Power Lunch - Countdown to the Fed, Powerhouse Blueprint: the Garage 9/17/24

Episode Date: September 17, 2024

We’re just 24 hours away from the next Fed decision on interest rates. And the odds are still split on whether it will be a 25 or 50 bps cut. We’ll discuss that and much more with our guest host for the hour, WaFd CEO Brent Beardall.Plus, were finishing off our Powerhouse Blueprint series, and today we’re heading to the garage. We’ll check on car prices, and also one of the biggest reasons why car ownership is so expensive right now: auto insurance coverage. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Good afternoon, everybody, and welcome to Power Lunch alongside Kelly Evans. I'm Tyler Matheson. Glad you could join us. We are 24 hours now from the Fed decision on interest rates. The odds are still somewhat split on whether we will get a quarter point or a half point cut. Joining us to discuss that and everything else over the next hour is Brent Beardall, the CEO of Wafed out in the West Coast. Brent, welcome. It's great to have you in-house in studio today. Tyler, great to be here. Kelly, great to see you. You know, when the Fed cuts interest rates, it is often a sign that, the economy is struggling one way or another. How do you see the U.S. economy right now? It doesn't feel like it's struggling particularly hard, and especially in your region of the country. You know, I think the economy has been remarkably resilient, especially the consumer. If you look at just the dramatic nature of what the Fed had to do to get inflation under control, going from almost zero interest rates to five and a quarter percent, everyone, including myself,

right, and no one likes to admit when they're wrong. I was dead wrong. I thought for sure they were going to impact the labor market. Me too. I hand up. I'm right there with you. But it certainly looks like they are going to be able to pull off the soft landing, which is remarkable. So to answer your question specifically, the economy is doing very well. You look at the airports. We went to dinner last night in Manhattan. The restaurant was packed. There is activity. The consumer has remained remarkably resilient. Not that they haven't been hurt by inflation. They feel it.

They feel it, but they feel it in the discretionary spending. The mandatory spending, right, the mortgages. We'll talk a little bit about our mortgage portfolio. That's where we deal with consumers. You still have delinquencies that are less than one half of one percent. The consumer has just remained remarkably resilient. Who would have thought it with rates going up that much? A lot of people say it's home equity, and there's, you know, we can dig into so many different aspects of this.

But if rates come down and suddenly people can tap that home equity, how many trillions of dollars is that right now to draw upon? It is huge. That's exactly right. And not only can they tap that home equity, but their credit card rates are going to go down, right? And we've already seen the move down in mortgage rates. We've mortgage rates earlier this year were what, 7.5% today they're 6.10 to 6 in a quarter. But what very few people are talking about is the spreads that you get on mortgages. We were just asking about this with the CEO of Rackis saying, shouldn't they already be sub six if we had normalized conditions? Who do you blame for this? Well, that is the market being greedy, right? That is everyone in the market, including Woffett, everybody. Today, the spread on the 30-year mortgage is about 255 basis points. Wow, two and a half full points. Historically, it's been about 150 to 200 bases.

Over the 10-year? Over the 10-year? That's right, because you look at a 30-year mortgage, and you think the duration in and out of the cycles is about eight years. So you use a 10-year treasury as kind of the base. Why do you say the big to be greedy? I mean, you're kind of alluding to this is an arrangement that is benefiting everybody, but how do we kind of flip the script?

Well, it's because of the volatility. When there's volatility, everyone errs on the side of conservatism, and that's what's happening now. If we can get a clear sign that we're going into lower for longer rates, then I think you'll see that volatility come down, that spread come down. But we have been in the fearfulness of higher for longer, and that's what we needed to do. And there have been a lot of people that have been wrong. It doesn't look like higher for longer, right?

What the Fed has done in terms of navigating it. what looks like a soft landing to their credit, right? How many of us? Don't jinx it now, I know. How many of us? So you just go back two years, right? When the Fed had their head fake and they thought inflation was transitory, and we were all calling the Fed was wrong,

the Fed is out of control, to Jay Powell's credit in the entire Federal Reserve, they have built credibility with the market. Who would have thought that they could get inflation to pull back? And one of the other things I really want to talk about is, We're so focused on what is inflation today, and that's what everybody's focused on. But you talk to consumers and with the election, you talk to the electorate, what are they worried about the economy? Inflation. Why? Because over the last four years, prices are up 20.

Their prices are up and they have not come down. They want deflation. That's exactly right. And we are still getting adjusted to it when we go to the grocery store, when we go to the gas station. It is still shocking all. I can't believe how much I'm having to pay for this. So that is what I think everyone discounts. hey, inflation is in check now, but really look at the last four years in my lifetime.

I've never seen it. Absolutely. It's a perfect place to bring in our next guess. The consensus is that a rate cut is a given. The size of it is still up for debate. We asked our CNBC mock fed how they would vote if they were calling the shots tomorrow. Out of our seven economists business owners and market watchers, four went 50, three went 25. It's almost exactly like the market right now, evenly split.

Our next guest is part of the latter group. He says the proverbial close call camp. Joining us for more is PIMCO cheap economist Paul McCulley. Paul is, so you're calling for 25. Welcome. Yes, I am. I think 25 is the base case because I think it maximizes the Fed's optionality. If they go 25, they retain the option to speed up if you get an unexpected weakness in.

the labor market. In contrast, if they go 50, I think they are de facto locking in at least two more 50s, which would mean that if you get unexpected weakness, then you would put 75 on the table. So I think from an option-adjusted perspective, it makes sense to them to do 25. But note, I am not pounding the table on that because I also understand the argument they have a long way to go. They're a long way from neutral. And there is a reasonable, sensible argument for starting with 50, but at the cost of giving up optionality in my view. So let's say they do go 50 or they go 25. Where do we end up a year and a half from now in terms of where interest rates are going to be?

because the Fed will almost certainly do many more, well, maybe not many, but several more cuts beyond what they're expected to do tomorrow. Well, I think many is the right word, Tyler. No question about that. Which is why I think that we have to look at the 2550 decision tomorrow in the context of the new dot plot. The last dot plot was back in June when they were only looking for, one cut this year, and then for a series of cuts down to a little over four, call it four and a eight, at the end of next year. So I think the big thing they'll be doing at this meeting is a serious whack to the dot

plot. And I think that by the end of next year, we're thinking in terms of at least 200, if not a little more and basically moving down to a three-handle, maybe a three and a half. Brent, you want to jump in? Yeah, I do. So, Paul, my question to you is, why if neutral is 3%, why should we go on a slow pace? Why shouldn't the Fed be more aggressive? If we're truly in balance in terms of inflation and employment, why shouldn't they be more

aggressive? I understand that argument. We always get that argument in at the beginning of a cycle, whether it's a tightening cycle or an easing cycle. If you know you've got to go a long way, why the hell don't you just go ahead and get there as quickly as possible? I understand that argument. That's not how the institution tends to go because the world is uncertain. So essentially, incrementalism is the code at the Fed. And I think that from the standpoint of support for the economy, incrementalism is not all that negative of a thing because the capital markets are going to romance and discount the destination.

So you can have both. You can have the capital markets reflecting a lot of the destination out the curve while you can have the Fed moving in a careful judicious. measured way in validating what the curve is already done. Yeah, and they certainly have earned that credibility in terms of forecasting. There's no question about that. I would ask you the political question. Historically, the Fed has not acted so close to an election. And so does having the election so close, and to have, I think it was three sitting U.S. senators yesterday to write a letter encouraging the Fed to move by 75 basis points,

If you're sitting on the Fed Open Market Committee, does that have an impact on you? I don't think it makes one damn difference whatsoever. I think that Jay Powell has said the truth, which is that he's going to make the decision based upon his best judgment. He may make a mistake, but he's going to do it on his best judgment of what the economy needs and that he's not playing politics whatsoever. So I don't think the election matters a damn bit in the decision they make tomorrow. But how do you really feel, Paul? I love that.

So I want to go back and get in touch with my inner nerd, and that is to talk a little more about the dot plot. If I'm remembering correctly, if you went back to sort of the start of this year or late last year, the dot plot would have forecast more, interest rate reductions than it did in June when they scaled back and said only one this year. Now, if I'm hearing you correctly, you think they're going to pivot back more towards what they were saying in December of last year, say, than what they were saying in June. Why the change in June and why the change back now?

You got my script right. I think we're back to the future in many respects to where we were. back in December when they did the rhetorical pivot teed up three cuts this year and continuing cuts into next year. And then we got the inflation scare. That was really what changed in the first half of this year. The inflation scare, and it was unambiguously a scare and getting into the wonky weeds, A lot of it was related to residual seasonal effects and how you adjust the inflation data.

That actually inflation has been this year on the trajectory that they anticipated last December. In June, effectively, they reflected the inflation scare. And now that it's proven to be a scare, then we can get back to the status quo, Annie. And I think that's what the dot plot is. going to show tomorrow and maybe just a bit more, particularly in 25, than what you had printed back in December of last year. So it's back to the future with a little bit of Tabasco, I think. Tabasco is good on everything. It makes everything better. Paul, thank you for joining us again. You're on the record saying you'd go a quarter tomorrow in our very closely split Fed panel.

Paul McCulley, thanks. All right, coming up for our final day of our powerhouse blueprint, we look at what has become one of the more expensive parts of the home, the garage, whether it's sky high auto loan rates or inflation in insurance costs. Power Lunch, we'll be right back. Welcome back to Power Lunch. Since the CPI came out last Wednesday, we've been examining the different areas where you buy, the different things and how those prices have changed over the past year. Some have fallen, others remain elevated, but almost nothing has risen as much as car insurance. up 16 and a half percent. More if you look back over the past couple of years. Contessa Brewer joins us now with a look at all of these price hikes, which are, we should add,

Contessa, paying off for the stocks here. Yeah, I mean, that's the upside, right? Investors are seeing a return on their investment, but it's clear Americans are getting sicker shock when they're opening their insurance bills. We continue to see car insurance going up, though it's going up at a slightly slower pace. The consumer price index for August shows six-tenths of a percent increase over the previous month. And as you say, said, Kelly, 16.5% over the previous year. Ottawa insurers, though, were just playing catch up to the spike they saw in 2022 and 23 in the costs to repair and replace vehicles as well as, you know, what it costs

to fix someone who gets hurt. Property insurance, we're seeing a similar story. In fact, Moody shows a 17% increase in property insurance in some markets over the past few years where normally it increases two or three percent. It's especially troubling Moody, says, in commercial real estate. where cost and availability is killing deals. I saw that firsthand. You saw it triple in price for a Texas multifamily property,

and he says, hey, that killed my profit margins. Marsh, though, is showing property insurance moderating, just a 2% increase in the second quarter. It also reports that casualty insurance rates increased 7% if you exclude workers' compensation. And then umbrella or excess liability risk, those rates increased for companies 10%. Some lines, though, are seeing declining premiums.

83% of companies have seen a reduction in what they pay for directors and officers' insurance over the last couple years, according to Woodruff Sawyer. And the trend is beginning to reverse. They say that going into 2025, you might see slight increases. Cyber insurance, single-digit percentage declines, even though ransomware attacks are higher. But companies are learning better how to mitigate the impact. Property and casualty remains the pain point. insurers have been unable to raise rates fast enough to cover their payouts on claims. And when that happens, they just leave the market, which makes availability tougher.

Look at California and Florida. Marsh says overall in the second quarter insurance rates, I mean, all lines here, rose just 1%. It sure doesn't feel like that, though, when you're opening your own car insurance or home insurance bill. Contessa, we were just chatting about this around the table here. But do you know how many people are now trying to go without, for instance, home insurance? I guess on auto, you're not really supposed to. Look, what happens with your, if you have a mortgage, the bank demands that you have insurance that's going to cover the cost of repair and replacement.

And that can be very expensive. If you don't have a mortgage, you don't have to do that. Chubb, for instance, is seeing great opportunities in what's called excess and surplus lines, meaning the California regulator doesn't want to approve the rates that you think you need in order to really cover your risk. And so you go outside the regulated market and you pay whatever you need to pay. for this, you know, Cadillac of insurance policies, and that is for AIG, for other insurers, those excess and surplus lines have become very valuable.

And if you own your home outright, you might just decide, you know what, I'll take it as a loss because I can afford to rebuild. Brent? You know, contest, it's very interesting. We talk about the insurance company self-selecting and pulling out of markets. But I do think you are seeing more and more consumers self-selecting and pulling out of the mortgage insurance as well as the auto insurance. Now, you're not supposed to.

If you have a mortgage, the bank's supposed to be checking on it, and the bank will eventually catch you. But on the auto insurance, it's only if you get caught. So I think more and more consumers are likely viewing that to be discretionary spending and pulling back. The system seems to be so automated now that, for instance, if you don't provide the proof of insurance to your, when you register your car, they will yank your registration. And then you start getting tickets because your car is not registered.

There seems to be some sort of automation at the state. level now to enforce those insurance and therefore registration claims. But you're absolutely right. And a lot of people now are foregoing full coverage and opting just for liability. So they're trying to bring down their price down wherever they can. All right, Contessa, thanks very much for a complete report there, very complicated, interesting business. Contessa Brewer. Inflation high rates, cost the insurance premiums. They're slowly making your garage. One of the most expensive parts of your home. That's because of what's inside it. And that's the focus of our final blueprint of our series on the home. According to the latest CPI data, vehicle prices are actually down

slightly year over year. It's everything else that drives up the prices. The interest rate for a new vehicle hovering above 9 percent. Auto insurance prices, as we just mentioned, up 16 percent or so over the past year. And all this is pushing Americans to keep their cars longer. The average age of a passenger car on the road now is a record 12.6 years, so says S&P Global. Joining us now for more is Colin Langan, Automotive and Mobility Analyst at Wells Fargo. Colin, new vehicle prices, welcome number one, new vehicle prices down about 1% year over year, used vehicles down 10.4%. That's quite a change from the growth we saw during the pandemic.

but boy, the basic automobile is $50,000 or more, and there are plenty of makes and models that are going for more than $100K. Jeep has one. Yeah, I mean, we've seen since COVID record auto pricing, and it's been a big tailwind for the Detroit 3 and the traditional automakers. I mean, the car since COVID is over $10,000 more expensive. So yeah, it's down a meager 1 or 2%, but it's been on a 6% Kager for many years now. And I think we're going to see more pressure. We see excess industry capacity. And so automakers are going to have to discount to move volume. But so far, it's been a very slow pace so far this year. But it's one of the key risks is I think price normalization off of record pricing over the next few years. So you don't think they're going to be able to keep taking price the way they did in 2021, 2022. Those those salad days are done. Well, there were structural things going on. So you had COVID.

but you also had the subsequent supply chain issues. So the industry was handcuffed. And there was a point in the industry where if you made the car, you sold it because there was nothing on dealer lots. Those days are long gone. Inventory is back to, you know, over the last few months is back to the days of supply where it used to be at. So you go to a dealer lot and you could find a pretty good selection.

The other problem that's happened in this period is we've added about 3 million units of capacity. So we have sales that are actually below pre-COVID levels, but more industry capacity. Historically, you know, what happens is if you have too much capacity, there's such a motivation to discount the car to get that capacity higher, and I think that's what's going to play out over the next few years. Colin, I'd like to ask you about the mix of what the manufacturers are producing in terms of

internal combustion versus EV. I think it was recently reported that Ford is losing $132,000 per electric vehicle they make. So we talk about the prices of cars. even with the higher prices, the manufacturers are losing money, some manufacturers on these electric vehicles. Are they recognizing did they make a mistake? And are you going to see them retrench a little bit and go back to where they're making money rather than just producing cars for the sake of producing cars? Well, I don't think, to be fair, to the industry, they've made a mistake. They're in a bit of a dilemma.

So they have EPA targets, and it's going to be very tough for them to hit those targets. And then the EPA targets all over to 20302 are extremely aggressive. So they're going to have to sell EVs. All we've seen so far is them pull back on their EV plans. There's a lot of uncertainty. The election actually might dictate some of this. But the unfortunate reality is they have to sell it. I think they got a bit overconfident in how much they could sell.

But they're actual regulations. They're going to have to sell certain EVs to hit those regulations. And so unfortunately, this is actually another pain point in addition to pricing, is they're going to be forced to sell EVs. And unfortunately, it doesn't seem like the consumer is that interested, which is why we've seen, while industry pricing is held in, EV pricing has pretty much collapsed. If there's a new administration, if Donald Trump wins the presidency, won't those EPA targets be reduced?

I mean, be liberalized or made easier? I think that's, I mean, there's a mixed bag no matter who wins the election here. But yeah, I mean, I think it's very likely Trump, given his commentary, would actually cut those targets dramatically. But look, under Obama, it took him about three years to cut those targets. So if you're a traditional automaker, those targets will increase through probably 2028, even if he wins. There's also a worse scenario if that he actually removes part of IRA, which gives funding to EVs. They actually might have this period of actually more unprofitable EVs because of the lack of subsidies and being forced to sell more of them to hit those targets until they could actually flatline those targets out in 2028. So it's a pretty tough situation regardless of who wins, but it's challenged no matter what.

I'll leave it there, Colin Langen. Thanks very much. By the way, he's got to sell on all the major automakers. Electric or mainstream, if you want to call it, that Borg Warner is the way to play the garage, he says. Gold prices are falling today after soaring to new record highs above $2,600 an ounce. Up next, our trader is looking at a new way to play gold ahead of tomorrow's Fed meeting. That's in Market Navigator next. Welcome back to Power Lunge. It's a holding pattern ahead of tomorrow's Fed decision.

One of the closest calls we've had since at least 2015, by the way. The way the Bank of America calculates it, the odds of a quarter point cut were basically 50-50 three days ahead of the meeting. We haven't seen it that high in a long, long time. NASDAQ is positive. The Russell's not there, but it's actually the outperformer of the session today. And ahead of the Fed, gold is continuing to hit new highs this week as the dollar. The dollar's getting more attention to its weakness lately. But is the gold trade also getting a little crowded for those that still want the hedge that today's trader has a different option for you?

Tony Zang joins us now. he's chief strategist at Options Play. Tony, it's great to see you. Walk us through your line of thinking here. Yeah, so it really comes down to tomorrow's Fed meeting, whether we're going to get 25 basis points or 50 basis points. And I would argue that the Fed right now is looking a little bit further towards the labor market, rather the cooling of the labor market, more so than inflation in terms of their decision right now. And if they make only a 25 basis point cut, which traditionally is where they start, they might find themselves. quite a bit behind by the next meeting in November if, let's say, September and October continues to come in fairly soft in the labor market. So I think for those reasons, they may very well have to make a 50 basis point cut in tomorrow's meeting. And I think that's going to be

supportive for assets such as gold, which is why I'm taking a bullish position here on gold, especially now it's broken out to new all-time highs. I think we can continue on to around 2750. And you have a whole strategy around that, Tony, for if we get a 50. cut, but what if we only get a 25? What do you do? That certainly will be potentially a bearish thesis for gold. However, that's why I'm using options to play this. The way to do this is to utilize options where we're protected on both sides. Whether this works out in our favor, we're going to collect roughly $2 in premium. If it doesn't work out, our total risk per contract is a maximum of only $300 per contract.

So I have a risk-reward ratio here of about a little under one and a half to, one in this particular case. So no matter what happens, even if gold completely collapses for outside reasons of beyond just the 25 basis point cut decision, the risk is limited using an option strategy like this. All right. You're feeling still pretty bullish. You said bullish to neutral on gold itself, short the implied volatility using a put credit spread.

I'm taking notes. Tony, thank you very much for your time today. We appreciate it. Tony Zang for Market Navigator. Tyler, over to you. All right, Kel. Thank you. Some breaking news out of the airline.

industry and Phil LeBoe has the details. Hey Phil. Tyler, take a look at shares of Alaskan Airlines, Alaska Airlines, I should say. The DOT has cleared the way for Alaska Airlines to close its merger with Hawaiian Airlines. This was announced last December. The DOJ did not fight it in court. There are some stipulations in terms of consumer protections, things like no expiration of miles, family seating is required, also air service to rural areas, maintaining access to the airport in Honolulu. Those are not onerous terms. This means that Alaska, which was the fifth largest airline, solidifies its position by adding in more market share with

Alaska Airlines. By the way, Hawaiian will continue flying under that brand, as will Alaska. And tomorrow, we have an exclusive interview with Alaska CEO, Ben Minicucci. You don't want to miss this. we will talk with him on Squawk on the Street about closing this merger and a few other things, including getting some Boeing airplanes. They've got a lot of them on order. We'll see what he has to say about the current situation at Boeing tomorrow morning on Squawk on the Street.

Guys, back to you. All right. Thanks very much. Another Seattle company there. We're a real neighbor of yours, Brent Beardall. We'll have more with Brent next as we dig into commercial real estate. Power Lunch will be right back. Welcome back to Power Lunch.

Let's go a little bit beyond the Fed and talk about the economy with our guest. host Brent Beardall. He's the CEO of Woffed. And I don't even know where to begin, Brent, but there's really so much to discuss. We were just talking at top of the show about how surprised we've been by the resilience of the economy in the face of rate hikes. How about commercial real estate? One area, by the way, you said, hey, it's not going to be as bad as feared. But the headlines going into this year were all about this massive wall of commercial real estate refinance things that's looming. You know, it's a cliff. It's a this, it's a that. It's going to be a disaster. And yet here we are.

Well, thank you for bringing it up. I am on the record of saying, I want to kill chicken little. All of the pundits out there that are saying commercial real estate, the sky is falling, the sky is falling, the sky is falling, stop the madness. To me, if somebody says, I want to talk about commercial real estate, they're being intellectually lazy. It's way too broad of a category. If somebody wants to talk office, which is included in commercial real estate, let's talk office. Absolutely great. Our portfolio is only 4% of our loans are office, and we don't have a single delinquency. But you have to understand what makes it up. Multi-family, for example. We were just looking outside. Apartments. We were just looking outside. A corporate headquarters

is right next to the CNBC studio. They just bulldoze the corporate headquarters. What are they putting in? Housing. It turns out we have a massive shortage of housing in the United States. And the fact that everyone grouped everything together in this broad category of commercial real estate. Stop. Understand. The uniting characteristic, though, was a lot of real estate. A lot of real estate for the past decade had been built with super low interest rates and boom, the Fed jacks it up to 5%. And so, you know, that cost, it's, look, it's hurt private equity. It's hurt a lot of businesses that depended on cheap financing. Why hasn't it been a bigger factor for real estate?

Well, they were able to withstand it. It was a big factor. But let me ask you a question. Why is it just so targeted on commercial real estate and not the same four residential single family? It had the same characteristics there. Because you're locked in. So it's fascinating how the government set this up to basically say,

we're going to subsidize homeowners by offering a 30-year mortgage product that's fixed, and the banks have to take all the risk. But that's a decision we made as a society, and that's why we saw the collapse of banks when those rates jacked up and they were on the other side. Well, and what nobody's talking about, the banks take the risk, but who takes most of the risk? The federal government. Look at the balance sheet of the Fed and how upside down that balance sheet is.

But back to the point on commercial real estate, we were all so nervous about, oh, my goodness, all of these loans are going to come due, and they're not going to be able to afford the interest payments. Well, what's happened? We've seen that already baked into the tenure. The tenure today is, what, 3.65%? Which is, again, where typically the commercial real estate are priced off of. I want to get your thoughts on something that happened yesterday in your town, Seattle,

and that is Amazon announcing that they expect all of their workers, a lot of office workers, to be back in office full-time in January. Were you surprised by that? And obviously, if the big dogs start doing this, the little fry are going to follow, I would think, and you're going to see a return to office. All I can say is God bless Amazon and Yassie. That is needed. It is a fantastic thing for the cultures of the companies.

But how much of your workforce is in full-time? I mean, obviously the ones in the banks, in the stores are there. In terms of back office, very few. But as an employer, I have very little leverage. You know, I'm not Jamie Diamond. I can't say, hey, I demand everybody come in, and if you don't come in, you don't have a job. I don't want to see 20, 30 percent turnover. But if the market shifts, which I thought yesterday was absolutely pivotal because Amazon being

the 100 or the 800 pound gorilla in Seattle and frankly in the country, if they say we are better off as a company, it is better for us. It's better for our employees to have you in the office five days a week, then that will be easier for us. Now, I do want to put a grain of salt on that because I think there are some jobs that it makes sense to have a hybrid environment. And I think it's good for a lot of, you know, if certain career, phase when you have families, when you're balancing care for younger people and older people,

I would love to see some degree of flexibility remains. Some degree is good, but if you're a young person coming into the workforce and you want to learn how things are done, how could you do that through a remote-only environment? And then the other thing that we haven't experienced that, frankly, again, I was wrong. I thought with the Fed increasing interest rates up to 5.5% and a quarter percent, we would see slack in the labor market and you would start to see massive layoffs. And if you're a manager and all of a sudden you get a dictate, you need to cut your staff. Who is it that you're going to cut first?

You cut the remote workers. Unless that's what this Amazon announcement is all about, the attrition that you're warning about could be attrition that they would welcome. In other words, people won't come back. They'll say, I'm not, I don't want no part of this. Because they're flattening as well, looking to flatten out some of the mid-middle manager. They still have post-pandemic bloat, I believe, after that hiring spruce. So you just wonder if it's a bit of right-sized. And you have to wonder, though, if the employee says, hey, is this is this,

an opportunity to go somewhere else. If no one else is hiring, they're not going to look for that option. Right. Let's pause for a moment and go to Bertha Coombs for a CNBC News update. Bertha. Tyler, the Iran-backed militant group Hezbollah says Pagers belonging to its members exploded across Lebanon today, killing nine and injuring more than 2,700 people. The group placed the blame on Israel without providing evidence for that claim. Israel has not commented on those accusations. The Coast Guard hearing testimony for a second day into the implosion of a tourist submersible headed to the Titanic last year. The findings include the first images of the Titan wreckage on the seafloor, as well as new claims today from a former employee of the company behind

the excursion, saying owner Ocean Gate was motivated by money and ignored his safety concerns about the sub. And Boston Marathon hopefuls will have to. to train even harder if they want to get to Heartbreak Hill. The world's oldest marathon is asking most prospective runners to finish the 26.2 mile race five minutes faster than in recent years in order to qualify. Male runners between 18 and 34 will have to clock in at two hours and 55 minutes or faster. Women of that age will have to complete the distance in three hours and 25 minutes. Tyler, I think that's how long it takes me to do 26 meters. Boy, I'm telling you, coming in at under three hours in a marathon is a real accomplishment.

That's going to narrow the field, I would think a lot. But what do I know about running a marathon? All right, Bertha, thank you. Coming up, an exclusive interview with Snap CEO Evan Spiegel, announcing some big security changes in new products too. Power Lunch is back in two. Well, welcome back to Power Lunch. Tens of millions of teenagers may see a major change to their Instagrams. That's because starting today, Instagram plans to default all new and existing accounts set up by people who have indicated they are under 18 years old to private mode, which basically means that only approved followers will have access to their posts.

This comes during a time when social media firms are under scrutiny in multiple states over the impact their platforms have on teenagers. This was not, Kell, the only thing that Facebook or Meta announced today with respect to Instagram. They also are going to put a thing on where you're not going to get alerted after 10 p.m. at night, so it would presumably help people sleep more. But the question here is, how are they going to ensure that the people who say they are 18 and above are actually 18 and above? And not just that. And we are moving to a world where everyone has, I think the anonymity is going away. and you're going to increasingly have to be who you are,

which might help with all of these platforms. But Apple also here is the device by which all of us in the U.S. basically are accessing these apps. They just had a big product launch. There's always an opportunity to say, by the way, here's a switch to flip for teen or kid mode, allow people to do it not just for META's family of apps, but across the phone more broadly, which is the issue that parents and all of society really are grappling with.

Yeah, absolutely. All right. Let's get over now to Julia Borson, who's joined by a special guest who knows a little about these kinds of things. Snap CEO Evan Spiegel joins Julia Live. Julia. Julia. Thanks so much, Tyler. And Evan, thanks so much for joining us here from your big partner summit, where you just unveiled some really big news. I am going to ask you about that Instagram news, but first, I want to start off with your news. You just unveiled your next generation

of spectacles, their augmented reality glasses, and also an operating system for developers. When will consumers be able to buy these devices and how much are they going to cost? Who are competing with here. Thanks Julie. We are so excited that you're here with us today at the SNAP partner summit and we're even more excited about the SNAP spectacles. The fifth generation is out today featuring our all-new operating system that's based on natural interaction. So you just use your hands and your voice to interact with augmented reality. And what's so exciting about spectacles is that it brings us closer to our vision for people using computing together grounded in the real world with their friends and that's

something we've been working on for a long time now. But so we also have two other giants who've been working on this, which are Apple and Meta. They've been throwing a ton of money on this. We have yet to see augmented reality go mainstream. Why does it make sense to invest so much in this at a time when your stock is down 43% near to date? We've also yet to see augmented reality glasses from either of those companies. So it'll be interesting to see if they follow our lead here. I think the reason why we're so convinced that AR glasses are the path forward is because people are getting tired of screens. And we've worked really hard to try to innovate with screens, to make them better, to make them more fun to use.

But at the end of the day, they're just screens. And people feel isolated by their screens. They feel like it takes them away from their friends and family. Glasses are a way to use computing that actually brings us together and keeps us connected with the real world. But give us a sense of the timeline here. These devices, maybe you could pull them up and show them to our viewers. I got to try them out.

They're very cool, but they're still not being sold to consumers. How much will you sell them for? When can we expect these to be competing with whatever it is that maybe meta will be introducing next week at it? We've initially focused on our developer community. So there are hundreds of thousands of developers who are already using Lens Studio to build millions of lenses. And today they can go on spectacles.com, link to Lent Studio, and sign up for our developer program, which is just $99 a month.

We've tried to really lower the barrier to folks getting started with this new technology. So they'll get spectacles and SNAP support to bring their imagination to life. But explain how this fits in with your overall business. I mentioned the stock is down 43 percent. your date. Explain to investors what you're doing to help turn the stock around. Well, we're really excited about the growth of the Snapchat community, which now reaches over 850 million people all over the world. And we're on pace for record annual revenue this year, driven by the engagement across the platform and the investments we've been making in our

direct response advertising platform, especially for small and medium-sized customers. But is there going to be a direct connection between these innovations that you're showcasing here and revenue? And how long will we start to see those investments? boost your bottom line. Well, the key to generating revenue is making great products that people love and want to use. And that's always been our focus. That's driven the growth of our community, the engagement with our products. And we're really excited about the way that people are going to use AR glasses.

We think we're at a bit of a watershed moment. People are getting fed up with their screens in the way that they make them feel. And developers are feeling frustrated about, you know, developing for the smartphone platform. So I think we're at a unique moment where both consumers and developers are really ready for something new. But you haven't announced when we're going to be. haven't announced when consumers will be able to buy them in a mass way or what the long-term business applications are in terms of actual revenue. So I have to ask about some other announcements

you made here today. What is a simplified version of the app? You've talked about it for a while. Today you demo date. You're going to start rolling it out. The last time you revamped Snapchat, you got a huge amount of pushback. I believe that was in 2018. How is this time going to be different? How are you going to avoid alienating your users the way that there was some of that six years ago? We're really excited about Simple Snapchat. It brings people closer to everything they love about Snapchat, like snapping with their friends, chatting, and of course watching stories. We've actually rolled out a mixed feed content experience that brings stories and short video together

into one unified content experience. So we're really excited to get Simple Snapchat out to our broader community so far. The feedback has been really positive, and we've got more work to do, but I think this will be a better received than the last time around. And do you think that makes you've been testing it? because you have a better sense of the responses. Why not have concerns that you'll have a repeat of that? Well, when we redesigned Snapchat a few years ago,

it was really about our values. We wanted to bring people closer together with their friends. And so at the time, creators were getting a lot of distribution at the top of the stories page, and they posted very frequently, sometimes pushing people's friends lower on that page. And we redesigned the service to bring your friends to the top because Snapchat is built for friends and family. It's built around relationships.

And that did frustrate some creators who saw their reach diminished, but it was the right thing to do for our business and for the long term. And the growth we've seen since then, I think really validates that decision. Now, in terms of your business, you reference that you have new ad formats. You just announced you're gonna be putting ads

into direct messages, also into the map. How will we see those impact your revenue and profitability? Yeah, we're really excited to roll out new ad placements. One of the things we know about Snapchat is that people use it in a lot of different ways. So they chat with their friends, they see what their friends are up to on the map. Of course, they use augmented reality lenses

and watch content. And historically, most of our advertising business has been based on content, on full screen vertical video, which is a format that we pioneered. And we think there's an opportunity to pioneer new ad formats that help our advertising partners reach Snapchatters where they are across the entire app. Now leading into this conversation,

Kelly and Tyler were talking about this new format of Instagram for teens, limiting access to certain types of content that could be inappropriate for teens, and also giving parents a chance to keep an eye on who they're messaging with and putting their accounts to fall into a private mode. Do you need to be doing more to protect teens, given the growing scrutiny and concern of whether it's regulators or the surge in general?

Well, we're really happy to see Instagram copying some of our safety tools. Family Center has been available on Snapchat for two years now. That allows you to see who your teens are messaging or adjust their content settings. But I suppose it's better late than never. But Evan, there's still been a lot of scrutiny about what can happen on Snapchat, whether It's investigative articles finding the way that teens are getting access to drugs via Snapchat. Do you think you need to be doing more? We're always focused on protecting our community. We've invested hundreds of millions of dollars in our trust and safety efforts,

and we've architected the platform to help keep people safe. So whether that's making sure you have to opt in to communicate with somebody, you have to add each other as a friend before you even start talking or defaulting people into private settings for their profile, not having a public friends list. These are the sorts of things that can help keep young people safe. And we're excited to see Instagram copying a few of them. We hope they'll come out in support of the Kids Online Safety Act. We were the first tech company to step up and say that we thought that was the right thing to do

because we need rules of the road in tech. And we'd love to see their support for that as well. Yeah, and COSA is sort of slowly making its way through Congress. But Evan Spiegel, we're out of time. I know this is going to be a hot topic. All the efforts that you and other companies are making to protect kids online. Thanks so much for joining us here at your partner summit and for giving us a sneak peek at your new spectacles.

Thanks, Julia. Guys, back over to you. All right, Julia and Evan, thank you very much. We appreciate it. And remember, you can always hear us on our podcast. Be sure to follow and listen wherever you go. If you want to go back and listen to everything our guest, Brett Beardall has said this hour,

share this with all of your friends, and we'll get his final thoughts when Power Lunch returns. Welcome back. Just a couple minutes left with our guest host, Brent Beardall. He's the CEO of Wafed Bank. We were going to mention, by the way, how the regional banks have also kind of held up this year, contra everyone's concerns. Before that, though, let's just talk for a second about another big part of

your area out there in Seattle, which is Boeing. This company might have to furlough workers and executives as it deals with this strike. What have been the impacts for you or just for the community? You know, I have not met their new CEO, Kelly Ortberg, at all, but I respect him a great deal. It is leadership to say our headquarters are in Chicago, and he's going to move to their largest manufacturing base in the Seattle area where they've had issues. He is an engineer, I believe, by trade. He is going to get in there. I'm bullish. I'm bowing what they're doing, and that is leadership. Now, they have a huge challenge in terms of the strike, but I'm confident they'll get it addressed. Let's talk a little bit about regional banks and how yours is doing. There was all that

trouble about a year and a half ago. Some of it lingers. Your bank is healthy and the stock has risen. You know, it is great to be here with you today and not talk about the health of regional banks because regional banks are incredibly strong. And I think there's a pent-up demand in the country for regional banks. Consumers, small businesses, large businesses, they want a relationship with a banker. And it turns out the largest banks in the country, you can't have the relationship the way you can with the mid-sized bank. I saw even J.P. Morgan is building out a lot of branches again and kind of this, we have a whole death of the internet thesis around here. But anyway, that that in-person touch really, really does go along by.

It does, just like this. So I want to close by saying, thank you for having it. Thank you for being with us, Brent. It's always good to see you. You always had so much to the conversation. It's really good. And thank you all for watching, Power Lunch. Closing bell starts right now.

We'll see you tomorrow in Washington, D.C.