these countries need which is traditionally what the IMF -
QUEST: Right.
FOROOHAR: -- has provided, right?
QUEST: What do they need?
FOROOHAR: We're a wash - we're a wash in capital. They need to make a transition from being commodities driven, manufacturing powerhouses to
being more like the U.S. and Europe - consumption economies.
It's a tough thing to do, only three countries have made it in Asia. I'm not sure China's going to do it.
QUEST: Fascinating because you're - what we're hearing tonight is the views from yourself and Mohammed El-Erian and Diane Swonk is all the same
idea - that there's no quick fix to what we're seeing tonight.
FOROOHAR: Absolutely. This is the rumblings/the echoes of 2008 coming back to haunt us.
QUEST: Excellent. Good to see you. Now we'll turn to talk about oil prices and exactly what's likely to happen. It's "Quest Means Business."
First you need to know how to "Make, Create, Innovate."
(COMMERCIAL BREAK)
(BEGIN VIDEOCLIP)
NICK GLASS, CNN REPORTER AT LARGE: It begins with a spark, a eureka moment making the impossible possible, turning a dream into reality. Join
me Nick Glass and meet some of the great inventors of our time. Ingenious products, breakthrough technology, revolutionary science.
Make, create, innovate, Wednesday on CNN.
(END VIDEOCLIP)
QUEST: Crude oil prices tumbled on Monday and they're at levels not seen in more than six years. And the drop partly fueled by China concerns
as China's the world's biggest consumer of raw materials.
If you look at the crude so far price to date, you've got Brent and you've got West Texas and they're virtually - well, they are - they are
mirroring each other point for point.
West Texas fell below $39 a barrel. Oil was $100 in June 2014, so just over a year ago, way up there, but nothing like that at the moment.
And despite the record prices, rival producers are not letting up in the battle for market share. And that's one of the big issues. Nobody
wants to give ground. There's up to $2 million barrels a day surplus of supply over demand.
CNN's emerging markets editor John Defterios reports.
(BEGIN VIDEOCLIP)
JOHN DEFTERIOS, CNN EMERGING MARKETS EDITOR: Call it an East/West oil showdown for market share. The world's three biggest players - Saudi
Arabia, Russia and The U.S. - producing nearly a third of global supplies.
In November 2014 at this OPEC meeting, the kingdom doubled down the stakes as prices were spiraling lower.
ROBIN MILLS, NON-RESIDENT FELLOW, BROOKINGS DOHA CENTER: Had to devise a strategy on the fly and the strategy they went for was to keep
production quite high and even this year to increase production and accept lower prices and hope it would drive out the competition.
And I think that's what they have to do, but they have to stick the course.
DEFTERIOS: And OPEC has not let up, producing near three-year high of just under $32 million barrels a day, adding to a daily oversupply of $3
million barrels, a 17-year peak.
A third of the 12 OPEC producers are based right here in the Gulf and they voted as a block to support Saudi Arabia in this fight for market
share. Regional sources tell me they're expecting prices to be at $60 or above at this stage, planning for many of the U.S. shale producers to
already be out of business.
The number of active U.S. oil rigs has fallen like a rock by more than half in a year. But not American production as companies squeeze costs.
Chris Faulkner, a Texas fracker, was recently in Dubai.
CHRIS FAULKNER, CEO, BREITLING ENERGY: We're paying less to drill, we're paying less to frack. Certainly not 60 percent less but that margin
has helped us.
So while we're doing things more efficiently on our side, we're also getting discounts with service providers to keep on fracking.
DEFTERIOS: The price advantage clearly sits in the Gulf producers' camp where their cost hovers around $5 a barrel onshore.
The problem in Saudi Arabia is prolific spending, especially by a new king who has opened up the coiffures to maintain domestic stability while
fighting a war at its Southern border in Yemen.
[16:55:10] MONICA MALIK, CHIEF ECONOMIST, ABU DHABI COMMERCIAL BANK: If we look at Saudi Arabia's budget break-even oil price, it was around
$100 a barrel. So there's an absolute need to pull back on spending, especially with the weak outlook for oil in the medium term.
DEFTERIOS: If history is any gauge, this price war could take longer than most expect. Saudi Arabia took a similar strategy nearly three
decades ago which was the last severe U.S. oil bust.
MILLS: In 1986 they did the same but it took almost 15 years for them to rebalance the markets and drive out the high-cost producers.
Now maybe it won't take as long this time, but it still might take several years and they have to be ready for that.
DEFTERIOS: OPEC players from Algeria to Venezuela certainly are not ready, but the Gulf producers have over $2 1/2 trillion in the bank and are
being forced to use it.
John Defterios, CNN Abu Dhabi.
(END VIDEOCLIP)
QUEST: I promised you a busy program and I promise you a "Profitable Moment" after the break. (RINGS BELL).
(COMMERCIAL BREAK)
QUEST: Tonight's "Profitable Moment." Let's just enjoy the moment if we can, even though the market in New York was down 600 points. Because at
this hour, there is no major market trading anywhere in the world.
This could be just the calm before the next wave of the storm that will start when Auckland, Sydney, Tokyo and Shanghai all start trading in
the next few hours.
It is literally the calm before the storm because there are many more headwinds on the way. Just keep it quiet.
And that's "Quest Means Business" for tonight. I'm Richard Quest in New York. Whatever you're up to in the hours ahead (RINGS BELL), try to
make it profitable.
[17:00:02] I'll see you tomorrow.
END
