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QUEST MEANS BUSINESS
Swings in U.S. Markets; Italian PM Calls for Emergency G7 Meeting
Aired August 5, 2011 - 14:00:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
MAX FOSTER, CNN ANCHOR, QUEST MEANS BUSINESS: A roller coaster ride on the markets. The Dow shoots up, and down, and up again.
This hour, we will be getting a reaction from PIMCO Chief Exec Mohammad El-Erian. And the former prime minister of Italy, Romano Prodi, and former White House economic advisor Austin Goolsbee. We have all the big names for you.
I'm Max Foster. This is QUEST MEANS BUSINESS.
Hello to you.
Volatility is back. Ongoing fears of a global slowdown has taken hold of stock markets around the world. The focus is on Europe. Italian Prime Minister Silvio Berlusconi speaking right now and is calling for an emergency G7 finance meeting on the debt crisis. He also says Italy will speed up reforms. After a major stock sell off and brush with default, it is positive news, at last, for the United States. The Labor Department says 117,000 new jobs were created in July much more than the 75,000 that were expected. And more than double June's figure.
So better than expected, that is a crucial thing. The unemployment rate dropped from 9.2 to 9.1 percent. U.S. investors were initially thrilled with the figures. With all the major indices opening higher, but the party was short-lived and hangover soon kicked in. Right now, though, the Dow is up. It is up more than 1 percent, 119 points. It dropped deeply in the red earlier in the session.
Mohamed El-Erian is the CEO of PIMCO, one of the world's-well, the world's largest bond trader. He joins us now live from Newport Beach in California.
You are one of the people that can move the markets. But if you can, can you explain what is going on in these markets. It seem completely irrational.
MOHAMED EL-ERIAN, CEO, PIMCO: Oh, it is a wild day, Max.
So let me try to explain. Yesterday when we had the massive sell off, you had two forces acting in the same direction. You had the fundamentals, people worried about global growth, worried about Europe, worried about the U.S. And you had the technicals, people saying, enough, I can't take this anymore. Both of them were in the same direction. And the result was a very sharp sell off.
Today, there is a tug of war going on. So, as you mentioned, we got good economic news, or relatively good economic news, out of the U.S., the employment. So that took us up. And then, people said, you know what, I can't take this anymore. I'm going to sell. So that brought us down. And then we got news out of Europe that maybe, finally, the Europeans will get their act together and that has taken us back up. So it has been a crazy day where you had the fundamentals and the technicals countering each other.
FOSTER: OK, so just what do you make, I mean, we are only getting Berlusconi's comments right now. But he's basically saying, look we are going to do more. We are going to try to convince the markets. He is basically trying to convince you, because the world thinks that Italy may go the same way as Greece. Which might be irrational, but that is what they are thinking. So, is he able to convince you that Italy is going to be safe?
EL-ERIAN: Well, he is saying three things. One, is his is speaking about more fiscal reform; doing more to get the debt under control. That is really important. Second, there has been a link from what he says to the willingness of the Europeans, through the EU, and critically through the ECB, to support Italy. Which is another way of saying Italy will have more funds at its disposal. And thirdly, he is telling us, this is not just an Italian issue. This is not just a European issue, it is a G7. And that is why the market is reacting very positively.
As to whether it lasts, you know, one of the ironies of all of this has been that we get nice speeches, but implementation is weak. So, only two weeks ago we had a wonderful summit, very strong statement, and then implementation was weak. So it is going to be critical that the Italians and the Europeans follow up on whatever they say.
FOSTER: Well, all they are doing is organizing another meeting. So you are going to have finance ministers saying countries need to do more. You are going to have the European commissioners saying, countries need to do more. And then they are going to get locked into parliamentary debates about it. So are you convinced that Europe will be strong going forward? Do you think there will be genuine reform, which is what is needed?
EL-ERIAN: The hope is that they have learned that words aren't enough. The markets now are saying we have heard it all before, we want to see action. So, if words aren't followed up by action quickly next week, and also over the weekend, then this brief market respite is not going to last.
And going forward-
FOSTER: So we could see more drops again next week unless we hear more good news?
EL-ERIAN: Oh, we absolutely have to see more action, not just words. I mean, one thing that happens, Max, when you get a sharp sell off like that, you get a lot of damage in the market. You know, I come across people all the time. That say I can't take this anymore. I want to be able to sleep at night. I can't sleep anymore. Get me out of these markets. So, a lot of confidence has been eroded. So it is critical to try and stabilize this market, so it can regain its composure.
FOSTER: We were talking yesterday about how people are rushing into gold in whatever way they can, even jewelry.
But let's talk about the U.S., because that is the other big talking point in the markets, isn't it? We had these jobs figure. Complete over reaction in many ways, because they were good but they weren't that good, were they? So, where do we stand with the U.S. economy and faith in that?
EL-ERIAN: So the good news is relative to expectation. They were better, like you mentioned in the beginning. The bad news is they are not good enough in an absolute sense. Why? It means that the U.S. is still not creating enough jobs. So the U.S. has an unemployment crisis, a housing problem, a credit issue, and has a public finance issue. You know, the U.S. will unfortunately, will not be able to grow and generate jobs until we see the policymakers in Washington get serious about structural reforms. And this whole debacle over the debt ceiling has eroded trust in the ability of the policymakers to respond.
FOSTER: Let's be realistic. They can't seem to agree to anything right now, can they? So it is nothing but gloom, is it? As far as your point of view?
EL-ERIAN: My hope is that they are getting the message, so there is a real sense of anger in the Street, that we had a fabricated crisis. Because after all, this was a fabricated crisis. This, unlike Italy, unlike Greece, this wasn't imposed by the creditors, or enforced by the markets. This was homemade. And there is anger in the streets of the United States as to why-how can our politicians be so irresponsible? So the hope is that this is a wake up call. But it is a hope.
FOSTER: OK, Mr. El-Erian at PIMCO. Thank you very much indeed for joining us on the program. A key voice in this whole debate, really.
Former Italian prime minister and one-time president of the European Commission, Romani Prodi has a unique perspective, particularly on the European angle on this. He joins me on the line now from Tuscany, in Italy.
Thank you so much for joining us Mr. Prodi.
ROMANO PRODI, FMR. ITALIAN PRIME MINISTER: Thank you.
FOSTER: We are hearing reports about what Berlusconi plans to do in Italy. The world is watching Italy right now, isn't it? Because Italy needs to be safe, economically, to hold up the markets. Can he convince the world?
PRODI: Well, look if you look at the figures, the Italian situation is absolutely identical, when Italy entered into the euro, you know? The ratio between debt and GNP is the same 1.20, around 1.20, very high. But (UNINTELLIGIBLE) that moment did not include during the crisis, a slight increase. So, in theory there is nothing new. Everything is already known. The times for keeping the deficit under control, it was accepted. But clearly during the turbulence, the figures of the debt is so high, it put all the markets under turbulence. But really, I think that the reaction of the market has been overdone, overdone. Because, I repeat, there is no new even under the Italian (UNINTELLIGIBLE), you know?
FOSTER: I understand that, and we keep hearing from policy makers and politicians that the markets are overreacting. But the markets are reacting in a way that they are reacting and politicians now have to take that seriously, don't they? He needs to say there is going to be major reform in Italy to convince the markets. He is talking about a finance ministers meeting in a few days time, but you think, Europe, Italy, can agree on something that is going to convince the markets?
PRODI: Look, when you talk about reforms, I completely agree, the reforms are needed. Because the rate of growth is sufficient to get out of the problem, you know? But this does not mean that in one shot they are (UNINTELLIGIBLE) interest of the Italian bonds goes beyond the Spanish one, because there is no relation with the necessity of long range reform, that are overdue. And the immediate reactions of the market because there is no indication in the country, there is-the budget is under control. The problems we have are circular (ph) and not daily problems. And the exports are not going so badly, but I do understand that the reason (UNINTELLIGIBLE) in which the necessity for reform becomes the primary necessity, probably this moment, this year. Now, I do hope that the government will react in this direction.
But I repeat, I really under, you know, deep worry, when I see such overreaction in the market. You know, 400, almost 400 percent-400 points, but over the German, the German rate of interest, it is absolutely out of any (UNINTELLIGIBLE), you know?
FOSTER: Mr. Prodi, thank you very much indeed for joining us.
I know that many politicians across Europe and the world are agreeing with you right now.
But U.S. stocks have a very, very choppy session. After a positive start the three major indices have been dipping in and out of the red. Alison Kosik is at the New York Stock Exchange.
You hearing there, from a former prime minister, policymaker, there, Alison, saying that the markets are overreacting. But they are just doing what they are doing, right? Can you help us understand why they are overreacting?
ALISON KOSIK, CNN FINANCIAL CORRESPONDENT: You know what, I think, what you are seeing is a market, Max, that is reacting to every news headline that comes out. We saw that at the opening bell, when we got the better-than-expected jobs report. We saw the Dow rally 172 points. Then we saw the market fall 244 points unsubstantiated worries that Standard & Poor's, the other credit rating agency, other than Fitch and Moody's, could downgrade the U.S. credit rating after the closing bell. We did contact S&P. They don't have a comment as of yet. And then, we saw a rally when we heard about the ECB saying it is going to buy up debt from Spain and Italy.
So we are seeing a lot of activity, a lot of volatility. I brought in Teddy Weisberg, he is president of Seaport Securities.
This market action? We are hearing that it is overdone. Is that really the case?
TED WEISBERG, PRESIDENT, SEAPORT SECURITIES: Well, I mean, common sense would dictate that it is a little overdone. I mean, yesterday, clearly I think folks were just kind of throwing in the towel. The expression we use is, keep the cheese, and let us out of the trap. There was a lot of emotional selling yesterday. I don't think we are out of the woods yet, clearly. There are still a lot of issues out there and not the least of which is this sword that is hanging over the U.S. debt, by the rating agencies, that at any time they could in fact downgrade the U.S. debt. And unfortunately, that is not going to go away anytime soon, until Washington does something different from what they have been doing and deal with our own economic problems. Forget what is going on in the rest of the world.
But at least for the moment, it looks like market is trying to find some legs here. The volatility is very disconcerting, drives investors nuts. Traders love it. But obviously there some buy interest out there, because we have seen it today. You know, we have had both upside and downside volatility.
KOSIK: A lot of what we saw yesterday was emotion, that kind of, sort of, that trading coming from the heart, rather than the gut maybe? Maybe a little of both? You know, a lot of that was being driven by fears of maybe another global recession. Is that question off the table now, now that we saw a stronger jobs report here in the U.S.?
WEISBERG: Well, no, one number is not going to make any difference. And I think that that possibility is certainly not off the table. You know, we have had a string of very negative, economic numbers in the U.S. The U.S. is still the world's largest economy, revised downward GDP, a bad GDP, a bad ISM number, I mean there are a lot of negative things out there.
KOSIK: So we have a long way to go?
WEISBERG: We are certainly not out of the woods yet, but investors are pretty fickle and I think most of us tend to view the glass is half full. We want to be optimistic, so all we need is a little good news and maybe that will change the direction of the market.
KOSIK: There you go. Just a little good news is all we need. Right, Max? Back to you.
FOSTER: Yes, absolutely, Alison, thank you very much indeed for that. We are going to be following this story throughout the show, of course. Excitement was so high, in fact, when those U.S. jobs numbers came out. The Bureau of Labor Statistics' Web site actually crashed. Now the excitement has died down a bit. But what do you think are the numbers really mean for the U.S. economy? We'll hear from the president's top economist in just a minute.
FOSTER: The markets and the White House seem to agree the U.S. jobs numbers have-that we see today, aren't really good enough. On the White House blog the chairman of the Council of Economic Advisors said the unemployment rate remains unacceptably high and faster growth is needed to replace jobs lost in the downturn. Felicia Taylor caught up with him.
AUSTAN GOOLSBEE, CHAIRMAN, COUNCIL OF ECONOMIC ADVISERS: It was an encouraging number, well better than expected. But, clearly, we got a long way to go. I think what needs to be done is we need to overcome what are some well-known heavy blows we took the first half of the year from gas prices, from the events in Europe, the events in Japan.
I think what we ought to do now is enact those things that have bipartisan support, put off the things that both parties are going to argue about. And do the things that they agree on, like free trade agreements, the infrastructure bank is bipartisan, the patent reform, some things that have been put on hold while there was this dysfunction coming out of Congress.
FELICIA TAYLOR, CNN FINANCIAL CORRESPONDENT: Do you think that there's a possibility still of a downgrade from one of the ratings agencies? I mean, they've been bandying it about it. They've certainly put it out there. They haven't announced anything like that yet, but they almost look like they're crying chicken if somebody doesn't do that at this point, right?
GOOLSBEE: I don't -- I definitely don't want to get inside the head of the rating agencies. We went through a financial crisis where it's clear in the run up to the -- in the bubble and the run up to that crisis, people put way too much weight on what the rating agencies were saying about different kinds of bonds and structured products. I would hate to see us go back to that similar kind of thinking.
I think it was a -- while the process was messy, we sort of filled the Winston Churchill maxim that the Americans can always be trusted to do the right thing after they've exhausted all the other alternatives. And that's kind of what happened with the debt ceiling. And that's OK, that we got some long-run fiscal contraction in this $2 trillion kind of range, that we're not concentrating that right now, and that we're allowing ourselves to get back to a -- to a growth agenda that the president outlined in the State of the Union. I think that's a good sign.
That's -- we've got to keep our eye on the events in Europe, because that -- those are a little worrying. But I think, with this jobs report, we're getting some -- we're getting at least a breath of good news.
TAYLOR: We talked about QE1, QE2 and, now QE3 is suddenly on the table again. Do you think the Federal Reserve is going to need to step in one more time and provide stimulus and is it actually going to work?
GOOLSBEE: Well, you know, all my time here, they tell me you don't talk about monetary policy. If you tell the Fed what to do, you're going to be fired. What are they going to do? It's my last day of work. So look, I don't know. Ben Bernanke's a -- is a friend. I knew him when he was an academic. And I worked with him there at the Fed. Our focus is on the fiscal policy side. I think the moment in the economy that we're in is clearly different than the one at the beginning of 2009, when we came into office.
TAYLOR: Today is your last day, so what are they going to do, like you said. They can't fire you. Give us a little insight, because, you know, from the layman's perspective, watching what's going on in Washington, it can seem very frustrating, frankly. Do you think that the administration is doing an effective job, really? Or is it just sort of -- I don't know, madness?
GOOLSBEE: Well, I think it's been doing a fairly effective job. We're in a bit of a -- I guess I'd call it a silly season in Washington, where it does seem to me that, you know, if the president says let's do this thing, there is a group of people that says, well, whatever he said, we don't want that, even if the thing that he said was bipartisan. I hope we can get out of that, because that's - look, it's not just frustrating to the staff. Who cares about the staff (ph)? That's frustrating to America.
FOSTER: Well, there you are. Well, Felicia joins us now.
A sense of relief you get, from him, don't you, a big, Felicia? He is leaving the economy at a time when there is so much volatility in those markets. We are now having to assess why those ups and downs are taking place. How would you assess this week, particularly today, how the markets were going up and down so much?
TAYLOR: Well, you know what is happening is your actually seeing the activation of some computer trades that go in. It is called quantitative technology. And what happens is there is this-they automatically trigger things, because they take the emotion out of the trade, literally. So, yesterday, when we hit certain levels those computer trades automatically kicked in. And that exacerbates the spiral downwards. That is why you see it happen so quickly on the downside, maybe not quite as much on an upside, when we see a significant rally.
Today, though, what the markets are concentrating on, in addition to seeing that kind of computer activity, the computer trading, is just literally the markets trying to find a level of comfort. And each time there is a headline that crosses, like what we saw from the ECB stepping in to buy up Italian bonds, immediately you get a rally. But then, again, it falls back again. Because we don't have enough in this economic recovery, in terms of numbers, strong numbers to keep that rally going.
And frankly, going into a weekend, most investors, most traders don't want to hold onto their positions, because they are very uncertain as to whether or not we are going to get any breaking news, over the weekend, before Monday's session, Max.
FOSTER: OK, Felicia, thank you very much indeed.
Well, it has been a market meltdown in many ways, across continents this week, not least here in Europe. Up next, how a sea of red swept across the Atlantic Ocean.
FOSTER: Well, just moments ago, Italian Prime Minister Silvio Berlusconi announced that an emergency G7 meeting will be held within days, he says. Italy has suddenly found itself at the center of the European debt crisis. Concerns over its 120 percent to GDP ratio pushed yields on its sovereign debt to euro era highs this week.
After hours of emergency talks with Finance Minister Julio Tremonti today, Mr. Berlusconi said measures to balance the country's budget will be accelerated. Economic and Monetary Affairs Commissioner Olli Rehn says markets haven't responded to the EU's new bailout plans, as he had hoped. And another down day gave the European economics commissioner more concern, more cause for concern.
Jim Boulden has been navigating the sea of red. And it is all mixed up with politics.
JIM BOULDEN, CNN FINANCIAL CORRESPONDENT: Yes.
FOSTER: Everyone is arguing.
BOULDEN: And you know, these announcements out of Italy tonight have come in time to help European-not help European markets, in time to help American markets. So, when the European markets closed we still had many of the American markets deep in negative territory.
So, let's show you, just a reminder of how Friday closed. You see the FTSE 100 down 2.5 percent; Xetra DAX down more than 2.5 percent; Paris, which actually had been up for some of the day, down a little bit over 1 percent. And Milan, the shares who had also been higher for the day, along with shares in Spain, ended the day lower. It just couldn't hold on, on Friday, when they were trying very hard. Good bounce in the morning. And a really good bounce in those markets, for about 20 minutes, after the U.S. unemployment numbers came out.
For the week, the route: FTSE 100 down nearly 10 percent. Xetra DAX by far the worst, down nearly 13 percent. We saw some big name exporters hurt really hard. And of course, the banks were hurt very hard. The bank hard-hit in Paris as well, the CAC 40 down more than 10.5 percent. Milan, for the week, down 13 percent.
Now we were talking about Olli Rehn? He held a press conference. I have to say, I think he was pretty brave to hold a press conference while markets were still open. And he said the lack of investor confidence was quote, "incomprehensible". And insisted that Spain and Italy would not need a bailout. Of course, there is no way the EU could realistically afford to bailout both countries now, or ever. But even still he stuck up for the health of both countries and he urged investors to keep their heads.
(BEGIN VIDEO CLIP)
OLLI REHN, EU ECONOMIC & MONETARY AFFAIRS COMMISSIONER: In this context it is very important that we can restore confidence into the markets. And I would encourage everybody now to stay calm and breathe deeply and look at the economic fundamentals of the countries that have been under pressure recently. Both Italy and Spain have taken very important decisions on fiscal consolidation.
(END VIDEO CLIP)
BOULDEN: So, Max, I think it is interesting. We used to get European leaders during the economic crisis come out with a statement sort of Sunday afternoon, Sunday evening. Now we are getting them on Friday evening. They are not even waiting for the weekend. They are really trying to see if they can stop the route from continuing next week.
FOSTER: Jim, thank you very much indeed.
I'm joined now by Holger Schmieding, chief economist at Berenberg Bank.
Thank you very much indeed for joining us. It is a bit of a loosing battle, isn't it, for the politicians right now. Because they keep saying the markets are overreacting. You know, Romano Prodi was even saying that to me earlier in the program. Doesn't mean anything, though, does it. The markets are reacting to what they feel.
HOLGER SCHMIEDING, CHIEF ECONOMIST, BERENBERG BANK: Well, the markets are overreacting, but that is a fact politicians have to get used to. These are financial markets. Politicians have to take a bit more effort to actually understand markets. Markets can be driven by herd behavior like all other human interactions. And politicians have to get ahead of the game. What they did at their 21, July EU summit simply was not good enough. And Trichet's performance yesterday at the EC press conference really a bit ridiculous.
FOSTER: He talking a bit bitter and angry, though, isn't he? He got the commissioners and people in Brussels criticizing the national governments for not doing enough. National governments have got all of their political problems domestically, haven't they? And the markets are saying the politicians aren't doing enough. So where is the onus here?
SCHMIEDING: Well, the onus is on policymakers to deliver a better response. That pretty much means the European Central Bank cannot say there is a problem in Italy, so we buy Portuguese bonds. It just doesn't make any sense. They have to say, we buy Italian bonds very clearly.
FOSTER: And they need to do it this weekend, don't they?
SCHMIEDING: They had better do it as fast as they can, which is this weekend. They may want to exact a condition from Italy. Something on the budget progress, yes. A balanced budget amendment in Italy would be fine, but the ECB ultimately, it is the big bazooka, the ECB bond purchases. That is what we need as an immediate stop gap so that we can thereafter having stopped the panic, sought out the other issues at more leisure.
FOSTER: And the ECB and also in America, the central bank there, they wanted to sort of let go of printing money. And that sort of liquidity, we had a whole process of-actually, they are going to have to back to it, aren't they? Otherwise the markets aren't going-they need something in the meantime whilst some structural reforms take place?
SCHMIEDING: Well, in Europe we definitely need that. Now there is no way around, I think, the ECB stepping in and intervening. We, of course, need other things. More fiscal progress would be good. More reforms in Italy, perhaps fast-track approval procedure for the other European reforms that were part of the 21st of July, yes. But if you have a panic, you need to act in big force, in big size and immediately. And that is the task of the central bank, as the ultimate backstop. Just as in the U.S., you could buy a lot of bonds. The Fed did, when it was needed. And that actually- remember March 2009, when the Fed announced that it would be buying bonds, the financial panic stopped then.
FOSTER: Yes, but it is just putting the problem off, really, isn't it? But it helps?
SCHMIEDING: Well, it helps to ever stop (INAUDIBLE)...
SCHMIEDING: -- that -- to get time to sort out the problems.
Let's talk about the Italian prime minister. We have to analyze what he's been saying over the last half hour. But it seems as though he -- he is convinced that he needs to say something about the economic reform to sort of comfort the markets, which is a realistic position, isn't it?
But, really, he's only really calling another meeting of finance ministers, European finance ministers, but actually, isn't it the heads of state that actually have to work on their own in their own countries to sort this out?
SCHMIEDING: Well, we need clear signals from Italy. If the various Italian parties, government and opposition, could both come out over the weekend and say we support a balanced budget amendment. That would actually give the ECB the cover to say, OK, Italy is working on its own problems and we, the central bank, can support it.
So such a signal from Italy would be good. And, of course, then having some European supervision over Italian reforms -- a balanced budget amendment, hopefully, labor market reforms would be good, but that would take more time. We need signals, ideally, over the weekend, as soon as possible, that is, to stop the market panic from doing more damage.
FOSTER: Yes, what will happen Monday if you don't get that?
SCHMIEDING: Well, we've seen it in equity markets in Europe this week --
FOSTER: The same thing.
SCHMIEDING: Maybe more of the same until policymakers step up to the plate. And if they do so, markets can turn around.
FOSTER: Mr. Schmieding, thank you very much, indeed, for joining us.
Right now, as you can see on the corner of your screen, the Dow is down almost 100 points.
That's not right, is it?
It's up 83 points. Well, it was a different screen.
More on the market volatility after the break.
FOSTER: Welcome back.
I'm Max Foster.
You're watching QUEST MEANS BUSINESS.
Let's check the latest headlines for you.
U.S. stocks are having a wild ride this Friday. Right now, you can see the Dow is up .75 of 1 percent. Earlier, we saw all three of these indices fall into the red. That's after enthusiasm over the better than expected July jobs report fizzled out.
An activist group says at least 15 people have been killed across Syria during anti-regime demonstrations on Friday. This video is from YouTube. CNN can't confirm it, but it purportedly shows heavy gunfire and a tank moving through a dust cloud in the flashpoint city of Hama.
A controversial Polish politician has died, apparently by his own hand. Police found the body of Andrzej Lepper at his party's headquarters in Warsaw. The Self-Defence Party leader rose to deputy prime minister after the 2005 election before a sex scandal ended his career.
Returning to our top story, the financial markets and the big question is whether the U.S. economy is heading for a double dip recession.
CNN's Poppy Harlow spoke to Sam Stovall, chief investment strategy -- strategist -- for Standard & Poor's, as we were witnessing another day of turmoil on these global markets.
How could we have missed that -- and, Poppy, what have you managed to work out in your interview?
POPPY HARLOW, CNNMONEY.COM CORRESPONDENT: You know, it's interesting, if you look at where we are now in the markets after that massive sell-off on Thursday in the United States, Max, we're officially in correction territory for the S&P 500, that broad index.
And I talked to Sam Stovall, the chief investment strategist at Standard & Poor's, about where that puts us historically and whether or not we were ready, it was time for that sort of correction here in the United States.
We went on to talk about the risks of a double dip recession and where you are supposed to put your money, given the market volatility we're in right now.
Take a listen to part of our conversation.
(BEGIN VIDEO TAPE)
SAM STOVALL, CHIEF INVESTMENT STRATEGIST, STANDARD & POOR'S: Nobody is really ready, and that's why it takes people by surprise. This market declined 12 percent since the top on April 29th. So of course, people are now thinking, gosh, I should have sold in May and then gone away.
So the real question is how deeply will this correction go or might it morph into a new bear market?
HARLOW: I think that is the question. You said in your -- in your most recent notice, it's just going to be a matter of months before we see whether or not this is just a correction or whether we're falling into another bear market.
How long will it take us to see that?
Historically, what are the signs that will tell us which way we're going?
STOVALL: Well, historically, it takes about nine months for us to breach that 20 percent line in the sand that separates a correction from a bear market. So we still have a few months to go before we at least hit that average time zone.
I think, certainly, the real question is whether the U.S. will likely slip into a double dip recession. With the most recent payroll report, I think investors are breathing a bit of a sigh of relief that the numbers actually came in better than expected and prior months' numbers were revised higher.
So a lot of your more traditional indicators, such as an inverted yield curve, mentioning that short-term rates are higher than long-term rates are not helping us to decide whether we're in recession.
So we're going to have to wait for additional data to tell us the answer.
HARLOW: When you look at the massive decline that we had on -- on Thursday in the equity market, what are you attributing it to?
And should investors brace for that to happen again?
Was that a one time panic?
Is that emblematic of the underlying fundamentals of the U.S. economy not being in line with where corporate profits are, with the performance of companies reflected in the market?
STOVALL: I think that because all of the 10 sectors in the S&P 500 posted declines in the most recent four day period that it's a reflection of worries about the U.S. slipping into recession, not just worries about the -- the banking community in Europe because of the continue sovereign debt woes.
STOVALL: So I would tend to say that we're not out of the woods just yet. This correction still probably has further to run. Maybe we won't get another 500 point down on the Dow, but I think certainly that we could continue to see red arrows for a while.
HARLOW: How do you play this market then?
Where are you advising investors to put their money at, at a time like this, when you say we're not out of the woods yet?
STOVALL: Well, I -- I have been advising investors to gravitate toward larger cap stocks because when the seas get rough, investors prefer larger boats. Go more toward the value side of the equation, because earnings growth and valuations look more attractive there. Also, gravitate more toward the defensive sectors, consumer staples, for instance, because the demand for these products and services remains fairly static and they tend to fall less than the overall market.
And also look toward those companies that have consistently raised their earnings and dividends over the past 10 years as seen in a -- a quality ranking by S&P of A-, A or A+.
HARLOW: But during the sell-off on Thursday, what we saw as a result was all the Dow 30 stocks down and down significantly. And take a company like Alcoa, right. This is a very good company in terms of being emblematic of the broader economy. They make aluminum, so it's in -- in jets and it's in soda cans. So Alcoa was the biggest loser on the Dow. And that is a very big company.
Is that really where people should be putting their money, in these big blue chips?
STOVALL: Well, I think the question is, when the market falls, are there safe havens?
And the answer is no, that regardless of whether you are tagged as a defensive sector or as a cccl sector, when the market goes down, there is no place to hide. Defensives simply lose less than the overall market does.
Actually, if you're looking for one area that consistently rises when the market falls, that would be Treasuries.
STOVALL: And so right now, with the worry...
STOVALL: -- still overhanging us as to whether the debt rating will be reduced for U.S. Treasuries, I think investors are finding that there are very, very few places to hide right now.
HARLOW: The -- the yields are so -- so low, whether you look at the 10-Year, 2-Year, or -- or 1-Month T-Bill. But yet you still have people, just in the last day-and-a-half, blocking the treasuries.
STOVALL: I think it's because investors, at this point, remember what happened in 2008, and they would much rather get a 0 percent return on their money, but feel that it is safe as compared with risking a -57 percent, which was what they experienced from December of '07 going into March of '09.
So I think investors are really focusing more on capital preservation than they are looking to make a profit on that money.
(END VIDEO TAPE)
HARLOW: And that's the -- the very interesting point, Max. The focus now, in the United States, for investors, is on capital preservation, therefore, they're putting money into Treasuries with very low yields, just making sure that it's not in very volatile equities.
We do have a higher market right now. No telling where the U.S. market will end.
But I will end by telling you this, Max. I thought it was fascinating to near Nouriel Roubini, the economist, tell Bloomberg today that he says, no doubt, we have a 50 percent chance right now of the United States falling into a recession in the next 12 months.
And if you look at Nouriel's history, he's generally spot on -- Max.
FOSTER: Absolutely. And that's scary stuff.
Poppy, thank you very much, indeed, for that.
Now, it has been quite a ride the whole of this week.
After the break, we'll take you through all of the day's developments aboard the market roller coaster.
FOSTER: Well, the Dow seems to have bounced back a bit from its brutal session on Thursday. But the atmosphere in the U.S., as well as the sell-off worldwide, has had plenty of knock-on effects.
The dollar has been falling against rival currencies. Any optimism over those jobs numbers quickly disappeared. Investors seem to be heading for safer currencies, like the yen. The dollar fell .8 of a percent against the Japanese currency.
Also falling recently is oil, although it has gained a bit today. Brent is back up by just more than 1 percent. However, it shed $8 a barrel since Monday, as fears about the global economy increase, the price of oil tends to decrease, as well.
And investors have been heading for safe havens, as said. And they don't get much safer than gold. We were talking about that yesterday. And that is another new record, more than $1,650 an ounce.
As for the stock markets, in the U.S., it's been a real roller coaster as we head toward the last hour of trade for the week. The traders in New York, I'm sure, are waiting to go home. The Dow currently up, though, .75 of 1 percent. The NASDAQ down. The S&P 500 up.
But on the week they're all firmly down.
And that is QUEST MEANS BUSINESS for you.
We'll bring the latest market news for you on Monday. Lots of traders and economists waiting for good news from policymakers about structural reforms, and particularly the ECB.
What's it going to do?
I'm Max Foster in London.
We'll bring you the news on Monday.
But "MARKETPLACE AFRICA" is after the break.
ROBYN CURNOW, HOST: You're watching MARKETPLACE AFRICA.
I'm Robyn Curnow.
And this is the new high-speed rail links between Johannesburg and Pretoria. Officials hope it will carry 100,000 people a day, a fraction, of course, of the 15 million people who travel on mini-bus taxis every day in South Africa, a uniquely African form of transport.
CURNOW (voice-over): Like a modern-day urban cowboy, the South African taxi driver controls his mini-bus like a galloping steed, weaving in and out of traffic, breaking road rules, loudly hooting -- a signal to pick up passengers, who randomly jump on and off. Unmetered with unscheduled stops, it's an industry that's chaotic, haphazard and relentless.
Tabu Machau (ph) says he drives 10 hours a day.
(on camera): Is this a good living?
TABU MACHAU: It's a living.
What can I do?
Because it is my living.
CURNOW (voice-over): Tabu is one of nearly 300 mini-bus taxi drivers. Another estimated 400 people work in the trade, says the industry's national association. It's an informal, cheap, grassroots solution to South Africa's woeful public transport system, which has, over the decades, failed to provide transport for the poor.
(on camera): Millions of South Africans travel in taxis like this one. It's often overcrowded, dangerous, as well. And the government is trying to regulate this industry. But the taxi drivers and taxi buses say they want to remain independent.
(voice-over): Lauded as a showcase of homegrown black capitalism, the taxi industry takes pride in operating on the fringe of the formal economy.
AJ MTHEMBU, PRESIDENT, SOUTH AFRICAN NATIONAL TAXI COUNCIL: We are regulating ourselves. We've been regulating ourselves. There -- there is nothing that will say we want to run a business in an unregulated manner. As you can see, you can see -- it's -- it's a very calculated chaos.
CURNOW: A calculated chaos evident here at the Bree Street (ph) taxi rank in Central Johannesburg. Passengers cue in the early morning rush hour. Marshals direct them. Inside, conductors collect fares. At the top of the pile, taxi buses can only own eight taxis -- a cap on ownership to spread the wealth around, they say.
It's a collective of competing taxi associations who dispute that they have a Wild West approach to business.
(on camera): Is this a cowboy industry?
FELIX STEVENS, TAXI OWNER: No, no, no, no, no. That I disagree with, not because I am a taxi owner, but what is happening is you -- you become a taxi -- a taxi owner/driver regulated by the people that wants to stop at the places that they want to be. I think the definition of a taxi is to stop, start, stop, start.
CURNOW (voice-over): An unusual business model which they're hoping to expand into low cost air travel. Plans to launch their own airline in September are on track.
MTHEMBU: It's time, therefore, that we move to the other side and begin to spread our wings. People will be coming into the taxi. We'll have kiosks in the taxis where they will check in there, they will check their boarding pass. They will then be taken into the taxi, right to the airport. When they get to the airport, we put them into our airline, we take them into their next destination. When they get there, another taxi is ready for them there to take them to their final destination.
CURNOW: Diversification of an already uniquely African type of travel.
MTHEMBU: Even if you watch a movie, if you see a yellow cab, then you know that you are in America. That movie was filmed in America. Once you see a mini-bus, then you know that you are in Africa. This is a symbol of Africa. It's a symbol of unity. It's a symbol of sharing. It's a symbol whereby we use the little resources that we have, put it together so that we are able to assist one another to move from one place to the other.
(END VIDEO TAPE)
CURNOW: We're on the cloud train now, that high-speed rail link between Johannesburg and Pretoria. Before we get to our destination, I just want to give you a few more numbers about the taxi business.
The industry itself contributes about $5 billion to South Africa's GDP. And despite directly employing drivers and conductors, they also say they indirectly employ about 100,000 car washers in taxi ranks around the country, as well as 150,000 porters who supply food to commuters -- all, of course, servicing the poorest of the poor.
Now, after the break, we're going to go to East Africa and ask if rising food prices have contributed to the food shortage crisis in the Horn of Africa. We'll ask an expert.
CURNOW: A round trip ticket on this train will cost you just over $12 US. Not a lot, say the commentators who've had to contend with traffic congestion and rising petrol prices.
Now, the high cost of transport and food has infuriated many across Africa.
David McKenzie now speaks to the lead economist for Kenya for the World Bank, Wolfgang Fengler, about just how much high food prices are playing into food shortages in East Africa.
DAVID MCKENZIE, CNN CORRESPONDENT: There's a lot of focus being put on the lack of rain.
But is this, in some ways, a manmade crisis in the Horn of Africa?
WOLFGANG FENGLER, LEAD ECONOMIST, KENYA, WORLD BANK: Look, David, I think it -- it is a manmade crisis which is compounded by these very unpredictable rainfalls and by climate change, to put it more directly. I mean it is manmade because if you didn't have the situation that you have in Somalia, the consequences would be less dramatic and people -- the delivery of aid and of support could happen more directly.
Let me make a second point, which is more the silent crisis that is happening and building up, which is the crisis on food prices, which does affect a much bigger share of the population, not as dramatically, but seriously enough.
MCKENZIE: Why is it a crisis for people in this region?
FENGLER: It's a crisis because this region is still a poor region, where half the population and more are living on $2 a day.
MCKENZIE: So you mean those people could be spending on education and investment and they're spending it on food?
FENGLER: Yes. So they spent, you know, as mentioned, they spend on - - on average, half of their income on food. Obviously, if prices go up, they then reduce the food intake. But just to give you the key number for Kenya, Kenyans consume mainly maize for Kenyans. So that on average, every Kenyan consumes one bag of maize per year. One bag is 90 kilos. So it's roughly 300 grams a day. The price of a bag of maize has gone up over the last half year from something like $20 to $45.
So it is a -- it's a massive increase. And not just the increase, as such. It's the volatility, the price has gone up and down a lot over the last, what, two to three years.
MCKENZIE: Is it that this is just the poorest of the poor that are being affected, or, also, the middle class?
FENGLER: No, I think it -- it's all affected, because the middle class, I mean in such a country like Kenya, is defined as having an income of $2 to $10 a day, which is poor by our standards. And so it does affect everybody, except a very small share of food producers. But there's -- it's a very small number. It's basically 1,000 farmers who are benefiting from a relatively in effect system where -- where prices are -- are kept at a high level and to the detriment of the mass of the population.
Basically, it's a system of distribution -- redistribution from the poor to the rich.
MCKENZIE: When you mean it's a distribution from the poor to the rich, what exactly do you mean by that?
FENGLER: Well, I mean that the poor pay high prices. They do, actually, in Kenya, and that's the tragedy. You know, they pay higher than the high international prices. But when the international price goes up, in Kenya, the last three years, in 2009 and this year, it went up even higher. So while if Kenyans would buy at international prices, they would just buy at something like $30 per bag of maize. Now they pay $45 for a bag.
MCKENZIE: In the big picture, long-term development of this region, how important is it to dampen food prices or for people to have more money to get food?
FENGLER: You know, two things, David. One, first, just to also come back to your earlier point on the reason for high food prices.
Globally, it has a lot to do with the emergence of China and India and their change of dietary patterns. So there is more need -- people in these -- in Asia eat more meat. And that's more agriculture intensive. That drives up prices.
And the second is that biofuels, you know, thought to be, you know, the magic solution to the planet issues actually have had a negative impact on -- on food prices.
Now, food prices in general don't, you know, there can be situations that they are good for poor countries who are agricultural countries. But not in markets where it's just a very few who dominate this market. If -- if 20 or 30 percent of Kenyans would have big fields, produce efficiently for the world market, then, first, you'd get the prices probably a bit down because you have more supply. But many more would benefit.
But ultimately, if you just look at Kenya's economic structure and basic development transitions, people move to cities. They'll have other jobs in agriculture. They'll have more industrial jobs, more service jobs. Kenya is doing exceptionally well in some of those segments. And then they -- they earn more money. If you've got stable economies, you can sell your products to many more customers and you can employ more people. And then you have more money to go and buy food even if it's at higher prices.
So ultimately, you need to get to a situation that people in Kenya and Africa don't pay -- use half of their income for food. If they have a smaller share. So that then, like in richer countries, where people are complaining about high food prices, but they're just complaining, they're not suffering.
(END VIDEO TAPE)
CURNOW: That was World Bank economist, Wolfgang Fengler.
Now, let's see what's trending this week.
CURNOW (voice-over): Indian firm, Essar Group, plans to spend as much as $4 billion to build an iron ore processing plant in Zimbabwe. That would be the single largest investment into the country's troubled economy. The new investment is also India's latest push into Africa's resource sector.
(END VIDEO TAPE)
CURNOW: We're at our destination now. We're in Pretoria.
But please do go to our Facebook page. It has behind the scenes photographs of some of our shoots, my weekly blog, as well as a sneak peak of next week's show.
But for now, I'm Robyn Curnow here in Pretoria.
Thanks for watching.