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Economic Woes; Banks and Corporations Feeling Oil Price Issues - Part 1>
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[16:00:00] MAX FOSTER, CNN HOST: Red Cross rings the closing bell and some stocks might be in need of some urgent care. Today's trading session is anything to go by. It is Friday the 15th of January.
Tonight, no end in sight, the great selloff 2016 has its worst day yet. Oil prices plunged below $30 a barrel as Iran prepares to turn on the taps. And, beware the Chinese bear, stocks in Shanghai hits a new miserable milestone.
I'm Max Foster. This is "Quest Means Business."
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FOSTER: Tonight, fear grips the market, trading has come to a close on a brutal day for U.S. stocks. Two weeks into the year, the volatility on Wall Street hasn't subsided. It's getting worse actually. The Dow is down nearly 400 points. It is the first time since August indexes hit below 1,600. At one point it was up more than 500 points so it's not as bad as it was.
Friday's selloff begun in China, the Shanghai Composite now in a bear market, that means it's off 20 percent or more from its last peak. The fear spread to the other Asian markets as well before moving westwards into Europe. Bear concerns about China's economy mixed with fear over the plummeting price of oil, finally in the U.S. investors headed for the exit ahead of the holiday weekend. U.S. treasury yields fell and gold prices spiked, and stocks tumbled straight from the open. Miserable day.
Tim Anderson was there to see it all unfold, Managing Director of TGM Investment, he's joining us now from the New York Stock Exchange. Just describe your day Tim.
TIM ANDERSON, MANAGING DIRECTOR, TGM INVESTMENT: Well, Max, you mentioned the two trigger points are really set -- started the day on a down note, and that's the Shanghai Composite, trading below 3,000. And oil which had bounced off $30 support level a couple of times earlier in the week, trading below 30 and holding below 30 for most of the day.
And I think what's really got investors nervous, is that if 30 now becomes resistance for oil on any further rallies. It's just very hard to model (ph) or to project how much collateral damage might be done for the global economy in an environment of sub-$30 oil.
FOSTER: So, it's guessing game right now about which way things are going in terms of economics?
ANDERSON: That's right, because there's no doubt the economist have been beating on us for year, saying how lower oil prices was the boon for consumers, and it really hasn't started to show up yet, there might have been a little glimmer of it last week when some of the retail stocks perked up early in the week even through the market was down. But, there's -- I think that they have underestimated the extent to which job losses and anything to do with the oil area have reverberated into other job looses in those geographies. And, we're just not sure how deep that might get.
FOSTER: Tim, thank you very indeed, a grim day for you. Thanks for joining Tim.
Our three warning really, fashioning (ph) the markets around the world and Tim was -- touched on them there, the first was China. The Shanghai Composite is now at a bear market and the fall yuan and the dollar has really spurred volatility. The second is weak economic data for the U.S., retail sales dipping in December, manufacturing activity in New York, source supplies fall in January and shares of Citi and Wells Fargo plunged after the bank results failed to beat expectations.
Now those weak earnings were due impart to the third factor which was oil. Prices are below $30 a barrel and they are likely to go lower if sanctions on Iran for example are lifted. Both Citi and Wells Fargo won't risk to their energy portfolios. Put those three factors together and you get a stock rout really, that's reaching around the globe as we can see.
Joining me now, Austan Goolsbee, Service Chairman of the White House Council of Economic Advisors, he's now a professor at the University of Chicago's Booth School of Business. Mohamed El-Erian is of course is the Chief Economic Advisor of Allianz. Thank you very much indeed for joining us.
Professor, first of all, within (ph) there from the trading floor, concern that the economist were warning oil prices would be good for the consumer and that's not turning out to be the case if you look at the impact that everyone's feeling right now.
AUSTAN GOOLSBEE, FORMER CHAIRMAN, U.S. COUNCIL OF ECONOMIC ADVISOR: Well that's not turning out to be the case, but I don't think all economics were saying that because there were a lot of us saying, that if the oil price is going down because of weakness out in the rest of the world especially in China, that's a terrible sign for the global economy, and even for the U.S. not a positive sign.
[16:05:14] And I think that's what's going on here. All of these is ultimately coming out of the slowdown in China being worse than what anybody had anticipated.
FOSTER: Mohamed, in terms of the impact of oil and of China, they'll see link but what is it that's worrying people most here?
MOHAMED EL-ERIAN, CHIEF ECONOMIC ADVISOR, ALLIANZ: I think if you look at the financial markets, they're worried about a third factor, which is the central banks no longer have their back covered. Central banks are no longer the market's best friend. So in the past, markets have been comfortable about ignoring weaker fundamentals, because they believe the central bank will continue to support them.
And now that central banks are on divergence path, they are less confidence, so any little hiccup in the real economy, these two outsize declines in the stock market.
FOSTER: Does this show that the Fed was wrong in raising rates?
(CROSSTALK)
Sorry. Mohamed?
EL-ERIAN: So Austan and I will disagree. I don't think it does because the Fed is responding to domestic indicators including a very strong employment number, which created 6 million jobs in two years. The Fed has to be careful that it cannot forever decouple the fundamentals from the financial asset pricing because bad things tend to happen when you artificially elevate financial assets.
GOOLSBEE: And my point of view, it is and was, that the Fed has been wrong year after year, predicting that we were just in the clasp (ph) of growing in the United States, that we were about to have inflation, and that's why they needed to raise rates. And I don't think there's any chance of inflation, and I think actually that there's a higher chance that the U.S. were to go into recession in 2016 that it would see inflation get above what the Fed has been saying was their target.
FOSTER: But this immediate concern, Professor, about oil prices, they're tumbling so fast right now, and I know a couple of guys (ph) have predicted it could hit $10 a barrel. Where is the floor on that and what sort of impact is all of these going to have, continue to have on the market if that oil price keeps tumbling?
GOOLSBEE: Well, I mean, it is surprise how much it's falling. For sure you would see in the short run if the price of oil keeps going down. The amount of oil exploration will come to a dead hold even more than the severe slowdown it's been in.
If as you pointed out in your report, you see a lot of oil from Iran start coming on the market. That could be another factor. And, I think all those parts of the markets that touch on resource producers, there are many states in the U.S., plus Canada, plus Australia, plus a lot of the emerging markets who are big resource producers, in an environment in which demand is way down and the price of oil is plunging, which the dollar is going up, I think they could be in for a very bumpy ride.
FOSTER: Mohamed, if it does get to $10 a barrel in the near future, what sort of impact it will have?
EL-ERIAN: It will have a huge impact. And, it will depend on whether you're a producer or a consumer. Let's understand that where oil prices are today cannot be justified only the basis of supply and demand. Yes, demand is lower, particularly because of what's happening in China, and yes supply increased tremendously because of alternative sources of energy.
But let's not forget there was also a surge, and I think major terministic (ph) change which is that, the oil market lost its wing (ph) producer. It lost OPEC as able to make a decision and the next day the level of decline in order to support pricing. Now we have to wait for market faucet, and when you make such a dramatic change in the operation of a market, you tend to get what are called volatile volatility, not just volatility but really volatile, and that's what where we are now. And oil producers better have their seatbelt fastened because this takes months if not years to work through the system.
GOOLSBEE: I think there's an insight to that...
FOSTER: OK, Mohamed El-Erian and -- yes. I'm sorry...
(CROSSTALK)
GOOLSBEE: ... Mohamed has an insight there. Yes.
FOSTER: OK, Mohamed El-Erian and Austan Goolsbee, thank you both very much indeed for joining us on a very volatile day. There seems no end to the sliding crude oil prices and Iran is set to make things even worse.
[16:10:06] Our next guest is to advice (ph) Iran's Prime Minister on energy policy. We'll ask him about the country's impending return to the oil market.
(COMMERCIAL BREAK)
We got some breaking news coming in right now to CNN. The State Broadcast in Burkina Faso is reporting gunfire and detonations in a hotel in the capital. Securing forces are exchanging fire with fighters outside the Splendid Hotel, it's called, in the capital's business district, and no details yet available, any casualties following the attack. It's a different area to get communications to right now but we are bringing in information as we gather.
Now, it's perhaps the single most important factor driving the market at the moment, oil prices have tumbled today to their lowest level in 12 years. Oil prices fell more than 5 percent as markets prepare for more Iranian oil to come to the market. The IEA is expected to rule on lifting Iran's sanctions too soon. The decision comes sooner for market than previously expected and is affecting things.
It's taken just 18 months for prices to collapse and turn world economics literally in its head. The market as we're talking about, back in June 2014 crude was trading more than $100 a barrel, oil prices spiked as Iran and Libya fell into political turmoil and the Ukraine crisis threaten to disrupt Russian supplies. Global demand was much stronger then too.
On the same month of the following year the price of oil have plunged to $60, making matters worse, OPEC refuses to cut production after a meeting in Vienna. Fast forward to today, oil is below the $30 mark, six months on from that Vienna meeting, OPEC members already choose to froze, literally as some nations are polling from an emergency meetings to take action, and Iran is now about to join the party.
Africa's richest man says the price will continue to fall and could go as low as $20 a barrel. Still, Aliko Dangote told John Defterios that he plans to keep up investing in oil and in commodities and he explained why he's still cease the opportunity.
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ALIKO DANGOTE, CEO, DANGOTE GROUP: Obviously some people will shutdown because it will make sense for them to produce. But it will be an interesting game, you know, to see what's going to happen. But definitely prices will be, you know, affected seriously.
JOHN DEFTERIOS, CNN EMERGING MARKETS EDITOR: You're suggesting on the downs, we could even go as low as $20 in the near-term as a result of this sort of over...
DANGOTE: Well, we can easily 2025, you know, it could be 2025, but, you know, a couple of countries is not a death sentence. You know it is also an opportunity. I think Nigeria, this would be a blessing for us, to diversify the economy. I know that it depends, but definitely good things (inaudible).
DEFTERIOS: But in fact, let's go to the Minister of State, is suggesting potential unrest because of this oil crisis. So, is too heavy of a price for Nigeria because of what we see today going below $30.
DANGOTE: Well, if oil goes even $20, 25, I think mostly a potential, you know, unrest, because Nigeria's economy is very, very big. Oil will not really -- we sold oil in 1993, '94 and almost '95 between $8 and $9.
[16:15:10] And, you know, that's the time we build L&G and all these other projects. What we need more in Nigeria is actually management of our resources.
DEFTERIOS: The lowest level here in quarter century, if you look at the basket of commodities today, are we near that bottom in terms of the unwinding of that rally we saw for the better part of the decade?
DANGOTE: Well I think you can never know the bottom. If you do know then you'd be the richest person on earth.
DEFTERIOS: But you're the richest man in Africa so you got to have a sense for it.
DANGOTE: Well, you know, in my thinking, things haven't really bottomed down yet. It's going to take a little bit of a push, you know, going forward. And we still have quite a lot of fat. We have almost $20 billion worth of projects, various ones, you know, and, we're not going to stop, we'll continue.
DEFTERIOS: That is a great point, you took a $5 billion hit in 2015 to your wealth because of the downturn, what we seen in the Nigerian stock market. Did you change the mix of your portfolio at all, or eliminate projects because of that?
DANGOTE: The fundamentals of the business is actually very good. So it's not about evaluation, value shares is up and down, you know, I mean you never know, maybe this time it won't go down, it might go up. You know, but is not a determinant factor of our own investment strategy.
DEFTERIOS: And this sort of pressure that we see today, we're looking at 3.5 percent for 2016. That doesn't alarm you this rate of slowdown?
DANGOTE: I think with the kind of budget that the government has to be, and if they're able to implement it definitely the economy will grow at about 4.75 to 5 percent. I think we'll defiantly grow more than 3 percent for sure.
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FOSTER: Well corporations and banks are feeling the pain of falling prices. Anglo-Australian mining company BHP Billiton announced say, $7.2 billion hit and will reduce its rig capacity in the U.S. as well
Wells Fargo warned that loans at energy companies could be at risk. Earnings for the fourth quarter were flat.
J.P.Morgan warned on Thursday about possible bad loans to the energy sector, but boosted its reserves in case of default, all very worrying.
CNN Money Correspondent Paul La Monica joins me from New York. We're really getting a sense of the importance of oil in so many different parts of the global economy.
PAUL LA MONICA, CNN MONEY CORRESPONDENT: Definitely, it's not just a case of the plunging crude prices affecting only the oil and energy companies, some of those big banks as you mentioned starting to feel some pain as well. I think we need to be careful though, as of right now it looks as if the loans made to the energy sector by major banks in United States, they pale in comparison to the exposure that these banks had to subprime mortgage in 2008. So I really doubt that oil in of itself could turn out to be some sort of analogues event to mortgages that led (inaudible) in a huge crisis.
It bears watching of course but I don't think that is going to be something that sends the entire financial sector into a tailspin.
FOSTER: What advisors is suggesting investors do right now because it's such a complicated victory, you really have to understand international economics to work out why the markets are reacting in the way that they are.
MONICA: Yeah, the people that I spoke to today and over the past few days, they are urging everyone to really take a step back, take a deep breath, relax and have a sober, non-emotional if you can outlook for the market for the long-term. One of the financial advisor I spoke to this morning, said that he had a client who called him, all afraid because that RBS earlier in the week were some from oil bank of Scotland, said sell everything, and his response was, do you really think that big companies like Apple and G.E. are going to be out of business in five years?
The answer is no, then don't do anything different, if anything, now is a good time to be buying. And, I know it sounds tried, it's hard to really have that conviction when the market is falling as much as it has, but throughout history, holdbacks like this have been historically very good opportunities to buy quality stocks, not fluff that is loosing money, that's overvalued but blue chips that are reasonably valued and that are growing their earnings.
FOSTER: And, obviously business people do understand, want to understand shop being earned (ph), there's some worrying news about Wallmart today.
MONICA: Yeah. Wallmart is a company that we all know from last year has some big problems right now. Sales growth has been sluggish, they have warned about profits taking a hit this year because they have to spend more money in order to compete with Amazon as well as give many of their workers a wage hike.
[16:20:06] But the problem now is that, Wallmart is also realizing there are many underperforming stores as well, they're closing 269 around the globe, many of them in the U.S. Most of those are the smaller stores so I think what's happening with Wallmart is that, the big superstore, that's still seems to be working but some of the experiments they've had with smaller format, that hasn't really been a success for Wallmart.
FOSTER: The next sort of thing that people are looking at in terms of the market, hopefully some hope in there to bring them back up is earning season, what are you expecting?
MONICA: Yeah. Earnings is bit of an odd duck if you will. Expectations are so low that perversely we might have companies being able to sort of ooze over that very low bar, and if we get any pleasant surprises, that might be the catalyst to bring stocks higher. I think what's really going to be important is, the outlook that companies have for the first quarter in 2016. Max, we all know that the forth quarter was not very good, it's very likely to prop its bell for the S&P 500 for the second consecutive quarter of so-called earnings recession.
If the outlooks are good and the dollar, you know, has weakened a little bit lately, so that might take some pressure off of your IBM, your G.E.s, you big multinationals, maybe their outlook will be just a little bit later than the doom and gloom that many on Wall Street currently have.
FOSTER: Fingers crossed, Paul, thank you very much indeed.
MONICA: Thank you Max, have a great day.
FOSTER: Well as the low oil prices take their toll, Venezuela's President is calling it a state of economic emergency. Now, as he prepares to address the nation, Nicolas Maduro is fighting this political lie, details on that coming up.
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Updating that breaking news for you this hour, the state broadcast Burkina Faso is reporting gunfire and detonations in a hotel in Burkina Faso's capital. Security forces are exchanging fire with fighters outside the Splendid Hotel, in the capital's business district. No details available, any casualties following the attack. We'll bring you any details as we get them.
And Nicolas Maduro has declared a two-month state of economic emergency in Venezuela. Pressure is running especially high on the Venezuelan president. He's expected to give his annual State Of The Nation Address any moment now in Caracas.
The country maybe hardest hit by plunging oil prices, it has the largest reserves in the world. And after triple-digit inflation is now facing economic collapse. Venezuelans voted the opposition party (inaudible) majority in Congress. It has enough power to potentially oust Mr. Maduro from office.
Shasta Darlington is following this story from Rio de Janeiro in neighboring Brazil. What can he say to the nation to regain that support?
SHASTA DARLINGTON, CNN CORRESPONDENT: Well Max, first he reject (ph) his economic team now he's announced this economic plan, so certainly Venezuelans will be listening for what he can actually do during this two- month economic emergency because so far we don't have details. And, the problem is, that up until now, both Maduro and the now opposition- controlled Congress have seen more intense on fighting each other than tackling the economy.
Here we laid it out for you.
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Anyway you look at it the government's power base is being seriously eroded. Back when Hugo Chavez was first elected in 1998, he used the country's considerable oil reserves and invested them in massive social programs for the country's poorest.
[16:25:10] UNIDENTIFIED MALE: (Speaking foreign language).
DARLINGTON: Well things have changed for his handpicked successor Nicolas Maduro after Chavez died in 2013. Last year alone the price of oil crashed 50 percent, and unfortunately for Venezuela under Chavez, oil went from representing 70 percent of the export basket to 98 percent.
That means the government just doesn't have the money it needs to import even basic goods, there are shortages of everything from milk to toilet paper.
Maduro also doesn't have the money to funds those very popular social programs. Add to the mix, triple digit inflation and rising crime and violence and you have a very volatile situation.
The battle has already begun when Venezuela's opposition controlling congress for the first time in nearly 17 years and facing off against the country's president Nicolas Maduro.
The Democratic Unity Coalition won by a landslide in election last December claiming two-thirds of the seats, a super majority. Setting the tune portraits of the late Hugo Chavez removed from the national assembly by the opposition even before they got down to work.
Now, the new president of the assembly Henry Ramos Allup has vowed to remove Maduro from office by legal means within the next six months. In theory it's possible with a super majority congress could initiate a referendum for a recall vote. In practice, things have gotten complicated. The big question going, what will their priority be? Will they try and work with the government to come up with alternatives to what is arguably the country's worst economic crisis in over a century, that would have include unpopular measures like a currency devaluation, or will they ramp up confrontation with Maduro trying to get him out of office before his term ends in 2019?
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Now, we've also heard some new economic data today from the Central Bank confirming what we really been saying all along last year. Venezuela saw triple-digit inflation in the third quarter. The economy contracted 7.1 percent. This is what Maduro is up against. And again, we haven't had any details about what he's going to do with the state of an economic emergency, maybe -- there's been some talk about intervening in companies, limiting access to currency but nothing about the more dramatic and possibly necessary measures, like I was mentioning, the currency devaluation or raising the price of the heavily subsidized gas at the pumps. Max.
FOSTER: Let's talk about the state control over business, but the government has pretty much run out of money hasn't it? This rapid decline in the value of its resources, its funds and the trading is down as well because it's all oil-based as well. I mean, how are they going to afford to run the economy effectively?
DARLINGTON: Well clearly they haven't been Max, and it's not just the economy, you know, as we've been saying, it's also these social programs that have made the socialist government so popular. When you consider that all -- 96 percent of their foreign income was oil and price has dropped so dramatically, they're pretty much squared in. Again, there are some things they could do, like currency devaluation, and the price of oil at the pump is heavily subsidized. What analyst say is they've also got to come up with some way to attract foreign direct investment, that's going to be hard to do, with Nicolas Maduro at the helm, under, first Hugo Chaves and Nicolas Maduro.
They really, you know, there were -- they took over certain companies, they made it so unprofitable to be in Venezuela and so uninteresting that it's going to be hard to lure anybody back, that something that in theory the opposition congress could be working on. But they have said their fist task of the day is going to be passing an amnesty law that would allow many activists who are put in jail out of jail. So again, who's going to tackle these really difficult problems, Max, we'll see.
FOSTER: OK, Shasta, we'll stay with you as he makes that big speech and see how he'll manage to regain that support if indeed he does.
Now, in New York and on trading flows around the world, oil was just one of the factors driving fear and putting investors towards the exit, details coming up.
(COMMERCIAL BREAK)
[16:31:52] MAX FOSTER, CNN ANCHOR AND LONDON CORRESPONDENT: Hello, I'm Max Foster. There is more "Quest Means Business" in just a moment. First, this into CNN and we've got some breaking news for you out of Burkina. The Faso state media there reporting that gunfire and detonations have been heard and seen at a hotel in the country's capital. Security forces are exchanging fire with fighters outside the Splendid Hotel in the capital's business district. There are no details yet available about any casualty following the attack but we're chasing things up for you. Shares on Wall Street have suffered their biggest losses in months as stock markets across the world were hit by a huge selloff. The Dow closed almost 400 points lower. Fears over the falling price of oil and a slowing Chinese economy are partly responsible - mainly responsible - for the drop. In France one person has been declared brain dead and five more are in hospital after they took part in clinical tests for a new pain killer. The French Health Ministry is investigating. More than 100 other people have already been given the drug and suffered no serious reaction. The chief neurosurgeon in the city of Rennes described the condition that the patient (AUDIO GAP).
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GILLES EDAN, RENNES CHIEF NEUROSCIENTIST, VIA INTERPRETER: One of them came in a very serious condition, arrived on Sunday. We thought it was a vascular condition and this patient is the one who very quickly, who became very, very serious which means that today he is in a condition of cerebral death. And the other patients it became more serious in the start of this week and today we can say that four of the five other patients have neurological troubles to (inaudible) and one patient has no symptoms.
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FOSTER: Indonesian police have released the name of one of the five terrorists involved in Thursday's deadly attacks in Jakarta. They say his name is Afif but he was known by an alias which is Sunakim. He already had been convicted on terror-related charges and died during Thursday's attack. The actor Sean Penn says his interview with Mexican landlord known as "El Chapo" has been a failure. Penn says his "Rolling Stone" article was designed to start a public conversation about the so-called war on drugs. He told CBS News that readers have missed the point of his interview.
