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The Exchange
Fed's Inflation Battle, the Alphabet Case, and the Memory Meltdown 3/27/26
00:44:01
Mounting inflation concerns could put Trump's pick for Fed Chair in a bind. The company Wells Fargo says is the "best-positioned" name in the AI race. Plus, a rough week for memory stocks but will the dip be short-lived?
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Trading at Schwab is powered by Ameritrade, giving you even more specialized support than ever before, like access to the trade desk. Our team of passionate traders ready to tackle anything from the most complex trading questions to a simple strategy. Gut check. Need assistance? No problem. Get 24. 7 professional answers and live help and access support by phone, email and in platform chat. That's how Schwab is here for you to help you trade brilliantly. Learn more@schwab.com trading the day begins at the Chase Sapphire Lounge by the club at Boston Logan Airport. You get the clam chowder in San Diego, it's Tostadas New York. Espresso martini. It's 10am why not? It's the quiet before your next flight, the shower that resets your day, the menu that lets you know where you are. This is access to over 1300 airport lounges and every Sapphire Lounge by the club. And one card that gets you in Chase Sapphire Reserve now even more rewarding.
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B
Learn more@chase.com Sapphire Reserve cards issued by JP Morgan, Chase bank and a member FDIC subject to credit approval. You're listening to the Exchange. Here's today's show. Thank you very much, Scott. Those de escalation headlines on Iran not doing much. The market still de risking the story on Wall street today. Welcome to the Exchange. I'm Kelly Evans right across the board to end the week, the Dow's down for 88, dipping briefly into correction territory, meaning a 10% decline from its recent highs. The Nasdaq that's squarely in it with another 1.4% drop today. The S and P also down about A. Yields continue to be a big story with the 10 year at its highest level since July now sitting around 441. And oil prices remain elevated as well. This is where all the focus is arguably the most important data point in the whole market right now. WTI crude 98 about to kiss 99 with a 4 1/2% gain even as the president has given this extension on his deadlines for the Iran war. Brent crude is up to 111 or so today. And of course, we're watching the memory trade which is rebounding. But big losses for the week after the disruption continues. Micron is down 14% in five days, although rebounding about 2% today. But let's begin with the latest on Iran. And Eamon Jabbers is live at the White House. Amen. Where the market is just frustrated, I guess we could call it, with the developments at this point.
- [02:18]
C
Kelly, that's Right. And take a live look right now at the South Lawn. You'll see that President Trump is on the other side of this building and he is addressing a group of farmers right now about some agricultural issues. And we'll monitor those comments to see if he says anything about the war in Iran and also on farming policy. A new report this morning, though, casting some doubt on how much of the Iranian missiles, Iranian military's missile capacity has been destroyed at this point in the war. It's a key war aim of the Trump administration. And citing five people familiar with US Intelligence, the report from Reuters says that the United States can only determine with certainty that it has destroyed about a third of Iran's vast missile arsenal so far in the fighting. And Reuters also found that the exact status of about another third of that capacity is less clear. But it is likely that bombings damaged, destroyed or buried those missiles in underground tunnels and bunkers. That's according to four of the sources that Reuters was citing. Now, that's in stark contrast to the upbeat tone of briefings that we've had from the Pentagon and the White House so far in this war. And it does raise questions about how long it would take the US Military to reopen the Strait of Hormuz using force, given the remaining missile capacity. We heard the president talking about that yesterday in his Cabinet meeting and acknowledging that even with a small percentage of its missile capacity online, Iran can still harass civilian shipping in the crucial Strait of Hormuz. Now, a White House official tells me that in this event that we're watching right now, the president is going to issue some new guidance for the diesel exhaust fluid requirement, which the White House says is going to help lower prices for farmers and consumers. And the Small Business Administration at this event is expected to open up new loan guarantees for farmers and food suppliers that will help ease some of the financial burden there, Kelly. So the administration doing what it can here to provide some relief to the farm sector.
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B
This afternoon we see this Reuters headline, amen. That the US can only confirm about a third of Iran's missile arsenal is destroyed. Our next guest is about to say as well that the defense secretary hasn't held a formal news conference in more than a week. And also more people are kind of noticing that the cabinet members haven't been doing a lot of these extended TV sit downs like Rubio or Vance. Is there any significance to that?
- [04:33]
C
Yeah, you know, there could be, Kelly. It's difficult to say, though, in all honesty. I mean, you look at a thing like that and it could be a coordinated communication strategy from the administration to make the president the spokesperson for the war. Or it could be that these cabinet members feel that they don't have a lot of good data points to share right now, so they're not raising their hand to be as visible on national television. It's tough to say necessarily. We did see this kind of striking divergence of tone between Pete Hegseth, the Defense Secretary, or Secretary of War, as he refers to himself, and Dan Kaine, the chairman of the Joint Chiefs of Staff. The General Kaine, you know, very somber in those. In those briefings at the Pentagon and offering sort of his thoughts about the young Americans who are fighting in the war, admiring their courage, admiring their technical capacities. And you saw Hegseth with a much more blustery bravado, kind of a tone in those briefings and the two men side by side. You know, maybe the Pentagon just decided that that tonal disparity between the two just wasn't working for them.
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B
Very interesting point, Eamon. For now, thanks. Appreciate it. Image Average at the White House. Let's bring in Roman schweitzer now. He's T.D. cowan's aerospace and defense policy analyst. And Rowan, what's the significance to you of the fact that we haven't had a news briefing at the Pentagon in the last recent period of time?
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D
Yeah, hi, Kelly. It's. It's great to be with you. I have a slightly different take on that. I think that actually General Kaine, chairman of the Joint Chiefs, has been particularly revealing in his remarks, particularly during his last press conference, talking about A10s and Apache attack helicopter helicopters working along the southern flank, which is presumably the Strait of Hormuz. I actually think they want to avoid questions about where is the 82nd Airborne, where is the 31st MU, what are the plans for perhaps islands in the Strait of Hormuz or at the entry and exit points of the Strait and things like that that might reveal future intent. So, actually, I don't think it's necessarily a lack of good news. Admiral Cooper, in a message yesterday, revealed that 66% of missile, drone and naval production capacity has been destroyed. I know there's a lot of percentages and things going on, but I actually think it's more about potential forward future operations.
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B
What do you think sort of the scope of those operations might be, Roman and will investors welcome these developments or be continually alarmed by them? You know, I know that there were some analysts who responded. If you go back to last year, when the President would kick off a Tariff delay, the market breathes a sigh of relief and effectively would decide, you know, it's kind of over. We don't really have to worry about this, we can move on. This seems to be having the opposite effect. When the President kicks out a deadline on Iran, as one analyst put it, that means the oil price has to stay elevated until that deadline or unless there is a much clearer cease fire. So in trying to delay and repeat that playbook from last year on tariffs, I wonder if the market is saying you can't do that this time with the oil price. The oil price needs real resolution here.
- [07:36]
E
Sure.
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D
So a couple of things on that. I think we are sort of at a decision point in the course of this campaign excursion, war, you know, whatever you want to call it. You know, number one, I think the President views this opportunity as a potential diplomatic off ramp because the next phase is probably going to put, be riskier and put American lives at risk. If that does include, you know, opening the Strait of Hormuz and putting US Combat forces in closer jeopardy to the, to the Iranian military forces. I think he would love an off ramp. I think he is perhaps buying time for forces to assemble. He may be trying to sow dissent and confusion within the regime. He may be jawboning the price of oil. So I think we're at this point in time where I think there's, there's no reason not to have talks to see if the Iranians believe they should capitulate or if there is an opportunity for a deal. And if not, that next phase, which could be in 10 days, could be certainly less. He has shown a capacity to do that. You present the next hard decision point that he will have to make.
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B
And guys, maybe we can show the oil futures curve because in order to remind that we're talking about spot prices here and we've been told that because of the length of transit that the physical market could see shortages and price hikes in the next couple of weeks. Maybe the picture improves beyond that if you want to use that as your real proxy for what the market's gaming out here, or you could simply look at the price of equities. Maybe that's a cleaner one, Roman. But you're saying you don't really think that there's going to be any kind of breakthrough until the Iranians realize they can't win. Is that correct?
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D
Well, I mean, you know, I hate to put it this way, but you know, in warfare you either have total victory or you convince the other guy that he has lost and I'm not necessarily sure that's the case right now. If the Iranian government can keep the Strait of Hormuz closed, or believes it can, then then it is likely to not do a deal. It may behoove them to do a deal now if they believe the US Military can force and hold the strait open and allow some amount of commercial traffic through, because then they've lost arguably their largest strategic economic bargaining chip.
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B
Yeah.
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D
So, you know, again, complex equation is tough to know. And, and you never know when the other guy is ready to give, although.
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B
And we have to go. But now it seems that there are, there's another choke point that's entered the discussion this, Bob El Mande. Don't know if you have a point of view on this. This is further to the south. It would be off the Yemeni coast, and I understand the Iranians believe their strongest proxy there would be able to kind of continue a war of aggression on an area that accounts for 12% of seaborne oil trade and 8% of global LNG flows. So can this really just be contained to the strait?
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D
That's a great question. And I mean, I think, you know, the neutrality of the Houthis so far in Yemen has been. Been an interesting one. I think in some ways that could be linked to Carg Island. Right. So I would view any action, either attempted seizure or military attack on Karg separate from opening the strait. But clearly the Houthis could, could enter the war. And in that case, you might see the Saudis and Emiratis enter the war because they've had longstanding concerns with the Houthis as well.
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B
If we look at that map on the wall right now, the area we're talking about, you kind of can't really glimpse. It's all the way south. Correct me if I'm wrong, Roman, south of Saudi Arabia, where you see Yemen down to the left, there's another little choke point. And that's the area that could also what happens if Iran retaliates? Because an Iranian military source said they could launch attacks on vessels transiting that area if the US Conducts ground operations or escalates naval pressure.
- [11:21]
D
Correct. And so earlier, the Trump administration did launch Operation Rough Rider, which was strikes against the Houthis to, to open that, that strait. And again, that is where the terminus for the Saudi pipeline on the Red Sea, where it is diverting some of its energy flows through the Red Sea and around the Bor El Mandeb. And so again, that, that it would be represent another strategic escalation. And so you could foresee some sort of trade that if the Houthis were to get involved and look to close that off again, Carg island could be held at risk by the US So I think there are a lot of moving pieces in this and over the next 10 days we're going to start to see is is there a genuine opportunity for, for talks or are we going to escalate to another level?
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B
All right, Roman, thanks so much. Appreciate it for now.
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D
Thank you, Kelly.
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B
Roman tries it with TD Cowan and the Iran war's impact on gasoline prices here at home is just one factor that could force the Federal Reserve to hike rates. That's despite Fed chair nominee Kevin Warsh's promise to cut them sharply. Let's bring in Steve Lees Liesman with a closer look at these challenges, Steve, which are crystallizing.
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E
Yeah, Kelly. Kevin Warsh has promised nothing short of regime change at the Fed and he has his work cut out for him. From markets to his future colleagues on the Fed. A lot stands in the way of Warsh's desire to overhaul the Fed's operating system, so to speak. His agenda includes, it's a very ambitious agenda. It includes cutting rates apparently even below the current Fed long run median of 3%, slashing the $6.7 trillion balance sheet and rethinking communications, including those infamous dots and whether or not they ought to be filled out at all. His nomination hearing, of course, delayed by objections in the Senate to a criminal probe against Fed Chair Jay Powell. But right now, markets suggest that any time Warsh becomes chair in the next year or during this year, he will not be cutting rates. In fact, with the surge in oil prices, markets now are pricing in a 30% chance of a rate hike by December, no probability of a cut even as far out as the summer of 2027. Warsh has suggested that surging productivity, that's going to allow the Fed to run the economy hotter with lower rates. Some of its potential colleagues agree with the general prospect. They want to go slower, especially with inflation running above target, reducing the balance sheet. Well, that's Wash's signature agenda item. Could be the trickiest part. It ballooned after the great financial crisis and again with the pandemic, Wash wants to bring it down sharply. Markets, however, they have thrown tantrums during previous such efforts. Warsh is going to benefit, of course, from the power of the chair. He's got a persuasive personality and he's got a lot of confidence that he has this right. He said, by the way, he'll also take his time. So time he'll need, I think, for the data to go more his way, markets to go more his way and to convince colleagues and markets that he's got Kelly, the right plan for overhauling the Fed.
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B
All right, Steve, stay there. You know, we got a short time and a very smart guest here, Barry Knapp with Ironsides. And you know, so Barry, let's try to cut to the chase, which is yesterday on this program you heard Sri Kumar arguing for higher rates. The market is pricing for higher rates. Long term bond yields globally are pricing for higher rates. How can we be persuaded that that would make this problem very worse right now when people are worried about inflation and want the Fed to do something?
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F
Yeah, it definitively would make things worse and exacerbate the K shaped economy that the Fed's asymmetric policy easing primarily through their balance sheet and then tightening primarily through rate policy really kicked off. Certainly the tariffs exacerbated that and a persistent energy shock would further exacerbate that dynamic, which is in essence pressure on households that live paycheck to paycheck, small banks relative to large banks and you know, businesses that are more leveraged borrow at a floating rate versus those borrowing at a fixed rate. So what Warsh is getting at and Moran released a paper with Fed staffers about yesterday and gave a speech on in Miami is the idea that you wouldn't, you know, and I was listening to how Steve characterized this closely. But in essence, what Governor Moran was arguing for would be lowering the policy rate at the same time that you resume shrinking the balance sheet. So it's an offset. Clearly shrinking the balance sheet is a tightening of financial conditions. But if you do it at the same time that you're lowering the policy rate, you're actually easing pressure on the parts of the economy that are strained and tightening policy on the parts of the economy that have looser than they would otherwise financial conditions and are the parts of the, you know, that balance sheet is really the part of their policy that facilitated all the Fed borrowing that led to higher goods prices, non housing services prices and housing inflation. Where do you think things are remedy it would. I agree with Steve. It'd be tricky to implement. But that is the way, you know, to really resolve this huge dichotomy in the economy.
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B
And I'm listening closely to you also. Very. So where do you think things are too loose in the economy right now?
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F
Well, there's no doubt that longer term rates are at least 50 to 75 basis points below where they would be otherwise in the absence of the Fed's six and a half trillion of holdings. You could measure that through the three month ten year curve which is a rough proxy for bank lending. You could measure it by the return on equity of regional spread sensitive banks to large banks. You could measure it by small business hiring in the ADP survey versus the large survey. You can measure it through the term premium models that are about half of what they historically have been. So all those things are putting downward pressure on the 10 year part of the curve and out. And even through this sell off we've had term premium hasn't moved. The only thing that's repriced is the Fed's policy path which is again squeezing those small floating rate borrowers. Another measure would be the duration of the high yield index relative to investment grade credit index. High yield index duration has never been shorter, meaning they can't refinance and term out their debt the way investment grade companies can. So it's like just a range of stuff that says that Fed's balance sheet is still reducing longer term rates below where they would be otherwise. And all the burden of the tightening has fallen on small banks, small businesses, households living paycheck to paycheck.
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B
Steve, do you have a question or a comment here quickly?
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E
Well, deep respect for Barry, but I can't get there where he's at. I cannot get there to this notion, which is something that Kevin Wash has talked about, that somehow the balance sheet is good for Wall street and bad for Main Street. And when I, when I look at this issue, Barry, with due respect, everything I see that ends up reducing the balance sheet and putting downward, putting upward pressure on rates affects Main street just the same. And one thing you want to do is just look at the connection between the 10 year and the mortgage rate. If you're going to put upward pressure on the 10 year, that's what I'm going to put upward pressure on mortgages. And it's, it's all one big pot. And this notion that there are separate pots out there, I can't get there. But I guess I remain to be
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B
upright pressure on mortgage. I mean in a weird way it's the worst thing for the public unless you trying to buy a house and then I guess that's how you get the home price down.
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E
But I know the President that's what you'd end up with either right? That's what I'm afraid you'd end.
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F
That's the demand side of housing. The supply side comes from mom and pop builders that finance with shorter term construction loans that are floating rate loans pegged off the policy rate. So we have an affordability problem, we have a supply problem. This is an argument that my former colleague Rick has made quite a bit, that most of the much of the economy is not particularly rate sensitive, but that housing sector has had its supply impaired by lack of building from mom and pop builders, the publicly traded builders further out the curve, mom and pop guys have been squeezed.
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B
We got to go, Steve, quickly.
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E
I know we got to go. But Barry, if you end up putting upward pressure, if you end up reducing the balance sheet, you got $2 trillion of mortgages, you're going to have to sell some mortgages. That's going to put upward pressure on mortgages. Why doesn't that hurt Main street just the same as it as it would hurt Wall Street?
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F
Because you have bank regulatory policy that that compresses the spread between the primary and secondary mortgages, gets the house, the banking sector back into the mortgage market. So you don't only go to not Mr. Cooper, whoever took over Quicken to get your mortgage loan that you actually compress that spread. So yes, it has to be done carefully, Steve. And if you read Moran's paper, he recommended doing it over the course of about two years. But this is the real issue is that the inflation came from the balance sheet, not the reduction in rate policy during the crisis. And to really reverse this and get inflation back down to target, if you really think that's possible, you'd have to rebalance that policy.
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B
Listen, where else do you get this kind of content in about. We did that like five minutes. It was fabulous. I'm trying, as you can tell, we're all trying to figure out because the last thing you want is the last thing you want is a Federal Reserve or any central bank to hike rates and make all of this worse right now. So I do think it's so important to keep talking about it, guys. Thanks, Barry. Appreciate it. Appreciate you joining us. Barry Knapp, Steve, as always a pleasure. Don't miss an exclusive interview next week with Fed governor Guess what, Stephen Myron, we were just talking about his research. Listen, Monday, 10am Eastern, squawk on the street, you'll hear a whole lot more about it and we'll keep this going with inflation the most important factor for the market right now. According to our next guest, whose fund has doubled the S and P over the past year, plus Alphabet having its worst week and month in over a year, down 7% since Monday. Wells Fargo says they got everything they need to be an AI winner. Shares could go up 40% from here. That analyst joins us ahead on the exchange. This is the exchange on cnbc.
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Trading at Schwab is powered by Ameritrade, giving you even more specialized support than ever before, like access to the trade desk. Our team of passionate traders ready to tackle anything from the most complex trading questions to a simple strategy. Gut check. Need assistance? No problem. Get 24. 7 professional answers and live help. And access support by phone, email and in platform chat. That's how Schwab is here for you to help you trade brilliantly. Learn more@schwab.com trading this is a vacation with Chase Sapphire Reserve. The butler who knows your name. This is the robe, the view, the steam from your morning coffee. This is the complimentary breakfast on the balcony, the beach with no one else on it. This is the edit, a collection of handpicked luxury hotels you can access with Chase Sapphire Reserve and a $500 Edit credit that gets you closer to all of it. Chase Sapphire Reserve now even more rewarding.
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Learn more@chase.com SapphireReserve cards issued by JPMorgan
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Chase bank and a member FDIC subject to credit approval.
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B
Men are struggling with their mental health at some of the highest rates we've ever seen. But most aren't getting the support they need. And that needs to change. I'm Dr. Guy Winch, your host for season three of the Visibility Gap, presented by Cigna Healthcare. This season we're focusing on men's mental health, bringing together real stories and expert insight to explore the pressures men face every day and why opening up can feel so difficult. Join us for the new season wherever you stream your podcasts. The President's Iran extension failing to call markets today or to bring down oil prices. That's fueling inflation concerns and making our next guest zero in on one trade in particular. Hard assets Halo. Perhaps joining us now is Charles but Brinskoy, the vice chair at Ariel Investments. You were Halo before. Halo is Halo Charlie. So it's good to see you. Welcome.
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G
Thanks, Kelly. Great to be here.
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B
And you and others have been positioning for this era of, you know, here's why I'm going to struggle with the word inflation for our audience who was just listening to the last segment, I do Grant, there is a difference between the price of stuff is going up and there's inflation. Because if the price is going up and I'm making more money, there's inflation. If the price is going up and I'm not that's called possibly a recession. So I'm trying to figure out which landscape we're in right now.
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G
Yeah, so you're talking about real wages. Real wages at the upper end have been positive. Real wages have been okay, but that's not how people think about it. Kelly, when I get a raise, when I'm a construction worker or a roofer and I get a 3% raise, I think I have earned that raise. And if I have to give it all back in inflation, I am mad. I don't think that I am equal. So right now that's the people are thinking right now they are getting raises. Minimum wages actually are up across the country. Upper income people are benefiting from the higher stock market but they feel they've earned that and it's being taken from them by higher inflation and so they don't feel good.
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B
Let's talk about apa, formerly Apache and a stock that has just been on a tear. The whole energy space is up 30% this year. But do you, as someone who's positioned with these names in your portfolio, what happens if in a couple of days, somehow a week or two, I don't know, there really is more of a cease fire on the Iran situation. Does all that go away?
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G
Yes. So the market is already predicting that the market is in backwardation, which means that the forward curve has a lot lower price than the current curve. So when everybody is expecting negative things, that's usually a positive for a stock. And these stocks have traded as if people aren't going to be using oil and natural gas in the future. And we think they are. So this the reason I pounded the table about Apache APA is because it was trading at a P EE of about 5. It was trading at 2 and a half times EBITDA. It was trading as if nobody's going to need oil and gas in the future. And that's just silly. So apa, we think that in the US demand for electricity is going to come mostly from natural gas production. We're not going to have enough wind and solar to power all the data centers. We're going to use natural gas to do that. And so APA is very well positioned for increased demand for natural gas.
- [26:03]
B
You know, I suppose I look at, we're at session lows today. People are not too happy to see their, their balances go down. You know, we're 10% off the highs for a lot of the major averages, it'd be one. You know, I think you've made the case for why this should be in people's portfolio, if nothing else, as you know, you know, as a safety blanket. But what happens with the broader indexes?
- [26:23]
G
Well, you know, I'm always going to say there are two different markets right now. They still are. The S&P 500 is still dominated by large cap growth stocks. Those stocks got grossly overvalued. It is true that you can do well, pretty well by buying index funds. But last year they were no longer a safe place to be. And so value stocks like Apache, like energy stocks, got extremely cheap while the S and P got extremely expensive. The market is down this year. Our value index, our value portfolio is up about 7% this year. So value investors are feeling pretty good.
- [26:58]
B
So there's, and as you say, the most important factor is inflation. I think a lot of people would agree with you. I mean even the gains we've had off the lows a few years back have been from falling rates and to some extent falling inflation. That has all stalled out and stopped. Your positioning is working out. My question for you is what should the Fed do against this backdrop?
- [27:17]
G
Yeah, I want to. This is a point. I just listened to the conversation you just had and I don't think the Fed has the power right now. It has an influence, but it can't change inflationary expectations in the next six months. What's causing inflation right now is a whole cacophony of different policies, including tariffs, including massive fiscal deficits, including less globalization, even less immigration, which many people support. I probably in principle support has got an inflationary aspect to it because wages go up. So we have all of these policy factors, not just the Fed, that are contributing to more inflation right now. Expectations for 10 year inflation have probably gone from the low twos to over three, which is why the ten year is over four. Close to four and a half.
- [28:02]
B
Yeah. So for you this is simple. Inflationary eras are not good for bonds. Certain asset classes do poorly. I just want to rattle off so our audience is aware of these. Chevron is at all time highs, highs. Valero all time highs. Exxon all time highs. Equity all time highs. Marathon Petroleum, all time highs. Enter G all time highs. Then you start getting into the names like is it bungay up, you know, levels we haven't seen since 2000? I mean this does in some ways, I don't mean it quite in this following way. Charlie, remind me of 2008. People forget you had oil going to 140, you had nat gas. Think about that megadeal Blackstone and whomever you had all of those commodity prices surging at the same time and we're seeing that again right now.
- [28:41]
G
Yeah, but so that's why you do have to be selective. Kelly, I agree with you. Apache is not at an all time high. Apache at one point was at 82 and it's only at 43 today. Apache is only trading right now at about five and a half times EBITDA. So yes, it's moved a lot, but it is not overpriced in our opinion. And frankly, we've had a lot of inflation since those numbers that you just rattled off. And so in real terms, oil is nowhere near its all time high. Natural gas is nowhere near its all time high. Demand for natural gas is going to be reaching all time highs. And we think, frankly I'm bullish about demand for natural gas over the next 10 years.
- [29:17]
B
All right, Charlie, thank you so much. Pleasure to have you today. Charlie Bobrinskoy with Ariel Investments. Coming up, Micron is trying to snap its first six day losing streak in over a year. It's down 15% since Monday. Is Turbo Quantum to blame? We'll dig into Google's new technology ahead.
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If you're a parent and want to help set up your child for success, then IXL is right for your family as an effective and affordable online learning program. IXL covers math, language arts, science and social studies using interactive practice problems for kids from Pre K to 12th grade. Listeners can get an exclusive 20% off IXL membership when they sign up today at ixl ixl.com 20 Visit ixl.com 20 to get the most effective learning program out there at the best price. Welcome back. We're at session lows right now. The market's Dow's down almost 600 points. It's a 1.3% drop, similar for the S&P. Nasdaq's down 1.8. And it was already coming into the session in correction territory, 10% off the recent highs. You can see Even the small cap Russell 2000 are down about 1 1/2 percent as well. Headline on the wires from 20 minutes ago. US signaling to allies, no immediate plans for an Iran invasion. That's not the kind of thing that will calm down the markets. And you can see the oil price responding as well. Meantime, we are 41 days into the partial government shutdown. Could be an end in sight. Kalshi odds now show an 84% chance of the shutdown lasting 43 days or more. 67% chance it goes 45. You can see 48% chance it goes 50. More than a quarter of people think it'll go at least two months. What will it take for Congress to fund Homeland security? Let's bring in Emily Wilkins with the very latest. Emily, including some new developments in the past hour.
- [32:04]
H
Yeah, Kelly, you know, we woke up this morning to learn that the Senate had passed almost all funding for the DHS with the exception of ICE and some Customs and Border Patrol. There seemed to be a lot of optimism that the House could get this done as soon as today. But that optimism very quickly fading up here on Capitol Hill. Republicans are now in a conference call where they are rejecting the Senate offer and instead floating the idea of doing an eight weeks stopgap funding to cover the Department of Homeland Security, including ICE and Customs and Border Patrol. But now, of course, we have Senate Minority Leader Chuck Schumer out in a statement saying that a 60 day CR that locks in the status quo is dead on arrival in the Senate and Republicans know it. So even if Republicans were to go up ahead past that stopgap funding, the Senate's supposed to be out for the next two weeks. It's not clear if they'd be called back for this. And of course, that just means more confusion at airports. It means the Coast Guard's not getting paid. It means cybersecurity, fema, all of them will be stuck in this funding crunch. And at this point, again, there was a lot of hope, I think that what had passed the Senate was going to be able to go through in the House. House Democrats have said that they are supportive of it. So you could have seen some bipartisan support. But it seems at this moment that Republican leadership is deciding to take an alternative path and that they don't see enough support among their members for what the Senate moved earlier this morning.
- [33:29]
B
Kelly all right, Emily, for now, thanks. Emily wilkins, appreciate it very much. Let's get to Mackenzie Segalos now for the CNBC news update. MACKENZIE hey, Kelly.
- [33:37]
I
The Justice Department has sent out subpoenas as part of its investigation into Paramount Skydance's acquisition of wbd. That's according to Reuters, citing sources familiar. The DOJ is seeking information on how the deal would affect studio output, content rights, movie theaters and competition among streaming services. And Sony plans to raise the price of its PlayStation 5 for the second time in a year by as much as $150. The company cited continued pressures in the global economic landscape as the reason. The price hikes will affect customers in the U.S. uK Europe and Japan and will take effect on April 2nd. And a social media ban for children under 16 years old is set to begin tomorrow in Indonesia. The process will be carried out in stages, beginning with YouTube, TikTok tok, Facebook, Instagram, threads and roadblocks. According to Indonesia's Minister of Communications and digital affairs, it'll be the second country to impose a full ban after Australia.
- [34:35]
B
Kelly I couldn't believe, you know, Jonathan Haidt, I think it's two years since it's two years since his book was published. Mac. I mean, think about how much has happened. It's it actually gives you hope. Honestly, other things could change that quickly as well. We'll see what his next fight is. Mackenzie, thanks very much. Coming up, Alphabet is set to close out its worst week and month in over a year. But one analyst says it should still have 40% more share upside. Why Google's AI infrastructure is becoming its new profit engine. Next. Alphabet is the best position name in the air race, according to Wells Fargo. Writing in their new note, the company has all the pieces necessary to be an AI winner, including its recent Whiz acquisition and a chip licensing deal with Anthropic, the firm raising its price target to 397 which would be 40% upside from around 274 levels we're at today. Let's bring in Ken Gorelski. He's a senior Internet analyst at Wells Fargo. Ken, it's good to see you. The market obviously jumped way ahead and priced this in when it had that 70, 80% run after Gemini launched and it's taking a breather now. So is this giving us the next incremental move that could get us 40% more from here and are those recent acquisitions part of it?
- [35:46]
J
Yes. First, thanks for having me. I think there's a couple of things going on here. One is there are two pressures. One I would say is the cyclical pressure, the ongoing war. We obviously will have an impact here. But in the second is really on the, on the CapEx side. You've seen a meaningful upward revisions in Capex the last four or five quarters with the lack of kind of upward revenue revision. And so that means free cash flow has been cut pretty meaningfully. What we think is going to happen here is we think free cash flow will stabilize and start to rise as CapEx stabilizes here for, for a while and you'll start to see these new revenue streams. And that's what we really pointed out today which was these new, the ability to license their TPU's. This is kind of the first true organic AI revenue that, that Google can recognize that it's truly incremental and we're looking at this as a very high margin revenue stream. And this is licensing out technology that they're on the seventh generation. So this is not something they just started in the last one or two years. They've been working on this for many years and they're starting to see the
- [36:53]
G
fruits of the labor.
- [36:55]
B
The, you know, the next question to always ask once a company really has positioned themselves this well is at what point is there regulatory or political pushback? Because look, I agree with you. I mean they've made every right move. They've come from a bit of a, you know, a backward foot obviously to chatbots. They've caught up and surpassed them with even more components. You know, they have their own chips, they have all of those things that you mentioned. What's the next chapter of the story?
- [37:21]
J
Yeah, so we think that really if you look at this, this was a consumer advertising story before and we think the next leg of this is far more subscription and enterprise based. And to the point I made earlier, the worries on cyclical, we think the key drivers here are not the cyclical drivers of the past. The advertising side, yes, advertising should continue to be quite robust here. But going forward we think the key upside drivers are really on non cyclical factors. And this has to do you think about the TPUs, you think about the subscriptions that they're going to drive off of their, their model build in the Gemini model. This is where we think the real upside, and I think this is actually represents a pretty big shift in the business mix here. And ultimately in the end, I think this ends up being a higher multiple company than it was over the last five years.
- [38:14]
B
Just wonder if everyone's already kind of in the game and knows to some extent the things you're talking about. You know, it's just, it's like it becomes so widely owned, you know what I mean, that it just takes so much to kind of bring in who are, who are the new buyers, who's, who are the skeptics on the sideline, right. Who are the sellers saying, nah, yeah, no fair.
- [38:35]
J
And we were the skeptic for many years. I would say this, and that's why I really would point here is that we need to see those incremental revenue streams. You need to see those incremental profit streams. And, and that in our view is the way you get the stock moving. You're right. There is not a lot of like, I think there's general agreement that Google is an AI winner, but there's also an agreement that like, where's the upside?
- [39:03]
B
Right?
- [39:03]
J
Like where are the upside to estimates? And I think we started to point out in the note today, here's one upside driver and I think there will be many, many more as the years to come.
- [39:13]
B
All right, Ken, appreciate you joining us. Thanks.
- [39:15]
J
Thank you.
- [39:16]
B
Ken Gorelski with Rails Fargo. Coming up, Google may have those winning AI tools, but is that a major loss for the memory names with one CEO called calling this Google's Deep Seek moment. And in this case it's the deep seeking one. We have those details ahead. Memory stocks, turns out they can go down micron down about 15% on pace for its worst week in August of 2024. This comes after Google unveiled Turboquant. It's a new technique that the company says will reduce the amount of memory required to run large language models by six times. So these still names are still seeing some nice gains over the past year. Microns up 300%. SanDisk 1100%. But here to discuss what's next is Mehdi Hosseini. He's senior analyst at Susquehanna, the very man we wanted to talk to about this many. Welcome to you. Minor blip or potentially a bigger problem here?
- [40:10]
K
More like a minor blip. Remind you that the deep seek and all the hysteria back in early 25 didn't really slow down investment in infrastructure. And I see the same thing. Some of these white papers have actually been around for some time. What concerns me with memory stock is gross margin. Micron recently guided to gross margin of 81% for the May quarter. And there could be some more upside into the July August time frame. I think that's that peaking of a gross margin and sustainability of gross margin is a, is a bigger a cause of concern than some of these white papers.
- [40:51]
B
So first of all, I didn't even realize this was only a white paper. I'm not trying to diminish it, but it's not as if they came out with a product launch, in other words.
- [40:59]
K
Right, right. There are various approaches to the infrastructure. Everything is more like a greenfield and people are trying different things. What you need to know is there are. There is such a diversification, diversification in the workload that there could be a diverse approach in memory architecture. And just because Google may have an innovative idea doesn't mean that everyone is going to adopt it.
- [41:23]
B
You mentioned, and this is, you know, so much more obviously relevant, its gross profit margins in the 80, what is it? 8,385% right by July time frame.
- [41:35]
K
So over the next three to six months and. Let me carry, let me. Sorry to interrupt you. What is fascinating is, is the commodity products that are driving this gross margin improvement, not the related products, the commodity
- [41:51]
B
products are driving their improvement, not AI. So what does that mean? Because you're emphasizing. And look, people would kill for 80 some percent profit margins. It's just that the stocks are up so much if those, if we're at peak margins and they're going to decline. So before I get to that part of the story, explain what you mean by the drivers behind them.
- [42:09]
K
So when he relates to AI like high bandwidth memory, they're actually carrying a rather a stable margin profile for Micron given the tightness and the shortage, especially for a smartphone and notebook. Those are the kind of DRAM or memory products that are driving improvement gross margin. The prices for those kind of commoditized products are increasing at a faster rate and that's what's driving the gross margin towards a mid 80. I think if we were to exclude the geopolitical risk, I think this tightness is going to sustain into the second half. Commodity prices continue to increase and the gross margin improvement were to sustain into the second half.
- [42:54]
B
Would you many view or would you differentiate even between the companies in your world who you think could be an investment and those which are a trade? And maybe that's you know, asking, being a little unfair. But in other words, I look at these companies which are in such a great moment and the businesses, they deserve all the success they're experiencing right now. But are these trades or are these, if you were to buy them now, could you hold them for a decade and you know, have significantly more wealth?
- [43:23]
K
Unfortunately, we don't, we don't know enough to say convincingly that this is a holding for more than a couple of years. I don't think any stocks in semiconductor universe could be whole for a decade or more. The beauty of the semiconductor industry is, is quick, is rapidly changing, especially with AI and, and new type of technologies and infrastructure. But what you need to, but what I would, the way I would differentiate is if AI training were to peak in 27 and we switched to inferencing, it is the NAND memory, specifically SanDisk, that should see a prolonged demand improvement. We still don't know how much storage we would need for inferencing. And I think that's, that's a, that's an area where we could see a sustainable growth into 27, 28 and possibly 29. So I would differentiate Sanders from Micron.
- [44:23]
B
I love that. I appreciate your time and kind of the intellectual journey of that. Many thanks very much.
- [44:29]
K
Thank you.
- [44:30]
B
Mehdi Hosseini of Susquehanna. Coming up, Anthropic scoring a major legal victory against the Department of Defense. We have the details of the decision and what it means for other contractors like Palantir and Microsoft. And as we head to break, stocks are falling to new session lows. With the Nasdaq down nearly 2% now, the 10 year Treasury 442. The Dow's down 643 points, 1.3% drop for the S and P. We'll be right back. A federal judge handing Anthropic a win blocking the Trump administration's designation of the company as a supply chain risk. Mackenzie Segalos is following that story for today's Tech check. Mackenzie, what happens now?
- [45:11]
I
Hey Kelly. So this is a huge win for Anthropic, but it is a long legal road ahead. The judge called this classic illegal First Amendment retaliation and said the Defense Department offered no legitimate basis to conclude that Anthropic's usage restrictions meant that it might become a saboteur. So the supply chain risk designation is frozen. The government wide ban across 17 federal agencies also on pause. But the injunction doesn't take effect for seven days, giving the government this window to appeal before anything actually changes on the ground. But the company's already suffered undeniable financial and reputational damage. CFO Krishna Rao saying they've lost billions in business. Amazon and Microsoft Anthropic's own investors were asked to certify they weren't using Claude in defense contexts. And that's really the biggest practical thing that this decision does do. It protects the contractor ecosystem so companies using CLAUDE in their products can keep working with the government without ripping it out. And then on the consumer side, Claude surged to the top of the app store. Anthropic saw stickiness among retail users that it hadn't seen before. Those we know aren't as lucrative, but it was still a major departure from past precedent. And then looking ahead, Kelly, there's a second parallel case in D.C. it's a statutory challenge, three judge panel two appointed by President Trump TBD on that outcome. But if the government appeals this decision in San Francisco, there is a good chance that these legal battles could still be active when Anthropic files for its ipo.
- [46:43]
B
It's been great press for them also, we've seen. So as speaking of an ipo, is there any chance the Supreme Court could get involved?
- [46:50]
I
Well, there is a question of one, how far these court cases could go. At this point, we're still waiting for a decision in the D.C. case because they're fighting two very different stipulations. Here in D.C. it's all about the Federal Acquisition Supply Chain Security Act. They're saying that they're essentially misapplying this law that's meant for foreign contractors in this case. So certainly we're looking at how this will play out. And when they file the S1, you'd have to imagine that this will be a big line item in terms of risk disclosures that they're sharing. We already know it's hitting them in terms of billions of dollars of lost contracts. But it is very hard to remove this tech from systems, which is why you're seeing Microsoft come to its defense. Why Palantir says it's going to take them months to to pull out that tech.
- [47:32]
B
All right, Mackenzie, really appreciate it. We'll leave it there for now. Mackenzie seagallos with our stoplights. Speaking of which, the market is firmly in the red today. We're near at session lows. Once again, thanks for watching the Exchange. We'll pick up coverage with Brian Sullivan on Power Lunch right after this. You've been listening to the Exchange. Make sure you're subscribed to get each episode every day, same time, same place.
- [47:58]
A
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