Closing Bell - Closing Bell Overtime: Fundstrat’s Tom Lee On Why The Market Has More Room To Run After Today’s Fresh 52-Week High For The S&P 500; Baker Hughes CEO On The Energy Transition Ahead

Episode Date: July 12, 2023

The Nasdaq and S&P 500 close at fresh 52-week highs today. Fundstrat’s Tom Lee makes the case for more gains in the short-term after a cooler-than-expected CPI print. Baker Hughes CEO Lorenzo Simonelli on the global demand for energy and the future of LNG. Recursion stock soared 78% today after announcing a partnership with NVIDIA; CEO Chris Gibson on what AI can do for pharma. Morgan reports on a whistleblower lawsuit accusing Medtronic of prioritizing profits over patients. RXR CEO Scott Rechler on the state of real estate and the massive amount of commercial real estate debt coming due in the next three years. Plus, our Phil LeBeau on what to expect from Delta Air Lines earnings tomorrow. 

Well, as the stocks settle, S&P and NASDAQ closing at fresh 52-week highs just now on that softer CPI reading that sent Treasury yields tumbling, too. That's the scorecard on Wall Street, but the action is just getting started. Welcome to Closing Bell Overtime. I'm Morgan Brennan with John Fort. We have got such a big show coming your way. We're going to be joined by the CEO of Oilfield Services, Giant Baker Hughes, with his outlook on crude, LNG, and much more.

Plus, an AI-assisted biotech boost. the CEO of Oilfield Services, Giant Baker Hughes, with his outlook on crude, LNG, and much more. Plus, an AI-assisted biotech boost. Shares of Recursion are surging today after the company announced a partnership with NVIDIA to work on AI-driven drug discovery. We're going to talk to Recursion's CEO about that news. But let's begin with the market. Stocks closing higher after cooler-than-expected CPI print. Core CPI up just 0.2% versus last month. That's what our next guest was counting on when he predicted 100-point gain for the S&P 500 this week. Joining us now is Tom Lee, Fundstrat's managing partner and head of research. Credit where it's due, Tom. It's unfolding much as you said.

But you have a 4825 year-end target, I believe, for the S&P 500. That's another three hundred fifty five point seven and a half percent. What else has to go right for us to get there? John, a few things definitely have to go right. One of them is that inflationary pressures need to sort of be cooling that in a way that we saw in the June CPI report. And we're pretty confident like a 0.2 core could be seen for July and August. So I think it's repeatable. The second is that I think the Fed has to sort of start to accept that this is indeed a breakdown of inflationary pressures. And so they may potentially then reduce their notion of higher

for longer or the market begins to price it in. And that's not a guarantee. But again, we believe that's the case, especially because this is pointed to core being in the 3% range within a year. And the third is that investors really have to believe this because, as you know, many believe a recession is imminent. And I think earning season will really give us an idea. We'll know that in the next couple of weeks. But if a recession is not imminent, then I think a lot of folks are off sides. And I think that's what helps propel markets to all time highs. OK, so it sounds like you're saying that you need point two core for July and August. Fed needs to relax higher for longer. And yet we need to not be in a recession, which which if we were heading into a recession, that would be a reason for the Fed to cut.

So that's a lot to go right. Yeah, you're right. The Fed's trying to navigate a really difficult path that I think people assigned almost no probability to, which was a soft landing. But now it looks like they've achieved a soft landing because they telegraphed a massive increase in hikes last year. When Fed funds was under 100 basis points, they said they were going to be aggressive. Businesses got cautious. So we don't necessarily have companies tripping over themselves, which is what typically creates the recession dynamic. But at the same time, we can't have inflation linger and burning and then flare up again. Fortunately, consumers

aren't expecting that. But I think that the Fed can actually sort of breathe a little easier because the economy hasn't been destroyed. So is your expectation, Tom, that we're going to see another 25 basis points at the end of this month and then maybe that's it? Well, yes, I think July, you know, for credibility's sake, they have to follow through with that hike. There may be one more because they committed to that. But one thing viewers have to keep in mind is that last year, the market endured 500 basis points worth of hikes. This year, we only have another 50 in front of us. It's a lot less damage to the system, of which that of 25 may not happen. I think either way, if it happens, I think we can still

see earnings grow and get to all-time highs, actually. Yeah. I mean, we saw treasury yields really across the curve drop pretty dramatically today on the heels of this inflation reading as well. I wonder what your outlook is there, especially when you do see not only tech and growth names rally on a day like today, but also cyclicals. Yeah. I think the Treasury move last week was really telling because, you know, ADP, you know, historically, in my old firm, they called it a random number generator, really triggered a big jump in yields. And this year, a lot of this week, a lot of that was reversed. So we know the interest rate market's very nervous because they all believe the Fed when

the Fed says higher for longer. I think it's very good news that the yields are reversing because it does confirm to us that I don't think five and a half percent Fed funds make sense in a year if core inflation is at three. I think it would make sense for rates to actually come down next year, which means cuts. And again, that would be supportive of a cyclical recovery, which is why, as you pointed out, there's been a broadening of this rally. I mean, energy, stocks themselves, too, are quite important because they've started to participate as well. So it looks like it's almost all cyclicals plus commodities. Now, it sounds like, Tom, again,

you're describing perfection in a way that the Fed sort of pulls back from higher for longer, but we don't get a recession. Core CPI stays about where it was, you know, in June for the next couple of readings. And I guess the consumer holds up for the rest of the year on top of all that? Yeah, John, I mean, it sounds like a tall order. But I would say that I would look at it from the other perspective, which is for the folks that have expected calamity, because as you know, at the start of this year, many people thought we'd revisit the October lows of 3500. Their belief was that a recession was imminent, the consumer was going to break, the treasury refill was going to crash the market, that stocks had no business holding PEs, and it was only FANG, so everything else was lower and FANG would crash. So what we're seeing really is a market that is behaving more like a soft landing. And you're right, what I've described seems very difficult

to achieve, but this is sort of what is actually has taken place year to date. I actually think it's a lot easier now for inflation to fall from here because we know consumer expectations have been really anchored. So if consumers think inflation is three, it's not like they're going to be asking for 10% wage increases. So wage pressure should be diminishing. That's the last bastion of anyone who's trying to be hawkish would point to. But consumers, remember, wages follow inflation. They don't lead inflation. I mean, there's been some talk that you see disinflation take, you know, take on greater traction and that actually could be a double edged sword for the market. Case in point today, the transports, which actually finished the day slightly lower as we saw all the airline stocks sell off today on an 8%

a plus percent decline in airfares, airline fares in the CPI. How are you thinking about and parsing out this notion of, OK, maybe disinflation is good for the broader market right now, but it could also erode pricing power for some of these sectors and some of these companies specifically. Yeah, there's a change question, then a level question. But to me, we know that a little bit of inflation is quite good for corporate profits. So I think inflation at between 2% and 4% is very good for earnings and therefore very good for stocks. I think that the market's adjusting to the idea that at the start of this year, many people said inflation would be pinned at 4% to 5% for the foreseeable future. That was a widely held consensus view. The deflation you're

pointing out, I think, strongly argues that the inflation episode of the last 24 months was transitory. And if that's the case, the Fed doesn't need to stick at 5.5%. If the Fed funds moved towards 3, multiples could rapidly expand because a 10-year at 3.5% is, you know, a 30 PE for the 10-year bond. I think S&P PE should be expanding. Transitory. I feel like I haven't heard that word in a little while. Tom Lee, great to have you on the show. Thank you. Well, let's get to senior markets commentator

Michael Santoli at the New York Stock Exchange. He's looking at the run for the Nasdaq 100. Mike. Yeah, Morgan, try to put it in some perspective. Nasdaq 100, the big growth stocks, led again today. Take a look how it compares to the S&P 500 over three years, though. You see this has been a huge catch-up move. Yesterday, massive underperformance, something close to a 40% peak to trough decline for the NASDAQ 100. We've now caught up. It's just about parity, a slight advantage of the NASDAQ 100 over a three-year period. Actually, over two years also, neck and neck, similar, relatively smaller gain. So it

shows you not just that the market has been largely about piling on market value in the very largest growth names, but that you're taking back a lot of last year's punishment. So it's not really carving new relative upside valuations for the Nasdaq 100. Similarly, have gained back most but not all of their peak valuations from late 2021. Now, there is some of the action in the short term in the more spicy areas of the market, you might call it. Take a look at semiconductors, but also the ARK Invest ETF, as well as the meme stock ETF. The reason I love this is just how synchronous they are. That's kind of the same chart.

It's the same impulses pushing it higher. This is going to happen if we're early in a bull market, relatively early in a bull market. You're going to have the risky stuff. Buyers are going to be more indiscriminate. They're going to embrace the more aggressive parts of the market. But it can also mean you're getting a little bit stretched and overheated in the very short term. So you can keep an eye on areas like this as a little bit of a kind of a mood indicator for the more aggressive traders.

Morgan. Yeah, I mean, this got my attention. The second chart, in part because BTIG and Jonathan Krinsky over there wrote about it this week, too, and sort of this idea that maybe a surge of this magnitude in some of these meme names relative to defensive groups like consumer staples, which have underperformed recently, may indicate that there might be a chase for what hasn't moved up until now and raising the very same question. It's a completely valid point. It's one of the lines of thought that I would kind of keep on the radar screen. The thing is, the idea that when the meme stocks finally start

to participate in rally, it means that we're due for a setback in the broad market. That seemed to hold true when we were in this range bound, mean reverting market. If we're in a a setback in the broad market. That seemed to hold true when we were in this range bound mean reverting market. If we're in a real new uptrend, this stuff's probably going to work along the way, too, of course, with some more volatility. So it's tough to make a declarative call that says when meme stocks are doing well, you have to take risks down across the board. I would also remind everybody January was famously said to be, it's just the junk from last year that's rallying from depressed levels. It's too aggressive. It's not reliable. You did have a correction beginning in early February, but it did not necessarily

take us back to zero in terms of year-to-date gains. Reversion to the meme. There's some CNBC humor for you. There you go. I'll talk about buying quality. Look what happens. Mike Santoli, thank you. It's low quality. Coming up next, Baker Hughes CEO Lorenzo Simonelli weighs in on the outlook for crude, LNG and global energy demand. Overtime is back in two. Welcome back to Overtime. Shares of biotech company Recursion ended the day higher by nearly 80% after the company struck a deal with NVIDIA to use AI for drug discovery.

Recursion's CEO will join us in just a moment to talk about that deal. And what a move for that stock. It's almost parabolic today. All right, well, in the meantime, West Texas crude rising today, touching levels not seen since early May, while Brent crossed above $80 per barrel after that cool inflation data. Barron's even making the case today that oil is finally bottoming out. Joining us now, Lorenzo Simonelli, chairman and CEO of energy giant Baker Hughes. Lorenzo, great to have you on the show. Thanks for being with us today. Thanks a lot, Morgan. Great to be with you. And I'm here in Vancouver at LNG 2023. So nice to

be with you. And I want to talk to you about LNG. But first, just more broadly, I mean, energy tends to be cyclical. Oil field services tend to be, or at least investors tend to look at it as an early indicator of where markets are heading. From your vantage point, where are we in the cycle? Well, I think you've seen that there's been underinvestment in the sector over the course of the last few years. And as we look out at Baker Hughes, we see a positive cycle that's a multi-year cycle. As you look at international demand, it continues to grow. As you look at LNG growth, it continues to be there.

As China rebounds and as some of the developing markets continue to consume more, we see a very positive cycle for the next few years. Why are rig counts in the U.S. coming down then? Well, if you look at North America, it's more of a transactional, and obviously it's sensitive to the price and the volatility. But I think you've got to look at it from a macro perspective, what's happening around the world. There's obviously efficiencies in North America, but globally demand continues to be robust. And as we look at China, we look at other areas. And you may have seen from Monday what Fatih Birol said from the IEA,

we continue to see robust demand for the next few years, especially from the developing and China areas. Yeah. And I realize you're in a quiet period ahead of earnings later this month, but just to dig into that a little deeper, then does that mean that you see more opportunity internationally versus U.S.? Yes, we've said that, you know, we expect international to grow mid-double digit and that continuing next year.

If you look at the Middle East, you look at Latin America, you look at areas of Asia, we continue to see robust growth. And Baker Hughes is more exposed from an international perspective than in North America. So we've got good visibility to what we're seeing out there. And we feel very positive about the outlook over 23 and 24. Yeah. And Baker Hughes, as analysts point out, B of A, for example, today tend to be less exposed to energy market cyclicality writ large. You've got a big backlog. You do have that LNG exposure, which tends to be a longer cycle.

Given the fact that you are at this LNG conference, your outlook for natural gas? Natural gas is being better understood. And having been at the conference, I think the narrative is changing where people really see natural gas being a base load for the future and LNG continuing to grow. As you know, we've said that we see this year between 65 MTPA to 115 MTPA being FID. There's lots of good customer discussions. There's lots of activity. And we see this going into 24 and 25 as well. I think as you look at the last year, there's a realization that natural gas and also LNG plays a key role in solving the energy trilemma of sustainability, security and affordability. And we're thankful that we're participating in it.

Yeah, it speaks to the secular energy transition and the role that natural gas is going to play as a bridge fuel. Supply chain, how is that playing out for Baker Hughes right now? What does that mean in terms of costs and inflation, especially on a day where everybody is focused on CPI? True, and again, we look at this from a long cycle perspective. Clearly, there's been some inflationary pressure. There have been some supply chain hurdles that we've overcome. But as we look at the rest of 23 and also going into 24, we're managing those supply chain constraints and we've effectively put those into order. And also, we're starting to see some areas where inflation is abating. And again, we continue to be constructive on the outlook as we go forward.

You've also been making a lot of tech investments. I would be remiss if I didn't ask you about this partnership with C3 AI. It was the subject of an investigative report by CNBC recently, an investor lawsuit raising questions about that partnership. Are you still committed to working with C3 AI? And what is your response to all of the scrutiny that that partnership has received in recent months? Look, clearly, C3 AI can speak for itself. And we as a partner of C3 AI see artificial intelligence as a key proponent of driving efficiency and productivity in the oil and gas and energy sector.

And we continue to look for ways for optimizing solutions for our customers. And we think that AI is a critical component to the future and continue to explore different ways to bring that to the market. Okay. Lorenzo Simonelli, Baker Hughes, Chairman and CEO, thanks for joining us today. Thank you very much. Speaking of artificial intelligence, after the break, we are going to talk to Recursion's CEO about his company's deal with NVIDIA that sent that stock soaring today and the opportunities that AI can unlock in pharma. We'll come right back. Shares of biotech company Recursion soared 78 percent today after announcing a 50 million dollar investment from NVIDIA, which is going to speed up the development perhaps of recursion's ai models for drug discovery and joining us now from sun valley is recursion ceo chris gibson

chris quite a move today it's got investors paying closer attention to recursion again bringing you back to november levels on the stock i guess the question, how soon are we going to see whether this partnership and this AI platform really do provide the kind of advantage that recursion has promised? Well, look, we've got five programs in clinical trials now, some of those reading out next year. There's a number of other companies in tech bio who are bringing medicines into the clinic and through the clinic now. And so I think in the next 12 to 24 months, we're gonna start to see real proof points of the importance of ML and AI technologies

in bringing better medicines to patients faster. And we're excited to be moving in that direction. And some of the skeptical analysts out there before this big stock pop have been saying that before phase two ready assets you have your questions about whether clinical development is moving as quickly as investors had hoped. Does this speed that up at all or is this just all along you feel confident that that was moving apace and now there's just a tension on it?

Look, developing medicines is extraordinarily complex. There's a lot of regulatory interactions and I think every company who's working on many different programs has a lot of successes and a lot of failures along the road. I think we're focused on the long term and at Recursion we believe that by leveraging technology, automation, the newest tools in biology and chemistry, we have an opportunity to really speed up the pace and scale of drug discovery in the coming years. And I think that we know we're focused on the long term. We've had a lot of positive proof points over the last couple of years and I think that we're well positioned to hopefully show a lot of positive catalysts in the

coming couple of years as well. And I understand what that means in terms of your own pipeline. You've got five clinical programs it looks like, three of which in phase two or phase two, three studies. Is there an opportunity here for you to leverage what you learn from this and the tech capability to work with other companies and enable their own pipelines as well? Absolutely. We already have exciting collaborations with Bayer in fibrosis and Roche Genentech

in neuroscience and one oncology indication. And we're going to leverage these new models we're building in partnership with our friends at NVIDIA to accelerate our own internal pipeline, bring new, better medicines to patients we hope more quickly, to accelerate our partnerships with Roche Genentech, with Bayer, and hopefully other partnerships in the future. And I think we also have a plan in place to start leveraging these models that we're going to build with NVIDIA, accelerate the building of the models we've started at Recursion, and find ways to share those even more broadly,

even with academic researchers and others. Because ultimately, I think as you get to know patients who are suffering from these diseases, you really feel the urgency of trying to change this 10 to 15 years of investment that it takes today to get a medicine across the line. And with 90% failure rates in the clinic, all of us feel like there's an opportunity to leverage this technology revolution to go faster and do better. Of course, when we're talking about feeding these AI models, we're also talking about vast amounts of data. So just to go back to your own underlying technology,

I mean, you're focused on cells. What has enabled this vast collection of data that you're now going to use in this partnership with Nvidia? Well, if you walked into our headquarters in Salt Lake City, you would see a giant factory full of robots that are executing millions of experiments every week.

I like to say that they do about my entire PhD's worth of experiments every 15 minutes. And we're generating from all of these experiments massive omic data sets that are completely proprietary and they're built in-house at an incredibly high level of quality. And these data are aggregating over time and helping us look at the incredible complexity of biology and chemistry and using computer vision and machine learning tools to extract signatures and identify patterns in these data that no human would be able to pull out. And to give you a sense of scale here, Recursion today has generated over 23 petabytes of data. And to put that into context, if you took every feature-length film in human history in every language in 1080p, that's on the order of 4 to 5 petabytes of data. And to put that into context, if you took every feature-linked film in human history in every language in 1080p, that's on the order of four to five petabytes of data. So this

is a huge quantity of data. It's growing by hundreds of terabytes every few weeks. And I think that if you look at the space of AI across so many industries, we're seeing these huge shifts in the way that business is done. But what's different about biotech and drug discovery is that there are not publicly available training sets, training data. There's not high quality, widely available training data. And so what we started 10 years ago at Recursion was a company focused on building the data

alongside the computational approaches and putting those two things together, I think creates a very important virtuous cycle. Yeah, Chris, at the same time, a few months ago, I was talking to Sanofi CEO Paul Hudson about AI, and he was saying many of the same things about the potential of using their massive repository of data to aid in drug discovery, kind of speed the process, narrow down their focus to increase the likelihood of success. Is there any particular unique advantage that you have versus some of those giants that naturally have tons of data? Or is it just a question of you being nimble and smaller and we'll have to see how fast they can move?

Well, I think nimble and small is good in this case, especially in the area of new technology. But what the team at Sanofi is doing and what the teams at Roche Genentech and Janssen and other companies are doing is fantastic. We welcome every company in the space to start leveraging technology. I think what's unique about Recursion, though, is we've built data at a scale that rivals the large pharma companies, but we've built almost all of that data in the last 24 months. And if you look at the data sets that some of the large pharma companies are using, they've been generated over decades, and that's useful, important data, but it wasn't built fit for the purpose of machine learning.

It wasn't built with machine learning in mind. And so I think it'll be harder for them to extract the same kind of output from their data that we can extract from ours. And what's amazing about the approach we've built is that when we find an interesting hypothesis, we have a wet lab that's set up to allow us to test that hypothesis the next week or a couple of weeks later. And so we get excited when we're right or we're wrong. When we make a prediction and we test it and we're wrong, that is new data that can feed into a retraining of our algorithms so that the next generation is better. And I think that if you put us side by side with many of the large pharma companies, they of course have bigger clinical and safety databases, and

that's exciting. And we love partnering with them. But I think what we're building on the real wet lab side is pretty unique. All right. Chris Gibson, we appreciate you joining us today. CEO of Recursion. Thanks for having me. Stock finishing up the day at 78%. Kind of sounds a little like a possible takeover target, too, especially with this new deal, we'll say. I don't know. All right. Well, time now for a CNBC News Update with Brian Sullivan. Hi, Brian. Hey, Morgan.

Thank you. Yeah, the January 6th rider arrested outside the D.C. home of former President Obama in June will have to stay in jail until his trial. A judge gave the order today saying he was concerned that Taylor Taranto posed a threat to the public. Taranto only faces four misdemeanor charges for now. However, federal prosecutors have indicated more charges could be on the way. They say that Taranto also had hundreds of rounds of ammunition in his van when he was arrested near the Obama's home. Workers across Vermont are coming together to begin a major cleanup effort following the massive flooding in the state's capital of Montpelier. Vermonters are clearing mud and washing streets for cars to drive through.

Look at that. The Wrightsville Dam is at capacity, but officials say it is stable and the floodwaters are receding. Meantime, Elon Musk and Twitter's new X Corp are being sued for allegedly refusing to pay over $500 million in severance to employees. According to the complaint, about 6,000 workers have not received their full benefits since being laid off. And John and Morgan, are you like I am? Do you hate long, boring company meetings? I think most of us do. One company, though, Shopify, may have had the answer. They've assigned a cost to meetings. We'll talk to their CEO about it and how it may impact other companies. Could be the end of those long, boring company meetings. Let's one can only hope. John and Morgan, back to you.

I only like long, exciting family meetings. Yes. Yeah, those are great. All right. Especially with other people's families. No, no. Only with mine. Only with mine. Let me specify. Up next, Max Exoli, who's like a family member. He's back with a look at the relationship between stocks and bonds and what the recent outperformance of equities could signal about the rally's staying power. And check out Domino's Pizza as we head to break. Shares heating up on news of a partnership with Uber, where customers can order delivery through the Uber Eats platform. Shares finished up 11% today. We'll be right back. Welcome back to Overtime. Mike Santoli returns with a look at the relationship between cats and dogs. I mean, stocks and bonds.

Just about in terms of the somewhat incompatibility and the fact that people are very loyal to one or the other, not necessarily both at once. However, take a look at the last decade in stocks relative to bonds, specifically the Vanguard total stock market ETF versus the Vanguard total bond market ETF. We know that over long spans of time, most of the long spans of time, stocks do outperform. What I find interesting is the cadence, the fact that you kind of go up and then stay on a landing for a little while. You have these two year periods where stocks go sideways versus bonds or even chop lower. That was 2015 into 17. And then, of course, 2018 through the covid crash. Also back and forth, no real headway for stocks versus bonds. And here we have, again, another roughly two-year period when stocks basically did not make any advance relative to bond performance. And then this is a pretty

aggressive breakout right here. So each time after you've had one of these little sideways phases, you have had a pretty pronounced breakout by stocks over bonds. Now, it's worth asking the question if we can expect a longer-term stock over bond trend to take hold simply because in these other periods, you essentially had a relationship between stocks and bonds

that was a little bit more inverse. So when bonds were rallying, stocks were coming off. Now you have to wonder if bonds rallying and yields staying contained would also be accommodated for stocks and vice versa. Worth asking the question, but I do think it's interesting that it seems like the equities have wanted to try another blast off phase here against fixed income. What does this mean, Mike, though, for you're talking about bond prices? What about the yields and the opportunity in, you know, for returns in bonds, total returns versus for equities? Is there a way of sort of measuring that? Because it's different.

Well, the total return, the total return chart looks similar to this simply because he started out this period without very high yield. So it doesn't look like there was much there. But it is a good point, because right now, you know, the way I think about it is buying bonds. You have your first five percent of losses in stocks covered by the by the income you're getting off of the bonds. So they obviously work in tandem. Nobody's suggesting all one or all the other. But it is one of those deals where if you find yourself leaning too hard in one direction, consider that we may be in a period, at least by this evidence, where, you know, equities can can sort of leave bonds in the dust. And they're almost designed to do so. You don't always necessarily buy the bonds because they're going to appreciate in price.

Yeah. Yeah. And sometimes cats and dogs get along. You see the Instagram videos of the dog licking the cat. It is true. Says the cat.icking the cat. It is true. Says the cat owner over here. Yes. Mike Santoli, thank you. A recently unsealed whistleblower lawsuit alleges that the medical device giant Medtronic is at the center of a kickback scheme. Up next, the whistleblower speaks about what he says went wrong in an exclusive CNBC interview. Welcome back to Overtime. Medtronic, the world's largest medical device company, is under fire in a whistleblower lawsuit that accuses it of prioritizing

profits over patients. In an exclusive CNBC interview, the whistleblower alleges Medtronic sales reps operated a bribery scheme in a veteran's hospital, possibly jeopardizing the health of veteran patients and wasting millions in taxpayer dollars. A small Kansas hospital spent more on medical equipment than some of the country's largest facilities. Hospital staff allegedly bribed with lavish dinners and claims that doctors put unnecessary medical devices in patients' bodies. Tom Schrader is the whistleblower. Why speak out now? Because lives have been hurt for decades, and I would have thought the system would help correct that. Schrader spent 17 years working in the medical device industry, and now he's filed a whistleblower lawsuit seeking to hold one of the biggest players accountable.

The lawsuit says Medtronic and its subsidiaries bribed hospital staff to purchase its devices over those of its competitors and to purchase grossly excessive inventory. Schrader says he discovered the alleged misconduct occurring at the VA while working as a sales manager for Becton Dickinson, a direct competitor to Medtronic. For those who might say that you were a disgruntled former competitor, how would you respond? Anybody who thinks I'm a disgruntled employee just really

hasn't read the facts because when you read the facts, I think it speaks for itself. At the heart of the lawsuit, veterans treated for peripheral artery disease at the Dole VA. The condition occurs when plaque builds up in the arteries and blocks blood flow to the legs. Some doctors treat this disease with an atherectomy device, which removes buildup in the arteries and restores blood flow. Medtronic is a major manufacturer of these devices. There's a lot of money tied up in this business.

In its latest annual filing, Medtronic reported sales of nearly $2.4 billion from the segment that includes its peripheral vascular devices. That's almost 8 percent of the company's sales. Independent from Schroeder's lawsuit, the VA launched its own investigation in 2017, when the Dole VA's new medical director, Rick Ammitt, noticed the hospital was purchasing an excessive amount of Medtronic inventory. Ammitt, who still works in the VA system, declined an interview, but CNBC obtained his nearly six-hour video deposition.

RICK AMMITT, New York City Medical Director, Dole VA Medical Center, I have been running hospitals for 35 years, and this infuriates me. MARGARET WARNER, New York City Medical Center, Why does it infuriate you? RICK AMMITT, New York City Medical Center, This infuriates me because it feels like the Wild West. Medical experts say typically one to two of these devices is used per patient. But a sample of patient data the VA gathered in Kansas shows on average seven devices used per patient. And one veteran at Dole VA had 33 implanted. Data the VA gathered shows that this hospital was purchasing more devices than

some of the VA's largest medical facilities. Rough estimates early in the analysis showed that our costs were, it looks like, five million dollars a year more than they should have been in this department alone. Medtronic records show its sales reps taking the VA staff to expensive dinners. An order for a dozen oysters at $34, two orders of those filet mignon, two orders for $76, and it goes on. This clearly gives the impression that influence is trying to be asserted. Schrader says the alleged kickback scheme at the Dole VA wasn't just an instance of a rogue sales rep. I was an executive with a competing company, so I had a distinct understanding of what's visible to the higher-ups. Brendan Donilon, Schrader's attorney for this case, says this is a systemic issue. These pretty grotesquely large dollar

amounts had to have stuck out like a sore thumb, but you can choose to look the other way. The company declined an on-camera interview, but in a statement to CNBC said the allegations in this case are false and Medtronic will continue to defend the litigation as it moves ahead. Since 2011, Medtronic and its subsidiaries have paid more than $60 million in settlements related to allegations of kickback schemes and other health care fraud claims. The company also said it has cooperated fully with the Department of Justice in past settlements and when problems were found, took appropriate remedial action. You can have policies on paper, but unless you put them into practice and unless you

change your culture, it's going to keep happening. The individuals who sold to the Dole VA, who paid the bribes, are still working for the company and they're still selling at other VA hospitals throughout the country. Medtronic said Schroeder has admitted he has no firsthand knowledge about problematic procedures involving its devices. The company also said the doctors who performed these procedures didn't receive additional compensation for these surgeries or using the devices. In a statement to CNBC, the VA said the hospital's high expenditures were from Medtronic devices. It also said it shut down the hospital unit where these procedures were performed, but so far it's found no quality

of care issues in patients. ProPublica previously reported on Schrader's lawsuit in response to its story. Kansas senators urged the VA to contact patients that these procedures may have impacted. In a recent court filing, the VA said 59 veteran patients are having their medical records examined for, quote, possible substandard care issues. And John, you can find much more on this story and much more detail around all of this investigation on CNBC.com as well. Indeed, read it online this morning. Great work. Up next, the CEO of real estate investor RXR on which sector he thinks could get hit the hardest by a massive amount of commercial property debt

maturing over the next three years. We'll be right back. Welcome back. We have a news alert on Lionsgate. Shares are moving higher in the post-market session after the company filed with the SEC about its planned spinoff of Starz. CEO John Feldheimer saying, quote, the filming of the filing, I should say, of this Form 10 continues the process of planning for the separation of the studio and Starz businesses. Saying the move gives investors the opportunity to own both a pure play content studio and a premium subscription platform. Shares are up around 3% on light volume. Meantime, there's a massive amount of commercial real estate debt coming due in the next three years to the tune of $1.5 trillion. And our next guest says that it's a, quote, slow-moving train

wreck. Joining us now is Scott Reckler, CEO of RXR, a real estate manager and developer that owns properties across the U.S. Scott, it's great to have you on the show. Thanks, Morgan. It's great to be here. You've talked about this before, this slow-moving train wreck. What do you mean by it? Yeah, you know, what we've been experiencing in the commercial real estate space is this historic interest rate rise

has thrown a lot of these loans off balance at the same time that banks and other lenders are under pressure to stop lending to commercial real estate. So we have this spike in rates, which meant that loans that were financed when rates were near zero now have to be refinanced at rates that are two to three to four times more than it was before. So they don't work. And there's much fewer lenders that are willing to actually make those loans to those potential borrowers. So we're facing a credit crunch across the whole commercial real estate space. And then

on top of that, as it relates to office and multifamily, you have some strong fundamental challenges, offices on the remote work and people trying to understand the future. Of office space in the level of demand there and for multifamily. A surge of record supply of new units that are coming to market. Right in the face of this challenging credit period so on a day where

we had a softer inflation print and investors are cheering that maybe we are indeed getting closer to the end of a fed rate hike rate hiking cycle. This idea that you could see higher for longer in rates, that's really the risk here over the coming months and years. That's right. You know, and the thing, you know, why it's a slow moving train wreck, which, by the way, will eventually pick up speed is because as loans mature,

they have to be refinanced from rates that could be as low as your 2% to now 789% right and so that and that could be. One year out two years out of three years out so if it's. Higher for longer- you know every time those refinancing is occur. That's where the challenges occur

particularly for the multi family space on the office base. It could happen earlier than that because many of these buildings- require capital invested- and people don't want to invest capital. On the space on the office space it could happen earlier than that because many of these buildings uh require capital invested um and people don't want to invest capital uh without having uh balance sheets that are in balance and so they need to be addressed uh more quickly scott is there a way perhaps that this gets resolved that we're not seeing there's that saying in the industry if i

owe the bank five hundred thousand dollars it's my problem if I owe the bank $500,000, it's my problem. If I owe the bank $500 million, it's the bank's problem. There's such a big debt bomb across so many different banks and so many different places. Might there be some either government or bank industry-wide solution that causes this to play out in a way that's different from what we all expect? Yeah, first, I think you're right. If we can get some, you know, government action, which we've had some, which I'm pleased, you know, this past month,

the regulators came out and, you know, put down an edict that lending institutions should work with responsible borrowers where they can actually restructure loans or, you know, provide some relief during this period of illiquidity. But what we really need is fundamentally is we need the market to actually have more liquidity. Right. These these loans need to be re-equitized. I mean, Green Street came out this morning with a report that said, for example,

that office building values have come down about 30 percent and multifamily values come down 16 percent. That's for the value of the building if you think about just the equity which if someone puts 65 percent debt on it from the office building owner your equity is worth zero from the multi-family owner it's about half so you need to re-equitize that and and that means you need to have the private sector come in and work with the lending sector lenders to actually put new equity in and rebalance those loans as we go through this. We're doing it at RXR as an example. On office buildings right now, we have about $2 billion of office building loans. But to refinance them, the only lender that will do it are the existing lenders. And we're investing $700 million more as part of those refinancings to

rebalance those buildings. Now, we can do that, but now you've got to take that across the entire country to small owners, small operators. That's very challenging. And so we need to start creating liquidity in the marketplace, creating transaction, creates price discovery, and then hopefully that unclogs the plumbing. And then, John, to your point, that should enable us to re-equitize. But it's going to come with pain.

There's no doubt there's losses going to be here, right? The borrowers are going to have losses. The lenders are going to have losses. The regional banks are going to have, you know, heavy concentration on this. And so there's going to be challenges ahead. This is not going to be smooth and it's not going to be without some level of pain. Scott Reckler, it's great to get your insights on this. Thank you, Lauren.

Appreciate it. RXR CEO. And, of course, just ahead of bank earnings. See how this factors into the conversations, write-downs, and everything else. Yep. All right. Well, airline stocks have been taking off over the last two months, and Delta is leading the way higher.

Up next, find out what to watch for when Delta reports earnings tomorrow morning. Delta is set to report earnings in the morning. Investors waiting to find out whether airline stocks will keep soaring. After that report, Phil LeBeau has a preview. Phil. John, we are expecting strong numbers from Delta when it reports tomorrow. Remember, just a couple of weeks ago, we were down here in Atlanta for their Investor Day. They raised their guidance substantially for the second quarter to a range of between $2.25 and $2.50 a share. And the revenue was also brought up.

So what you're looking at here is a street that has increased its expectations in terms of what they think Delta will report tomorrow morning. But it's the question of what they say about guidance beyond the second quarter. What do they tell us for the first time about guidance for the third quarter? And as you take a look at shares of Delta, it's had a heck of a run here. It's at a 52-week high. What do they say about bookings after Labor Day, before the holidays? And do they change their full-year guidance? We will be talking with all of this after the numbers come out with Delta CEO Ed

Bastian. This is a Squawk Box exclusive. You don't want to miss what he has to say tomorrow morning, not just about the second quarter. We know it was strong. They raised their guidance already. The real question becomes the strength through the rest of this year. Guys, back to you. Phil, United had some operational issues over the last couple of weeks. Southwest did months ago. I know the airlines are doing well, but are there costs that these airlines, maybe not Delta, but maybe Delta, are going to have on IT that perhaps investors aren't factoring in here? We've already seen that with Southwest, and we saw that in the first quarter, and we'll likely still see some impact in the second quarter.

They outlined exactly how much they're going to have to be doing to increase their IT technology. With regard to United, I'm not sure that's necessarily an IT issue as far as the scheduling that was involved with the problems, particularly with the Newark hub. But you bring up an interesting point, John. They do need, all airlines are constantly investing in their infrastructure. A lot of that has already been allocated or at least earmarked for the future. The question becomes, does that have to increase in the second half of this year and well into next year? Yeah, it's a key point. You see with all the transportation companies, whether they're moving humans or freight, so much investment into their own infrastructure.

Phil LeBeau, thank you. We're looking forward to that interview tomorrow. We also get earnings tomorrow morning from Pepsi and Fastenal, which is the one I know you've been watching lately. I do. And also in the morning, I'm going to have, on the other hand, on Squawk Box. So I'll be and race based preferences in college admissions and tackle that one. Because I want to get away from controversy with on the other hand. I mean, you just run right away from it with that one.

All right, well, that's going to do it for us here. All the major averages, except the transports, ending the day higher. Fast Money starts now.