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bjbjLULU JEFFREY BROWN: It was another rocky day on the markets, with a fearful beginning,
but a more positive end. The Dow Jones industrial average was down more than 160 points this
morning. But, for the day, it gained more than 29 points to close at 11,896. The Nasdaq
rose just under 24 points to close at 2,693. The S&P 500 also rose slightly, avoiding what
would have been its longest losing streak since the peak of the financial crisis in
October 2008. At a Cabinet meeting this afternoon, President Obama said the debt deal had averted
a massive blow to the economy, but there were some lasting effects. PRESIDENT BARACK OBAMA:
Unfortunately, the debt ceiling crisis over the last month, I think, has had an unnecessary
negative impact on the economy here, as well. So I'm meeting with my Cabinet here to make
sure that, even as they have been throughout these last several weeks, they are redoubling
their efforts to focus on what matters most to the American people. JEFFREY BROWN: Earlier,
White House spokesman Jay Carney said the president doesn't believe there is a threat
of a double-dip recession. Wall Street's sharp drops yesterday were felt worldwide overnight
and into this morning. Asian stocks fell amid increasing pessimism over weak economic prospects
in the U.S. European stocks also fared poorly amid continuing debt problems in a number
of nations, including Italy and Spain, where bond yields surged to 14-year highs. Joining
us now to discuss the latest on the markets and the economy are Liz Ann Sonders, senior
vice president and chief investment strategist for Charles Schwab and company, and Mohamed
El-Erian, CEO of Pimco, a global investment management firm and the world's largest bond
fund. Liz Ann Sonders, I will start with you. What happened starting about a week ago to
start this market, all the jitters? LIZ ANN SONDERS, Charles Schwab: Well, I think the
market's had its eyes on several things. Clearly, the debt ceiling debates was a big factor,
and I think that weakened some confidence. But, in addition, last week, we got the beginning
of what was a string of fairly weak economic readings, the first primary one being the
GDP, gross domestic product, report for the second quarter, which was not only weaker
than expected at only 1.3 percent, but the prior quarter was revised down quite a bit
to barely into growth territory, only 0.4 percent. And they not only did that, but they
went back and they revised the entire recession's period, such that we now know that the decline
in the economy during the recession was a little bit more than five percent, as opposed
to only a little bit more than four percent. And, finally, what that actually means is,
prior to those revisions, the economy looked to already be in expansion, meaning that the
economy had grown to -- back to its 2007 highs. With those downward revisions, we're back
down below the 2007 highs, which means we're still only in recovery. And then we have had
some additional weak economic news, and I think the market had a tough time with that.
JEFFREY BROWN: Well, Mr. El-Erian, what would you add to that? What triggers do you see
here? MOHAMED EL-ERIAN, Pimco: You know, Jeff, all year -- so, it's not just this week -- it's
been all year -- the market has been torn, torn between worrisome top-down news and good
bottom-up. The best way to think about this, Jeff, is suppose you are considering a good
and improving house in a bad and deteriorating neighborhood. How would you feel? You would
feel torn. So, on the one hand, the markets like the fact that companies are doing well,
they have strong balance sheets, lots of cash, and they have tapped into growth in the emerging
world. On the other hand, as Liz Ann said, the economy is weakening. Policy flexibility
is limited. The politics is not just divided government. It is, as President Obama said,
dysfunctional government. And then there's concerns in Europe. So you're seeing this
amazing tug-of-war, and the last eight days or so, it has been the bad neighborhood that
has dominated the good house. JEFFREY BROWN: Now, Liz Ann Sonders, what explains what happened
today then? Is it -- I mean, I know you can never look at one day and tell all that much.
Is it a pause? LIZ ANN SONDERS: Right. JEFFREY BROWN: What -- what goes on, on a particular
day? LIZ ANN SONDERS: Well, you never know what goes on, on a particular day. And I think
there's multiple dynamics. Probably the best explanation was that some of the selling just
simply got exhausted. We hit some technical levels in the market that brought some buyers
in. We hit sentiment conditions. Sentiment, by the way, works in a contrarian way. So
particularly when individual investors become very, very pessimistic, that usually sets
up an opportunity for the market to rally a little bit. So that may have happened. We
may have hit a little bit of a short-term exhaustion point. But we had an intraday rally.
We closed up. That was a nice thing. I don't know that that necessarily means we're off
to the races here. I think there's still a lot that the market has to digest. JEFFREY
BROWN: Now, Mohamed El-Erian, you mentioned the government situation. Is there still,
do you think, the possibility of a credit downgrade, even after the debt deal? Where
are we on that and what impact -- how does that impact markets? MOHAMED A. EL-ERIAN:
The possibility is there, and it's really S&P, one of the two rating agencies. So, the
other one, Moody's, came out last night and said, we're going to keep the U.S. at AAA,
but we're putting the outlook on a -- on negative, which means that we're worried that it's deteriorating
over time. S&P has been much stronger. Back on July 14, it put the U.S. outlook on negative
watch, which means a presumption that you will downgrade unless you get policy reaction.
It's a question mark as to whether there's been enough out of Washington, whether this
debt ceiling is going to satisfy S&P or not. And we're going to have to wait. If we do
get a downgrade, I suspect that the markets will not take it well. JEFFREY BROWN: Liz
Ann Sonders, what would you add to that? And, also, just -- you mentioned Europe a little
earlier. How much are -- those problems have been with us a good while as well. How much
does that continue, though, to weigh on our markets? LIZ ANN SONDERS: I think it has,
in fact. Unfortunately, some of the problems have now moved out of what they call the periphery,
which would be some of the smaller countries like Greece, and now the latest two countries
that are really feeling the pressure of this are Italy and Spain. And that's a much different
set of problems obviously in terms of the size of the problem, the integration into
the European and global banking systems. So, that kind of re-erupted. And I think the market
was contending with that. Back to what Mohamed was talking about on the ratings downgrades,
I think what is still uncertain are a couple of things. One, treasury bills are used as
collateral, particularly with lending from bank to bank. And if the ratings agencies,
particularly S&P, downgrades treasuries, then suddenly that collateral is worthless, so
the cost of borrowing goes up. And if yields go up or rates go up, then the cost of borrowing
across the board goes up. There is also a question about whether there will be any forced
selling. A lot of funds have mandate to hold AAA securities. Whether they can change those
covenants or not is yet to be seen, but there may be some forced selling, which would put
some additional pressure on yields, too. And there's other things, but there are some unanswered
questions that I think market is trying to grapple with in the event of a downgrade.
JEFFREY BROWN: Well, when you look forward, Mr. Mohamed El-Erian -- I think it was your
colleague at Pimco, Bill Gross, today referred to the economy as in stall speed. It might
have been you. It might have been him. I read it some -- read it coming out of the company.
But what does that mean when you're looking at the prospects for growth and for your company?
As a major player, people watch how you're betting. MOHAMED A. EL-ERIAN: So, Jeff, that
is a key issue as to the -- can we survive in stall speed, we being the American economy?
And it's also true for Europe. So, the concept of stall speed, think of a plane. The plane
has to move forward at a certain speed. Otherwise, it comes down. Our economy has to move forward.
We are still over-levered. There's still too much debt in the system. We need to grow out
of our debt problems. So, if we get stuck with growth of about two percent, that's simply
not enough. So we risk tipping into a worse equilibrium, as we call it here. So this concept
of stall speed is very, very important for a de-levering economy. And that's true for
the U.S. and especially true for Europe. And so what it means, it means that investors
should be very careful. They should recognize that the rules of the game are changing. The
fact that we're talking about the possibility of the U.S. being downgraded would have been
unthinkable a year ago, two years ago. So it's very important to adapt the intellectual
framework to be agile and to understand that this is happening in a global environment
and that the opportunities are global. So, be it Pimco, be it Schwab, be it any firm,
I suspect you will find that firms are becoming more global and they're looking for opportunities
much wider than just the local market, and they're managing risk also in such a fashion.
JEFFREY BROWN: All right. Well, we will end on that interesting, provocative note. Mohamed
El-Erian and Liz Ann Sonders, thanks very much. LIZ ANN SONDERS: Thanks, Jeff. urn:schemas-microsoft-com:office:smarttags
place urn:schemas-microsoft-com:office:smarttags country-region JEFFREY BROWN: It was another
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