Closing Bell - Closing Bell Overtime: Keith Rabois On Role In Silicon Valley Bank Collapse; NBER Director Charles Dallara On Calls For More Banking Regulation 3/29/23

Episode Date: March 29, 2023

Founders Fund was fingered in the days after Silicon Valley Bank’s collapse as a possible accelerant for the failure. General Partner Keith Rabois talks why that wasn’t the case, why TikTok should be banned in the US and why researchers should not pause AI experimentation. Meanwhile stocks closed near session highs as the averages shook off Tuesday’s declines. Axonic Director of Research Peter Cecchini talked the market action and Loop Capital’s Anthony Chukumba gave instant reaction to RH’s earnings. Jon Fortt walks through why Intel had its best day since November and NBER Director Charles Dallara talks calls for more banking regulation.  Our Kate Rogers reports on former Starbucks CEO Howard Schultz time in front of Congress today and Meg Tirrell analyzes the lack of generic drugs on the market. Plus, Macquarie’s Tim Nollen on Q2 opportunities in the communication services sector. 

Well, you got your scorecard on Wall Street, but winners stay late. Welcome to Closing Bell Overtime. I am John Fort. Morgan Brennan is off today, and we are gearing up for another busy after-hours session with earnings results from high-end retailer RH just moments away. And later, we're going to talk to Keith Raboy, general partner at Founders Fund, which reportedly pulled its money out of SVB in the early days of the crisis. And some investors advised clients to do the same. But now let's get into the market action.

A strong day for the major averages. Joining us now is Peter Cecchini from Axonic. Peter, today aside, I mean, how much of this has to do with consumer confidence? How much of this do you think investors should maybe fade, sell? Hi, John. That's a great question. You know, we would all love to believe that the issues with regional banks are well in the rearview mirror. And certainly the Treasury and the Fed acted decisively to restore confidence and prevent a broader contagion. But, you know, I think the takeaway

from what happened there is that banks will be less profitable lenders and less willing to lend. And consumer confidence, which has already been challenged, and demand for loans, which has already been quite moderate, and in fact contracting based on the Fed's own surveys, I think will suffer even more in the sort of wake of what we just experienced over the past couple of weeks. Yeah, that's what I wonder. And this conference board consumer confidence index being up so much versus expectations. It seems like consumers were saying they're especially excited about what happens six months plus from now. But isn't that what the Fed was saying is really hard to tell where they think we're going

to feel the impact of this credit tightening? And when some people have been telling us, well, that's probably when we're going to get a recession right before Q4. Right. You know, and it's what's interesting about the conference board survey versus Michigan is they're quite divergent. You know, the Michigan survey, even on an expectations basis, as well as, you know, current sentiment, has been quite a bit less bullish relative to consumer expectations and conference board. And frankly, both within the context of history have not been spectacularly strong. So, you know, I've had some difficulty sort of reading much into either one relative to positive consumer expectations. And I've actually sort of

taken the other side of that saying, you know, look, consumer expectations have actually not been all that great in the context of history. So what are the best ways in this market to take the other side? You know, regional banks maybe look expensive, but you might be afraid to buy them because you're thinking, well, maybe other investors out there know something that I don't. Do you buy them here or do you have to be extra selective because there's going to be consolidation and maybe some of those smaller banks will have trouble? Yeah, I mean, you know, one of the things that these sorts of dislocations do is it provides opportunities for those who are willing to do their work and do their research. The dispersion of performance is likely to be quite great among regional

banks. We're about to come out with a piece that actually identifies, you know, banks that we think are at the greatest risk based on their lack of loan loss provisions and reserves relative to deposits. And, in fact, the four banks that failed took very low provisions. So there will certainly be winners and losers. The banks, the regional banks as a group look inexpensive, but there are clearly going to be opportunities to buy regional banks inexpensively at this point. Let me close by asking you about mega cap tech. Apple and Microsoft both comfortably above two trillion in market cap. Apple at two and a half. And that's been the flight to safety. Right. That's been propping up a lot of major indices. Should investors run from those or do they remain safe?

Well, we know this is your wheelhouse, John. You know, it's interesting to realize that, you know, they're more than 15 percent of the S&P 500. And one of the reasons we can't look at the VIX anymore as a real gauge of broader market volatility, you know, as Mike just pointed out, is because of that. It certainly, to me, makes the market more fragile. That is to say, when you have so few names carrying an index and keeping volatility low, it doesn't take much to wobble the index, in my view. Yeah. You don't want Microsoft to tear its ACL in this, or you might have trouble winning a championship. Peter Schicchini from Axonic, thank you. Thank you. Thank you. Now let's get to our champion on the markets, senior markets commentator Mike Santoli. Joining us now from the New York Stock Exchange.

What are you focused on this afternoon, Mike? I thought it was going to be the wounded warrior over here. No, not just yet, John. Just thought I'd take a snapshot of the S&P 500 after we did get this little bump toward the end of a quarter. Where it sits along with the longer term trends right here, 50 and 100 day moving average. You see, we've been kind of trapped between that for a good part of the last couple of weeks. So a little bit trendless. It makes sense to be a bit sideways. The 200 average itself is basically flat. I mean, it's actually slightly down the last week or so. So it itself is not showing you even the longer term trend over the last, call it, you know, nine, 10 months or anything like that.

So if you got above just to stay the 50 day, it's going to give some people a little bit more of an idea that things are gathering in a more positive direction. But again, it's very hard to get away from the idea that we are caught between these offsetting currents of recession fears, the inflation fight, the Fed, but also a very strong current economy. Now, longer term, how does the market trade in relation to recessions, recessions that have actually happened? This goes way back. Fidelity put this together all the way back to the late 1950s. The dots are the time when the stock market bottomed as associated with a recession. And what you'll see is GDP growth still going down in most cases, often had not happened right at the very bottom. Now, occasionally it has. That's late 70s, early 80s. Here's the great financial crisis. You did have a stock market bottom coinciding with the worst of a recession.

But more often, the stock market bottoms really before you've you've borne the brunt of the recession. The one that I would point out as an outlier, it's one to keep in mind that was very frustrating, is right here. That's the early 2000s. Stock market, the recession was brief and relatively shallow, and it came and went, and still we had a bear market making new lows. There was a lot else going on, accounting scandals, 9-11, huge overvaluation to start in tech. So, you know, there's no specific ways it goes. But when you start to see the evidence of a recession in place, John, it's not the time to start getting bearish on stocks because the market will have gone some distance toward figuring that out already. So, Mike, what does that mean for us now? Because some people thought they saw the evidence a while ago. But, you know, now, no, I don't think most people would

argue that we're in a recession now. Are we looking for new evidence? Is SVB evidence? Is it not because it got, I don't know. I don't know either, John. It's absolutely the correct point to emphasize right here is that you have very plausible folks saying, you know, we're not really in a recessionary kind of lead up right now. It doesn't seem that way. Growth has been sturdier than you might anticipate. Others are saying, look, you don't get a good preview from things like employment, from things like even surveys. What you get is the yield curve says what it's going to say. And then you might get some financial market stress that could lead us in that direction. So I do think we're coming up such a high level of absolute activity with inflation

plus growth just being, you know, very, very significant in terms of nominal GDP that it doesn't feel like it's recessionary, even though we might be going towards stall speed in real terms. All right, Mike, restoration of hardware earnings are out. So I'm going to get over to Steve Kovac. That stock initially dropped maybe, you know, 6% or so, but it's come back some after hours. Steve, what do the numbers say? Yeah, that was on a miss, John, on the top and bottom lines.

So let me give you the numbers here. The EPS coming in at $2.88. That's versus the $3.34 adjusted the street was looking for. Revenue was also a miss, $772 million versus $779.8 million. Guidance for the full year, John, also below expectations. The company citing just uncertainty in the housing market and things like that. Up to $3.1 billion in revenue for the year they're expecting. Analysts were looking for about $3.5 billion, John. All right, Steve, thank you. Let's go to some instant reaction now to those numbers. Joining

us now, Loop Capital equity analyst, Anthony Chukumba. Anthony, you were concerned about restoration hardware, about the margins, about the outlook. Is this just as bad as you expected? Worse? It's a little bit worse than we expected, certainly. To some extent, I mean, probably not completely unexpected given the macroeconomic headwinds that, you know, that your colleague referred to. Existing home sales have been down sequentially the last 12 months. Prices have been down sequentially the last six months. You know, RH is very, very levered to existing home sales, particularly luxury home sales. So a bit surprising, not entirely surprising. So given the strong consumer confidence number from the conference board we got today, I'm

wondering how to think about that, especially given that the consumer is expecting, boy, six months from now, things might be really good. But a lot of people we have on our air are saying six months from now, it's really hard to see how they are good does that mean that restoration of hardware is potentially going to do better because people are feeling better or they're going to do worse because people are feeling better than they should I mean quite frankly when you look at a consumer competence number it's a very sort of broad number with RH you know this is a company

that's really catering to like the top 1 percent. And so, you know, you'd have to look at consumer competence among that top 1 percent. And it's not great, right? I mean, particularly when you have, you know, Silicon Valley Bank and Signature going under. And like I said, this very kind of like high end home market that's just not in great shape right now.

So, I'm not really sure if I would read too much through that consumer confidence number to RH's results. But what can we read through to? I know William Sonoma had some results. There's some others in that luxury category that RH sort of competes with. Who's after RH that perhaps we should be eyeing now for similar impacts? You know that's a good question I mean that you know I guess anyone who really caters to you know sort of high end luxury

consumers whether that's like an. LVM major occurring or you know an Estee Lauder- you know that I it's it those are the same type of you know customers that are going to shop at at an R. H. I mean you know those names are not.

Obviously going to be as you know. Closely tied to the housing market but certainly you know, you know, those names are not obviously going to be as, you know, closely tied to the housing market. But certainly, you know, when you have these high-end consumers not feeling great, it's going to hurt the luxury retailers. That's a good caveat. The return of the Chinese economy not going to help RH here domestically, perhaps as much as LVMH. Anthony, thank you. Anytime. Now, after the break, venture capital firm Founders Fund in the news

after a report said some investors there were advising portfolio companies to pull their money from Silicon Valley Bank before that bank collapsed. We're going to talk to general partner Keith Raboy about what really happened in the early days of the crisis, plus his thoughts on the new call to pump the brakes on AI development when Overtime comes right back. It is time to pause AI experiments for at least six months. That's the message from the Future of Life Institute in an open letter published today. Signers include Elon Musk, Apple co-founder Steve Wozniak, and former presidential candidate Andrew Yang.

They're calling for a pause for training AI systems more powerful than GPT-4. Joining us now on this and more is Founders Fund general partner Keith Raboy. Keith, I want to talk AI and e-commerce and some other things, but first, SVB, right? Because this was a huge issue for Silicon Valley and the banking system and beyond. You and your portfolio companies right in the middle of it. Tell me about how you handled it. Did you advise your portfolio companies to pull their money from SVB, some of it, all of it, ahead of the bank's collapse? No, I think there was not a one-size-fits-all piece of advice that

applied to our portfolio companies. I probably work with 20 companies, and each of them had different situations, different cash flow needs, different pre-existing bank relationships. So there definitely wasn't a policy or a one-size-fits-all solution that founders across the board followed or that we advised. I was talking to Adrian Aoun. You're on his board over at Forward. I think a half an hour after you got off the phone with him, he wasn't initially able to get his money out of SVB. And we were talking about the challenge that that posed. What's the lesson here? Is it a problem that there was a run on this bank? I mean, a problem for the people who pulled their money? Or does the blame lie with the bank itself, the Fed, et cetera, for setting it up that way to begin with?

Well, the bank obviously made sort of an insane calculation on interest rates not rising. And when you are massively exposed to technology investors, technology founders, and technology companies going along on that position is actually literally insane. Because as soon as interest rates go up, tech valuations go down. It's the inevitable law of physics. We've just seen this for the last 18 months. And the fact that the bank that had the highest concentration of tech wealth ever was betting on interest rates staying low as a hedge is literally absurd. So this was the bank that was supposed to know Silicon Valley the best, but botched Silicon Valley behavior. At the same time, you've given in the past SVB

a lot of credit for, pardon the pun, for the help that they gave in you launching some of the things that you've launched. So what do you, do you put money back into what used to be a Silicon Valley bank now because the tech ecosystem needs it? Or, hey, are you just a resident of Miami now and it's a whole different game? I'm a hobby customer. I've been a hobby customer of Silicon Valley Bank,

First Republic Bank for a long time. But that doesn't mean that the risk management protocols and management teams were appropriately running the bank. So, you know, some say you can be a happy customer because they're subsidizing, you know, not the best behavior by customers. But in any event, I think that Silicon Valley does not need a specialized bank. I think that's overrated. I think people need confidence in the banking system. Individuals need confidence in the banking system.

Companies need confidence in the banking system. Buts need confidence in the banking system. Companies need confidence in the banking system. But that's not unique to tech. The biggest mistake the government made was freezing the accounts. By freezing the accounts on Friday, everybody panicked, including like Adrian's situation, where there was some risk that he wasn't going to be able to meet payroll. And that was a function of government policy. If the government had just announced you could have access to 25 percent of your deposits right away, then nobody would have missed their payroll and nobody would have been scared about their payroll. There would have been time to sell off the assets. But I think because the government acted unilaterally and massively and froze everything with no clarity, then everybody had to worry about, like, bills that were coming due immediately.

And that was a massive miscalculation. All right. I want to move on and talk AI. to worry about bills that were coming due immediately. And that was a massive miscalculation. All right. I want to move on and talk AI. This call to pause some of this training for six months. You have said that China has some natural advantages when it comes to AI. I assume that's they don't have to worry about protecting people's data and privacy. and they got more than a billion people at the same time. Can we afford to slow down at all on AI and still expect to beat China? Absolutely not. We have an existential threat posed by the CCP. This is the biggest foreign policy potential crisis in 50, 60, 70 years for the United States. They don't just have military power, they have economic power. And the combination of those two things is incredibly jeopardizing to the United States self-interest and potential existence

The AI is the most important technology of the future and if China dominates we are going to be an incredible Disadvantage in terms of influence and potentially in terms of economic power, which will inevitably lead to an American decline. So slowing down AI research makes absolutely zero sense when you're in an existential battle with someone who wants to be the replacement for the United States in Western democracy. Is TikTok Chinese AI research on the U.S. population? I don't know factually. I do know factually that the Chinese government has the authority to seize the data about Americans and American citizens usage legally in law. Anybody who works at TikTok must provide that data upon request to the CCP. That's the problem. I don't know what in practice they're doing with the data. So then what should we do? Does that mean that the U.S. should have a policy that no app is able to operate in the U.S.

if the rule of law in the country where it's founded does not prevent them from turning over that data to their government? I think that's a reasonable policy. I think there's different ways you could calculate this. India, 18 months ago, banned 54 Chinese apps, nothing's gone wrong. Like, in other words, the idea that the world's going to fall apart if we defend our national security interests by banning TikTok is just false. No social apps built by U.S. companies are allowed to have content in China. So, again, the idea that we have to play by some rules that nobody else in the world does makes no sense either. Is that a slippery slope?

India bans a lot of apps, right? Like, don't we have to have clear lines about what kinds of apps get banned or we end up being the type of government we wouldn't want to live with, right? I don't know if you need clear lines. Like, imagine in the 1970s, the Soviet Union had an app that was tracking all of American citizens. Would we have allowed them to own a U.S. TV station broadcasting content that was censored? Definitely not. But do we end up with the equivalent of a digital red scare at the same time? I wonder if there aren't clear rules. But I also want to ask you,

feel free to respond to that, but I want to ask you about e-commerce and Shopify because you've got OpenStore, we've got ShopTalk going on right now, and I believe you've sort of made this promise to certain retailers that operate as third parties that you're going to guarantee them a certain amount of income if you let them if they let you, sorry, take over their stores and operate them. Is that how it works? It sort of, yes. So OpenStore allows any business who built a brand on Shopify, and there's 2 million of these businesses, to put their business on autopilot where we guarantee

them next year's profits and they do no work. Running a Shopify store is a 24-hour stressful operation. Just to continue to generate cash flow, people have healthcare issues, they have family issues. They have reasons why they may not want to work 24-7. And we allow them to get all the benefits of the brand they built with none of the stress. So we reduce 80% of the stress by guaranteeing them a year's profits. Do you have a recession provision? I mean, this seems risky. What if you're guaranteeing them that income because you're so confident in how you can operate these stores and then the economy doesn't cooperate? We do have some macro exposure. Now, that said, we have been buying brands. We bought over 40 brands over the last year or so. And we're the largest owner of Shopify brands. To some extent, we understand e-commerce, we see consumer data.

I'm on the board of lots of companies that work with consumers. We have different brands. Some are inferior goods, strictly in terms of economics speak, meaning if there's a recession, people will buy more. And some are expensive goods and luxury goods, and some may buy less. I think that portfolio as a whole is less exposed to macro wins than any specific brand would be or any specific company might be. Okay. So last question, big picture, are there specific metrics that you're watching for to determine what you think the economy is going to do and how you're positioning the businesses that you have influence over, either you're kind of operating or that are in your portfolio?

I actually think it's fairly simple. Inflation is the key driver of most economic problems in the United States. And as long as inflation is persisting, interest rates are going to have to be high. And as interest rates are high, the debt burden on the government is going to be too high. The debt burden on consumers is going to be too high. The debt, the expense of mortgages and other options and flexibility is going to be too high. So unless inflation starts receding, we're going to be, you know, in a very volatile, volatile economic and unpredictable economic environment. And I don't see any signs that inflation is slowing down. Wage growth is not slowing down. And wages

are a primary driver of the cost of goods in the United States. Okay, so slowing down. There are some signs it's slowing down, but you mean slowing down a lot more. Yeah, I mean a true recession. I don't see consumer behavior slowing down. In fact, if anything, travel, there's categories where it actually is increasing. Travel is still accelerating. All right. Keith Raboy, got to pick your brain on a lot of topics. SVB, e-commerce, AI, China. Thank you. Good talking to you. Pleasure. Now, Andrew Yang was one of the signatories of that open letter we were talking about calling for a pause in AI experiments. And he's going to explain why tonight on Last Call, 7 p.m. Eastern. It's just two and a half hours away right here on CNBC.

And now right now we've got a news alert on electronic arts. Steve Kovach is back with that. Steve. Hey there, John. EA just now announcing they're cutting 6% of their workforce. It's the latest tech company to cut jobs. So that would be about 770 employees of nearly 13,000 employees in total. The company says the costs related to these layoffs

are going to cost up to $200 million. That's for things like severance and office space reduction and so forth. And look, John, this is coming after we saw a disappointing holiday quarter across the gaming sector, not just for EA, but also mobile gaming companies as well. So not surprised we're going to see some belt tightening here in the video game space, too. Important update. No major move in that stock.

No, unchanged right now. Steve, thanks. Thanks. Is there a comeback brewing for a big tech underdog? Intel finishing at the top of the S&P 500 today. That's the biggest jump since November. After outlining plans for its next generation of chips, we're going to walk you through the news that sent the stock ripping higher when we come right back. Welcome back to Overtime. Time for a CNBC News update with

Christina Partsenevelis. Christina. Thank you, John. And here's your CNBC News update. Pope Francis will spend the next few days at a hospital in Rome to undergo treatment for a respiratory infection. This, according to the Vatican, the 86 year old pontiff had been complaining of breathing difficulties. The Vatican says COVID-19 has been ruled out, but it comes as Pope Francis prepares for his Holy Week or Holy Week activities, I should say, ahead of the Easter holidays. House Minority Leader Hakeem Jeffries taking part in a rally with other lawmakers today in Washington calling for tighter gun control laws. He and other Democrats are demanding gun reform after the latest mass shooting

at the Covenant School in Nashville. And Purdue University is taking a stand against TikTok. Students using the university's campus Wi-Fi will no longer be able to access the social media site in an effort to address cybersecurity risks. Purdue joins the ranks of other colleges and universities across the country who have made similar moves. John, back over to you. Keith Raboy.

Keith Raboy also feels the same way. Christina, thanks. Thank you. Intel today climbing to its best levels in six months in a good day for chips, but a great day for chip underdogs. Micron was up on earnings that suggested it is taking its medicine, cutting CapEx, getting inventories and margins under control. Intel, meanwhile, up for a different reason after updating investors on its data center and AI progress. Bottom line, at the moment, no more fumbles from Intel.

Right now, Intel has been under pressure, losing market share to AMD in the normally highly profitable data center segment. Intel was late delivering its current chip codenamed Sapphire Rapids. What pleased investors was the update that it's on track to deliver the sequel Emerald Rapids in Q4 of this year, which means it should ramp in 2024. And it's Gaudi 3 chip for AI on track 2. Intel data center EVP Sandra Rivera told me that a couple months ago, so I thought there would only be downside for the stock if the schedule slipped. But I underestimated how much investors are betting against Intel. Now, the big goal still to meet, regaining manufacturing leadership and standing up a foundry business, making chips for third parties at scale.

Almost no analyst I know is betting right now that Intel will succeed. And that is why I think CEO Pat Gelsinger is attempting the turnaround of the decade here. Stock is up because they appear to be back on track, but a long way to go. All right, now let's turn to housing. February saw a slowdown in pending home sales thanks to higher mortgage rates. Mike Santoli is back taking a look at the mortgage finance market. Mike? Yeah, John, a huge part of the fixed income market, and it's been pretty well disrupted here since the Silicon Valley Bank struggled. You see here, this is the spread of... All right, we lost Mike's mic there, but we'll get it back.

We will be right back in a moment. Goldman Sachs upping its odds for a recession in the next 12 months, in part because of the uncertainty in the banking sector. We will discuss it with Charles Dallara, who sits on the board of the group that declares when a recession begins. When we come right back. OK, Mike's back and Mike's Mike is back. And now Mike might make mention of mortgage rates. Mike.

Exactly, John. Yes, it's good to be heard here. Mortgage rates have actually had a wild ride in some respects. Now, Treasury yields, of course, have been bucking all over the place. But here's a spread between the 30-year fixed mortgage rate nationally and the 30-year Treasury yield. Now, normally kind of trends between one, one and a half percentage points. This is according to Bespoke here. And we see it just spiked right up here. Now, all the banking stress, regional banks are massive buyers of these things. Liquidity in that market has really been sapped by what's gone on, people being very conservative about hoarding cash. So this does mean that potential home

buyers are not getting as good a deal as they would otherwise, given we have seen a pullback to some degree in longer term treasury yields. Now, of course, the other side of that trade is you can invest in mortgage bonds. You can invest in mortgage REITs, which own portfolios of these mortgage-backed securities. Take a look at the ETF that does track those mortgage REITs over the last two years. Normally pretty stable. These have high stated yields, but that's because the yields are pretty risky and the REITs themselves use a lot of leverage. But it has collapsed pretty well here, just above those October lows. So very much a risk-off tone here. There is a lot of yield to be locked in on government backed mortgages if you have kind of the stomach and the wherewithal

to buy these things. And of course, down the road, we start getting mortgage defaults. It's not going to be great. But so far, it looks like dislocations in that market are still with us, even though the stock market has sort of made a new high since the Silicon Valley bank failure, John. Quite a theme today, dislocations. Mike, thanks. Meanwhile, regulators and supervisors facing day two of congressional hearings on the collapse of SVB and signature banks. And the chaos in the financials has some firms upping their odds of a recession. This week, Goldman pushed the probability back up to 35 percent. Joining us now, Charles Dallara, former Institute of International Finance CEO and director

at large at the National Bureau of Economic Research, the firm that officially declares when we are in a recession. Charles, good to have you. Now, I know you can't speak in advance for NBER, but do you think we're heading for a recession? Well, you're right, John. First, it's good to be with you this afternoon. And I can't speak officially.

We have a special committee at the NBR that handles the determinations of when a recession arrives, if it does. My own view, however, is that events and the volatility and disruptions of the last few weeks have certainly increased the odds considerably of moving into a recession. Hopefully and most likely still a fairly mild recession in the U.S., but I do think the odds have grown significantly over the past few weeks. You know, in an environment like this, risk managers in financial institutions all over the country will go from risk on to risk off. The result is clearly a slowdown in the availability of credit to various sectors of the economy. This was already underway somewhat, John, but I think it will be intensified in the aftermath of the volatility

of the last few weeks. Okay, so we hear you say that. We see RH, Restoration Hardware, saying, boy, things don't look good for our guidance with luxury consumers. But at the same time, the conference board survey of consumer confidence shows people feel pretty good about what's going to happen six months from now. So another dislocation. What does that mean for stocks, for equities? Well, maybe the average citizen has a better telescope out for the next six months than many of us do. But I think the reality is that, of course, stocks have gone through this major correction last year. And to a certain extent, I think they anticipated some of the volatility and stress that we've gone through this period of stress precipitated in part by mismanagement

of market risk by U.S., by certain selected U.S. financial institutions. We have not yet seen the stress on credit risk that likely will emerge as we continue down this path of higher interest rates. We have not yet seen the Fed find its final resting spot here. And, you know, we've been through the most dramatic and rapid rise in interest rates in modern financial history, John. It's almost difficult to remind ourselves that just a little over a year ago, in fact, one year and three weeks ago, the Fed was still sitting on a Fed funds rate of 25 basis points. Now we're at 5%. So the speed of that increase will still need to be processed through financial markets and through the credit availability of individual buyers and businesses.

And there's a lag effect to those rates, sure. But the labor market is still really tight. Real estate inventory is still really low. Unaffordability is still high. Prices still high. How many of those things have to shift in order for us to get that recession that you expect and how quickly? It's hard to say how many of those things have to shift. You know, we've seen recessions come through many different shapes and sizes in recent years. I mean, oftentimes, you know, recession can come fairly early in the cycle. Other times it can come fairly late in the cycle. I think the fact is, though, is that the system is still reacting to this dramatic reversal, not just in rates,

but let's remember, we went through this extended period of quantitative easing. This fed a tremendous amount of liquidity in the markets. That quantitative easing has now reversed. We're in a period of quantitative contraction. So we not only have rising rates, but we have reduced liquidity in the markets. This is part of the reason why, in my view, the deposit base in certain financial institutions has been more unpredictable than usual. I do think that the tide is bound to turn here, John, and it's not at all clear when. Part of this depends in part on exactly when the Fed will determine that it can move into a pause. And I do think that given the strains in the financial system,

that may be sooner rather than later now. Okay, given that, if rates aren't going much higher, even if they do go a little higher, when's the last time we saw an opportunity like this to buy bonds with rates as high as they are, yields as high as they are? Well, you've got an important factor, and certainly locking in some of those rates could be very attractive in the bond market. But let's face it, we've been through

an extraordinary period of bond market volatility, and I'm not sure that investors are quite ready to have that much confidence in reduced volatility in the bond markets. Certainly, though, rates are looking very attractive if you're in a position to buy the bonds and hold them to maturity. I think this is one of the key questions as we see banks struggling with these accounting issues of available for sale or hold to maturity. And that's an important decision which financial institutions and individual investors have to make.

Right. If you can afford to invest rather than trade. Charles, thank you. Great to have you, Charles. It's a pleasure to be with you, John. Take care. Now talk about the daily grind. Up next, the highlights of former Starbucks CEO Howard Schultz's roasting on Capitol Hill and what it could say about the future of unions here in the U.S. We'll be right back. Welcome back. Former Starbucks CEO Howard Schultz put through the grinder on Capitol Hill today over the coffee chain's labor practices. Kate Rogers has the highlights. Kate?

Hi, John. Well, the hearing was certainly contentious at times, and really, Senator Sanders' focus was on the fact that this labor movement has been going on for more than a year, with some 300 cafes now unionized. And yet there's been no contract agreement between the two parties. Under law, the two sides do have to negotiate in good faith, but they don't have to agree to a contract. Take a listen. What I am not only asking you, I am urging you, is do not only the right thing, do what is legal. Sit down. Now, you've said you're prepared to sit down face to face.

Is that what I heard? Yes. Do it. Sit down in the next two weeks. Come back to us and tell us the success that you've had in finally negotiating a first contract. That is my hope. Former CEO Schultz defending the company's approach to negotiating, doing this in a single store fashion, one by one, as that's how the organizing with Starbucks Workers United has taken place.

And he wants to do it in person. The union wants to do some of these negotiations by Zoom in certain cases. And so there's been a lot of head biting over that. And he wants to do it in person. The union wants to do some of these negotiations by Zoom in certain cases. And so there's been a lot of head biting over that. Schultz was also accused multiple times of illegal union busting by lawmakers, which he maintains is not true and not the case. John, back over to you. Kate, first of all, good to see you. I missed you for these past few months. But big picture here. We saw over the last couple of years this surge in labor boldness. Amazon warehouse workers, Apple store employees, Starbucks, as you just mentioned.

How much of that has waned as we've seen? I know over at Amazon, the warehouse leader who had that initial success now dealing with some internal contention. And maybe Starbucks feels like they are not under as much pressure to negotiate? Yeah, that's a great question. And I think it's important to remember the voting group size, right? So at an Amazon warehouse, there are so many more workers who are voting than single Starbucks cafes, where there can be sometimes as few as five to 10 people voting in some of these elections. So the momentum at Starbucks has certainly slowed over the year. Petitions, remember, were initially really coming fast and furious.

The union said they'd slowed down in part due to Starbucks intimidation tactics and the fact that benefits had been extended to non-union stores and not those that sought to organize. Schultz was actually grilled on that today. And he said that's because under law, they can't just extend those new benefits to cafes without negotiating contracts first. So there was a lot of tension and back and forth there. I think big picture public support for unions is near all time highs. And overall, there was a big bump in petitions to organize year on year of about a thousand more from 2021 into 2022 for the full year. So a lot of interest there. But then when you see some of these back

and forths taking place at the companies and how this all plays out, workers may be deterred in the big picture long term. Yeah, we'll see how many of those petitions succeed. Kate, thank you. Thank you. America now struggling with a record high shortage of prescription drugs. Up next, we're going to tell you why generics are in such short supply. The U.S. is facing a prescription drug crisis like never before. Yesterday, we looked at what's behind the critical shortage of antibiotics. Now, Meg Terrell's back to explain why there's a lack of generic drugs on the market. Meg?

Yeah, John. So generic drugs, of course, are critical to the U.S. health care system. They make up 90 percent of all medicines sold here, but they're also the most likely drugs to fall into shortage because of what experts describe as a market failure when important drugs become too cheap. We rarely see a shortage of a branded product, in part because, you know, the financial incentives are there to not have a shortage of a branded product, in part because the financial incentives are there to not have a shortage. We've never had a shortage of Humira. We've never had a shortage of Keytruda. According to a recent Senate report of drugs that went into shortage between 2013 and 2017, 67 percent were generic, with a median price of less than nine dollars, and had been on the market for an average of 35 years.

And the generic drug industry has been on its heels as revenue has declined and debt piled up. Stocks of companies like Teva, Beatrice and Amniel are now at fractions of their previous valuations. And these companies make really crucial drugs. We spoke with the director of the Poison Control Center at the Children's Hospital of Philadelphia, who told us they're now facing a shortage of the most important drug to treat a horrible side effect of lead poisoning in children that results in brain swelling. The only company that made the drug, Acorn Pharmaceuticals, filed for bankruptcy and shut down last month. Now, that drug is just not available. When those rare events like encephalopathy from lead poisoning occur, it's really important to have the right medicine on hand.

And that's the bleak future we're facing now. And we take a look at some of the solutions being proposed tomorrow in the third part of our series, John. Meg, the great stuff for areas like farming, for areas like transportation, where it's viewed to just be essential to society, government subsidizes. I hate to talk about government subsidies as a solution, but it seems like generic drug, you know there's going to be demand for that. So is that a solution?

No, you're absolutely right. It's something that we talked about with some of these experts. They were saying if this was happening to water, if this was happening to power, we would not accept it. But these things are as important to our health in many ways as those things are. And so some people have raised the idea, should these be treated like a utility? But it's also been pointed out the generic drug industry isn't just like that, because as long as these companies sort of operate under the same business model, they need to keep developing new drugs to keep the revenue flowing.

There has been discussion of whether there should be sort of a CHIPS Act, for example, for antibiotics, you know, bringing back U.S. manufacturing for these medicines. That would help the industry. But I'm also hearing on the other side, you've got to guarantee a certain level of profits in order to keep the investments coming. So maybe purchasing. Sound like the utility industry where you need a rate case to raise price. But I hate to think of that structure as a solution. Meg, thanks for bringing us that. Really thought-provoking. Meanwhile, Disney and Netflix among the best performers this quarter in the red-hot communication services sector. Up next, the top analyst on whether these names will keep outperforming in Q2. We'll be right back. Welcome back.

The communication services sector is up a whopping 17% this quarter with just two trading days to go. And names like Netflix, Disney, Alphabet, and Warner Brothers Discovery having a very strong start to the year. Will this group see more upside in Q2? Let's bring in Macquarie analyst Tim Nolen for his best ideas. Tim, one of the most interesting storylines in the sector, I think, is this what I guess is a game of chicken between Disney and CNBC's parent Comcast over who's going to end up with Hulu. Which eventuality is priced in? Disney buying a third? Comcast buying two thirds? Somebody else ending up with it?

That's a question for Disney to face up to over the next few months. You know, the general assumption was that over by January 1st, 2024, when this put call comes into effect between the two companies, that Disney would want to buy in that other one-third of Hulu that Comcast owns. I think Disney CEO Bob Iger's comments more recently have kind of thrown cold water on that view and made a lot of people wonder whether Disney might look to actually sell that stake. Comcast has publicly said that they'd be interested in acquiring it. Maybe that's just posturing to get the price of it up. And so we'll see what they really want. But I think it could attract some other interest from other parties. And I think more importantly,

to your question, I think Disney is maybe looking more intently at selling that stake rather than buying in because it's a very competitive market. It is arguably not core to Disney's franchise of children's and family entertainment and, of course, ESPN. And that's another big question as to what's going to come with ESPN and ESPN+. So, you know, I'm starting to question whether Disney might look to sell off that one-third stake in Hulu at this point. Okay. So after the sector has gone up so much to start the year, what's the best value? What should investors buy now?

Well, if you're comparing some of those names that you threw across the screen at the top, you know, WBD, Warner Brothers Discovery is still much cheaper than Disney and Netflix. And sure, they've had good runs in the quarter, but these stocks had pretty terrible performances last year. And so some of this just kind of rally rebound the first part of the year has just been recovering some of that. If you just look valuation wise and if you look at the storyline, I think WBD stock still has quite a bit more upside given they're getting the HBO and the Turner assets bedded down within the structure. They're trying to be much more rational on costs. And that stock is much cheaper. I think the upside to Netflix is still there as well. And I think Disney has perhaps a bumpy road ahead as they try to figure out what

they're going to do and what the news flow is going to be. But both of these companies, Disney and Netflix, are looking at having rolled out this new ad tier for Netflix and for Disney Plus, respectively, just in recent months. And we don't have much information on it, but I think that's an important component to the story going forward. It'll take time to roll through, but that's part of what's going to drive the interest in these companies and these stocks over the coming quarter and year. Tim, we got to leave it there. I appreciate it. Tim Nolley. Thank you. Well, that's going to do it for overtime. Fast Money begins right now.