Closing Bell - Closing Bell Overtime: Fed Governor Adriana Kugler, Value Plays for 2025, and Cybersecurity Outlook 1/3/25

Episode Date: January 3, 2025

Fed Governor Adriana Kugler joins to discuss the central bank’s outlook for 2025 and the data she is watching most closely. Jefferies' David Zervos gives his reaction to the interview and what was most important for investors. Ariel Investments’ Charlie Bobrinskoy highlights value stock opportunities for the year ahead, and Morgan Brennan gives a eulogy to the US Steel deal and a look at Shield AI's big 2024. Plus, Zscaler CEO Jay Chaudhry weighs in on the evolving cybersecurity landscape amid rising threats, including the recent China hack of US Treasury.

Well, that bell marks the end of regulation. PCOS Challenge bringing the closing bell at the New York Stock Exchange. Fox Development Holdings doing the honors at the NASDAQ. Not exactly a Santa Claus rally, but at least the coal's out of the stocking. Stocks jumping to end the holiday week with every S&P sector closing higher. And big pops for names like Nvidia, Palantir, and Tesla. That's the scorecard on Wall Street, but winners stay late. Welcome to Closing Bell Overtime. I'm John Fort with Morgan Brennan.

Well, coming up in just a moment, a cannot miss interview with Fed Governor Adriana Kugler. We'll get her outlook on rates, the economy and much more. Plus, Zscaler CEO can join us with his reaction to the Chinese hack of the Treasury Department and how he views the cyber threat landscape in 2025. And we begin with the Fed and a rare conversation with a voting member of the Central Bank who took her post in 2023 and hasn't done a US TV interview since then until now. Let's bring in Fed Governor Adriana Kugler, along with our own Steve Leisman. Steve, take it away. Hey, Jonathan, thanks very much. I am here in San Francisco at the annual meeting of the American Economic Association, where something like 5,000 economists are descending on this city. I don't think they can set it straight, but in any event,

they'll try. Thank you for joining us, Governor Kugler. Thank you so much, Steve, and Happy New Year to you. Thank you very much. I want to start with an area of expertise that you've had over the decades, I guess, which is as a labor economist. One of the things that motivated the idea of rate cuts beginning in the summer of 2024, which is now last year, was the concern about weakness in the labor market. Do you see weakness in the labor market? Does it cause you concern?

It seems like once again we have another strengthening going on. Yeah, absolutely. So let me start by saying that we're ending, or the economy's ending the year in a good place. The economy is resilient. The economy is growing at a good pace. It's projected to grow at 2.5 percent this year. It grew at more than 3% last year. This inflation has been happening, so it came down from 7.2% to now 2.4% in terms of the headline number, in terms of core PCE. It has come down by about half from 5.6% to 2.8%. In terms of the labor market, that has been something that has helped to get to that place. The labor market remains resilient.

Certainly the labor market, as you well remember, back in 21, 22, right after the pandemic, was extremely tight. A lot of people left the labor market. There were excess retirements, people left in the prime age group to go and take care of their children because they had to make choices. So all of that created a lot of tightness. And you remember the period, the so-called period of the great resignation. So quits were very high, but job creation and job vacancy rates were very high. And the vacancy to unemployment rate was basically up to two vacancies for one worker.

Businesses were having a really hard time getting workers. So where are we now? Fast forward. The labor market has been cooling. And it has been cooling gradually. That has been very good. In a sense, it's been easier now for businesses to hire,

but workers are also experiencing an increase in real wages. So that all has helped. So where are we now? Real wages are still up. That's a good thing. At about 1.6, 1.7 percent, the unemployment rate has come up a little bit, has stepped up. Well, I was going to ask you about that, because there is the SOM rule, and that seems like it's already beyond that in terms of how much the unemployment rate... No, it has not kicked in, actually. I mean, that's a statistical regularity, but it has not actually quite kicked in. It's close to it. It doesn't make you concerned about a recession when it comes to it. No, I think the key, again, is that this has been gradual. The unemployment rate has been increasing gradually. It came from about 3.4 percent back in April 2023, which was the lowest rate since 1969.

It increased to about 3.7 percent in the fall 23. It's now at 4.2 percent, which is still very much within what we consider historically low, right? So it's still at low levels. Of course, we're watching closely, and that was part of the reason why we decided to decrease our rates in the fall. But have you cut them enough now to a situation where you're no longer concerned about weakness in the job market? I think we're seeing that it's a stable situation, that the labor market is resilient, that the labor market has rebalanced.

We want to keep it at that level. That's what we want. And we feel it's staying resilient. The unemployment rate is not increasing rapidly like it has increased in prior recessions. Now, one of the things you've talked a lot about, and I've talked about it for 20 years, is productivity. And it is stronger now, more efficient, the economy being more efficient. What does that do to monetary policy? Does it mean the economy can run hotter for longer?

But does it also mean that you need to have a higher funds rate because of that? Yeah, that's a great point. I think, you know, productivity is one of those supply shocks, together with population growth and the supply of labor going. Those two shocks have really helped us to achieve this situation that I mentioned at the beginning of having a healthy economy together with quite a lot of disinflation. It allows the economy, as you just said, to run a little harder, right? It means that we can reduce prices while at the same time expanding economic activity. That's exactly what productivity growth

means. And I've been a productivity optimist now for more than a year and as it turns out in september 2024 the ba revised its national accounts and decided to yes exactly so that that's exactly what we're seeing and i would say there are a few reasons for that one is business formation business formation has been unprecedented and that really helps increase productivity. The second one is a lot of these new businesses coming to the tech sector. And the third one is that there has been a lot of sectoral reallocation. Some of that which happened earlier during the required resignation, but it has continued. Right fitting of the employer with the right employee.

But let's talk about some changes that might be coming on the way. Ideas like tariffs and immigration. Do they work against this productivity that you're optimistic about? So I'm not going to comment. As you know, we don't have a poor view of immigration and tariff policies. So we don't comment on those policies. But, of course, we're policymakers and we're forward looking. So we consider a wide range

of plausible scenarios that may be coming forward. We don't know exactly what those scenarios will be, what the actual implementation of those policies will be. So yes, immigration has been helpful so far in helping us to rebalance the labor market, generate wage moderation, and in turn generate moderation in services inflation. That's what we know so far. What is going to happen forward? We don't know. Immigration has been slowing down in the second half of 2024. It could continue to slow down. We don't know. We don't know by how much, and that's to be seen. Fed Chair Powell at the last press conference said there were three types of Fed officials. One type incorporated coming policies from the Trump administration in their forecasts.

Another type didn't, and a third didn't say. Which one are you? So, as I said, there is a wide range of views within the FOMC. And I think everyone is considering this wide set of plausible scenarios that could be coming our way. There's so many things, as I mentioned, in immigration, in terms of the magnitude of this slowdown in immigration. In terms of tariffs, that effect that we may expect tariffs to have on prices or on output and employment, our dual mandate, is even more uncertain, I would say. It will depend, for example, on the permanence of the tariffs.

It may depend on whether there is retaliation or not. Right, right. It may depend on whether the tariffs are imposed on a small set of countries or a wider set of countries in terms of whether you can substitute from other imports from other countries. It may depend on whether final goods or intermediate goods are taxed. And then, you know, if intermediate goods are taxed, it could be that it's passed through to supply chain networks. So there is a wide set of scenarios. And I think everybody's concerned that wide set of scenarios. I I think everybody's concerned that wide set of scenarios. I have two more things I have to ask you about.

First is inflation. It's been kind of stagnant for like five months. You haven't made much improvement. How much concern do you have over the stack as the improvement stalled? Yeah, I think we're all looking closely at this. I have to say we saw that in the first quarter of 2024. There was that bump. Right. And now we're seeing a bump again. September, October, November looked a little better.

But we're seeing potentially that we're traveling another bump. And we want to make sure that that is indeed just a bump and not something more permanent. I would say part of the reason why we saw that bump is because non-market prices accounted for much of that increase. And those are imputed prices. Those are not prices that are not matching. Just FYI, folks at home, Fed Governor Coogler was the former chief economist for the Labor Department. So you know this stuff like the back of your hand. Absolutely.

CPI data, all the labor data. That's my cup of tea. So before I let you go, the market has priced in the following for the Fed this year. It's pretty sure about one 25 basis point rate cut and can't really make up its mind about a second one. How well does that comport with your view of where rates are going to be this year? Again, we are data dependent. Sure. And we're data trend dependent.

And on top of that, of course, we have to be forward looking to see what actually happens in terms of any potential policy changes. So, you know, one thing is what we wrote in December. Another thing will be what we write at the end of January and what we will write in the next SEP, which comes in March. But you don't think the market is off base in its view or is close to your view? How would you characterize it relative to your view? I would say, you know, the mean came down from 100 basis points in 2025 to 50 basis points.

And so there is a view that we can take our time to slow down maybe the pace to be more gradual, precisely because of what you just mentioned, for example, that bump that we saw at the end of the year, until we see that that gets resolved. If, on the other hand, unemployment for some reason doesn't continue to be as resilient, we would be ready to act in a different direction. So it's, you know, we're always responding and seeing what is happening in front of us. Fed Governor Adriana Cougar, thank you for joining us today. Thank you so much, Steve. John, back to you from San Francisco, where it appears I'm the only person in the city wearing a tie.

That's likely, Steve Leisman. Thank you for bringing us that interview with Fed Governor Adriana Cougar. And joining us now for instant reaction to it is Jeffrey's chief market strategist, David Zervos. Happy New Year, David. So, Governor Kugler highlighting at the end there the view now that the Fed can take their time and slow down the pace of rate cuts. Perhaps commented on immigration having been helpful in wage growth moderation over the last year or so, and talking about productivity and how that's helped the economy

run a little hotter. What stood out to you, David? Well, Happy New Year, John. Thanks for having me on. And not much stood out as a surprise to me here. I guess what continues to surprise me the most is how little Fed or FOMC members talk about some of the potential good things that may be on the horizon with policy changes, particularly related to deregulation. I hear a lot about tariffs. I hear a lot about immigration. I hear a lot about worries on fiscal policy or geopolitics and the like. But I think the biggest storyline and we've been pushing this at Jeffries now for a very long time. The biggest difference between the two candidates going into the election and now with the Trump win, the biggest policy change is going to be deregulation. I think the markets are reacting to that. The markets are embracing that. That's why

we see resilience in the S&P. We had a pretty good 2024. It seems like today we're continuing a bit of that trend, although it's been a choppy start, but still like a good start. So is it priced in now, then, that expectation of deregulation? And if not, how would you factor in as an investor the continuing positive impact of deregulation? How soon does that hit? I think it hits fast. And that's why I really, I want our clients and I want listeners here today to be thinking about it because it's executive orders, John. It's things that can be signed on the 21st of January. And I think they're ready to go. They're ready to go January. And I think they're ready to go. They're ready to go in the energy sector. They're ready to go in the financial services sector.

They're ready to go in virtually every sector. And I think they've been preparing for this for a long time. A lot of folks at the AFPI that are going to be members of this staff and members of members of the cabinet, I think they're ready to go. And I just don't I find it a little frustrating that we're not talking more about the deregulation side. There's a lot of and I guess I'm frustrated, but I'm also kind of happy about it because I think the market's underpricing. How important that is gives me more confidence that we could see positive storylines developed that the market isn't 100 percent pricing in. And there are those folks that think the market is too Pollyannish at the moment, which I disagree with.

David, we did just hear Governor Kugler talk about the fact that the Fed continues to be data dependent. But she did also just talk about the fact that that SEP, that what the Fed and officials are expecting in terms of rate cuts and that neutral rate coming down in 2025 was tapered because of the quote unquote bump in inflation in the last couple of months of 2024. Could we be poised here, especially if deregulation really takes root in a meaningful way, as you're talking about, for a repeat of what we saw with the Fed under Powell in 2018?

I don't think so. And I certainly hope not. I don't think they're going to be that stubborn or Jay would be that stubborn. I think that's probably too much. There could be a little stubbornness and it sounds like there's a bit of stubbornness there. They're willing to wait and see. And the market may not like that at some point over the course of the year. And that'll be an opportunity. But I don't see that storyline as a really viable one. I think it's a very balanced view that you just got from Governor Kugler. And I think it's pretty consistent with what's on the rest of the FOMC's sort of thinking. But from the market's perspective, remember where we started 2024. We had over six rate cuts priced in. And one of our themes at the

beginning of 2024 was the market can go up even if the Fed's not cutting because things are going pretty well. So we don't need rate cuts to make the market go up. We need sort of a positive supply side story. That would be good. Or we need the Fed to be cutting if there's some negative demand side effects that come into play from over-restricted policies or shocks. So I think either way, the Fed is poised to cut if we need it. We have the put. We have the backstop. That's great. If we don't need it, that's great, too, because actually probably means we've got supply-side forces driving growth a little stronger. And I think those supply-side forces

would actually be disinflationary, not inflationary. And that's something that maybe the market isn't 100 percent factoring in because they're so obsessed with tariffs and immigration and some of the other policies that they seem to be highlighting as the drivers of this new administration, when I think that the first order of business is going to be to cut the red tape, cut the changes, cut the regulation, changes at places like the FTC, changes at places like commerce and treasury that I think are going to matter a lot to businesses. And we're going to see it in M&A. We're going to see it in our investment banking business and all the global investment banking business. I think it's going to be a pretty exciting 2025 in that sense.

OK, and we'll soon find out if that's where we start first in the next couple of weeks here. David Zervos, you've been talking about this for a little while and look forward to seeing how it all comes to fruition. for joining us thanks will 2025 be the year of value we're going to talk to ariel's charlie barinskoy about his buy list for this new year across housing financials and energy and later is china's hack of the treasury department just a catalyst in a broader cyber conflict we will will discuss the threat landscape with CEO of cybersecurity firm Zscaler. Overtime's back in two. We have a news alert on Apple.

Megan Casella has the details. Megan. Hey, guys, we are just learning that Apple CEO Tim Cook is personally donating $1 million to Trump's inaugural fund next month. He joins an array of big tech companies and CEOs that have been donating

in big ways to this inaugural fund. Amazon also donating a million dollars. Meta, a million dollars. We already knew about those. Uber, Goldman Sachs, Bank of America, Toyota, Ford, GM, all on this list of companies that are donating to the president's inaugural fund in a way that could look like they're currying favor or trying to get in the president-elect's good graces before he heads to Washington. The latest added to that list now, Apple CEO Tim Cook personally donating a million dollars, not the company itself, but the CEO. We are out to Apple on this. We'll bring you updates if we have them. Dawn, back to you guys. I'll take it. Megan Casella, thank you. Value stocks are coming off a year of underperformance, lagging growth stocks

sharply in 2024, rising just 10 percent. Our next guest says growth names are overvalued and he's got a shopping list of value plays for 2025. Joining us now is Ariel Investments Vice Chairman Charlie Babrinskoy. Charlie, happy new year. Great to have you back on. Let's start right there. And the fact that once again, 2024 was a strong year for growth. We certainly saw it in the in the number of companies that swelled into the trillion dollar club, if you will. How does that position us for value? Where do you see value now? So like any good value investor, I'm not going to say I know what's going to happen in the short term. But what we do know from history is that the best predictor of future performance over the five, seven year time frame is forward multiples, that when markets are trading at reasonable multiples,

you tend to get reasonable performance over the next five to seven years. When things are at high multiples, you tend to get pressured returns. And that would indicate that value is set up pretty well. Large-cap value is set up pretty well. Large-cap growth not set up well. So large-cap growth trading at big premiums to their historic run rates. They are very popular right now. Value is very much out of favor. That makes us feel good. But I'm going to acknowledge I have said this for the last couple of years and growth has

continued to outperform. So where specifically do you see value and value that is not value traps? And I ask that knowing also that we've had a pretty strong run in the dollar and value that is not value traps. And I ask that knowing also that we've had a pretty strong run in the dollar and perhaps that puts small and mid-cap stocks in bigger focus. So there are a couple of sectors that haven't kept up where total production and capacity has been below historic averages. Number one is housing. America is not building the houses that it has historically or that we need. And a lot of that has been regulatory. A lot of that has been interest rates. And so I think both of those things are going to get better this year. We've got housing names trading at very attractive prices when I think we're going to get an increase

in both new construction and sale of existing homes. So that would be number one. We love names like Mohawk and Resideo, the thermostat company. The second is going to be regional banking. There has been, the regulatory environment has been terrible for mergers. An inverted yield curve is terrible for regional banks. Regional banks tend to borrow short and lend long. And so an inverted yield curve is just brutal. That's going to get better.

And we're going to see, for the first time time some takeovers, we think, in regional banking. We Love Bank of Oklahoma is my favorite name in that space. And Northern Trust would probably be next. And then the other out of favor space is consumer staples, some names like Smuckers that make Hostess and Twinkie products that right now people are worried about what Kennedy might do to those companies. And we think that's going to be temporary and people are going to keep eating their Twinkies and Ho-Hos. Charlie, have you explored the possibility that there's a structural shift in the U.S. economy, maybe global economy, where more value is accruing to digital players and more of the digital plays are being made by larger companies and the effect of that on value? That's the best argument for why growth is outperforming, that this time is different, that this time there's something fundamental going on in the market that's going to make

the higher valuations for growth stocks work out in the end. And we're always skeptical of that. People obviously said that in the 70s when digital computers and big mainframes were coming in and the nifty 50 stocks got so expensive. We don't think that fundamentally is going to change and that there are a lot of smaller companies that are benefiting from digital changes in the economy. But you're absolutely right. And I don't want to downplay this. I've said this for the last couple of years. And these digital AI stocks have continued to do well. So it is very hard to time this. If we are in sort of a new digital robber baron era where scale and ability to control and if not monopoly power, just outsized power matters particularly.

Does that affect how long it takes value stocks to come back stronger? I think value stocks can do OK in that environment with the productivity improvements that come from digital and AI. And of course, I'm going to point you to my favorite digital stock, which is Oracle, still trading at a sub 20 PE and the dominant player in data software, which is going to do very well in an AI world. But you're absolutely right. Small companies and value stocks are not going to be the dominant players in AI, but they can be a big beneficiary. We have names in banking that are going to take costs out. We have names like FAF, which are going to take costs out. So smaller companies can be big beneficiaries while the large companies fight it out amongst themselves. And we're going to talk about that later in the show as well. Charlie Bobrinskoy, great to see you from Ariel Investments.

Well, up next, eulogy for a steel deal. President Biden officially killing the proposed takeover of U.S. steel by Japan's Nippon Steel, citing national security concerns. We'll talk about that decision, how Wall Street is reacting and what could happen next. And later, we'll hear from the co-founder of multi-billion dollar aerospace and defense company Shield AI about using autonomous pilots in warfare and about the company's partnership with the S&P 500's biggest winner of 2024, Palantir. Welcome back. A steel deal scrapped. President Biden blocking the $14 billion sale of U.S. steel to Japan's Nippon Steel for a national security grounds in an order expected after

CFIUS deadlocked on recommending the deal. And the president had spent months, despite an ongoing review, publicly opposing it. The order requiring the companies to abandon the deal within 30 days unless CFIUS agrees to extend the timeline. U.S. Steel and Nippon, quote, condemning the move, saying it, quote, reflects a clear violation of due process in the law governing CFIUS, that the process was manipulated to advance President Biden's political agenda. The president's statement and order do not present any credible evidence of a national security issue, making clear that this was a political decision, quote, unquote. The company is adding that they will take action to protect their legal rights. Shares of U.S. steel tumbling on the news,

closing down about six and a half percent because this raises questions about the future of the 124-year-old steelmaker. Nippon had promised to commit billions to upgrading U.S. steel's oldest mills to honor union contracts, to keep the business independent, and this week, reportedly, to not reduce steel production at U.S. steel plants for 10 years without federal government consent. Now, without the deal, U.S. Steel has said previously that it may have to cut production and shutter some mills. Waiting in the wings? Cleveland Cliffs, which has come on this show multiple times over the past year to express its interest in buying U.S. steel for, as CEO

Lorenzo Gonsalves has put it, quote, a much, much lower price if the deal with Nippon folds. But today's order could have geopolitical and ironically national security implications, too. Japan is one of America's closest allies and one of the biggest foreign investors here. Experts are already saying this could throw cold water on future investments in and trade activity with the U.S. by allies. Also, one reason Nippon struck this deal? To counter China, which the Pentagon has called repeatedly the biggest threat to U.S. security. This is one to watch, John. Well, Trump has said he'd have done the same thing. Trump has said it. Vice President Harris has said it. It became a political lightning rod in part because the union has opposed this deal. But we'll see where it goes from here. You know, the CFIUS review and the fact that that deadlocked what those next steps look

like all remains to be seen. And I would be very surprised to not see some sort of legal challenge, especially since there is actually precedent for foreign investors and international companies owning and operating steel mills in this country for quite a long time now. But bipartisan hate for the deal anyway. Yes. Well, time for a CNBC News update with Kate Rooney. Kate. Hey there, John. A judge in charge of President-elect Trump's hush money case says he is not inclined to impose any jail sentence on the incoming commander-in-chief,

but Trump must be sentenced on January 10th. That's one week from today. In a new ruling last hour, Judge Juan Merchan denied Trump's motion to dismiss the case in which he was found guilty on 34 counts of falsifying business records to cover up payments to silence Stormy Daniels. Ohio Lieutenant Governor John Husted is emerging as the favorite for Vice President-elect J.D. Vance's Senate seat. Sources tell NBC News Ohio Governor Mike DeWine and Husted met with President-elect Trump at Mar-a-Lago last month. But it's unclear if Husted, who has a long had ambitions of being governor, would accept an appointment once Vance resigns. And Boeing and the Justice Department say they are working to reach a new agreement to settle the criminal case that stemmed from the fatal crashes of two 737 MAX jets in 2018 and 2019.

In a court filing today, the party said they are working together after a judge rejected the deal over a diversity and inclusion provision. Guys, back over to you. All right, Kate, thanks. Well, the materials sector was a major underperformer in 2024, but there's one thing that could happen this year to turn around its fortunes. We will explain next. And later, the CEO of cloud security company Zscaler joins us with a look at how the Chinese hack of Treasury and the incoming Trump administration are changing the threat landscape in America. Stay with us. Welcome back to Overtime. Stocks rallying to close out the holiday week with the S&P 500 turning in its best day since November. Let's

bring in Mike Santoli for a look at the market setup after these first two trading days of 2025, and I should note the last two trading days of the Santa Claus rally. Mike. Yeah, so you can put down the Santa Claus rally as a miss this year with only modestly negative implications going forward. It's really not a make or break. But interesting spot we settled on here,

right at the 50-day average for the S&P 500, basically not a make or break. But interesting spot we settled on here right at the 50 day average for the S&P 500, basically within a couple of points. We're also right near the middle of the post-election range. Remember, the high was right near 6100. The low since the election is in the low 5800. So we're churning kind of sideways here. But arguably, this next chart shows we're pretty oversold internally, meaning the average stock has done a lot worse. Therefore, you've already had your pullback, your reset. Here's the Nasdaq 100 against the equal weighted S&P 500. That gap has opened up again. You did see some narrowing today in the last couple of days. So arguably, you have the makings for a little bit

more upside work in the average stock, even if the overall index is still a seem a little bit more upside work in the average stock, even if the overall indexes still seem a little bit stuck. Now, a more profound move, a washed-out-looking basic materials sector, XLB is the ETF, and it's gone perfectly inverse, as you might expect, the U.S. dollar index. The U.S. dollar index has been surging, although it did moderate that gain today, pulled back a little bit, and you have this plunge lower in materials stock. That would be probably a source of relief if, in fact, the rally in the dollar were to pause just a little bit. No, you were talking about U.S. Steel. That's part of XLB as well. All right, Mike, thank you. Well, up next, Zscaler CEO on the biggest cybersecurity threats

facing the U.S. and Wall Street this year in the wake of China's hack of the Treasury Department. And Rivian shares jolting higher. The EV maker announcing it delivered more than 14,000 vehicles in the fourth quarter. That beat expectations of 13,000. Shares finished the day up more than 24 percent. Welcome back to Overtime. New details emerging in the hacking of computers at the Treasury Department, which the agency has blamed on Chinese state-sponsored actors, including reporting saying senior Treasury leaders' computers were compromised. Will an incoming Trump administration expected to take an aggressive stance against China? Could global cybersecurity tensions escalate in 2025?

Well, joining us for an exclusive interview is Jay Chaudhry. He is CEO and co-founder of firm Zscaler. Jay, good to see you. Happy New Year. So let me first get your expert reaction to this breach of Beyond Trust and what it indicates about the need for cloud security. I mean, it was called Beyond Trust, right? This is supposed to be zero trust and safe, but it didn't work out. So, John, first of all, happy new year. Every breach starts with typically stealing identity. And once they steal identity, they get inside your castle.

They're free to roam around and do whatever they need to do. It's a typical thing that happens out there. Identities have been stolen, identities will be stolen. The question is, how do you protect against that? There are two things every company needs to do. Number one, we do something called segmentation, which means if you go inside the castle, you should be able to go to

only certain parts of it. So you can't do a lot of damage. You can only get to certain sections. That's the kind of segmentation ZSkill enables. The second part is being able to understand some of the behavior of the users coming in. And you can look for anomalous stuff. Look at the example of an airport. Sure, you could steal someone's ID, but being able to watch the behavior of people, that's the kind of stuff Zscaler does at Zero Trust Exchange. So you can actually identify stolen credentials and able to stop those things.

It is a race with bad guys, and every enterprise need to stay ahead. So let's talk about your business in relation to this. You've talked about the strength of your pipeline heading into calendar 2025, your sales motion improving a bit. Talk about how customers are embracing these ideas and the pace of adoption, how that's affecting your business. If you look at the budgets overall, the budgets for cyber protection, especially zero trust protection, have been going up. Every CIO and CISO I talk to, either the budgets are up or they're flat, while the IT budgets in many cases are going down. That's number one.

Number two, there is deal scrutiny out there. The market is still somewhat tight. But when Zscaler goes in and says, I can give you better cyber protection, but I can also eliminate a lot of legacy security point products, firewalls, VPNs, all that type of stuff, then the customer is saying, I like that. Combination of better security and cost savings helping our business grow and deliver great value to our

customers. Jay, this Treasury breach happened on the heels of this other breach by Salt Typhoon, which is considered the worst telecom hack in U.S. history. It speaks to the fact that cybersecurity incidents are growing, the breadth of them. We know a lot of state-sponsored actors are behind them. For example, in these particular cases, China. How does that speak to how this threat landscape is evolving, especially with the increasing use of AI, with more autonomy, and now with potentially new policies coming with a new administration in a couple of weeks? Yeah. So first of all, it's not of any surprise to any of us that threats are growing. They're getting more and more sophisticated. Why is that? Well, number one,

there's money involved, ransomware. Number two, they want national secrets to get ahead. Number three, in case of war, they want to embed it in your infrastructure, such as salt typhoon. So nations like U.S. have to step up. It is good to see the progress our country has made in the past four years, implementing zero trust in lots of federal and state agencies. But a lot of our infrastructure is still fairly weak. Salt typhoon happened.

It's not a big surprise. Being able to steal identity is not a big surprise. Companies need to go to the next level of cyber protection. That's where Zscaler comes in to help. And I think we just need to be paranoid. AI is making it easier and easier to find all those firewalls and VPNs out there, find the vulnerabilities and attack them. So it is good to see CIO, CISOs and board members

are paying more and more attention to it. And we are proud to serve not only these public companies, but also our nation. OK, look forward to seeing you when earnings come out. For more on that and the progress, Jay Chaudhry from Zscaler. John, thank you. Thank you. Well, marrying expertise with algorithms. Up next, a look at the race to remake business analytics for the AI era. And alcohol stocks, a real buzzkill for investors today after the U.S. Surgeon General called for warning labels linking alcohol use to increased cancer risk. The AI trade this year will depend on industries figuring out how to use their best data to accurately train so-called software agents to make smart decisions.

Today, John takes time out with a CEO who thinks that means it's the business analysts' time to shine. Well, Andy McMillan is the new CEO of Alteryx, a data analytics firm that was public until Clear Lake Capital Group and Insight Partners took it private in a $4.4 billion deal about a year ago. Now, McMillan now faces the interesting task of remaking business analytics for the artificial intelligence era, something others like Pegasystems, Smartsheet are also working on. McMillan likes to come up with creative solutions to problems. It's something he got started on in middle school. And we were in a debate as a student council of how many school dances could we have that year. And the number one cost was the DJ. And I thought, well, my dad, you know, he's kind of techie. He's got this big

stereo at home. Like, I'll just bring that in and I'll be the DJ. And that actually turned into a DJ business that I ran from seventh grade through college, doing weddings and events, not like the cool kind of DJing, to be clear, just playing music, DJing. And my cousin was my business partner. So no scratching, I take it. Well, for Alteryx now, the main challenge is going to be marrying expertise with algorithms. That's going to mean empowering subject matter experts who understand industry data to train AI agents to better serve customers. That might sound like it's not a huge leap, but experts in areas like construction management or fashion supply chains aren't often fluent in software. We need people that both understand this emerging technology, right?

Technologists that get what AI can do and how you can use it and can kind of reimagine how a business might do it. But then you also need people that understand the industry, the business, you know, what are customers trying to do? And so you can imagine this point where people are going to have to say, you know, I'm a retail analyst. I understand how retail works. I have to be able to describe that in a way that now makes sense to an AI agent that needs to interact with my customers. And so that might be some outside help people are bringing in, but even that outside help is going to be that intersection of technology and business knowledge. So the timeout takeaway, industry AI experts. 2025 will mark a more intense search for industry experts who can embrace AI to get faster insights, deliver better service and make more sales.

Now, while Macmillan and Alteryx are trying to figure it out as specialists, hyperscalers like Microsoft and Amazon are also going to try to deliver that as part of their massive slates of digital services. It's probably a lot of growth and M&A at stake, depending on which side does it best. Morgan? It's going to be a fun one to watch. Up next, the co-founder of one defense tech startup on using AI to pilot fighter jets and other aircraft, and whether the U.S. is adopting these technologies fast enough. And check out this under-the-radar AI mover today. Shares of small-cap software company Sarence jumping 143 percent. On news of an expanded collaboration with NVIDIA relating to in-vehicle artificial intelligence tech. Overtime. We'll be right back. Shield AI had a big 2024.

The defense tech startup equipped F-16 fighter jets with its AI pilot to dogfight autonomously, even flying the Air Force secretary in one last May. The company's hive mind tech was installed in quadcopters that helped Israel rescue hostages. And Shield's own autonomous aircraft, the VBAT, was deployed by Ukrainian special forces to jam communications and find Russian missile systems. Brandon Tsang, Shield AI's co-founder, president and chief growth officer, says a global military transformation is occurring and that international forces may be moving faster than the U.S. in adopting new technologies. I actually would draw the parallel to the compute industry where the United States went from desktops to laptops to mobile computers.

Much of the developing world, they skipped desktops, they skip laptops, they went straight to your mobile phone. You're seeing that with the defense analogy. You're seeing that with our allies. The United States, we went from fighter jets and aircraft carriers to reapers and predators, and now we're moving to this world of intelligent, affordable drones, whether they're air, land, or sea drones. A lot of countries, they don't have this legacy military force structure, and they're going straight to the intelligent, affordable drones in the same way these countries went straight to mobile phones. So in an interview from the Reagan National Defense Forum last month, Tseng, a former Navy SEAL, also discussed the startup's recently expanded collaboration with Palantir.

This is a partnership in which the two share some proprietary software to develop autonomous flight with AI-powered intelligence and operational control, essentially bringing new capability to battlefields. When we look at the work that we're doing with Palantir, you're talking about a global intelligence operational picture that has a massive amount of data. And for Shield AI, we are working with edge autonomy systems that are operating on the edge, conducting missions completely autonomously. And so our systems, when you feed them with data that is coming from a global intelligence picture, they can better react, they can better maneuver on the battlefield at not just the tactical level, but the operational and the strategic level.

And then when you think about those systems, our systems then are feeding back Palantir's intelligence and operational picture. Founded in 2015, Shield AI was most recently valued at $2.8 billion in expanded Series F funding around about a year ago. I asked if an IPO could be in the cards and sang demurred, saying the team's focused on building a great company, great products, delivering to the warfighter, and doing that at scale. For more on my discussion with Shield AI's co-founder, scan the QR code that's right there on your screen or download Manifest Space wherever you get your podcasts. It's pretty incredible because I feel like I've been covering defense tech and space and some of these national, the intersection of national security and tech for so many years. And now it is really becoming a mainstream story with so many technologists poised to be involved

either directly or indirectly with the Trump administration and so much the conversation now around AI on the battlefield. Well, there's a thread running through that and what we're just talking about with Alteryx as well. With this phase of AI implementation, really people and process are the potential bottlenecks. Even if the software works, if it's worth, you've got to change the way you do things. You've got to have people who know the mission or the data well enough to link that in with training the software. And that potentially takes time to either raise internally or have consultants do it. Yeah.

Autonomy, whether it's in the air or on the roads, probably going to be a big story we continue to cover this year in 2025. Meantime, you get some more macro data, including a jobs report next week. So we'll be watching that. For sure.

And a lot more than that as all of these storylines continue to play out. Yeah. We had a strong Friday rally for the major averages. That does it for us here at Overtime.