Closing Bell - Closing Bell: Overtime: IBM CEO On AI Deployment; CrowdStrike CEO On New AI Cyber Threats 01/11/24

Episode Date: January 11, 2024

It is finally here: the first day of trading for spot bitcoin ETFs. Marathon Digital CEO Fred Thiel and Mike Belshe, Bitgo CEO, on what it means for the price and the companies involved. IBM CEO Arvind Krishna talks AI deployment, the cloud and the company’s consultancy business. CrowdStrike CEO George Kurtz on how the company is adjusting to new threats as AI usage proliferates. Former Kansas City Fed President Thomas Hoenig talks the latest inflation data. 

A tug-of-war between the bulls and bears today with the major averages finishing essentially flat, even as mega-cap tech hit fresh highs. That flatness really belying the volatility we saw in the trading session. 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 Ford. And yes, Doc, staging a late-day comeback after a larger-than-expected inflation increase last month. Tenk once again outperforming the broader market and coming up an exclusive with IBM CEO Arvind Krishna on the company's AI and consulting businesses. Plus, spot Bitcoin ETFs.

They're now officially trading on Wall Street. We will discuss how that is impacting the crypto world when we are joined by the CEOs of Marathon Digital and BitGo. First, though, the major averages closing well off the lows of the session, on track to close higher for the week. Joining us now is Kenner Fitzgerald, head of derivatives and cross asset, Eric Johnson. Eric, good to see you. So, boy, you've been bearish for a while. I know it's a new year, but how does that pan out now?

You think you should be short, low quality, small cap. You don't think the growth trade is going to work for too much longer. But I guess you can't look at Bitcoin because it's tended to be good for that low quality stuff. And it's been higher. Yeah. So thanks for having me. So we think that the mega cap outperformance that we saw for most of 23 is going to resume itself and it's going to come.

We think that ultimately low quality, small cap cyclical is going to underperform. And we think that trend is going to persist until we see a economic downturn. But until then, you know, we like the MAG-5. We're not a fan of Apple and Tesla, as our clients know, but we do like the MAG-5, and we do like other large-cap, high-quality names. We think this is an environment where they'll do very well. And if you look at the—there was a lot of excitement came about at the end of last year around small cap and cyclicals.

And we didn't buy it. We thought it was very much a trading year-end phenomenon. But when you look at the fundamentals of small caps, their earnings estimates have been declining. They had negative year-over-year growth. They're most hurt by higher interest rates. They're most hurt by credit contraction. So this is not an environment that is favorable for that group. And yes, they've underperformed a lot over the last year, but that's not a reason for that to change. And so we think this trend is going to continue that

we saw in 23. And you think long-end bond yields have just about found a floor here. What does that mean for what you do with fixed income versus equities and at what duration? So we think the fixed income looks far more attractive on a risk reward basis than equities. Our view is that when I say that bond yields have found a floor, I think that until we have, until the market sees the economy really weakening, you know, if you look at the 10-year yield example, we think we're going to find a floor in that 385, 390 area with, you know, risk to the upside. And essentially, the thought process is we still have a Fed funds rate that's more than 125 basis points above where the 10-year yield

is trading. And so the 10-year yield is pricing in a significant amount of cuts when you consider the term premium that's also in those types of yields. But the reality is that I think over the coming couple months, we are going to find, I think, stability in the bond market and a lot of the big moves that we've seen over the last six months when we've gone from 3.5% to 5% back to 4%, I think those are probably in the short term probably behind us and is going to be much less volatile going forward. But there's a lot of places to be within credit, both private credit, within high yield, that we think offer very good returns relative to what you can get in the equity markets. Yeah. Financial is one of the worst

performing sectors today. Banks really taking it on the chin in terms of trading losses today. Concern about the bank earnings, which begin to kick off with some of the biggest banks tomorrow. How are you thinking not only about that sector, about how it is gearing us up in general for this earnings season and for Wall Street estimates that some would debate are perhaps still too lofty as we look to 2024? Yeah, so I think that this quarter's numbers are going to be fine. I think the outlooks are where they're going to disappoint investors. So, you know, regional banks certainly, you know, took part of that year-end rally of buying sort of smaller cap, beaten down, underperforming names. They got this big ramp into year-end. Well, now it comes down to the fundamentals. And I think that when

they report and, you know, people go through the numbers I think the quarter like I said will be fine but I think there will be continued concerns for the overall you know regional banks and yes the two-year yield has come down yes there are expectations for rate cuts but that's going to take time to impact the regional banks. And then, of course, you still have this looming issue out there around credit quality. And so right now, credit quality is essentially fine, but that's a looming concern that is not going to really go away. So that's going to be sort of an overhang for the group. So we do think that group probably will be under pressure, despite the fact that this quarter's numbers are probably going to be fine. We'll have to parse the conference calls that

kick off tomorrow. Eric Johnson, thanks for joining us. Pretty incredible. The S&P finishing at 4780, down just three points in what was a volatile session, given hotter than expected headline CPI just this morning. Well, we're going to switch gears to crypto, a milestone moment for Bitcoin. 11 spot Bitcoin ETFs began trading today. 11. Joining us now, Fred Thiel, CEO of Marathon Digital, the largest publicly traded Bitcoin mining company, and BitGo CEO Mike Belshi. BitGo is the custodian for Hashtex's Bitcoin ETF. So, Mike Belshi, I will start with you, given the fact that you are the custodian for one of these 11 ETFs that began trading today. How would you categorize the first day and the role that you're going to play with this ETF at a time where there's a lot of speculation that this new asset, this new investing instrument is going to bring more institutional players into the

market? Well, it's an exciting day for sure. Look, I think a lot has been said. Somewhere in the neighborhood of $3.5 billion of inflow into the various ETFs today, which I think is about in line with expectations. But this is just the beginning. You know, we've seen a lot of starts and stops with ETFs for Bitcoin over the years. So I think there's been some amount of like, let's wait and see what happens. Most institutions, I think, are still on the sidelines. And now they have a vehicle that's super easy for them to add to their portfolios. Those have been looking for something that operates under the traditional markets, have been waiting. And now it's here. So I think it's a huge, huge day for Bitcoin.

Fred, how are you thinking about it, especially since there is a camp out there that sees these Bitcoin spot ETFs as now competitors to equities that have a Bitcoin focus, such as Marathon, and have seen such big runs in those stocks in recent months? Well, I think, you know, and I've said this many times before, people who want more beta love things like the miners, because similar to in the gold industry, for example, is the miners across the board, even MicroStrategy, saw outflows. You saw a lot of selling as people either were repositioning into ETFs or simply believing that the ETFs would cause miners and MicroStrategy to go down in value. And so people shorted it. And you could see in the tape, really, there was a quick drop and then it leveled out during the course of the day. So I think this

is something you're going to see some rebalancing back and forth. But I think we're going to be back to business as usual relative to the performance of miners versus micro strategy versus spot Bitcoin and the spot Bitcoin ETFs once things settle out over the next 30 to 45 days. Mike, in light of this big moment for Bitcoin with the spot ETFs, I got to go back to basics because the trading in Bitcoin over years seems very emotional to me. And the narrative has gone from it's like gold to now it's a risk asset, like a meme stock. Now back to it's like gold. It's like you should own it because it moves. But what is it now? If people are going to add this to their portfolios, they should treat it like what? Well, look, it's an asset which is free of tampering from

the governments. It's independent of inflation, et cetera. Now, it's been a small asset, right? It just got started. It's a brand new technology. It turns everything up, up, upended. And so we're going to see a lot of change. Those that are interested in the volatility because they like to trade, well, OK, maybe that's a bit like gambling. But for the long term, the reason Bitcoin keeps winning, despite all of the claims that it's only for gambling. It doesn't keep winning. People who bought it at 60- or are still losing so what does it move based on i guess is my question like yeah okay it's a scam just about everything you can get as an asset you know a house you bought in 2007 was an asset but it wasn't a good buy what kind of an asset is

it look bitcoin has outperformed every other asset class over the last 10 years so uh to say that it's it's failed simply because it had a high that was higher than it is today is just a misrepresentation of what it's at. The reason it's important is because the supply is fixed. It's not tamperable. So when you buy into Bitcoin, you're buying into something where the rules are completely understood and it's fair for everybody from the smallest retail investor to the largest institution. All right. Gentlemen, thanks for joining us. Fred Thiel and Mike Belshi on day one of Bitcoin spot ETFs trading. It's time to bring in senior markets commentator Mike Santoli with a look at the recent slump in small caps.

Mike. Yeah, Morgan, you guys were just talking about it there with Eric Johnson, this interplay between the smallest, lowest quality, riskiest, beaten down small caps and then the largest mega caps that drive the Nasdaq 100. Well, here's two years of Russell 2000 small cap relative to the Nasdaq 100. What you see is really deep depth. I mean, that was a severe multi-year underperformance. By the way, right here, that peak was the very bottom of the bear market, which was led lower by the big MAGA, the MAG7 stock. So that shows you that basically the bear market was mostly about the biggest tech stocks, as was last year's rebound.

Now, what's interesting recently is a huge run of outperformance by small caps off the October low. But we've rolled right over and given up a good chunk of that relative performance. So it seems like it's still jury is out as to we have one type of market or another. A lot of folks did take some heart, though, if you care about the trading dynamics that that rally did break that relative downtrend. So, you know, there's still a shot here that Russell 2000 type stocks can stay in the game. It really does depend on expectations for earnings resilience, what yields do, and of course, how the Fed reacts to it all. Yeah. And of course, and there's been that argument out there that with the Russell 2000, I mean, you're talking about a higher percentage of operating leverage across this index, much

higher, for example, than the S&P 500. Many of these companies are still unprofitable. So how much hinges on that rate cut narrative? I think it's a combination of the rate cut narrative and the general sense that the rate cuts will rescue the economy or allow it to grow at a pretty decent clip. It can't just, to my mind, be, well, guess what? We lost the battle. We're going into a recession. But, hey, the Fed's going to cut rates to get us out of it. That probably means small caps lead the eventual rebound on the other side of it.

But it's unclear to me that we're willing to look across that valley if we think a recession is coming. Final point is, I don't think it has to be the case that it's either one type of stock or the opposite type of stock that works. Sometimes you can have somewhere in the middle where either everything participates or you have different subsets taking the lead from time to time. All right. We've been stuck in the middle in a way for a while. We'll see. Mike Santoli, thank you. Up next, an exclusive interview with IBM CEO Arvind Krishna on the outlook for AI regulation as company's biggest growth opportunities. Overtime's back in two. Welcome back to Overtime. IBM trading at levels it hasn't seen since 2017, raising the question, is this the moment in 2024 when AI could fuel sustained stock gains?

Well, joining us now with his perspective on AI consulting and more is Arvind Krishna, the CEO of IBM. Arvind, I'm still going to say Happy New Year, even though we're a week and a half in. It's my first time seeing you. Thanks for joining us on Overtime. Your portfolio is way different than it was four years ago. Your product and service portfolio, you've got Red Hat, you don't have Kindle. So to what extent can your consulting business now help you with AI as industries in 24 start adopting it? So John, happy new year to you

as well and to all of your viewers. I don't think I've been on the show this year at all. So look, if I think about AI, I think we've got to step back and accept how much AI is going to change the productivity of all the businesses we work with. McKinsey's estimate is over $4 trillion a year. On a global GDP of $80 trillion, that's 5%. As a business person, I would tell you there's very few things that can give you five percent more productivity or bottom line which you can then reinvest to get better top line in a given year so that kind of is what all the excitement is about and we all feel that as in any market early years are all going to be about deployment how do we get ai deployed and that is where our

consulting team is such a big advantage for us. Whether it's deploying our own AI or all of the open source models we work with or many of the partners that we work with, getting this deployed is going to unlock all those use cases. And we'll touch on those use cases, but one that particularly excites me is about code. Code as in programming languages and how it can make every one of those programmers more productive. Yeah, data ingest is one of those areas that's important. Getting data into data lakes, whatever you want to call them, so that it can be worked with, it can be analyzed, it can be useful for AI. How quickly are your consultants going to be able to do that versus other means of doing it so that we actually start

to see that sort of momentum and margin benefit for IBM for the preparation process for getting the use from AI? I'll give you a great use case from a client we are working with. So they were running a process. They had a lot of data inside the company. They bring in data from outside the company and they were preparing reports that they gave, some to their clients and some that they were selling. A two week process overall, in terms of hundreds of underlying hours of work

to do all that. Using generative AI to both do the ingestion process, do the report preparation and send it out, less than two hours. You think about that, two weeks to two hours and taking less overall complexity along the way, which also generally means fewer errors, I think that's the kind of advantage we're going to see. I think in terms of data preparation, all of the techniques in AI to sort of get rid of many of these people-based, rule-based processes and be able to ingest all of the data, huge market opportunity. I think that by itself is to be measured in the hundreds of billions each year for the next decade probably, John. Arvind, we talked about, I don't know, a little less than a year and a half ago, I remember.

And we were talking about the impact of the tight labor marketing. You said the fact that you have this technical and consulting workforce was going to be an advantage for you. I'm looking at your performance lately versus Accenture. You know, Mellius did this report we've had been, writes us on. You've done pretty well over the last few quarters, year over year, growth-wise. How, and I know this isn't earnings, so we're not talking about specific numbers, but how much can that continue based on the efficiency with which you feel IBM is moving? Look, I believe that this is going to be a decade-long play.

I've held a view, and I've been very articulate, that a lot of the advanced economies have a demographic deficit. By that, I mean we have fewer and fewer skilled people each year. It's just a fact. I'm not pro or con that. In that environment, those who have skilled people

are going to be able to win more business and be more productive with that. But it's not just enough to have skilled people can be are going to be able to win more business and be more productive with that but it's not just enough to have skilled people you've got to bring the technologies to bear that make the people themselves a lot more productive that's where ai comes to play that's where hybrid cloud comes to play that's where automation comes to play you mentioned data lakes they come to play play. And in the future, quantum. It's that combination that's going to drive growth of a sustainable nature. And every one of our clients wants to use technology to improve their business. So that is where we begin to get a great outcome, as you have seen over the last couple of years.

Arvind, I've got to ask you about a broader cultural issue. IBM's got a long history of hiring and promoting women, people from various backgrounds, people around the world for a long time now. Not many companies in tech are as old as IBM. And a few weeks back, a couple months back, you pulled some ads from Twitter, now called X. There's been a shift in tone and in attitude toward programs that have to do with what's sometimes called DEI. How are you and IBM navigating that change in external sentiment, and how are you leading this business now? John, it's very simple. Always when there is stress, when there is an environment, you should go back to one's principles.

IBM's principle has been that we want to be an inclusive workplace where our employees can bring their whole self to bear. I go back to a very simple example, one we're very proud of. In the 1940s, IBM promoted its first woman to an executive rank of leadership and significant responsibility. I think in the 1940s, 20 years before all of the other civil rights came to play, say something about our company. We intend to keep living by those principles even as time plays on. And I haven't spoken to you since the big, it's too much to call it a dust-up, November of 2023 with OpenAI and Microsoft. Sam Altman, he was out, he was in, you know, it's getting reformed. I know that you've got partnerships across the AI ecosystem. We've talked about Hugging Face and others. How, if at all, has that changed the type of conversation that you are having with potential customers as many of them seek to diversify the sorts of language models and platforms that they're working on? Yeah. So, John, you mentioned regulation, but regulation is in a

broader context of what should be the principles for responsible AI and responsible tech. And I'll mention two principles that we stick by, we endorse very strongly. And I think many nations around the world are beginning to endorse. One is keep AI open as opposed to closed and proprietary. And two, hold the developers of AI accountable. And by that I do mean to a legal standard of indemnity. So what we're seeing is more and more people are now asking those questions.

What is going to happen if somebody comes and sues us a couple of years down the road, or five years, or 10 years down the road? That's the accountable piece, and for models that we produce, we hold ourselves accountable and offer indemnity to our clients. The other part about being open is important. No, it's too important a technology to be held by any one or a small set of companies. You need

to promote an open ecosystem so different nations as well as different companies and different individuals can participate both in the production and the benefits of AI. And we find that this is a very mature conversation, at least in the boardrooms and the senior conversations that I have with clients personally. These topics play very well, and they all believe in that in a fundamental way. Finally, we got some inflation data today. We got jobs data just on Friday. Costs remain high. The job market loosening a bit, but still relatively tight. Are you at IBM as productive as you need to be? I believe that we are quite productive. And actually, John, I would turn around and say, I think that I would remain cautiously optimistic on the overall economy, both in this country and the globe, at least certainly for this year.

Unemployment is low. I project good GDP growth going forward. In terms of IBM itself, we are really happy with the productivity that not just the individuals, but the technology and tools combined with the people are bringing into our company. We feel very, very good about that. And I feel equally good about the next few years going forward. All right. We blew right through that time together. You've given us a lot to think about. Both puns included.

Arvind Krishna, CEO of IBM. Thank you. Great stuff. Thanks. Right size. Just sort of. He didn't say it, but that was sort of the message there on that last. I breathe a little easier if I worked for IBM on that. Well, what a week it has been for CrowdStrike's stock. That's a 15 percent week today. Up next, CEO George Kurtz on the outlook for the cybersecurity industry following the hack of the SEC's X account and so much more. Stay with us. Welcome back to Overtime.

I spoke exclusively with FBI Director Christopher Wray and General Paul Nakasone, director of the NSA and commander of U.S. Cyber Command, at an event for the CNBC CEO Council this week. We discussed how the agencies are working with the private sector when it comes to cybersecurity threats. Eighty-five percent of this country's critical infrastructure is in the hands of the private sector. And if you look at our innovation, it's higher than 85 percent. If you look at personally identifiable information, same thing. So the information that the adversaries want to go after is in the hands of the private sector. And as great as our partnerships are, we can't by ourselves investigate and disrupt our way out of that threat.

So we have to lean forward, which we are, in sharing information with the private sector so that they can use their considerable resources to better protect themselves against the theft of intellectual property, against cyber intrusions, and against farmland influence. If 85 percent of the critical infrastructure is in the private sector, we have to be able to talk to them. We started with one partner.

We have 850 partners today. It has made a demonstrable difference in being able to secure the defense industrial base. And this is the give and get, and at the same time, being able to understand what might be happening outside of what we're being able to see. Well, joining us now in another exclusive interview, CrowdStrike co-founder and CEO George Kurtz. His stock is up nearly 200 percent in the past year. George, it's great to have you on. I do want to get your reaction to that commentary, especially just in the last couple of weeks. And we mentioned it before the break, the SEC's X account with a false Bitcoin ETF announcement, the compromised account we saw there.

We saw deep fakes ahead of Bangladesh's recent recent election. And even just in the last couple of weeks, the targeting of water utilities by Iran backed hackers in this country. I mean, the world's becoming a more dangerous place. The cyber threats prove how borderless it is. What does that mean for CrowdStrike? What does it mean for cyber budgets, both on the government side and commercial side in 2024? Well, I think what you're seeing and what you're hearing is really how critical cybersecurity is in every facet of our life. We've talked about this many times, been on the show many times, and it continues to resonate day in day. If we think about our digital lives, if we think about our families, our kids, our workplace, our national security, it can't function without cybersecurity. It really is a critical element to

our society. And as I said before, it's come out of the back room into the boardroom and it's never been more critical than it is today. The role that AI is playing in this, there's pros and cons to this. Pros being what AI can do to detect other AI-based cyber threats. The cons being those threats themselves. I mean, in a day where you had Darktrace positively pre-announcing results this morning, calling out AI as a contributor, what are you seeing? Well, we know AI is a foundational component for security. We've been doing it since I started the company.

It was machine learning really in the early days. Now it's generative AI with Charlotte AI. And it is such a positive technology for being able to identify threats that have never been seen before and be able to stop the breaches, which is what we're focused on. On the flip side, certainly what it does is it allows the adversaries to democratize a lot of the bad things that they're doing. So if we think about some of the areas that we've called out, dark AI, the ability to have a generative AI technology without guardrails, right, that allows the democratization of these sort of esoteric techniques to many of the folks who don't have these skills, you're going to see

more and more cybercrime and you're going to see it happen quicker and quicker than it's ever happened before. The competitive landscape, I want to get your assessment of it, especially when it comes to one of the biggest players who's becoming bigger, Microsoft. Your take on that and how you navigate that relationship. Well, there's certainly a big player and, you know, you always have to respect Microsoft. At the end of the day, what are customers looking at when they're buying from CrowdStrike? They're looking for a company that's going to solve their problem, which is stopping the breach. They're looking to consolidate.

They're looking to save money. They're looking to make things easier and they're looking to get a positive outcome. From a CrowdStrike perspective, we don't do anything other than security. That is our job. Every day we wake up and we live in breach security and keeping our customers safe.

We're not building clouds and productivity applications and those sorts of things. And really, you know, what we've seen is certainly a crisis in trust on the Microsoft side and 48 new vulnerabilities that came out this week, continual breaches into these vulnerabilities and customers are just getting frustrated with that. And they're looking for church and state and not the Fox garden hen house. And I think that's an area where we've been very successful. George, good to see you. So the street is really believing in CrowdStrike to start the year. And some analysts, investors are trying to figure out how you're going to continue growing into this valuation. So I wonder about M&A. You haven't done a ton of acquisitions, but you just did do

Bionic, which gives you some more power around applications and APIs just a few months ago. Are you going to do more now in this environment? Well, we've always looked at the environment and really focused on can we get the best technology, the best people, and does it fit within our platform? Bionic Acquisition, I think, is a great example. Great tech, great team. It fits well within our cloud security stack and really gives us a leg up across our competition. We have one of the largest cloud security businesses in the world, and we'll continue to add to that. I think coming into 2024, you've seen a lot of the 2021 money that was raised by the venture, the companies that have venture money, and that's

going to roll over at different valuations. So we certainly are going to look at the landscape and be opportunistic where we can and where it makes sense. Okay. George Kurtz of CrowdStrike, thanks for joining us. Thank you. It's time now for a CNBC News update with Bertha Coombs. Bertha. Hey, Morgan. Hunter Biden just pleaded not guilty in a Los Angeles courtroom to all nine counts in the indictment against him. He was indicted for tax-related charges for failing to pay more than a million dollars in taxes for several years. The judge proposed a June 20th trial date. CVS will close dozens of pharmacies within Target beginning next month in an effort to pare down its retail footprint. It's part of the

company's plan to close about 900 stores by 2024. Affected employees will be moved to other roles while prescriptions will be transferred to other locations. And scientists have determined that a set of fossils found in New Mexico are a new species of Tyrannosaurus. The fossils previously found in 1983 were thought to be of the legendary T-Rex, but subtle differences showed it to be a separate species. According to the researchers, the new species would have been larger in size and lived several million years before its famed cousin. I see more Jurassic parks in the making here.

Back over to you, John. All right, Bertha, thanks. Larger, but Morgan, were its arms any longer? That is the question. It doesn't look like it from that depiction. Not from the picture. But I also say T-Rex, super, super, super collectible among fossil enthusiasts. Be curious to see if they find more of these and what that looks like on the market.

All right. Well, up next, former Kansas City Fed President Thomas Honig on what today's hotter than expected inflation report might mean for the Fed and the economy. And if you love the show and want even more overtime. Double overtime. You do. Scan the QR code on your screen and follow us on LinkedIn, where we will post exclusive content and lots of it. Stay with us.

Welcome back. We have a news alert on Apple. The company announcing some board changes this afternoon. Al Gore and former Boeing CFO James Bell will be retiring from the board. Wanda Austin, the former CEO and president of the Aerospace Corporation, will be joining the board. She was the first woman and the first African-American to hold that role at the Aerospace Corporation. So we will keep an eye on that.

It's kind of interesting, right? Somebody with a space background who's now on the board at Apple. I mean, she's been on a number of boards, but. Yeah. And James Bell was from Boeing. So I guess filling that void. Yeah, it kind of fills a void in a way. Well, stocks were flat today as investors reacted to a slightly higher than expected CPI report.

So how might that impact the Federal Reserve's rate cut timeline? Here to weigh in is the former Kansas City Fed President Thomas Honig. Thomas, good to see you. So last time you were on back in December, I think we talked about this and you said that if the CPI came in not so hot, you would expect cuts. Well, it came in hotter than the numbers that you gave. So what now? Does the Fed just accept without outright saying that 3% is OK? That's a very good question. And I think this number came up higher. But I think the more important information on this is that the CPI total inflation has been in the 3% or higher level

since the middle of 2023. So it hasn't really been coming down as that expected. And their willingness to rely on the long and variable lags of monetary policy to break it down. So they have a new dilemma. But it appears that they're going to accept three percent as good enough for now. And therefore, they're unlikely they're going to raise rates. They've made that very clear. But it does affect the timing of the rates going forward. And I think they're still going to rely on the idea of lag effects. Consumer is slowing, except their earnings are rising. And how will that play out? Investment is slowing, except for technology. We have chips, infrastructure, and green energy. So how will those two play off one another as far as growth going forward?

So I think they have some challenges ahead of them. And if I can say one other thing, they're shrinking their balance sheet as this takes place. And that means there'll be upward pressure on interest rates if this continues, especially as the government has to issue enormously larger amounts of new debt. That kind of pressure will then, I think, put pressure on the Fed to stop quantitative tightening in the middle of this. So they're in a tough position. Go ahead, ask me. So which from your seat is riskier right now for the Fed, cutting too soon and restarting an inflation inferno or holding too long and

triggering a recession? I think if they cut too soon and reignite inflation, they'll lose a lot of credibility, and they can't afford to do that. So I think that's their bigger risk. And I think they're weighing that against the fact that they do know quantitative tightening is having its effect as well. So they're in a dilemma. But I do think their greater risk is cutting too soon. If they lose that momentum, their credibility will fall, and I think inflation will be much harder to bring down to that 2% later. Thomas, we seem to have a little bit of a wild card here. And what I mean by that is we've seen the unwinding of these pandemic-era supply chain shortages

that did push prices up, particularly on the good side. Now you have conflict with Houthi attacks on commercial vessels in the Red Sea. You've got reports just today that Tesla may halt most Berlin site output due to that. Maersk warning that it could take months to reopen the Red Sea shipping route. And now reports, even just in the past hour or so, that the U.S. and the U.K. are preparing launch strikes against the Houthis in Yemen. As you see this scenario play out in a key trade route, how real is the risk to some of those areas where we've seen not only disinflation, but even deflation reigniting and reversing? Well, I think those events would have, I think, more effect on slowing the reduction in inflation unless we do break out in a global

conflicts all over and stopping trade. Otherwise, they'll have some effects, but I don't think they'll be the major factor causing rapid increases in inflation. They have that to worry about. I think, I mean, it's something they have to worry about. It's not the overwhelming factor at the moment. I think at the moment, they still have very strong labor markets pushing forward. They have a lot of demand in the economy, and they have a lot of debt to refinance. It's going to push interest rates up. Those factors will both push inflation up and pull back, and they're trying to thread that needle.

And they are in a difficult spot trying to do just that. But I think overall, while the bigger risk is easy to do soon, they're going to be under enormous pressure and a lot of temptation to go ahead and reduce interest rates at some point in the first half of this year. Okay. Thomas Honig, always great to get your thoughts. Thank you for joining us. Thank you. Thanks for having me. Today, there was a big merger in the energy space. Yesterday, there was a big tech deal. Up next, Mike Santoli looks at whether even more M&A is about to take off. Welcome back to Overtime. Chesapeake Energy closing higher today after announcing it will buy Southwestern Energy for $7 billion.

Could this be a sign that more M&A activity is on the way? Let's ask Mike Santoli. Mike. Yeah, John. Well, at least the atmospheric conditions for a higher volume of M&A activity seem to be in place. Morgan Stanley tracks such things. You can imagine they have a vested interest in seeing maybe more deals happen. While this blue line is the percentage of their forward looking M&A leading indicators gauge in positive territory. So it suggests that you do have the makings. This is financing conditions, things like that in the market that tend to feed higher deal counts. Now, you look at how weak it's been. It's the better part of two years. We're comping negative on the number of deals year over year. So clearly there should be some pent up demand for some transactions,

maybe starting to see the early signs of that coming through in the last, let's say, couple of weeks. Yeah. And Mike, George Kurtz, CEO of CrowdStrike, just told us that some of that startup funding from a couple of years back might be running out and rolling over, putting some pressure on for folks to sell. I guess that could be one of those indicators. No doubt about it. I think motivated sellers is kind of the first stage of when you start to see these deals coming through. We've had kind of a bear market, a partial recovery. A lot of companies have a better idea of exactly what valuation they might be able to to realize out there. And again, yields down, Fed probably done.

All these things suggest we should see more action, you know, remains to be seen whether it comes through. All right. Mike Santoli, thank you. Hertz, so bad. Up next, why Tesla's price cuts are having a ripple effect on a major car rental company. Welcome back to Overtime. Shares of Hertz dented today. The company saying it's selling about 20,000 cars from its EV fleet. Lots of Teslas. Here's Hertz CEO Stephen Scherer this morning on Squawk on the Street on the idea that customers are renting Teslas as a way to experiment with driving one. It's just not happening at a level of demand that justifies us maintaining a fleet of this size at this moment in time. You know, Carl, the one thing I would say is that at some point, the reality of EVs and Teslas being the best selling car will at some point

render them the best rental car. It's not yet. Not this year. Hertz ordered 100,000 Teslas, remember, in 2021 and said then that by the end of 2024, this year, a quarter of its fleet would be electric vehicles. But it turns out Teslas are more expensive to fix than other cars. And when Tesla slashed prices last year, it hurt Hertz. Here's Cher again on that impact. We're experiencing the consequence of a material price decline in Teslas, but in EVs more generally. So at the beginning of this year, when Tesla took down the price of their cars, residual price falls, depreciation goes up. That's obviously a cost to the business. We need to face that reality.

Tesla did what they did for reasons that are presumably good for their company. But we just need to adjust to the reality of what the cost input is of this car. And so we've made this move to really put ourselves back on track. The damage from the Hertz fleet sale, 245 million in non-cash depreciation expenses. That pencils out, Morgan, to a paper loss of more than $12,000 per car. It really, it also, I think the fact that we've seen gas prices come off as well has probably not helped the situation either in terms of renters' appetites to take on these cars too. There's probably, it's a little bit of a perfect storm, it seems like. People rediscovering gasoline.

While we're on the topic of planes, trains, and automobiles, Boeing shares tumbling this week after the FAA grounded dozens of its 737 MAX 9 airplanes for urgent inspections when a door plug blew out in the middle of an Alaska Airlines flight on Friday. So, is the bad news already priced into the stock or has this new safety issue doomed it? Well, QR code, let's get it up there. I argue both sides of the debate in my latest installment of On the Other Hand. And there you go. You can also type in CNBC.com slash OTOH, sign up for the newsletter through that. You can read the argument. Looking forward to it. Up next, space infrastructure as a service. How one startup is trying to make space accessible

to more companies. Stay with us. What if you could get access to space without having to build your own hardware or launch a satellite? What if a company could offer their space infrastructure as a service? Well, that's what Loft Orbital is betting on with its virtual missions. The startup is already running some on a satellite currently in orbit, but the first spacecraft completely dedicated to this business model, Yam 6, will launch via SpaceX as soon as March. So this idea of flying software payloads in space. And so Yam 6 has a couple of cameras on it. It has some RF sensors. It has an inter-satellite link, so it has real-time connectivity to the ground. And it has a bunch of GPUs and other compute systems that allow us to run customer software apps on board. So our business model for Yam6 is almost to treat it like a data center.

We're essentially renting out capacity of both the sensors and the compute on board to any customer who has any application they want to run. So think computing capability for AI workloads. Alex Greenberg, Loft's co-founder and COO, says Microsoft is both a customer and a partner on EM6. Others have signed on as well. Loft Orbital is essentially selling computing sessions, meaning the satellite gets utilized almost 24-7, generating revenue around the clock. How can Loft pull this off as an industry first? Well, bystander satellite buses from the likes of Airbus and outfits them with hardware and

software that enables a plug-and-play approach to ad centers and those compute capabilities that are needed. It's actually been commoditizing the satellite payload process for a couple of years now. Now it's taking the next step to offer access, well, virtually. So you can listen to my full interview with Alex Greenberg on the Manifest Space podcast wherever you get your podcasts. All right. And meantime, coming up tomorrow, earnings season ready to kick off with a bang tomorrow when big banks begin reporting bright and early in the morning.

Investors should watch results from Bank of America, JPMorgan Chase, Citi, Wells Fargo, and BNY Mellon. And then our Leslie Picker has an exclusive interview with Citi CFO Mark Mason. That's tomorrow, 3 p.m. Morgan. If the KRE regional banking ETF makes it through the end of tomorrow above 50, it'll be a solid month. It's been there. All right. We'll continue to watch that. You also get Delta and you get healthcare heavyweight United Health tomorrow. The other thing to keep an eye on is all of these reports that have really just bubbled up in the past hour about the U.S. and U.K. preparing to launch strikes against the Iran-backed

Houthis, given all of the activity we've seen in the Red Sea and Suez Canal. So something to watch. Yeah, that'll do it for Overtime.