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Quest Means Business
Trading Halted in Shanghai; U.S. Government Sues Volkswagen. Aired 4-5p ET
Aired January 04, 2016 - 16:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
[16:00:00]
RICHARD QUEST, HOST: The closing bell is ringing on Wall Street with the Dow off more than 1.5% and that's off -- well off the lows of the day.
First trading day of the New Year. Look at that. A good, strong gavel to start - or end I should say trading on the first trading day of the year.
It's Monday, it is the 4th of January.
(MUSIC PLAYING)
(BEGIN VIDEO CLIP)
QUEST: It's a very unhappy new year for the markets start with a sickening sell off across the globe. It's all because China shocks the stocks,
trading halted in Shanghai. And it's the people versus Volkswagen. The U.S. Government is suing VW.
I'm Richard Quest, we start a new year together, and of course I mean business.
(END VIDEO CLIP)
(MUSIC PLAYING)
QUEST: Good evening, we begin tonight with a new year, but exactly the same fears. Concerns over China, the Chinese economy and the prospect for a soft
landing once again hitting stocks around the world on this first trading day. Join me at the super screens.
(BEGIN VIDEO CLIP)
QUEST: We will draw a veil over the rest of the world for a moment. Let's just look at what we've seen in New York. This seems to have been the low
point of the day, the market was off more than 430 to 450 points but it rallied towards the mid-afternoon. Then it went down again and then in the
last half hour, there was a surprising burst of buying or at least not selling and the market in New York closes down 276, a loss of 1.5%.
It's been under 17,000 earlier in the day for the first time since October. CNN's fear and greed index measuring investor sentiment tipped well and
truly into fear. What began - or what ended here in New York began in the other side of the world.
Let's go around the world and you can see what happened over the course of Sunday night and Monday into the New York trading day. You've got the Asia
markets. This is where the trouble began. It was in China where you have the Shanghai composite down 6.8. You had the Shenzhen composite off 8%.
Chinese trading was even halted.
Then it moves into Europe where you've got the FTSE, the DAX down 4.25% and the (inaudible) finally ending up in the United States, where the losses
are there but they're not as bad as we've seen elsewhere. The U.S. suffering the last.
There was some minor economic news on manufacturing, but frankly we don't need to get too excited about that.
(END VIDEO CLIP)
QUEST: Joining me from the floor of the New York Stock Exchange, Tim Anderson, managing director at TJM Investments. Tim, well regardless of
the markets sir, a happy new year to you. It is good to see you. But what a day.
TIM ANDERSON, MANAGING DIRECTOR, TJM INVESTMETNS: Richard happy new year to you and all the people at CNN. We're breathing a little bit of a sigh of
relief today. We had a respectable recovery off the lows.
(BEGIN VIDEO CLIP)
ANDERSON: In the last 45 minutes of the day there were some very large buy imbalances published with about 30 minutes to go and that gave the market a
little bit of support. We held 2,000 on the S&P 500, we held 1100 on the Russell. I'm not - you know we still have to take a good look at what China
is going to do overnight and --
QUEST: Right, here's a question for you Tim; nothing that we saw economically out of China overnight justified this sudden sway of selling,
and this sudden down market.
(END VIDEO CLIP)
QUEST: I mean since we left on New Year's Eve, nothing has changed. So tell me why did sentiment change?
ANDERSON: I just - you know I think maybe people got a little complacent at the end of the year.
(BEGIN VIDEO CLIP)
ANDERSON: Maybe the market was a little artificially supported during the last couple weeks of the year. Keep in mind we had a 70-handle move up on
the S&P 500 from December 18th to December 28th or 29th, and then we gave a little bit back in the last couple days of the year.
And today you had tremendous selling in some very high price momentum names that have attributed to a good part of the gain in the S&P and some people
feel that maybe a lot of people were holding back selling those stocks in late December because they didn't want to create a taxable event in 2015.
QUEST: Well they've certainly managed to create a taxable event or some sort of event as we start the New Year.
(END VIDEO CLIP)
QUEST: Tim, good to see you sir. We look forward to your company frequently on "Quest Means Business" helping us understand the (inaudible) of the
world.
ANDERSON: All right, Richard have a great week.
[16:05:05]
QUEST: Lovely, excellent, well let's see how the markets go. There are three core concerns on investors' minds that we need to go through this
evening. And over the course of this program, we're going to discuss each one in turn because it goes to the heart of what this is all about. And
what could well be the entire financial year.
(BEGIN VIDEO CLIP)
QUEST: The first is the underlying weakness that's currently in China. Just how serious is that underlying weakness? Does it have the capacity to drive
the global economy into trouble. Then you've got the tensions in the Middle East. Wherever with look, they seem to be getting worse causing volatility
in oil prices, mismatches between fundamentals and valuations. And that gap, which is the third thing, fundamentals versus valuations. Speaking to
CNN Mohammed El-Erian warned valuations may not stay so high.
MOHAMMED EL-ERIAN, CHIEF ECONOMIC ADVISOR, ALLIANZ: We are coming from a situation where fundamentals are here and getting a little bit better, but
market evaluations are up here because they have been supported by enormous injections of liquidities from Central Bank. So while fundamentals are
getting better, the problem is there's already quite a gap with valuations. And that is what investors are worried about.
(END VIDEO CLIP)
QUEST: So the core goal of "Quest Means Business" is to make sense of it all for you.
QUEST: These three things, weakness, tensions, valuations. Joining me now Richard Clarida as we put some - we put some oomph into this. Happy new
year to you, sir.
RICHARD CLARIDA, STRATEGIC ADVISOR, PIMCO: Happy new year, Richard.
QUEST: Good to see you.
CLARIDA: You betcha.
QUEST: Strategic advisor at Pimco. Let's talk about the weakness in China versus the everything else that happened. What do you attribute today to?
CLARIDA: You know I think people were looking for a bit of a rebound in China. You know sentiment can shift. We got some disappointing numbers in
manufacturing. So I think the surprises were negative.
(BEGIN VIDEO CLIP)
CLARIDA: I also think you had a pretty big move in the exchange rate. They weakened it to a level above 650. That sounds technical but it is a case
authorities are perhaps concerned as well. So I think it's those two factors. People looking for positive surprise, they got negative and a move
in the currency.
(END VIDEO CLIP)
QUEST: It shows - we'll talk more about China later in the program. But in terms of the macroeconomic global economy, it shows to me how fragile it is
because a bit of odd technical financial ease in China has this sort of effect. Things are fragile.
CLARIDA: Well Richard, I think the way I would put it is that we have all got to get used to a Chinese economy that's growing at around 6%, probably
not 7, 8, 9, or 10%.
(BEGIN VIDEO CLIP)
CLARIDA: China is much bigger than it was, but also the composition of that growth is shifting. It's much less intensive in commodities and so as they
slow it's impacting big chunks of the economy in different ways.
QUEST: But even if we do have to get used to that. This volatility, this extreme reaction is something else that we've got to get used to.
(END VIDEO CLIP)
CLARIDA: Yes it is and I think that's part of the world that we're in. I mean I think we'll get positive as well as negative surprises. But
volatility is a fact of life, I agree.
QUEST: Why? I mean not why is it a fact of life. Why do we see more volatility now. Is it because of program trading, high frequency trading
that is exacerbating these minor fundamental effects?
CLARIDA: I think what we're seeing Richard is big shifts in risk appetite or this risk on and risk off (inaudible).
(BEGIN VIDEO CLIP)
CLARIDA: You can document that. Interestingly, U.S. equity volatility has been pretty low for the last several years. Also as your prior guest
mentioned, you know you have a lot of liquidity in the system through quantative easing. Central Banks like the Fed are starting to pull that
back.
(END VIDEO CLIP)
CLARIDA: And so I think markets are sort of broken. What is the new model? The old model was a lot of quantative easing, recovery from recession.
What's the new model?
QUEST: And the Fed has already indicated how they are adapting to the new model. Higher interest rates, reversed repo, overnight auctions, all this
sort of stuff. If you look out with as best a crystal ball as you can, are we in for troubled times?
(BEGIN VIDEO CLIP)
CLARIDA: My baseline is no. I think 2016 will look like 2015. The global economy will sort of stumble along at 2.5% or 3% growth. But there is a
left tail risk and there's less of a right tail risk than we might have thought a couple of years ago.
(END VIDEO CLIP)
QUEST: And that tail risk has the potential to firstly prevent gains in the market, investors gains and secondly to do damage.
CLARIDA: It does indeed. As I said my baseline case is a year in 2016 that looks like 2015, but there is that left tail risk.
QUEST: Good to see you, sir.
CLARIDA: As always.
QUEST: We look forward to having you coming to help us understand the year as it moves on.
CLARIDA: Anytime.
QUEST: Lovely. The selloff started in China where a system to prevent volatility got an unwelcome test on its first day.
(MUSIC PLAYING)
(BEGIN VIDEO CLIP)
QUEST: They were testing the circuit breakers, they certainly had no idea that day one was going to test them to just about destruction.
(END VIDEO CLIP)
(COMMERCIAL BREAK)
(MUSIC PLAYING)
[16:11:30]
QUEST: So continuing to delve into what happened today and why. It was an unwelcomed test for China's new market circuit breakers and a performance
that set in tone around the world that you have heard.
(BEGIN VIDEO CLIP)
QUEST: Trading in China ended early. It ended 15 minutes -- there was a halt for 15 minutes after the 5%, here we go. You can see it over here. If
you join me over - you can see it there after the 5% drop in the Shanghai Shenzhen index. 6 minutes between the first circuit breaker and the second.
The 7% drop halted trading for the day.
So two events happening that cause d eventually Shanghai and Shenzhen on Monday. The last one of course being over here when trading finally
stopped.
(END VIDEO CLIP)
QUEST: What has happened is that China has installed circuit breakers to curve volatility. We have seen these sort of circuit breakers, most markets
have them. The New York market certainly post 87/89 and high frequency, they most definitely have them as well.
But in this case, they were triggered, those circuit breakers by three shocks and they were triggered on the first day that they were put into
full operation.
(BEGIN VIDEO CLIP)
QUEST: The first thing that happened was factory activity. There was a bad jolt over manufacturing activity, which showed the tenth month of shrinking
activity. Then they removed one of the lifeguards -- safeguards. They lifted the ban on shares of short sellings of larger investors. They were
scheduled to expire on Friday, they lifted them.
Take the bad economic, add in highly technical trading and then you have the circuit breakers themselves. The very act of the 5% circuit breaker in
being introduced which causes a delay in trading or halt in trading, that exacerbates the situation and analysts say fear drove investors to pull
money out of the market and then the 7% limit was reached.
What you have here is a perfect example of exactly went wrong.
(END VIDEO CLIP)
QUEST: And to put this all together and help understand it, joining me now is Patrick Chovanec, the Chief Strategist at Silvercrest Asset Management.
Now you believe the circuit breakers obviously are not the problem, it's what happened to cause the circuit breakers.
PATRIC CHOVANEC, CHIEF STRATEGIST, SILVERCREST ASSET MANAGEMENT: That's right, you named two things that drove the downward pressure. The first was
fundamentals which have been bad all along.
QUEST: But not that bad and nothing new to what we didn't already know.
CHOVANEC: Nothing new - nothing new.
QUEST: That's the point - that's the point.
CHOVANEC: Right. And then the second thing is that you allow people to sell. And you know the combination, I mean what the real circuit breaker
that's relevant is the one that took place last summer when they intervened to prop up prices. And instead of having the correction then, they delayed
the correction and we're having it now.
QUEST: Well they will arguably say that you know cooler minds will come into the market tomorrow and realize things are no different on January 5th
than they were on December 30th.
CHOVANEC: No, they weren't any different. Except that you again, allowed people, you gave people room to run and room to sell and they sold because
they looked at the fundamental valuations. These are -- these are markets that have been propped up at valuations that don't correspond to the
underlining Chinese composite.
(BEGIN VIDEO CLIP)
QUEST: But when that - (inaudible) circuit breaker back, but when that first circuit breaker clicked in, that 5% breaker, there's a 15 minute gap.
(END VIDEO CLIP)
[16:15:00]
QUEST: Now that's designed to allow people to have a moment of pause and a thought. And when trading started, you're supposed not to have this -
CHOVANEC: Well it obviously didn't change their mind.
QUEST: Well there was - and I said, there was only six minutes between the first and second. So that first really did make a bad situation worse.
CHOVANEC: I'm not sure it made it worse. It didn't - it didn't change their minds about the fundamentals.
(BEGIN VIDEO CLIP)
QUEST; So what does China have to do. The market there opens in a few hours. What happens?
CHOVANEC: Well I mean they could either go back to the old playbook of trying to prop the market up again, which they - which they could very well
do, place more restrictions tell state owned enterprises to buy, instruct people not to sell, that's possible.
(END VIDEO CLIP)
CHOVANEC: Or they could let the market find its proper equilibrium which they should have done six months ago.
QUEST: OK, but, that sounds fine and dandy except if you've got a pressure cooker, what they're trying to do arguably is take the steam out of the
pressure cooker gently and that's the conundrum that can't be done.
CHOVANEC: Well what they're trying to do is have a correction without having a correction. Which is true - which is true in the stock market
it's true in the property market, it's true over capacity and all kinds. And then it never happens. So really I mean you need market accountability,
you need prices that reflect real fundamentals and they could have allowed that to happen without I don't think unraveling the Chinese economy back
half a year ago and instead we're just seeing a delayed reaction.
QUEST: So if you're right and I don't doubt you might be, we're in for more of this?
CHOVANEC: I think we are if they -- if they allow it to function as a real market. And I think that people watching China, people in markets here need
to realize that there's downward pressure for the simple fact that you've got an overvalued market.
QUEST: I was ringing Paul Donovan at UBS in London today, his view is basically that you know the Chinese stock market does not have a dramatic
effect on the Chinese economy per se, However, it can have a very bad effect on sentiment globally. So in theory, there's no reason why what's
happening in China should have a dramatic effect on the U.S. market.
CHOVANEC: No, and I think if you're talking about an overdue sell off of overpriced Chinese shares, that's not indicative of the outlook for the
U.S. economy or the U.S. markets.
(BEGIN VIDEO CLIP)
CHOVANEC: I mean there are plenty of data points that you can look at in the United States and not like. But the idea that we should be taking our
cues from China and this sell off didn't make sense. It reminds me of what happened in August, when the same thing happened, markets spooked by China
and then eventually they came back again.
(END VIDEO CLIP)
QUEST: Thank you, sir. Hopefully you'll be here throughout the course of the year to help us understand the maturations of what's going on.
CHOVANEC: Will do.
QUEST: Lovely. When we come back, it's a lawsuit that's been filed in Detroit and it has executives in Wolfsburg extremely worried for obvious
reasons.
(BEGIN VIDEO CLIP)
QUEST: Volkswagen is facing billions of dollars in penalties and all because it cheated on emissions, after the break.
(MUSIC PLAYING)
(END VIDEO CLIP)
(COMMERCIAL BREAK)
(MUSIC PLAYING)
QUEST: The United States Environmental Protection Agency and the Justice Department are suing Volkswagen for cheating on emissions tests.
If the U.S. wins its case Volkswagen could be hit with fines of more than $18 billion. It's all to do with the amount they have to pay for each
individual car.
[16:20:00]
CNN's justice correspondent Evan Perez is in Washington. Was there - I mean from the moment it happened, was there an inevitability that the
authorities would sue them?
EVAN PEREZ, CNN JUSTICE CORRESPONDENT: Well, yes and no. I mean one of the problems with this case - with this case according to the Justice
Department is that Volkswagen has been dragging its feet, Richard.
(BEGIN VIDEO CLIP)
PEREZ: If you go back to October when Michael Horn, The CEO of Volkswagen United States testified in congress. Even after that, Volkswagen issued a
statement in which it denied that these emissions defeating vehicles, these cheating devices that were on these cars that they had been installed in
certain 3 liter engine cars. And it turns out that they were on those cars.
That means that now we're talking about 600,000 automobiles that were - that were outfitted with these devices that were intended to cheat on
emissions tests. And so we're talking now beyond $18 billion in fines. There are four different types of violations here and if each of those
600,000 cars were in violation in those four different ways, we're talking about $90 billion in fines if the United States gets its way.
Obviously those are numbers that probably will not come to pass, but it does give you a sense of why this complaint was filed today, why this
lawsuit was filed today.
(END VIDEO CLIP)
PEREZ: Because according to the justice department, even after Volkswagen showed up in congress to say we're sorry, we did mess up, they continued to
deceive and to not admit the full extent of the problem.
(BEGIN VIDEO CLIP)
QUEST: So really since they've basically from - I mean eventually they've said we did it, it's a fair cop gov, as we might put it. We're really
talking here about how much aren't?
PEREZ: Right, exactly.
QUEST: This is about - this is what does the final bill look like.
PEREZ: Right, that's going to be the issue and it's going to have to be a negotiation because obviously they don't want this company to be destroyed
by this case.
I mean we have a couple of recent cases where GM paid $900 million for some problems that actually killed people, Richard and Toyota paid $1.2 billion
for similar problems that, again, were tremendous.
(END VIDEO CLIP)
PEREZ: But in this case, we're talking about defeating emissions testing and you know if the United States - if the law, the EPA's fines are
followed to the letter, it would be $90 billion. I don't see that happening, but it will be a significant amount of money.
QUEST: It will have several zeros in fact more than several zeros.
PEREZ: Absolutely.
QUEST: Evan, good to see you, happy new year to you, sir.
PEREZ: Happy new year.
QUEST: It's a new year and it's a new look for General Motors. America's largest auto maker has decided to invest half a billion dollars in Lyft.
That's the ride hailing competitor to Uber. It's known for their trademark, pink moustaches. The plan is for the two companies to develop eventually a
fleet of on demand self-driving cars, that's some way off.
(BEGIN VIDEO CLIP)
QUEST: It could be the start of a new wave of competition. Lyft is battling it out with Uber for funding and now of course having GM in its
corner will make autonomous vehicles mainstream reality.
Paul La Monica, is here. Good to see you, happy new year sir.
(END VIDEO CLIP)
PAUL LA MONICA, CNN MONEY DIGITAL CORRESPONDENT: Happy new year.
QUEST: So when I read this story, at one level it's GM and Lyft. But this is deep. This goes into the leasing of cars to Lyft drivers, the renting of
cars to Lyft drivers, the financing. This is a (c-change).
LA MONICA: It definitely is. This is the first major auto maker investing in one of these ridesharing companies and the fact that it's not Uber I
think is significant. And also as you pointed out, GM and Lyft are going to be working on self-driving cars and there's a huge race to try to see who
is going to be the first to get that market right.
Tesla, Uber, Google is reportedly working with Ford. There are rumors about an Apple car eventually coming out. So you have automotive and tech giants
all trying to do this self-driving autonomous car.
QUEST: What's the advantage between Lyft and GM for autonomous vehicles?
LA MONICA: I think it's -- the advantage for Lyft obviously is it has a major auto manufacturer that it now gets to work with.
(BEGIN VIDEO CLIP)
LA MONICA: I think for GM, what they get by working with Lyft, one, it's not Uber. Everyone is think -- is afraid of Uber's growing dominance. Lyft
also has some interesting global partnerships. They've partnered with China's Didi, with Ola in India, so they have a rapidly expanding global
ridesharing network.
(END VIDEO CLIP)
QUEST: But from GM's point of view surely you want to be agnostic at best, about which company is involved, which car company is involved. Because you
want to sell cars to Uber and you want to sell them to (Get) and you want to sell them everybody else in the business. By tying yourself with Lyft,
don't you deny that?
[16:25:03]
LA MONICA: It is a bit of a risk. I think though it does speak to the fact that Uber is so dominant that everyone does not want to make Uber the be
all, end all company in this market.
(BEGIN VIDEO CLIP)
LA MONICA: So by partnering with a smaller rival that is by no means any slouch in the business, this could possibly strengthen Lyft and make Uber a
little bit less dominant.
(END VIDEO CLIP)
QUEST: They could have worked together on driver less cars which seems to me to be slightly against the whole concept of what Lyft and Uber do. I
don't understand where the advantage is for GM and Lyft to work together on driverless cars.
LA MONICA: I think eventually companies like Uber and Lyft, all they really want is to be that service that you as a passenger you're going to hail a
cab.
(BEGIN VIDEO CLIP)
LA MONICA: And whether or not that is a car that has a driver or no driver, Uber and Lyft want to be - want to be the company that makes the money from
that car that's coming to pick you up.
QUEST: Finally, Mary Barra becomes chairman. This is another move where U.S. companies think its right to have the chairmanship as an executive
chairman that's also part of the - that's also got the CEO. In the rest of the world, that's frowned upon.
LA MONICA: It is definitely frowned upon, but you have many companies in corporate America where this is fairly common. At GM, you had many of her
predecessors were the CEO and the Chairman.
And I think what this is, throw the debate aside about whether or not you should have the chairman and CEO be the same person, I think this is a
reflection of the confidence that the company has in her. She really came in at a very difficult time given the recall scandal and all the people who
were killed because of the problems in older GM models.
(BEGIN VIDEO CLIP)
LA MONICA: I think she did a very admiral job of crisis management.
QUEST: Before we go to the break, the Dow Jones. The Dow Jones, the markets, the global markets simply horrible today. You have heard us
describe the tensions in China, the Middle East. Is this what we've got to look forward to Paul?
LA MONICA: I think we unfortunately have to look forward to a lot more volatility this year.
(END VIDEO CLIP)
LA MONICA: That doesn't mean every day is going to be as gruesome as this, but I think there's just so much uncertainty. You throw in Saudi Arabia and
Iran, you have the U.S. Presidential election, there are a lot of proverbial wild cards out there and we all know the market really doesn't
like all that uncertainty. As trite as that sounds, it's true.
QUEST: Thank you.
LA MONICA: Thank you.
QUEST: Paul mentions the tensions between Iran and Saudi Arabia. Of course, the big fear of the market is that it boils over into the oil markets.
(BEGIN VIDEO CLIP)
QUEST: The rift between the two largest OPEC producers is at a critical time for the organization, in a moment.
(MUSIC PLAYING)
(END VIDEO CLIP)
(COMMERCIAL BREAK)
(MUSIC PLAYING)
[16:30:05] QUEST: Hello, I'm Richard Quest. There's more "Quest Means Business" in just a moment when the head of the Eurasia Group Ian Bremmer
talks me through the top risks of 2016 as they see them.
And Mark Zuckerberg says artificial intelligence will be his houseguest in the New Year.
Before that, this is CNN and on this network the news always comes first.
Saudi Arabia has banned all flights to Iran after the Iranian authorities and protest - I beg your pardon - after Iranian protesters attacked the
Saudi embassy in Iran.
Demonstrators were angry at the Saudi execution of a Shiite cleric. Iran's ambassador to the United Nations today expressed his regret over the
attack.
The White House is calling on both countries to show restraint.
(BEGIN VIDEOCLIP)
JOSH EARNEST, WHITE HOUSE PRESS SECRETARY: We do continue to be concerned about the need for both the Iranians and the Saudis to deescalate the
situation in the Middle East.
That we're urging all sides to show some restraints and to not further inflame tensions that are on quite vivid display in the region.
(END VIDEOCLIP)
QUEST: Markets around the world started the year with a major selloff on Wall Street. The Dow lost 450 points. It clawed back some of that lost
ground.
It still ended off 276. Investors were most worried about China's economy in China where the authorities suspended trading following a stock's
falling by 7 percent.
President Obama has met with the attorney general of the United States to discuss options to expand gun control. The President expected to announce
an executive action to beef up background checks.
The Republican presidential candidates are accusing Mr. Obama of overstepping his constitutional powers.
A group of armed protestors who have taken over a federal building in the U.S. state of Oregon are now going by the name Citizens for Constitutional
Freedom.
The group has taken over a remote wildlife sanctuary in protest it says against the U.S. government and says they won't leave until their demands
are met.
Its spokesman tells CNN they want to return the land to the people.
(BEGIN VIDEOCLIP)
AMMON BUNDY, SPOKESPERSON FOR CONSTITUTIONAL FREEDOM: We're going to stay here until we have secured the land and the resources back to the people of
Harney County and where they could get back to ranching, get back to logging, get back to using these lands without feeling fear and
intimidation. And that's our goal.
(END VIDEOCLIP)
QUEST: Real Madrid have sacked Rafael Benetiz as manager and replaced him with the French football legend Zinedine Zidane. Real are currently in the
third place in La Liga behind their rivals Barcelona and Atletico Madrid.
Zidane takes over after having served as Real Madrid's B team manager.
The Dow finished 276 points in the red, which all things considered, was better than we'd feared after seeing 450 losses earlier in the day.
At one point that was the worst of the session. It even dipped below 17,000 for the first time since October.
Now, (RINGS BELL) a look at how some of the Dow Industrials performed you can see there straight away.
Just every market - every stock - was down except three - Caterpillar, Apple and Walmart managed to eke out again. Interesting that Walmart
managed.
CNN's Alison Kosik is at the New York Stock Exchange. Who took the brunt? My eyesight's not good enough to look at that chart. Who took the brunt?
ALISON KOSIK, CNN BUSINESS CORRESPONDENT: I think it was an sort of equal opportunity selloff. I mean, you make a good point that Walmart ended
higher because, you know, Walmart has great exposure to China.
You look at some of the stuff that got hit hard that do have exposure to China. Yum! Brands generated half of its sales from China last year. Yum!
brands down over 1 percent.
Tiffany shares down more than 2 percent. Tiffany had big exposure as well.
But you look at some of the day's worst losers - they had something else in common, Richard. Analysts downgrade watchmaker Fossil, Netflix, Chipotle,
Amazon - all sliding sharply on ratings cuts.
And remember, Netflix and Amazon were the top picks - the top stocks - in the S&P 500 in 2015 -- both more than doubled.
So, you know, maybe not/that's (ph) surprising to see investors take some profit on those names.
But I want to leave on an up note here. Not everything was down today. Gold was actually one of the few bright spots, rising almost 2 percent an
ounce, pushing gold mining stocks like Newmont, (inaudible) Goldcorp, Barrick, Randgold --
QUEST: -- Ah, ah!
[16:35:04] KOSIK: -- all those. And I would be remiss to not mention Lululemon soared 6.5 percent following two analyst upgrades -- you know,
everybody getting into the workout mood -
QUEST: Ah.
KOSIK: -- on - in this January.
QUEST: Right, yes, yes, keeping myself trim for the New Year.
KOSIK: (LAUGHTER).
QUEST: But listen, you talk about gold being up as being something bright. That's a sign of fear as much as anything else. And if we look at this
market, -- I mean, look that at that. DuPont down 5.25 percent, the worst of the day.
And even those gains, Alison, just barely a quarter of a percent. A bit here, a bit there.
KOSIK: It is true what you say about Gold, it is a safe haven. But, you know, what I'm trying to do here is show a glass half full
QUEST: (LAUGHTER).
KOSIK: -- and a picture in a sea of red today.
QUEST: We'll allow you're your glass half full left over from New Year's Eve.
KOSIK: Thank you.
QUEST: Alison Kosik who is at the New York Stock Exchange.
The stock selloff was also felt on the oil market where U.S. crude prices dipped even with the tension building between two of OPEC's biggest
producers.
Look at how Monday went. You've got a lot of tension in the market already from 38 - you go up and then you come crashing right the way back down
again.
The spike was because of the escalating dispute between Saudi Arabia and Iran.
Now that is the oil market's in many ways worst fear - that these two OPEC producers not only have a diplomatic spat, but that it does get
considerably worse and it comes down to where things closed just at around 37.25.
Part of the fracas (ph) that's now going on --Saudi says that all flights to Iran are cancelled effective immediately, trade ties are being suspended
which is serious, Sudan, Bahrain are following Saudi Arabia in cutting diplomatic tensions.
So it's an escalating battle. Tensions between the two countries flared you'll be remembering of course after Saudi executed a prominent Shiite
cleric.
As relations (ph) deteriorate further, Saudi's foreign minister defended his government's response.
(BEGIN VIDEOCLIP)
ADEL AL-JUBEIR, SAUDI FOREIGN MINISTER: These were people who had no problem about blowing up compounds and killing people who are innocent.
And so when they received their just dues, we should be applauded for this, not criticized.
(END VIDEOCLIP)
QUEST: So wherever we look, the crisis between Saudi and Iran it comes after a year of falling oil prices.
Iran is poised to bring even more oil to the market following last year's nuclear deal.
CNN's John Defterios joined me to talk about how oil markets respond to this rift.
(BEGIN VIDEOCLIP)
JOHN DEFTERIOS, CNN EMERGING MARKETS EDITOR: In fact, Richard, this is a market that's been described by a glut for the last 18 months.
But what happens now, with the split between Saudi Arabia and Iran, it reintroduces risk into this market.
In fact regionally some are describing this as a comparison to the Iran- Iraq war during the 1980s - that's how high tensions are.
And they're talking about commercial splits - breaking airline links - and we even see Saudi Arabia getting the support of Bahrain, Sudan, even the
UAE downgrading relations with Iran.
So what does that tell us going forward, Richard? I don't think we could discount this. We have the number one and two oil players in terms of
proven reserves in this region in Saudi Arabia and Iran, Saudi Arabia 265 billion barrels, Iran hovering just over 150 billion barrels.
And with tensions here it changes the dynamics that we often talk about - the supply of U.S. shale onto the market, Russia producing at record
levels.
But at the end of the day in 2015, 30 percent of the oil on the market came from the Middle East.
So you don't want to see those with the number one and two reserves going at confrontation. If you ask anybody in the Middle East - even investors
in the broader market - what is the worst-case scenario? And that is a conflict between Saudi Arabia and Iran.
We've never been so close -
QUEST: Right -
DEFTERIOS: Right now it's a war of words, but it's starting to impact the market at the same time.
QUEST: If it remains a war of words, it could also become a war of production - each deciding to produce and actually pushing prices further.
Because the scenario you've sketched - the realistic scenario - assumes a physical conflict.
DEFTERIOS: A physical conflict indeed, Richard. I would go as far to say we've never seen OPEC in so much disarray.
They just came out of a meeting in December. Many thought they would plan for the return of Iran into the market in the first quarter of 2016.
What did OPEC do? They kicked the can down the road, didn't factor in Iran, the potential return of Libya to the market as well.
The Iranian oil minister Bijan Zangeneh has told me face-to-face he wants to add up to 1.5 million barrels to the market in 2016 if the sanctions can
be lifted.
[16:40:07] And in fact, when you go to an OPEC meeting, you've always seen the tensions, Richard, between Saudi Arabia and Iran.
They've both put up candidates for the secretary-general of OPEC and they can't reach an agreement. Both on very polar opposites coming at the worst
time -- at the start of 2016 as Iran tries to get the sanctions lifted.
And I would add another caveat here - Saudi Arabia never liked the P5+1 deal with Iran to see the sanctions lifted.
Perhaps this is their last stand, their last push here - very dramatic push - to get the Sunni players on their side to say we don't like a deal and
we'll ratchet up the tensions between ourselves and Iran.
QUEST: John Defterios in Abu Dhabi. You can tell already from what we've been talking about on this first program of the New Year the risks that are
out there from China to Saudi Arabia, to Turkey, to markets and interest rates.
When we come back, Eurasia Group has published its 2016 risks list and Ian Bremmer will tell us where he sees the biggest risks. In a moment.
(COMMERCIAL BREAK)
QUEST: The weakening alliance between the U.S. and Europe threatens global stability in the New Year. That's according to a new risk assessment by
the Eurasia Group.
Now, if you look at the companies and what they say the list of top risks, it shows the various hot spots across the globe.
The United States and the European Union or Europe generally - what they describe as a failing transatlantic relations on a variety of groups and a
variety of levels - whether it be NATO, E.U., transatlantic - that's one of their key concerns.
Then obviously you have ISIS, the situation in Saudi Arabia that we've just been talking about, and the economic woes in Brazil where the country is
facing its second year of desperate recession is a deep political crisis, possibly the worst in several decades and the economy is in almost free
fall.
We haven't added into that of course China, and if you look at the map for their risks, you see perhaps with the exception of Africa, the risks are
fundamentally global and exceptionally widespread and deep.
I spoke to the Eurasia Group's president Ian Bremmer who joined me a short while ago and discussed the relations between the United States and Europe
that now top the list.
(BEGIN VIDEOCLIP)
IAN BREMMER, PRESIDENT, EURASIA GROUP: -- Seventy-five years the most important alliance in the world, whether it's international security or
economics or the values that we all try to aspire to in globalization has been the transatlantic relationship.
It is now weaker than at any point since the end of World War II.
QUEST: Why? Where's that weakness?
BREMMER: Well, one weakness in the United States, we have an election where we don't know who we are in the world, where it's massively
polarized.
Our foreign policy focus is on terrorism and Syrians and building a wall while the Europeans are experiencing political crisis, and everything they
want, they don't think the Americans can actually achieve for them.
This is one of the reasons the geopolitical climate is becoming so incredibly dangerous in 2016 -
QUEST: But what -
BREMMER: -- and why its new leaders (inaudible).
QUEST: But what is that danger? I mean, is it, you know, when you talk about a danger and a risk, the extremist argument says it eventually breaks
out into a war.
[16:45:02] BREMMER: Yes. Well, I think the danger is that the leaders that are evolving in the world are leaders that are not going to be ones
that we're prepared to accept or work closely with and we're not going to (AUDIO GAP) because the real alliance that we see is so much weaker than it
used to be.
Who are we talking about? We're talking about Putin, we're talking about the Saudis, we're talking about Erdogan, we're talking about the Chinese.
They're not global leadership, but they're the people that are increasingly are getting it done, they're making the decisions, they're determining
outcomes that we don't like.
QUEST: Aren't you expressing a certain amount of hyperbole in all of this? We've been through bad times before.
BREMMER: Yes.
QUEST: I mean Gulf War 2, Gulf War 1, the Cold War, the Yom Kippur War - whichever one you want to talk about. We've seen instability before.
BREMMER: Yes, I do think that - I mean, look, we've been doing this for 18 years and I'll tell you when I put this out every year and we keep it on
our web page all year long, this is - we're hardly doomsayers.
I think 2016 from a geopolitical perspective is the worst risk environment that we've been exposed to. You've got the most powerful terror
organization in history, you have six failed states in the broader Middle East, you have a refugee crisis that is unprecedented.
All three of those things will get worse and that's before you count the weakness and vulnerability of the Saudi regime which has of course led to
the conflict we now have with Iran.
QUEST: (RINGS BELL). I am refusing to allow you to finish this interview on a dower, down note.
BREMMER: Yes, not a problem.
QUEST: Give me something that I can take and say, good!
BREMMER: I can give you two things. The first is that if you look across Asia which of course is the largest economy in the world, you have leaders
that are relatively strong, they're relatively stable and they're focused on economics not on politics so they're not going to be playing
nationalism.
India/Pakistan, Japan/South Korea, Japan/China, South China Sea, those are risks you won't see this year. That's great.
Second big piece of news is that we're going to be yelling and screaming about the U.S. political election and right up until November, and it
doesn't matter.
We're not electing Trump and people are going to invest in this country irrespective of who we vote for.
So, I mean you know, at the end of the day the world's largest and second largest economies are not the ones that are actually internally driving
risk - it's what happens outside.
(END VIDEOCLIP)
QUEST: A programming note for you during this week and what will be one of the biggest talking points of 2016. CNN will have a special look at guns
in America with President Barack Obama.
Anderson Cooper hosts an exclusive one-hour live town hall event with the U.S. president. It's Friday at 1 a.m. London, 2 a.m. Central Europe and
it's only of course (RINGS BELL) on CNN.
In 2010 this man promised to learn Mandarin. In 2015 he's dedicated himself to reading 23 books in a year. Now Mark Zuckerberg has a new and
ambitious New Year's resolution.
He's going to code his own personal assistant. You'll enjoy that after you've had the time to pause to think - to Make, Create, Innovate.
(COMMERCIAL BREAK)
QUEST: This time last year Mark Zuckerberg announced his New Year's resolution and he was to read a book every two weeks for all of 2015.
[16:50:00] Mr. Zuckerberg is back and his plans in 2016 are definingly (ph) more high tech. He plans to develop artificial intelligence that he says
will help run his life.
He wants to create a virtual assistant that will learn his voice and be able to control things in his home - things like the lights, the music.
He wants to be able to go make everything blue. How about a little green? You get the idea. He also wants this virtual intelligence, this artificial
intelligence to remember his friend's faces so that when they come up to the front door, the artificial intelligence knows (SOUND OF DOORBELL) to
open it automatically.
There are so many other things that he wants this A.I. to do. You'll know of course Mark and his wife recently had a little baby girl - ah, bless -
they called Max.
Now this software will be able to let them know if anything is wrong with Max, even when Zuckerberg is not there. Yes. Baby also virtual baby.
And when it comes to his work, he wants to be able to find ways to use virtual reality to better visualize data. Obviously to become a more
afflect (ph) - ooh, I say.
Now that's different. You get the idea.
This idea of artificial intelligence which many such as Elon Musk have said is a potential evil if it goes rogue. Zuckerberg is going to try and code
himself.
Erik Brynjolfsson is a professor at the MIT Sloan School of Management, author of "The Second Machine Age" - one of the books that so many of our
Reading for Leading experts have been on. He joins me from San Francisco.
Sir, so Zuckerberg says he's going to code it himself to make this A.I. personal assistant. Do you think he can do it?
ERIK BRYNJOLFSSON, AUTHOR, "THE SECOND MACHINE AGE": I'm sure he can. You know, he's one of the best coders on the planet and he did the original
Facebook.
Now that doesn't mean it's going to have all the capabilities of J.A.R.V.I.S., but some of the basic things you mentioned in your intro like
recognizing faces, the building blocks are already there.
QUEST: The debate over - I mean, it's one thing to have a robot because of course it's got to recognize - I mean, is it going to move? Is it just
going to activate door locks? Is it going to have physical presence? What do you think?
BRYNJOLFSSON: You know, this is one of the big paradoxes. It's often easier for A.I. to do mental tasks like beating you or me on chess. Like
my cell phone can beat me at chess.
But picking up a pencil or walking around a room the way a two-year-old can do, that's beyond the capabilities of machines today.
So there's a real difference between mental and physical tasks.
QUEST: Right. So is it - we don't know too much about what the Zuckerberg goal is, but would you imagine he's going for the mental and then the
physical follows later?
BRYNJOLFSSON: Absolutely. I think that line is blurring. Some things like visual - like what we just mentioned recognizing faces or voices -
that kind of perception has improved tremendously in the past five years, partly because of the work that people like Yann LeCun at Facebook have
been doing.
But it - balanced humans are still better at those basic physical and perception tasks.
QUEST: Why do you think he's doing it?
BRYNJOLFSSON: Well, number one it's fun. And I think he's having fun with his life. But number two, there's a huge impact it's going to have on the
world.
Over the next 5, 10 years all of us are going to see more and more A.I. agents, A.I. robots, many of them software based changing our lives, making
recommendations, listening to our voices.
Amazon Echo is one that some people use in their houses now where you can ask simple questions and whatever Mark codes -
QUEST: Right, but -
BRYNJOLFSSON: -- up for himself, it'll be easy to digitize that for us all to use.
QUEST: And yet there is still this fundamental debate that takes place that you have heard. You talk about it in "The Second Machine Age" that
people like Elon Musk talk about - the prevention of A.I. becoming an evil or a rogue.
BRYNJOLFSSON: Well, A.I.'s becoming super powerful. It can solve a lot of the world's problems. But it also can create new kinds of problems we
hadn't seen before.
I think the benefits are likely to outweigh the cost, but we have to be vigilant.
QUEST: So you do have to be vigilant to a degree on that - that -
BRYNJOLFSSON: Sure.
QUEST: -- I'm not suggesting some sort of James Bond - `No, Mr. Bond' - type of -
BRYNJOLFSSON: (LAUGHTER).
QUEST: -- blowfeld or (inaudible). Or maybe I am suggesting that. Maybe that is the fundamental fear.
BRYNJOLFSSON: Well, you know, there is a group of people - Elon Musk is one leading them that have started this open A.I. initiative specifically
to, you know, safeguard us against some of those dangers because it's on the horizon and it's something people are paying attention to.
But the benefits in terms of curing disease or even just recognizing people when they ring the doorbell, I think are vastly greater at this point.
[16:55:06] QUEST: Thank you very much for joining us. Thank you, sir.
BRYNJOLFSSON: My pleasure.
QUEST: One thing to think about - just a moment - imagine if we ever did a virtual reality of "Quest Means Business" while we were on-air, and then as
you turn `round, you would be able to see exactly everything that I'm seeing as well.
Just think how cool that would be. Our "Profitable Moment's" next.
(COMMERCIAL BREAK)
QUEST: Tonight's "Profitable Moment." New Year, same fears. The speed with which everything that had worried the financial world during 2015
roared back into our consciousness was really quite remarkable.
It started in China with the Shenzhen and the Shanghai with - of course halting trading.
It moved swiftly into Europe where all the markets are down - the worst is the Dax off 4 percent and it ends up in the United States.
Has a cycle begun that's going that's going to be difficult to break? We simply don't know. Anyone who tells you it has, is simply making it up.
The reality of course is that nothing has substantially changed from how we left things last year to how we've started now except minds are focused
once again.
And it's that focusing of mind on risk that we need to be worried about in the days and weeks ahead. Who knows? 2016 certainly won't be a barn-
burner of a year, but we don't want it to be a disaster either.
And that's "Quest Means Business" for tonight. I'm Richard Quest on January the 4th. Whatever you're up to in the hours ahead, (RINGS BELL) I
hope it's profitable.
We do it again tomorrow.
END
