NYSE President Farley: We had to have a market pullback

Tom Farley on Dow's wild swings, outlook for financial markets, health of the underlying economy.

This is a rush transcript from "Your World," February 6, 2018. This copy may not be in its final form and may be updated.

NEIL CAVUTO, HOST: All right.

I think they call this a metaphor for the markets. You have just been watching the launch of this Elon Musk rocket here that went off without a hitch, we're told. And you also heard about the rocket that was the comeback in the Dow Jones industrials today, 569 points.

We're still waiting to hear from Elon Musk. You will be hearing from a lot of market analysts on the comeback that was to the right of your screen. So if there's a way to time these sort of metaphors, this was it.

Welcome, everybody. I'm Neil Cavuto. And you're watching "Your World," where stocks came back, and 50 years after we used that space platform to really get going on our lunar program, and, remember, it was from that same platform that we launched these gigantic Saturn V rockets, which were the thrust behind the Apollo that would took us all the way to a lunar landing, indications today that we're firing away on all cylinders again maybe in space and maybe reusable space rockets as well.

And we're once again firing at the corner of Wall and Broad. Now, one day doesn't a guarantee make that things are back to normal or that the Wall Street bull market rocket has returned. But it had a lot of people breathing a sigh of relief nevertheless.

Lauren Simonetti outside the New York Stock Exchange on what was behind the sudden comeback today.

It started out country differently, Lauren.

LAUREN SIMONETTI, FOX NEWS CORRESPONDENT: I know.

This is a day where I think the traders in the building behind me are just happy to walk out and be done with it. We had an 11-point range from top to bottom of the market today. If you add to the near 1,200-point sell-off that we had yesterday, down 666 points on Friday, a few other rough days last week, we're talking a market that has given up about 2,300 Dow points, and then, bam, right in the final hour of trading today gains a lot of that back, closing sharply higher, as we wait for these final numbers to peter out here.

The Nasdaq and the S&P 500 closing up nearly 2 percent. So, yes, call this a turnaround Tuesday indeed. We have seen so much volatility come back, it almost feels like out of nowhere into the market. You have the VIX surging yesterday, the most ever, rising sharply again today, as investors fear and bet that higher interest rates are needed to combat inflation.

So a lot of traders that actually bet the VIX index, that fear would remain low and the market would remain calm, they got burned here. But the question is, should investors in the markets be calm at this point? What is this state of the U.S. economy?

It is looking pretty good at last check if you take a look at the latest GDP numbers. We're talking 2.6 percent growth. That is likely to be revised higher. We have seen previous quarters up 3 percent. Wage growth of near 3 percent, best in eight years. And, of course, corporate earnings very strong.

So the state of the economy is doing well. This is something that the treasury secretary, Steve Mnuchin, commented on earlier today, basically saying the economy is -- quote -- "fundamentally strong." The markets are functioning well, and he believes and the administration believes the long- term policies of the White House will be a positive for the economy.

So, right now, we're grappling with the idea as investors of how to react to the new normal environment perhaps that we're in where volatility made a comeback, and the idea that you can have a market that pulls back, comes in a little bit, if not corrects itself, when the economy, Neil, is still strong.

CAVUTO: All right. We shall watch that very closely, Lauren Simonetti outside the New York Stock Exchange here.

We should posit here that it was a whipsawing day, as she pointed out, a better-than-1,100-point swing that only went substantially higher in the last hour of trading. You don't want to sort of pooh-pooh that. It was and ultimately got to be what it was.

But, again, with the gain today, the 2.33 percent gain, we have now retraced about one-third of the ground lost over the last few days. So, not quite there. For a while, we were down in excess of 10 percent from our highs today, the second time we have revisited that in as many days here.

So a technical correction of 10 percent is not really official until you do so on a close. And we didn't do that today. So, again, just a reminder for those who want to see some closure on this sort of thing and see it convincing, they're not convinced we had our 10 percent correction without a closing event. We didn't.

Again, market pros Charles Payne, the host of "Making Money," market strategist Alan Knuckman, and Kimberly Foss.

Kimberly, to you.

Is this real or was yesterday real?

KIMBERLY FOSS, EMPYRION WEALTH MANAGEMENT: I think they're both real, Neil.

The bottom line is, we have a new normal in that there's high-frequency trading. And these algorithms don't have a heart and soul like a human does. So, what happens is, these are programs that do exactly what they're programmed to do. And when the markets go down, they need to rebound.

So, they are going to go in and sell. So the fact of the matter we went so far down so fast and coming back today, that doesn't surprise me, in that this is what the new normal is. And investors just have to get used to that.

But, long-term, this is a bull market pullback, if you will. I think we have got a long way to go in the future. So I'm not concerned. I was buying yesterday and I was telling my clients to buy yesterday as well.

CAVUTO: What about you, Charles? Was this the rally that we needed or was this just a head-fake?

CHARLES PAYNE, FOX NEWS CONTRIBUTOR: Well, let's put it this way, Neil.

A lot of people picked the wrong week to put on their mood rings. But I agree with Kimberly. Honestly, both of them are real. And, yes, there was a lot of trading, high-frequency trading, although we said machines don't have a heart and soul. They are programmed by people who do.

And essentially what we're seeing now is markets move at super speeds, the speed of light, based on fears that man -- mankind would have normally done themselves. So, hence the whipsaw.

But ultimately look underneath the surface of the market at the fundamentals. Today, we had three earnings up. General Motors had an amazing number, in fact, the best margins in company history. Tapestry, also known as Coach, had an amazing number, pointing to a consumer that is spending money.

And Micron Technology, a strong session. One of the best sessions it's had in a long time. Pointing to continued strength in technology. I'm looking at the factual stuff to go along with the emotional stuff.

CAVUTO: Alan, how about you?

ALAN KNUCKMAN, BULLS EYE OPTION: Today's strong surge is a start of stability.

I am paying attention to three things that happened in the last couple days. Number one, yesterday, we had a key reversal in bonds. The bond market was the catalyst for the downward slide last week. But bonds bottomed out and actually bounced. So, that's a healthy sign.

And then overnight, we saw the S&P futures take out their Monday lows and then come surging back. So, that's a very positive sign to take out that bottom and then bounce back.

And lastly today, the key reversal in the VIX. New highs on the VIX and a lower close. So, I think some of the worst may be behind us. We have to build on this. But this could be a very good beginning.

CAVUTO: All right, he's referring of course to the fear index, which was all over the map the last couple of days, kind of stabilized by day's end, Kimberly.

But, you know, the one thing that the last few days have shown us is that the kind of tenterhooks people are on regarding these markets and going forward. What could move them now, obviously, where all you need is a push of button to get wild swings sometimes within seconds? What do you think?

FOSS: Well, I think folks could get nervous about that.

There's going to be volatility going forward. I mean, we can't have any kind of movement forward if we don't pull back a little bit, Neil. We have had eight years of consistent growth in the market. That's only happened twice since World War II.

If we're pulling back 5 percent or 10 percent, that's kind of healthy for us to move forward. And I suspect we will have a couple more of these this year.

CAVUTO: Charles, as we're speaking, we're getting earnings out of Disney right now, so we're back to following some of that fundamental stuff. Out with much better-than-expected numbers in after-hours trading. Disney stock is up.

Do you expect we kind of revert back to the kind of things we were focusing on, oh, I don't know, three or four days ago?

(LAUGHTER)

PAYNE: I do, Neil.

You know, that's the ultimate decider, where markets go. We have seen an amazing earnings season, 50 percent of the names in, 80 percent beat on sales, 75 percent beat on earnings. And, more importantly, the guidance has been pretty good.

And then you go a step further. Look at the orders for commercial trucks. Look at the orders for Caterpillar equipment. We are rebuilding this country in a way that we haven't done in a long time. We have gone from survival mode to growth mode. And I think the markets will reflect that.

CAVUTO: You know, and I will raise this with you, Alan.

Michael Block of Rhino Trading was quoted saying the data is good, the psychology is poor. In other words, even here, we can say the data is good, the earnings are good, the fundamentals are good, the economic string of events we have gotten good.

KNUCKMAN: All good.

CAVUTO: But -- but the psychology, it's a little better than when he made that statement this morning. But it doesn't mean that we're over this sort of antsy psychology. Right?

KNUCKMAN: Well, my father is a psychologist. So, I'm licensed to talk about this subject.

(LAUGHTER)

KNUCKMAN: It's very important to have the right frame of mind. And we saw a six-day sell-off straight down from all-time highs.

But that just needed to be done. And with electronic trading, you talked about the programmed trading, the fall will occur at a much faster rate. The profit-taking plunge is really what it was, will happen at a much faster rate, as opposed to over a period of weeks than it used to happen before these electronic markets.

So, volatility is opportunity. And moves will happen fast. You have to stick to your plan. But discipline remains the key. I'm still remaining very, very positive.

You talked about the earnings growth. Earnings growth is 13 percent for this quarter. Stocks are doing, corporations are doing extremely well. I have been saying that for weeks, months and years. And it hasn't changed and it's not going to change any time soon.

CAVUTO: All right, guys, I want to thank you very, very much.

Just to sort of button up some of these items here, of the 30 Dow stocks, 26 were up today. We had Travelers, Coca-Cola, Merck, ExxonMobil among the decliners. So, again, oil still giving back.

And of the 11 sectors we have watched, including banking, you know, including retail, you name it, seven of the 11 were up. Two were barely changed. Two others, including financials, down.

But, by and large, that is not, not, not, you know, too bad. We're going to take a look at this and how this sort of falls out politically here. Remember that press conference interrupted by the launch of this rocket and some other distractions.

Whether that is a good or bad thing for the president, well, that's anyone's guess.

Stick around. You have more of "Your World" after this.

(COMMERCIAL BREAK)

CAVUTO: All right. What a crazy day it was, a better than almost 1,200- point swing if you count everything today.

We had, what, almost a 2,000-point swing yesterday. Up is up and so this is a big improvement here, but a reminder to the White House and something that was briefly addressed at the presser today, that if you're going to want to own it on the way up, you have to own it on the way down.

The Hill's editor in chief, Bob Cusack, on how that can play.

Obviously, if I'm at the White House, Bob, I'm encouraged what happened today and more prone to talk about that than I am the last three trading days. Or maybe the lesson here is focus on other news that has to do with finance, like the economy and jobs and maybe those tax cuts. What do you think?

BOB CUSACK, THE HILL: I definitely think that you are going to get the blame or the credit on the stock market and the economy, for that matter.

And I think it's good for the president to talk up the economy. That's what presidents have to do. But maybe going to that well a little less off, certainly State of the Union, making the case on the election campaign trail. But Trump has gone there a lot and that's what got the White House a bit jittery this week.

And, remember, a lot of these gains in 2017 were because of the expectation that tax reform was going to pass, and it did pass. And now the question is, OK, now that we're seeing it in paychecks, what does that do to the market?

CAVUTO: Yes. There are a lot of technicians who go way beyond all those fundamentals, Bob.

And I'm a pretty boring guy. And when they're boring me explaining this, I know that, wow, we're on boring steroids here. But the gist of it is that you hit certain levels or an inflection point where rates back up to the point where a 10-year note, for example, widely and very much used instrument to get everything from homes to cars, had gotten to the point that it was the highest it had been in four years.

And they still fear interest rates are going to go still higher for all the right reasons. An improving economy, wage growth all, and that good news is actually going to work against the market. Again, I don't expect you to be a market soothsayer here, but if they're right about that, that could be a problem, ironically, for the president.

Good news gets to be bad news now.

CUSACK: Yes, yes.

And it does get complicated, especially with the inflation, the interest rates. And you're right. Those experts who know a lot more about the market than I do, they're definitely saying this may not be a rosy scenario.

And, remember, this is when Republicans -- they have had a good run. They have had a bit of spring in their step at their Republican retreat. They passed the tax cut law.

And the polls have started to change in their direction, not dramatically, but certainly Democrats are a little nervous now. So I think where we go from here is going to play a big role in whether Democrats can take back the House or the Senate.

CAVUTO: I have heard a lot of former administration officials from the Clinton years, back to the Reagan years, the Bush Sr. and Bush Jr. years say that if the market is going your way, that should be self-explanatory. What you have got to pound is the improvement in jobs, as this president has, the improvement in GDP, as this president has, the kind of things that people will relate to.

And it's icing on the cake if the markets are going your way as well. What do you make of that?

CUSACK: I totally agree with that.

Think of what Trump's slogan was, make America great again. Now, yes, it was make America safe again to some degree. But when he said that, he was talking about the economy, and there was so much unrest.

If you listened to Bernie Sanders and Hillary Clinton on the campaign trail criticizing the economy, you would think that there was a Republican in the White House, as opposed to Barack Obama.

CAVUTO: Yes.

Speaking of that, one thing just floored me really was the criticism that a lot of Democrats had given the president about the run-up in the markets and that it was -- fell on deaf ears because so many people were not involved in the markets.

And then, all of a sudden, they started turning south, and a lot of them were saying, oh, my God, look what this is doing to the average person out there. I found that a little weird.

CUSACK: Yes, a little hypocritical.

But I do think that, generally speaking, Republicans do feel -- they do feel confident that going forward -- they were able to get a lot done at the end of last year and they're feeling the wind shift a little bit. But we have a long way to go.

CAVUTO: We do have a long way to go.

And, again, we don't want to interpret or overinterpret either the last couple days or what happened today. But, again, most investors, most, are generally inclined to like it when stocks go up, not so when they go down. We will see, my friend.

Thank you very, very much.

CUSACK: Thank you.

CAVUTO: All right, I told you yesterday when we were talking about the market in the middle of a freefall here, they like to see encouraging developments when either companies buy back their stock or let's say a billionaire says I'm buying some stock.

We didn't hear much about companies. We did hear about a billionaire doing that. Mark Cuban. He was buying yesterday. And he was reaping dividends today. After this.

(COMMERCIAL BREAK)

CAVUTO: All right, you saw this launch. It was really impressive.

This is the biggest rocket the world has ever seen since the Saturn V. That was the booster rocket, of course, for Apollo. That was 50 years ago from the same launchpad a lot of those Apollos lifted off from, of course.

This was the big Elon Musk undertaking where everything went according to plan. We're waiting a presser from Musk, the launch and the landing, these boosters that successfully landed on a ship positioned not far offshore there, really an amazing undertaking here. We will be hearing from him.

He's needed sort of a boost in this regard. He's had a number of troubles with his Tesla vehicles, a number of production problems and all the rest, not so much when it comes to rockets right now. But, again, we will monitor that.

Also monitoring the rocket booster called the Dow for a change. And there is a bullish and a bearish argument on this big advance and what is behind it, whether you trust this or you don't.

First the bull, then the bear.

(BEGIN VIDEO CLIP)

CAVUTO: Are you nervous after today?

MARK CUBAN, CO-FOUNDER, HDNET: No, I'm not really nervous.

I think it was necessary. I still think there's uncertainty about what the market does next. But when you have a run-up like we have had since the election, markets don't go in a straight line forever. And so something had to happen. It was just a question of what and when and how much.

The market could go down a lot more. I don't know. But, over the long haul, I think we will be OK.

PETER ELIADES, STOCKMARKET CYCLES: If this is truly going to be a bear market, there's a long way to go, Neil.

CAVUTO: How much longer?

(LAUGHTER)

ELIADES: Well, you know, when we spoke last time, I told you I thought that we were facing a bear market at least as bad as the '07 or '09 bear market. So, that was over 50 percent.

CAVUTO: That's right.

ELIADES: And I still think that's going to happen.

(END VIDEO CLIP)

CAVUTO: All right, so Peter Eliades, the famed market contrarian, who says that don't pay attention what happens today. The trend is not going to be your friend. Mark Cuban says quite the opposite. The trend is going to be your friend.

He put money on it, Mark Cuban, by investing an ETF that mirrors the performance of the S&P 500.

So, who is right longer-term in all of this.

Let's go to Dennis Gartman, investor extraordinaire.

Dennis, what do you think?

(LAUGHTER)

DENNIS GARTMAN, THE GARTMAN LETTER: Well, thank you, Neil. Thanks for having me on.

I listen to Peter Eliades this afternoon. And I have to say that I tend to agree with him. Market tops or peaks of some consequence are made in volatility. Market bottoms are usually made in quiet, lonesome, boring types of affairs.

And the volatility that we had in the past several days I think is indicative of a market that is making a peak. The public is terribly involved. The amount of money that flowed in into ETF from the public in December and January was historically almost unprecedented.

And it's that type of activity that bothers me some. Yes, the economy is strong. I understand that. But what happens at the end of bull markets when stocks peak is that money moves out of the capital market and moves into plant and equipment and labor.

And that's exactly what we're seeing. The monetary authorities have stopped supplying reserves to the system. They had begun doing so in '07, '08 and '09, when it was needed. Now it's not.

And money -- capital is moving away from the capital markets and moving to strengthening economic activity. I think this is indicative of a peak, not a market that I would want to be an aggressive buyer of, no question about that.

CAVUTO: Interesting. It's still too early to tell, but, gosh, if I didn't discover that in the 1929 crash and the week of the '87 crash, there were periods punctuated by an uptick in activity and then back to the downdraft, as there was after 9/11, when the markets finally opened almost a week later. So, we can expect that.

But you always hear from certainly the administration today and others fundamentals are sound. Now, of course, I remember that too from Republican and Democratic administrations in every hit the markets had. The fundamentals are sound. Our economy is sound.

GARTMAN: Yes.

CAVUTO: You know, earnings, certainly, if you want to add them in the latest batch, eight out of 10, the S&P 500 stocks reporting better-than- expected news, et cetera, et cetera.

GARTMAN: Sure.

CAVUTO: And that is the saving grace. You're not buying it. Why not?

GARTMAN: Well, in the past -- you go back to 1973. The economy was doing very well. Things were going along swimmingly until we had an oil embargo. But things were doing very well.

Read newspapers from August, September, October of 1973 just before the stock market began a two-and-a-half-year bear market, you would have thought that the economy was doing very well. And, indeed, it was.

(CROSSTALK)

CAVUTO: Oh, I remember Barron's laying out the -- I don't know why I'm criticizing a fellow publication in our empire here, but saying that the sun looked bright for investments early that year in 1973. But go ahead.

GARTMAN: Yes, sure. And it looked good in 1980 and 1981, before those two recessions hit.

CAVUTO: You're right.

GARTMAN: The stock markets make their peak during periods of time when euphoria is abundant.

And I think that that's my major concern at this point. The public is involved. The price-to-earnings multiples are extremely high. Price-to- book values are extremely high.

CAVUTO: So, even now, you say that the multiples are high. They're not beaten down enough to make the markets look a tad more affordable to you?

GARTMAN: Well, they're a tad more affordable, but I'm afraid they might get a good deal more affordable before this is over.

Again, Neil, markets make their peaks in volatility and they make their lows in quiet, somnolent, lonely types of trading. This is clearly anything other than quiet, somnolent,lonely trading. This is exuberance, this is volatility. And that to me is indicative of a peak.

Does that mean we can't go higher? We could. But I have my very serious doubts that we shall.

CAVUTO: Well, it worked, Dennis. I'm no longer feeling like supper now, so the diet trick worked like a charm.

(LAUGHTER)

CAVUTO: Thank you very, very much, Dennis Gartman of The Gartman Letter, very, very bright guy on all of this.

I want to bounce that off of Tom Farley. The name should ring a bell. He's the president of the New York Stock Exchange. We're very happy to have him.

Tom, welcome to you.

TOM FARLEY, PRESIDENT, NYSE GROUP: Good afternoon, Neil. It's a lot better afternoon, up 500 points on the Dow, than down 1,000 yesterday.

CAVUTO: It does make a big psychological difference.

I was talking to a bear and other bears who they say the problem is not so much the fundamentals -- they're sound -- or what the exchanges are doing - - they're sound -- it has to do with the fact that we have more exotic products than we do underlying stocks, more ETFs and mutual funds and special flavors that, you know, you could trade off volatility than underlying stocks.

And that's a prescription for trouble. What do you say?

FARLEY: You referenced a lot in that question.

CAVUTO: I did.

FARLEY: You talked about -- you started with the fundamentals.

The last overnight that I can remember was the election night. And I think we all need to take a deep breath and realize the Dow is up 40 percent since that night. GDP is up a percent. Unemployment is down a percent. Everything is going well.

And despite this volatility, we are going to be OK. With respect to the types of products we have in this market, of course we have the underlying securities like the great companies listed here on the New York Stock Exchange.

We have those core ETFs, for example, ETFs on broad-based indices that have allowed retail investors to have a sophisticated risk management tool. And then we have the inverse and leveraged instruments, instruments on more complicated indices like the VIX.

And already there's going to be a debate about the suitability of those products, the disclosures of those products, given the events of the last couple days. And we will be a participant in that.

CAVUTO: All right, do you worry, though, as some say, that we have gotten too clever for words here, that, all of a sudden, given all of these different options for stocks that now eclipse the number of shares of stocks that we have, that something is wrong with that picture?

FARLEY: Neil, I feel pretty good about the market here. I don't want to be Pollyannish, because I'm aware we have had extraordinary volatility.

But the markets have actually functioned quite well over the last couple days. We have had this extraordinary period of slowly increasing prices. We had to have a pullback at some time. We had to have a period of volatility.

And the fact that it has happened in such an orderly fashion should actually give us all confidence. I have empathy for your viewers that have a position that lost money in the last couple days. That's not to be minimized. But, by and large, the markets are working.

CAVUTO: Tom, much is written and said about mood and psychology and it can easily get whipsawed.

You're down for a few days, and you have a big hit, people get burnt and they get nervous. You're up a lot, they forget what they were nervous about. Do you ever worry about these extremes? A lot of people pounced on today, we're back, we're back, we're back. But they forget what happened yesterday.

What is real?

FARLEY: I do.

Yes, I do. The psychological aspect of investing and trading is real. And, in fact, one of the reasons I'm coming on with you is, there's been a good deal of anxiety, maybe even a borderline hysteria over the last couple days. And the last thing I want to see is see people make decisions about their portfolio, about their retirement savings because of panic.

Again, the markets are behaving appropriately. And decisions to buy or sell to the portfolio should in most cases be with made with a many-years horizon, not a many-days horizon.

CAVUTO: Real quickly, the president has been criticized in the past for riding this market and quoting it. How do you feel about that, whether he should on the upside, shouldn't on the downside, should on both sides? What?

FARLEY: I mean, I have worked quite a bit with the administration. In fact, I had a call with the SEC just before I came on and I have a call with Treasury when I get off. So, I appreciate that they're watching the markets and they're asking the right questions.

But the conversations I have had with the administration have been more about the economy than they have the individual number of the Dow or the S&P.

And I think we all take comfort in the fact that the economy is headed the right direction. Global asset prices are still very close to all-time highs, Neil. Wages, we saw the growth on Friday. So, again, I feel pretty good about the underlying economy.

CAVUTO: Tom Farley, thank you very, very much, the New York Stock Exchange president, joining us.

FARLEY: Thanks, Neil.

CAVUTO: At the Big Board.

Well, the president talked up a shutdown today, and the market still went higher. Why is that?

(COMMERCIAL BREAK)

CAVUTO: All right, things kind of returning to normal today, in that we're focusing again on things like earnings. Disney out, Chipotle out, both beating estimates, both reminding investors, we're back -- in our case in 60 seconds.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

PRESIDENT DONALD TRUMP: We're going to get it stopped. And if we have to shut it down because the Democrats don't want safety, and unrelated, but still related, they don't want to take care of our military, then shut it down. We will go with another shutdown.

(END VIDEO CLIP)

CAVUTO: All right, that's a big deal. The president of the United States is saying, you know what? If it comes to it, yes. Shut the government down.

I immediately wanted to take a peek at how the Dow was reacting to that. You know what? Crickets. Nothing. The shutdown threat happened. Stocks moved up and up and up and, as you know, finished the day more than 500 points up.

Fox News Channel's Mike Emanuel on that threat, how likely that is.

What do you think, Mike?

MIKE EMANUEL, FOX NEWS SENIOR POLITICAL CORRESPONDENT: Well, good afternoon, Neil.

The House was due to vote later this afternoon on a six-week funding extension. So, it sounds like they're making plans to keep the government up and running. It would also include more money for the military through the end of the fiscal year, which is popular with defense hawks and conservatives.

(BEGIN VIDEO CLIP)

REP. KEVIN MCCARTHY, R-CALIF., HOUSE MAJORITY LEADER: Remember what Schumer said during his last Schumer shutdown. He said he didn't want to hold the military hostage. This gives our ability to fund the military completely while we figure the rest of agreement for everything else.

(END VIDEO CLIP)

EMANUEL: That's a reference to Senate Democratic Leader Chuck Schumer, who has warned this House plan is dead on arrival in the Senate.

Schumer wants more money for domestic spending as well. Sources say the big four leaders here on Capitol Hill, McConnell, Schumer, Ryan and Pelosi, are close to an agreement to boost both domestic and military spending levels for the next two years.

(BEGIN VIDEO CLIP)

SEN. MITCH MCCONNELL, R-KY., MAJORITY LEADER: I think we're on the way to getting an agreement, and on the way of getting an agreement very soon.

(END VIDEO CLIP)

EMANUEL: And then, a few minutes, the Senate Democratic leader came out and said, his side is upbeat too.

(BEGIN VIDEO CLIP)

SEN. CHUCK SCHUMER, D-N.Y., MINORITY LEADER: I'm very hopeful, very hopeful. Nothing is done yet. There's some outstanding issues. I know you are going to ask me which they are, and I'm not going to tell you. So, don't waste your questions.

But I am very hopeful that we can come to an agreement, an agreement very soon.

(END VIDEO CLIP)

EMANUEL: The thinking is the six-week government funding extension goes over to the Senate after the House votes later today.

Then the Senate could potentially pop in this government funding package for the next two years, and then the appropriators could fill in the blanks after that, Neil.

CAVUTO: All right, Mike, thank you very, very much.

There was a little bit of news today, indications that Uncle Sam might have to borrow a trillion dollars -- you heard me, a trillion with a T. -- for a likely deficit we're facing this year.

Former South Carolina Republican Senator Jim DeMint doesn't much like it when it happens under Republicans or Democrats. But the debt and the cost of carrying that debt, especially as interest rates begin to rise, well, it's not going to get any better.

Senator, very good to have you. Thank you.

JIM DEMINT, FORMER U.S. SENATOR: Neil, it's good to be back with you.

CAVUTO: What do you make of this? A trillion dollars, it is what it is. And there were special circumstances, and all of that. But, man, we're digging a deeper hole.

DEMINT: Well, Neil, I was a businessman who ran for Congress because I was concerned our debt 20 years ago. And it was less than $5 trillion. Now we're now busting $20 trillion.

We're on an unsustainable course. Almost everybody in Washington knows that. The fact that we can't address it, the fact that the Democrats won't allow us to fund the military unless they get more for domestic spending, it's just very concerning as a citizen looking in from the outside.

But I think Trump is playing this right, Neil. He's putting his cards on the table. If the Democrats want to hold the military and our government hostage to get their amnesty program across the line, then let them do it. I think they will suffer for that. And he will probably make them pay for it.

CAVUTO: Well, you know what I think is going to happen? And if I'm wrong on this, I will burn this tape or this digital thing, whatever it is.

I think both sides are going to get what they want. There's already talk in the Senate they have a master plan to get a two-year budget going. I don't know how believable that is. But it would allow Republicans to see more money for defense, Democrats more money for nondefense programs, and no one will give a tinker's cuss about the debt that will be piling up, up, up, up, up, up.

DEMINT: Well, Neil, that's what happens every year is...

CAVUTO: Well, it's going to happen again.

DEMINT: You don't get $20 trillion in debt without a lot of bipartisan cooperation.

CAVUTO: But I thought, when Republicans took over, they would stop that nonsense.

What happened?

DEMINT: Well, I would hope so. But now they control all the branches.

And we're looking at a trillion dollars of debt. And that is not because we're taxed too low in America. It's because we spend too much. There's billions and billions of dollars of duplication and waste in our government.

A number of people have pointed those out over many years. But we're not even addressing one of those. And that just tells me and I think every American that they're not serious about spending, and eventually that is going to hurt a lot of people.

CAVUTO: Yes.

No, I think you're right, Senator. Thank you very much. A crazy news day here. Always good seeing you, my friend.

DEMINT: Good to see you, Neil.

CAVUTO: All right.

You guys probably know there's something called a volatility index, a fear index, but did you know there's something called a velocity daily inventory short-term exchange index and a pro-shares VIX short-term futures ETF index, which is meant to counter the effect of buying against a fear index that is getting too fearful?

In other words, you can trade on fear, and there's instruments to do this. That's the problem, my friends. These exotic trading instruments now vastly outnumber the stocks you normally would trade. Whatever happened to buying and selling based on, well, the underlying product? You cannot escape market volatility.

The problem is, there's some bunion heads who think we can, and it's costing you money. I will explain.

(COMMERCIAL BREAK)

CAVUTO: You know, did you know you could invest in fear? You could invest in volatility.

There's something called a volatility index, the VIX, as it's known. And it shot up for a while today to close to 50, 49.21. Generally eased down a little bit.

But in case you think that that is too scary for you, and you want to counter that position or sort of leverage against it, you can invest in velocity shares, something called daily inverse.

I don't even want to go on the full name. It's just a mouthful. There's another one, pro-share short, the VIX short-term futures ETF, meant to counter both of those.

I only raise these not to sort of dull your senses, although I like it when I do that, but that we have gotten to be elaborate in our choice of boutique investment schemes to think that that would outlaw market rises and falls.

And it's something I want to pursue with UBS America's chairman, Robert Wolf. Whatever you think of his politics, conservative or liberal, he's a brilliant financial mind.

That's the problem I have, Robert. We have more of these little boutique devices that we're apparently told will shield people from the type of thing we saw. And it didn't. They don't.

ROBERT WOLF, FORMER CHAIRMAN, UBS: Well, when I was at the Fed-Lehman weekend, I thought we were done with financial engineering.

But we're in a -- as you and I have discussed, this is a real Jekyll and Hyde market, Neil. On one side, you have high fiscal concerns with the deficit, debt, you know, protectionist environment.

On the other side, you have new sugar. Instead of quantitative easing, it's the new tax cuts. And you have decent growth and decent profits. And the question is, will the bulls beat the bears or the bears beat the bulls?

It feels to me that the bulls will beat the bears in the short-term, because people put money to work faster than they take money out.

CAVUTO: Well, that's the problem. That's it.

And I don't mind. All those things you mentioned are sort of macro fundamentals that I can get my hands around and understand. But I do think in almost every economic cycle where we see a hit or a market cycle, be it now with all these elaborate instruments that we're told would shield you from the type of thing that happens in sell-offs -- they didn't -- to portfolio insurance back in '87 -- it didn't -- to mortgage-based derivatives or these big funds that you could invest in and dump all that money into. And it didn't.

So I'm wondering when we're going to wake up and realize that no one has found a way to cleverly shield themselves from these things, outside of maybe shrewd financial planning.

WOLF: Well, the truth is, programmed trading and algorithmic trading has really taken over the market. So, you have lost really the pulse of what I would say experience in cycles, because, Neil, I have been in the business 30 years now, and sometimes cycles repeat themselves and sometimes they don't.

And experience counts. And I think right now we actually have moved away from that. There's a lot less analytics and a more programmatics.

CAVUTO: And it's unemotional. It's algorithms that trade just at the push of a button and vastly accentuate these wild swings.

WOLF: Yes. You see higher highs and lower lows.

CAVUTO: Absolutely.

WOLF: The pendulum goes an extreme case each way.

You had a great show today where you're talking, I think you said, what, almost a 1,200-point swing. I think we have had that a few times in our history, other than one direction.

CAVUTO: Yes.

WOLF: I'm talking a 1,200-point swing.

CAVUTO: Right.

WOLF: So I think we're in a new normal. And this new normal for this year is going to be high volatility, because the fact is, at the end of the day, we don't know where growth is going to come out. We have a rising rate environment, and we really don't know whether this corporate tax rate is going to impact wages long term or not. These are just unknowns.

CAVUTO: Yes. A little tough to tell.

But, Robert, we will have to watch it very, very closely. But that volatility index we were just showing as Robert was speaking...

WOLF: Crazy.

CAVUTO: ... shows you how crazy it is. And it's second by second.

Robert, thank you very, very much.

WOLF: Great coming on. Thank you, Neil.

CAVUTO: And, again, I know I'm sounding like a Luddite here, like the old grandpa, get off my lawn or that I walked six miles to schools uphill both way.

But I did walk six miles to school both ways, and it was uphill.

(LAUGHTER)

CAVUTO: We will have more after this.

(COMMERCIAL BREAK)

CAVUTO: All right.

The great thing about going to our Nicole Petallides on a day like this is she's been right there with the traders throughout this crazy week and when all of this stared.

And, man, what was the mood like, there, Nicole? What were they like?

NICOLE PETALLIDES, FOX BUSINESS CORRESPONDENT: What is interesting is, the moment of panic or some nervousness came in yesterday in that 3:00 p.m. hour, when we dropped over 1,000 points and it was selling off fast and furiously during that time

After that time, after 3:30, they were back to a sense of calm. And for today, they anticipated that this morning we would see a sell-off and maybe by the end of the day have some up arrows. And that's exactly what happened.

And interestingly enough, right at the opening bell, we were down 567 points. And we closed up 567 points. The volatility is certainly part of the action that we have been seeing here. But they overall feel like the fundamentals are still good news.

We're still seeing good news in the American economy and abroad. But they're watching where to get in. And that's really the key, where to get in on something that you really want, because you don't want to catch a falling knife.

The one piece of news that people are watching is the concern that maybe the bottom is not in, because we have had the zigzag back and forth action today. We didn't really test those lows. That's something that they have spoken of.

But big picture, they still think this market is headed to the upside because of all the elements, not only corporate earnings, but what we're seeing out of Washington.

CAVUTO: Yes, that could be the fundamentals.

Now, a lot of people are wondering as you're speaking why we're going back to January 26 to show how, for example, a lot of big names did since that time. That's when the averages were at their all-time highs. And it would be that correction since. For a while, we were over 10 percent on the Dow.

PETALLIDES: Which we touched yesterday during this.

CAVUTO: Right. Exactly.

And now we look at some of these issues, that it sounds to me like they're telling you they're not convinced this is over with, but that they're relieved.

PETALLIDES: But that's OK. But you have to say, that's OK.

I know you have spoken to Mark Cuban recently, who said he bought into the S&P 500 and he wants to pick more Amazon and more Netflix. They're OK with a billion of a pullback.

Don't forget what we have seen since November of 2016, all up arrows. Records after records. We went from 18000 to 26000. It's OK to have a little bit of pullback and try and find some evaluation and get in there at a better level, I would say. They're OK with that.

CAVUTO: Absolutely. Got you.

All right, Nicole, thank you. We're OK with your great coverage. Thank you very, very much.

Nicole Petallides, she has been in the line of fire with all of this on the corner of Wall and Broad.

Now, what happens tomorrow? What if I told you it depends a couple of hours from now, what happens in Asia? I will explain.

(COMMERCIAL BREAK)

CAVUTO: You know I am biased, but I think our coverage of all of this on FOX business and, by extension, what we carry over here on Fox News has been second-to-none.

And Nicole Petallides is a big reason why.

This next fellow is as well, Ashley Webster. He carries essentially Stuart Varney, but Varney gets all the credit for that.

ASHLEY WEBSTER, FOX NEWS BUSINESS CORRESPONDENT: Just as I wrote it.

(LAUGHTER)

CAVUTO: But, anyway, buddy, it's very good to have you with us. It's been a long day. I appreciate you staying.

WEBSTER: Sure.

CAVUTO: We're going to -- I think an analyst told me today, Neil, we are not out of the woods. We are just in a clearing. Don't get ahead of yourself.

But what do we look for especially tonight out of Asia and elsewhere?

WEBSTER: Well, it's interesting.

Sometimes, we take our cue from Asia, but not in this particular spell, Neil. We are going to see the Asian markets I think pick up on where the Dow left off.

But let me what the Asian markets have been doing. This is since the recent across Asia highs following the cue of Wall Street. South Korea, Shanghai, Hong Kong, Japan, Taiwan, Singapore all down. Look at Japan, down more than 10 percent.

CAVUTO: Vow.

WEBSTER: It was down, down another 4 percent in Tuesday's session. Those markets will be opening up in a couple hours, as you say.

But Asia takes its cue from Wall Street. Why? Because during all the low interest time that we have had for years and years, Neil, a lot of money has been going into Asia for people looking for better returns, and because of that, they believe that money is going to come back now that interest rates are rising.

That hurts Asia. As for Europe, same story today, a big sell-off, a sea of red all over the place. As you can see, all of these countries, France down 2, Spain down 2 percent, the U.K. 2. Also off, the DAX in Germany down 2.3 percent.

What I expect -- I'm looking at the futures now for the Asian markets, and already I see in Nikkei in Japan up 600 points, which is about a 3 percent gain.

CAVUTO: Well, they're optimistic they can turn it around.

WEBSTER: So, that is good news for Asian markets on Wednesday.

CAVUTO: All right, Ashley, thank you very, very much.

WEBSTER: My pleasure.

CAVUTO: Stuart who?

Kidding.

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