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QUEST MEANS BUSINESS

Germany and France Emerge from Recession; Volkswagen and Porsche to Merge

Aired August 13, 2009 - 14:00:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


RICHARD QUEST, CNN INTERNATIONAL ANCHOR: The leaders of the pack: Germany and France emerge from recession. But feeling thrifty Americans are still in no mood to spend. And tonight, Virgin Atlantic says no way BA/AA, its chief exec tells me dinosaurs should not be allowed to merge.

I'm Richard Quest, a busy hour ahead because I mean business.

Good evening. The two biggest economies in Europe, France and Germany, are beginning to grow again. Both expanded 0.3 percent in the second quarter, compared to the previous three months, Q1 of the year.

Here is how Europe looks: most of the map remains red for recession. The economies of France and Germany are the only green bits for growth at the moment. This unexpected upturn follows 12 months of brutal decline. You will know it has been Europe's worst recession since the end of the Second World War.

To get some parameters and background on this, because it was an unexpected move into positive growth, Jim Boulden has been taking a look at the numbers.

(BEGIN VIDEOTAPE)

JIM BOULDEN, CNN INTERNATIONAL CORRESPONDENT (voice-over): Was it the success of the car scrappage plans? Was it the French heading back into stores? Was it a statistical blip? Whatever it was, France and Germany saw some economic growth in April through June, catching many in the markets, especially the bears, off-guard.

MANUS CRANNY, MF GLOBAL: I would have to acquiesce at this juncture and say things are looking a little bit brighter than I have anticipated. Of course, I hang a question note beside the durability in these numbers for Europe in the second half of the year. But no means are we out of the woods yet.

BOULDEN: This 0.3 percent quarterly growth is compared to the first quarter, when the economies of Germany and France fell heavily. Year-on- year, Germany's GDP is still down 7 percent. And as a whole, the Eurozone saw another quarter of negative growth, though, again, not as bad as predicted.

Britain, Spain, and Portugal continue to be in negative growth, suffering from weak housing prices, little consumer demand, and big consumer debt.

But many economists aren't willing to stick their neck out to say...

GILLES MOEC, DEUTSCHE BANK: I think that we are now in a situation of turnaround, which probably came a bit earlier than what we expected.

BOULDEN: The French have firmly gone back into the stores, Germans to a lesser extent. But in both places, public and private consumption was up. Exports also helped Euroland's two biggest economies.

German manufacturers rely heavily on selling their products around the world. This particular uptick may be a bit misleading though.

HANS REDEKER, BNP PARIBAS: We should never forget that export finance was not available in the November-February period. And that means as export finance came back into the market, there has been a normalization of export.

BOULDEN: Not a stunning new trend, says Redeker, after all, credit is still very tight, banks are in poor shape, especially in Eastern Europe, and the euro remains strong.

CRANNY: I think it's going to be hurrah for the next couple of trading sessions, and then the reality of the consumer is going to come home to bite. There are more defaults to come. I do not believe that write-downs are over in Central Europe.

BOULDEN: In other words, let's not get carried away.

Jim Boulden, CNN, London.

(END VIDEOTAPE)

QUEST: We'll update you with the market closing numbers in Europe in just a moment. But before we do that, we need some analysis, detailed discussion on the German numbers, because Germany obviously is the largest economy in Europe.

Holga Schmieding is the chief European economist at Bank of America, he joined me earlier to discuss Europe's biggest economy, which he believes will continue to grow in Q3.

(BEGIN VIDEOTAPE)

HOLGA SCHMIEDING, BANK OF AMERICA: This is not a one-off. This will be repeated. We will be having stronger growth than that before the end of the year. Germany has pulled out of recession.

QUEST: Upon what basis has it pulled out of recession? Is it inventory rebuilding, or is it export-led growth? Or is the economy actually performing better?

SCHMIEDING: The major part of this growth is that imports fell more than exports. So in a way German belt-tightening contributed a lot to that. On top of it, what we did have is a rise in private consumption and government consumption.

The fiscal stimulus program of the government is bearing fruit.

QUEST: The problem, of course, with growth resulting from stimuli is that it -- if the stimuli is withdrawn, then the growth often pulls back. Do you see evidence within the numbers that organic growth, private consumer growth, if you like -- corporate spending, do you see much evidence that that has come back?

SCHMIEDING: In the second quarter we do not yet see evidence that we will have lasting growth. However, we do look at leading economic indicators from the private sector. And they say very clearly that the economy will be growing in the second half of this year.

So to some extend, you could say the getting out of recession, the second quarter, was a bit artificial, yes, but that's what cyclical stimulus programs are all about. Germany is now geared up for stronger growth and more organic growth later this year.

QUEST: You see, that's the point, though, Holga. Cyclical stimulus packages are designed to get growth going, while the patient heals. Is there evidence that the German patient has healed?

SCHMIEDING: Well, there is a lot of evidence that the global patient is healing. Germany isn't really ill itself. Germany is heavily exposed to the global manufacturing cycle. And as the global manufacturing cycle stabilized in the second quarter, it looks set to go up in the third quarter, Germany will be a nice part of this trend.

That will be a major basis for German growth later this year.

QUEST: All right. We have our traffic light in the studio here. And we've had a lot of ambers over -- yellows in the past few weeks. Which color is it going to be, red, yellow, or green for these German numbers?

SCHMIEDING: This data is clearing saying it's going to be green.

QUEST: And we'll give a flashing green to show that this is the first growth sign that we've seen from a major economy.

Holga, many thanks, indeed.

SCHMIEDING: You're welcome.

(END VIDEOTAPE)

QUEST: Holga Schmieding there. And that is the flashing green. I can't remember -- well, we got a green from David Buik on -- purely on the bank results in the U.K., but we haven't really had a green on economic numbers for some time. So -- and I suspect we're going to see more of those in the weeks and months ahead.

Perhaps we might even see some from the United States where a group of economists that were surveyed by The Wall Street Journal believed the U.S. economy -- the U.S. recession is also over. Jeffrey Sachs from Columbia University agrees with that prognosis and says we can take stock of the turnaround.

(BEGIN VIDEO CLIP)

JEFFREY SACHS, COLUMBIA UNIVERSITY: We can see that this very steep collapse has bottomed out. And so we're kind of dragging on the bottom. How fast we now start to rise remains an open question. But this was good news from the Eurozone in general, and particularly surprising that both Germany and France actually had positive gains, at least in these preliminary numbers.

(END VIDEO CLIP)

QUEST: Now we'll hear more from Jeffrey Sachs -- Professor Jeffrey Sachs in about 20 minutes, a detailed discussion on the way economies are moving.

In Europe, the result of what we saw economically gave very much a positive feeling. Stocks certainly gained ground all around the region thanks to the turnaround. It was France and Germany, Wednesday's warm words from the U.S. Federal Reserve.

Remember, the Fed said the U.S. economy was probably bottoming out -- leveling out I think was the exact words.

As a result, today in London the FTSE put on the best part of 1 percent. It was a 10-month high at 4,755. Frankly, we must now start to wonder when 5,000 is on the horizon. I don't think I'm being a bit previous in that.

It was in (INAUDIBLE) banks, mines obviously were much on demand that things are getting better. If, of course, industry is doing well, mines do well as well. So Xstrata up 6 percent, Rio up 4 percent.

Paris saw a nine-month high with a gain of half a percent. Renault and Credit Agricole, they were higher as well.

But I want to quickly move to the Xetra DAX tonight, over 5,400. BASF up 4 percent. Deutsche Bank up 2.5 percent. But the crucial thing is tonight, apparently Volkswagen and Porsche have announced tonight their merger. It is official.

We haven't got all of the details. Dotting I's and crossing T's, but we're expecting more information. But it is official, Volkswagen and Porsche are to merge. And we will have some more details on that shortly.

The New York markets open and doing business. And this is the way the Big Board stands: down 13 points, just a fraction unchanged, just off -- less than, well, a quarter of 1 percent, 9,349. Something tells me it's a bit of a quiet day in New York. We perhaps should have been seeing more numbers, more volatility at this stage.

You're up to date. You know where your investments stand. You know what the news it. Now we'll bring you up with the news agenda, and Fionnuala is at the CNN news desk.

Good evening.

FIONNUALA SWEENEY, CNN INTERNATIONAL ANCHOR: Hello, Richard.

Afghan President Hamid Karzai has ordered an election cease-fire. In a radio address he called for security forces to put down their weapons on election day next Thursday. He also sent that demand to Taliban fighters.

Meanwhile, three British troops and one American have been killed in attacks in the south. That brings the British death toll in Afghanistan to 199.

Reports say the Libyan man convicted of the 1988 Lockerbie bombing could be released from jail next week. But the Scottish government says no decision has been made. The man has appealed for release on compassionate grounds because he is dying from prostate cancer. Two hundred and seventy people were killed in the airplane bombing.

Rescuers in Taiwan will soon have help in their efforts. Thirty-five countries have pledged typhoon relief in the form of helicopters, medication, and other needed supplies. At least 115 people were killed when Typhoon Morakot slammed the island over the weekend, triggering floods and landslides.

And guitar legend Les Paul has died. The musician was renowned as an innovator in jazz, rock, and in the studio. The Grammy-winner is also credited with developing the electric guitar that came to master. He was 94.

Richard, back to you in the studio. But I gather you interviewed him, didn't you?

QUEST: I did, indeed. I interviewed Les Paul a couple of years ago in New York. He used to still play regularly at a club, an early evening performance, Fionnuala, at a club. And we were very privileged not only to go there, but he spoke to us and he played for us. And although not strictly on the business agenda, I really want you to enjoy some of my discussion with Les Paul.

(BEGIN VIDEOTAPE)

LES PAUL, JAZZ GUITARIST AND INVENTOR: The electric guitar, when I was done with it, was to be shaped like a woman. And then I could take that thing and go to a nightclub and get with a great big orchestra and be a super power.

QUEST: When rock 'n' roll came along, you didn't like it very much, did you, because it was a threat. It was a threat to your existence.

PAUL: It was a threat. At the beginning there was a great resentment because it was anything but in tune, bury the melodies so you can't here it, and play all long chords.

QUEST: Have you ever written to a guitarist saying, oi, I invented that guitar, would you stop bashing it and throwing it around the stage?

PAUL: No, no. I would much rather they buy another one.

(LAUGHTER)

QUEST: What does it feel like inside Les Paul when you're watching world class artists using your guitar?

PAUL: I believe I'm very proud, very, very happy, very proud that I did something during my life here that I was privileged, whether it was something like the guitar, that he no longer was a wimp but he was a big first-class heavyweight fighter.

QUEST: Thank you, sir.

PAUL: You're very welcome, Richard.

QUEST: That was lovely, thank you.

(END VIDEOTAPE)

QUEST: Les Paul, who also told me that the shape of the electric guitar that he invented -- these were his words, the shape of the electric guitar, well, you make of that what you will.

A trans-Atlantic tussle, Richard Branson is taking shots at BA's proposed tie-up with American Airlines. The head of Virgin Atlantic talks about why he thinks it's bad for his airline and bad for travelers also too. In a moment.

(COMMERCIAL BREAK)

QUEST: Sir Richard Branson has written to President Barack Obama in his latest bid to block British Airways' proposed tie-up with American Airlines. In his letter, the Virgin founder says that "your administration is nearing a defining moment in U.S. airline competition policy, the choice is a stark one that could last for decades, whether to side with the consumer and competition or whether to approve the virtual merger of British Airways and American Airlines."

Sir Richard also stressed his belief that every carrier faces financial challenges and should be adjusting their business plans and costs without, what he calls, a "free meal ticket from the U.S. government."

Friday, tomorrow, marks exactly one year since BA/AA first applied -- the latest application to have their tie-up approved. It's the third time the two airlines have gone before the regulators. A final decision by the regulators is expected in October.

Virgin's chief executive, Steve Ridgway, joined me earlier. I asked him why the airline continues to push against the deal that, frankly, may be needed in desperate times.

(BEGIN VIDEOTAPE)

STEVE RIDGWAY, CEO, VIRGIN ATLANTIC: Because nothing has changed. Heathrow, the U.K. remains unique. It's by far the largest market from Europe to the U.S. Heathrow is full, as we all know, hence so much controversy over the third runway.

British Airways already has a level of control and a level of dominance at Heathrow that exceeds both SkyTeam in Paris and Star in Frankfurt. And we have a choice. You know, there is another airline that has been competing very hard for 25 years, so we want to make sure that the regulators don't take their eye off the ball and suddenly push something through that we believe should not be allowed, if you just look at the concentration levels.

QUEST: Are you getting any indication that you've either won or lost this argument?

RIDGWAY: Well, we're still out there battling. I think it's too early to say. I think our arguments have struck home. This is all happening, remember, against a very bad economic backdrop, against recession, it's very tough out there for airlines.

We all know that. But that's no reason for the regulators just to nod this through.

QUEST: You see, the point is that if consolidation, if bad times, if all of these other arguments are on the table, than BA/AA makes sense, except for Virgin Atlantic, as an independent carrier out of the hub airport.

RIDGWAY: It's not just except for Virgin Atlantic. It's except for consumers. And I think our whole thing about this has been, we're not opposed to consolidation, we're certainly not frightened of competition either. We've been competing for 25 years.

But in our world, there is good consolidation and bad consolidation. We may be part of that ourselves, but we would want to consolidate. We're a small company, to actually be stronger and fail to compete more effectively.

What we don't want is giant dinosaurs that are already pretty big and already huge, made even larger sitting on top of us. And that will have an effect.

QUEST: Who are you thinking of consolidating with, either buying or being bought by?

RIDGWAY: Well, I mean, we have quite a number of options. There are things that we can do, who knows, we may acquire, I don't know. But Lufthansa are going to be looking at what they're going to do in the London market now that they are in BMI. We will see what happens.

But that will be -- that will still only -- if anything like that happened, it would still only take us to a size where we were, not a dominant competitor, we were a more effective competitor, and that would be good for the market.

QUEST: Let's talk about what you're seeing on the aircraft at the moment in terms of reservations. The planes -- the gist of the story at the moment seems to be the planes are full but no one is making any money and the yields are pretty pathetic. Is that about right?

RIDGWAY: Yes. Now that is the situation. I mean, I think we're all getting past summer peak, I mean, because there is more travel in July and August, but the summer peak is at a much lower level of contribution simply because of what has happened to fares. And it's going to get even more tough again going into the winter.

We may be at the bottom. And I think there are indications, several people are saying that. But this is an untenable place to be in terms of, yes, we're getting passengers on aircraft, but if you look at the yields and the contribution, it's just not viable.

QUEST: Do you fear that we -- I mean, we thought that last winter was the absolute worst possible moment. Do you fear that this winter could be worse?

RIDGWAY: It could be very similar. It very easily could be the same. I mean, we don't know whether -- at the end of August, whether business travelers, for example, are going to start traveling again from the hubs and start going out there, doing deals.

That -- business travel has been decimated.

QUEST: Do you subscribe in any way to Willie Walsh's musing that there may have been a fundamental paradigmatic shift in business travel, and some of that travel at the front may never come back?

RIDGWAY: That may well be the case. I think it has been such a seismic shift and if you look at what's going on in the world, and what business travelers have done in terms of the way they have disappeared, it could take a very, very long time.

I mean, aviation will grow again, markets will come back. But I think the nature and the shape of it will be very different.

(END VIDEOTAPE)

QUEST: Steve Ridgway, the chief executive of Virgin Atlantic, with an honest assessment with how the industry is performing.

The U.S. car industry has been on a rollercoaster ride. In a moment, the man with insight on what's driving the car business. The chief exec of General Motors tells us how things are running.

This is the program where you hear from the decision-makers.

(COMMERCIAL BREAK)

QUEST: Good evening. I do apologize this evening if I'm wheezing away, a bit chesty tonight, with a bit of a cold.

Now General Motors says reinventing the automobile is the best way to spend taxpayers' money. A day after the company unveiled its 230 miles per gallon Chevy Volt, CNN has been talking to chief -- the GM's chief executive, Fritz Henderson. The person who has been doing the talking to him, Poppy Harlow. Poppy is in New York and joins me now.

He has had an enormous amount of government money, he has got a new company to run, and has got new cars. I mean, he has got all of the toys to play with.

POPPY HARLOW, CNN BUSINESS CORRESPONDENT: He does. And there also, they have $43 million in federal grants that they're putting to work today, announcing today at this plant in Michigan to make those batteries, to assemble them that are going to run the Chevy Volt. That's where we spoke to the CEO, Fritz Henderson, joining us from Michigan a little earlier today, talking about the future of the Volt.

But I really pressed him on what does this mean for the future of General Motors? I mean, Richard, you and I know this is not a car that is going to be profitable for General Motors in the near term. It could even cost them. So take a listen to what he told me on that front.

(BEGIN VIDEO CLIP)

FRITZ HENDERSON, PRESIDENT & CEO, GENERAL MOTORS: Our job is to learn from generation one technology to get to generation two and generation three. We haven't priced the product yet. But in terms of the cost, the cost is high, as it is with any sort of generation one technology.

(END VIDEO CLIP)

HARLOW: Now let me tell you, I asked him, this is a company, $59 billion in the hole to the U.S. and Canadian taxpayer, is this really what a company that is so far in debt should be doing with their research and development money, with their energy? Should they be putting it, Richard, into a car that isn't going to turn a profit for a while?

And here's how he responded to that one.

(BEGIN VIDEO CLIP)

HENDERSON: I think taxpayers should be concerned if we didn't make investments like this in our future, because we need to be part of reinventing the automobile, not simply building what we have today.

In order for us to be successful, to create value for shareholders in which the taxpayers -- the U.S. taxpayers are our largest shareholders, we need to reinvent this company and be part of the future. And I would say that if we didn't invest in these sorts of technologies, people should be deeply concerned.

(END VIDEO CLIP)

HARLOW: And remember, of course, this is the company that put an electric car on the market, Richard, back in the '90s, only to pull it from the market. I did also ask GM's CEO if they will need more government aid. He said, no, definitively no at this point -- Richard.

QUEST: The fascinating part about this discussion, and you and I have had it before, and probably we'll have it again, is that you know that old journalistic cliche that we all learn never to use, "only time will tell," which is rapidly followed -- which is rapidly follow by "remains to be seen."

But that really is the truth of General Motors at the moment.

HARLOW: It certainly is. The executives there have the confidence that this is going to turn the company around. You know, I've asked a lot of people, and some people say good for GM, they're doing this, they're pushing forward. Others say a little too little and a little too late.

I mean, you're looking at other companies that have pushed forward with hybrids a long time before General Motors did. It is still to be seen -- I think we're still a few years out rather than months to see if this can do it for General Motors.

And if this is their only bet, this electric-powered car, or if they will turn to other fuel cell technology or diesel technology, that's still to be seen -- Richard.

QUEST: Ah, but the key thing is -- and we haven't really got time to discuss it, is whether they can create a car that people fall in love with. That's a subject for you and I for another day.

Poppy, thanks very much. Nice to see you. Poppy Harlow in New York.

Now let me remind you of some news just coming in to us right now here at CNN. Volkwagen's supervisory board says it has approved that merger, to merge Volkswagen and Porsche. They will form an integrated company.

The plan is to be completed by 2011. Volkswagen's chief, Martin Winterkorn has said: "Together we are on our way to becoming number one." The deal has been in the works since 2005, the result of some very protracted negotiations.

In just a moment or two, we've been talking at length about the road of recovery on this program over many weeks, you'll want to know, are we there yet? We'll pick the brains of one of our favorites, Jeffrey Sachs -- Professor Jeffrey Sachs to me, of Columbia University in just a moment. What does he think about the road to recovery?

(COMMERCIAL BREAK)

QUEST: Good evening, I'm Richard Quest, QUEST MEANS BUSINESS. This is CNN.

France and Germany have emerged from recession. And that's much sooner than many had expected, both economists, lawmakers, you and me. Well, in Q2 no one quite realized it was going to be that good.

Germany and France may have just popped their economic growth above the parapet, but it is a blip or a sign that the global recession is firmly at an end? It was a question to Professor Jeffrey Sachs, director of the Earth Institute at Columbia University.

(BEGIN VIDEOTAPE)

JEFFREY SACHS, COLUMBIA UNIVERSITY: I think what we had starting last fall was real financial panic, the financial markets seized up, businesses could not get working capital. There was just no lending around. And now the markets have returned to at least a modest amount of normalcy and we're seeing, therefore, the bottoming out.

I don't think that this is simply false inventory-building. This is the end of the downturn, at least the beginning of a gradual recovery, I would say. Countries differ in their specific circumstances, but there is no freefall in the world economy right now.

Some places are actually growing rather well, especially, of course, in Asia.

QUEST: Is this the time, do you think, for governments rationally to start taking away the stimulus, whether quantitative or monetary, that they have been pumping into the system?

SACHS: Just the pedal to the floor does not make sense at this point. And at any time one should be thinking about the medium term budget scenario. In the United States, we have an all-time high budget deficit that looks to be about $1.8 trillion this year roughly, 12 percent of national income, unprecedented in peacetime.

And as far as the eye can see, maybe a trillion dollars or more in out-years. This is not good. And this needs to be addressed in a serious way.

So in this sense I do think that with the panic phase over, looking to the medium term, trying to get some of those structural changes really happening, not just reflating consumption spending, is also a very important part of this.

QUEST: The role of government as we move into the next phase of the crisis, and as we look at, if you like, a return to more normal conditions, I know you have written extensively about this, but can we -- do you believe that the days -- the laissez-faire days where government just stands back have gone for good and that that is an argument that is now widely accepted?

SACHS: I think those days should be gone for good in the United States, but we're more in situation, Richard, of political paralysis here rather than any decisive national consensus. This country is divided on everything right now.

It's divided on health care. It's divided on climate. It's divided on energy. It's divided on regulation. Congress is overwhelmed maybe by its own desire with the vested interests and lobbying.

So what should be, which is a more coherent role of government in -- certainly in financial regulation, but I also believe in climate control, sustainable energy and the like, health care reform, a social safety net, we're not on a clear glide path to that even though we saw the enormity of this crisis.

There is little consensus in the United States about these matters right now. And I think that's very regrettable.

QUEST: We're virtually out of the worst of -- the worst is over. But as we look forward, do you see the biggest threat coming from long- standing, entrenched budget deficits that will be very hard to reverse, or perhaps from some other area?

SACHS: Well, I think in general we're living in an unprecedentedly complex time, completely global interconnections, climate change, energy stress, swine flu epidemic, the new El Nino, every day we have new challenges of a globally-connected world. And we're just very bad at global problem-solving right now.

And in the United States, which still has a leadership role to play, though not the unique one that it used to play, we're still so tied up in our internal knots that we're unable really effectively to lead internationally, even to solve our own internal problems.

So I wouldn't say it's just the budget deficit, Richard, but I would say that that's indicative in my own country of the lack of a consensus on what to do. Should we raise taxes, close the deficit, should cut spending?

This is as divisive as it has been in this country for the last 25 years. And I don't believe we're going to make any clear-cut resolution of this in the short-term.

(END VIDEOTAPE)

QUEST: That was Professor Jeffrey Sachs. As economists line up to declare the recession over, it could take some time before the benefits trickle down. That much they are telling us. But how much we are listening is another issue.

CNN's chief business correspondent, Ali Velshi, has been on the road all week. He is holding his own version of town hall meetings. Ali Velshi joins me now. Ali is at the state fairground in Missouri.

Good evening, Ali.

ALI VELSHI, CNN CHIEF BUSINESS CORRESPONDENT: Richard, I'm in Missouri. I'm Sedalia, Missouri, at the state fair, "Missoureh," as some people say around here. And it's part of our tour. You know, we've been driving and we've talking to you all week. We started in Atlanta, went through Georgia, Tennessee, Kentucky, Illinois, Missouri. We're going to go to Kansas and then Iowa.

And we are talking to people about the economy and about health care. Now we got into Missouri, we got the news yesterday that some noted economists -- 57 noted economists said the recession is over.

Even the Federal Reserve says we're bottoming out, we're flattening out. So we asked people how they felt about that in a place called Wentzville (ph), Missouri. Listen to what they told me.

(BEGIN VIDEO CLIP)

VELSHI: There are economists saying this recession is over. You live in this town. You see the businesses in this town, the people who live here, what is your thought on that?

UNIDENTIFIED MALE: Well, if the recession is over, as they say, I figure it's going to take me, personally, about five or six years just gain what I've lost over the last couple of years.

UNIDENTIFIED FEMALE: No, my personal recession is not over.

UNIDENTIFIED MALE: It's going to take six, nine months a year before the job loss slows down and stops and we start turning around and adding jobs.

UNIDENTIFIED FEMALE: I look at my own 401(k) and, you know, I didn't get hit as hard as others, but it's not back where it was. And I feel I'll probably be working to 70 or 80, until it gets back to where it is.

(END VIDEO CLIP)

VELSHI: So 401(k) obviously is the retirement plan that so many Americans invest in through work. Those are the three things that people are most worried about, the value of their retirement investments, which have been decimated since the top of the market back in September of 2000, October of 2007, the value of people's homes that are still lower, although they're starting to stabilize, and the idea that we continue to lose jobs in the United States.

So for most people, it's not that they don't believe the recession might be ending or might be over, it's that their personal circumstance isn't leading them to consume more, as Jeffrey Sachs was just talking about. They are still very, very cautious about the year going forward -- Richard.

QUEST: Which brings me to ask you, Ali, as our chief business correspondent, Ali, how do we cover this interesting situation where we have a stock market out of control in rising, we have economic numbers that tell us recession probably technically over, and yet ordinary people tell you and tell me, and all eyes (ph) tell us that it's going to be years?

This is the conundrum, Ali.

VELSHI: Yes. And then you add to that conundrum the fact that our consumer-driven economies in the Western world are driven by -- have been driven by easy credit and increasing home values. Those two are not back.

So people don't have that ability to say, OK, guess what, it's kind of ending, maybe I kept my job, so why don't I start spending on big ticket items? Because the reality is you can't borrow for those big ticket items against your home easily, and you can't borrow it from the banks.

So the reality is right now governments are making up for all of that consumer spending and it's not clear that consumers are going to make up for all of that consumer spending once again, once we get back into a moving economy.

So again, the secret to this one is jobs. If we start growing jobs, that's where real consumer confidence comes from, and that's when people start spending.

QUEST: That's a splendid hat you're wearing. Is it yours?

VELSHI: Thank you. This is mine. I often get in trouble for wearing it by the bosses. They would prefer if I didn't. But I also got this one, Richard, which says "Put Some Cheese on It." And if you turn it around it says: "I Love Cheese."

You know, I'm a bald guy, I need a hat. It's sunny and bright out here.

QUEST: I was about to say, Ali, I hope you've got the -- I hope you're practicing safe sun-wearing or whatever it is, you need a hat. Here's your hat, where's your hurry?

(LAUGHTER)

QUEST: Ali Velshi -- and I'm going to say it for you, because I always just sort of -- Ali Velshi in "Missoureh." Many thanks, indeed...

VELSHI: "Missoureh."

QUEST: ... for joining us. "Missoureh." And we've been talking about that all day.

Now in the news headlines, and Fionnuala Sweeney is with us with the update on CNN news.

Good evening, Fionnuala.

SWEENEY: Hello, Richard.

Some news coming in to us now. The Israeli military and police are investigating a report that a soldier may have been kidnapped. Paula Hancocks joins us on the line from Haifa in Israel.

Paula, what do we know?

PAULA HANCOCKS, CNN INTERNATIONAL CORRESPONDENT: Well, Fionnuala, at this point we know that the Israeli Defense Forces and the Israeli police received a report around noon suggesting that a soldier was forced into a car near an Israeli air force base just adjacent to the Ben-Gurion International Airport.

At this point they say they are investigating a possible kidnapping, but that's as far as they will go. Now certainly throughout the afternoon we have seen security forces setting up dozens of roadblocks in the greater Tel Aviv areas doing spot checks to try and find out what has happened.

We've heard from Israeli Army Radio that a female soldier coming off a bus (ph) saw two civilians bundling a soldier into a car. And then that car then sped off. She then called it in to the military.

And now certainly the military is taking this report very seriously. It's not the first time that an Israeli soldier has been kidnapped, if, in fact, this report does turn out to be correct. And we understand from army radio that that female soldier is being debriefed at this point to see if there is any more information she can give.

Now what we expect the Israeli military will be doing at this point is checking on every single soldier, asking soldiers to call in to their commanders, to say that they're there to account for them.

But of course, this is Thursday night, and many soldiers go home for the weekend. So it's going to be a very long and painful task for them to try and find out and account for everybody -- Fionnuala.

SWEENEY: And in terms of the location of this possible kidnapping, very different from previous kidnappings of soldiers?

HANCOCKS: Well, actually, Fionnuala, back in 1994, so 15 years ago in the October of that year, there was another soldier killed in a similar area. It was around this area, close to where the airport is now, a soldier called Nachshon Waxman.

Now there was a rescue attempt by the Israeli military at that point. But the soldier and also the commander of the rescue team died in that bungled rescue attempt.

So it has happened in that particular area. And of course, Gilead Shalit, the soldier that was taken more than three years ago on the border with Gaza, is still being held captive in Gaza itself. So this is something that the Israeli Army is going to be taking extremely seriously. They're going to be watching for any kind of information they can get. We understand that the female soldier who called this in is being debriefed to see if she has any more information.

UNIDENTIFIED FEMALE: Paula Hancocks there on the line from Haifa in Israel.

The U.S. Defense secretary, Robert Gates, says a report due soon from General Stanley McChrystal won't contain any specific recommendations for a boost in troop numbers in Afghanistan. At a news conference, Gates also said the situation there is a mixed picture. The report from McChrystal, who commands the U.S. Forces in Afghanistan, will come some time after next week's elections there.

This follows the killing Thursday of three British soldiers and one U.S. Soldier in Afghanistan.

Drought and high winds combined to fuel wildfires in California. Hundreds of homes were evacuated in the hills south of San Francisco. Wildfires are spreading in the hills near Santa Cruz. At least 500 houses have burned. No word on when firefighters will get the day old blazes under control.

Cuba's Fidel Castro turns 83 on Thursday and a new social exhibit honors him in Havana. The display features photos and paintings of the former president through the years, including a picture of a much healthier looking Castro. The curator says the image is recent and it was taken by Castro's son.

The former leader has often looked gaunt and thin since taking ill three years ago.

And those are the headlines.

Back to you -- Richard, in the studio.

QUEST: Thank you, Talina (ph).

We appreciate that.

Take a look.

There is still malaise at the malls. Maggie Lake is out taking the pulse of American shoppers.

MAGGIE LAKE, CNN CORRESPONDENT: That's right. We are live at a mall in New York City. A lot of people are window shopping, but not many are buying. We're going to give you an update on the state of the U.S. Consumer, coming up next.

Stay with us.

(COMMERCIAL BREAK)

QUEST: Those hoping for a retail rebound in the United States -- it's going to have to all be a little bit longer. Retail sales numbers in July, they were extremely disappointing. They fell in the red rather than rose, as had been expected.

Maggie Lake is out at the mall.

This isn't what we were expecting -- and, Maggie, judging by the number of shoppers around you, I'm venturing to suggest there may be more of you than there are of them.

LAKE: No, actually, Richard, it's not true. We're sort of off to the side so no one mows us down. It is New York City, remember.

There are some people in here. The problem is a lot of them are doing window shopping. They're browsing, they're coming in from out of the rain, they're getting maybe a little bite to eat. They're not really making major purchases.

And this is what we've been seeing. You know, you're right, economists were expecting a positive read on retail sales, but more worrying is that ex-automobiles. If it wasn't from some of the -- the power from Cash for Clunkers, we saw retail sales down 6/10 of a percent.

Across-the-board weakness -- general merchandise, food and beverage, electronics, furniture, I mean you name it and sales were down.

It is very clear from this report that consumers are very worried about their job and they're reluctant to open up those wallets.

(BEGIN VIDEO CLIP)

CANDACE CORLETT, WSL STRATEGIC RETAILING: They put the brakes on everything last fall. They're starting to come back. They're starting to buy their favorite brands again. But they're never going to go back to the shop until you drop mentality that we had in 2005, 2006 -- the good old days of retailing.

And that's what retailers are going to have to adjust to.

(END VIDEO CLIP)

LAKE: The shop until you drop mentality is over -- I don't know, Richard. We've heard that before.

So we have two shoppers that were nice enough to talk to us here in the mall -- proof that there are shoppers in the mall. So let's -- let's see what they think.

Anna (ph) and Tricia join us.

Anna, we just heard a retail analyst -- you couldn't hear her -- but she was saying, listen, the days of shopping until you drop are over, things have changed on a more substantial basis.

Do you feel like your spending habits have changed?

ANNA: Absolutely. I'm really only interested in buying things that matter and hopefully they're on sale.

LAKE: And what is it do you think that's sort of driving that?

I mean, were you the same way before, always cautious, or is it sort of worry about the economy and retirement and jobs and a lot of what we hear in the headlines?

ANNA: There's a lot of those sub things that you just detailed that are important.

But the point of it is, is that when your buying pool, in a sense, expands -- who you're buying for, then you have to really be cautious of what you're spending per person, you know, with grandchildren and things of that nature.

LAKE: Right. And speaking of children, I know, Tricia, you did have a bag from FAO Schwarz, so you're doing a little bit.

But the same question to you -- do you feel like things have changed for you?

TRICIA: Yes, I am. I'm more cautious and I always shop -- look for a sale or it's something I need.

LAKE: Right. It's that -- it's that need to have, not nice to have, is that sort of fueling the way you make decisions now?

TRICIA: For the most part. I mean I bought shoes, but I didn't actually need them, but...

(LAUGHTER)

UNIDENTIFIED FEMALE: We've done that.

TRICIA: But for the most part, my purchases are based on need versus want, yes.

ANNA: Yes.

LAKE: You know, and Richard, that's the thing, you know, we went through a few years where, you know, credit was loose and people were sort of reaching aspirational (ph) buying -- trading up for things. That's really changing. And retail analysts, at least, say it's changing for good. Some of the economists, some of the investors -- and we've seen the action in the stock market -- maybe they're not convinced.

QUEST: Why do I get the feeling you knew exactly what she meant when she said she'd bought shoes that she didn't need (INAUDIBLE)...

LAKE: Richard, Richard, Richard -- I am doing my part and I also bought something that I didn't really need, but I wanted. But it was -- it wasn't expensive, though.

QUEST: Oh. Well, we'll be looking at your expenses very closely.

(LAUGHTER)

QUEST: Maggie Lake joining us from New York from the shopping mall.

We thank you for that.

Now, we need to update you with the weather. There's been some particularly appalling storms around, deadly -- just brutal. Elsewhere in the world, things aren't so bad.

Guillermo is at the World Weather Center.

GUILLERMO ARDUINO, CNN CORRESPONDENT: That's a perfect summary, in fact. And I want to talk a little bit about a new storm that we have in Britain. It's only going to affect London (INAUDIBLE) since yesterday. It's mostly bringing heavy rain in the north and then it stays dry and warmer a little bit in the south, because we have now influx from the south.

So let's see the radar and what we have seen in the last 12 hours. So the moisture leaves London, Southern England, and then moves into the low countries. And Germany stays dry behind. That's why tonight is going to be a nice night for star gazing, right?

And then the other system that is coming, it's going to do pretty much the same, because the high pressure in the south is keeping things dry.

But in Asia, apart from the story we've been reporting on Marakat (ph), that the weather is improving in Taiwan. In fact, we see a heat wave going on in China. We have more than five degrees or even more above normal values in Beijing Games and it's going to continue all the way to Tianjin (ph), like 36 degrees or so.

Look at Taiwan on the dry side. Look at here at Lusanne (ph), getting better. Hong Kong, a little bit better, because we had some severe storms, but we are still seeing some delays at the airport in Hong Kong.

Then Taiwan, the south, is the focus of our attention where the devastating mudslides occurred. It's a little bit better. In the evening hours, we may see some rain showers. We are still expecting some bad weather in coastal parts of China, as well.

Now, let's see, Singapore, Mumbai, Delhi, thunderstorms; Kuala Lumpur, the same thing.

Back to Europe, everything is happening in the north. We have some alerts here in Spain and, also, we have OK conditions in the mid-portions of Europe, but the heat continues in the south.

Look at the comparison -- Glasgow, London -- 17, 22. And then we go down to Madrid at 32. All the way to Turkey, conditions are going to remain quite dry and warm.

Amsterdam looking fine. Dublin, that's the area -- Dublin, also, Belfast maybe with some delays at the airports; also Inverness and every -- everywhere in Scotland, I would say. And Copenhagen with windy conditions.

That's about it.

Stay with CNN.

After the break, more QUEST MEANS BUSINESS.

(COMMERCIAL BREAK)

QUEST: Welcome back.

This is the running order of tonight's program, QUEST MEANS BUSINESS. These are the stories that we have been bringing to you tonight and the various news agencies.

You can get online just about anyhow these days. The problem, of course, is if you are in a coffee shop or you were just around the corner from me here and you were able to log in or to eavesdrop onto what I'm doing on my laptop.

The worst place, incidentally, for this eavesdropping is airports, where, of course, we all use laptops through our wi-fi hot spots to do a bit of work before we get on the plane.

How secure are wi-spots -- wi-fi spots overall and what can we do about it?

CNN's Phil Black met up with an I.T. expert at London's Heathrow Airport to discuss how vulnerable we are.

(BEGIN VIDEOTAPE)

PHIL BLACK, CNN CORRESPONDENT: (voice-over): It's the most efficient way to use those hours lost in airports -- sending e-mails, researching, buying, selling, closing deals. The air here is thick with sensitive information transmitted across wireless Internet connections and much of that sensitive information can be read by anyone who knows how.

This man looks innocent enough -- a business traveler on his laptop. But Kiren Dispanday (ph) is an expert in wireless security. He's watching everything I do online.

(on camera): So I'm connected to one of the open wi-fi networks here at Heathrow Airport and I'm just having a browse around my favorite site.

(voice-over): As I casually surf, Kiren sees all.

KIREN DISPANDAY: You actually went to the business traveler page. That's what you've been doing.

BLACK: It's all there on his screen. This was pretty harmless spying. But it could have been much more serious.

(on camera): But if I was sending an e-mail or doing some banking, would you be able to see that, as well.

DISPANDAY: If you send some passwords and some other stuff, anything that you're doing on a (INAUDIBLE) is pretty much visible to me here.

BLACK (voice-over): Using open, public wi-fi is one security risk at airports. There's another and it's more sinister.

Sean Remnant (ph) is a wi hack hacker. He's a good guy in the hacking world. First, he shows me how easy it is to scan the terminals' available networks.

SEAN REMNANT: And then instantly, I've got -- I'm seeing probably 20 wireless networks with four or five of those having relatively weak secure -- security.

BLACK: Among this list of wi-fi networks, there's a fake -- a trap.

REMNANT: I have a colleague that sets up a -- a what we call a rogue access point to -- to lure someone in. And he's basically caught a public wi-fi that we can see here. Now, that's my colleague's rogue access point. He's got a little access point that's no bigger than a matchbox that he's just got sitting on his lap. And that's now, basically, a public wireless service that somebody could...

(CROSSTALK)

REMNANT: That's how easy it is.

BLACK (on camera): How hard is it to tell the difference between a genuine wireless hot spot and a rogue hot spot?

REMNANT: If somebody really wants to capture your traffic, they will pretend to be a public hot spot service provider. So they will pretend to be your BTU Open Zone, your T Mobile, your Cloud Network.

From an everyday traveler's point of view, you're going to find it very different to differentiate between good and bad.

BLACK (voice-over): So are wi-fi zones best avoided?

The expert advice is to search securely using BPNs. However, when in a rush, we tend to sacrifice security for speed. Remember to stay alert. A cyber thief may be waiting to mug you in the most clean and bloodless way.

Phil Black, CNN, London.

(END VIDEO TAPE)

QUEST: Finally, it is now almost a year since Lehman Brothers went bankrupt and what was a crisis finally became a calamity, and the financial world, just about seized up. Trillions of dollars later, a year on, it's time for us to see how things have changed in the world's financial capitals of New York, Hong Kong and London -- NILONKONG (ph).

Over the next three weeks, I will be traveling between these major centers to present this program and hear from people affected. We're going to be taking time to bring you the latest current thinking on the recession -- even more important tonight, when we hear Germany and France are just about out of it.

How far are we along the road to recovery?

For this trip, NILONGKONG -- we've scrambled the words -- it now becomes KONGNILON (ph). We're starting in Hong Kong. I will see you in Hong Kong there on Monday at this time.

And that's QUEST MEANS BUSINESS tonight.

END

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