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QUEST MEANS BUSINESS
Stormy Times In Global Economies, In The Eye Of The Storm, U.S. And European Markets; And Today, Add French Banks; Riot Fallout; Faltering Financials; Riots Across England; The Economic Impact of the Riots
Aired August 10, 2011 - 00:14:00 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: Slower growth, strong headwinds, brace yourself, it is a stormy session; and in the eye of the storm, the U.S. markets, and European markets, and French banks. Talk about a holiday hangover, Nicolas Sarkozy is back and calls for emergency action.
We have a busy hour together. I'm Richard Quest. I mean business.
Tonight it is an ill wind that blows from Europe onto Wall Street. And the U.S. markets are into the third session of volatile, helter- skelter, roller coaster, doesn't matter what you wan to call it, the effect is the same, all over the place.
Speculative fear is focused on France. And there were rumors it could loose its AAA sovereign debt grade. Despite assurances of all the major rating agencies, including Standard & Poor's, that they would not downgrade, or that there was no risk to France's AAA rating.
France's banks, too, were under threat. We'll talk about that in a moment. First of all, to New York and our Correspondent Alison Kosik, is there and joins me now.
Well, we have had an extraordinary day on Wall Street. Started lower, and then went lower still. And I still don't know why.
ALISON KOSIK, CNN BUSINESS CORRESPONDENT: OK, well, where should I start? First of all, the good thing about today's session, when you compare it to yesterday, Richard, is that it looked chaotic. We are not seeing those wild swings. Now we saw them at the opening bell, but we are not seeing them throughout the trading day. So, why are we seeing stocks lower? You know what? A lot of it has to do with the rumors about France. And also worries about problems in the European bank sector. The possibility of them spilling over here to the U.S. banks.
Of course what is really, really, really driving the trade, though, is this fear factor. There is emotion and this fear that is really driving the trade. Investors feel like, you know what Richard, they feel like they are flying blind. No one has any idea of what is coming next or where the economy is headed, Richard.
QUEST: All right. Looking at the numbers at the moment, the S&P has come back. We are now just down -- I say, just down, 2.2 percent. And the Dow Jones, we are down 2.5 percent. We had been more than 400 points up.
Is this fear? Is this fear based on anything -- any substance, Alison? Or is it just speculative fear to use the phrase?
KOSIK: I think it may be a little bit of speculation. You know, there is obviously nothing concrete. You know, I talked with some traders and they are saying, you know what? What you could be seeing, right now, happening in the market, it is the market pricing in the growing likelihood of another recession. You know, this especially after the Fed came out and said get ready for more slow growth. Economists have been dialing back their forecasts, especially, in the past several days. So, you are kind of -- traders say you are kind of seeing the marketplace price in the likelihood of a new recession. Whether or not that is base on speculation is really up for debate?
QUEST: All right, Alison. Alison Kosik in New York.
A reminder, this is where the markets are standing. We have been off more than 460 odd points, 458 points, on the Dow Jones. These are the reasons behind the markets. Take France and the debt deadline. Now, France has to take -- it has to take action to protect its AAA, or at least say everything was in order. The French President Nicolas Sarkozy is setting his budget, and the finance minister to work. He has given them a week to come up with more cuts. And he wants lawmakers to put a constitutional limit on the deficit. It is part of France's efforts to protect the AAA rating that the country has.
Now to Italy, borrowing costs have fallen largely as a result of the ECB's action. They are now up 4.1 percent for the 10-year bond, well below last week's uncomfortable highs of more than 6 percent. Good news for Silvio Berlusconi, the prime minister, who has introduced one austerity drive. He is meeting unions and employers and he is looking to find a second austerity move for the Italian government. The ECB, of course, is the main reason why Italian bonds are now under 6 percent, having gone into the market.
The U.K. is having a fairly difficult time of it at the moment. The Bank of England is cutting its growth forecast for 2011 and `12. It now expects the economy to grow less than 2.5 percent this year and 2 percent next. And to some extent those forecasts are into question as well. It is the second time that Mervyn King and the bank have reduced their estimate, as the economy falters. Inflation will hit 5 percent this year, according to the bank. And as far as the governor is concerned there are some serious problems ahead.
(BEGIN VIDEO CLIP)
MERVYN KING, GOVERNOR, BANK OF ENGLAND: And these headwinds are becoming stronger by the day. Reflecting this, and the prolonged period of economic adjustment facing some countries, the MPC's projections embody relatively slow growth in the Euro Area. The intensification of sovereign fiscal concerns has been associated with renewed funding stresses for banks, which are contributing to higher borrowing spreads, tight credit conditions for households and smaller companies, and exceptionally weak credit in money growth in the United Kingdom.
Nonetheless, fourth quarter GDP growth is likely to recover modestly during the second half of 2011, and beyond, as the squeeze on real incomes abate.
(END VIDEO CLIP)
QUEST: Brutal session for stocks in Europe, because they have seen perhaps the worst of what had taken place in New York. The FTSE 100 broke deeper into the 13-month low. The Xetra DAX has now been falling for the past 11 sessions. It is at an 18-month low. And the CAC 40 is at a 25- month low. The Zurich SMI has not seen levels of this size until 2009.
In France the banks faired the worst. Societe Generale, fell nearly 15 percent. Credit Agricole was off nearly 12 percent. BNP Paribas was down 9.4 percent. Remember, Societe Generale had to deny any market rumors. In Germany, the utility EON was off 11 percent, Commerzbank -- you can see the numbers for yourself. Broad-based falls across the market.
Here in London, it was the banks again. Barclays off 8.7. I really must remember, before the week is out to remind you how my Barclays shares, that I bought for 93 pence, 60 pence, or whatever, how they are doing now. Standard Chartered was down 7.5 percent.
Into all of these problems, let's talk more about it. Tom Elliott is the global strategist for J.P. Morgan Asset Management.
Tommy, good evening. What do you make of it?
TOM ELLIOTT, GLOBAL STRATEGIST, J.P. MORGAN ASSET MANAGEMENT: Good evening, Richard.
I think what we are seeing is every attempt for the market to make gains has been met by sellers. I came into the office early this morning, the Asian markets were up on news of Greenspan (ph) promising to hold rates at very, very low levels into 2013. Europe was up.
And then, we start getting these doubts about France, and about the Eurozone crisis and that is not going to go away. It is one crisis after another regarding Europe. And my bet is that with each crisis we have another meeting. We have more and more ammo fired at the problem, until eventually we get some form of fiscal union.
QUEST: OK. That is the fiscal union, on the European side. Gold, I'm just being told, and I'm just going to confirm it now. Gold, I'm being told, is now over $1,800 an ounce. That is the not a surprise. It has been heading in that direction. But what is it telling you?
ELLIOTT: It is telling me there is an enormous amount of fear. And funnily enough of all the defensive areas I would choose to go right now, you might consider there aren't so many left. You are getting diddly squat yield on your Treasuries, the Swiss franc, the yen look overvalued by most quantitative metro analysis, but gold still has a charm about it. And one, why is the reason for the charm, it has a use, whether fabricated jewelry, electronic -- all the electronic governs (ph), in your portable phone, gold, gold, gold.
QUEST: You like gold?
ELLIOTT: I appear to.
QUEST: Yes, you like gold. The regular viewers of this program will know I think it is a useless metal. I've never been a fan of gold. But we'll put gold to one side for the moment. Perversely, the U.S. Treasury sold 10-year bonds today, $23, $24 billion worth. And they got a way with a yield of 2.1. Amazingly, U.S. Treasuries, despite the downgrade, are still the safe haven.
QUEST: It makes a nonsense of the downgrade, doesn't it?
ELLIOTT: It makes -- it is a bit of an insult to the ratings agencies. And I think this is a number of reasons. First of all, there is not alternative. If you are China, you want to take those dollars you made from selling exports, out of the country to avoid inflation, where do you put them? No market is big enough, and liquid enough other than the Treasury market.
QUEST: Right we were talking earlier. We have got the bit -- if you like, putting the fires out at the moment. But they are really dealing with literally nothing more than the day-to-day matters. What needs to be done to actually put proper concrete into the foundations?
ELLIOTT: Supply side reform in both North America and Europe. And by that I mean there are a number of areas. First of all, reform the tax system so that you don't give exemptions to those politically powerful lobbies, and then you can bring overall tax rates down, which means poor people will spend money in the shops and they spend more money than rich people. And that helps overall demand.
QUEST: You know as well as I do, that structural change, however necessary, is much more difficult -- politically.
ELLIOTT: It requires political courage. And there I'm afraid to say, both in the United States and in Europe we seem to be lacking. But it has to be done because this is a sideshow to what is the mother of all problems, which the demographic problem is looming at us, when the baby boomers start to retire.
QUEST: All right. Looking at those numbers, if we can't -- and the last 48 hours -- and the last three years -- if we can't get structural change now what gives you hope that you are going get it at all?
ELLIOTT: Eventually we are going to come to a crisis point where --
QUEST: We're there!
ELLIOTT: Oh, no, no. This is nothing, Richard, compared to when the young are taxed so much and have all their education stripped away, because the old want their nursing homes, their very expensive drugs for obscure illnesses, that they will be voting for. That demographic challenge is around the corner in the next couple of decades and it will put the current crisis into the shade.
QUEST: Cheerful thought, but we thank you for that. Many thanks, indeed.
ELLIOTT: Thank you.
QUEST: So you are up to date. You now know what happened, why it happened, and what happens next.
(DESK BELL CHIMES)
A complex, volatile situation we have on our hands. We take you right to the bottom of it. We'll be asking one of BNP Paribas chief economists for her perspective, from the U.S., in a moment.
QUEST: The sell off continued on Wall Street and the comments from the world's top central bankers showed the depth of concern. This the reason, I believe, why the markets are down so sharply. What they are now looking at.
Let's start with Ben Bernanke and the FOMC. The Fed statement said that U.S. growth was "considerably slower" than they had expected, or anticipated. Today as you have heard on this program, Mervyn King the governor of the Bank of England downgrading growth, saying "headwinds are becoming stronger." And Jean-Claude Trichet, the other big central banker, at his press conference saying, "exceptional market circumstances". This is the underlying fundamentals driving the market.
Well, that is my theory on it. Maggie Lake is in New York and joins me now. Maggie, do you agree?
MAGGIE LAKE, CNN BUSINESS CORRESPONDENT: Yes, I do agree, Richard.
LAKE: But I also --
QUEST: You are on the fence!
LAKE: Yes, I also that there is just a lot of emotion in this market. And people aren't even thinking as rationally as you are. I think they are just moving money around.
LAKE: Let's talk about some of that irrational. Perfect example today was the financials, banking sector. I know you were talking about it a bit with a guest. You know, in a market this sensitive -- it is just so sensitive to rumors. And that is exactly what happened with French banks being in trouble; Soc Gen being in trouble. That really undermined confidence in the market again.
The financials lead the way down earlier. We had some of the big stocks off, 9, 10 percent. If you look at what has happened since, you are still are seeing pretty sizable losses, especially considering how much they have fallen already. But they have come off their lows a lot. Especially look at Bank of America. The CEOs were out watching what happened. Getting out and talking. Brian Moynihan of Bank of America holding a previously scheduled -- but a lot of people piling on -- conference call, talking about their fundamentals. J.P. Morgan Chase's Jamie Dimon speaking exclusively to CNBC, addressing the situation in Europe; saying, yes, it is complex, it is messy. But he thinks they are going to work it out. Have a listen.
(BEGIN VIDEO CLIP)
JAMIE DIMON, CEO, J.P. MORGAN CHASE: We have been in Europe for hundreds of years, OK? So we continue to do business there. We have manageable exposure to all of the banks, we are not going to cut and run. We are very careful of what we do. But we are not going to leave Europe. You know, there are a lot of companies we have been doing business with. So we feel quite comfortable there.
(END VIDEO CLIP)
LAKE: He's out in California. He's not coming back to New York. No sense of crisis. When he watches what is going on with the overall business, Richard. But he does admit that there are headwinds for banks. And I spoke to Dick Bove, a banking analyst we both talk to many times, and he outlined exactly why banks are under pressure from a fundamental standpoint. And that is that a weakening economy is bad for banks. Loan losses go up, those bad loans, people stop making payments. Loan demand goes down. You have corporate deals going on for investment banks.
LAKE: And those rock bottom interest rates that the Fed is using mean that they don't make any money on deposits. So, you know, with that sector under pressure, very hard to see how the overall market is going to stage a very strong comeback.
QUEST: Which, of course, brings me full circle, to this fundamental point: Are we headed down again? And I don't necessarily expect you, or me, to take a position on that, whatever our own private views may be. But it is -- and maybe I'm showing a little more under the skirt than I should, in saying this. But it is hard to escape -- it is hard to escape the position, Maggie, that things are not good.
LAKE: Yes, Richard, and I think what you have going on are two things. People definitely repricing for the possibility of a double-dip recession; not a done deal that is going to happen, but obviously, the odds have gone up. But you also have another thing. And this is why we saw this sharp, very sharp decline, mid-session for us. And that is fear that Europe could spark a systemic problem. So there is the fears on this side, at least, from what people were telling us. Very much concentrated on the European situation as opposed to that sort of global downturn.
QUEST: All right. We thank you for that. Maggie Lake is in New York.
Now, in the blink of an eye, we have seen trillions of dollars worth of investor wealth evaporate before our eyes. If you are in charge of someone else's money you probably lost a bit of sleep. That goes for the hedge fund manners -- manners, who have got no manners -- managers, who tried to make money even when stocks are falling. CNN's Nina Dos Santos spent the day with one such hedge fund manager.
NINA DOS SANTOS, CNN INTERNATIONAL CORRESPONDENT (on camera): The world's hedge fund industry manages no less than nearly $2 trillion in assets, globally. And 70 percent of Europe's hedge funds are based here in London. And I'm off to spend some time with one of them to learn a few trade secrets.
(Voice over): Lex Van Dam has spent two decades trading the markets. He is now a partner at Hampstead Capital, a $700 million hedge fund and family office. With typical management fees of 2 percent on all assets and a 20 percent performance bonus, managing a hedge fund is lucrative, but it is also all-consuming.
(On camera): It must be quite stressful, right?
LEX VAN DAM, LONDON TRADER: Yes, yes, yes, it is really stressful, especially at the moment.
You know I sit here all day long, between 7:00 and 5:00, I sit behind my screen, and I go home. I watch the markets from home. At night, I wake up probably once or twice to look at what is happening in Asia. So it just goes on and on and on. And this year has been totally crazy.
DOS SANTOS (voice over): Hedge funds use sophisticated investment techniques that enable them to make money when the markets are rising, and falling. Like short-selling, the borrowing and selling of a stock with the hope of buying it back later at a cheaper price.
(On camera): What are your memories about the credit crunch? Was it a particularly difficult time?
VAN DAM: Well, the credit crunch, it was extremely difficult. Everybody was depressed, everybody -- lots of people got made redundant. And we all thought this is never going to be OK again. So then, you know, a year, or two years later, people tell you that everything is fantastic again.
So, what do you think, Harry? Should we buy this stock, or should we wait?
UNIDENTIFIED MALE: I think it is a great infrastructure play on the Internet.
VAN DAM: Most hedge funds pretend that what they do is really, really difficult. And it really isn't. You know, you try to identify good companies, that you want to own, and I think a lot can actually analyze it themselves.
DOS SANTOS: This is some serious technology here. Do you -- what are you looking at? Do you need all of these kinds of screens?
VAN DAM: Unfortunately, you really do these guys (ph), because there is so many different asset classes that trade, and they all correlate. Everybody looks at everything. Everybody is paranoid. Everything is correlated. There is computers in there that just trade and trade and trade. So for every human trade that happens, there is probably 10 trades that are being done by computers.
DOS SANTOS: You have a chance at gold here, right?
VAN DAM: Uh-huh?
DOS SANTOS: It is at $1,700, plus. Is that a little expensive for gold?
VAN DAM: There is not enough of it. They can't print more of it.
DOS SANTOS: It has no utility?
VAN DAM: Well, it has to me. I'd rather have it than a piece of paper that the government can print. If you have some money I think you buy gold, you buy government bonds, and you put your cash in the bank.
DOS SANTOS: Which means this 43-year-old Dutchman is not just hedging his bets, but keeping his eye on the big picture, too.
QUEST: Now, let's return to the question of economic growth and what is happening in the U.S. economy. Julia Coronado is the chief economist for North America at BNP Paribas.
And always good to have you with us, particularly, Julia, at such difficult times. Let's just start with a straight up and down question. What percentage are you now saying, do you think, for a double dip in the United States?
JULIA CORONADO, CHIEF NORTH AMERICA ECONOMIST, BNP PARIBAS: Well, I'd have to say that we -- the chances have risen to probably 50/50 at this point. We are in a sort of self-reinforcing cycle of gloom right now. And unfortunately what the Fed did yesterday wasn't really enough to really break us out of that? I think more is coming. And hopefully that will be enough to break the cycle. I expect them to be moving, maybe even before the next meeting. So, I think that could be helpful in breaking this psychology that is taken hold.
QUEST: You see, that is the problem, if we were to just take the raw economic fundamentals at the moment, they are bad but not disastrous.
QUEST: But what you getting is these dislocation of days with volatility, which is killing confidence. Am I right?
CORONADO: Absolutely. Absolutely. It is all about confidence right now. The fundamentals were, as you say, weak, and there is lots of structural issues facing both the European and U.S. economies, but we have been growing and moving forward. But if you start to have this fear take root, well, then at the margin everybody is going to sit back and wait and not hire, not invest, not spend money on cars, or clothing or other items. So it becomes very self-reinforcing and I think that is a very precarious situation that we're in right now.
QUEST: What can be done? The core question people ask again and again, what -- I mean, yes, the Fed can flood the market with money. The Fed can have a bit more QE, QE3, although that is arguable what it would do. What else can be done?
CORONADO: Well, we could hope for solid fiscal policy that addresses some of the structural issues facing the U.S. economy and also the European economies. But apparently that is too much to hope for, because our policymakers just can't seem to get out of the political infighting that they get trapped in.
CORONADO: So, I think that is part of the bloom that is taking hold as this depression around the policymakers ability to address the underlying issues in the economy.
QUEST: But, but, that is long term. I'm talking about next week, next month, to try and prevent us from going down into the mire again.
QUEST: What good would QE3 do? I mean, QE2 is already of questionable benefit.
CORONADO: Well, so I will make an argument for you. I will say that what QE2 did, while it was in place, was it did provide an insurance policy. It provided a sense that the policymakers were going to be there as long as we needed them. They were going to provide the liquidity. It provided a liquidity buffer, shock absorber to financial markets. So, when Japan came and the earthquake happened, and all of these concerns about the ripple effects through the globe, markets barely, barely budged on the news. Why? Because we had this shock absorber. Now it is gone.
I would argue that QE2 is effective it is just too little, and too short. So perhaps what we need is a stronger commitment from the Fed. Maybe other central banks saying, nope, we're not going to let this happen. We're not going to let financial markets meltdown. We're going to put a floor under the situation and we're going to be there as long as it is necessary. Now, that is a sort of crazy thing to do, but we are in an unprecedented world of money printing.
CORONADO: But perhaps it buys enough times for these structural adjustments --
QUEST: Oh, yeah, right, hang on, hang on. Isn't the fact that Mervyn King said it today, in his testimony? And we've heard it before from the president. Don't we need, Julia, a little bit of honesty from them, that basically says -- that basically says, there is nothing we can do. This has got to work itself out, and there will be pain as it happens.
CORONADO: Well, the problem with sort of, you know, there is a lot of -- there are many people that think that well, if we could just find a bottom then we could move forward. Just let it happen. That is one possible outcome. And there will have to be pain as we make these structural adjustments. But there is a lot of potential outcomes for the economy. One is a bad outcome, where that fear becomes self-reinforcing and then good solid businesses go out of business. Not because they weren't good or productive at what they did, but just because there is this cycle of gloom that takes the whole ship down. And I think that is the scenario we want to avoid.
CORONADO: I don't think we're there yet. Maybe this is all just a correction and then we'll move forward from here. But I think that if I were a policymaker I would take that scenario very seriously.
CORONADO: And to take out some insurance against that scenario seems like a good risk reward decision for a policymaker at this point.
QUEST: Julia, great to have you on the program. Thank you for coming in and talking to us today. Much appreciate it. We'll talk more again. Always have -- wonderful having your assessment.
There are many businesses that are going to find it difficult at the moment. Imagine you are a British airline, and not only a British airline with strong routes to North America. We'll be talking about Virgin Atlantic.
(DESK BELL CHIMES)
After the break.
QUEST: Imagine you are running an airline, not only that, you have large routes across the Atlantic. You are going to be hit by a double- whammy. A slowdown taking place on both sides of the Atlantic, along with the dreadful scenes of rioting taking place in Britain.
Virgin Atlantic's chief executive, Steve Ridgway, says that falling consumer confidence could make a difficult trading environment even worse. The company so far made a pre-tax profit of almost $30 million for the year to February the 28th.
But the problem now, of course, is what happens next with these double issues of riots and slowdown?
Steve Ridgway with me earlier.
(BEGIN VIDEO TAPE)
STEVE RIDGWAY, CEO, VIRGIN ATLANTIC: I mean it's too early to see that at the moment, but clearly, you know, this -- we do not want to see that. I mean we want Britain to be a place that people absolutely want to come to, whether it's for business, whether it's for -- as a tourist or whether it's visiting friends and relatives. So -- and I think, I mean with the next year coming up, as well, where, you know, Britain should be a huge showcase, it's really important that, obviously, this is stopped and it doesn't affect sentiment about -- about the U.K., because that's not good for anybody, let alone, you know, the airlines, let alone Virgin Atlantic.
QUEST: And to add to the woes, of course, you have the economic problems. Now we have markets in turmoil and seemingly on both sides of the Atlantic, economies slowing down.
RIDGWAY: Yes. And I think, again, you know, that's -- we want -- we -- that's something that none of us want. We want to see the economies stabilizing and growing. I know governments want that, as well. I mean, fortunately, we fly all around the world, as you know, Richard. So, you know, we've got other markets where they are performing more strongly and they're growing.
But I'll tell you, the U.K. is a very important market, just as the U.S. is a very important market.
Are you planning to take any measures to try and, if you like, circle the wagons in these difficult times, because economically, things could get very rocky?
RIDGWAY: Well, I think we have kept the hatches battened down very tightly since 2009. We did shrink the size of the company then. It was the right thing to do. We haven't yet grown back to the size we were before. And -- and we will watch what happens over the winter very carefully. And if we -- and, you know, as we always do, adjust capacity and make sure we tune our network to the market that's out there.
QUEST: And just talking about the numbers that you've just seen, are you able to see any pricing pressure come back, because that's where you -- what this is all about now. You can fill the -- you've told me many times, you can fill the planes if you're prepared to lower the price.
RIDGWAY: Yes, no, I think -- I mean we had a very strong first 10 months last year, where there was good capacity balance. Obviously, since then, we've seen capacity coming back in. We've seen, obviously, consumer sentiment, which I think we just talked about then. I think we've seen the fuel prices go up pretty dramatically since the Arab spring.
So there's no doubt it's very competitive out there.
(END VIDEO TAPE)
QUEST: Steve Ridgway of Virgin.
Banking shares have taken the brunt of a sell-off on Wall Street.
Next, we'll go to New York to find out what's hammering them further.
QUEST: Hello. I'm Richard Quest, QUEST MEANS BUSINESS.
This is CNN. And on this network, the news always comes first.
Wall Street has pared back the losses at this hour and the big three markets are still deep into the red. But they have come back quite considerably. The Dow now, as you can see there, over 11000.
There are grave concerns about European debt. The stock markets in Europe are suffering heavy losses, too, erasing Tuesday's gains.
Nearly five months into Syria's crackdown and activists say security forces have stormed a neighborhood in Homs, killing three people and wounding eight others. The United States has slapped new sanctions on Syria's largest mobile phone operator, as well as a Syrian bank.
NATO says it has killed the insurgents who shot down a military helicopter carrying U.S. and Afghan personnel. Thirty-eight people died in the Afghanistan crash, including 22 elite U.S. Navy SEALS. The American president made a surprise visit to the Dover Air Force Base on Tuesday to salute the victims as their bodies were brought home.
Police are now using footage from security cameras across London to track down suspects involved in the past few days rioting and looting. And Prime Minister David Cameron says the police will use any means necessary to restore order. And he's authorized the use of plastic or rubber bullets, along with water cannons.
Let's talk now about the markets and what has been taking place. The question of fear -- "We have nothing to fear but fear itself," said the famous president.
Well, joining me now from Philadelphia is Professor Jeremy Siegel, professor of finance at the University of Pennsylvania.
Now, Professor Siegel says the fear we are seeing in the market is overdone.
But, Professor, isn't that the wonderful thing about fear, you can say it's overdone, but fear is fear itself?
JEREMY SIEGEL, PROFESSOR OF FINANCE, UNIVERSITY OF PENNSYLVANIA: Oh, absolutely. And -- and in the short run, fear and psychology are -- are what drives the market. I -- I heard one of your speakers earlier say that they thought it was a 50-50 chance that the U.S. would go into a double dip recession. I don't think so. I -- I think the odds are still pretty overwhelmingly against it, although I certainly acknowledge a tremendous slowdown and a surprising slowdown in -- in U.S. and global economic activity.
QUEST: So what is driving that slowdown, because when I looked at the numbers, the ISM, the PMI, consumer confidence, the trend is definitely down off the top.
Is it because consumers haven't deleveraged yet, as they should have done during the recession?
SIEGEL: Well, certainly that is part of it. And, certainly, in -- in the U.S., all the squabbling about the debt ceiling and potential default on -- on U.S. government debt and then the downgrade of -- of the debt, and, of course, you know, today even increased problems in Europe, there are certainly things out there to -- to fear and -- and -- and to worry about. I mean what the market has to figure out how many of those will precipitate a real, true crisis, because right now, when you take a look at how stocks are trading relative to -- to earnings, they're one of the cheapest that you could ever failed.
And that's certainly a sign that -- that they fear that the economy is going into a double dip.
QUEST: And that makes the point, though, Professor, stocks' P/E traditionally may be ridiculously cheap or on the cheap side, but nothing is cheap if it goes down 400 points in a day and you've just lost the money you put in.
SIEGEL: Yes, absolutely. And sometimes -- I mean we sometimes think the best thing for stock investors to do is only look at the market once a month...
SIEGEL: -- because, certainly, the short run is going to give you an awful locked up...
SIEGEL: -- of -- of nervousness, to say the least.
But that is why we, you know, advocate and almost all advisers say, hey, look at the value. If you buy at good values -- yes...
QUEST: All right.
SIEGEL: -- you may lose tomorrow, next week or next month. But, you know, over the longer run, you're going to do so much better. And I...
SIEGEL: -- I think today's values are persuasive.
QUEST: Let me take you into the thick weeds of Fed policy.
QUEST: Was it a mistake -- was it a mistake for Bernanke and Co to come out the the 2013 date in the FOMC statement?
Clearly, three members of the FOMC didn't like that specificity.
SIEGEL: Well, Richard, you know, I have supported Bernanke full square, you know, ever since the crisis. I will have to say this is the first policy I -- I do not like. I would have been a dissenter had I been on the board at that meeting. I -- there is no way that the Fed can know, for the next 24 months, that it should keep these rates at 0. I mean, we see they're forecasting six months ago, they had a rosy forecast of the U.S. economy. That fell apart.
So how do they know what's going to happen over the next two years?
QUEST: All right. Well, if you're right on that, then QE3 is on the cards and probably is necessary, but is going to complicate the equation.
SIEGEL: Well, you know, there -- there are other -- I had been advocating, there are other measures they could have taken outside of what they did do. I mean they could have lowered interest rates on reserves, which are now, by the way, 25 basis points, a quarter of 1 percent, are higher than the rate on 2-Year U.S. Treasuries.
I mean it's -- you know, why should the banks lend it out under those circumstances?
They could have done that. The could have said we are going to be buying more long-term bonds...
QUEST: Right. But...
SIEGEL: -- and selling short-term bonds, twisting the yield curve. I mean I could mention other measures. I just think this idea that, you know, we can commit for two years to these lower interest rates, it's something that I don't think they're going to be able to fulfill.
QUEST: All right.
Professor, come back again.
We're out of time now, but you and I clearly have much more business that we need to talk about in the future.
Good to have you on the program.
Professor Siegel joining me from Philadelphia.
Now, it was a case of looting, arson and wanton destruction. You know the story. The violence in the United Kingdom has moved north and vigilantes now seem to be the next problem in a country in crisis mode.
QUEST MEANS BUSINESS.
QUEST: Police across the United Kingdom are on alert tonight after the violence that began in London has now spread to cities across England. There have been copycat riots on Tuesday night, fires and looting in cities in the West Midlands and Northern England.
Vigilante groups are now mobilizing across the country. The far right English Defence League has called on its members to turn out and provide what they say is physical presence against rioters.
One of the cities hit by violence was Birmingham. Three men there were killed after being hit by a car, which police are treating the incident as murder.
A cleanup is underway in London. The capital streets have been calmer. Sixteen thousand officers were deployed on Tuesday night. And the British prime minister, David Cameron, said it was time to get tough.
(BEGIN VIDEO CLIP)
DAVID CAMERON, BRITAIN PRIME MINISTER: We needed a fight back and a fight back is underway. Whatever resources the police need, they will get. Whatever tactics the police feel they need to employ, they will have legal backing to do so. What -- we will do whatever is necessary to restore law and order onto our streets.
While they're not currently needed, we now have in place contingency plans for water cannon to be available at 24 hours notice.
(END VIDEO CLIP)
QUEST: Dan Rivers is in Birmingham in the British Midlands this evening, in the England Midlands tonight -- Dan, let's just have an overview before we get to the causes and what's gone wrong.
What's happening this evening?
DAN RIVERS, CNN INTERNATIONAL CORRESPONDENT: Well, right here now, it's very tense but -- but calm. This after the death of three British- Pakistani men who were killed by a car right here where the flowers are being laid. I don't know if you can see that. Mowed down by a car that locals say was being driven by a black man who they suspect was coming here to loot the area.
The three young men were out trying to protect these local businesses.
Now, we've got, as you can see over here, you know, a big crowd of people on the streets. The father of one of the dead men has spoken, appealing for calm. But obviously, this is a very delicate situation because there are fears, clearly, that this could be twisted and manipulated by extremists in both the black and Asian community into something about race rather than something about looting and criminality, which is how this all started.
But at the moment, things, you know, are calm. They're -- they're staying here at the -- there are appeals from lots of people that -- you know, for both sides in this just to -- to stay calm and go home. There's no signs at the moment of any other violence or looting, which is great. And there are about 1,000 police out on the streets of Birmingham this evening, trying to -- to make sure that that continues.
QUEST: Let's talk on the wider issue, if we may, Dan. And I realize you're in a pretty spot where you are. The idea that this is some disenfranchised youth being affected by austerity and by the measures with no hope versus a bunch of wanton hooligans and criminality, where is the truth in both of those views?
RIVERS: You know, I -- I think that the vast majority of the looting and criminality that we've been reporting on for the last three or four days, was just that, was looting and criminality and was opportunistic and -- and there was a lot of copycat crime going on. I think they were emboldened by the fact that they saw, initially on Monday, that the police weren't doing anything to stop it. They weren't intervening, perhaps because the police felt so thinly stretched and under -- under powered in some areas.
And that emboldened the -- the looters to just go on a rampage.
Very few of the people that we've talked about have mentioned that shooting in Tottenham. Very few of the people -- of the -- of the young kids in hoods have -- even know the name of the person, Mark Duggan, that was shot last Thursday.
The issue of whether this is about social deprivation and feelings of alienation, well, maybe there is an element of that. But there is some sense that some of these people feel like they, you know -- you know, have been locked out of sort of mainstream society, there aren't jobs and so on for them.
But there was a big element, as well, of sheer criminality and copycat violence, where they just were watching this unfold and thinking, this is my opportunity to go and steal something.
QUEST: Dan Rivers joining us from Birmingham this evening.
Many thanks, Dan.
Loose is -- looters and activists have done their worst to hurt businesses across the country. In some cases, the effects will be felt for weeks or even months.
One warehouse that burnt down in South London may cripple some small British film companies, for example.
Leone Lakhani reports.
LEONE LAKHANI, CNN INTERNATIONAL CORRESPONDENT (voice-over): As the smoke billows from this warehouse, the economic costs of the riots that have swept across London are being counted. This site, operated by Sony, has 25 million DVDs and entertainment products owned by European film companies, as well as CDs and games.
(on camera): This Sony warehouse was set alit on Monday night. Now, nearly three days later, firefighters are still working round the clock to put the fire out. Now, no one was hurt, but hundreds of thousands of DVDs, films were all stored here. They've all now been destroyed. And that's left many of Britain's independent film distributors reeling.
(voice-over): David Wilkinson is one such distributor and says this is going to be a huge dent to his business.
DAVID WILKINSON, CHAIRMAN, GUERILLA FILMS: I had about 65,000 DVDs, across -- around about 70, 80 titles.
LAKHANI (on camera): Is that all your titles?
WILKINSON: That's all my titles, yes. Luckily, I wasn't holding as much stock as some people. I mean I have other labels that I know that were in there, they had 10,000 or 15,000 units per title.
(BEGIN VIDEO CLIP COURTESY GUERRILLA FILMS)
UNIDENTIFIED MALE: In a country devastated by war...
(END VIDEO CLIP)
LAKHANI (voice-over): All of David's video material, like the others in the warehouse, are insured. They will be replaced, but that may take weeks, even months. And for independent film companies, time means money.
WILKINSON: The day of the fire, I had one title that was due to sell 32 units to someone. Those 32 units are now lost. And you multiply that between every title I've got and then with all the different labels, we're all going to lose a lot of money.
LAKHANI: The British Film Institute, the UK's leading film body, says DVDs and Blu-ray discs are the industry's largest single source of revenue, bringing in more than $2 billion a year. For independent films, that's an even greater chunk of their profits.
RICHARD COOPER, IHS SCREEN DIGEST: In terms of physical video, consumers in the U.K. spend around twice as much on video products than they do being -- going to the cinema. Now, for independents who were releasing films over the next, even a few months, any advertisement spending that they've done, any anticipation of revenue from that bit, is completely lost.
LAKHANI: One of many businesses paying the price.
Leone Lakhani, CNN, London.
(END VIDEO TAPE)
QUEST: When we come back, let me update you with the New York markets. And I do assure you, they're a lot better than they were.
QUEST: So this is where the markets closed. London just holding onto the 5000 level, but it was only just, as you can see, a loss of 3 percent in London.
Paris bearing the brunt, down 5.45, along with the DAX market, very seriously.
In New York at the moment, the Dow is down 312 points. But truth be told, at one particular point, we had been more than 450 points further down in the market. So things have actually improved quite a bit in the New York market. The Dow down just 314 points.
That's the way the markets are trading at this hour.
When I saw you yesterday, what can I tell you?
You and I and were together in New York. The heavens opened. I promise you, I was like a dish rag by the time I got to the airport.
And tonight, we have a perfect evening in London, I believe.
GUILLERMO ARDUINO, AMS METEOROLOGIST: Yes.
QUEST: And, hopefully, where you are, too -- Guillermo.
ARDUINO: Some. You know what?
It's gorgeous in New York City.
How about that?
QUEST: Nah. Nah.
ARDUINO: Well, it's nice now, but it's very nasty in Richard's hometown of Liverpool. It's raining all over. You see, I would say, Birmingham is fine. But to the north, it is very, very stormy. It is really bad. Maybe this comes a little bit of that attitude outside.
But we see that this moisture will continue, with the jet stream positioned right there. And all these storms riding like a roller coaster in there, like a highway. And they are bringing all the rain.
Also, in the northern parts here of the Low Countries and into Scandinavia, especially to the south and Copenhagen, Northern Germany, is where we see the rain.
Then it says mostly clear in here. But you know what, in Romania, Bulgaria and later and very soon into Istanbul, we will see some storms.
Watch out, because we may see some floods because of the persistent rains in the north and also the intensity of those storms.
You see that over there?
That's what I'm talking about. In Bulgaria, Romania, especially in Bulgaria. And that, later on, like one day from now, it's going to move into the Bosporus. So we may see some problems.
If you're on a cruise anywhere in the Mediterranean Sea right now, looking fine, except for the Aegean Sea, where we may see some storms here and the northern sections of the Sea. Elsewhere, great, from cypress in the Middle East all the way into Cicely, the Balearics, fantastic.
So look at the airports -- Amsterdam, London, the same thing. Even London may see some winds and rain later, but nothing compared to what we see into the northern parts of Great Britain, where the weather is really bad.
Berlin also may be seeing some rain with this same system.
Let's focus a little bit on Istanbul, that area that I was talking about. So the storms from -- from Bulgaria are going to move into the northern parts of Turkey. So that's where the problems are today.
Temperature-wise, cooler in the north. Still hot and like two months in Madrid, without any rain. I believe it was like the 10th of June the last time it rained. Thirty-seven degrees, the high expected for tomorrow for Madrid. Twenty-nine in Athens. Fifteen in Bucharest because of all the cloud cover. Twenty-one in London.
It's not that cool over there.
And, as I said, New York, New York, look, nothing, high pressure. Richard left...
QUEST: Wait a minute...
ARDUINO: -- and the weather got...
ARDUINO: -- so much better.
QUEST: Listen, there must be at least three -- it must be at least a month since you've been on holiday, Guillermo.
ARDUINO: Probably. I tell you, I was soaked yesterday. Well, I was sick last week, so I was in bed.
ARDUINO: And the week before, I was in Punta Cana. So I was hoping...
QUEST: Oh, here we go. I was wrong. Go away. The man, he's gone part-time.
All right, Guillermo, many thanks.
ARDUINO: Good stuff.
QUEST: With the sheer -- the sheer number of Tweets out there, we're going to make sense of it for social media.
We've sifted through the influences and the messages from the Tweets. They are our top Tweets for today.
The American economy's Joseph Stiglitz has Tweeted: "Considerable risk in banks today because so little has changed since 2008."
The NYU professor who we love to talk to, the Nouriel Roubini, he has Tweeted on that dissent in the G -- the FOMC: "The Gang of Three can't prevent Bernanke and the rest to move next to the variety of more QE3 actions."
And finally, the economist, David McWilliams, Tweets: "EU political vacuum gaping. Why invest in a currency with no government who is in charge?," he says.
Now, for other top Tweets from the program, I suggest you visit Twitter.com/richardquest and we can be friends on there.
When we come back, a Profitable Moment.
QUEST MEANS BUSINESS.
QUEST: Tonight's short Profitable Moment.
It doesn't matter how many times what about volatility, when you see the market down 312 points and it had been down 468 at one point, it's simply a frightening experience. And then you hear that the possibility of a double dip recession is 50-50. We've got some more rocky days ahead of us this summer.
And that's QUEST MEANS BUSINESS for tonight.
I'm Richard Quest in London.
Whatever you're up to in the hours ahead, try to keep it profitable.