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Trading Resumes After Halt Triggered Due to 7 Percent Market Plunge; Saudi Arabia Launches Oil Price War Against Russia; Oil Feud and Virus Hysteria; Leave Markets Shell-Shocked; Crude Prices Currently Dow More Than 20 Percent. Aired 10-11a ET
Aired March 09, 2020 - 10:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
[10:00:00]
ROB THUMMEL, MANAGING DIRECTOR AND PORTFOLIO MANAGER, TORTOISE: And you know, oil prices probably would have stayed right where they were in the
mid-40s, maybe even gone up a little bit. Because the market would have been totally supplied, entirely supplied and not oversupplied.
So my point is, is I think if we can, once we get the oversupply rectified, that one to two million barrels, whether that comes from the U.S., Russia
and the U.S., all three of them come together and make that happen, then we'll see oil prices gradually rise and we'll see them rise back into that
$40 or $50 range.
JULIA CHATTERLEY, CNN HOST: Wow, exciting times. Rob Thummel, great to have you back with us, managing director and portfolio manager at Tortoise.
And there you have it the Dow Jones.
It's 10:00 a.m. at the New York Stock Exchange. I'm Julia Chatterley.
BECKY ANDERSON, CNN HOST: And I'm Becky Anderson in Abu Dhabi. Trading at the New York Stock Exchange was halted earlier after the market plummeted 7
percent on the open.
CHATTERLEY: Let's take a look at what we're seeing for the global markets right now. As you can see, pressure across the board. We're talking global
losses in the trillions of dollars. Right now we've got the Dow down some 6 percent. I should point out we are off the session lows here. The S&P 500
down some 5.8 percent. That's an economic disaster on its own, of course, Becky. But what's going on in the oil prices also front and center.
ANDERSON: Yes, it's an economic disaster in and of itself when we take a look at the oil prices. These are making things an awful lot worse. Let's
take a look at these numbers. Brent crude down 21 percent. And WTI crude down some 20 percent. Saudi Arabia going all in on an oil price war with
Russia, and that is translating into these numbers. Oil hovering there around, what, 35 bucks on the barrel. We haven't seen a crash in oil prices
this bad for 30 years. That, Julia, was since the first Gulf war.
CHATTERLEY: Yes, and it's having global implications. The ripple effect across global markets and stocks, bond prices rallying, a real fear. This
of course, tied to what we're already dealing with in the coronavirus outbreak. Ruchir Sharma is back with us. Head of emerging markets and Chief
global strategist at Morgan Stanley Investment Management, also the author of the book, "The Ten Rules of Successful Nations." Great to have you back
with us. When you and I were last talking on the "FIRST MOVE," we had a halt in trading. We were down 7 percent or more. We're kind of stabilizing
at this moment, down some 6 percent, but clearly fear, panic is the driver today.
RUCHIR SHARMA, HEAD OF EMERGING MARKETS, MORGAN STANLEY INVESTMENT MANAGEMENT: Yes, but I think that this is a very important moment that we
have here in the markets. I will tell you why. Because the S&P or the U.S. market is town about 20 percent roughly from its recent peak.
CHATTERLEY: Right.
SHARMA: And the 20 percent line is a very important line because we looked at past sort of market developments. In this economic recovery, too, which
started in 2009, you had a couple of instances with the markets going down 20 percent. But just at that line it tends to sort of bounce back. And why
it's very important is this, because if the market goes down more than 20 percent, the odds of having an economic recession rise to well over 60
percent.
CHATTERLEY: Wow.
SHARMA: So I think that this is very important, which is that the 20 percent line is almost forming like a line in the sand. You cross that, the
odds of having an economic recession rise quite sharply. And very tellingly, in this sort of market over the last ten years or so, twice we
came to just breaking that line in 2015, 2016, and with the European crisis in 2011. In both times we were able to pull back from the brink. So
therefore, it's almost a very telling sign as to what this market does from here over the next few days.
CHATTERLEY: I could argue that this time is different because we've got two thirds of the world -- the central banks in the world -- already
stimulating. We've got a bond market that's got unprecedented low yields in the United States. Just to mention two things. Do these things make a
difference here or to your point, is the psychology here as important as anything, that 20 percent fall, that bear market territory for U.S. stocks
is a signpost for future recession?
SHARMA: No, I think it will still be because actually what the market is doing is trying its best to sort of figure out what's going to happen in
the future.
CHATTERLEY: Yes.
SHARMA: And the market is hardly perfect. Like the phoenix that thought it was sleeping even as the virus was sort of developing.
CHATTERLEY: And you wrote an op-ed to that effect.
SHARMA: Yes. But I still feel it is an important telling sign.
[10:05:00]
Because it tracks through the market so that it's better than the tactical policymakers in trying to forecast these things. So I don't think it is
different in this regard, which is that we are dealing with hear a real unknown. And as long as the number of new cases keeps on increasing across
the world, it's hard to know is to how you get confidence back. And as per our earlier discussion, we have this major headwind where you have a
massive increase in global corporate debt. And financing that is a constant challenge.
CHATTERLEY: You've mentioned this point. And I do want to reiterate it because I don't think we can talk about had this enough. That the
percentage of zombie companies, those that simply don't bring in enough cash flows to be able to make their debt repayments and they have existed
in an 11-year bull market. Happy birthday to the bull market today, of course. And now, now this is when they feel significant pressure. And some
of those, I'd argue, would have to go out of business, will go out of business.
SHARMA: Yes, so the markets remains shut for them to sorted of borrow more. I think it's a serious risk. So that's what the vicious cycle in how
that can develop as we spoke about. The number of zombie companies has increased over time. It's not just sort of been there. It's now at 16
percent of all listed stocks in the United States. And I think 14 percent of all of the listed stocks in the developed world. That's a pretty hefty
number.
CHATTERLEY: And we know the investors looking at this are going how do I know? How do I know whether I've invested in one of those stocks that
simply isn't viable under these kind of pressures? And I guess the other question is, how long can they exist before they got out of business? I am
not sure we can even imagine what we would see.
SHARMA: Yes, so that's why I think that it's so important that if this virus has not come under some control, some semblance of control over the
next couple of weeks, then we are really looking for the vicious cycle to develop. Now course, will see what's the policy response.
How much the Fed and how much along with the treasury are they willing to intervene here? Are they going to set up facilities for these companies to
be able to borrow directly? Will there be some regulatory forbearance. I think that stuff which we will know. So therefore, there's volatility is
very much here to stay. But I still go back to my original point. Watch this dividing line of 20 percent. We've had two such instances, we've
pulled back from the brink. We are here once again on the edge.
CHATTERLEY: And I'm just doing the math. You were down around 18 percent I think around recent highs. So around 2 percent away from that. You know,
when you are speaking there, TARP came into my mind, the Troubled Asset Relief Program. Where they tried during the financial crisis so relieve
some of the burdens of assets in some of the banks. Do we need to see that kind of targeted support for the travel sector, the airline sector, for
example, specific targeting of sectors if you want to prevent -- and there will be people who say moral hazard here, perhaps some of these companies
should go out of business. But at least in the interim, protect economies to prevent broader spillover, bigger spillover.
SHARMA: Yes, we will need that. And I'm not a fan of too much stimulus. But I think that what sort of created this issue in the first place.
CHATTERLEY: I think there are many people that say that.
SHARMA: Exactly, that you have such low interest rate, you kept many zombie companies alive. You had a massive buildup and corporate debt. But
given this very unknown situation where you are dealing with a crisis which is not man made in a way.
CHATTERLEY: That would take a natural disaster.
SHARMA: I think that you will need -- yes. So you may need some sort of that support. So I think over the next few days we are likely to see I
think more steps in that direction.
CHATTERLEY: I want to bring it back to your point as well, the things to watch at least in the short term. You said watch that 20 percent line, the
stock markets, just as a gauge of recession risk here as well. We've talked about stimulus potentially from governments and the that reaction we need.
Do you think we can see some form of coordinated response just to give greater confidence? Because there is a downward spiral here, a lack of
confidence, a pressure on stocks, that we're seeing this the oil markets.
SHARMA: Yes.
CHATTERLEY: Even if we don't see cases stabilize, which you said is what we ultimately require here?
SHARMA: Yes, I'm sure, you know, that sort of mitigates what's going on. But for me that is the single most important statistic to watch. Because I
take the template from China. We saw what happened there in that there was also panic there. But the moment the number of new cases, the growth rate
in the new cases sort of stabilized and started to come off, the growth rate, I think we saw the Chinese market and the Chinese economy bounce
back. So that has to be the optimistic scenario. But that's the number I'd watch more than anything else at this stage.
CHATTERLEY: The key is what measures are required to stabilize those cases. Ruchir Sharma, fantastic to have you with us. Thank you. Ruchir
Sharma head of emerging markets and the chief global strategist at Morgan Stanley Investment Management.
Becky, we are down at this moment some 5.5 percent, the Dow Jones. It feels like is going to be a long session but I'll hand back to you, to the
epicenter, of course, and that is the oil market today.
KINKADE: Doesn't it just? At 5.45 percent, the market off its day's low, now at a shy of 6 percent. Yes, you heard us correctly and a huge driver
today, a massive drop in oil prices, of course.
[10:10:00]
After Saudi Arabia launched an oil price war with Russia. John Defterios tracking all prices from London. We've also got Sam Kiley here in Abu Dhabi
for a deeper dive into the geopolitics behind the kingdom's oil power player. And we start with you, John, and seemingly a time when the world
economy can least afford it, the Saudis have launched an oil price war. Why?
JOHN DEFTERIOS, CNN BUSINESS EMERGING MARKETS EDITOR: Well, it's amazing, Becky. And it's looking pretty ugly as we speak because the coronavirus has
eroded away at demand by some four million barrels in the first quarter in China alone. That's pretty radical and that's something that can be
repaired in the next two or three months it looks like.
In fact, the International Energy Agency was suggesting a contraction for the first time since 2009 in oil demand by about a million barrels a day if
not a little more. Then we had an oversupply already hitting the market before the virus and now we have a clash of titans with the number one and
number two oil producers and exporters, Saudi Arabia and Russia, disagreeing on how we remedy the situation.
So what we had was that Russia was asked by OPEC and non-OPEC players to agree to this cut of 1.5 million barrels a day which would take these cuts
up to 3.6 million barrels a day. The Russian view is we have been cutting for more than 18 months right now as part of this OPEC plus agreement.
We're tired of it. When we cut, we see that U.S. production continues to rise. And in fact, it's at a record of over 13 million barrels here in the
first quarter.
Saudi Arabia having seen what the Russians did suggested, look, you are going to live to regret this day in the next three or four months, sources
told me when that meeting broke Friday night in Vienna while we were there on coverage. Not only did they decide to raise production against Saudi
Arabia. A very audacious move to cut prices by up to $7 a barrel. That was a signal not to the United States, but a signal to Moscow and to Vladimir
Putin. We have had this partnership for three years working together to stabilize the market. You don't want to play ball with us? We'll open the
taps as the lowest cost producer in the world and now flood the market with low cost oil. And that's why we saw a 30 percent correction.
It's worth noting, Becky, we were at $70 a barrel on January 6th. We are looking at two months later with a collapse of 50 percent from the start of
the year and 30 percent of that happening between Thursday of last week at the OPEC meeting and here in Monday trading. It is extraordinary by any
measure.
ANDERSON: So Saudi Arabia, John, flooding the markets with crude in a bid to effectively recapture market share. What happens in the short term as
you have just described is markets hitting lows that we or certainly on a daily basis going down as much as we have seen in, what, 30 years. We
haven't seen a plummet like this, a one-day plummet like this since the Gulf war back in 1991. Look, this is hurting everybody. The Saudis, the
Russians, and indeed the U.S. frackers. This some will say is a bold move by the Crown Prince, Mohammed bin Salman in the kingdom. But I just wonder,
and there will be people out there wondering the same thing, where is the upside for Saudi at this point? This will have a huge impact on the bottom
line of these Gulf producers.
DEFTERIOS: Indeed. Saudi Arabia is one of the lowest cost producers in the world. And so is Kuwait and the United Arab Emirates where you're sitting
right now. They produce it for 2 to 6 dollars a barrel the challenge for Saudi Arabia is that the breakeven price right now remains around $80 a
barrel. Very lavish spending internally for the Crown Prince as he tries to build support there, Mohammad bin Salman. Also because of the war they've
had in Yemen carrying on longer than they anticipated.
On the other side, the Russians say, look, because of U.S. sanctions, because of the competition, our breakeven price is at $40 a barrel. We
heard from the CEO of Rosneft, the leading Russian producer, suggesting we're tired of cutting and giving space to the Americans. We're not going
to do it anymore.
Now something changed though, Becky. I spoke to senior sources from Saudi Arabia early Saturday morning. They said we tried to rescue this deal,
John. Make sure your reporting is correct we tried to get that cut at 1.5 million barrels a day. By Sunday they said they were going above ten
million barrels a day and start slashing prices. It makes me believe that the young Crown Prince stepped in and said I'm tired of this as well.
Rather impulsive on the decision and look at the results. And as you suggested, Becky, nobody wins. The shale producer, the Russians, the Saudis
and the other Gulf producers, nobody wins at this price. It's a lose-lose all the way around.
ANDERSON: Yes, I mean this is absolutely remarkable. John, stand by. Let me just bring in Sam Kiley here because there is some really interesting
geopolitical calculations going on here.
[10:15:00]
We had seen a really cozy relationship between Russia and the Saudis -- as John rightly pointed out -- over the past three years. This is very much
been about the Russians supporting OPEC, effectively supporting the Saudis and what they want to do with the oil price. If what we are seeing now is
of the result of the Kremlin saying, sorry about this, but we're going our own way, that is going to hugely impact that relationship going forward.
And indeed we have to remember the U.S. relationship with the Saudis. This is going to hurt the U.S. frackers, the shale industry, and that quite
frankly could hurt Saudi's relationship with the United States at the moment.
SAM KILEY, CNN SENIOR INTERNATIONAL CORRESPONDENT: Well it's hurting off in both directions of the two key strategic partners. Which -- and John
hinted at it there -- is this almost a whimsical act by the Crown Prince? This is coming less than a week or during the same period, in fact, exactly
as key members of the royal family have been arrested or detained, or somehow been removed from circulation further away from the rather limited
levels of circulation they had before, namely the king's brother and the former Crown Prince, Mohammad bin Nayef. Who was shoved aside in 2017.
Now if you've got that situation, and then on top of that you have this very unpredicted, with very unpredictable consequences, that are self-
harming, and John again referred there, Saudi Arabia needs to sell oil at the price at 83.6 percent to balance his books. It's nowhere near that
figure. It can't sustain this kind of pricing. But in the short term what it does do is signal power. It signals perhaps power with a degree of
irresponsibility.
Donald Trump has demonstrated also that the unpredictable nature of very powerful people is and of itself a powerful tool in geopolitics. It's not
something we are used to dealing with. We are dealing with -- we are used to dealing with malice of forethought, if you like, a lot of sort of
strategic malevolence at worse. Rather than in every indicator here is an impetuous decision. There is no economic or indeed strategic advantage for
Saudi Arabia to do it.
ANDERSON: There will be those that say this is an impetuous decision by the Kremlin, by the way. You know, what are they up to at this point? They
are having a pop at the U.S. fracking industry. And, John, I'll bring you in here. Having a pop the U.S. fracking industry at this point when, quite
frankly, the Russians have said, you know, they have been allowed to get away with, you know, stealing, you know, quite a significant amount of
market share as the OPEC plus producers of course have sat back and said, you know, we are going to put our foot on the brake in order to keep these
prices relatively high.
And I'll bring you back in in a moment, Sam. John, what does this do to the U.S. shale industry? Because that will have a bearing on how Donald Trump
responds to what's going on at present.
DEFTERIOS: Yes, it certainly will. And, Becky, as you know, I was there in the autumn in the shale basin, particularly the Permian basin in west
Texas. This has never seen a doubling of production for a country in a span of less than a decade. That's what happened to the United States. And as I
noted, they hit this magic mark of 13 million barrels a day.
Now there's two ways to look at it. Yes, we've had 200 companies in those basins file for bankruptcy over the last four years under $100 billion of
debt. That's not done yet. So when 30 to $35 oil settles in, we're going to see a lot more bankruptcies.
Now there's another way to look at it as well. During that period of bankruptcies and the folding of U.S. companies, we had the majors from
around the world, ExxonMobil, Chevron, BP, Total, Shell, ConocoPhillips, you name it, Occidental, they've all go in to by assets on the cheap,
Becky. And that's what happened. They have much deeper pockets. So I think candidly here, Vladimir Putin has decided to fight this battle in the shale
basins far too late to create the damage that he was looking for. That's the reality today.
The other side of this, though, we were seeing a natural evolution in the United States almost peaking out, scheduled to peak out by the end of 2020.
So if the U.S. stays at 13 million barrels a day, we see Russia going and aiming for 11.5 to 12 million barrels day. We know Saudi Arabia has the
capacity to do 12.5 million barrels a day. If all three go flat out right now, this price of $30 a barrel may look cheap. In fact, Goldman Sachs was
suggesting we could test $20 a barrel because of the coronavirus.
And we're kind of in this unknown. And we talked about this face to face. We had a black swan with the coronavirus. Nobody was expecting it. We're
expecting global growth of over 3 percent this year, which is average. The OECD is suggesting now it will be 1.5 percent for 2020. We could be in a
global recession.
[10:20:00]
So if you have the three major powers of the world going all out to get market share and an economy that's slowing down radically, this price could
be with us for a long while. And 2016 at $30 a barrel, it caused problems in the Middle East. It caused problems in Russia. It caused problems in the
shale basin. It is basically the fittest survive, but it will be really messy along the way.
ANDERSON: Well let's keep an eye on the oil prices. The Dow Jones Industrial Average which was halted 15 minutes into the trading day today
with a 7 percent fall, now down about 5.5 percent and change, down 1,300 points or so. That is 24,500 -- just shy of. Julia is at the New York Stock
Exchange. And we have seen this market -- it does seem remarkable to say clawing its way back to just down some 5.5 percent. We are only, what, an
hour, less than an hour into the trading day. Who knows at this point? Any advice from those on the floor?
CHATTERLEY: Yes, hold your hats, I think, and buckle up, quite frankly, Becky. To say some calm is being restored in these markets and we are only
down 5.4 percent tells you some of the drama that we've had already just 45 minutes into this session. To your point, for everything that you were just
discussing there, the intensification of the measures I think in Italy alarming investors compounded with the shakedown, that the pressure we have
seen in all markets. And Investors simply heading for the exits here, I think.
It was those circuit breakers though that I think were key this morning in restoring some element of relative calm. 15-minute halt that we saw early
on in the session that's allowed us to bounce off the lows here and that 7 percent decline we saw early on. Paul La Monica I just want to bring you in
here, Paul, and see whether you agree with me here. The key, that circuit breaker kicking in giving us 15 minutes of some degree of reflection, I
think here. And we are stabilizing and are off the lows here.
PAUL R. LA MONICA, CNN BUSINESS REPORTER: Yes, I'm reluctant to say so far, so good, because this is not good by any stretch of the imagination.
But I think you're right, Julia. If the circuit breakers were designed to prevent panic selling from really just steam rolling and having an
avalanche of red on the trading screens, it did work for the time being. But, you know, look at the clock. It's 10:22. We have a long day ahead of
us. Hopefully, if we can stabilize around this level, not going to go so far to say it's a moral victory on Wall Street today, but at least it would
have prevented a much worse rout so far.
CHATTERLEY: I just been running the numbers as well. At one point with the Dow down that 7 percent when that trading halt was called, we were 19
percent off recent highs. So we talk about being in a bear market when we are down 20 percent or more. And Ruchir Sharma, from Morgan Stanley
Investment Management, just saying, actually when you see a 20 percent decline, it's significantly raising the probability of recession. If we
look at what's going on in the bond markets right now, that warning signal is well and truly flashing.
LA MONICA: Yes, definitely. And the things that worry me, obviously, the bond market, the signs there, but also look at transportation stocks. The
plunge in oil prices today is still not good news for airlines and truckers and FedEx and UPS. I mean, when demand has fallen off a cliff, it doesn't
matter that crude oil is cheap. And the Dow Jones transports, they are now in bear market territory.
CHATTERLEY: That's such a great point. There has to be some benefit of cheaper oil prices to a consumer, but it just gets overwhelmed and swamped,
quite frankly, by the recession fears and the broader panic. And that's actually what we're seeing in terms of the price action today. It's tough,
Paul, and I know a lot of people will be asking this question. At what point we ask if we've overreacted, if we've moved far enough. It simply
doesn't feel like the day, yet again, to make that point.
LA MONICA: No, not at all. I think, you know, this selling that we had and this market volatility, it's been going on for now more than two weeks. I
think, this is probably what, the 17th time or so that we've reached capitulation. Obviously, we haven't because we're still talking about the
eventual capitulation that hasn't happened yet.
One other interesting thing I noticed when, you know, just before coming on air, one Dow stock at last check was actually a little bit higher --
Walmart. So I think there is a sense that consumers are so worried about the coronavirus that they are just shopping and really stocking up on
anything they can find, all those staples, whether it's wipes, toilet paper, what have you. I mean, I know a lot of people went shopping over the
weekend and I suspect that is not going to end any time soon. You're going to see a lot of people at big discount stores trying to get anything they
can get their hands on.
[10:25:00]
CHATTERLEY: Yes, I mean, this is just a great point as well. At least in the short term, we have to separate out what short-term investors do here
versus medium to longer-term. And the hope, the believe that so the some point the coronavirus crisis ends, the tensions in the oil market lessen
and we do see some kind of bounce back. But at least in the short term, if you are looking for safe havens here, Walmart, because they benefit from
panic buying. Gold, of course, hitting seven-year highs and the bond markets. And yet, you are kind of looking around and going I'm struggling
to see what else.
LA MONICA: Right. But I think you have -- just have to stay diverse identify. I mean, you can try to be opportunistic and play the
quote/unquote coronavirus safe havens. But I think -- as I wrote last week -- as long as you're still putting money in your 401(k), and I feel really
badly for people that are closer to retirement. Because obviously it's little consolation when they are looking at their balances right now and
thinking that, hey, I've got to retire in a few years.
But if you are a younger American in your 20s, 30s, even 40s and retirement is decades away, don't panic and shift your retirement strategy because,
hey, if you did that in 2008, you missed a huge rally that started in 2009 and, well, probably ending today, because it looks like we are at the
precipice of potentially bear market territory. But we eventually will rebound. That is what happens with stocks. They are not going to go down to
zero.
CHATTERLEY: Yes, that's what history tells us. Paula La Monica some words of wisdom and reassurance there. And I think that's important at these
moments, too. Great to have you with us. Paula La Monica there.
I want to bring in Matt Egan now. Because as we keep talking about oil very much at the epicenter of the concern, the cautiousness, the selling,
pressures that we're seeing today in energy stocks, tend to overreact and react more when we see oil price declines. And today's following that
pattern as usual.
MATT EGAN, CNN BUSINESS SENIOR WRITER: But truly this is the last thing that the oil industry needed. The energy sector was the worst performer
last year. It was the worst performer all of last decade. There's all these climate change concerns and of course, excess supply. And now you have the
coronavirus, which is causing serious demand destruction. Outright declines in demand that we haven't even seen during the financial crisis. And now on
top of all of that, which is a lot, on top of that now we have this price war being launched by Saudi Arabia after Russia refused to go along with
supply cuts. So, this is just a nightmare scenario for the oil industry.
We've seen major companies really diversified ones that are supposed to be built to withstand an oil crash, like Exxon and Chevron, down double digits
today. Some of the independent exploration and production companies like Pioneer down more than 20 percent. And Occidental Petroleum, which is a
company, Julia, you and I have talked about because they piled on debt to make an acquisition last year, at last check they were down by 35 percent
today alone. That is a clear reflection of balance sheet concerns and about the ability of this company to generate cash flow when oil prices are this
weak.
CHATTERLEY: Yes, and how quickly they can take measures to cut capacity here and to restrain spending in order to protect themselves if we do
indeed have to deal with oil price this low or they have to deal with oil prices this low for a concerted period of time.
I do want to talk with the credit markets as well and the focus particularly on some of the shale players. Those that already face higher
borrowing costs. And a lot of people here looking once again at the so- called high yield market. 10 percent of those energy companies and saying are we going to see some of the concerns that those companies played out in
the credit markets, too.
EGAN: Well we know that last time there was an oil crash between 2014 and 2016, there were dozens of U.S. oil and gas companies that went bankrupt.
They simply couldn't pay down their debt with the prices as low as they got. We also saw hundreds of thousands of people in the oil industry lose
their jobs. And so, there is reason to think that when you see a crash like this in oil, you are going to have more bankruptcies and you are going to,
unfortunately, have layoffs.
And I think that is really because of the debt issue. It costs a lot of money to drill oil. It's a very, very expensive process. So a lot of these
companies have piled on a lot of debt. And that creates stress when you have markets like this. So, we need to keep an eye on the health of these
companies. As Paul mentioned earlier, there are banks that lend to energy companies. So that is a concern as well.
Now if there is a silver lining, it's that consumers and airlines and other travel transportation companies are going to eventually see a break in some
of their costs because of the fact that oil prices have come down. But you know that silver lining is kind of small because the United States is now
the world's biggest oil producer. And so when you see a crash in prices, it cuts both ways.
[10:30:00]
And what we're going to see is energy companies are going to slow down their spending, and that is going to have a real impact on GDP. GDP is
already under pressure because of the coronavirus and now you'll see even more pressure because of energy companies slowing their spending.
CHATTERLEY: You make some great points there, Matt. For oil, all the oil producers around the world, the likes of Mexico, Brazil, Norway, we've seen
significant pressure on those markets today, too. As everyone starts to ask questions about what it's ultimately going to mean for their economies.
Some great points there. Matt Eagan, thank you so much for that.
To your point, as well, on the travel industry, maybe they will benefit in the future, but certainly not benefiting now. Clare Sebastian watching the
selloff in cruise stocks. In particular, clear, well and truly under pressure once again.
CLARE SEBASTIAN, CNN BUSINESS CORRESPONDENT: Yes, Julia, and coming off a very bleak month or so for the cruise line industry. This selloff that
we're seeing today sparked in large part by an advisory from the State Department telling Americans not to go on cruises. This as we're seeing
passengers today that should be evacuated interest the Grand Princess off the coast of California, 21 passengers there, infected by the virus.
This is really causing sort of a triple whammy for the cruise line industry. First there were the cancellations. They, of course, are exposed
to Asia, they're the epicenter of the virus. They had to cancel sailings across that region. Then the drop off in confidence. People not wanting to
book cruises. The cruise lines then having to discount and offer incentives to try and keep people booking.
And then just as Matt was saying, if we start to see economic growth come down, then we see another potential hit for this industry. Of course, as
you know, discretionary spending is really the first thing to go when you start to see economic growth slow down. So I think that's why often the
back of these cruise lines falling by give or take 50 percent before today's trading, we're now seeing even more drops today. These are
significant losses for this industry. .
CHATTERLEY: I mean, look at that. Royal Caribbean cruises down some 18 percent. To your point, these stocks already in bear market territory, just
moving further, deeper into that territory. It's also true for the airlines as well. But we can look more broadly across the markets, the financials
also coming under severe pressure as the bond yields track down. Banks struggle to make money when they can't borrow money cheaply and lend money
at higher rates. It has implications for all sectors at this point.
SEBASTIAN: Yes, where we're seeing that you might have seen upside in the past, for example, with the Fed and its emergency rate cut, usually that
sends markets higher. But this is really hitting hard. I mean, as you say they financials are in the firing line of that. The Fed may still have more
to cut. The markets are pricing in another significant cut at their meeting this month. So that could be coming pretty soon -- Julia.
But there are stocks we have seen some sort of upside, too, throughout this, the likes of Zoom and Netflix. Zoom of course provides video
conferencing that helps people work from home which mean people having do. They were up 68 percent before this coming down today, as well as Netflix.
There're also the retailers, the likes of Walmart and Costco, they had seen some benefit from people stockpiling essentials also coming down today. So
there is very little safety. Oh, actually, Walmart slightly up. Basically seen some people seen some upside still despite this selloff, it's changing
by the minute. But there isn't a lot of upside today within equities. I think people are, as you have been mentioning, hiding in the likes of
government bonds and gold, the safe havens.
CHATTERLEY: Yes, this just has a very different feel as we were discussing earlier with the market open this morning, the trading halt, the sense that
we couldn't really get a gauge of where markets were going to trade. And it's not just about the coronavirus anymore. It's also, you know, dealing
with what's going on in oil. These markets just have a different feel today, I think.
SEBASTIAN: Yes, I think throughout the past couple of weeks I have been speaking to traders and portfolio managers, and they were sort of telling
me like this is the process of trying to find a bottom. We don't know yet where it will be. We don't know how far and how bad the virus is going to
spread. And then you add to that black swan another sort of black swan from the oil markets. Governments causing, you know, disruption at a time when
people are looking to governments to come in and provide support in the frame of sort of fiscal stimulus, spending on health care, things like
that. So that is a spatter in the works today.
But just, Julia, some context for the viewers. We could be looking at another record points drop for the Dow today. But in terms of percentage
this is nowhere near the record that we saw back in Black Monday in 1987. That was down some 20 percent. So just to put the declines in a bit of
context today.
CHATTERLEY: Absolutely. And to your point as well, we've already seen one trading halt. We'd have another one kick in if we fell some 13 percent. And
then, of course, you've got another five, the final trigger there, the 20 percent. So there are measures now in place to try and prevent that. But we
are a long way from that at least for now. Early days in the trading session. Clare Sebastian, thank you for that.
[10:35:03]
So I will give you another quick look at what we're seeing. For the Dow at this moment we are now firmly off the lows in the session, but it is early
minutes and early hours in this trading session. We were already dealing with the economic fallout of the coronavirus, the stepped-up measures, of
course in Italy over the weekend, adding to the nerves. And then, of course, the fall, the significant plunge in oil prices as we've been
discussing through throughout the show.
Becky, I think that just the trigger point for investors today simply looking at the world and going its geopolitics, it's pressure on oil,
there's recession risk here and the coronavirus that we simply can't quantify. It all just became a bit too much today.
ANDERSON: Yes, and there will be people who see some value in this market, of course. But you're going to have a stomach of steel. Because we have no
idea where this will go next. 5.5 percent lower, we are off the day's lows.
Let me bring up this next graphic though. Thank you, Julia. This is everything about today in one chart, folks. The crude market has crashed.
The biggest fall since the 1991 Gulf war -- biggest intraday fall. Saudi Arabia at the weekend launching a price war with Russia.
Well, Rob Thummel joining me now. He's managing director and portfolio manager investment firm tortoise. And it is, as far as the oil markets are
current, it's a blood bath out there today. 1991, the Gulf war, the last time we saw a one-day drop in oil prices like this. What do you make of
what we're seeing?
THUMMEL: Yes, you mentioned it earlier, Becky. It's just uncertainty really on uncertainty, basically. So there was already uncertainty with
regards to global oil demand. And now over the weekend the Saudis and the Russians created uncertainty with regards to actually increasing supply
when everybody thought they were going to decrease supply.
ANDERSON: Do you buy this idea that should prices, and at the moment they are around 35 bucks, should they drop below $30 on the barrel? Goldman
Sachs certainly suggesting there is more to come. Are we likely to see, do you think, Russia and Saudi getting back into coordinated action to once
again support these markets?
THUMMEL: Well, anything below $40 is not helpful to anybody across the world. I mean, nowhere across the world is going to be successful below
$40. So could prices go lower in short-term periods? Yes. But over the longer term I just don't think that that's going to happen. Because
ultimately you are going to need higher prices to whiff, you know, the fiscal deficits.
Take Saudi Arabia, for example. Their cash reserves have declined by a third since 2014 because of low oil prices. And now if we have these prices
stay low for an extended period of time, fiscal -- or cash reserves will decline 50 to $100 billion a year out of Saudi Arabia. That country simply
can't afford that. Russia can't inertly increase production at this point. Maybe marginally, but not much. And so, lower oil prices impact them as
well. And so, we need to get a compromise between Russia, U.S. and Saudi Arabia to move forward and because all of them will be important going
forward to balance the global oil markets.
ANDERSON: So, Rob, what happened then? Why did Saudi Arabia decide to launch what is effectively this oil race to the bottom on prices? I mean,
just what's the psychology here?
THUMMEL: Yes, well, this appears to be a poker match that -- and it's a high-stakes poker match. And so Saudis' play was to simply suggest a 1.5
million barrel per day reduction in oil production last Thursday and get -- and have Russia be 500,000 barrels of that 1.5 million, it would be
basically a third of it. Russia then chose not to participate, and so Saudis' reaction was, well, if you are not going to participate, then we're
actually going to raise production. So that 1.5-million-barrel reduction is off the board.
So, that really turned the markets upside down because everybody thought the global oil markets were going to be balanced. And now the global oil
markets are going to 1 to 2 million barrels per day oversupplied for an extended period of time. And what we do know is when global oil markets are
oversupplied, prices do fall.
ANDERSON: I just wonder what sort of damage this might do to the oil markets long term. After all, we talk on a regular basis about peak oil,
when we believe demand, these days it's when we believe demand for oil might run out.
[10:40:05]
It used to be when we were looking at $200 on the price of a barrel, when will supply run out. But these days it is all about, you know, how much oil
do we really need going forward. How damaging are days like today long term, do you think?
THUMMEL: Yes, well, Becky, you're right. We are in an energy transition at Tortoise. We firmly believe that the globe, the world is in an energy
transition. The energy transition means we think the first phase is more natural gas, more renewables, less coal. Oil still plays a critical role,
but the pace of growth does slow. So there's no doubt that we are in an energy transition.
The one thing we know from history though, when oil prices fall, demand and growth and demand for oil and growth of oil from a demand side grows. So if
you go back and look historically, when oil prices fell to $26 a barrel in 2016, we saw in 2016 and 2017 oil demand growth, you know, 60 percent, 80
percent higher than what it has been historically. So you've seen oil demand growth grow up to 1.6, 1.8 million barrels in response to low oil
prices. So, we still see global energy demand growing at Tortoise. We still see oil being a piece of that. But we are in an energy transition.
ANDERSON: Rob, thank you. It's been really valuable having you on. I want to get back to John Defterios and to Sam Kiley who is with me here. You
know, we've been discussing, John, why it is that the Saudis decided to take this decision over the weekend and create this rift between themselves
and Moscow. This has been the kind of OPEC plus it called this relationship, ensuring that everybody sort of stays together to ensure a
bottom in these oil markets.
It sort of feels like the kingdom has taken a risky decision, but one, as far as I can tell from sources I've spoken to, one that they really have
had no choice but to take. After all, it's been the Saudis who led in the past and others who followed. And it's been damaging to a certain extent
for the Saudis to be in that position. What do you make of what Rob just -- Rob's position?
DEFTERIOS: Well, if number one, we are in the midst of an energy transition. That's going to carry out for the next 20 or 30 years. So the
strategy behind the OPEC plus is like let's not go all out and produce as much as possible. Let's collaborate, where we can set up a baseline of $50
a barrel, in a range of $65 a barrel and everybody wins in this sort of environment.
Now we have some political dynamics that has changed as well, Becky. The previous energy minister, Khalid Al-Falih, in Saudi Arabia who was pushed
out in September to bring in the half-brother of the Crown Prince, Mohammad bin Salman, had an extremely tight relationship with his counterpart in
Russia Alexander Novak. And he told me personally on many occasions, he wants to escalate this relationship with Vladimir Putin, King Salman,
Mohammad bin Salman and then we want to keep this running for at least a decade.
So the plan by Saudi Arabia, and Saudi sources told me this both on Friday night and Saturday, is that we wanted to preserve this cut of an additional
1.5 million barrels a day, stabilize the market. Even if it gives room to the shale producers. Their strategy was by the end of 2020 shale will have
topped out. We'll be washing out companies that cannot make a profit. The majors have moved in. But in our view, Saudi Arabia, Russia and the United
States can live happily ever after. They can continue to be low cost producers to the world with demand rising 1 to 1.5 percent a year.
So what did go wrong to your point here? Nobody expected the coronavirus. We're ten years into an economic cycle. We have been slowing done. We knew
we were going to slow down in 2020 but not perhaps to have the threat of a global recession. And this frayed tensions. Let's put some burden here on
the Russians. The Russians came into Vienna saying they didn't want a cut. They went back to Moscow to have a deeper discussion with Vladimir Putin,
the minister of energy, Alexander Novak.
In that period of time, OPEC said not only do we want a cut 1.5 million barrels a day through the second quarter, we want it for all of 2020. It
was a showdown, Becky. Perhaps they didn't see it that way. For those of us covering it and for those in the market, knew it was bravado by Saudi
Arabia and one would say it backfired here. And so, when it did backfire over the weekend, the Saudi's double down on the bet and said, look,
raising production, cutting prices, it's a whole new ballgame.
And back to my points that we had earlier, on your program here, I don't think anybody wins out of this scenario. You're going to have a shakeout
all around the world. You have to think of the political ramifications, Iraq, Iran, Kazakhstan, Azerbaijan, Angola, Libya.
[10:45:00]
They will suffer. And there are geopolitical implications for the Middle East, no doubt, and for Donald Trump at the election ballots in November.
10 million jobs linked in the shale country to energy right now, Becky, it's a big job creator and this will hurt Donald Trump because he was
touting the rise of U.S. production and this will undermine that narrative for him going forward.
ANDERSON: And will undermine the relationship between this Trump administration one assumes then and the kingdom of Saudi Arabia, at least
in the short-term. Thank you, John, stand by. I'm bringing back in Sam. By sticking with Saudi Arabia's lead to date, over the last three years, the
Russians have effectively towed the line and said, look, we're looking for a decent relationship with the Saudis, we are also, by the way, looking for
some investment from the Saudis in the Russian economy. We'll play ball with you so far as the OPEC decisions are concerned and we'd like to see a
bit of investment by the Saudi's.
Now, I'm not sure that the Russians have necessarily seen that bilateral exchange. It may be one reason why they've got sort of, you know, a little
bit -- a little bit itchy feet about that relationship. It certainly -- it's certainly damaging, as John rightly points out, it's not just some
damage that we are seeing here to the relationship between the Russians and the Saudis but a much wider geopolitical story here playing out.
KILEY: I think it's very clear that the Russians, from what John was saying has borne it out, have no notion that the Saudis would go all in. I
mean, this is like betting the house on the whole game. Thing is they do have deep pockets. You know, from the Russian perspective, their price
point is about $40 to the barrel. They were in a position where it made sense to work with OPEC to keep it between 40 and 50. That works for the
shale producers. Kind of worked for everybody. But if they stop cooperating, from the Saudi perspective with that, then they can get
slapped.
I mean, in the real world, real politic is about the exercise of real power. That is, what arguably, Mohammad bin Salman has just done. Now, the
ramifications of that, again as John was hinting at, but I think really can't underestimate, think Nigeria, think of these countries that are
themselves weak in terms of civil society, politically vulnerable. Libya, obviously in the middle of multiple civil wars. Angola teetering under the
weight of corruption. But these are countries that have 40, 50-barrel price points before they become uneconomical.
Suddenly, if you have these cuts right down, you are going to end up with civil unrest. Potential explosions of complete breakdown of political
structure, arguably. And then you've got the several stans, you know, Kazakhstan and elsewhere. Not quite as vulnerable politically, but
nonetheless, places that can ill afford a long-term period of 30 a barrel. So it's a gamble.
My hunch is that they're going to get back together and raise this back up, having exercised power. And that's what the Saudis have done. Nobody's
going to like it. It's not good for the planet economically but it is an exercise in real politic.
ANDERSON: And Rob alluding to the very same thing. Suggesting as we've been discussing Goldman Sachs pointing out these markets could go lower on
the oil price. There is, obviously, an opportunity for some coordination to put a -- put a seal, a bottom, underneath what is going on at present. It's
pretty messy out there.
That's the oil markets. And as you and I wind that up and get back to Julia at the New York Stock Exchange, I am seeing the Dow Jones Industrial
Average just shy of a 6 percent drop. Some, what, 75 minutes into this Monday trading session -- Julia.
CHATTERLEY: Absolutely, and you can see that chart there on the screen. We've just tilted slightly further into the red here. It's simply going to
be a very nervous session. Investors watching precisely what you've been discussing for the last ten minutes or so. The pressure, the sheer-size
scale of the drop in all markets and whether or not a solution can be found. It compounds the risks that they're already dealing with and the
fears surrounding the coronavirus outbreak and the intensification of measures that Italy took, I think, over the weekend, too.
I want to bring in Richard Quest. Richard, earlier this session, we were suspended. Trading was halted. Those circuit breakers giving investors a
moment of pause here, and we are holding above those levels at least for now. But these are very fearful markets at this moment.
RICHARD QUEST, CNN BUSINESS ANCHOR, QUEST MEANS BUSINESS: They are. And what's interesting, Julia, and you'll be well across this, is that these
particular circuit breakers are the ones that were introduced in 2013 or a variation thereof.
[10:50:00]
And with circuit breakers, there's always the battle. If you stop trading, do you create a pressure cooker, that when trading restarts, is exacerbated
and you go further down? Or do you, when you stop trading for a short period of time, like 15 minutes, do you allow time for mature thought and
reflection? So when you start trading, things come back. And that seems to be it worked. That it was looking at the numbers as we see them now, the
circuit breaker worked, Julia.
Now, watch how it's doing. It's testing. As the day moves on, will we continue to test 7 percent knowing that if that happens, well, there are
repercussions?
CHATTERLEY: We'll continue to test and we'll continue to watch it. The challenge here, of course, and we have been discussing it for the last two
hours, tough to see a solution for the tensions, the geopolitical issues and the supply issues now in the oil market, tough to see a solution on the
coronavirus outbreak until we see a peak in cases. So wherever you look here, the one thing that markets always look for in these moments, clarity,
information simply isn't there.
QUEST: And it is not there, as you have just put it, across the range of issues that investors want to know about. Investors are, first and
foremost, worried about the bull market. However many years this bull has been running. We're down about 18 percent. Now, you know, just because we
drop to 20 percent below does not mean we can all call a bear market and the bull is dead. It has to be a bear market of sustained losses over a
period of time. And you pays your money and takes your choice on that.
But there is no certainty. And what's worse, Julia, when we start getting Q1 reporting in next month, we're going to see the initial out peak of this
dislocation which will go into Q2. Because Q2, likely, is going to bear the brunt of most of this worry.
Look, it's not 2008 all over again. It really isn't. But it is going to be nasty. And for you, me, anybody around the world who has an ordinary
pension fund, we are 18 -- 15 to 18 percent poorer today than we were when we all went home a couple weeks ago.
CHATTERLEY: Yes, and that's anxiety inducing to your point. And yes, we may see a recovery at some point in the next one, two, three quarters
depending how this goes. But we're again we're asking these questions of V shaped, U shaped, or real recession risk here? Real challenging.
QUEST: We're getting -- we are getting to the point where there is simply so much uncertainty, as you point out, so much uncertainty, so much
volatility, so much economic dislocation, the oil price feeds to -- feeds to manufacturers, which feeds to distributors, which is airlines and
shippers and wholesalers and consumers. That, eventually, you cannot avoid -- I don't want to say a recession at this point but I think Europe is
almost certainly looking at a sharp recession, deep and nasty, the euro zone. I think the U.S. it's not probable, but it's not getting more likely.
And if this level of dislocation continues much longer, then it becomes an inevitability. You cannot have this much stuff going on in the economic
system and not have a recession.
CHATTERLEY: You used the perfect word, dislocation. It's exactly what this is. Richard Quest, great to chat to you and we'll continue to chat in the
coming hours.
You are looking at the Dow right now. Down some 6.3 percent so we are tilting further here into negative territory. I'm pleased to say I am
joined by Stacey Cunningham. She is the NYSE president. Great to have you great to have you with us and great to have you out on a day like today.
STACEY CUNNINGHAM, PRESIDENT, NEW YORK STOCK EXCHANGE: Thank you. It's been an interesting morning on the market.
CHATTERLEY: Yes, busy already. I mean, we were just saying early, Richard and I were discussing the circuit breakers and the impact that simply
stopping trading at a 15-minute pause has here.
CUNNINGHAM: Yes, and so, the circuit breakers are designed to slow trading down for a few minutes. Giving investors an opportunity to digest the
information and reassess the market and then reenter the market with a little bit more information and a little more clarity.
CHATTERLEY: What are you seeing here? Can you just describe what you are seeing and how you're processing?
CUNNINGHAM: I'm seeing markets act normally. So they react to uncertainty. They respond to uncertain events and they become more volatile when there
are uncertain issues in the market and we're seeing that with oil and we are seeing that with corvid virus. So the markets are behaving the way
markets behave. I've been in this business for a really long time and this is what happens. It's not the first time I have seen a market-wide circuit
breaker trigger and markets come back over the long term.
CHATTERLEY: OK, so just in terms of the very short term here, to your point as well, you described it as healthy markets. So in terms of the
price action, you're not seeing dislocations, things that concern you about the price action here? This is an adjustment to uncertainty.
CUNNINGHAM: Yes, it's an adjustment.
[10:55:00]
It's a reaction to uncertainty. And I don't mean to minimize, obviously, when the markets move down. But certainly, you want to protect investors
and make sure that markets are operating appropriately. And that's what's happening. Markets are reacting and they're selling off some. But it
doesn't mean that there's anything wrong with the market. It's just this is how they operate. It's in fact, you see how our market model comes together
during this time to actually prioritize price discovery and give a pause and then reopen those stocks, bringing together buyers and sellers and
establishing value.
CHATTERLEY: I mean, you always try and bring new companies here to market to list on the stock exchange. Do those conversations just remain on pause
for now, given what we're seeing more broadly here in two weeks of volatility?
CUNNINGHAM: No, in fact, there's still companies that are looking. I mean, traditionally, when volatility picks up in the market, the IPO markets
slows down. Those companies are waiting for more certain conditions. But we've been in a very long upward market. There're still companies looking
to come out to market. In fact, we had an IPO, just last week, raised over $2 billion collectively in the market. And that was a significant IPO and
it worked pretty well. We are seeing more to come. And frankly, market events like this help tell the story about why our market model matters to
those companies that are considering where to list their stocks.
CHATTERLEY: It might that. A note of optimism among a sea of red here. Stacey Cunningham, fantastic to have you with us.
CUNNINGHAM: Thank you.
CHATTERLEY: Thank you for that. The NYSE President there.
All right, you are looking at the Dow. Down some 6.4 percent at this moment. Shaping up to be a volatile, probably pressured session, Beck, but
we've got our viewers covered. I'll hand back to you.
ANDERSON: Absolutely, and you are going nowhere. I am going nowhere. We are, though, going to take a very short break. We'll have our breath back
in a couple of minutes right after this.
(COMMERCIAL BREAK)
[11:00:00]
END
