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QUEST MEANS BUSINESS

Difficult Decisions on Hold at the G20; Quelling a Currency War; U.S. Stocks Slump

Aired November 12, 2010 - 14:00:00   ET

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


RICHARD QUEST, HOST , QUEST MEANS BUSINESS: The G20 leaders thrash out an agreement, the difficult decisions on hold, they have to wait.

Debt and default is diminished, Ireland is not out of the woods yet.

And Rolls-Royce tells investors the problems we know about and they are not widespread.

I'm Richard Quest, live tonight from Abu Dhabi. It may be Friday, but I mean business.

Good evening.

The G20 has a plan to save the world economy. It may be vague, and it certainly needs a lot more work, but it was hard won, and it seems, it was the best they could do in the circumstance of their meeting in South Korea. They met and they agreed that they needed to fix dangerous imbalances which threaten he world's economy. The definition of an imbalance depends on two words, "indicative guidelines". It all seems extremely tenuous. The leaders say they are working on exactly what indicative guidelines may well be. Despite the feelings of unfinished business President Obama says the summit made more progress than some observers might think.

(BEGIN VIDEO CLIP)

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: The work that we do here is not always going to seem dramatic. It is not always going to be immediately world changing. But step by step what we are doing is building stronger international mechanism and institutions. That will help stabilize the economy, ensure economic growth, and reduce some tensions.

(END VIDEO CLIP)

QUEST: The actual communique, which was very difficult to put together, it runs to some three pages. It is long on wooly detail and short on actual specifics. Our Correspondent Paula Hancocks is in Seoul and she looks at what the summit actually achieved.

(BEGIN VIDEOTAPE)

PAULA HANCOCKS, CNN CORRESPONDENT (voice over): Big smiles for the camera at the G20 meeting in Seoul, even a little wave. But can these leaders claims success?

OBAMA: We succeeded in putting the global economy back on the path of recovery, but we also know that the progress has not come nearly fast enough.

HANCOCKS: Mr. Obama described a hard-won consensus on steps to monitor world trade and economic recovery. The leaders also agreed to refrain from the competitive devaluation of currencies. This came against the backdrop of the U.S. dispute with China over currency policies. Some fear the conflict could undermine global economic growth.

JOSE MANUEL BARROSO, PRESIDENT, EUROPEAN COMMISSION: These are extremely sensitive issues that, frankly speaking most of those countries around the table, two years ago they would not even accept to discuss publicly. They would say that because of national sovereignty this is an internal matter. And now we are launching a cooperative process of assessing, of having a bench mark?

HANCOCKS: While officials talked about currency concerns and agreed to come up with what they called indicative guidelines to tackle trade imbalances, reading the small print it would have to be seen as a work in progress.

JAMIE METZL, ASIA SOCIETY: The test of every principle that is laid out in this communique is, is specific action going to be taken? You can have the best principles in the world if specific action isn't taken by states to realize those principles, then all this is, is a piece of paper.

HANCOCKS (on camera): : The leaders didn't agree to much more than their finance ministers had already agreed to last month, and despite meetings going into the early hours of the morning, the job of actually hammering out specific details when it comes to trade imbalances, has been deferred until the first half of next year. Paula Hancocks, CNN, Seoul, South Korea.

(END VIDEOTAPE)

QUEST: For all the talk of agreement, we know that deep divisions certainly remained among the G20 summiteers. That vague language of indicative guidelines is a way of paper over the cracks. For instance there was no commitment from China, to allow its currency to rise. There was no change in the U.S. stance on its policy of printing dollars. And the idea of cap and trade on surpluses, Timothy Geithner's plans to correct imbalances, well that never made it to the table.

With all these issues in mind, it is worth asking was it really worth them going to all that trouble after all. Robert Reich was the U.S. Labor secretary in the Clinton administration. He joins me now on the line. From the University of California, in Berkley.

Mr. Reich, when you look at it, was this-was this summit simply a bust?

ROBERT REICH, UNIV. OF CALIFORNIA, BERKLEY: Richard, it is always useful for heads of state, and also their secretaries of the Treasury, or their ministers of finance, to get together and talk. That is always good. And it is always nice that they get together and talk face to face.

But beyond that, this particular meeting was, in my view, a waste of time. Nothing happened. There was a lot of nice handshakes and nice talk and a nice communique and some very vague, but nothing specific. What really shouts out here is what did not happen. The Chinese did not agree to revalue the yuan. The United States did not agree to stop pushing down the dollar with monetary policy.

QUEST: There was one line there, wasn't there? That said that the countries agree that uncoordinated activity would harm all countries. And yet that is exactly what the U.S. did with QE2.

REICH: Yes, and I expect that if the United States economy does not pick up, if this recovery here continues to be anemic, Ben Bernanke, the chairman of the Federal Reserve Board, our central bank, is going to continue to pour money into the United States economy. The net effect of which is going to be to lower interest rates and that, in turn, is going to make the United States a less attractive destination for world investors. The obvious consequence? Well, the dollar is going to decline even further.

So, yes, there is always an agreement to coordinate. Whenever you hear world leaders, particularly with regard to the economy saying we're going to do a better job coordinating, watch your wallet, because coordination means absolutely nothing.

(LAUGHTER)

QUEST: The reality is, this was always going to be difficult, but Robert do you think what is really needed is another Bretton Woods type conference, a major get-together for the specific purpose of sorting out these imbalances. Rather than the piece meal, finman (ph) approach?

REICH: Eventually, Richard, I think there will be. But it may take years before we reach the crisis point. That is there is going to be, this is my prediction, but I think I have a fairly good reason for making this prediction. I think there will be competitive devaluations. That is almost inevitable, because the United States has very, very high unemployment, but there is also high unemployment at other major industrial nations. China is worried about inflation right now, China is basically raising interest rates trying to control Chinese growth. Well, all of these together mean that countries are going to try to export their unemployment.

QUEST: And with that in mind, as we look at what's next, the big fear, even perhaps more than competitive devaluations, is ultimately protectionism. Are you worried about it? And do you think we are going to see it?

REICH: Well, we are going to see protectionism in a lot of very subtle ways. I don't think we are going to have anything like we had the 1930s which, in the United States, was spurred by the notorious Smoot- Hawley tariff round, which caused retaliation around the world. But I do think that in very subtle ways countries are going to be using health and safety and environmental rules to ward off imports. There is going to be more subtle form of competitive currency devaluation, which really is a form of protectionism, let's face it. And there will be greater stresses on the international economy.

Already the United States Congress has given the president permission to impose very severe tariffs on goods coming from China. Because China has been found to be, or is on the verge of being found to be a currency manipulator.

QUEST: OK, as we come to an end here, Robert, give me a overview, a simple final overview, are you tonight, more or less, optimistic?

REICH: I'm slightly less optimistic, Richard. I had hoped for more coming out of Seoul. And the real problem here is not only global imbalances but there are imbalances inside major industrial countries. That is we are seeing more and more income and wealth going to the top, the top 1 percent, the top 2 percent, in almost every country, which means the vast middle class doesn't have enough purchasing power to keep these economies going. Hence the relentless drive for exports.

QUEST: Robert Reich, we thank you, as always, for your comments and for your insight. Robert Reich joining us from the U.S. this evening. Have a good weekend, Robert.

REICH: Thank you. You, too.

QUEST: Now the G20 communique made no mention of Ireland, although it was very much on the minds of those there. Pressure is eased on the former Celtic tiger, but borrowing costs are dropping back from Thursday's record highs. The rate on the 10-year bond is now around 8 percent, still dramatically higher than the German bunde. It is after EU leaders meeting at the G20 reassured investors. They said Ireland's existing creditors won't bear the costs of a bailout if it happens, the so-called bond payers. The Irish officials are doing their utmost to quiet talks of a rescue here is the Nobel prize-winning economist, Joseph Stiglitz talking about Ireland's problems.

(BEGIN VIDEO CLIP)

JOSEPH STIGLITZ, NOBEL LAUREATE FOR ECONOMICS: The fundamental problem is that the way Ireland approached the problems of restructuring their banks was fundamentally flawed. And they underestimated the magnitude of the problem. Anybody looking at the nature of the problems in the Irish property markets, the bad banking practices, and looked at how they had proposed to deal with those problems, saw that there were fundamental flaws. And to me it is not surprising that the international markets are responding, so adversely.

(END VIDEO CLIP)

QUEST: Joseph Stiglitz there.

When we come back in a moment-

(DESK BELL CHIMES)

Sorry seems to be the hardest word for Rolls-Royce. One week after one of their engines blew up on that Qantas flight, we hear an apology of sorts. But will it take more than humble pie to get Rolls out of the hole? In a moment.

(COMMERCIAL BREAK)

QUEST: Rolls-Royce says it has now pinpointed the cause of the engine failure on that Qantas flight that forced it to turn back to Singapore last week, when the engine blew up. According to an update released on Friday, a specific component failed in the turbine of the Trent 900. And that sparked an oil fire, which led to an explosion. Rolls-Royce had already confirmed this issue is specific to the 900. Those faulty parts will now be replaced on the Airbus A380s, using that model of engine.

After more than a week of silence, Rolls-Royce Chief Executive Sir John Rhodes, released a statement saying he regrets the disruption caused. He also admitted the incident would affect the company's financial performance this year.

Despite that news Rolls was the top performer on the FTSE today. The company shares were up more than 4.5 percent at the close. Still down around 6.5 percent from where the shares were before the incident on November the 4th.

Now Airbus isn't happy, you won't be surprised to hear. It says these engine problems could affect the number of orders they get for the A380 and how they are delivering those planes. So, the question is, what will it take to get Rolls-Royce into something more of an acceptable position? And, indeed, do they have to do more to actually make an apology and sort this out.

Joseph Lampel is a professor at the Cass Business School in London. Joins me now.

Professor Lampel, well, you and I spoke recently and Rolls hadn't said much. Now they have said what caused it. It's clear, isn't it? This was a very serious matter?

JOSEPH LAMPEL, PROFESSOR, CASS BUSINESS SCHOOL, LONDON: It is a very serious matter. In the short-run they have diffused the crisis by identifying the defective component. But there are still a lot of questions left. You know? How did it happen? What about the design manufacturing system? Is there something deeper going on? They have to provide more explanation. They have to assure customers that this is an isolated incident. It does not reflect on another product, something more fundamentally serious in their operations.

QUEST: As I read the statement, they don't actually say there is a defect or a deficiency in the design. They merely say there was a single component failure and they are going to change it on other planes. Would it be your understanding that there was a risk of a similar failure on other engines?

LAMPEL: This is something that they have been working very hard to fight against. The impression that there could be other-problems with other engines. So, even though they kept a silence, relatively silent for quite a while, the one thing they did first is move decisively to argue that the problem was confined only to the 900 engine. They were worried about a pattern emerging and questions being asked about other engines. There is no evidence that other engines are defective. There has been the problem with the 1000 engines, she is still in testing.

So, for the moment they can rest assured, people may accept their explanation. However, this is where luck comes in. If they have bad luck and another incident happens, either in this engine, or other engines. Then it is going to catch public attention, people will surely remember this particular event over the past week.

So, in effect there is no evidence of problems with other engines, where at the same time, also it is better hope that nothing else happens to change people's views.

QUEST: And Tom Enders, of EADS, has basically said that this could have problems on the delivery schedule for the A380, because as he puts it, engines are scarce. They are not just sitting around waiting for somebody to buy them. So would that would-so the knock on effects are starting to be felt?

LAMPEL: I think the people at EADS must be quite upset with Rolls- Royce. They have just managed to have barely pulled into positive territory, very anemic performance, and suddenly they have this situation which has a knock on effect on their deliveries. And therefore a knock on effect on their cash flow.

Clearly, also (UNINTELLIGIBLE) was put Airbus in a fairly awkward position. And clearly everybody is hoping that this bad news is well behind them. And nothing like this will happen in the near future.

QUEST: OK, we must just finally, though, talk about even those carriers like Emirates, up the road, in Dubai. Now they don't have the Trent 900. They use the GP, General Electric Alliance engine. But they are saying that the plane itself could be tainted, the question of competence could be tainted by what's taken place. Are they just scare mongering?

LAMPEL: I think they are right. I mean, people don't know really, what engines fly on Airbus. They know that this is-this is a new aircraft, let's face it. It doesn't have a long track record. So, while it has a certain kind of sex appeal, in terms of customers, in terms of flying, the flying public, this particular incident has tainted what essentially is a relatively aircraft. So they are not scare mongering.

But having said that, in the end, there may be other deeper things going on in terms of they don't use the Rolls-Royce engine, so maybe they have an interest in encouraging others to switch to a competitive brand. We don't know that. Those are things that go on behind the scenes.

QUEST: Professor Lampel, many thanks for your interpretation. And please, have a good weekend.

LAMPEL: You, too. Thank you very much.

QUEST: Professor Lampel, joining me there from London.

Now, there have been plenty of engines revving here in Abu Dhabi. Formula One is in town and the season has got right down to the wire. We are going to be track side next.

(COMMERCIAL BREAK)

QUEST: Here in Abu Dhabi we are gearing up for Sunday's final race of the 2010 Formula One season. The biggest prize is still up for grabs. Four drivers remain in the running to take the driver's title. Now, this time last year, for the first Abu Dhabi Grand Prix, effectively it was already decided. It was very, very different this time `round. Don Riddell has been taking in the day's practice sessions.

Don is with me now. I'll have to raise my voice slightly, so he can hear me.

Don, it is quite extraordinary, any one of four could win it, but how have we ended up in that situation?

DON RIDDELL, CNN SPORTS CORRESPONDENT: Well, it depends who you ask, Richard. Some would say it is because all the teams have been making a lot of mistakes. Some would say that the regulations have been tightened and it has made it an awful lot closer. But it is absolutely fantastic, certainly, for the fans and in the neutrals that we have got this position in the very last race.

The Yas Marina Circuit is a glorious setting for such a dramatic finale. And as you say, four drivers could walk off with the title on Sunday. In reality it is probably only three. Lewis Hamilton, who incidentally was the fastest man in practice this afternoon, needs a miracle if he is going to win his second Formula One title. And he admits that. He is going to have to win the race and hope that his three rivals all do very, very badly.

But it is no doubt that it is up for grabs and whether it is going to be Alonzo Vettel or whether we shall have to wait and see. It is in Alonzo's hands, though. He is 8 points to go for the championship. If he finishes first or second, it is his for sure.

QUEST: So, to the extent of the mathematics of winning, it is the simplest option in this is Alonzo?

RIDDELL: Yes. Absolutely, he is the easiest option. If he wins we can put the calculators away and just forget about it.

QUEST: If we take a look back at this Formula One season, there have been new cars, new contenders. I need an openness and transparency, CNN is one of the sponsors of one of the new teams, Lotus. Has it been a good year for the new entrants?

RIDDELL: Not really. They are the three teams that are at the back of the grid. Not one of them has scored a point between them. The top man in Formula One, Bernie Ecclestone, has been pretty outspoken about it. In fact, he's really not very impressed with them. He doesn't think they try very hard. And he's even described them as an embarrassment. He says we should get rid these cripples, is how he described them; which, I think, is a little bit unfair, especially when you are a new team in a sport like this.

It is a very expensive sport. It is extremely competitive and you are only going to get big money by either having some one who wants to invest in a very expensive hobby or by being successful and getting new money. And perhaps Ecclestone is forgetting that in sport there are winners and losers, well there is your Alonzos and your winners at the front of the grid, there is going to have to be somebody at the back. So he's been pretty harsh.

Although he has admitted that the CNN team, Lotus, perhaps, he wouldn't mind them sticking around. I think they have shown a bit of ambition, and they are the best of the worst, if you like.

QUEST: All right. Don Riddell, who is down at the fan zone. We thank you Don Riddell, who will be watching and giving us the results tomorrow. Joining us from Abu Dhabi, or another part of Abu Dhabi.

Now, another day, another destination for Barack Obama; the U.S. president is talking jobs in Japan. But as he reaches the last stop of his Asian tour, what is he going to come away with?

(COMMERCIAL BREAK)

QUEST: Hello, I'm Richard Quest, QUEST MEANS BUSINESS, this is CNN. And on this network the news always comes first.

(NEWSBREAK)

QUEST: The idea of setting indicative guidelines likewise is vague. Now these are the way the Federal Reserve currencies of the world is reacting to all of this talk, in terms of what's been happening with the currencies. And the world has been reacting to what has been happening. These are the rates that we are currently seeing at the moment. The pound against the dollar is trading at $1.61. The euro against the dollar is at 1.36, and the U.S. dollar against the Japanese yen, at 82.4.

It is all very much on the back of what took place at the G20. Now we need to talk more about this. Sebastien Galy is a senior currency strategist at BNP Paribas. He has been watching the currency markets take in all the rhetoric and the promising. He joins me now live from New York.

Sebastien, the G20 was a great disappointment, but I wonder are we actually going to see any market turbulence as a result of it?

SEBASTIEN GALY, SENIOR CURRENCY STRATEGIST, BNP PARIBAS: Yes, I think it is not really helpful that we had Mr. Obama make some comments about the Chinese manipulation. That hasn't helped the trade. Also it is the end of the year, not everybody wants to take a lot of risks at this point. And we can see both in the FX market and the U.S. Treasury market a significant pullback in risk taking as basically the -- you can see the costs of borrowing for the U.S. government is -- is raising. And that's helping the dollar, which is appreciating across the board, with the euro/dollar going lower, sterling going lower and equities not really happy at this point in time.

QUEST: Right. But hang on. The dollar is supposed to be going down as a result of QE2.

Are you saying that might not actually happen or that it will actually happen even faster?

GALY: Well, actually, the -- it already happened. So we had a very sharp weakening of the dollar under Q -- the expectations of QE2. Actually, today, the -- the Fed was supposed to implement the first phase of QE2. It had some technical difficulties which created a lot of turbulence in the U.S. Treasury market. And we can see some of the impacts from that on the -- on the dollar.

So most or almost all of the impact of QE2 already happened. They -- and they're -- that's part of the reason, actually, why the dollar is strengthening. It's -- if you tell the market something is going to happen, they price it in a lot earlier than when you actually do it.

QUEST: Right. So -- so this talk in the -- in the communique of indicative and the sort of returns that they're talking about, the things they're going to be looking at for imbalances, does anybody really understand what the indicative barometers will be, and, more importantly, how they will be implemented?

GALY: Well, there's a whole lot of series of indicators which have been studied for the past 20 years. They're all known. And, of course, the question is which one they're going to pick. It may be current account imbalances. They may look at exports. And essentially, if they really wanted to know what these indicators were, they would have pegged it at these meetings. They essentially decided to do absolutely nothing. And that's why we have these vague type of announcements on pos -- potential indicators.

We know what they are. We've known them for the last 20 years. We learned about them in the Asian crisis. There is nothing new there. And it looks like just a delay tactic.

QUEST: OK. The final point has to be this, though.

Is it really that serious?

A lot of viewers will be watching us tonight and saying, well, these imbalances have been around for a long time, they were not the cause of the great financial crisis as such, so why do we need to worry about them in the years ahead?

GALY: Well, we only need to care about the speed at which they're somewhat resolved. There are things which can last for a long time and things which cannot.

So, for example, in -- in Europe, profits are not sufficiently good and that's part of the story of global imbalances. If there were global imbalances which were sustainable, we wouldn't care. But you can see in Ireland and in Portugal, they're simply not able to grow sufficiently fast enough to, essentially, pay their debt. And that's what it is, a global imbalance, is you have too much debt and you don't have enough income, just in the case of anybody who owns a -- a house and he can't pay his mortgage because he's not earning enough. It's the case for other parts of Europe, and in a very, very bad case, it could also be the -- also the case for the U.S.

So what we're trying to do is resolve, you know, the potential for a future crisis. And for that, we need things to move, you know, both on the affect side and also in terms of policies both in Asia and the U.S.

Therefore, the G20 that we had this week was nice and interesting, but what's much more interesting is what they're going to do in the next weeks and months.

QUEST: Sebastien Galy in New York.

Many thanks.

Have a lovely weekend.

GALY: Thank you.

QUEST: We are going to stay in New York for the moment.

Alison Kosik is at the New York Stock Exchange, where the market is down the best part, if not more than 100 points.

Alison joins me now.

How much of this sharp fall today is because of the G20?

How much of it is just simply grumbles?

ALISON KOSIK, CNN CORRESPONDENT: You know, there is a little grumbling, Richard. You've got that right. But, you know, a lot of what we're seeing as the reason as -- as to why the market is selling off today is these global pressures that have been happening, really, all week.

You know, there has also been this trend in stocks, you know, for months. When the dollar was down, we'd see higher stocks. Clearly, we're not seeing that today. The dollar is down, stocks are down.

And this is really about global fears. With China, China is threatening to slow its own growth. And, of course, the concern is that a slowdown there, without stronger growth elsewhere, it could have an impact, a negative impact, of course, on the global economic recovery, especially here in the U.S.

What's also weighing on stocks, traders tell me, is Ireland, you know, will the country default on its debt and need a Greek-style bailout?

One trader called what's happening now with stocks -- I'm talking about the sell-off -- as kind of a mini-version of what we saw in the spring, when Greece was going through its bailout.

You know, traders are trying to stay optimistic, though. They -- you know, they're saying that this isn't the start of a prolonged downturn. You know, the focus all week has been on the G20, it's been on global issues, especially today. And they say once attention turns back to the U.S., stocks are going to return to a more upward trend. That's what traders are telling me. But, you know, a focus on jobs improving, high hopes for the holiday shopping season, you know, that could help markets only so much, because at the same time, we are also seeing investors take some profits off the table -- Richard.

QUEST: You know, when you say that, though, Alison, that the traders are looking to more -- for a more optimistic trend, I do wonder, do you think, perhaps, it's just a bit of optimism, not necessarily based on any hard fact?

KOSIK: I agree with you, because, yes, what are the hard facts?

The hard facts are the data that we get every -- every day or so here in the U.S. And, sure, we've gotten some decent data lately, especially seeing that -- the improving signs on the jobs front.

But the fact of the matter is, we've got millions of people out of work and they're really -- their spending is what really makes this economy go around. We're really not seeing the data signs that things are really getting tremendously better.

I mean, take the housing market, when are we going to see improvement there?

So these things, sure, are still weighing on -- on the market itself and weighing on the reality that, you know, we're still having a rough time in the economy -- Richard.

QUEST: Alison Kosik in New York, who we wish you a good weekend.

KOSIK: The same to you, Richard.

QUEST: And we'll talk to Alison next week, of course, when I'm back in London.

If you're getting ready for the weekend, then you may need some new threads, perhaps not the quality of these.

Does window shopping for clothes have a wow factor?

One classic company is taking style into the fourth dimension.

(COMMERCIAL BREAK)

QUEST: It's been around for more than four decades, but Ralph Lauren Polo is still setting trends. And now the vintage brand is trying to keep fresh by using so-called 4-D projections on its store fronts.

They just posted some spectacular videos online.

But Ralph's son, David, took us on a personal tour of their brand new London emporium.

(BEGIN VIDEO CLIP)

DAVID LAUREN, POLO RALPH LAUREN: You know, when you -- when you come into a Ralph Lauren store, you're really walking through a home. This is a famous photograph of Ralph Lauren by Annie Leibovitz. But what makes it so elegant and so beautiful is that it's a beautiful old Mercedes that Ralph Lauren collected, but, you know, he's in a t-shirt and jeans. And it's that contrast and contradiction of tastes and styles coming together to create something that is definitively Ralph Lauren.

We also use technology in new ways. So what you see with 3-D technology and now 4-D teach, which we introduced on the facade of this building, it's this effortless combination of the two. What our 4-D experience did was take the chandeliers and make them float from the sky. It took the mahogany that tied the evening bags and made them spin in thin air. And that's exciting because it gives you a new way to see product in -- in a -- in a very modern way, which is very glamorous but also appropriate because it highlights the details and the craftsmanship.

We built a brand based on great taste. And what he does is creates a credible environment in the stores and in his advertisements. And people look at those ads and they love the car, the home, dog, the model sitting in it. And they want everything about it. They buy a shirt or a dress because it's an entree into this beautiful world.

With the Internet, you're no longer limited to a single page. You're no longer limited to a spread in a magazine. So the ads come to life, where you can step into that world now much more fluidly.

While you're living in a world that feels so glamorous and so elegant and so tangible, it's really about combining technology in a way that's appropriate to the company. We use technology in so many ways, whether it's touch screens, whether it's big videos playing in the store.

What we do here is not a hard sell. What we do here are show beautiful products and we're finding that customers embrace it when they understand the philosophy, when they want to step into that world. Ralph Lauren has built a business that spans the globe. And it's done elegantly and it's done beautifully. And at a time when the economy has struggled, our business is better than ever.

(END VIDEO TAPE)

QUEST: Ralph Lauren's son giving us a tour of the emporium.

Now, the weather forecast.

Pedram is at the World Weather Center.

I did, of course, put my request in for an F1 -- a special forecast.

Where would you like to start us off today?

PEDRAM JAVAHERI, CNN METEOROLOGIST: Oh, well, we're taking you to Europe first, though, Richard. I certainly didn't forget the request. I have that forecast for you. And one of the best forecasts on earth right in your backyard right now.

Yes, it absolutely is. And take a look at what's been happening across Europe here, because this satellite perspective shows you a vast difference to the south with high pressure, to the north with a broad storm system. And that storm is weakening. We do have another storm system that is going to begin moving in toward the western portions of Europe. Soggy conditions, partly, on Saturday, and eventually on Sunday and I think probably by Monday and Tuesday we get clearing beginning to take place.

But generally speaking, very stormy weather the last couple of days, especially the past 24 hours. In Ireland, wind gusts over 115 kilometers per hour and officially, if you're curious, you get up to 118, that's hurricane force winds. So a lot of damage in place. And some video coming out of Scotland and also Ireland here showing you some of the damage, the swells, of course, very high.

Richard missing out on all the fun across parts of Europe this weekend, as he is in Abu Dhabi. But you take a look at the conditions out there, reports of power outages. We have reports of heavy rainfall, blustery winds and cool temperatures feeling like winter here in the heart of fall. And folks getting ready for this storm system to move out.

But again, going to deal with travel delays. And take a look at the your maps here. We're talking about delays again for you on Saturday, if you're going out toward Copenhagen, this storm is shifting to the east. So 60 to 90 minute delays. Winds going to be the culprit.

The same thing around Amsterdam, looking at 45 minute max delays. Stockholm and also Glasgow going to quiet down a little bit, as the next storm in line going to move in. And, again, notice this initial storm moves out toward Scandinavia. The next one, a little southern trajectory. So rainfall heavier out toward the western ends of, say, France and also areas within Spain and Portugal are going to see some heavy rainfall come out of this.

But talking about the opposite end of the spectrum, dry conditions, we want to take you out to the Gobi Desert. This happened in the past 24 hours. Take a look. Google Earth and satellite imagery here, courtesy of NASA. That's the dust and the sand in the Gobi Desert. It's the fifth largest desert in the world. And look at the easterly flow in the upper levels of the atmosphere. The sand, you can find it right here, south of Beijing, in Eastern China, work your way toward Japan, even South Korea. You can pick out all of that sand there. And, again, one of the most inhospitable places on earth, with some of the highest density of sand. And the winds taking it all the way out there toward Japan.

And, of course, we promised Richard his forecast in Abu Dhabi, and we're going to go in for a closer look at the UAE -- Richard, we envy you. As I said yesterday, the temperature is going to be very warm, to say the least, about 30 to perhaps 32 degrees. If you're curious, in the Fahrenheit scale, that's about 86 to 90, 91 degrees Fahrenheit out there. Northwest winds 10 to 20 kilometers per hour. Sunny skies on Sunday.

Send a few degrees of that our way and we'd be happy -- Richard.

QUEST: I assure you, I'm more than happy with that.

Pedro, many thanks, indeed.

And that's QUEST MEANS BUSINESS for tonight.

I'm Richard Quest in Abu Dhabi.

Whatever you're up to in the hours ahead, thank you for your company this week.

I do hope it's profitable.

"MARKETPLACE MIDDLE EAST" starts now.

(COMMERCIAL BREAK)

JOHN DEFTERIOS, CNN CORRESPONDENT (voice-over): This week on "MARKETPLACE MIDDLE EAST," the multi-billion dollar business that knows no recession -- we look at defense spending in the region.

(BEGIN VIDEO CLIP)

TOM CULLIGAN, CEO, RAYTHEON INTERNATIONAL: The Gulf area is one of the high growth areas for defense spending and aerospace spending in general. And Raytheon is a major player in the arena, so we're out here working with all of these countries.

(END VIDEO CLIP)

DEFTERIOS: The head of the world's largest missile maker tells us about the growing opportunities. Tom Culligan of Raytheon International.

(on camera): This week, MARKETPLACE MIDDLE EAST is coming to you from Abu Dhabi, a bedrock of economic development and also military spending. The UAE is the world's fourth largest importer of military equipment and represented half of all military spending in the region over the last five years. With concerns around Iran's military capabilities and also suspected terrorists in Yemen, the region is retooling at a rate not seen since the first Gulf War.

Leone Lakhani has the story.

(BEGIN VIDEOTAPE)

LEONE LAKHANI, CNN CORRESPONDENT (voice-over): It's a mission to reinforce Arab military might, sparking fresh interest in defense services and technology.

THOMAS RODABAUGH, VICE PRESIDENT MIDDLE EAST, NORTHROP GRUMMAN: The security environment now really demands top quality intelligence surveillance and reconnaissance in order to respond to the range of threats. And note that that range of threats is everything from regional conflicts to transnational threats like terrorism.

LAKHANI: Add to that a perceived threat from Iran.

RIAD KAHWAJI, CEO, INEGMA: There is the ongoing controversial nuclear program for Iran. These countries here traditionally have been threatened by Iran. So they've gone on this shopping frenzy, if you want to call it, acquiring the most advanced systems.

LAKHANI: The Gulf Arab countries are beefing up their defense capabilities with deals worth an estimated $120 billion -- a potential $60 billion agreement between the United States and Saudi Arabia is said to be the single largest component.

ANDREW SHAPIRO, ASSISTANT U.S. SECRETARY OF STATE: It will send a strong message to countries in the region that we are committed to support the security of our key partners and allies in the Arabian Gulf and broader Middle East. And it will enhance Saudi Arabia's ability to defer -- deter and defend against threats to its borders and to its oil infrastructure, which is critical to our economic interests.

LAKHANI (on camera): Saudi Arabia is the biggest military spender in the Gulf, followed by the United Arab Emirates. And although it's difficult to get exact numbers, one thing is clear, Gulf countries are spending an increasing amount of their GDP on defense to raise the level of regional deterrence.

(voice-over): Defense agreements are both with U.S. and European contractors. A large part of these deals is training.

OLIVIER BADARD, PRESIDENT, THALES MIDDLE EAST: We see now, more and more, very qualified officers and -- and forces within the GCC to the level of sophistications of the systems deployed. And the level of training that those forces are going through allow them to be a lot more prominent today while keeping, obviously, a close -- a set of close ties with their traditional allies.

LAKHANI: Ties with the allies remain tight, but the emphasis for these Gulf countries is to develop their own resources.

KAHWAJI: Economic conditions right now tell us that the U.S. will not be able to keep as many troops and as many assets, military assets, in the future as they have now. So countries over here are a bit concerned about that. The Gulf countries, especially the smaller ones, they have small populations. And, therefore, they have small sized militaries. The advancement of technology will make up for the shortage in numbers.

LAKHANI: While the spending seems grand, these governments don't see an option with today's new threat.

Leone Lakhani for MARKETPLACE MIDDLE EAST, Abu Dhabi.

(END VIDEO TAPE)

DEFTERIOS: The Gulf market is seen as a vital one for military contractors. Raytheon, the U.S. technology and aerospace company, is seeking billions of dollars of contracts in Saudi Arabia as part of a broader U.S. weapons package. It also wants to grow its business here in the UAE, Kuwait and Qatar.

I spoke to the chief executive of Raytheon International, Tom Culligan, and asked him about the pace of growth that we're witnessing throughout the region.

(BEGIN VIDEOTAPE)

CULLIGAN: The -- the Gulf area is one of the high growth areas for defense spending and aerospace spending in general. And Raytheon is a major player in the arena, so we're out here working with all of these countries.

DEFTERIOS: It's interesting, most people don't know this, it's not a big country by population, but the UAE represents more than half the spending in the last five years, between 2005 and 2010.

Did you bear any fruit on this latest visit?

CULLIGAN: Well, the -- one of the things about the Gulf Region itself is, over the years, the last 15 or 20 years, a lot of the equipment has aged, so there's a lot of replenishment going on. And also, there's a change in -- in sort of the neighborhood, if you will. There's a -- a different kind of threat that they're trying to deal with. And so they're looking at a -- at a whole new wave of -- of equipment having to do with air defense and air -- and missile defense.

DEFTERIOS: What are you telling your customers right now about the -- the threat from Iran and Yemen and how best to respond to it?

Some would argue that they're almost buying too much for the different type of threat in the 21st century.

CULLIGAN: Well, what we're seeing is they're -- they're busty trying to figure out the threat along the Yemen border and how they could, you know, secure that border. At the same time, they're -- they're looking to the north to what other threats might be out there in the neighborhood that they have to be able to respond to.

DEFTERIOS: As you know, everybody has been salivating over this potential $60 billion -- a very high number -- coming from the kingdom of Saudi Arabia, with the U.S. Defense Department going to Congress.

Is that a realistic number or is this just a -- a build over a 10 year or a 20 year period in that total figure?

CULLIGAN: Well, we've -- we've all had trouble trying to figure out where that number came from, so I can't really speculate, because we can't add to that kind of number. But it -- it could be over, you know, a 20 year period of maintenance and follow-on for everything that's going on there.

So it's hard, with these numbers, to -- to figure them out. The bottom line is we -- we know what we're pursuing and -- and we've got some outstanding business in all of these countries in the region.

DEFTERIOS: Going back to the first Gulf War, you had this lump of spending by Saudi Arabia and then followed on by Kuwait and the UAE. But Saudi Arabia, in particular, has almost gone dormant on the defense front.

This kind of a reawakening of the giant, wouldn't you say?

CULLIGAN: Well, it's, again, you know, after the Gulf War, I know they were busy kind of rebuilding the economy and their -- and their budgets and their and -- and their reserves. And so things slowed down substantially and -- and, as I say, once you go through a period like that, this is high -- highly complicated equipment and -- and it does get worn with time and it does age. And so they wanted to replace it and this is an opportune time for them to do that.

DEFTERIOS: If I can get a time line, this is kind of an amorphous sized number, $60 billion. But no specific time line to contract?

CULLIGAN: No, we don't push on the time line. Obviously, we -- it helps us with planning to know when things are going to happen. We're working to -- to resolve any issues and any concerns and -- and any contractual issues on a daily basis with them. So, hopefully, the sooner the better.

(END VIDEO TAPE)

DEFTERIOS: Coming up, from national security to water security, a company that's using nuclear technology to turn a profit and combat a scarcity of water supplies, when MARKETPLACE MIDDLE EAST continues from Abu Dhabi.

(COMMERCIAL BREAK)

DEFTERIOS: The Middle East, of course, is one of the driest regions in the world, so securing access to water, one of the most precious commodities, is a top priority. The are projects underway in the Gulf, Egypt and Jordanian. And in Israel, they're turning sludge into profit and tackling the water challenge along the way.

Paula Hancocks has that story.

(BEGIN VIDEOTAPE)

PAULA HANCOCKS, CNN CORRESPONDENT: (voice-over): Flush the toilet and you may think or hope you'll never see that water again. But you'd be wrong. This Israeli high tech plant may look like a nuclear facility, the test materials are slated to end in these centrifuges. But what's being enriched is not uranium, it's sewage.

YUVAL SELA, CHIEF ENGINEER, SHAFDAN PLANT: This section, when it will start running, we will have the possibility to start operating for agriculture, to send the sludge for agriculture and not using it as a -- to dump into the sea.

HANCOCKS: Yuval Sela, the chief engineer at the Shafdan Purification Plant Center outside Tel Aviv, is using atomic energy concepts to extract the precious water from the not so precious sewage. There's nothing spectacular about the process of sanitizing 350,000 cubic meters of sewage a day. After getting rid of debris and skimming off the oil, what's left undergoes a biological process which separates the water from the sludge.

SELA: You can see that here, see the quality. It's clean water, it's beautiful. And these effluents are going to the desalinization plant.

HANCOCKS: Water effluent is the product everyone likes -- what's left is the sludge, which is thickened and dumped into the sea. But they're hoping the new facility will extract even more water.

SELA: We take all this water from here, we sent it to the head works, we treat it and we get much, much more water. It's about 10 to 50 million cubic meters.

HANCOCKS (on camera): It's not just about purification, it's also about education. This sewage pipe that I'm standing in is for show, as are these periscopes filled with interesting facts and also some that you'd assume would be pretty obvious, like don't flush diapers or nappies down the toilet. You'd be surprised how many end up at this plant.

(voice-over): After a year in the underground, the water will be pumped and transferred to agriculture in the Negev. The circle is completed when the water has returned to nature. Eventually, the water will be pumped and supply 70 percent of the water in the Negev. That means they'll be able to preserve process drinking water currently used in agriculture -- a vital resource in a region where droughts and water shortages are a fact of life -- turning bird dung into champagne is an artistic impression of the dreams here.

Paula Hancocks, CNN, at the Shafdan Purification Plant, near Tel Aviv.

(END VIDEO TAPE)

DEFTERIOS: And that's all for this special education of CNN MARKETPLACE MIDDLE EAST, this week from Abu Dhabi.

I'm John Defterios.

Thanks for watching.

We'll see you next week.

END