President Donald Trump Says China Wants To Run Out The Clock And Him With It; Federal Reserve's Two-Day Meeting Begins
RICHARD QUEST, CNN INTERNATIONAL HOST: Sixty minutes to go on trading on Wall Street and the Dow has been down, but not too much. Look, it was further down this morning. A little bit of a smidgen of green, a rally perhaps underway. So, we're off 29 points not to be too concerned about that. The reasons of course, well, these are the markets and these are the reason why. President Trump is lashing out at China. Trade negotiations are underway, why the President says China wants to run out the clock and him with it. The rate cut come off. Mohamed El-Erian joins us in the C-suite as the Fed meets. And Beyond Meat comes back to the market for seconds. The stock is down. We're live in the world's financial capital, New York City on Tuesday, July the 30th. I'm Richard Quest, of course, I mean business. Good evening, Donald Trump has warned China don't play a waiting game on the trade deal. The U.S. President has been talking trade just as his negotiators over in Shanghai are getting back to talks. He says China's tactic is to let the clock run down on his presidency.</s>DONALD TRUMP, PRESIDENT OF THE UNITED STATES: China would love to wait and just hope -- they hope -- it's not going to happen. I hope. But they would just love it if I got defeated. So they could deal with somebody like Elizabeth Warren or Sleepy Joe Biden or any of these people because then they would be allowed and able to continue to rip off our country like they've been doing for the last 30 years.</s>QUEST: Matt Egan is with me. The President is on and on and on about this. I mean, he is there talking about trade. But this morning, he was seemingly in a very convoluted economic understanding of trade.</s>MATT EGAN, CNN BUSINESS LEAD WRITER: Right. He is certainly nodding to the fact that there are these political calculations going on. China knows that at a certain point, President Trump has an economic and political need to get a trade deal. He needs those votes in the rust belt, which is hurting from the trade war. He needs the votes from the farmers, which is -- they're really hurting from the trade war. And so he is saying that, "Listen, Beijing wants to wait out the clock on me. They want to get another candidate in there in the White House, and perhaps that's when they'll make a trade deal." But you know, Richard, he's also kind of contradicting himself, because on the one hand, he said right there, "China would love to wait for him to leave office." On the other hand, he then said, "China is dying to make a deal with me." So, we shouldn't listen to carefully to what he says because some of these messages are a little bit contradictory.</s>QUEST: Right. So, on the one hand, these -- they want to make a deal. They keep saying they want to make a deal. They want to make a deal. They should have taken the deal that they had before they reneged. But on the other hand, they didn't want to make a deal, because the next time they're waiting for the next President, which is it?</s>EGAN: Exactly. It's not really clear which it is. But here's what I think is very telling is that President Trump tweeted this morning, that there's no sign yet that Beijing is making these large purchases of U.S. crops like soybeans and other products. And I think that's really telling that they haven't made those purchases yet, at least according to Trump, because that is the lowest hanging fruit. If they can't even just go through with buying a whole bunch of crops from U.S. farmers that they already need, then how are they going to make progress on the much harder structural issues?</s>QUEST: Who needs the deal most?</s>EGAN: It depends on when. I think six months ago, China seemed to really need that deal. I think right now it's shifting because we're coming into an election season. And if the U.S. economy slows too much, really, if the global economy slows too much, China, as you know, plays the long game, right? I mean, they're thinking the next 20, 30, 40, 50 years, and the United States is thinking about it in, you know, a two-year or four-year election cycle.</s>QUEST: The President said this morning that China was paying for the tariffs. His argument was that they've manipulated the currency lower. Therefore, the goods were cheaper. Therefore, they were eating into their own margins in terms of what they're selling them at. And although -- therefore, that they were able to -- they were able to hold the cost down when the goods come into the United States.</s>EGAN: China has long been accused of devaluing its currency. But President Trump's own Treasury Department has not labeled China a currency manipulator. And that's in part because China has actually spent a lot of money preventing its currency from going into a free fall. In some ways, they've actually propped up their currency because they don't want all of that capital to leave.</s>QUEST: But if the price of the import from China is the same, even after the tariff, so if they've lowered the price through currency, so that by the time it reaches the U.S. shores, it's 15 percent lower, so the tariff just takes it back to where it was, then he is right, China is paying the cost of the tariff.</s>EGAN: I guess that's one way of thinking about it. But you have to remember --</s>QUEST: Convoluted.</s>EGAN: It's convoluted.</s>QUEST: Eccentric and a bit averse way of thinking about it. And I'm probably wrong.</s>EGAN: But listen, we're also -- the United States is now coming out with these bailouts for farmers, $10 billion last year, another $14.5 billion coming in the next few weeks, and that is money that's coming out of the U.S. Treasury, really coming out of U.S. taxpayers to help mitigate some of the effects of the trade war. And that's on top of the tariffs that the U.S. companies are paying, and the U.S. consumers as well, Richard.</s>QUEST: Good to see you, as always. Matt Egan. Wall Street is trading slightly lower. The President's trade comments had certainly sent it down. And now all eyes are on the Fed. But what's interesting is the way in which the market has rallied over the course of the day, as the Fed's two-day meeting begins, Donald Trump is again attacking the Central Bank and calling for a large interest rate cut.</s>TRUMP: I am very disappointed in the Fed. I think they acted too quickly by far, and I think I've been proven right. People have said I was right, they were wrong. The Fed is often wrong. The Fed is often wrong.</s>QUEST: Investors are certain there will be a rate cut of some kind, the question is how big? The decision of the market is saying the chance of a quarter point cut is 78 percent. The chance of a more dramatic half point cut is 22 percent. But we need to go back to basics. Why are we cutting rates at all? Economics 101, and today's lesson, The Federal Reserve and interest rates. The rate we're talking about is the Fed funds rate. It's the rate that the Central Bank uses to dictate what banks will lend between each other on an overnight basis. It changes the cost of credit. It can stimulate growth or it can restrain an economy. It's typically lowered very quickly during recessions on the prospect of recession. Here is '99, but this is the great recession, of course, lowered very, very fast from a nearly six percent, right the way down to just half a percent. And then it is gradually raised when the economy is healthy, which is what you're seeing over there on the far edge. The nine rate stages that we have seen. This is what we will see, if they cut tomorrow, by the way, it will be the first of a downward series since 2008. Today, the U.S. economy is looking healthy by most metrics, growth is solid 2.1 percent. Donald Trump says he wants it higher. Well, let's see if we can do that. Four percent seems a long way off. Unemployment 3.7. That is the stellar performing part. And in fresh inflation figures, a 1.6 shows getting closer the Fed's target. The Fed, the current Fed rate is 2.5 percent. Higher than most other countries except emerging economies. Donald Trump's chief complaint says that this 2.5 percent puts it at a disadvantage compared to the U.K. at three quarters, the EU at zero percent, Japan negative. There's a lot there to take in. Luckily for us, Mohamed El-Erian is an advisor at GIC and he is with us. Good to see you.</s>MOHAMED EL-ERIAN, INTERNATIONAL ADVISORY GROUP, GIC: Good to see you.</s>QUEST: Make yourself comfortable, sir.</s>EL-ERIAN: Thank you.</s>QUEST: Now, first things first, is a rate cut tomorrow, which everybody believes, I think you probably believe, too is going to happen. Is it justifiable?</s>EL-ERIAN: It is not justifiable on traditional metrics. As you pointed out, I economy's doing fine. In fact, we got very strong numbers this morning on consumer confidence. So if you look, in terms of your traditional metrics, it's not. The justification the Fed is going to make is twofold. One, they're going to say we need an insurance cut because the rest of the world is hurting, and we don't want to be contaminated. And two, is that the PCE, the 1.6 percent you showed is below our target. What I really think is happening is they are unwinding a mistake. They made a mistake last December, they shouldn't have hiked last December. That fourth rate hike was excessive, and they're just trying to take it back.</s>QUEST: Right. And if we look at the graph of the Fed funds rate, the steep decline, of course of 2008 was entirely justifiable, the slow rise up again. Does it make a difference if you just take one back?</s>EL-ERIAN: So it shouldn't make a huge difference at all.</s>QUEST: There you are. What difference will it make if you just nudge off one notch?</s>EL-ERIAN: So, ironically, where it makes a difference is in the rest of the world. The rest of the world sees this as either being forced or being able to relax their monetary policy. So, what are we doing? We are creating an umbrella for everybody else to lose in the monetary policy. That is why the dollar is not getting weaker as the President would like.</s>QUEST: Explain.</s>EL-ERIAN: So, normally when you lower interest rate, you attract less capital because people earn less. And that brings pressure on your dollar, on your currency. But what's happening now is that the rest of the world is being even more dovish than we are. So our currency today is at the strongest level it's been all year, and that's quite an appreciation since the start of the year.</s>QUEST: which makes the President's call for an interest rate cut, somewhat justifiable in that sense. But it also shows the lack of understanding at the numerous currents underneath that really dictate the economy.</s>EL-ERIAN: So, two things. One is that it's justifiable in terms of what's happening elsewhere.</s>QUEST: Right.</s>EL-ERIAN: And it's justifiable in terms of most people would agree, December's hike was a mistake. But you know, this is a political equation. It's a win-win for the President. If the economy slows, who do you blame? The Fed. If the economy does well, who do you say? It is because of me, despite of what the Fed did. So, politically, it's a win-win situation.</s>QUEST: But economically, one can't really justify this particular cut.</s>EL-ERIAN: Correct. And economically one can't justify politicizing the Fed.</s>QUEST: Okay, but listen to -- but the President of Mexico has also taken - - seemed to have taken a leaf out of President Trump's book, in terms of how he views the ability to cut rates. Have a listen.</s>ANDRES MANUEL LOPEZ OBRADOR, MEXICAN PRESIDENT (through translator): They are more cautious -- they are more cautious about inflation. That is not a bad thing. This is not the wrong thing to do. I'm not saying that. But it's important to lower rates to encourage growth.</s>QUEST: Lower rates to encourage growth is fine when inflation is not a problem. Inflation is not a problem is it?</s>EL-ERIAN: No, because of what's happening to price discovery. With you and I, it's what I call the Uber effect, the Google effect and the Amazon effect, have taken pricing power away from people who sell it to us.</s>QUEST: But everything you are taught in Economics, and everything that I've ever understood suggests, with an unemployment rate at 3.7 percent, growth of two to three percent, interest rates should not be near zero.</s>EL-ERIAN: You're absolutely right. So, you have to understand, the reason why interest rates in the U.S. are so low is because of Europe. They are negative in Europe. You have $13 trillion of bonds trading at negative yield. People are willing to give their money to either government or a company and pay for the privilege of doing so. You will find no textbook that has this in there. But that's the amount of distortions that have been created in the in the global economy.</s>QUEST: Let's stay with Europe. The British pound is falling steadily this week, touching its lowest level against the dollar in more than two years. Now, it nearly dropped in a $1.21, it slightly recovered a bit on an earlier ground. It's a factor of the no deal Brexit under the new Prime Minister Boris Johnson, what are they fearing here?</s>EL-ERIAN: So, they're fearing a no deal Brexit that will cause a major recession. That would cause the Bank of England to really bring down interest rates a big way and will cause the government to increase fiscal spending. So they're looking at what are the consequences of a no deal Brexit, and the U.K. has policy space, but the policy space it has is bad for the sterling.</s>QUEST: But the U.K. -- I mean, everybody thought Theresa May would never do a no deal. Boris Johnson is far more likely to do a no deal than the others. And that's the worry. But do you think there'll be no deal?</s>EL-ERIAN: I think it's a 50 percent probability.</s>QUEST: Really?</s>EL-ERIAN: Yes, I do.</s>QUEST: Really? Are you sure?</s>EL-ERIAN: I do. Not sure enough, 50 percent is not sure.</s>QUEST: No, are you sure with the 50 percent?</s>EL-ERIAN: Yes, I think it's a relatively high probability. And you know what? If the choice is between a hard exit or three more years of what we've had, you should go for a hard exit because three more years of what we've had is going to create serious damage, and you might as well get to the destination. You know, there's a limit to how long a journey can be. People lose confidence in you if the journey is too long.</s>QUEST: Final question, who should be the next Managing Director of the IMF? Do you have a thought on that?</s>EL-ERIAN: It shouldn't be done the way it's done today. I feel quite strongly about this.</s>QUEST: Go on, go ahead, tell me.</s>EL-ERIAN: You know, I understand why 75 years ago, we gave nationality as the basic criteria to select the leader of the IMF and the World Bank because Europe and the U.S. are dominant. Today, that's no longer the case. So, for the rest of the world, it looks ridiculous that we have a nationality-based approach. We should have a merit-based approach, and Europe is doing itself a disservice by first saying we don't have a clear candidate, but insisting he should be --</s>QUEST: I know, and so far, there doesn't seem to be anybody particularly brilliant --</s>EL-ERIAN: Correct. And there are brilliant people.</s>QUEST: Hang on. Hang on. We are missing an opportunity for yourself.</s>EL-ERIAN: No, forget about me. You have brilliant people out there like Mike Carney, like Tharman, the Senior Minister, like Raghuram Rajan -- these are top quality people. And the only problem, they're not European or they're not European enough. That's a ridiculous way to make a decision about the leadership of such an institution.</s>QUEST: Good to see you. Thank you very much indeed. When we continue, millions of Capital One customers are wondering if their data has been exposed. You can count me as one of them. After the revelation of a hacker who stole supposedly secret files. And Beyond Meat shares get roasted on Wall Street. The meat and potatoes of the business are looking juicy. It's all about some funny finagling with the finances. But the stock is still up about 600 percent, so maybe we shouldn't be too upset. It is QUEST MEANS BUSINESS.