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Quest Means Business
Bank Of England Raises Rates 0.5 Percent, Most In Five Years; Biden Calls On Congress To Pass Inflation Reduction Act; Rising Interest Rates Threaten Housing Market Boom; Kellogg's Beats Earnings Amid Price Hikes; BOE: Rising Energy Prices Significantly Worsening Inflation; Eleven Pro Golfers File Antitrust Suit Against The PGA. Aired 3-4p ET
Aired August 04, 2022 - 15:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
[15:00:17]
RICHARD QUEST, CNN BUSINESS ANCHOR: There is an hour to go of trading on Wall Street and as the chart will show, it is a relatively down day, but
the losses aren't huge.
The red looks worse than the reality in a sense. We're just off a quarter of a percentage point, even though there was a smidgen of green earlier
this morning, but it is down and it's going to stay that way. What we've got to watch out for and guard against is a sudden tip to the tumble
towards the close.
The markets and the main events of the day: Dreadful economic outlook, from the Bank of England in the UK, and a crisis that will set off alarm bells
in Central Banks and economies around the world.
Tonight, the Chief Executive of Kellogg is with me to explain why higher prices are not putting off cereal shoppers.
And the PGA is being sued for antitrust after banning golfers who have joined the new Saudi-backed league.
Well, live in New York as usual, on Thursday, it is August 4th. I am Richard Quest, and yes, I mean, business.
Good evening.
Today, there was a truly dire economic forecast from Britain's bank, the Bank of England, as it raises interest rates, by half a percentage point.
The bank predicted here, it is only a half year, the UK will enter a recession later this year, in the last quarter, with inflation peaking at
13 percent, and it responded with its biggest interest rate hike in nearly 30 years of half a percentage point.
And there are more to come says the bank. The Governor, Andrew Bailey said, the Bank of England must act and attack inflation now, before it causes
more harm later.
(BEGIN VIDEO CLIP)
ANDREW BAILEY, GOVERNOR, BANK OF ENGLAND: If we don't bring it back to target, and if we get the so-called second round effects setting in, and
it's going to get worse, and it will get worse precisely, I'm afraid for those who are least well off in society.
So while I have huge sympathy and you know, huge understanding for those who are struggling most with this, and I know that they will feel well, you
know, why have you raised interest rates today? Doesn't that make it worse from that perspective in terms of consumption? I'm afraid my side is it
doesn't because I'm afraid the alternatives is even worse in terms of persistent inflation.
(END VIDEO CLIP)
QUEST: The Bank of England's inflation forecast, 13 percent by the end of the year, puts Britain way out in front of other Central Banks.
The Fed is projecting over five percent inflation this year. The ECB projects 7.6 percent in the Eurozone. Now those two Central Banks all
expect inflation to fall next year, despite uncertainty over the global supply chains and the war in Ukraine.
The issue is whether or not like the Bank of England has seen it get out of control and go higher and higher, is the same thing likely to happen at the
Fed and the ECB?
Shamik Dhar the Global Chief Economist at BNY Mellon, who also used to be the Chief Economist at the UK Foreign Office is with me now from England.
Is it -- I mean, what the bank has basically said is the situation of the Bank of England is getting worse. Are we likely to see these other major
Central Banks? The RBA said the same thing in Canberra. Are we likely to see the Fed and the ECB eventually say, well, actually, it is going to be
worse than we thought?
SHAMIK DHAR, GLOBAL CHIEF ECONOMIST, BNY MELLON: Yes, well. Thanks, Richard.
Yes, I think the bank is leading the way here and I think you might see inflation forecasts go up a little bit in those two economies, and you
might see, I think the bank is also leading the way in terms of the bad news on recession.
So particularly in Europe, I think, the ECB you might see some of those recessionary forecasts coming through in the next month or two. But I
think, overall, it is pretty clear that the UK is hit harder than most other countries because it is suffering not just from the rising real
energy prices, but from essentially rises in interest rates that are there to sort of clamp down on burgeoning domestically generated inflation.
QUEST: But at the same time, you know, the other major Central Banks have also raised interest rates. So why is the UK suffering greater? Is it
Brexit? Are there particular issues -- systemic issues, housing issues, whatever, in the UK economy, that mean it will be worse than others?
[15:05:15]
DHAR: Well, the first thing to say is this is a forecast from Bank of England and you know, sort of forecasts aren't sacrosanct. So, it could
well be in my own personal opinion is that things may not turn out to be quite as bad as the bank is suggesting in the UK, or at least that the
recession could be shorter and sharper.
But let's say they are correct. Why is it worse? I don't think it's hugely to do with Brexit? No, I think it's fundamentally to do with the size of
the shocks that are hitting the UK economy.
As I said before, you know that it has got this double whammy. First of all, the real energy price increase has been bigger here probably than
almost anywhere else, barring maybe Germany.
But secondly, I think the bank is playing a bit of catch up here. It probably left interest rates too low for too long, and therefore, you know,
built up a bit of a domestic inflation problem, but it's having to step on pretty hard now.
QUEST: Which justifies the two three-quarter percent rates from the Fed and the half a percent point. Essentially, what the BoE didn't do was front
load its rate rises.
DHAR: Yes, I think that's right. I think, you know, it's just about getting going. It was the first to go in fairness to it. But I think, you
know, you saw that really aggressive loaded response from the Fed, and the bank is really sort of catching up with that at the moment.
QUEST: So, if this is the situation, I mean, I'm familiar with the phrase, our forecast or our central position is that there won't be a recession.
You and I have talked about this before.
At what point is the reality going to hit or at least, the realpolitik going to hit that there is going to be a recession in the Eurozone?
DHAR: Look, I think that's pretty much a done deal. You know, obviously, a lot depends on what happens to gas prices from here. And of course, there
are rumblings about sort of, you know, further gas shutdowns later this year.
But I think, given what's happened already, the real income squeeze in Europe is pretty tough as well. And certainly, it's going to be hard for
countries like Germany to avoid a recession. In fact, I think they are pretty much heading into one in H2.
So yes, the bank is scarier than most, but I think you're going to see the same kind of story coming out of different economies pretty soon.
QUEST: Is it fair to say the UK is the canary in the mine?
DHAR: Well look, you know, in the past, you know, we were the first to go into recession in the early 1980s, same again in the early 1990s and that's
partly because we had a worse inflation problem than anyone else, so it feels a little bit like history is repeating itself.
But remember, those recessions affected everyone. It wasn't like the UK suffered them alone.
So I suspect we may be seeing some of the same again.
QUEST: Shamik, thank you. Good to have you, sir.
Rising interest rates, very likely to trigger a crisis for British homeowners. Regulators say half of the UK's fixed rate mortgages. They're
not fixed for very long. It's two, three, maybe four years, unlike the United States.
Soaring housing costs, then become the major headache for the next Prime Minister. Rishi Sunak and Liz Truss are debating again this evening.
They are the two, of course, candidates preferred by members of the Conservative Party, Members of Parliament and are going head to head for
the membership in the country.
Isa Soares and Bianca Nobilo are in London, who of course -- in fact, I sort of sat with you -- sit in the middle of the sandwich between you on
air, between Isa Soares tonight and Bianca later with "The Global Brief."
But look, I've got both of you here tonight because, Isa, you you're going to do sort of the wider issue of household; Bianca, you're going to do the
politics for me.
Bianca start with you tonight's debate. Liz Truss says she wants to change the Bank of England's mandate. We've got all sorts of potential changes.
How significant is it bearing in mind the Chancellor, the former Chancellor is responsible for a lot of the policies.
BIANCA NOBILO, CNN ANCHOR, "THE GLOBAL BRIEF": Well, the main dividing line between the two candidates as we know is the economy, but Liz Truss
has caught a lot of flak in recent days for her numbers simply not adding up, and I'm not sure how seriously people are taking some of her economic
plans.
Largely, Sunak's plans have been lauded by economists and he has their support for his much more fiscally austere and controlled approach to the
economy.
Liz Truss is going for the simple, more optimistic remarks, which seem to be working with the British public. She is the one that is out there
saying, yes, there is this terrible recession coming, but I believe that we can turn it around and bring in the positivity, not so much the facts.
[15:10:07]
QUEST: Isa, the situation is pretty grim. I mean, I've still got a flat in London and when I saw the electricity bill, when I saw the cost of it going
up, it's just extraordinary.
ISA SOARES, CNN CORRESPONDENT: And it's only going to get worse, Richard and that's the reality. That's what we heard today, from the BoE, there is
no way for us to ignore this reality, and because also, it is worth bearing in mind showing viewers that, you know, we are already facing a cost of
living crisis.
Expenses have gone up by more than $325.00 per month with inflation, of course, at 9.6. When we hit that 13 percent in the fourth quarter, that's
when the reality is going to buy.
So yes, the sun is shining for now. People are out having beers, and having drinks, but come winter, that's when it's going to hit. And look, I know
you like a prop, so let me just show viewers what this mean.
I've got a food basket, which I am borrowing, just so you know, but this is what I've got, Richard.
So I've got bread here. Grain prices, a huge concern, of course, because of the crisis in Ukraine. Basically, grains stuck in silos, so that that's
gone up 2.7 percent, so you know. I've got milk up 30 percent. This is June to June right now.
And of course, if I want to have some sausages, as I've got here, Richard, I will have to use the hub, gas, heating oil, 131 percent June of this
year, last year to June of this year.
Hey, I might not want to spend on money on my gas. So I'm going to have some baked beans, Richard, I'm going to use the microwave. That's the
reality. And that's not even counting with filling the petrol tank, taking my kids to school, how much that's going to bite.
NOBILO: And this is also, Richard why Sunak is making the point that tax cuts which -- or keeping taxes low, which Liz Truss is promising may be
irrelevant if inflation spirals out of control.
His point is, well, that doesn't even matter anyway.
QUEST: So, what's the mood? I mean, at the end of the day, you're both there. The Tories, I assume, Bianca, are deeply concerned, although there
doesn't have to be an election for some time. The sun is shining.
But you know, Isa, I mean, talk amongst yourselves here, but the reality is, if you want to go away, Heathrow Airport is now telling you, they are
capping the numbers and British Airways aren't even taking bookings on some short haul flights.
SOARES: I think the reality hasn't set in. This, of course, and I think the BoE governor talks about this, this will impact the most vulnerable,
that we know, but I have heard from several people who said they will have to make a decision between heating and eating come winter. And not just one
person, several people are telling me this. And that's I think, come autumn, when we're going to start seeing people having to make these
decisions and the extra pressure, of course, on whoever takes that spot at 10 Downing Street.
Some charities here in UK, Richard, are already saying really, people will die as a result of this.
NOBILO: And this is also why there is increased frustration about how this election of the next Prime Minister is actually happening. It is happening
because under 200,000 conservative members, less than one percent of this country's electorate are making the decision, and those people, what we
know of the demographic are predominantly male, largely over 60, more privileged and White.
So in terms of what Issa was just describing, they're not necessarily the people that are going to be copping the greatest burden from the
increasingly dismal financial outlook.
QUEST: Thank you both. Thank you, Isa for your program earlier. And Bianca, for your program still to come.
SOARES: Thanks, Richard.
QUEST: I am very grateful. Thank you.
One thought on that, one of the reasons I wanted tonight to have my colleagues discussing this with me is because although the UK, it might be
a particular situation tonight, exactly what they were talking about maybe without leadership, in terms of economics is going to hit in Germany, in
France. In terms of politics, we already know that. That's happening now in Italy with Mario Draghi having resigned.
So what is happening in the UK is the litmus test for what will happen economically elsewhere.
As we continue tonight, on QUEST MEANS BUSINESS, China flexing its military strength after the US Speaker's trip and the Chinese missiles and the war
planes have been swarming in the Taiwan Strait.
In a moment.
(COMMERCIAL BREAK)
[15:17:20]
QUEST: Now on to the transatlantic side, the United States' side on the inflation question, where President Biden is trying to rally public support
for a new bill designed to fight inflation in the US.
The President met business leaders and labor leaders to discuss the Inflation Reduction Act. It is aimed at curbing the country's highest
inflation in four decades.
After highlighting parts of the bill that cover healthcare, corporate tax, climate change, et cetera, the President said this:
(BEGIN VIDEO CLIP)
JOE BIDEN (D), PRESIDENT OF THE UNITED STATES: The vast majority of people in America support what is in the Inflation Reduction Act.
So my message to Congress is this: Listen to the American people. This is the strongest bill you can pass to lower inflation, continue to cut the
deficit, reduce healthcare costs, tackle the climate crisis, and promote America's energy security, all while reducing the burden, especially
working class and middle class families.
(END VIDEO CLIP)
QUEST: Rahel Solomon is with me listening to the President there. I mean, he does everything -- makes a cup of tea as well before bedtime. I mean,
what's in this bill that is so magnificent?
RAHEL SOLOMON, CNN BUSINESS CORRESPONDENT: Primarily, it's the healthcare initiatives, right, the fact that you can negotiate prescription costs. So
that's sort of what we're seeing, and you know, Richard, there was that letter that 130 US economists had sent, sort of encouraging Congress people
to pass this bill because of its inflationary benefits.
That said, there is a bit of debate, University of Penn Wharton put out a research note just a few days ago, saying that, look, the impacts on
inflation would be marginal. So, its true impact on inflation is debatable. That said, we know next week, we're going to get the CPI report and we are
seeing expectations, Richard, that that should lower at least on the top line.
The issue, however, that we have seen in those inflation reports is that inflation has really spread and broadened to areas that aren't as easy to
lower, right? Shelter costs, for example, that makes up a huge percentage of CPI and that has remained elevated and is expected to remain elevated.
So certainly, positive news to see some top line reductions, hopefully next week, but it's really the core inflation that still has a lot of folks
worried.
QUEST: I mean, do you think we're fooling ourselves in the sense that we all sort of think this is going to be over by tea time? The reality is
monetary policy doesn't work that way. This inflation at nine, 10, 11 percent, it is going to take months to squeeze it out the system with
considerably higher rates.
Now, you could arguably make the point as you have in the past with me, that job creation is a new paradigm here.
SOLOMON: Yes, for sure. In fact, we're going to get the Jobs Report tomorrow, right? I mean, that is the whole thing, Richard. I mean, this
whole time I mean it has been the strength of the labor market and the strength of the US consumer that has really saved the day.
[15:20:09]
SOLOMON: So one thing we're already starting to see is some early signs of weakening in the labor market. We've got weekly jobless claims today,
continuing to rise. We're looking at levels not seen since last November, really.
So some early signs of some cooling, but we're still expecting, the consensus for tomorrow's Jobs Report -- monthly Jobs Report is another
250,000 jobs being added and the unemployment rate to remain at a near 50- year low at 3.6 percent. So, it's still quite high.
The thing that we're looking at really closely, Richard is, even though we're hearing anecdotally from these companies that they're starting to
announce layoffs, we're not really seeing that in the data. And one reason could be because demand for workers has been so strong.
So two things: One, companies are going to be hesitant to let go of workers after they've worked so hard to get them. But two, even if you are one of
these unfortunate Americans who has lost their job, you can probably get one really quickly because there are still 10 -- more than 10 million job
openings right now.
So that's part of the reason it is a part of the anomaly of why we're sort of hearing these reports of people being laid off, but we're not really
seeing it in the data. And of course, the big concern is, are we in a recession? Are we headed toward a recession? But the labor market doesn't
seem to show it.
QUEST: Rahel, grateful. Thank you.
On this continuing question of the economy and inflation, well, you're aware, home prices have soared in the last two years across the world, in
all the major markets. In the United States, the average home now costs a third more than it did just two years ago.
And in the UK, prices are up nearly 20 percent, admittedly, from a low. German and Japanese homes are both up at 10 percent.
I spoke to Brian Klinksiek earlier, head of Global Portfolio Strategies at LaSalle, one of the world's largest real estate companies.
(BEGIN VIDEOTAPE)
BRIAN KLINKSIEK, HEAD OF GLOBAL PORTFOLIO STRATEGIES, LASALLE: It is no question that higher mortgage rates are putting pressure on affordability,
which puts pressure on prices, and you're starting to see that come through in a number of housing markets across the globe.
But what this does is it pushes some of those would-be homebuyers into the rental segment of the market where we see considerable strength.
So a big question that people ask us all the time, is real estate an inflation hedge? And the answer is, like the answer to many question, it
depends and it really depends on whether landlords have pricing power and what we're seeing is that strength really transitioned from the for sale
market to the for rent market.
QUEST: Which of course is not unique. I mean, this is a well-traveled path that when houses become too expensive, or when homes become too expensive
to buy, the rental market benefits.
But I guess what we're seeing, of course, in major cities are those cities that were evacuated almost during the pandemic where rental prices
collapsed.
KLINKSIEK: Well, rental prices in cities have come way back. That exodus from cities was short lived. People have come back to cities. They're not
in offices to the same number of days a week and as often as they used to be, but if you think about kind of that in-person interaction, divide that
up into live, work, and play, play is back. Play is back big time.
Seated diner data, so the number of people making reservations at restaurants is higher than it was before the pandemic. We all know that the
challenge is with traveling domestically, and leisure travel demand is off the charts, and that's drawing people back into the city.
Now, they're not going into the office five days a week and it depends on which part of the world. We see the US going into the office less often
than Europe and Europe going in a little bit less often than Asia, but people are back in cities and you see that in the rental prices in those
cities.
QUEST: So if we look at commercial property -- large buildings, like where I am at the moment in Hudson Yards. I mean, are they going to fill up or
are they just albatrosses now?
KLINKSIEK: Well, Hudson Yards is an example of a place that's really on the high end of the quality spectrum. What we see for offices is a big
divide in quality with the kinds of places that have a compelling environment that draw people away from their homes, they'll suffer the
commute because they find it a dynamic, exciting place to work, and also buildings in those kinds of locations have the best credentials in terms of
environmental sustainability, and that's zero carbon.
But we are at the beginning of a big transition in the property sector of decarbonization, and that creates big risks for the owners of buildings
that are stranded, that can't get on a pathway to decarbonizing.
QUEST: Final question, as somebody who is about to buy a property in New York, for example, what would you say?
I mean, the price is off -- the prices may have come down but they're still high. The numbers are large, the mortgage rates are going up. And yet, the
history of those of us who have bought property in the past always tells me that you really don't regret it in the future because you've forgotten now
that you've paid for it. Five years down the road, you've forgotten about the pain that you went through when you bought it. What would your advice
be?
[15:25:30]
KLINKSIEK: Well, my advice would not be to try to time the market, but to think about whether it is where you want to live and how you want to live
your life. At the end of the day, we use real estate to live our lives and into work, and real estate houses the economy. And so I wouldn't try to
game the market.
I would try and figure out whether it is the kind of place where you would be comfortable living for the long haul, and if so, if you can afford it, I
would do it.
(END VIDEOTAPE)
QUEST: Anyone who has gone to the grocery store lately has felt the weight of rising prices on everyday items. In a moment, the Chief Executive of
Kellogg's on rising prices, and the company's cereals and basically, do we all -- are there some things that we just won't give up?
Frosted Flakes, for example. After the break.
(COMMERCIAL BREAK)
QUEST: Hello, I'm Richard Quest. There is a lot more QUEST MEANS BUSINESS as we continue. We'll be hearing from the CEO of Kellogg's to explain price
rises and the offsetting effects of inflation within his company.
And 11 pro golfers are suing the PGA Tour. They claim it is now illegally antitrust by banning them from playing for a Saudi-backed golf tournament.
We'll get to that in a moment, but only after I've updated you with the news.
This is after all, CNN and here, the news always comes first.
A Russian Court has sentenced the WNBA star, Brittney Griner to nine years in prison on drug charges. Griner says, she mistakenly entered Russia in
February with less than a gram of cannabis oil. Her lawyers say they are trying to appeal against the decision. President Biden has called the
sentence unacceptable and calls for Griner's immediate release.
[15:30:23]
(COMMERCIAL BREAK)
QUEST: A Russian court has sentenced the WNBA star Brittney Grinder to nine years in prison on drug charges. Grinder said she mistakenly entered Russia
in February with less than a gram of cannabis oil. Although they said they plan to appeal against the decision. President Biden has called the
sentence unacceptable, and called for Grinder's immediately -- immediate release. Yes, House Speaker Nancy Pelosi says she visited the Korean
Demilitarized Zone during her trip to South Korea. She's the highest ranking American official to tour the border with the North in three years,
the South Korean President called it a sign of powerful deterrence against Pyongyang.
Kellogg's reported better-than-expected earnings this morning. Q2 rose despite rising prices. Now, the Frosted Flakes, I can forgive a company
almost anything that makes Frosted Flakes that's so delicious, but that's a story for another day. We made a few calls to see how much people are
paying for some of my favorite things, Frosted Flakes. Now, Frosted Flakes cost $2.49 last year, in one Arkansas town. People are now paying $3.79 at
the same store. In Delaware, the costs were up 17 percent. Kellogg stock is up slightly, they've raised their guidance for the rest of the year. And
they're also going to split the company.
Steve Cahillane is a CE -- is the CEO of Kellogg's. He joins me from Michigan. This interesting battle at the moment, in a sense, between
inflation, which of course, rising prices, yes, it helps your bottom line, but obviously also, you have to pay more for your raw materials and the
manufacturing the cost of moving it. How do you balance it out? How are you facing the inflation crisis?
STEVE CAHILLANE, CEO, KELLOGG'S: You know, first, thanks for having me, Richard, good to be with you. And I would say, you know, the price points
that you pointed out are real, and on a percentage basis, they're quite significant. And so, we're working very, very hard to mitigate that as much
as we possibly can. But also remember that it's still very affordable, right? And so, in a -- in a world where prices are rising across the board
for everything, you can still have a bowl of cereal, a bowl of frost -- your beloved Frosted Flakes with a cup of milk for less than $1, like more
like $0.50. So, it still remains very affordable despite being higher than it was a year ago. And those higher prices are clearly driven by our input
cost inflation, which is in the very high teens.
QUEST: Right. Now, your input cost inflation, of course, you have to contain a lot of that within the factory gate as we used to say, you have
to basically eat a lot of that inflation, rather than passing a good chunk of it on. But do you believe that cereals are recession proof? We've always
known that cakes and biscuits, to some extent, have a recession. But if I look at the breadth of your company, do you believe that many of your
products are recession proof?
CAHILLANE: Yes, you know, I'd say recession resistant, to be sure. I don't think anything in the world is recession proof, necessarily. Because, you
know, we just don't know quite how these challenges are going to affect individual families. But as I said, cereal is very affordable. So, in many
ways, it benefits from tough times. And then, our snacks. You know, people love affordable luxuries. People don't want to give up their Pringles,
their Cheez It. It's our job, as you said, inside those factory walls, to contain and mitigate price increases as much as we possibly can. We want to
do that because we want to remain affordable. And yes, people do, you know, come to our brands during tough times.
QUEST: Right. But here's the -- here's the contradiction you face. Your employees want higher wages, because their own cost of living for things
other than your goods, energy, gas, all the things that they're buying. So, how are you going to contain wage costs? Which is exactly, of course, what
the Fed is frightened off, that there is a wage inflation spiral about to start.
CAHILLANE: Yes, it's a macroeconomic issue, right? And it's the world that we're in right now, when you have high single digit to, you know, low
double digit inflation across -- you know, across the economies, it creates pressure on wages, not just in our company, but in companies everywhere.
And so, like everything, we -- you know, we work to mitigate that, but we want to pay competitive wages as well. So, we watch what's happening across
the labor market, so that we can maintain our competitiveness as other companies do. But it's clearly a challenging time right now, because the
inflation pressure is not just in commodities and cost of goods, it's in wages to be sure. And you have very low inflation -- or excuse me,
unemployment in the United States and many other areas which exacerbates the pressure on wage -- on wages.
[15:35:08]
QUEST: I wanted to ask you about this split of the company. When I read it, I sort of -- I read the rationale, and I saw the reasoning, but I wondered
why. Surely, as a company, you're better having these different aspects that can pick up the slack and take the strain. When one is doing well, the
other is not. What do you gain by splitting off snacks, and cereals, and all these other bits?
CAHILLANE: Yes, so it's really the opposite of the scale argument that you would make and the portfolio diversification that you would make. The
global snacking company is obviously going to be a very, very sizable company with over $11 billion in sales in the international markets, lots
of different brands. But the cereal company, we believe, we'll benefit from a singular focus on cereal, the one category, the -- you know, the limited
geographies of the U.S., Canada, and the Caribbean, and a single-minded focus of the sales organization, the management team, the incentive
compensation, everything, to focus on just cereals. So, we believe in the long run, it will be something that unlocks significant value creation for
us, for our customers, for our employees.
QUEST: I do wonder, because I've been around long enough, as indeed, have you, sir, that we've seen this wheel turn. Sometimes it's put together and
the people who put all these cereals and snacks together thought this was the right thing to do. Because it gave diversity and strength in difficult
times. So, what changed?
CAHILLANE: Yes, for us, you know, we're doing this from a position of strength. And so, a lot of the things that you could point to in the past,
we're not done from positions of strength, you know, you have to go buy something, add it to your portfolio, because you've got a weakening.
Obviously, our second quarter results show that across the board, geographically and category wise, our business is doing very well. And so,
you know, our argument is we're doing it from a position of strength, it's nothing that we have to do, it's not solving a problem. It is chasing an
opportunity, it is chasing the future. And again, a single-minded focus on cereal, we believe, is necessary right now, and we'll unlock value there.
And the global snacking company, as I said, I mean, marvelous brands across great geographies, and obviously a very high-growth business.
QUEST: You'll forgive me, sir, as I thank you that I have a single-minded focus on cereals at the moment, and I'm unlocking real value as I tick into
a box of Frosties. And I think, you know, with milk, they're great, but I also like them just on their own. Thank you, sir. I'm grateful to have your
time.
CAHILLANE: Good to be with you, Richard.
QUEST: Oh, they really are very, very good. That's my dark gone for the day. QUEST MEANS BUSINESS back in a moment.
(COMMERCIAL BREAK)
[15:40:38]
QUEST: And onto our top story tonight, the economic story of the Bank of England saying, rising energy prices are making inflation significantly
worse. The bank noted Russia's restriction of gas supplies, and said the issue could deteriorate, contributing to a cost-of-living crisis in Britain
and around the world. Brian Gilvary is the Executive Chair of the global chemical company, INEOS, former chief financial officer of BP. He's now
with me from London. The reality is, Phil (PH), is grim from what we heard from the Bank of England today, and it's going to get worse. And I wonder,
for a large company like yours, how do you contain costs when your workers are going to turn around and say, we need higher wages to pay these extra
inflationary prices?
BRIAN GILVARY, EXECUTIVE CHAIRMAN, INEOS: We're lucky at INEOS. As a big global chemical company, we do our annual reviews, we look at where our
workers are paid overall. And I'm sure that we continue to stay competitive. So, that's just part of our annual review process. And like
everybody can see right now, what's happening in terms of inflation in many countries and geographies where we operate, and the focus is to stay as
efficient as possible, and to ensure that we continue to create the products that our customers need.
QUEST: What's interesting, because we've just been -- you've just heard from the CEO of Kellogg's, which, of course, is a consumer-based company,
in that sense, consumer packaged goods. Now, we're talking to yourself on much larger gas production and energy. And -- but the same pressures are
forcing you.
GILVARY: Yes, no, look at -- actually, what's happening is -- the question is, can you push on some of these energy prices further down the chain in
terms of supply? And that's what we're seeing across the PC (PH), even as we emerged out of COVID. Before we got into the situation with Russia and
Ukraine, we were already seeing inflated costs in cyber supply chain, and the degree that there is a short market right now for a lot of these
products, those prices can be passed on. And you're seeing that with gas right now, particularly in Europe, that relies on 40 percent of its gas
imports come from Russia, they have been curtailed. And I think what the issue is going to emerge as we go into this winter, is if Europe can't get
to 80 percent stocks, I think we have a major problem coming. And that's going to affect a lot of industry, particularly in Germany, and then also
France and Italy.
The idea of rationing and we've already heard -- I mean, you've already seen the E.U. introduce some rationing plans at 15 percent. Do you think,
to some extent, this essentially gives Vladimir Putin who's already got his foot on the neck of the European economy, great leverage? Until we Europe
weans itself off Russian gas, the ability for Russia to inflict greater economic damage is huge. Would you agree?
GILVARY: Yes. But then, equally, it's very difficult for Europe to wean itself off gas without the infrastructure to allow it to import. Maybe just
a very simple statistic, if you look at the amount of gas that Europe currently takes from Russia, about 72 percent of that is via pipelines. So,
72 percent of all pipeline gas into Europe is from Russia. You would need to increase LNG imports by about 150 percent to be able to replace that
gas. So, I don't think Europe is in a position to wean itself off Russian gas anytime soon.
Equally, it would take already now, five to six years to start to build regasification plants. But again, you'd have to be able to source that
natural gas, and that is not readily available. If you look at gas reserves, globally, over 50 percent of gas reserves in the world sit in
Russia, they sit in Iran, another sanctioned country, and they sit inside data (PH). The ability to be able to move gas from other parts of the world
into Europe is that much more complex. So, I think this is a multi-decade solution if you're going to try and wean yourself off Russian gas.
QUEST: So, for a company like yours, where does that leave you? Because at the moment, you're nutcrackered between the -- you know, the inflationary
rising spiral that's costing you more in your chemicals business, your oil and gas, and the GOP political aspects of Russia, Ukraine, and the E.U.
Where does it put you?
[15:45:08]
GILVARY: Oh, right now, for INEOS, it has limited impact around, we're a producer of gas, so we have in our INEOS energy business, gas production
out of the U.K., we have some gas production out of Denmark, and some oil production out of Denmark. And equally, we entered the SA market some five
years ago, seven years ago in terms of transporting ethane from the United States to our crackers in Europe and around the world. So, we've already
repositioned the company to ensure that we have a more balanced portfolio of where we take our main feedstocks from, natural gas and ethane, in terms
of our cracker system.
So, we've already reoptimized, but we're going to -- obviously, we'll see the inflationary pressures come through. And really, in terms of the
companies, the question is, do they agree we can then move that on to our customers that require, as you said, previously, with your Kellogg's
conversation, the packaging that then gets pushed further down the supply chain that then drives inflation.
QUEST: As we look to winter, and I know that you're enjoying a very hot summer in London, so I don't want to sort of bring in the cold weather too
quickly. But as we look to winter, are you optimistic or pessimistic?
GILVARY: Oh, I think the outlook for the winter looks particularly -- there's a degree of trepidation around the winter right now. So, if we come
back to Europe, it's just like the gas prices. Gas prices in Europe are trading almost double what they are in the U.K. U.K. does have a lot of LNG
import capacity. But as we get into the winter, we'll start to draw down on those stocks quite significantly. You have cold winter, and I think we see
more pressure on prices, and particularly domestic prices. I think Europe's got a major problem.
And that right now, since Nord Stream 1 is being curtailed, and is now only running at 20 percent of its capacity with no sign that the new compressor
will be put in place. It's still sitting in somewhere inside Germany waiting for permits to move back into Russia. I think if Europe doesn't get
back to 80 percent of its stocks coming into the winter, and you know, we're down at 70, Europe is going to have an issue, and it will have to
curtail its energy sources to different industries. They will have to start to think about how prioritize it and--
QUEST: All right. Sir, we'll talk more as the year moves on and we discuss, and we find out exactly where we stand. I'm grateful for your time tonight.
Thank you, sir.
GILVARY: Thanks, Richard.
QUEST: QUEST MEANS BUSINESS, you can see very busy day, and we've got all the right people talking on exactly the right subjects that we need to know
about. Tonight, a group of pro golfers is suing the PGA. Now, it was perhaps inevitable. They're suspensions for joining the Saudi rival league,
they say is anti-trust. Do they have a case? In a moment, QUEST MEANS BUSINESS.
(COMMERCIAL BREAK)
[15:50:29]
QUEST: A lawsuit being brought by 11 pro golfers is accusing the PGA Tour of anti-trust violations. Phil Mickelson and Bryson DeChambeau amongst the
players that are now challenging their suspension at the PGA. The tour, the PGA Tour, has excluded all 11 from its events after they signed onto the
Saudi-backed LIV Series. The players are calling the tour monopolistic. They say it has carefully orchestrated a plan to choke off golfers from LIV
hoping to limit competition. Craig Seebald is a lawyer specializing in antitrust issues, a partner of Vinson & Elkins. It was inevitable that
antitrust was going to be used here, wasn't it? I mean, restraint of trade, all the usual things. From your understanding, do you think they have a
case?
CRAIG SEEBALD, PARTNER, VINSON & ELKINS, LLC: Yes, no, I -- you're exactly right. I've been waiting for this case to be filed. You know, it's
interesting. They have two claims. One is the monopolization claim that you mentioned. They claimed that the restrictions that the tour has in terms of
players being able to play rival tours, which they're basically not allowed to.
QUEST: Oh, not at all serious. Because -- are you back? We lost you for a second.
SEEBALD: -- the tour -- the west tour inspired the Europeans.
QUEST: We lost -- we lost you -- we lost you for a second. Are you still there, sir? So (INAUDIBLE) --
SEEBALD: I'm here.
QUEST: Do you think -- do you think they have a valid case?
SEEBALD: Yes, I think -- look, I think it's going to take some time. I think they have a case. They're arguing that the professional golf, there's
a market here in the United States, and they're alleging a monopolization, and they're also alleging a conspiracy that the PGA Tour conspired with the
European Tour to both cut down on the ability of those players to play, not only in the U.S. Tour, but on the European Tour.
QUEST: The thing about antitrust is it's a really heavy weapon to deploy, that usually ends up in a settlement, somewhere along the way, because
nobody really wants the answer to it.
SEEBALD: Yes, the cases tend to be very long, you know, they're going to ask for some preliminary leave because they want to play in the FedEx
Playoffs coming up in a couple of weeks. But I'll tell you, having defended many antitrust cases, they go on for many, many years. So, I would not
expect a quick resolution to any of this litigation anytime soon.
QUEST: Do you get the impression that people are digging in for a fight? Because at the end of the day, LIV has got money, PGA -- to some extent,
PGA Tour can't really allow too much wiggle room?
SEEBALD: I think that's right. I think the PGA Tour has taken a pretty tough line, and I don't see them changing. I don't think they're going to
want to open the floodgates, and let their players that have stayed loyal to them, be able to jump ship to LIV. The tour only exist -- it's only
popular because of the players that remain on the tour. So, I think it's hard for them to say, oh, never mind, we'll ease up on our rules, and we'll
let LIV take all our players. I just don't see that happening.
QUEST: All right. So, let's -- you know, the beauty of having a lawyer on is you can play both sides of the fence. Let's look at it from the PGA
point of view, they must have a strong argument that says, look, you all signed up to this. You all knew what you were doing. You knew -- I mean,
but as you know, of course, it's always an ex post facto aspect, but you knew what you signed up to.
SEEBALD: Yes, I think that's right. You know, the other thing that I think is interesting about that, is it they're being accused of being a monopoly.
But the funny thing is the PGA Tour doesn't even control the four majors. So, think about other monopolization cases where you might have a case
against a big industrial company, but they don't have the four largest customers in the industry. Here, you're accusing them of monopolizing a
golf tour. But the four biggest tour -- the four biggest events, the Masters, the U.S. Open, the British Open, the PGA, the PGA Tour doesn't
even control.
So, if I'm the PGA, I'm saying, this market makes no sense. And if I'm the PGA Tour, I'll say, you know, monopolization is the ability to exclude. I'd
say, I don't have that power. And if I do, I'm not exercising it very well because you're playing golf tournaments, you've taken my stars, you're
paying these people a lot of money. So, I'm not excluding these competition very much.
QUEST: So, last question, give me your professional advice. If you were advising, first of all, the golfers, and then secondly, you were advising
the PGA Tour. What would your advice be to one then the other?
[15:55:07]
SEEBALD: You know, I think if I'm representing the players, I think they filed the suit, I would keep pushing it, see if they can get relief that
they want. They've asked for all kinds of injunctive relief they want the court to stop all these rules that they have. So, I think, as I said, was
we started out with, it's -- I'm surprised it's taken this long for them to file the suit. So, I think that's a big first step. If I'm the PGA Tour, I
am defending it. I'm saying, I'm not a monopolist. I'm saying, I'm not conspiring with the European Tour, I'm not conspiring with the Majors. We
have rights to have our players be loyal to us, our rules are reasonable. And if I'm the PGA Tour, I'm going to fight this to the bitter end, because
I just don't think settling and changing the rules is going to be good for the PGA Tour.
QUEST: And we'll talk more about it as the years progress on this. I'm very grateful, sir. Send your usual fee note to the usual place, and we'll
(INAUDIBLE)
SEEBALD: I will do that. Thank you.
QUEST: And it'll end up in the usual place. Good to see you, sir. Thank you. Last few minutes of trade on Wall Street and the markets. The Dow has
been down all days, it's been red right across the board. We haven't really shifted a huge amount, we're 88 or down, 85 at the beginning. We're now
down 100. We've got five minutes to go. The Friday's job report is going to be significant. Looking at the 30 and you get a really mixed view of this.
You know, when you see 3M, Visa, and Salesforce -- Salesforce had a good day yesterday -- you sort of wonder what's going on. Walmart should be
higher, bearing in mind, if there's a possibility of recession, Verizon is the -- this tells you nothing really happened today, to be frank, to be
blunt. This tells you that sort of there's no great theme of the day that we can extrapolate when you see that sort of movement of the markets. We'll
take a "PROFITABLE MOMENT," though after the break. QUEST MEANS BUSINESS.
(COMMERCIAL BREAK)
QUEST: Tonight's "PROFITABLE MOMENT," you'll notice, of course, obviously the (INAUDIBLE) after I've been away on sabbatical, and I'm wearing a nice
light suit, because it is the summer, it's stonkingly hot. In tomorrow night's program, part of our summer Friday series. Friday is easing off
will be at Little Island. Where is Little Island? There it is, on the western side of Manhattan. It's a philanthropic gesture from Barry Diller
and Co. And our program tomorrow night comes from Little Island live, you'll hear from Barry Diller. It's just great to be out and about during
the hot summer in New York. 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. Closing bell (INAUDIBLE) Wallstreet market is down.
END
