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Quest Means Business
Wall Street Rally Disappears, Markets Fall; Shanghai Composite Down 42 Percent Since June 12; Dow Falls Sharply at End of Trade; Dow Closes Down 200-Plus Points; China Acts to Boost Economy After Stocks Plunge; Risky Market; Dozens of Countries Rely on Trade with China; Impact of China Slowdown on Emerging Markets. Aired 4-5p ET.
Aired August 25, 2015 - 16:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
[15:59:55] (NEW YORK STOCK EXCHANGE CLOSING BELL)
RICHARD QUEST, HOST: The closing bell is ringing not a moment before time. I'm going to update you exactly what the market is doing, but it has
fallen very sharply in the last hour of trade. Please, bring our misery of the day to a close. It's Tuesday, it's August the 25th.
Where to begin? Well, there you have the Dow Jones Industrials, off 205, its lowest point of the session, down about 220. The rally didn't
just fade, it evaporated. The hopes of a rebound disappeared and the market is down again.
China is taking evasive action. The central banks are cutting interest rates.
And European markets are higher, but they hadn't seen the worst of the session that we saw in the last hour of New York.
I promise you, it's going to be a volatile hour, because things are happening while we're speaking. I'm Richard Quest. I mean business.
Good evening. Whatever program we had planned, we have just thrown out of the window because no relief and no respite after days of stomach-
churning losses. The Dow has had the most extraordinary day, and you're going to see it right here on QUEST MEANS BUSINESS.
The market went up at the open. At its highest point during the day, having seen -- having had a loss of over 500 or 600 -- 500 points
yesterday, having gone up so sharply, the market rallied, and at its highest point during the day was up more than 444 points.
The majority of the session was a pullback around lunchtime, where you see the markets basically holding in a range. And then, late in to the
afternoon, the market turned dramatically. You saw it -- it gave away, it was about 300 points up at one particular point. That become 200, 100, and
then it started going negative by about 20 to 4:00. It happened in an instant.
The market went down exceptionally sharply. It went 60, 70, 80, 90, 120, 150. At its worst point, it was over 220 points lower, and a loss of
1.3 percent for the market, down 205.
And if you look at how the -- I'm going to stay with the Dow for just one moment, because I do need to show you exactly the range of the course
of the day. That sharp gain, and that terribly sharp fall at the end.
And if we factor it into the week, you start to see that no matter which way you look at it, that momentum of selling has not been stopped.
And that, of course, is the serious part of today.
Also, put it into the wider context or what we saw. We saw London up, Frankfurt up, Paris up, very strong gains, because they'd seen Australia
up, and they realized that the selling of the last 48 hours have, perhaps, been overdone. Even the Hong Kong HANG SENG was up, only the Nikkei was
down.
But now, the US markets completely and utterly turned on a dime and went sharply lower. Tim Anderson is at the Exchange, and now needs to make
sense of this for me. All right. I went to have a cup of tea at around 25 to 4:00 and it was about 200 up. I came back, and I had indigestion
because the market had disappeared. What happened?
TIM ANDERSON, MANAGING DIRECTOR, TJM INVESTMENTS: Well, Richard, clearly we had just a drastic reversal in the last hour of the day, or
maybe a little bit longer than that. At midday, at about 12:00 -- between 12:30 and 1:00, advancers were leading decliners by 4 or 5 to 1. They went
out slightly negative.
QUEST: But why?
TIM ANDERSON: We had a --
QUEST: Why? What happened?
ANDERSON: Richard, I think it just tells us that big fund managers have a lot stock for sale on their desks right now. They check in with
their traders at different points during the day, and probably with about 90 minutes to go in the day, they had a lot more stock for sale that had
not yet been executed.
Now, we didn't have nearly the volume we had yesterday. Yesterday was the second-highest dollar volume day ever.
[16:04:58] But clearly, the volume picked -- accelerated in the last 90 minutes of the day. I'm kind of a big believer of the last hour
indicator. And it was negative. It's hard to imagine how the market will have a positive tone to it tomorrow morning. And that being said, I
wouldn't be surprised if the Chinese market acts well tomorrow after being down 15 percent --
QUEST: All right.
ANDERSON: -- in two days. They're going to see the news that they did last night and probably rally.
QUEST: Now, we need to just talk about this. Was there actually much selling at the close, or was this just marking down of stock towards the
closing bell?
ANDERSON: Well, there was both. There was clearly marking down of stock. There was maybe a billion and a half for sale market on close. But
that was well-publicized, and people saw that at 3:40.
And clearly, there are just people that -- I didn't see any news late in the day, but there are people that wanted to limit their exposure
overnight before Asian markets have a chance to open in a few hours.
QUEST: OK, I'm going to -- I'm looking at a -- at graph on my screen here that shows the weekly fall from last Wednesday, which is basically
just a solid line going down. The market has now got to look for and find a reason to rally. Today might have been that reason, but didn't turn out
that way. That makes tomorrow, Tim, very dangerous.
ANDERSON: Yes, it does. It -- the market had every reason to have a decent day today. And tomorrow, we'll just have to see where the support
is. The one thing that's good about these very volatile moves is that it helps us to find support and resistance.
Now, we saw resistance yesterday during the rally and during the rally today. At yesterday's highs, at S&P 1950, at NASDAQ 4700, at the Russell
2000 level of about 11.40, we couldn't get through those levels today. And then the market faded, faded, and then it went from a fade into a sharp
sell. So --
QUEST: All right.
ANDERSON: -- we'll just have to see if we can hold -- we can hold yesterday's intra-day lows on the downside, that's the level people are
going to be looking at tomorrow.
QUEST: Final question, sir. Have you ever seen anything quite like this sort of topsy-turvy, make-no-sense markets?
ANDERSON: We had a lot of very volatile days during the global financial crisis 2008, 2009. We had some very volatile days in 2011. And
we've had volatile markets in the past, there's no doubt about it. But, I mean, this certainly is in the top ten.
QUEST: Tim, good to see you, sir. Thank you for it.
ANDERSON: Great. Thank you.
QUEST: We needed your interpretation and your analysis.
The reason, we've talked about, you and I many times, Chinese stocks. Well, they suffered another dramatic day of losses. The Shanghai Composite
was down some 7.6 percent. The market is now, as Tim was saying, off the best part of 15 percent. Monday was off 8.5. The bubble has truly burst.
And if you look at the Shanghai overall, it's down some 42 percent since early June. Absolutely all the gains of the Shanghai market of the
year have gone. If you look over a 12-month period, it's still got a smidgen of gains as opposed to year-to-date, but the gist of it has
disappeared.
Ken Rogoff is with me. Ken, well, for goodness sake, which button did you push that caused that to happen? I mean, that was quite a close.
KEN ROGOFF, FORMER CHIEF ECONOMIST, IMF: Yes. I suspected this might happen as the market was sinking through the day. There always seems to be
this tremendous action at the end. It's certainly incredibly volatile situation. And I think you're right, it's going to continue tomorrow.
It's not stabilized yet, just by what happened in Europe before us.
QUEST: Now, we talk about not stabilizing. People were telling me yesterday that -- and I think, in fact, you were one of them who were
saying you were looking for policy direction. You were looking for decision-making. Well, that overnight decision by the PB -- the People's
Bank of China, the PBOC -- to cut rates, to change liquidity. You're saying that was sufficient policy direction?
ROGOFF: Well, we don't know. We'll see when the Chinese market opens up. But no, I doubt it was. I think they've lost a lot of credibility,
the policy-makers in China, they need to regain their footing.
[16:09:54] They've done sort of a lot of very ineffective interventions, telling people, the reporters, don't write bad news about
the economy, doing some intervention. They're used to being able to control everything, and they're finding they can't control the stock
market.
That said, I think what people are more worried about is what's going on with the economy in China. Is this a sign of something? And I think,
frankly, that's hard to know. We have a lot of bad news coming in. Freight down, electricity usage down -- I mean, not growing at the same
rate that it was.
But on the other hand, there's very little information here going on, which is maybe why people read so much into these small moves the Chinese
authorities do.
QUEST: Right. And if we now look at the transmission mechanism that the equity markets are suffering, it's difficult to understand how that
mechanism can in any way be broken. Can the linkage be broken between what's happening in China and, let's face it, Europe's growing just about,
and not badly. The US is doing better. Nothing really justifies what we're seeing.
ROGOFF: No, it's sort of hard to know exactly what's going on. There's certainly a sense in which the market had gone way up. People are
nervous about what the Federal Reserve is going to do. Inflation has been up the last few months.
Maybe they are going to go ahead and hike interest rates in September. I don't think they should, but they well might. And people see the market
up, and then they don't know, maybe something worse is going on in China. There's nervousness. This will calm down at some point, but it was
certainly a strained session today.
QUEST: And finally, Ken, on that point, when QE 1, 2, and 3 began, we always knew that the unwinding of the non-traditional mechanisms was going
to be volatile. You told me this many times, that it was going to be a very bumpy ride because of that. Is that what we are seeing? Not just
because of the Fed, but because of the totality of global economics at the moment?
ROGOFF: I mean, Richard, who knows? It's a question of why did the market go up as far as it did? And it's not unusual for it to come down
this fast. It's very hard to pinpoint one thing.
I think China really is the big thing, because that was a constant. People were sure whatever else was going on, China would be growing. Now
they're nervous about that.
But as you say, Europe's not doing that badly, the US isn't doing that badly, Japan. So, hopefully, this will stabilize.
QUEST: Ken, good to have you with us, sir. Thank you very much for helping us talk us through --
ROGOFF: Thank you.
QUEST: -- what's happening. It's one of those days where there's a considerable amount of confusion, a great deal of honesty, and if you look
at the way the markets traded over the course of the past 24 hours, who knows?
Europe was up, part of Asia was down, the US was up for most of the session, and then suddenly, the US market turned turtle in the last 20
minutes, with the Dow Jones Industrials closing down in 1.3 percent. It's QUEST MEANS BUSINESS on the sort of day that none of us really understand
what happened.
(RINGS BELL)
(COMMERCIAL BREAK)
[16:14:56] QUEST: OK, so the good part about being British is that you always when remember, when things get grim, you can't beat a nice cup
of tea.
(LAUGHTER)
QUEST: It soothes everything, even a day like today. Turning to our breaking news tonight --
(RINGS BELL)
QUEST: -- look at the numbers, and you'll maybe need to pour a little something extra into the tea.
(LAUGHTER)
QUEST: The Dow Jones Industrials closed down an amazing 204 points. The range -- I'm going to give you the range, now. The range -- it was up
a maximum of 441 earlier in the day, pretty much at the open within half an hour or so.
Its low point was just about 10 minutes before the close, even in the last 5 minutes. Its low point was down 200. That gives a trading range of
641 points on a day that 90 percent of the session, the market had been much higher. Can CNN's global economic analyst, Rana Foroohar, explain
what happened today, or put some perspective into that, please?
RANA FOROOHAR, CNN GLOBAL ECONOMIC ANALYST: Well, I can say we've entered a new age, it's the age of volatility. We knew this was coming.
We knew that for several years, now, we've been in what I call a genetically-modified recovery, one that's been modified by the world's
central banks, which have dumped trillions and trillions of dollars into the markets and kept them high and kept them smooth, and that era is ending
now.
The Fed's going to raise rates at some point, whether in September or later in the year doesn't really matter. We're going to be in for more of
this.
QUEST: OK. But what's fascinating is the way in which this happened so late.
FOROOHAR: Yes.
QUEST: So we've spent most of the session trundling along at a fair old pace, in a narrow range, 200 --
FOROOHAR: Yes.
QUEST: -- 150, 100 range.
FOROOHAR: Yes.
QUEST: And then suddenly, that volatility comes and bites us on the butt right at the end.
FOROOHAR: That's right. Well, you know, this could have something to do with China, which is, of course, where this began. China is the world's
second-largest economy, and it's a total black box. We don't have good numbers about what's happening there.
I tend to think people are really underestimating the political risk and strife in China right now. I think any sense that there's uncertainty
about the policy environment is going to lead to exactly what you're seeing today.
QUEST: So, if China -- I mean, what -- all those people, those clever brokers --
FOROOHAR: Yes.
(LAUGHTER)
QUEST: -- and economists and analysts who send me long detailed things, had they just been blowing smoke?
FOROOHAR: I think bullishness on China has been overdone for years, absolutely. I mean, come on, this is an autocracy that is trying to make a
transition from being basically a place where cheap shoes get made to a place that replaces the US in terms of being a global growth driver. That
hasn't happened yet, and that's a big leap, only a couple of countries in Asia have ever made it.
QUEST: Obviously, the traditional warning, don't do anything in a crisis --
(LAUGHTER)
QUEST: -- for the amateur investor remains, but there comes a point when people like you and me, we have to sort of say, not only is it
serious, but it's worrying. Are we there?
FOROOHAR: I think a few more days of this, and depending on what comes out of the Jackson Hole Fed meeting, we might be there. I think that
if there is a sense that there's strife within the Fed, that policymakers really haven't charged a smooth course, I think that markets could get a
lot more jittery, absolutely.
That said, fasten your seat belt. I mean, come on, you don't sell, you don't make big portfolio moves in the middle of something like this.
QUEST: No, you don't -- if you didn't sell by last Wednesday --
FOROOHAR: That's right.
QUEST: -- you were gone.
FOROOHAR: Yes.
QUEST: But of course, the classic buying opportunity --
FOROOHAR: Absolutely.
QUEST: I mean, do you subscribe to that?
FOROOHAR: Well, I think that US blue chip stocks are still a safe bet. Now, there are some exceptions to that. There is a record amount of
margin debt in the US, which by the way, is about the Fed keeping rates low for so long. I think that the corporate debt bubble is going to burst at
some point.
(CROSSTALK)
QUEST: I want you to look at that chart, if you can see it from there. That's -- oh, there we are, it's here, now.
FOROOHAR: OK.
QUEST: That selling was deep at the end, and I -- somebody needs --
FOROOHAR: It's across the board, though.
QUEST: Somebody needs to explain to me why Disney is always managing to --
(LAUGHTER)
QUEST: Apple I understand. But Disney, I --
FOROOHAR: They've got a really good PR department, Disney.
(LAUGHTER)
QUEST: But Disney had terrible results. They've got the problems with ESPN.
FOROOHAR: Yes, yes, yes.
QUEST: They've got questions of cutting the cord.
FOROOHAR: Yes.
QUEST: And I don't understand how Disney manages --
FOROOHAR: People want to keep their kids occupied, Richard. That's what it's all about.
(LAUGHTER)
QUEST: And Apple? That was a -- and then you've got the question of whether Tim Cook at Apple actually did break stock market regulations --
FOROOHAR: Oh, my, yes.
QUEST: -- when he sent that email to Jim Cramer of CNBC --
FOROOHAR: Yes.
QUEST: -- saying that sales were good in China. By any definition, that's a market forecast.
(LAUGHTER)
FOROOHAR: And I mean, let's also backtrack. They may be selling a lot of iPhones in China, but consumer spending in China is still minuscule
compared to government spending. This is a command and control economy.
QUEST: I've got my cup of tea --
(CROSSTALK)
FOROOHAR: Can I ring the bell?
QUEST: What?
FOROOHAR: I want to ring the bell. You've never let me do it.
UNIDENTIFIED MALE (off camera): Uh-oh.
(FOROOHAR RINGS BELL)
(LAUGHTER)
FOROOHAR: Does this mean I don't get invited back ever?
(LAUGHTER)
[16:19:57] QUEST: Right. Well, I can see where we're standing today. A bit of volatility and the market collapses and everybody thinks
they can ring the bell.
(LAUGHTER)
QUEST: Coming back in a moment, we're going to be looking at the emerging markets. You've got to laugh, because if you laugh, you'll be
crying. Have a cup of tea.
(COMMERCIAL BREAK)
QUEST: So, Europe was up, most of Asia was down, and the reason? The Shanghai Composite. Chinese stocks suffered another dramatic day of
losses. Much of the loss was made before the People's Bank of China jolted into action.
The PBOC has basically cut rates by a quarter point, multi cuts over many months, and reduced liquidity requirements. The major concern for the
Chinese government is not so much its falling stock market, but the efforts to boost growth. Join me at the super screen and you'll see what I mean.
Now, what did China actually do to try and boost growth? Well first of all, it has cut interest rates, and by cutting interest rates, you see
that the interest rate come down by just a quarter of one percent. But look at how rates have moved. There you are. Now at 4.6 percent, they're
down from 6 -- over 6 percent in November.
But arguably, these very small, incremental moves over quite a long period of time has caused more damage because it hasn't created a feeling,
a real boost. What the Chinese economy has needed is, perhaps, some more stimulus. And that, of course, means it came from the bank.
Look at the stimulus that the Chinese have put in. Well, the stimulus so far, it lowered the amount of cash the banks must keep in the reserves.
What does that do? By reducing reserves, it makes it easier to lend.
Over the past few months, it's literally given out money to brokerages and investors to buy stocks, it's instructed companies to buy their own
stock back, and it's prevented executives from selling their shares. Arguably, none of these sort of -- none of these actions would be seen
somewhere, for example, in a Western market.
But then, there was the controversial devaluation of the currency, in the onward and the ongoing devaluation of the Chinese yuan. Look and see
how that has affected.
Now, if you go back to before -- go back several years, and you have a slowly devaluing Chinese yuan against the US dollar. But then you have
pretty much a peg against the dollar, and that peg holds until August the 11th, when China says it's giving the markets greater control over market
forces. Some claim that was meant to increase exports.
It said it was only going to do it once. Well, that was the first one, and then it widened the band again.
So, all these measures from China designed to boost the economy. France's economy minister says global economies cannot afford to ignore the
risks of China's slowdown.
(BEGIN VIDEO CLIP)
EMMANUEL MACRON, FRENCH ECONOMY MINISTER: We should not underestimate the risk. China is a country that contributed the most to global growth in
the past ten years.
[16:24:56] Its development has been based on a compromise between society and the ruling party, economic success and political stability. If
the former is challenged, the latter is at risk.
(END VIDEO CLIP)
QUEST: China makes a massive contribution to global trade. It's one of the major consumers of exports from around the world, primarily, of
course, commodity-based, because China's a manufacturing country.
All these countries count China as their top trading partner, and exports to China make up a third -- just about a third of Australian trade.
It's about 14 percent of trade from Malaysia and, indeed, from parts of southeast Asia. And it's nearly a fifth of Brazilian trade. No wonder, of
course, in the case of the so-called South-South trade, China's been there.
Shasta Darlington's now with us from Rio de Janeiro. The economics of this are difficult, but first -- we'll get to that in a second. How
important is China seen in Brazil?
SHASTA DARLINGTON, CNN INTERNATIONAL CORRESPONDENT: Oh, this is absolutely huge, Richard. But I have to say, Brazil was already down. It
really is hitting a country that was already struggling with a recession. Economists are forecasting two consecutive years of recession here in
Brazil for the first time since the Great Depression. So this is, of course, bad news.
But they've been feeling this fallout from China's slowdown for a few years now. Like you said, China's the biggest trade partner. So, we've
seen stocks like Vale, which sells the iron ore to China, we've seen that stock tanking. The currency -- every week, we say it's hit a new 12- year
low. The same today, it hit a new 12-year low. So, this is a big deal --
QUEST: Right.
DARLINGTON: -- but yesterday was certainly not the first time that Brazil was feeling the fallout from China.
QUEST: Right. But obviously, it sells out to China. The question of fuel, that we obviously -- ethanol huge in Brazil. But the question of the
oil price, it's all creating -- you've just alluded to it -- a currency crisis as well for the Brazilian currency.
DARLINGTON: Absolutely. I mean, it's all playing in. A lot of the problem is also now with China sort of hitting the global economy, one of
the roots out that Brazil was betting on is, OK, our currency's getting weaker, but that means we can actually boost exports. It's been overvalued
for so long.
But now, looking at all of these other economies reacting, concerns that they could actually be -- see their recoveries slowed. That's also
spelling bad news for Brazil, so --
(CROSSTALK)
QUEST: So, is there a sense of panic?
DARLINGTON: -- the currency's headed even lower. Another bit of bad news we got today was -- go ahead, yes?
QUEST: Is there a sense of panic in Brazil tonight over not just China, but also the currency, also emerging markets, that somehow it's --
everything's falling apart?
DARLINGTON: There definitely is that sense, Richard, But I don't think I can make it more clear, it's just not coming from today or
yesterday.
Remember, Brazil is also battling this huge corruption scandal at Petrobras, the state-run oil company. They've been accused of dealing with
these bribes of politicians, some of the biggest construction companies in the world right here in Brazil have been accused of receiving and giving
bribes in order to get these Petrobras contracts. The president --
QUEST: Right.
DARLINGTON: -- Dilma Rousseff, her approval rating is below 10 percent. This is not a very governable country right now. So, it's all
playing into it, Richard.
QUEST: Shasta, good to see you. Thank you very much. Shasta in Rio. You can see, we have global coverage on this -- for there's no respite for
US investors. We're going to discuss the ups and downs of Wall Street and the Dow when we return. It's QUEST MEANS BUSINESS, a horrible day on the
market.
[16:29:05] (COMMERCIAL BREAK)
[16:31:20] RICHARD QUEST, CNN INTERNATIONAL ANCHOR AND REPORTER HOST OF "QUEST MEANS BUSINESS" SHOW: Hello, I'm Richard Quest. There's more
"Quest Means Business" in just a moment. You're going to hear from Austan Goolsbee who is going to talk about after U.S. markets slumped to another
loss. We need to hear his views.
And Donald Trump has made a very powerful enemy at Fox News. Before all of that, this CNN and on this network the news will always come first.
The global stock market rally has been halted in the United States. The Dow Jones Industrials having jumped at the open, erased a 442-point
gain and ended off 205 points. It was a terribly volatile session and it follows a market plunge around the world on fears over the ripple effects
on Japan - China's - economic slowdown.
French officials have announced multiple terror charges against the man accused in last Friday's thwarted train attack. Authorities say he was
carrying out 200 rounds of ammunition. The French prosecutor says the suspect's activities online showed clear evidence of terrorist intent.
(BEGIN VIDEOCLIP)
FRANCOIS MOLINS, FRENCH PROSECUTOR, VIA INTERPRETER: His use of the internet through his phone showed us that among others Ayoub El Khazzani
was looking at "Aboard the Thayls Train", an audio file on YouTube in which an individual was calling his followers to combat and to take up arms in
the name of the prophets.
British investigators found a Facebook profile opened in the name of Ayoub El Khazzani. That was shut down on August 22, 2015.
(END VIDEOCLIP)
QUEST: Fourteen people have been arrested in Spain and Morocco on suspicion of recruiting for ISIS. The suspects were taken into custody in
a town outside Madrid and in a number of locations across Morocco.
Officials say the network sent foreign fighters to Iraq and Syria.
After more than a week's delay, South Sudan's president is set to sign a peace deal on Wednesday. A spokesman for Salva Kiir says he'll sign the
accord despite having some reservations about it. The rebel leader Riek Machar, a former vice president, signed the deal last week and could return
to that post.
(Inaudible) was one of three people killed after a shooting at a Roman gypsy camp in France. The shooting took place in the town of Roye, just
north of Paris. Four other people were severely injured in the shooting including two French policemen.
And a former analyst at JPMorganChase has been charged with insider trading in the United States. The Securities and Exchange Commissioner
says Ashish Aggarwal and two of his friends made almost $700,000 by sharing information about MNA (ph).
All three have been charged with securities fraud.
Now it looked on Tuesday as though the markets might finally be recovering. But not in the end . This is what happened on Tuesday. The
Dow Jones Industrials down 205 points. But you have to factor it into a week or nearly a week (AUDIO GAP) a succession of losses.
Last Wednesday, off 163, Thursday 358, Friday we went into the weekend with a loss of 531, last night down 588. And on Tuesday, that's today, we
are down 205. That's a loss in total - add it up yourself - of 1,845 points.
[16:35:14] Now if you take May's all-time high, it's now down 2 1/2 thousand points from the all-time high which is I think a loss of about 14
percent. So we are well - we're beyond a technical correction level. We're well and truly into the area of a technical correction, not yet at
the point of a bear market.
Eighteen hundred points off the market in just a week. Banks and brokers have been reacting to the wild events of the last 48 hours.
Schroders says that the rate cut by the Chinese government will help market sentiment.
It warns new stimulus is not likely to boost growth in China. Bearing in mind many of these people have been writing before we saw the losses of
the day.
HSBC tells investors to breath. The bank says the situation's nowhere near as bad as the Asian financial crisis in 1997.
And Capital Economics says the outlook does not point to a major decline in U.S. stocks. I guess what they're talking about there is a
long-term perspective.
Let's ask Austen Goolsbee what he thinks - the former chairman of the White House Council of Economic Advisors joins me from Chicago.
Sir, good to see you on difficult days.
AUSTAN GOOLSBEE, FORMER CHAIRMAN, U.S. COUNCIL OF ECONOMIC ADVISORS: Yes, good to see you.
QUEST: We'll just get rid of one on the market before we look at the wider economics. This is starting to become extremely serious for the U.S.
economy as for anything else.
GOOLSBEE: I agree with that, I think. Now, it's certainly becoming serious for the U.S. financial market. What that means for the U.S.
economy is not as clear.
As you and I have talked about many times, there has been a divergence between how the stock market does and how the GDP does or how the job
market does over time in the U.S.
So it doesn't automatically -
QUEST: Right.
GOOLSBEE: -- have to mean recession or downturn.
QUEST: Unless it feeds into the psychology because people see these numbers -
GOOLSBEE: Yes.
QUEST: -- pull back, stop spending - I mean, you, sir, are the expert -
GOOLSBEE: Yes.
QUEST: -- you know the transmission mechanism backwards.
GOOLSBEE: I think the transmission mechanism here will be backwards in the sense that 2008 which is what is in everyone's mind when they see
the stock market going down like 1,000 points in five minutes that they saw yesterday.
When they see that they think 2008 and 2008 was a transmission mechanism from the United States to the rest of the world. This time it's
coming from China and it's coming -
QUEST: Right.
GOOLSBEE: -- backwards into the U.S. I think you're right -- the psychology. People should not forget the psychology.
If China has literally a hard landing and a very substantial drop in their growth rate affecting their real economy, I think it's unrealistic to
think that this problem will be restricted only to stocks in the United States and only for a short run. I think it will slow things down here.
QUEST: So we end up with a position where tonight - I mean, China's - the central bank has cut rates, it's done a whole load of other strange
things, but it's basically trying to raise stimulus within China.
But we don't know the true magnitude of the Chinese problem because I think you might agree the numbers are dodgy or iffy.
GOOLSBEE: Yes, look Richard, this is the key point that we learned in 2008 and that we have learned in many other previous financial crises.
That the thing that makes a crisis 100 times worse is when the investors and the participants cannot trust the numbers that they're getting and they
don't believe them.
So when they start looking at the Chinese numbers and the Chinese government has been directly intervening, trying to buy up the stocks to
suck all of the information out of the prices, then people tend to just pull their money out because they say I don't know where the losses are, I
don't know the true values are.
QUEST: Right.
GOOLSBEE: And now they'll try to engage in stimulus but I'm pretty nervous that this is the beginning of a hard landing. You know, you had
Ken Rogoff saying that all along, and I think he's right that when you see a big increase in the amount of debt, that should make you nervous - that
it's not just an equity bubble popping which is primarily losses for the people who hold those stocks that go down.
If they've borrowed money on this thing, it can lead to a major credit crunch in China. And that would almost certainly lead to recession.
[16:40:01] QUEST: Now, when you hear - I'm going to take you into a different area, Austan, if I may. When you hear Donald Trump saying - when
you hear Donald Trump saying, you know, this is evidence that the U.S. has basically capitulated to China, that the trade agreements have all been
one way and that now it's time to - this is - he's basically saying I warned you about this. This is what happens.
GOOLSBEE: I agree that is what he said but I couldn't help but notice what he's been warning all along was that China was eating our lunch and
their success was coming at the U.S. expense. So now China's economy is sucking wind and then Donald Trump said, 'See, that's what I told you all
along. China's hurting us.'
But now he's saying China's hurting us because they're going down. He used to be saying it was hurting us because they were going up.
QUEST: On one final point here, are you worried about the current situation? I know that sounds maybe a naive question, but we can go
backwards and forwards about China and markets on any given average Tuesday in August, but fundamentally, Austan, are you worried?
GOOLSBEE: Worried over the next 12 to 18 months about China for sure. About the U.S., less so. And if you look out beyond just the immediate
period, I'm not that worried. The growth rate of the United States is based on things - and the growth rate in China - are based on things that
are not really up for debate I don't think.
But I'm pretty nervous that this is the sign of the hard landing coming for the Chinese and that that will reverberate around the world.
QUEST: Grateful to have you on the program tonight, sir. Thank you for joining us.
GOOLSBEE: Great to see you again.
QUEST: Excellent, thank you. Austan Goolsbee joining me from Chicago. We're going to talk emerging markets -- there's the bricks to
worry about, there's currencies and we could end up with a good old- fashioned trade crisis. "Quest Means Business." (Inaudible).
(COMMERCIAL BREAK)
QUEST: Despite the heavy selloff in China, some of the biggest companies doing business there say they're optimistic about the country's
future.
If you look, BHP Billiton's chief executive says Chinese economy to improve in the second half of the year despite the worst profit numbers in
a decade (RINGS BELL).
Boeing sees strong growth in Chinese aviation. Almost $1 trillion worth of new planes -- Boeing says in its forecast -- is needed over the
next 20 years as the fleet triples in size. (RINGS BELL).
And even Alibaba's chief exec is telling employees forget about the share price, focus on serving customers. The stock has fallen below the
IPO for this giant Chinese company - below the IPO for the first time.
We've already heard tonight from Shasta in Rio about how Brazil is suffering from China. And we've heard about the volatility in the markets.
But if we take a look at the bricks overall, well we've talked a great deal about China and we've heard from Brazil. How do the other bricks fare ?
[16:45:19] Let's take India, another member of the group, and you look at what's happened there. The bricks in India certainly saw stocks rally.
It saw the best of the day in many ways. It was after the worst trading day of the year.
And the Sensex gained some 1 percent. The Indian rupee also gained around 1 percent. So in India, in Mumbai, our correspondent is Mallika
Kapur.
(BEGIN VIDEOCLIP)
MALLIKA KAPUR, CNN CORRESPONDENT: It's lunchtime in Mumbai and I'm outside the Bombay Stock Exchange .
Now this is usually the hour people take a break from their work. They take a break from the market and they come outside to grab a bite.
But today people are outside the stock exchange though they are less interested in their food. As you can see over here, they're much more
interested in what's happening in the market.
And even though it's their lunch hour, they're standing outside the building and they've still got their eyes on the ticker that runs outside
the Bombay Stock Exchange.
There is uncertainty in the market in India but people aren't really panicking here just yet. And the reason for that they say I because the
fundamentals of the Indian economy are still very strong. The Indian economy is still growing, inflation which is usually a huge problem for
India, that's come under check over the last couple of months in (gas) fiscal deficits, that's narrowed.
Commodity prices have come down, oil is so much cheaper. With these factors under control, there is optimism that India, which it hasn't been
spared by the global mayhem, that perhaps it'll be able to cope with it a lot better than some of the other economies.
(Inaudible) here they were really they're heads trying to figure out how serious this correction is - whether it's just a temporary tantrum as
one of the traders said or whether it's the start of something more serious.
Mallika Kapur, CNN Mumbai.
QUEST: While South African stocks also rallied in South Africa you'll be aware, there are underlying fears about growth and that's giving
particular cause of concern - factors that are unique in South Africa's situation. The economy has shrank in the second quarter.
There are questions of course about how long the president will remain in power and whether there is some form of plan or plot for the president
to step aside before the end of the term. Q2 economy shrank and the rand is at an odd near all-time low. There's also problems of - not only with
the rand, but of infrastructure, electricity, power cuts and the feeling that the level of corruption in South Africa remains distressingly high.
And then to Russia. We've done these part of the bricks. Now to the Russian economy which is also struggling. Growth forecast is lowered, GDPs
expected to fall over 3 percent in 2015. Some suggest GDP might be as low as 4 percent down this year.
The reasons you're well familiar with - sanctions over Crimea, a falling oil price -- devastating to the Russian budget deficit - and a
complete and utter feeling that the economy is somehow grinding to a halt as lack of investment from the West.
Matthew Chance now reports from Russia's biggest air show where Moscow is doing whatever it can to sell its weaponry.
(BEGIN VIDEOCLIP)
MATTHEW CHANCE, CNN SENIOR INTERNATIONAL CORRESPONDENT: The awesome spectacle of Russian air power is ferrying through the sky. This is the
Kremlin's cutting edge weaponry on display and on sale at its most high- profile arms fair.
Warplanes like these are among Russia's most lucrative exports and interest seems high. Despite Western sanctions, delegates from more than
20 countries attended the opening, evidence for the Kremlin it's not isolated.
Male, VIA INTERPRETER: I'm convinced that regardless of the current international political environment, this international aviation and space
salon will serve as an efficient venue for expert level communications and to find new partners.
CHANCE: Potential new partners from states in the Middle East like Abu Dhabi and Jordan where Russia doesn't traditionally sell arms. The
Egyptian president is also visiting Moscow as is the king of Saudi Arabia in what could herald significant deals with Russia.
Well there's a lot of interest in this helicopter. It's called the Ka-52K and it's a new aircraft and it's been developed by Russia to go
especially onboard those amphibious assault ships - the Mistral aircraft carriers that were commissioned from France. That deal never went through
because of the sanctions against Russia over Ukraine.
Now there's word that Saudi Arabia may be interested in buying those aircraft carriers from France and purchasing these helicopters from Russia.
[16:50:13] But by far the most controversial deal may be with the Iranians, soon to finalize the purchase of sophisticated S-300 surface to
air missiles that could shield its nuclear facilities.
We ran into the delegation at the Missile Pavilion. Are you going to be signing this deal for the S-300s today?
KHON SUAVASH (ph) NADER, IRAN DEFENSE MINISTRY: We are - we are considering it then we want to decide.
CHANCE: Ah, but you haven't decided yet?
NADER: Yes.
CHANCE: Negotiations may still be underway, but the coming days could see Russian arms deals go sky high. Matthew Chance, CNN Zhukovsky, Russia.
(END VIDEOCLIP)
QUEST: "Quest Means Business." A powerful voice in the United States media has a message for Donald Trump - apologize for an unprovoked attack
against one of its journalists. Before all of that, though, you need to learn how to "Make, Create, Innovate."
(COMMERCIAL BREAK)
QUEST: U.S. presidential candidate Donald Trump's being called out by one of its most powerful people in American media.
Fox News chairman Roger Ailes has now demanded that Trump apologize to one of his anchors - Megyn Kelly - for what he's described as an
unacceptable and disturbing verbal assault.
Now on Monday Mr. Trump tweeted that Kelly was off her game and he retreated -- retweeted even -- messages from others that had called her a
bimbo. Trump has complained about the journalist since she co-hosted the Republican debate earlier this month over questions about his treatment of
women.
Our senior media correspondent Brian Stelter's with me. Brian, we're tight on time. I'm going to jump the first question. So let me ask you,
why has Donald Trump launched this all of a sudden? This had been dead and buried. Why did he open it up again?
BRIAN STELTER, CNN SENIOR MEDIA CORRESPONDENT: Maybe to his fans the headline is "Trump Gets Tough," "Trump Stays Tough." That's his brand
after all - strength, projecting toughness.
But it has a possibility of really backfiring. So many journalists are standing with Megyn Kelly and are perplexed that he's attacking her 19
days after the debates. But he's clearly unhappy with her coverage.
He must have been sitting at home last night, watching Fox News and yelling at the TV. But unlike the rest of us, he has millions of Twitter
followers he can yell at.
QUEST: Right, but he also must have known Roger Ailes having had a detente -
STELTER: Right.
QUEST: -- or at least a peace agreement.
STELTER: That looked like a truce, yes.
QUEST: Yes, truce, thank you. That's the word I was looking for.
STELTER: But no more, no more.
QUEST: A truce. Having had a truce with Ailes, Roger Ailes isn't a man you fight.
STELTER: Absolutely not. He grew up reminded by what his father taught him which is don't pick a fight with a guy who likes to fight.
Ailes usually says that to his rivals - don't fight me, I like to fight. But so does Trump. That might be the challenge here.
They've met their match. Trump and Ailes are both fighters, neither of them want to appear to lose here, so for the time being they do seem to
be at war.
QUEST: The only difference is --
STELTER: I don't think we're going to see Trump on Fox News this week for example.
QUEST:
QUEST: But the only difference is Roger Ailes didn't start this second one - second blast.
STELTER: (LAUGHTER).
QUEST: I mean, Roger Ailes must be sitting in his office over on (Inaudible)) thinking, 'What on earth happened here?'
STELTER: He's fed up, he's fed up. I was told he feels that what Trump's doing is disgraceful and this is something that now goes into a
whole new round between Fox and Trump.
The question is whether Trump can continue to win in the polls without Fox News. Maybe he doesn't need the Fox megaphone, but most of the people
I talked to think he does.
[16:55:02] QUEST: Ailes used one interesting word. He described it as "disturbing."
STELTER: Right.
QUEST: And that sort of suggests is Trump playing with a full pack?
STELTER: Yes, earlier Fox also used the word "bizarre" to describe one of his conspiracy theories. I have had - people have talked privately
say Trump, that guy's crazy. You know, that's how they talk about him privately but for it to become public will be a while new thing.
You know this goes even higher than Ailes. It goes to Rupert Murdoch, the head of all of 21st Century Fox and News Corp. The other day, Murdoch
- he's out on the Great Barrier Reef vacationing apparently. He tweeted that Trump is a very serious candidate but he now wants to see Michael
Bloomberg, another billionaire, get into the race.
He wants to see Bloomberg run for president. I think maybe Murdoch, maybe Ailes are out there looking for some sort of alternative to Trump.
QUEST: We are not having an alternative to you.
STELTER: Well thank you.
QUEST: Thank you sir.
STELTER: Good to be here.
QUEST: I'll have a "Profitable Moment" - if there is any profits left in the market - after the break (RINGS BELL).
(COMMERCIAL BREAK)
QUEST: Tonight's barely "Profitable Moment." Look at how the week has traded. A loss of more than 1,800 points since last Wednesday and
there seems to be no end in sight.
The problem of course is China and the worries because as you heard on this program - from Austan Goolsbee, from Ken Rogoff and from others -
nobody knows the true situation. That's the real problem with China. Nobody knows how far or how deep.
As for the U.S. markets, well and truly now, are not in technical but a deep correction - off some 14 percent since its all-time high back in
May.
But tomorrow's another day, there are many more markets to trade, and who knows? The rally may be around the corner. Maybe.
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) I do hope
it's profitable. I'll see you tomorrow.
END
