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Quest Means Business
Dow Falls 1179 Points, Biggest Points Drop in History. Aired 4-5p ET
Aired February 05, 2018 - 16:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
[16:00:00] RICHARD QUEST, CNN HOST: Closing bell ringing on Wall Street. The Dow Jones is off very heavily. The worst percentage point fall since
2011. The misery of the day need to come to an end. The closing bell has rung. Trading day is over.
Before we go any further, let's look at the Dow so you can see exactly how the Dow has proceeded a loss of 4.6 percent, over 1,100 points off the Dow.
The market is now down 8 percent since its all-time high. There isn't a single Dow stock that went positive with even Apple losing 2.2 percent at
one end, which was the best performer. ExxonMobil down 5.5 percent. Trading is now over for Monday, the 5th of February.
There is only one story in the world of economics, the biggest points drop so far. I'm Richard Quest live from the world's financial capital, New
York City, where I mean business.
Good evening. Tonight, it makes ugly viewing if you are long in stocks for anybody interested in financial markets. Us stocks almost into free fall,
as the Dow suffers its worst single day point fall some 1,179 points. It's the largest single day points fall in history. But, you know, we have to
keep that into context. It's the worst fall in percentage terms since 2011.
So how did the day actually proceed? The Dow went vertical just after 3:00 p.m. down nearly 1,600 points. Come over and I'll show you exactly how
the day has proceeded right the way across the world. Let's show you the Dow Jones as it proceeded throughout the course of the day. We bring up
the map of the Dow. This is how I can best show you.
We start down and then as the day moves on, we edge up just a little bit over there. And there's a moment when it looks like the Dow might actually
go positive but then things really start to get bad. The Dow falls even further and just after 3 o'clock a weird sort of reasoning, no obvious
reason. President Trump was speaking, but at the moment, I don't think that had anything to do with it. The Dow takes this massive tank where it
drops from about 700 or 800 and it goes down some 1,500 points. Then it recovers and we're seeing swings of between 2 to 3 percent. At the worst
point of the day down here that's a loss of some 5.5 percent.
So, let me show you, that's what happened in New York today let's begin with the way the world moved across. Remember, it all starts from a 666-
point fall, a 2 percent fall on the Dow in the New York markets on Friday. That is the scenario with which the rest of the world went into the weekend
and traded. Let's start with Asia and you'll see the Friday effect immediately hit home into the New York effect into Asia. The Nikkei was
off 2.5 percent. The Hang Seng down 1 percent, Seoul 1.3. Only the Shanghai composite for some completely unrelated reasons, banking stocks
supported the gains in Shanghai. Otherwise, everybody else trading on the back of what they had seen on the Friday session. Then as the sun rises
and the world turns, we move on to world turns, we move on to Europe where the losses continue. Because now Europe hadn't had a full chance to react
to Friday, and so we get some quite I suppose, modest losses all in all, smaller losses. The FTSE down 1.4, Paris is off 1.5, similar losses. Only
Frankfurt manages to basically buck the trend.
[16:05:00] And then the U.S. for all the reasons that we know about. A new Fed chair, Jerome Powell who takes over. Worries over rising interest
rates. Concerns about higher inflation. Deep worries over rising wages. All of this with companies that are quite heavily indebted, and you see
what's happened on today's market particularly as Jerome Powell takes over.
Jeremy Siegel says a correction may be just what investors needed. He's a professor at the Wharton School, a business school in the University of
Pennsylvania. I see you've got your -- well, congratulations. I see you got your super bowl hat on. We shall allow you that moment of celebration.
JEREMY SIEGEL, PROFESSOR, WHARTON SCHOOL OF THE UNIVERSITY OF PENNSYLVANIA: Thank you. I was there at the game last night.
QUEST: Well, you can celebrate that because you've got plenty to commiserate today. What happened today?
SIEGEL: Yes
QUEST: What happened?
SIEGEL: So, the market, it had gone up too far too fast. We have a tremendous number of momentum players that joined the market upswing. In
other words, they were riding the trend. They didn't care about values. They just knew it was going up on 100, 200 points every day and were going
to ride it. And they said, well, you know, when it starts going down I'm jumping off. They put their stop orders on, which means sell when it gets
below a certain level. They draw their trend lines and that's exactly what happened. When you have a trending market, you often have this momentum
players, you have them jumping off and you have that tremendous sharp decline such as we had Friday and particularly this afternoon.
QUEST: Right, but --
SIEGEL: There's really nothing fundamental except that the market had overrun fundamentals earlier and I think it's now coming back to a much
more realistic level of prices.
QUEST: OK, but within that -- within those parameters, the VIX index, for volatility, that Rose some 76 percent today. With the CNN fear and greed
index has dropped down to 40, which is into the fear territory. So, we are clearly seeing the effects not only at the momentums but also of the high
frequency trading, algorithmic trading, all the things that make it more volatile.
SIEGEL: Well, whenever you get a sharp drop, and this is like you can bet a dollar against a dime on this, you will have a sharp rise in the VIX.
Every sharp drop that we have had over the last ten years, I'm not surprised, go to 30 or 35, almost to 40 these are really high levels which
is really prompted by a lot of people trying to buy what's called put options, which are basically insurance policies against a further decline.
And they bid these insurance policies up, widen those spreads and that causes the rise in VIX. But it's not at all atypical, in fact, it's
extremely common sharply declines in the market are associated with sharp rises in the VIX volatility index.
QUEST: Now, if we look elsewhere, we see gold didn't really do much today. It just put on a third of a percent, which suggests that we're not looking
at anything incredibly fundamental going on here. But, but, the bond, the ten-year bond, did give back some of its yield, drop something -- the yield
dropped overall, something like 2 percent overall on a percentage basis. That, of course, reverses --
SIEGEL: That is also very common. When you have a big gap in the market, a big shock in the market, people run to treasuries. That's the hedge
asset and, you know, 20 years ago used to be gold, I'm going to go to gold. But that has lost its edge there. People will go to treasuries. They did
during, you know, the financial crisis. They did when, you know, when S&P downgraded even the treasury people even rushed into treasuries because
they want safety.
QUEST: Right
SIEGEL: The safest asset in the world is still considered U.S. treasuries.
QUEST: Right.
SIEGEL: So, when risk assets are collapsing, that's called a risk-off scenario, it is extremely common to see that tremendous rise people go to
treasuries and that brings down the yield. I was actually watching it on the screen and as the Dow was going vertically downward, treasury bonds
were going vertically upward. I can just sort of see that money flowing from stocks to bonds. Again, a very common risk-off/risk-on type of a
situation when you do get a plunge in the stock market.
[16:10:00] QUEST: So, take it -- we've got some time, let's delve into this just a little l bit deeper. And yet it was arguably the rising yield
and the fall in prices -- the rising yield over 2.8, heading toward 3 percent that precipitated Friday's fall in the Dow. Which led everybody to
assume the four-interest rate rises from the Fed this year higher that was going to push yields higher. Now we're seeing the bond being a beneficiary
of the very mayhem arguably it created, from last week.
SIEGEL: Yes, and you're exactly right. And it was the rise in the yields. I mean, the two biggest impact on stock prices are earnings and the
interest rate. And when those bond yields -- when we got that -- the wage report, 2.9 percent, that put the fear, oh, my goodness, maybe there's
going to be for increases by the Fed. You know, I fear that the ten year is going above 3 percent by, you know, maybe six months. And they did bid
it up to 2.85 and that was the cause of that decline. But then when it accelerated by the momentum people saying, all right, I'm done with this
rise, and they jumped off.
You got that totally opposite knee-jerk reaction when there's tremendous fear risk-off on the markets, I go to treasuries. So, they did actually
get that gain even though you're absolutely right, Friday and I actually think through the rest of this year, it's going to be a struggle for
interest rates. Because I think -- I think they're going over 3 percent. But in the short run, when you get these vacuum types of drops in the
market, the treasury will respond positively.
QUEST: Professor, we'll be back with you shortly later in the program because I want to discuss with you what you think the Fed's options are,
bearing in mind they don't want to scare the horses. But they have now got arguably an inflation. Stay with us, professor, and we'll talk more in a
moment.
Just a quick look while we look see exactly the minutia of what happened. And you do get a very good idea here over the whole amount. Exxon is the
worst on the Dow, down 5.5 percent. 3M just came in at the last minute, it was actually Boeing -- not surprisingly with Boeing, it had such a run-up.
The stock is up something like 20 percent this year or 14 percent this year. So, that's not surprising that that one has fallen back.
Caterpillar, again, even Apple which was one of the few stocks during the course of the day that remained positive was Apple and Intel. And then in
the last hour, both of them went negative, obviously nowhere need to the extent of the rest of them. Clare Sebastian is at the New York Stock
Exchange and joins me now. Clare, this was ugly at the exchange. Was there a feeling of fear or panic?
CLARE SEBASTIAN, CNNMONEY CORRESPONDENT: You know, Richard, the interesting thing is that there only was when it really started to
accelerate later on in the afternoon. Don't forget the market opened down quite far and by lunchtime is nearly dipped into the positive, the Dow. We
went down to speak to some traders and told us, you know, we've just been waiting for this to happen, really. The bull market has been going on for
so long. One of them talked about the VIX index which actually almost doubled today up to 32. Bear in mind when you and I spoke on Friday, it
was only at about 17 percent which is still high based on the last year. They said we need the VIX. Volatility is good for them. That's where they
make their money.
But in terms of tension, we really only saw it when it crossed the down 1,000 mark later on in the afternoon. Then we started to hear some noises
coming out from the floor and really the sense that people were getting quite fearful. You know, the tipping point really when selling begets more
selling, I think that's what we were seeing later on in the day.
QUEST: OK, look, if you join me while we look and see exactly the points move that we've seen over the last few sessions, and you think that today
the range was some 1,500 points, bearing in mind the worst to the best. So, look so far, today 1,500, Friday was 696. This is the swings when it
goes positive to negative. This volatility that you're talking about is very disconcerting to ordinary investors.
SEBASTIAN: Yes, absolutely, Richard. And particularly in this market, you know, I was speaking to Sam Shovall from CFRA, he tracks historical trends
in the market earlier. He gave me a really important number, 564 days, Richard, is the number of calendar days up until the peak on January 26th
when there wasn't a 5 percent pullback. Now apparently, according to Mr. Shovall, that was the longest since the end World War II that we've seen
that level of stability in the market. So really, the VIX is the one look at today. This is really a new stage that we're seeing. If this
continues, then we are going market, you know, different behavior in the market, more speculation, perhaps.
QUEST: Clare --
SEBASTIAN: Yes.
QUEST: Clare, golden move much. Oil was off 2 percent and that obviously had an effect on the dollar, and arguably some key stocks. But gold didn't
move.
[16:15:00] SEBASTIAN: Gold didn't move that is interesting, Richard, because as you and I know, often when you see this kind of market
volatility, investors are running for those safe havens like gold. And of course, the percentage drop was significant today. Doesn't take away from
the fact that over the last year, the Dow is up -- is still up some 20 percent even with these losses.
QUEST: So, I don't know whether you can see from where you are, and feel free to turn away from me if you need to. What was volume? About half an
hour, 45 minutes toward the close, volume was 800, 900 million. Did we go over a billion?
SEBASTIAN: We haven't got a good view from here, Richard, but about 800 is the last number we got. That was on a par pretty much of what we saw on
Friday. It may have accelerated before the close there, but certainly based on the last couple days, that was on par with what we've been seeing
but still higher than average.
QUEST: Just looking at all the different sectors, everything was down. The dollar index was up, the yield was down, retailers were down, drugs
were down, drug stocks were down, real estate, gold, everything was down. And it was heavy selling as well, wasn't it? I mean, I'm just looking,
again. The actual down volume versus the up volume 773 million versus 61 million, so we actually saw some real activity in this market.
SEBASTIAN: Yes, absolutely. Now in terms of a correction, Richard, by my calculations we're down 8.5 percent since the peak on January 26th, the
post-Davos peak. After we saw Donald Trump in Davos touting the U.S. economy was open for business. I think the sense here, certainly from the
people I've been talking to, is we are going to see that down 10 percent range, that technical definition of a correction. But not perhaps a bear
market. That according to the people I was speaking to only really happens when the economic fundamentals aren't there, and as you know, they very
much. The jobs market proves that on Friday.
QUEST: Unless it becomes a self-fulfilling prophecy. Thank you, thank you Clare Sebastian at the market. Plenty there to keep you busy. We'll
continue we need to analyze exactly now where this market goes next. OK, it's one thing to have a fall. It's another thing to prevent it from
becoming a catastrophe and to work out the policy prescriptions that prevent that from happening. Its QUEST MEANS BUSINESS.
(COMMERCIAL BREAK)
QUEST: Recapping today's stunning losses on Wall Street, allow me to put it into some context for you. The free fall nearly 1,600 points, the
largest intraday decline in the Dow's history, or into context, of course, the Dow is now 25,000, 26,000. It's left the Dow negative for the year.
All of this year's gains have now been wiped out. However, percentage wise, black Monday, 1987, the Dow fell 22 percent. And in 2008, the Dow
fell as low as 7 percent in one day today, the Dow closed down 4.6 percent.
[16:20:00] CNN's economic analyst Stephen Moore joins me in Washington. Before we get into, if you like, the political spinning, aspects of this, I
think you got to agree, ordinary investors seeing this find it a troublesome -- it's worrisome.
STEPHEN MOORE, CNN ECONOMIC ANALYST: Oh, for sure I mean, you know, you're talking about 1,000 -- what is it, a 1,200-point decline, and counting on
what happened on Friday, Richard. Were down 1,800 points. So, that's a giant selloff. You know, that's the loss of almost $2 trillion in
financial wealth. So, of course, it's troubling I wanted to just make one point about 1987, because I remember October 1987, I don't know if you do,
Richard. But, you know, that was, what did you say, 20 percent decline in the Dow in one day. And here we are 30 years later, and people look back
at what happened on that fateful day in 1987, and there's still not a consensus about why it happened. And so, the reason I mention that is
because we may look back at this, you know, six months from now, or a year from now, and not know exactly what happened. Would you like my
hypotheses?
QUEST: Oh, of course go ahead.
MOORE: OK, all right. Look, I think what happened is that on Monday -- on Friday morning --
QUEST: Yes.
MOORE: -- we had two very positive reports on the economy. We had a good, positive jobs report with healthy increases in wages that were faster than
any time we've had in a decade. And then we had the Atlanta Federal Reserve Bank come out with a report about that same time that suggested
that we might have 5 percent-plus growth in the economy in the first quarter of 2018. Now, those are good-news signs in the real economy. And
I believed what happened is that Wall Street got spooked. Because they believe that that high economic growth, if we were to attain it, we haven't
had 5 percent growth in 30 years, would lead to inflation, higher interest rates and it just spooked everybody, and you got this selloff.
Now, I'm one of these people who does not believe that higher wages and more productivity and more people working, and more growth leads to, you
know, higher interest rates. I just don't get that. I mean, look, when you get real -- you know, when you normally get real growth in the economy,
you do see a, you know, nudging up in real interest because there is more of a demand --
QUEST: Hang on a second hang on. I mean, Larry Summers is writing about that in this morning's "Financial Times." You may have seen his article.
That is the argument, what does he call it, secular --
MOORE: Stagnation.
QUEST: Secular stagnation.
MOORE: Secular stagnation.
QUEST: Yes, but in his case, he points out that Janet Yellen has redefined or accepted a lower definition of what interest rates can go to.
MOORE: Well, look, it's an interesting thing that you brought up secular stagnation because the truth is Larry Summers has been wrong for the last,
you know, nine months. I mean, we've had averaged 3 percent growth. And Larry Summers said it was impossible to get the three percent growth. And
now people are saying we can four to potentially five percent growth. Now, that's real growth. That's after accounting for inflation. And, look, we
had, you know, if you look back at the 1980s, for example, Richard, when we had rates of growth, you know, we had annual rates of growth a couple years
of 4 percent, 5 percent, 6 percent growth, and yet the inflation rate fell over that period. So, again, I don't think real economic growth
necessarily means you have to have more inflation. I reject the Philips curve I think too many people, too many of your friends on Wall Street
believe in the Phillips curve.
QUEST: OK let's just go deeper into this.
MOORE: OK.
QUEST: Do you think there's an inherent risk for the president touting the stock market rise, particularly -- I think back to a few months ago, he
stands in front of a fireman, I think in New Jersey, he says your 401(k)s, you won't know what your 401(k)s. Well, those same firemen tonight are
looking at their 401(k)s -- that's the pension funds for international viewers -- they're looking at that and saying, Mr. President, my 401(k)'s
given back much of the gains.
MOORE: Well, I mean, yes and no. Has this been a big, big selloff? No question about it. We've lost 2,000 points on the Dow, but, remember, you
know, we gained something like 6,000 or 7,000 points since Trump was elected. So, you know, it's given back maybe 25 percent or 30 percent of
it, so people are still way, way ahead of the game in terms of what's happened in the last 14 months. But I agree with your fundamental point.
And I've actually said this, that presidents should not look at the stock market as necessarily an indication of how well they're doing. Because
it's a roller coaster ride, right? It goes up and it goes down. If you want to live by the Dow, you're going to die by the Dow.
[16:25:00] QUEST: So, what does Chair Powell do first meeting in March? Clearly, if this volatility continues, the last thing you want to do is
raise rates, which is what they were planning or think doing. I mean if you look at expectations. You got to soothe the markets and the best way
to do that is through the statement.
MOORE: Yes, look, I think that this selloff, and, by the way, who knows what's going to happen tomorrow or the next day. I mean, we could see a
500-point gain, and everybody is just going to forget this. But as the Fed chairman and the other members of the Fed -- Federal Reserve look at what's
happened and how even the threat of higher interest rates is spooking people, I think it will give them pause and maybe they will hold pat for a
while. I'm not recommending that, but you got to get it in these people's head. And they don't want to see a stock market crash.
QUEST: Stephen, good to see you. Thank you. We need is your economic analysis.
MOORE: You, too.
QUEST: Stephen Moore joining me.
Now, to the stock exchange again. Ted Weisberg is the founder and president of Seaport Securities. Ted, you had said to me many times that
it couldn't continue. The question was not if, but when. Is it your feeling we've got more days of this ahead?
TED WEISBERG, FOUNDER SEAPORT SECURITIES: Well, possibly, Richard. I mean, no one knows. Unfortunately, they don't give us a crystal ball and
they don't ring a bell. If they did, it would be a lot easier and we'd be sitting on a yacht someplace in the Mediterranean. You know, this is a
risk business. It always has been a risk business risk business, and it will continue to be a risk business. Trees don't grow out of the sky. We
knew there was a correction in here somewhere. It's easy to be philosophical about it. The fact is, and you just mentioned it with your
other guest, you know, we've given away January, at least until now, and we're starting over. And as ugly as it is, I don't think we're looking --
I don't think we're looking at a 2008-2009 kind of situation.
QUEST: Oh, no, no I don't think that at all.
WEISBERG: We are looking at just a correction.
QUEST: Right. But let's talk about that. From what you saw today, and I'm looking at volume at the moment, volume was over 1 billion shares.
Heavily, obviously, on the downside, on the sell side. I mean, was this momentum trading today or was this real selling?
WEISBERG: Well, the answer is yes, it was -- it was real selling, no matter where it came from. But probably more of a lack of buyers. I mean,
there's a lot of internal things going on. A lot of stop orders get hit. Years ago, we used to see where the stop orders were and there were dealers
-- a lot of dealers that basically would be there to take out some of this volatility. Now everything is opaque. You have the stop orders, no bids.
I mean, at one point, Caterpillar, we had a customer that elected a sell stop at 148 and got an excuse at 142, down $6. I mean, that never would
have happened five or six years ago. But these are the markets we live in today. A lot of computer driven trading. A lot of opaque markets that you
can't see anything, and the risks clearly have gone up as the market has gone up.
QUEST: What about question of margin? Any issues on that as we -- I mean, are these sort of down 3 percent on -- 2 percent on Friday, down 4 percent.
If we're down 8 percent to percent from the all-time high, at what point do you get concerned on margin calls?
WEISBERG: Well, I mean, I can tell you at Seaport we're always concerned, and I'm sure other firms are concerned, too. And clearly overnight, you
know, you're going to have -- you know, margin I think is at all-time highs now. So, clearly that's going to be a problem. At what percentage does it
become more of a problem? It sort of tends to feed on itself, Richard. You know, becomes kind of like a little bit of a steamroller. But the
margin calls. If there are any, will go out around 11 o'clock in the morning. So, that selling will come early, not later in the day. But
clearly, it's something I'm sure a lot of firms are looking at now to see what shape a lot of their customer accounts are in.
QUEST: Tell you, I'll probably see you tomorrow, "QUEST EXPRESS," I'll be down at the exchange. If you're there tomorrow, we'll share a cup of
coffee. Good to see you, Ted.
WEISBERG: Good to see you, thank you.
QUEST: It's one of those sorts of days. Trying to make sense of it.
When we come back, we do need to understand what the Fed might do next you heard Stephen Moore talking about potential ways in which the Fed can
soothe the markets. We need to get to grips with that. It's QUEST MEANS BUSINESS.
[16:30:00] (COMMERCIAL BREAK)
QUEST: A steep selloff on Wall Street, look at the numbers the Dow fell more than 1,500 points at one stage then pulled back off 1,175 the index
closed off 4.6 percent and the volatile trading extended across the board, the S&P 500 and the Nasdaq both ended sharply into the red.
The president of the Maldives has declared a state of emergency as a political crisis there escalates the president is facing a backlash for not
enforcing a supreme court order to release political prisoners including the former President, Mohamed Nasheed.
Former Team USA gymnastics doctor, Larry Nasar, has been sentenced to 40 to 125 years in prison for sexual abuse the Michigan judge says she wasn't
convinced Nasar was, Nassar told the court he was sorry and more than 150 victims' statements in the past few weeks had impacted him to the core.
So, whichever way you look at it, it was a particularly dreadful day on the world's stock markets, the issue is whether what we've seen is a correction
or is it a calamity? So, if you join me, let's take a some of the biggest names. First of all, this is the Dow 30, and you will see every single
stock in the Dow was off. Some as much as 5 percent, 5.5 percent. Disney down 3, GE -- I mean, GE just had a horrible, horrible year so far. In the
stock in our world under 15 at 4.38 percent.
But the issue is which stocks have now lost 10 percent or so of their value. Thus, making them an official correction? Well, the big three
airlines, American, Delta, and United, they are off sharply. We know the reason for that, after United pretty much started a capacity war and said
prices and the yields will be under pressure, all three of the major airlines fell sharply in response, so we know why the airlines are down
sharply.
You've got the tech giants, you've got even Apple which has had a really bad, nasty year. Ford which warned against its earnings and against its
costs and said it was going to be. IBM was the dog of the Dow, as we came into 2018. IBM has not recovered ever since, and then you got oil
companies, now Chevron, a good dividend play on Chevron.
AT&T up to its eyes in litigation with the Time Warner parent company of this network, the court case for that starts next month. Starbucks, growth
issues. General Motors, interesting, Mary Berra has had a good run-up in General Motors, and the stock is now in market correction. But the point
about this is, these are major stocks, major companies that are already lower, 10 percent from the all-time highs.
Bob Iaccino is the founder and chief strategist of Path Trading and he joins me from the Chicago Merc. It's not surprising and I'm guessing, Bob,
that you will or would expect to see more big names joining the illustrious bunch down 10 percent.
[16:35:00] BOB IACCINO, FOUNDER AND CHIEF STRATEGIST, PATH TRADING: I would, Richard, thanks for having me. I would buy almost all of the stocks
you mentioned. But not today. It is interesting I wouldn't go into the airlines just, yet I probably would wait longest on those because if the
selloff continues, when people feel poorer, the first thing to suffer is a vacation, so you're going to see some suffrage on the airlines there as
well. They've been hedging their jet fuel with crude oil where it is, so we are okay on the cost side of things.
But essentially when we get so lost like this, I think a lot of people have gotten used to them, I'm sure you've talked with other guests about this,
but the calm that we've had over the last 24 months or so in the markets is really the unusual thing. When you look at what the Dow has done over the
last three days, it's the largest three-day drop since 2015, it's not even three years ago. The record without a 3 percent fall in the Dow, the S&P
rather than just fell, it's 400 days that's not a lot. So, I mean these things are typical.
QUEST: OK. They're typical, but the swings and the volatility, which the markets like, people like you like to a certain extent.
IACCINO: Love them.
QUEST: OK, since we have a moment or two more than usual, explain to the viewer watching in Rome or Delhi or Moscow or Tel Aviv tonight, why is
volatility your friend?
IACCINO: Essentially when you look, we talk about the stock market in the U.S. from 2009 until now, was basically a straight line, the stock market
since its inception to now has basically been a straight line up. If you go to a sophisticated hedge fund investor and you say I have an investment
for you that returns 7 percent, 8 percent a year, every ten years or so it goes down 50 percent, they'd tell you you're nuts.
But that's the stock market. OK, there is no outperforming the stock market from a buy and hold prospective, where you can outperform the stock
market is to the downside, not to the upside. And this is where people get a little bit confused on selloffs this. This is not unusual they're going
to sell off overnight, overseas they're going to, but they're going to recover as well, the fundamentals, globally, are really strong, Richard.
QUEST: So briefly, what does it take to break this cycle if it can be broken?
IACCINO: Which cycle, two or three days lower versus 400 higher? I don't see that as cycle.
QUEST: Good point
IACCINO: To me again, we've got -- we essentially have the S&P 500, 50 percent of the companies have reported, 75 percent beat on earnings and 80
percent beat on EPS, 75 percent on revenue, 13 percent blended earnings growth rate. Highest PMI in the EU the last 11 years. Things are really,
really good.
QUEST: All right. Bob, we'll talk more, thank you sir, for the common sense from Chicago.
IACCINO: Thanks, Richard.
QUEST: Now the jobs and the report that we saw on Friday along with the wage growth that we experienced, well, it was partly -- that was the reason
for the selloff. Robert Reich is the former U.S. Labor Secretary and a senior analyst joins me from Berkeley, California. When you saw today's
market fall on the back of what we saw on Friday, were you surprised?
ROBERT REICH, FORMER U.S. LABOR SECRETARY: Richard, I was surprised at the magnitude of today's fall, but I wasn't surprised at the fall, itself,
because not only have the markets kind of expected a correction, as it were, but also you have this massive tax cut going into effect you have a
new chairman of the Federal Reserve board, Jerome Powell. And the old chairman who is very, very well-respected and liked and which the markets
had a great deal of confidence, Janet Yellen has left, and you also simultaneously, this is like a perfect storm, you have the Treasury
Department in the United States saying that the date by which the debt ceiling has to be raised has been pushed upward. Now, you look at all of
that, and you look at also the fact that consumers and workers have been getting a little bit of a raise, well, inflation, the fear of inflation,
and the stock market's natural fear of uncertainty all conspires here.
QUEST: All right, so I need to push forward in the sense of what -- what do you -- what do you believe should be the Fed's response without being,
obviously, knee jerk because they're looking six months, nine months, x number of months down the road? But if this volatility continues at the
next meeting, the expected rate rise clearly can't happen, or can it?
REICH: Well, it could happen, but Jerome -- Jerome Powell who's going to be the new Fed chair, the good news is that he, for all appearances, is
very much in the same ballpark as Janet Yellen.
[16:40:00] He has said -- everything he's said, everything he's done so far indicates he will not depart from Janet Yellen's general position which was
to -- not to raise interest rates until they -- it was clear that they had to be raised, and until it was clear that inflation was a threat. Now,
that doesn't mean that the Fed will refrain from raising interest rates, it just means that I doubt very much that there is going to be a substantial
hike. But what's happening right now is that the uncertainty about what the Fed is doing or going to do with this new chair, particularly, and
given the tax cut, all of it combines to make the market very jittery.
QUEST: You would agree, though, that talk of sort of -- and I don't in 2008, 2009 again, let's put that to one side. There's no reason for
anybody to be thinking in those terms but more than a correction, up to a bear market of, say, a loss of 15 percent to 20 percent, a sustained loss
and the economic fundamentals wouldn't justify that.
REICH: No, the economics will not justify that kind of a correction, that's deep correction, no. I think that and again, it's always hazardous
to guess where markets are going, because the markets are responding to where the markets think other investors are going. But undoubtedly, there
has been sort of a correction, I would say, probably in the serious but not really hazardous realm. I think the market once it knows what the Fed is
likely to do, once it knows what inflation is likely to be the market is going to resume an upward trajectory I don't think this spells doom with
regard to the stock market.
QUEST: When you were in government and in your, obviously, work since, you're very familiar with the wealth effect, we saw the wealth effect being
very significant in the '80s when it was huge in the U.K., we saw the wealth effect being very significant after 2008-2009, if people feel poorer
because of this, that can create a self-fulfilling prophecy.
REICH: Yes. It could, but remember, and this is very, very important, at least in the United States, the stock market is not a major factor in most
people's consumption patterns because so much of the stock market owned by people who are very wealthy. The richest 10 percent of Americans own 80
percent of all shares of stock, so their consumption patterns are not going to be dramatically affected by this kind of a selloff over the last three
days. Now, if it continued to be a major selloff, if it started to affect pension plans, if it started to affect the total kind of confidence people
had in the stock market, and in our financial system, then you could see a bigger rout. I don't think that's going to happen.
QUEST: Good to see you, secretary, thank you for joining us, I appreciate it
REICH: Thank you, Richard. Bye-bye.
QUEST: Our goal tonight is to make sense of this for you, so that when you see what happens in Asia and in Europe, as the world turns, it all makes
sense in the global picture. This is QUEST MEANS BUSINESS.
[16:45:00] (COMMERCIAL BREAK)
QUEST: If you think the Dow had a bad day, Bitcoin's was worse, the price is now hovering around $7,000. A jaw-dropping loss of nearly 15 percent
just check the numbers there. 15 percent over the course of the day. So dramatic over the recent weeks, several major banks in the U.K. and in the
U.S., are making moves to block customers from buying the cryptocurrency with their credit cards. As far as the latest fall is concerned, it's
still the biggest in the short Bitcoin history. It is one of the big three the worst was 71 percent in April 2013, 16 percent in '11, 57 percent so
far from the all-time high so far this year. Joining me is David Wachsman, he's a Bitcoin and digital currency expert, and Shelly Palmer.
Good to see you. Let's start with you.
DAVID WACHSMAN, BITCOIN AND DIGITAL CURRENCY EXPERT: It's had a rough day.
QUEST: Well, I'd hate to see it have a bad day if that's rough day, OK.
WACHSMAN: It's a volatile cryptocurrency, it's been volatile its entire life, only a year ago, Bitcoin was hovering far less than it was today, and
people were wondering could Bitcoin ever eclipse 1,000? Here we are today at 7,000 yes, down 57 percent from its all-time high, but still up
significantly from where it was a year ago.
QUEST: Would you accept that as a result of these volatile moves, it cannot legitimately be considered a currency?
WACHSMAN: I don't think it's because of the volatility it can't be a currency, it's because it's not very spendable as a currency Bitcoin simply
doesn't act fast enough to act like a currency.
QUEST: The volatility is the reason in the sense I would be horrified if the dollar moved 57 percent.
SHELLY PALMER, CEO, THE PALMER GROUP: No. It can't move, Richard, because you can't literally spend it, it takes 45 minutes to clear a transaction,
and it doesn't solve the problem. The banking system in the United States and worldwide, it takes nanoseconds to clear a transaction it takes
literally 45 minutes to an hour to clear a Bitcoin transaction. So, it's not a currency. That's why it's not treated as a currency.
WACHSMAN: And a minimum of at least ten minutes to clear.
QUEST: So, we're talking now about this fall, when it got to 19,000 or whatever it was, we knew that was not sustainable, it was just a question
of how far and how nasty. Do you see from what you're talking to the market today, the Bitcoin market, that there may be some element of its hit
a bottom?
WACHSMAN: Well, I certainly hear a lot of people who think this is a great time to buy I'm hearing that quite a lot, I'm not someone who's investing
in Bitcoin right now, but I do think that it is certainly going to increase over time, cryptocurrencies as a whole, as
the entire asset class is down substantially from what it was earlier this year.
QUEST: Which is good.
WACHSMAN: Yes, it is.
QUEST: I want to show you the Dow 30, Shelly, the Dow 30 and we saw today the two stocks, Apple and intel, they fell the least and, in fact, for much
of the session, they were actually up and this is on the rumor that Apple is potentially ditching Qualcomm for its phones and going for intel and
stuff, Now, I know we don't comment on rumors, and it would behoove me not to raise them, but what do you think?
PALMER: So today was a crazy day, Apple may well change their chip manufacturer, it's possible they've done an amazing job with Samsung. One
thing I will tell you, Richard, is that we don't know what the future of handsets actually is, so we know that there are all kinds of new chip that
need to be created. I'm not sure that that rumor which I heard, too, had any impact today at all.
QUEST: The Apple share price suggests the market at least temporarily has fallen out of love with, it is one of the stocks that is now fully 10
percent off its all-time high in a correction if you like. I know you don't comment on share prices as such, but knowing what you know about the
company, its pipeline, the iPhone sales, does that justify what is being done to the share price?
PALMER: So, it depends how you look at the market, if you're looking short term at Apple, there are certain indicators that tell you that they're
going to have a kind of a year coming up, if you take the long view of Apple, you have to take the long view of the sector which says that this is
going to be an awesome time for tech and this is just an adjustment.
QUEST: An awesome time for tech, an adjustment, an awesome time for cryptos with an adjustment?
WACHSMAN: I think it's going to be a fantastic year for cryptos in the end, you got a huge, huge asset class with lots of different types of
technology below it and I think what you're going to see is the overall market for crypto is going to significantly increase over time.
[16:20:00] PALMER: May I?
QUEST: Go on, last word.
PALMER: You believe someone's going to pay more than you did? That's the belief system now when it changes --
WACHSMAN: That's not accurate, cryptocurrencies can be many different things and in fact most of them or other currencies, but they are digital
assets and there are very, very interesting types. There's going to be security tokens coming out this year, in security tokens open up a whole
new can of worms.
PALMER: I'll accept that, a new can of worms. I will.
QUEST: Can of worms, the last thing we need is a can of worms today, keep your worms to yourself.
A triple digit fall, the Dows worst ever we're going to take a step back, all the hyperbole of, I can hear some of you saying, Quest, calm yourself.
We shall do that after the break and put it into context.
(COMMERCIAL BREAK)
QUEST: Financial, health, industrials, energy, the big losers in today's rout on the market for that is what it was, the Dow and S&P. Look at the
triple stack, the Dow was off 4.6 percent. The S&P 4.1. The Nasdaq slightly less but still 3.78 percent.
Essentially the Dow and S&P have both given back their gains for the year, and the VIX had its biggest jump, one day job ever, 76 percent by my
reckoning. It was up 13 points on the market. Clare Sebastian is at the New York Stock Exchange. Rana Foroohar is CNN's global economic analyst
also at the FT and joins me from there.
Start with you, Rana, all right, we are not aging either of us here, but we are both students of more than a few market dislocations over the years.
Does this worry you?
RANA FOROOHAR, ASSOCIATE EDITOR, "FINANCIAL TIMES": You know, it doesn't yet, and I'll tell you why, I don't mean to down play the fact that we've
had a big dip and has a big impact on average people but think about where growth is. We are in a synchronized global recovery right now. The reason
this entire market event is happening is really I think because of Friday's news that wages were up so strongly, that's something we've been hoping for
a while now. At the same sometime, Europe is doing well, Asia's doing well so I see higher rates themselves, which is part of wages going up. You our
probably going to get higher interest rates that makes the markets go down, but that correction was necessary and potentially healthy
QUEST: Claire Sebastian, do they see it as necessary and healthy down at the exchange?
CLAIRE SEBASTIAN, CNN CORRESPONDENT: Yes, Richard, you know what, most of them very much do. We talked to a number of people over the last few days
who said simply this has just gone on for a really long time. And it's not just about what's been happening in the last couple days and weeks, it's
the speed at which it's been happening. If you look at the market, 24,000 was hit at the end of November, early January we get 25,000. Less than two
weeks later, 26,000. And the same with the bond market, 2.4 at the beginning of the year on the ten year, and 2.8 last week. So certainly,
the rally that we been seeing over the last year a bit accelerated in the past few months.
[16:55:00] And I think perhaps that's contributed to the precipitous falls that we're seeing based on that wage report and what's going on in the bond
market.
QUEST: So, Rana, to your readers and our viewers, what do you do tomorrow?
FOROOHAR: Hold tight, I mean really this is just the beginning, Richard, you and I have talked so many times in the last year, we knew volatility
was coming back, we knew markets were not going to be as sanguine as they've been for some time now, forever it's not natural. Yes, we are
going to see more volatility, we could see the markets go down again tomorrow. I'm not selling anything, I'm holding tight, I'm going to look
for the next few months of real economic data to see where we really are on Main Street and eventually Wall Street has to reconnect to Main Street.
QUEST: Wall Street, Main Street, both of them looking at tonight wondering what on earth hit them as they got clobbered over the head with a piece of
wet fish. All right, Rana, Clare, thank you.
We will try to make some sense of it all with a Profitable Moment, maybe not so profitable by the market, it's after the break.
(COMMERCIAL BREAK)
QUEST: Tonight's less than Profitable Moment, it's a truism in the markets that stocks always fall faster than they, and you've seen that over the
last two or three days. But we have to keep this into prospective not just by the basis of how far they've already risen since the election, that is
one metric by which we can use. But there's more to it than that, you have to ask yourself what the future is likely to be.
[16:30:00] The volatility is inevitable because of the new ways of trading, algorithmic. Quants, high frequency they put the markets on steroids and
turbocharge it. And that's what you've seen over the last couple of sessions, in fact, we knew it was coming, the question is just how ugly it
has been.
Whether this continues, nobody really knows. But I will say this, it would be perverse, bearing in mind the economic fundamentals, to assume that this
is anything more than a correction that's under way. And that's QUEST MEANS BUSINESS for tonight, I'm Richard Quest in New York whatever you're
up to in the hours ahead, I hope it's profitable. We will do it again tomorrow.
END
