BUSINESS-01
4-5p ET - Part 1>
Defterios>
sell off across the globe. It's all because China shocks the stocks,
trading halted in Shanghai. And it's the people versus Volkswagen. The U.S.
Government is suing VW.>
[16:00:00]
RICHARD QUEST, HOST: The closing bell is ringing on Wall Street with the Dow off more than 1.5% and that's off -- well off the lows of the day. First trading day of the New Year. Look at that. A good, strong gavel to start - or end I should say trading on the first trading day of the year. It's Monday, it is the 4th of January.
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QUEST: It's a very unhappy new year for the markets start with a sickening sell off across the globe. It's all because China shocks the stocks, trading halted in Shanghai. And it's the people versus Volkswagen. The U.S. Government is suing VW.
I'm Richard Quest, we start a new year together, and of course I mean business.
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QUEST: Good evening, we begin tonight with a new year, but exactly the same fears. Concerns over China, the Chinese economy and the prospect for a soft landing once again hitting stocks around the world on this first trading day. Join me at the super screens.
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QUEST: We will draw a veil over the rest of the world for a moment. Let's just look at what we've seen in New York. This seems to have been the low point of the day, the market was off more than 430 to 450 points but it rallied towards the mid-afternoon. Then it went down again and then in the last half hour, there was a surprising burst of buying or at least not selling and the market in New York closes down 276, a loss of 1.5%.
It's been under 17,000 earlier in the day for the first time since October. CNN's fear and greed index measuring investor sentiment tipped well and truly into fear. What began - or what ended here in New York began in the other side of the world.
Let's go around the world and you can see what happened over the course of Sunday night and Monday into the New York trading day. You've got the Asia markets. This is where the trouble began. It was in China where you have the Shanghai composite down 6.8. You had the Shenzhen composite off 8%. Chinese trading was even halted.
Then it moves into Europe where you've got the FTSE, the DAX down 4.25% and the (inaudible) finally ending up in the United States, where the losses are there but they're not as bad as we've seen elsewhere. The U.S. suffering the last.
There was some minor economic news on manufacturing, but frankly we don't need to get too excited about that.
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QUEST: Joining me from the floor of the New York Stock Exchange, Tim Anderson, managing director at TJM Investments. Tim, well regardless of the markets sir, a happy new year to you. It is good to see you. But what a day.
TIM ANDERSON, MANAGING DIRECTOR, TJM INVESTMETNS: Richard happy new year to you and all the people at CNN. We're breathing a little bit of a sigh of relief today. We had a respectable recovery off the lows.
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ANDERSON: In the last 45 minutes of the day there were some very large buy imbalances published with about 30 minutes to go and that gave the market a little bit of support. We held 2,000 on the S&P 500, we held 1100 on the Russell. I'm not - you know we still have to take a good look at what China is going to do overnight and --
QUEST: Right, here's a question for you Tim; nothing that we saw economically out of China overnight justified this sudden sway of selling, and this sudden down market.
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QUEST: I mean since we left on New Year's Eve, nothing has changed. So tell me why did sentiment change?
ANDERSON: I just - you know I think maybe people got a little complacent at the end of the year.
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ANDERSON: Maybe the market was a little artificially supported during the last couple weeks of the year. Keep in mind we had a 70-handle move up on the S&P 500 from December 18th to December 28th or 29th, and then we gave a little bit back in the last couple days of the year.
And today you had tremendous selling in some very high price momentum names that have attributed to a good part of the gain in the S&P and some people feel that maybe a lot of people were holding back selling those stocks in late December because they didn't want to create a taxable event in 2015.
QUEST: Well they've certainly managed to create a taxable event or some sort of event as we start the New Year.
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QUEST: Tim, good to see you sir. We look forward to your company frequently on "Quest Means Business" helping us understand the (inaudible) of the world.
ANDERSON: All right, Richard have a great week.
[16:05:05]
QUEST: Lovely, excellent, well let's see how the markets go. There are three core concerns on investors' minds that we need to go through this evening. And over the course of this program, we're going to discuss each one in turn because it goes to the heart of what this is all about. And what could well be the entire financial year.
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QUEST: The first is the underlying weakness that's currently in China. Just how serious is that underlying weakness? Does it have the capacity to drive the global economy into trouble. Then you've got the tensions in the Middle East. Wherever with look, they seem to be getting worse causing volatility in oil prices, mismatches between fundamentals and valuations. And that gap, which is the third thing, fundamentals versus valuations. Speaking to CNN Mohammed El-Erian warned valuations may not stay so high.
MOHAMMED EL-ERIAN, CHIEF ECONOMIC ADVISOR, ALLIANZ: We are coming from a situation where fundamentals are here and getting a little bit better, but market evaluations are up here because they have been supported by enormous injections of liquidities from Central Bank. So while fundamentals are getting better, the problem is there's already quite a gap with valuations. And that is what investors are worried about.
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QUEST: So the core goal of "Quest Means Business" is to make sense of it all for you.
QUEST: These three things, weakness, tensions, valuations. Joining me now Richard Clarida as we put some - we put some oomph into this. Happy new year to you, sir.
RICHARD CLARIDA, STRATEGIC ADVISOR, PIMCO: Happy new year, Richard.
QUEST: Good to see you.
CLARIDA: You betcha.
QUEST: Strategic advisor at Pimco. Let's talk about the weakness in China versus the everything else that happened. What do you attribute today to?
CLARIDA: You know I think people were looking for a bit of a rebound in China. You know sentiment can shift. We got some disappointing numbers in manufacturing. So I think the surprises were negative.
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CLARIDA: I also think you had a pretty big move in the exchange rate. They weakened it to a level above 650. That sounds technical but it is a case authorities are perhaps concerned as well. So I think it's those two factors. People looking for positive surprise, they got negative and a move in the currency.
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QUEST: It shows - we'll talk more about China later in the program. But in terms of the macroeconomic global economy, it shows to me how fragile it is because a bit of odd technical financial ease in China has this sort of effect. Things are fragile.
CLARIDA: Well Richard, I think the way I would put it is that we have all got to get used to a Chinese economy that's growing at around 6%, probably not 7, 8, 9, or 10%.
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CLARIDA: China is much bigger than it was, but also the composition of that growth is shifting. It's much less intensive in commodities and so as they slow it's impacting big chunks of the economy in different ways.
QUEST: But even if we do have to get used to that. This volatility, this extreme reaction is something else that we've got to get used to.
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CLARIDA: Yes it is and I think that's part of the world that we're in. I mean I think we'll get positive as well as negative surprises. But volatility is a fact of life, I agree.
QUEST: Why? I mean not why is it a fact of life. Why do we see more volatility now. Is it because of program trading, high frequency trading that is exacerbating these minor fundamental effects?
CLARIDA: I think what we're seeing Richard is big shifts in risk appetite or this risk on and risk off (inaudible).
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CLARIDA: You can document that. Interestingly, U.S. equity volatility has been pretty low for the last several years. Also as your prior guest mentioned, you know you have a lot of liquidity in the system through quantative easing. Central Banks like the Fed are starting to pull that back.
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CLARIDA: And so I think markets are sort of broken. What is the new model? The old model was a lot of quantative easing, recovery from recession. What's the new model?
QUEST: And the Fed has already indicated how they are adapting to the new model. Higher interest rates, reversed repo, overnight auctions, all this sort of stuff. If you look out with as best a crystal ball as you can, are we in for troubled times?
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CLARIDA: My baseline is no. I think 2016 will look like 2015. The global economy will sort of stumble along at 2.5% or 3% growth. But there is a left tail risk and there's less of a right tail risk than we might have thought a couple of years ago.
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QUEST: And that tail risk has the potential to firstly prevent gains in the market, investors gains and secondly to do damage.
CLARIDA: It does indeed. As I said my baseline case is a year in 2016 that looks like 2015, but there is that left tail risk.
QUEST: Good to see you, sir.
CLARIDA: As always.
QUEST: We look forward to having you coming to help us understand the year as it moves on.
CLARIDA: Anytime.
QUEST: Lovely. The selloff started in China where a system to prevent volatility got an unwelcome test on its first day.
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QUEST: They were testing the circuit breakers, they certainly had no idea that day one was going to test them to just about destruction.
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[16:11:30]
QUEST: So continuing to delve into what happened today and why. It was an unwelcomed test for China's new market circuit breakers and a performance that set in tone around the world that you have heard.
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QUEST: Trading in China ended early. It ended 15 minutes -- there was a halt for 15 minutes after the 5%, here we go. You can see it over here. If you join me over - you can see it there after the 5% drop in the Shanghai Shenzhen index. 6 minutes between the first circuit breaker and the second. The 7% drop halted trading for the day.
So two events happening that cause d eventually Shanghai and Shenzhen on Monday. The last one of course being over here when trading finally stopped.
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QUEST: What has happened is that China has installed circuit breakers to curve volatility. We have seen these sort of circuit breakers, most markets have them. The New York market certainly post 87/89 and high frequency, they most definitely have them as well.
But in this case, they were triggered, those circuit breakers by three shocks and they were triggered on the first day that they were put into full operation.
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QUEST: The first thing that happened was factory activity. There was a bad jolt over manufacturing activity, which showed the tenth month of shrinking activity. Then they removed one of the lifeguards -- safeguards. They lifted the ban on shares of short sellings of larger investors. They were scheduled to expire on Friday, they lifted them.
Take the bad economic, add in highly technical trading and then you have the circuit breakers themselves. The very act of the 5% circuit breaker in being introduced which causes a delay in trading or halt in trading, that exacerbates the situation and analysts say fear drove investors to pull money out of the market and then the 7% limit was reached.
What you have here is a perfect example of exactly went wrong.
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QUEST: And to put this all together and help understand it, joining me now is Patrick Chovanec, the Chief Strategist at Silvercrest Asset Management.
Now you believe the circuit breakers obviously are not the problem, it's what happened to cause the circuit breakers.
PATRIC CHOVANEC, CHIEF STRATEGIST, SILVERCREST ASSET MANAGEMENT: That's right, you named two things that drove the downward pressure. The first was fundamentals which have been bad all along.
QUEST: But not that bad and nothing new to what we didn't already know.
CHOVANEC: Nothing new - nothing new.
QUEST: That's the point - that's the point.
CHOVANEC: Right. And then the second thing is that you allow people to sell. And you know the combination, I mean what the real circuit breaker that's relevant is the one that took place last summer when they intervened to prop up prices. And instead of having the correction then, they delayed the correction and we're having it now.
QUEST: Well they will arguably say that you know cooler minds will come into the market tomorrow and realize things are no different on January 5th than they were on December 30th.
CHOVANEC: No, they weren't any different. Except that you again, allowed people, you gave people room to run and room to sell and they sold because they looked at the fundamental valuations. These are -- these are markets that have been propped up at valuations that don't correspond to the underlining Chinese composite.
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QUEST: But when that - (inaudible) circuit breaker back, but when that first circuit breaker clicked in, that 5% breaker, there's a 15 minute gap.
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[16:15:00]
QUEST: Now that's designed to allow people to have a moment of pause and a thought. And when trading started, you're supposed not to have this -
CHOVANEC: Well it obviously didn't change their mind.
QUEST: Well there was - and I said, there was only six minutes between the first and second. So that first really did make a bad situation worse.
CHOVANEC: I'm not sure it made it worse. It didn't - it didn't change their minds about the fundamentals.
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QUEST; So what does China have to do. The market there opens in a few hours. What happens?
CHOVANEC: Well I mean they could either go back to the old playbook of trying to prop the market up again, which they - which they could very well do, place more restrictions tell state owned enterprises to buy, instruct people not to sell, that's possible.
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CHOVANEC: Or they could let the market find its proper equilibrium which they should have done six months ago.
QUEST: OK, but, that sounds fine and dandy except if you've got a pressure cooker, what they're trying to do arguably is take the steam out of the pressure cooker gently and that's the conundrum that can't be done.
CHOVANEC: Well what they're trying to do is have a correction without having a correction. Which is true - which is true in the stock market it's true in the property market, it's true over capacity and all kinds. And then it never happens. So really I mean you need market accountability, you need prices that reflect real fundamentals and they could have allowed that to happen without I don't think unraveling the Chinese economy back half a year ago and instead we're just seeing a delayed reaction.
QUEST: So if you're right and I don't doubt you might be, we're in for more of this?
CHOVANEC: I think we are if they -- if they allow it to function as a real market. And I think that people watching China, people in markets here need to realize that there's downward pressure for the simple fact that you've got an overvalued market.
QUEST: I was ringing Paul Donovan at UBS in London today, his view is basically that you know the Chinese stock market does not have a dramatic effect on the Chinese economy per se, However, it can have a very bad effect on sentiment globally. So in theory, there's no reason why what's happening in China should have a dramatic effect on the U.S. market.
CHOVANEC: No, and I think if you're talking about an overdue sell off of overpriced Chinese shares, that's not indicative of the outlook for the U.S. economy or the U.S. markets.
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CHOVANEC: I mean there are plenty of data points that you can look at in the United States and not like. But the idea that we should be taking our cues from China and this sell off didn't make sense. It reminds me of what happened in August, when the same thing happened, markets spooked by China and then eventually they came back again.
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QUEST: Thank you, sir. Hopefully you'll be here throughout the course of the year to help us understand the maturations of what's going on.
CHOVANEC: Will do.
QUEST: Lovely. When we come back, it's a lawsuit that's been filed in Detroit and it has executives in Wolfsburg extremely worried for obvious reasons.
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QUEST: Volkswagen is facing billions of dollars in penalties and all because it cheated on emissions, after the break.
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QUEST: The United States Environmental Protection Agency and the Justice Department are suing Volkswagen for cheating on emissions tests.
If the U.S. wins its case Volkswagen could be hit with fines of more than $18 billion. It's all to do with the amount they have to pay for each individual car.
[16:20:00]
CNN's justice correspondent Evan Perez is in Washington. Was there - I mean from the moment it happened, was there an inevitability that the authorities would sue them?
EVAN PEREZ, CNN JUSTICE CORRESPONDENT: Well, yes and no. I mean one of the problems with this case - with this case according to the Justice Department is that Volkswagen has been dragging its feet, Richard.
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PEREZ: If you go back to October when Michael Horn, The CEO of Volkswagen United States testified in congress. Even after that, Volkswagen issued a statement in which it denied that these emissions defeating vehicles, these cheating devices that were on these cars that they had been installed in certain 3 liter engine cars. And it turns out that they were on those cars.
That means that now we're talking about 600,000 automobiles that were - that were outfitted with these devices that were intended to cheat on emissions tests. And so we're talking now beyond $18 billion in fines. There are four different types of violations here and if each of those 600,000 cars were in violation in those four different ways, we're talking about $90 billion in fines if the United States gets its way.
Obviously those are numbers that probably will not come to pass, but it does give you a sense of why this complaint was filed today, why this lawsuit was filed today.
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PEREZ: Because according to the justice department, even after Volkswagen showed up in congress to say we're sorry, we did mess up, they continued to deceive and to not admit the full extent of the problem.
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QUEST: So really since they've basically from - I mean eventually they've said we did it, it's a fair cop gov, as we might put it. We're really talking here about how much aren't?
PEREZ: Right, exactly.
QUEST: This is about - this is what does the final bill look like.
PEREZ: Right, that's going to be the issue and it's going to have to be a negotiation because obviously they don't want this company to be destroyed by this case.
I mean we have a couple of recent cases where GM paid $900 million for some problems that actually killed people, Richard and Toyota paid $1.2 billion for similar problems that, again, were tremendous.
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PEREZ: But in this case, we're talking about defeating emissions testing and you know if the United States - if the law, the EPA's fines are followed to the letter, it would be $90 billion. I don't see that happening, but it will be a significant amount of money.
QUEST: It will have several zeros in fact more than several zeros.
PEREZ: Absolutely.
QUEST: Evan, good to see you, happy new year to you, sir.
PEREZ: Happy new year.
QUEST: It's a new year and it's a new look for General Motors. America's largest auto maker has decided to invest half a billion dollars in Lyft. That's the ride hailing competitor to Uber. It's known for their trademark, pink moustaches. The plan is for the two companies to develop eventually a fleet of on demand self-driving cars, that's some way off.
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QUEST: It could be the start of a new wave of competition. Lyft is battling it out with Uber for funding and now of course having GM in its corner will make autonomous vehicles mainstream reality.
Paul La Monica, is here. Good to see you, happy new year sir.
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PAUL LA MONICA, CNN MONEY DIGITAL CORRESPONDENT: Happy new year.
QUEST: So when I read this story, at one level it's GM and Lyft. But this is deep. This goes into the leasing of cars to Lyft drivers, the renting of cars to Lyft drivers, the financing. This is a (c-change).
LA MONICA: It definitely is. This is the first major auto maker investing in one of these ridesharing companies and the fact that it's not Uber I think is significant. And also as you pointed out, GM and Lyft are going to be working on self-driving cars and there's a huge race to try to see who is going to be the first to get that market right.
Tesla, Uber, Google is reportedly working with Ford. There are rumors about an Apple car eventually coming out. So you have automotive and tech giants all trying to do this self-driving autonomous car.
QUEST: What's the advantage between Lyft and GM for autonomous vehicles?
LA MONICA: I think it's -- the advantage for Lyft obviously is it has a major auto manufacturer that it now gets to work with.
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LA MONICA: I think for GM, what they get by working with Lyft, one, it's not Uber. Everyone is think -- is afraid of Uber's growing dominance. Lyft also has some interesting global partnerships. They've partnered with China's Didi, with Ola in India, so they have a rapidly expanding global ridesharing network.
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QUEST: But from GM's point of view surely you want to be agnostic at best, about which company is involved, which car company is involved. Because you want to sell cars to Uber and you want to sell them to (Get) and you want to sell them everybody else in the business. By tying yourself with Lyft, don't you deny that?
[16:25:03]
LA MONICA: It is a bit of a risk. I think though it does speak to the fact that Uber is so dominant that everyone does not want to make Uber the be all, end all company in this market.
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LA MONICA: So by partnering with a smaller rival that is by no means any slouch in the business, this could possibly strengthen Lyft and make Uber a little bit less dominant.
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QUEST: They could have worked together on driver less cars which seems to me to be slightly against the whole concept of what Lyft and Uber do. I don't understand where the advantage is for GM and Lyft to work together on driverless cars.
LA MONICA: I think eventually companies like Uber and Lyft, all they really want is to be that service that you as a passenger you're going to hail a cab.
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LA MONICA: And whether or not that is a car that has a driver or no driver, Uber and Lyft want to be - want to be the company that makes the money from that car that's coming to pick you up.
QUEST: Finally, Mary Barra becomes chairman. This is another move where U.S. companies think its right to have the chairmanship as an executive chairman that's also part of the - that's also got the CEO. In the rest of the world, that's frowned upon.
LA MONICA: It is definitely frowned upon, but you have many companies in corporate America where this is fairly common. At GM, you had many of her predecessors were the CEO and the Chairman.
And I think what this is, throw the debate aside about whether or not you should have the chairman and CEO be the same person, I think this is a reflection of the confidence that the company has in her. She really came in at a very difficult time given the recall scandal and all the people who were killed because of the problems in older GM models.
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LA MONICA: I think she did a very admiral job of crisis management.
QUEST: Before we go to the break, the Dow Jones. The Dow Jones, the markets, the global markets simply horrible today. You have heard us describe the tensions in China, the Middle East. Is this what we've got to look forward to Paul?
LA MONICA: I think we unfortunately have to look forward to a lot more volatility this year.
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LA MONICA: That doesn't mean every day is going to be as gruesome as this, but I think there's just so much uncertainty. You throw in Saudi Arabia and Iran, you have the U.S. Presidential election, there are a lot of proverbial wild cards out there and we all know the market really doesn't like all that uncertainty. As trite as that sounds, it's true.
QUEST: Thank you.
LA MONICA: Thank you.
QUEST: Paul mentions the tensions between Iran and Saudi Arabia. Of course, the big fear of the market is that it boils over into the oil markets.
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QUEST: The rift between the two largest OPEC producers is at a critical time for the organization, in a moment.
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[16:30:05] QUEST: Hello, I'm Richard Quest. There's more "Quest Means Business" in just a moment when the head of the Eurasia Group Ian Bremmer talks me through the top risks of 2016 as they see them.
And Mark Zuckerberg says artificial intelligence will be his houseguest in the New Year.
Before that, this is CNN and on this network the news always comes first.
Saudi Arabia has banned all flights to Iran after the Iranian authorities and protest - I beg your pardon - after Iranian protesters attacked the Saudi embassy in Iran.
Demonstrators were angry at the Saudi execution of a Shiite cleric. Iran's ambassador to the United Nations today expressed his regret over the attack.
The White House is calling on both countries to show restraint.
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JOSH EARNEST, WHITE HOUSE PRESS SECRETARY: We do continue to be concerned about the need for both the Iranians and the Saudis to deescalate the situation in the Middle East.
That we're urging all sides to show some restraints and to not further inflame tensions that are on quite vivid display in the region.
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QUEST: Markets around the world started the year with a major selloff on Wall Street. The Dow lost 450 points. It clawed back some of that lost ground.
It still ended off 276. Investors were most worried about China's economy in China where the authorities suspended trading following a stock's falling by 7 percent.
President Obama has met with the attorney general of the United States to discuss options to expand gun control. The President expected to announce an executive action to beef up background checks.
