Power Lunch - Dow drops 2,000 points as trade tariff market rout deepens 4/4/25

Episode Date: April 4, 2025

The stock market is getting pounded for a 2nd straight day, after China retaliated with new tariffs on U.S. goods, sparking fears President Trump has ignited a global trade war that could lead to a recession. We’ll cover all the market angles for you.Plus, tech titan Microsoft is celebrating it’s 50th company anniversary. Andrew Ross Sorkin will join us with some very special guests to mark the occasion. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

All right, welcome to Power Luncheon, stocks and your money continue to fall. The Dow is down 1,534 points, 12 months gains, close to being wiped out or even wiped out if your technology stocks. I'm Brian Sullivan, everybody, alongside Kelly Evans today. We are all over the financial flashpoints, investors selling again, and the selling begets more selling. There are those some signs. This could be near the end. We're going to speak with Market Power Player Kyle Bass about all of it. in moments. And a CNBC exclusive that could help turn the markets around. I don't know. Do people want to hear from Bill Gates today? We'll see what he has to see. He's been through a few market cycles, a rare interview with him. And of course, with Microsoft CEO Satya Nadella, who, look, maybe with just some visibility on the business investment plank of this and their plans for AI. Steve Ballmer, everyone should be joining Andrew Ross Short. Yeah, and there's more to go. But let's speak. Why is this important now? Because if the market traded for two years on AI hopes and all the capital spending, Microsoft, Google and others we're going to do with

NVIDIA. Where did that go? None of these companies, none have cut their guidance at all, and we're getting crushed. Well, and we're coming up to April earnings season. So that's in the back of everybody's mind. As Brian said, we do have losses continuing today. And to some extent, accelerating in the Dow, although the NASDAQ is not as bad as it was yesterday. The Dow's down about 3.7 percent, 1,500 points this hour. The NASDAQ's down 4 percent. I believe it dropped 6% yesterday, although tech does continue to struggle. Apple's down again. Amazon having its worst week since 2022. Any chip in AI-related stocks continue to fall. Again, raising the question, how much of this is air coming out of the balloon, how much of it could be an opportunity for one

innovation cycle that should continue to some extent. And the home builders are bucking the trend. They're in the green with rates falling today. Yeah, China-based ETFs also sliding on that country's retaliatory tariffs. Remember, that's one of the reasons we're seeing another leg down today. is that China come out and saying, okay, you want to raise tariffs on us? We're going to raise tariffs on you. You got all these different China ETFs, FXI, K-Web and others. They are all falling, except look at Vietnam, the VNAM. That is up 4%.

It's because, as you saw the headline and Aiman talked about it, there is a chance, Trump came out and basically said that Vietnam may cut its tariffs on U.S. products to zero. So one wonders, Kelly, does that make us cut? them, as the president said, two zero, and we start to see some of these deals being made. Little glimmer of hope here, but a lot to be learned. DuPont, by the way,

leading the declines in the S&P, China regulators now investigating the firm for violating anti-monopoly laws. As part of China's retaliation announcements, there were other things in there, like they're restricting some rare earths, they're restricting some imports of certain poultry and sorghum, so there's a lot going on on that front. Yeah, I mean, they just

decided to open up an investigation into DuPont on the day they announced retaliatory tariffs. Oh, by the way. I mean, China, could you wait a day? At least make it look valid. All right, finally, oil prices tumbling to their lowest level since late 2021. You wanted lower gasoline prices, folks? You're getting them. They're on the way. Copper having its worst single day since 2008. So obviously, I think you might have gathered from the top of this show and the exchange. There is a lot to talk about with your market, stocks, and your money. The tariff sell-off continuing the Dow losing over 3,000 points in just two days.

Many indexes are now in technical bare markets, down more than 20% from their highs. China retaliating. The payroll numbers this morning actually came in hot, sort of re-raising inflation fears. Fed Chairman Jay Powell saying the economy is still strong. Oh, and the president pushing the Fed for a rate cut on his social media platform. Other than that, not a lot going on. Let's talk about all this and more Kyle Bass, founder and chief investment officer at Hayman Capital Management. I don't even know where to start, Kyle, so I'm just going to throw it right out there.

What do you make of the stock market action the last couple of days? First of all, Brian, pleasure to be here with you. You know, look, I think it's important to think about kind of the real big picture for a second. The Fed's balance sheet went from sub-1 trillion in 2008 to 4.5 trillion by 2019. And then from 2020, when the COVID hit, it went from $4 trillion to $9 trillion in two years. We added 40% more money to the system in two-year period. So we got about 40% inflation. In fact, the housing index, the government's own housing index was up 50% during Biden's

term. So now the Fed has actually reduced its balance sheet by 25%. It's gone from $9 trillion to $6.7. and the Fed continues to quantitatively tighten on it on a daily basis. So there's no real structural positives from a monetary creation perspective to support the stock market. And now the tariffs are scaring investors. So, you know, I actually think, I think the tariffs are thoughtful. I think they will work. I think you've already seen Vietnam ask for a 90-day reprieve to negotiate. You're going to see a lot of first cash plane tickets from delegations from all around the world

coming to meet with the president to try to hammer this out. Okay. Let's go back. Let's go a little more to that word work, okay, because we're CNBC. And I understand that a lot of people don't own stocks, but we serve that community. If we're looking at the screen right now, Kyle, it's red everywhere, right? I mean, market are, markets are not, I hate to use the term collapsing, but they're down 8%, 10% in two or three days, and many are in technical bare markets. How would you define, working with regards to the tariffs? You know, look, how many times have you heard people complain in desperation and talk about

the size of our deficit being $2 trillion on government revenues of what, $4.5 trillion? We must cut our deficit, Brian. The whole world's told us that. Our own economists tell us that. And so when Trump moves to do a couple of things that will close that deficit, number one, If Doge and Elon Musk are successful in cutting government expenditures, cutting the fat, let's say they cut. I don't know what your number is.

I would say $4 to $600 billion is doable on a number of $6.5 trillion. That will be cutting 10% of government spending. The U.S. government spending is 23% of GDP. That is a recessionary impulse, but it's necessary. The tariff move is akin to a currency devaluation. It will raise somewhere between $300 billion and $600 billion. in external revenue. There is a path that Trump and Secretary Besson are talking about here, taking us to showing us how we cut a trillion dollars out of that deficit. Right? When I talk about

working, we're going to cut our deficit by a trillion, and we're going to reset what the term of fare means with reciprocal tariffs. And so, yes, that's going to be difficult in the near term. In the long term, it's going to give us a positive foundation for growth. Okay. So let's play devil's advocate on that point, Kyle, because I don't fundamentally disagree with you. There are a lot of 28-year-old, 31, 35-year-old viewers that are watching or listening right now. They don't own any stocks. They're trying to buy a home. It's too expensive. Mortgage rates are too expensive. Hell, everything is too expensive. We've talked about bringing down inflation and bringing down the price of energy. All those things are going to happen. Interest rates are coming down. Mortgage rates are coming down.

energy costs coming down. But, but so there's a lot of people out there that maybe quietly will say, well, I don't own stocks. I don't really care about the Dow. This isn't the worst thing. But here's the problem. If you crash the economy to do it, if people lose their jobs and thus can't afford to buy the home, then what? What is the risk? We seem like we're walking a tightrope, Kyle, where, you know, hey, if we can pull this off, that's great.

But what if we fall? Yeah, I mean, the real risk here is 10% of, you know, of the top 10% of U.S. households represent 50% of consumption. Consumption, 68% of GDP. So the high end of the U.S. is what's been spending to keep our economy growing, and that's what's been driving jobs. So will that slow down? Yes. Look, I expect, just with pure math, I expect U.S. GDP in real terms will drop one and a half to two percent. Is that the end of the world? No. Could that change the psyche? of investors in their spending, potentially. But that's why, look, the Fed will be late. For certain,

they'll be late. You can even hear it in Powell's response to the president asking for a rate cut. Certainly, the yield curve will steep in. The front end's got to come down because the next two GDP prints are going to be difficult. It's going to look stagnationary, but it's going to get a lot better after that. And again, this is a restructuring we must engage in, Brian. We can't, We couldn't keep going the way that we went. Housing prices were up 50%. 5-0. If you look at the government's own housing index between 2020, 2024. And yes, there was a different president in the White House then, but it was a cost of living crisis caused by Congress and the Fed. And now what we're trying to do is reset kind of the crazy price moves that we saw over the last four years. And it's difficult.

It's going to hurt. But this is, look, it's akin to a controlled burn. You know, are we going to have the Palisades fire? Are we going to have a controlled burn with thoughtful leadership? I believe this is a controlled burn. I also believe that, you know, what's the NASDAQ down year to date, like 17, 16, 17, the S&P's down 13 and a half? Look, the president himself and the administration, there is a put somewhere.

My guess is it's somewhere down another 5, 6% from here. So when you're asking 31-year-olds, 28-year-olds, when you buy, you start buying in the next couple of months. Kyle, can I quickly ask you as such a close observer of China? Are they going to have to devalue? Is the rest of the world, as the Wall Street Journal's writing, going to be flooded with cheap Chinese goods? Imagine how that'll complicate things for Europe. What other, you know, if they devalue, are they going to have currency flight? Is none of this going to matter because retailers are charging $100 on a U.S. item that costs them five, and so now it'll cost 10?

And, you know, so what are the possible responses there? And it's interesting that their market is down worse today on their retaliation announcement than it was when we announced the 46% tariff. Yeah, I think that the general narrative around China is just wrong in the media. And what I mean by that is China has three and a half times the size of their banking system that we do as a percentage of GDP. They've already been dealing with an economic collapse for the last two years. We import about $440 billion a year from China.

we run a $30 trillion economy. We only export about $140 billion to them. If you want to do tit for chat retaliatory tariffs against us with a relationship like that, we win because there's very little for them to tariff back to us. So, Kelly, when you think about where China stands today, they already were broken. They already have a closed capital account. The fallacy in this concept of Chinese currency strength and weakness is they have a closed capital account. They're not a real open economy. And so their strong currency is actually works in their

favor. And what I mean by that is they have to pay dollars for everything in the world. They're the largest importer of crude oil, 13 million barrels a day, largest importer of LNG, about nine and a half bees a day. And they import 40% of their food every single day. And they must pay with dollars. A devaluation of their currency is a disaster for them, in my opinion. So that's why they're retaliating with tariffs. They have little other choice. There's not much else they can do. I mean, look, she wants to project strength, and he's in the weakest position he's ever been in his presidency, especially economically speaking.

So our slowdown, if it's intentional, which I think it is, to reset our spending, our expenditures as a government, really has a knock-on effect on China. China is really going to suffer if the West slows down, because the West has been the growth engine for the world. for many years, really since post-financial crisis, you've seen the West take over. So I think if the West is going to slow down, it's going to really impact China because they were already having trouble with the construct of their economy. Yeah, and your point is well taken. We only sell about $160 to $160 billion to them. There are companies that will be affected, the Tesla's of the world, the Starbucks, the Nikes, but overall, they don't buy a lot of our products.

And by the way, if you go to China, as I have, I've been there a few times, There's no Twitter. There's no Google. Most Microsoft products are pirated or stolen. So different issue. Very quickly, Kyle, I want to sort of tap your big brain on the markets. I posted something from J.B. Morgan's derivatives team. Talking about forced volatility selling.

Can you just, in layman's terms, sort of take us just quickly into the market? How does selling beget selling? Because these are not all people dumping their 401ks. In fact, yesterday, we saw billions in retail buying. So the mechanics of the market, what's happening? Yeah, I mean, there's a ton of cash on the sidelines that was part of the Fed's jubilant expansion of their balance sheet. So number one, there's a lot of cash on the sidelines.

Number two, you're asking about how selling to get selling. A lot of people run these things called value at risk models. Value at risk models have a component there of, call it, volatility. You know, when the VIX hits 40, historically, historically it has been a great time to buy things. And so when the, when the volatility spikes, the value at risk number expands, and it requires selling to sell down risk. And it's just, it's kind of, it's a crazy model. But it is what it is. And selling does beget selling. And so again, if the Fed is not going to be accommodative. And if you heard Powell what he said today, he's telling you he's certainly going to be

late to the party, certainly not looking to help President Trump. So I think if there is, If they're out of the picture, and in fact, they're still quantitatively tightening, and you've got a scenario where we are not bluffing on the tariff side, we are here to reset trade relationships. You know, we might have a short-term turn and bounce, but you're going to see the economy begin over the next six months. And then we're in a great spot to grow. We're in a much better fiscal position.

And look, I applaud what's happening. It is difficult medicine to swallow it. We all own stocks. Like, I'm not short anything, just to be clear. I'm not talking my book. I was just about to ask you, because I know you know Bessett, I was just about to ask you, do run a fund if you're short, you are not one on the record. Very clear, we got to go.

But Steve Leesman, who's not here, but he emailed me a question to Kelly as well. How do we blame quantitative tightening when the Fed just backed off to almost zero? Can you answer Steve's question real time? Yeah, I mean, the Fed has produced their balance sheet 25% over two and a half years. What do you mean? How can we? But I'm not trying to assign today's, or yesterday's decline to quantitative tightening.

But the fact of the matter is we've reduced our balance sheet, the Fed has 25%, two and a half years, and the Fed's down to $5 billion a month or $60 billion a year. But that's certainly not accommodating anything. So all I'm pointing it is the arrows. If you look at, if the Fed reduces his balance sheet 25%, there are multiplicative effects on the economy. What I'm saying is no one's talking about it,

and it's actually functioning relevant to this conversation. It's just not relevant on a digital day-to-day basis. Kyle Bass, Heyman Capital Management, taking viewer questions, live on the, live on the show. Only you could do that, Kyle. We appreciate it. Thank you.

It's a pleasure. All right. Let's turn to Rick Santelli now. As we watch those bond yield sinking, we went under 3.9 this morning. Kyle just said the two years should go way lower and the curve should steepen, Rick. What's it all going to mean? Well, I think the curve could steepen real quickly. I want to dig in on something that Kyle just said that was also in the journal.

The journal this morning said, we import $400 billion from China. Kyle Bass said $440 billion. Think about that number. Now, I'm going to ask you a question, Kelly and Sully. What size budget deficit do we currently have, roughly? About a trillion? About two. Two.

Think about a trillion plus on the deficit versus all the entire imports from China are less than half of that deficit. That really frames out the problems that we have. Now, let's get back to the market, shall we? If you look at two-year and 10-year, you'll see a couple of things. Coming into our time zone, around 6 a.m., we saw yield start to drop. The flight to quality, nervousness over equities running around the clock. Then, around 11 o'clock Eastern, we saw rates tick back up again. That was obviously, as you've all been talking about, the Vietnam Trump phone call that he put on his social media.

Now, let's move on a little bit. I tweeted earlier that we haven't closed below 4% since October 4th the last year, and we are flirting with that level. We just touched it and bounced back off. It really is a big psychological level. But if you're looking at the crash, 15% a 10 year was lost in one week in October 87. If you make that and put it into today's numbers, that would come up with the yield of 3.71%, just to throw it out there.

And if we look at the liquid LQD, which is the investment grade ETF, and you look at the HYG, the high-yield junk ETF, I find it so fascinating the differentiation there. The LQD looks like nothing's going on. The HYG is going to close at the lowest price since July of last year. And then finally, the dollar index is just going wild today. It's up over 1%. It's got over half back of its 2% drop since last year. Friday, at least as evident by where it was on Wednesday and Thursday morning.

Brian, back to you and have a restful weekend. Yeah, I'm sure it's going to be real restful. It's probably a CNBC special Sunday night. Rick Santelli, thank you, all right? After the break, how far will President Trump go with Terpson? How much do Americans, especially younger Americans, really care about this? Derek Thompson, the Atlantic, also just co-wrote a book. So it's a bestseller.

It's called Abundance. You've got to read it. And Derek is next. Welcome back. The president's team tried to make it clear yesterday. Tariffs are the future and there are no negotiations. But is that true? I don't think there's any chance that President Trump's going to back off his tariffs. This is the reordering of global trade. Let me make this very clear. This is not a negotiation. This is not that. This is a national emergency.

What are you open to deal here? Well, it depends. If somebody said that we're going to give you something that's so phenomenal, as long as they're giving us something that's good, the tariffs give us great power to negotiate. All of that said, there may be some negotiating going on. The president posting on truth social, he had a good call with Vietnam's leaders that turned some of the exposed stocks like Nike, the other footwear makers around.

And moments ago, the EU Trade Commissioner, tweeting he had Frank talks with the Commerce Secretary and the U.S. trade rep, saying U.S. tariffs are damaging and unjustified, and the trade relationships between the U.S. and EU need a fresh approach. So what's the strategy here, and how does the public feel about it? Let's bring in Derek Thompson.

He's a writer at The Atlantic and co-author of the new book, Abundance. All right, Derek, have that. I mean, where do we start? Do we say, well, the stock market reaction is one thing, but we're trying to do something different for this country. We're trying to make housing affordable again.

And I don't know. Where would you point our attention? If you're totally honest, Kelly, I've been listening to the last 10 minutes of this show. I cannot believe what I'm listening to. I heard your last guest say, if the economy shrinks, that's good. If the stock market goes down, that's good. If the housing market crashes, that's good.

If there's a trade war, that's good. When did the capital class get taken over by degrother protectionists seeking 19th century autarky? Okay, but Derek, let me just jump in for a second, because if there's one refrain we've heard from millennials over the past several years, it's that the dream is gone. They can't afford a house. Groceries are too expensive. It's only the first chapter of abundance. Apparently the first chapter of your book. So aren't you a little surprised to hear the globalists,

the pro-stock market types who are supposed to be at fault for all of this, now reading out of your book and saying we're bringing prices back down? No, they're crashing the economy. That's very, very different than making housing affordable. If you want affordable housing, you need a job. If you crash the economy, you're going to have unemployment. And whenever unemployment hits an economy, as we just sort of, in 2008, and we saw before in the 1990s, who loses their jobs first?

It's last one and first one out. It's young people. So if your job or if your plan is to crash the economy in the short term for the purpose of helping young people afford a house, you have got it totally backward. Young people need jobs, they need money, and then they need a plan to make housing affordable, right? Donald Trump could have come into office and said, what I want to do is to make the construction of housing affordable. That means the inputs to housing. Instead, he slaps a 25% tariff on Canada, which we import our lumber from, and a 25% tariff on Mexico that we get drywall gypsum from, thus immediately raising two of the most important inputs for housing by 25%.

This is a strategy to make housing less affordable at the same time that you make it harder for young people to keep a job because the stock market's puking. This is not the way to go about abundance. This is scarcity meeting scarcity. This is Trump saying we don't have enough housing, so we need fewer immigrants, or we don't have enough manufacturing in the U.S., so we need less trade. abundance is a positive some way of looking at the economy. It says we can grow if we invest in housing.

We can have a strategy that seeks to make more of what we need in the U.S. without trying to cut ourselves off from the entire global economy. I completely reject the idea that what Trump is pursuing is anything like abundance. It is an explicitly zero. So, Derek, so, okay, by the way, I'm listening to abundance. You, I love you. We've talked for over a decade. I'm listening to abundance.

out all the way through. It's a fantastic book. You guys are getting a lot of attention. And I think one of the reasons you're getting attention for the book is that you're basically saying, listen, we are sort of centrist Democrats, self-admitted. But what we've been doing is not working, right? I think we can agree on that, that the path we've been going on, that rich liberal towns, you know, they say, we need more housing, but not here. Don't do it here. Like, do it somewhere else, but let's not do it here. I mean, we want it, but don't do it here. we agree that what's happened is not working. So listen, you're right.

This could send us into deep recession, crash the economy, jobs lost. I have no idea what's going to happen, Derek. Nobody really does. But do you agree that we need to try something different? Would you agree at least with that? Oh, absolutely. We need to try something different. We need to make it much easier to build homes in cities and states that currently are torn up by rules and permitting processes and environmental review.

We have a terrible housing shortage in this country. We have a shortage in California and New York, and unfortunately, it is worst in places where liberals have the most power. This is a core theme of our book that if progressives really want progressive outcomes, they need to think about the processes by which they achieve them. So absolutely, I think we should reform zoning laws in big cities, big productive cities that right now are terribly housing constrained. But that's very, very different, I think, from a housing policy that begins with tariffs that make it harder to build homes. 25% of construction workers in this country are immigrants. An enormous amount of materials that we import comes from overseas. We need an all of government understanding that if we want houses to be affordable,

young people need good-paying jobs, and houses need to be plentiful. What we don't want is a world where young people are cut off from the opportunity ladder because there's a recession in their early 20s at the same time that we make housing inputs affordable. You and I have a lot in common, except that you're skinny and got great hair. and you wrote a best-selling book. None of those three things are true with me. But I think you're a guy that wants to find solutions. You sort of tweeted out, sort of semi-tonging, and by the way, the Dow's down almost 2000. It's down 1950. You tweeted out that we kind of need to do like a divorce, like there's this show in the Netherlands or divorced people go into a boat and they get divorced like 72 hours and they save time and money, that everybody gets into a room and do kind of a phone-a-thon on tariffs and rates, like kind of Vietnam was thinking about. doing maybe India, as I suggested, might do. And I think you meant it sort of tongue-in-cheek, Derek, but I'm going to give you credit because you were at least looking for a solution. Okay, I did kind of the same thing, and the Twitter hoard comes out and the attack and whatever.

What would Derek Thompson do? What is the solution? If what we're doing isn't working, and we need to fix some things, what's the answer then? If it's not what Trump is doing, what is the answer? I don't know. Look, Trump's in power and I'm not. So any solution in this problem has to start with the president. Well, Congress might disagree with that. I think there's going to be legal challenges to the terrorists. I would hope you're right. I would hope the Congress reasserts its very constitutional authority on tariffs. But right now, I don't know if that's going to happen. So if I have Trump's ear, what I say is, Mr. President, you have an enormous opportunity to announce a 72-hour phone-a-thon of freedom. We want to get you on the phone with every single state leader around the world to work out individual bilateral free trade agreements with all of them.

I want a beautiful Rose Garden speech at the end of this. You did it. 72 hours phone-a-thon of freedom. We are back, baby. We've got tariffs torn down across the world. American economy can roar again, and we can help young people get and keep jobs that will allow them to buy housing.

Honestly, I really do think it's incredibly important right now to persuade Trump that it is in his own interest and in the national interest, to use what is right now a trade war to become a trade victim. As soon as possible, we need to work out these deals around the world because a trade war in which you got walls going up for every single country is a place where you have falling demand for every single global economy.

That's a global recession. At the same time, by the way, that we're going to pass a $5 trillion corporate tax cut, which is going to be inflationary. And when you add falling demand to inflationary tax cuts, what you get a stackflation. I don't want the 1970s. I want the glorious 2020s. Trump on the phone right now, get him talking to these global leaders, have him work out these deals so that he can celebrate the deals that he got for America, and let's leave this all behind

us, because what's happening right now is absolutely madness. Very quickly, the S&P is down 5.3%. We're waiting on a Microsoft event, Derek, so we might have to jump in and cut you off. Very quickly, Kelly, sorry. If we get an S&P that's down 7%, trading is halted. We're down 5.3. Seven still ways away. Not that far away.

But it's not that far away. Yeah, it's a Friday. You know, people don't want that exposure going into the weekend. They're kind of, it's what Bill Gross told us yesterday. It's what he's been talking about today. There's a sense, it's what you talked about with Kyle Bass, the sense that it's a positioning unwind. And we need to learn more. It's fear.

It's fear. The VIX is at 40. And we had Kilberg last hour who talked about, you know, maybe when you get to 40, you start thinking about kind of dipping your toe back in. But this is a market that started out in the morning, okay, got really upset after China announced the retaliatory tariffs. That's what initially sent us lower. started to come back a little in the afternoon. Then we heard from the Fed chair. And then Powell was cautious and said,

I'm not necessarily in a position to start running to the rescue. People have been talking about emergency rate cuts over the past couple of days. The chair clearly just about ruled that out. And that's when we've seen stocks taking a leg lower and yields coming up a little bit as well. So there you have it. And look at that.

It's on your screen. The Dow is down 2,000 points. That's just under 5%. I know the numbers get bigger as the numbers get bigger. So 2000, the Dow was at 2000, 30 years ago. But we have gone up now over 40,000, not anymore. The Dow is down 2,000 points, Kelly, on a points basis.

Yeah. We have lost almost 4,000 points in three days' time. The Dow didn't hit 4,000 until I think it was the early 1990s, or at least late 1990s. 80s. So we are down 5% right now on the Dow. Nasdaq, Russell 2000, small caps, all in bare territory, down 20% or more from their high. A couple ways to put this in perspective also. It is extraordinary the declines we've seen the last two days in a row. And it's been uncommon to see declines like this in the past 50 years or so. In fact, the NASDAQ has only

had back-to-back 5% declines three times ever in 87, 01, and 08. So we'll see what happens today. the S&P 500, these could be the worst back-to-back declines. One of the worst two-day declines we've seen in the past 50 years other than in the pandemic in 2008. So this is a big repricing. And just to put the, I know the numbers are big, we're down 2000. It's not just in points. It's also, these are in percentage terms. One of the biggest two-day sell-offs we've really seen in recent decades.

And basically wiped out a year of gains. The S&P 500, let's not forget, is still doubled from four years ago, but we just took out an entire year of gain. The NASDAQ we've taken out more than a year of gain. I don't know if Derek is still there, but Stephen Stanley, Chief U.S. economist at Santander U.S. capital markets joining us. And everybody, I just want to apologize if we have to bail out because waiting on this important Microsoft event. Stephen, you just heard our conversation with Derek Thompson and Kyle Bass and others. Do you believe that what's happening in the stock market, which is ugly and terrible and awful, will translate to the American economy?

and is the market predicting a recession? Well, the market is certainly very concerned about a recession. I think in terms of whether it will translate, it really depends on how long it lasts. I mean, we've had plenty of episodes where the markets have moved drastically over a couple of days and then, you know, whatever something happens and it goes back the other way. I don't think one or two days is necessarily going to make a break the economy, but certainly if financial conditions tighten and they stay tighter,

that will be a problem. Stephen, just kind of bring some of your experience here into the fold. So we're talking about sharp two-day sell-offs. We're talking about analogies to 2008 and 2020 in terms of these declines. Obviously, there's a lot of differences between now and then as well. So what are the similarities? What are the differences? What strikes you as most important for the economy now?

Yeah, I think the biggest, for me, the biggest difference is that this, if I can put it this way, this calamity is entirely man-made, right? I mean, at any point in time, in theory, President Trump could come out and declare victory, as Derek suggested, and shift tack. And the economy seemed to be in pretty solid shape before Wednesday, so we could easily get back to something like that. You know, I don't think that that's sort of a quick reversal

was ever viewed as in the cards in either 2008 or 2020. So I think that's a big difference. And to me, at least at the margin, that does kind of hamstring the Fed a little bit, right? Because monetary policy works with a pretty long lag. And the Fed doesn't want to panic and react precipitously to something that might not be around in a month or six months or ever, how long it's going to take for their policy moves to really take full effect. I think that's exactly right, especially when you get a jobs report as strong as the one that is. It's ironic. It's probably the worst piece of news that the market.

could have gotten. If we added 40,000 jobs last month or were negative, I think the chair's speech would have had a very different tone. Yeah, perhaps. I mean, I think there's no doubt that Chairman Powell and the Fed are stuck in a really difficult position. As with any negative supply shock, you know, the tariff situation means that not only will growth be weaker, but inflation will be higher. And, of course, the Fed can't address both of those problems at the same time. So they have to decide. And I think you've heard from Powell and others that they're a little bit torn between whether the bigger issue for them is going to be slower growth or higher inflation. If the severity of the market moves is any indication of what might be in store for the

economy, then I think ultimately they're going to have to move in that direction. But I don't think they're in any rush to do so. Yeah. And Derek Thompson is still with us, the Atlantic co-author of The Best Selling Book Abundance. And so, Derek, you know, your book is literally about growing the pie, sort of growing the, and you've taken, by the way, you and Ezra Klein have taken a lot of heat from the left. They're like, well, this is not traditional progressive ideals. Donald, I traveled the country before the election. I met with people who said, I've been a Democrat my whole life, but I'm a Labor Democrat, and I'm voting for Trump because he supports jobs.

Is it clear to you who anybody is these days? When you've got people coming on the show that are ostensibly Republicans are like, We don't give a crap if the stock market crashes, if it's going to bring down interest rates. I don't know which side is up right now. What bothers me most honestly is not that I don't know which side is which. It's that I don't think the folks who are in charge know what they're doing or why. If you look at the justifications for this policy, they're all over the place. You've got Peter Navarro saying the tariffs are going to raise $600 billion a year.

That suggests they're going to remain in place. You've got the tech folks who are associated with the Trump White House saying that actually, this is just an opening negotiation tactic to force other countries to bring down their tariffs, and then we'll bring down ours. Well, wait, pause. You cannot raise taxes with a tariff that's designed to go away. So already you have parts one and two not making any sense. Then you have this third strategy, that's sort of Stephen Miron's idea,

that what we need to do is de-dollarization. Well, you just showed about 30 seconds ago that the dollar is actually appreciating right now because the entire global economy is puking. I don't think the folks in charge know what they're doing or why. And the reason that scares me on top of all of the obvious is that there's this theory that Donald Trump is this mastermind of uncertainty. And there's some reason to this, that if you have someone who is so great about uncertainty,

they can get other countries to do what we want them to do. But the problem is that uncertainty is a double-edged sword. Domestic businesses need certainty to know how to invest. Domestic manufacturers need certainty to understand how to explain. If there's uncertainty in terms of our trade and tax and spending policy, how is a manufacturing company supposed to figure out how it's supposed to finance a doubling of their factory base? They cannot do it. What we need now is absolute clear certainty.

And as the previous guest said, going into January, you had a growing economy with declining inflation and rising employment. And there was no situation that required us to essentially yank out the oxygen as we're trying climb Mount Everest. We can always just plug the oxygen back in. We could do it. Trump could have his phone athon or something, but it doesn't seem to be happening right now. This was supposed to be the most pro-business administration that we have seen. It's early. But right now, you wonder what CEOs are thinking as they watch their stock price go down 10, 20, 30, 40, 50 percent in a matter of days. Derek Thompson, the book Abundance and the Atlantic, Stephen Stanley, Santander, gentlemen,

both. We appreciate it. We are micing up. the CEO of Microsoft, easy for me to say, the Dow is down 2064 points. So let's just give a little bit of a sense of the context here. We can show big tech since we're about to hear from Microsoft, and this may touch on AI plans. Obviously, his shares of Nvidia down 30% from the highs, and one of the big questions will be if we hear something now that gives us some clarity on the business path going forward.

Andrew Ross Sorkin is live at Microsoft's headquarters in Redmond, Washington, for a CNBC. exclusive. Andrew? Thank you. And it's a big one because we don't just have one CEO. We actually have all three CEOs of Microsoft over the last, well, 50 years now. They are celebrating their 50th anniversary. It's a big one. Let me tell you who's here. The three CEOs of Microsoft throughout its history. Bill Gates is here, the founder of the company, of course, Steve Bomber and Sostia Nadella. This is a great moment to talk about the last. 50 years of Microsoft, that's why I flew out here. But while I'm here, I need to talk to you

about this, which is Microsoft, really, and it's a manifestation of the American dream and the manifestation of what turned out to be a global business that generated a global business, not just for Microsoft, but for so many other companies around the world. And so on a day like this, when everybody's trying to understand what they're supposed to think about these tariffs, not just the impact on Microsoft or others, but I'm curious what all three of you think of this and what you've been thinking over the last 48 hours. Is that you?

Yeah, to me, Andrew, it just comes down to, as an American company, as a multinational company, I feel that, you know, we have to earn the license to operate in every country, one country at a time, right? Every country is going to do what is right for themselves, starting with the United States. And so therefore, I always go back and say, is Microsoft adding local surplus, right? Are we making businesses in that country more productive?

Are we making public sector more efficient? Are we helping with health outcomes, education outcomes? So as long as our contribution to the local society and the local economy is there, we have a license to operate. It's true in the United States. It's true in France. It's true in Indonesia. And so that's kind of what will ground us. You know, these things, whether it's trade and so on, will come and go.

But we're very, very focused. But we'll come and go and is it going to change your own plans? I mean, this is a company that's broken down barriers itself around the world. And so, and now the United States is putting up a big barrier that's going to change. I imagine the economics of your business, the economics of your client's business. You're going to be buying or not all sorts of computer equipment and other things to build out data centers. There are two ways to look at it, right? One is the short term, then the long term.

In the short term, I look at it and say, whatever happens, whatever readjustment happens, we are for the first time really supplying what is the essential non-durable commodity called intelligence. The world has never had this, right? You know, when Bill started in 75, software was the thing. And today, we have a more essential, and it's non-durable. Like nobody's going to get up in the world.

anywhere and say, hey, I need less of it, I need more of it, and I need it daily. So we'll see how all that shakes out. The second thing is, 50 years from now, or 25 years from now, what is the one thing you can be guaranteed of is the world needs more compute. So I want to keep those two thoughts and then take one step at a time. And then whatever are the geopolitical or economic shifts, we'll adjust to it. Let's talk about those. I'm curious from both of you and what you think of the tariffs themselves. You've talked to the president before. for Bill. You know, what's your reaction to this?

Other CEOs calling you, talking to you, what are you guys talking to each other about in this context? You know, I'm not that expert on what the economic effects are going to be. So far it's just on goods, but, you know, will it eventually be on services? Who knows? You know, Microsoft has benefited from being a center of innovation. And now, you know, building out many countries around the world, engineering capacity. You know, so I'm sure that we'll adjust. You know, I'd say the biggest

trend in the world today, even beyond the complex geopolitics, is the arrival of AI. You know, it's kind of weird to think a company's 50 years old and the most profound decade will probably be the next one. I'm surprised the politicians aren't talking more about AI. I think that's the next wave is each country trying to shape lead into this new AI era? Steve, do you have a view? You never hold back. So what do you actually think is going on here? I'll say two things.

Number one, I took just enough economics in college to Zip said, tariffs are actually going to bring some turmoil. Right. Now, whether that's desirable, undesirable by any government around the world, and its citizens, you know, the democratic process or whatever process is in place. But do you three think it's desirable? I think that disruption is very hard on people. And so the decision to do something for which disruption was inevitable,

that needs a lot of popular support. And nobody could game theorizing. exactly who was going to do what in response. So I think citizens really like stability a lot, and I hope people, the individuals who will feel this, because people are feeling it, not just the stock market, people are going to feel it. You know, we'll see.

Now, as a Microsoft shareholder, this kind of thing is not good, and it creates opportunity to be a serious long-term player. We've invested, you started, what, in 78, working internationally. Microsoft has to be great for its customers. And if it does, no matter what happens in the short term with revenue, profit, share price, it gives an opportunity to reemerge and tell the citizens not only in this country, but in France, in Japan, around the world, Microsoft is there for you.

We're always going to serve you in the right way. And real quick, before we get into the AI about and go back, 50 years. Do you think that this changes that? The relationship that the United States, the halo that the United States has had and American business in all of these other countries that this company has done business with? I mean, I would say, you know, the tailwind of being an American company was huge, right? I always sort of describe it. I started in tech right after the Berlin Wall fell, and being an American tech company and riding that over the last 35 years has just been unbelievable tailwind. And this definitely changes that, right? So people want to know that you are more committed.

That's why I go back to it and say, hey, we enjoyed the tailwind of a being an American company. And guess what? Now, we have to make sure that we double down on that local surplus, right? When you're in France, you have to be a French company. When you're in Indonesia, you have to be an Indonesian company. Yes, we're a multinational and an American company. But the license to operate is about the value I had you bring to them. And that's what we have to really get back to. And the good news there, Andrew, for me is Microsoft's core business model is aligned with it, right? So I don't have to invent anything new. And we don't have to change anything from day one.

When we do, in fact, one of the fun, first thing I's check in any country, in fact, I learned it from these guys, is you go and check how many partners we have, how much employment they have, how much revenue they make as a ratio to ours. That's the kind of classic metric brief that we all have been used to. and that's kind of what will really differentiate us. Bill, I want to show you something, and I don't know if the camera can pick it up, this is the Altaire. This is, to go back a full 50 years, this is you and Paul on this machine

creating this company effectively back in Albuquerque. Do you remember that? Oh, sure. Paul and I had been lucky, Paul Allen, my co-founder had been lucky enough to be exposed to software and to realize that with the miracle of the chip improvement, the key thing would be software.

And so when this is first announced, Paul's moved back to Boston to kind of bug me to drop out of Harvard. And as soon as we see that being released, we decided, okay, we want to be at the forefront. And so I left school, and Microsoft actually spent its first four years down in Albuquerque, New Mexico, where the company that made that computer was. And then as we got more customers, I got to make the decision, do we want to go to Silicon Valley or come here to Seattle? And I ended up picking Seattle, which I think ended up being a great decision. So that was a eureka moment for you. And now you say 50 years, hence, that you think the next eureka moment is AI.

And I'm curious if you could both, all three of you, go to that moment because you've been talking about it a lot for a long time. But then I think there's a famous story where Sam Altman shows up at your house and shows you something. something? What happens? Yeah, so the idea that AI would be the future. I mean, it even predates me. Alan Turin talked about computers eventually being so good you couldn't tell the difference between a human and the computer. When I was in high school, there was Shaky the Robot at Stanford Research. And so the whole time of this industry, we've been saying, let's make these things smart. Let's have them recognize speech and images. And that really accelerated a little over 10 years ago.

Still, the idea that the computer could read and pass tests was a little over three years ago when the partner, OpenAI, had ChatGPT4 and I got to see the pre-release version of it. That blew my mind. That said to me that all this talk about intelligence finally was coming true. This thing could pass an AP biology test, which was the challenge I'd put to them. And so that's ushered in a very intense period where, you know, even intelligence will eventually become almost free. What's the relationship with OpenAI going to be long term? Last time I saw you in Davos, there was a lot of people asking questions about it. You guys just made a new investment in OpenAI.

And yet there's also questions about whether Microsoft ultimately is going to have to build or wants to build its own large language models. Yeah, first of all, we are very thrilled about all this. success Open AI is had. I mean, if you think about it, right, we are the early backers of Open AI. They run on Azure exclusively every day. Somebody uses ChatGPT. They're using even Cosmos DB and they're using Azure. So I'm thrilled for the success of Open AI. We are also investors. We have a very strong commercial relationship. And one of the things to Bill's point, it was super helpful to be partnered with someone who believed in scale of compute, especially as it comes to natural language.

And we saw it early together. We built a supercomputer. They built the model. We built, in fact, GitHub co-pilot on top of it. And so it is a fantastic partnership. It's done well. And I think I'm pretty confident we'll continue to partner. Does that mean, you know, we will have to build our own capability as well?

Absolutely. In fact, even while we were partnering with Open AI, we had a model internally called Turing. We chose. We made an explicit decision to give more compute to Open AI. And, you know, we're now building MAI models under Mustafa. These are all, and they're all going to be complementary. So when you use co-pilot today, you're using many models underneath it.

And open AI models are predominant there, but we also have capability. And so I feel very good about a long-term, I mean, at the end of the day, what I've learned from Bill and Steve is long-term-stable partnerships matter. And in order to really keep them long-term stable, it has to be win-win. And that's our construct. One of the big questions, and maybe it relates to tariffs as well, is people are building, including yourselves, a huge number of data centers. I mean, there is a massive investment that's going to take place over the next 50 years. What does that look like? And does it slow down at all?

Because there have been reports that you're thinking of slowing some of that down even now. The deep seek of it all raised questions about just how much compute power there is. And there's just big questions about what the investment looks like and whether there's going to be, when we look back at this time, are we going to say that there was, overinvestment? Yeah, I mean, see, the point is, at the end of the day, look, there's one governor to all of this. It's called GDP growth, right? If the world grows, it is going to grow because there's a new input called compute slash intelligence. And so we'll have to be really matched up to it. Will we be perfectly be matched every second? No. So is this something

where we are committed to building our data centers across our 60 regions? We're absolutely going to. Will we make adjustments as we get new signal or even new efficiencies? I mean, this thing, your deep seek moment is a real thing, which is, hey, not only is Moore's law working, in other words, it's on hyperdrive, but the software efficiencies on top of it, that means the fleet will be aged for a longer time. So we'll just make sure we write that well in a capital efficient way. You're the largest investor in this company. Yes, I am. If anything, certainly me as an investor, it when these guys invest. They're not leaving a hole someplace that needs to be plugged. There is a bright and long future for storage, compute, intelligence. And the worst

mistake for me is a long-term shareholder. If you want to own the stock six months, a year, two years, I don't know. You know, I hope, I'm not going to probably have 50 more years on the planet, but whatever minutes I have, I'm going to be a large Microsoft shareholder. And the only feedback I ever give this guy really is don't under invest because it's just money. Serving your customer. No, come on. Innovating and serving your customers. You will be able to solve that problem, even if you have a short-term hiccup where you build six extra data centers.

I won't care as an investor. I won't because I think it's more important to do that than to get caught short and not serve your customers. Do you think there's a chance, though, given the Moore's law of it all? that there is an overinvestment in this world? You know, these models are still very energy intensive. And as Satya said, as the price of intelligence goes down, the demand elasticity for intelligence is pretty unbelievable,

whether that's medical or new science, you know, new drugs. You know, in my work at the Gates Foundation, we're using these AI models to accelerate progress on pretty profound problems. And so I'll bet you'll go through some periods where you'll have a little bit too much. But in the next 10 years, I think, will mostly be in shortage. Shortage of electricity, shortage of data center capacity. And, you know, therefore the incentive to have a big capital budget, but also to be making those breakthroughs of the extra efficiency,

the payoff is going to be profound. Okay. How many players do you think will ultimately be, in this game, meaning there's you, there's Google. By the way, increasingly now you could look at Elon Musk and what he's doing. I don't know what you think of what he's doing right now. Meaning how many players across the board

of Anthropic, which is attached to some degree to Amazon, are there only four or five players? I think first of all, you have to sort of think about, like always the tech stack is complex, and there are many players depending on what layer you're talking about, right? So, and I think about, AI infrastructure.

First thing you've got to recognize is AI infrastructure is not just about the AI accelerator or the GPU. It's about that plus every other meter, right? Storage, network, core compute. And that's where the three hyperscalers or four hyperscalers, depending on how you count, are going to... How do you count, by the way? Look, we are one of the hyperscalers and I'll let you define the market.

But to me, having, it's actually amazing that the world, X-China, has three or four hyperscalers. So that's why we're investing all over the world. I feel like Steve wants to... Who are they? No, the answer is three. Who are they? No, that's the thing you have to figure out.

No, seriously, the industry structure hasn't changed much in the software business. There's always a very small number of very large guys. Then there's a middle, and I'll say three. Then you take a middle, and the middle might have a 20, and then you have a bunch of small guys. Now, Microsoft is one of the three. I hope you feel pressure on your shoulders, but Microsoft will be one of the three, and that's three, one slot done. You tell me you get the other two.

Doesn't matter to me. Okay. Outside of AI, is there some other thing that you think that Microsoft will be in? You got into games, right? Like that, there were these shifts, these big shifts. you bought LinkedIn. By the way, I don't know if you saw the news today about TikTok, Walmart, who you were about to do a deal with before.

Now Walmart's back in, or it says they're back in, and your neighbors at Amazon are also interested. You want to own TikTok? I'm just going to watch the fun this time. You're going to watch it. But where do you think this all goes, then? Do you see what I mean? Yeah.

Is there some other major development? I mean, to me, this is one of those things where... 25 years from now? Here's an interesting thing. And in fact, we were all talking about it. At a time like this, when you have found the thing, I don't want to go looking around for other things. The thing that is going to power everything is intelligence

and the compute required for intelligence. I want to make sure we do a damn good job of building out that infrastructure, the capital, and the knowledge required, and then building the apps that we want to build, whether it's co-pilot, M365, copilot, GitHub copilot, Dax co-pilot, Dax co-pilot for doctors. That's what I want to do a superb job.

And by the way, enable a robotics company, enable an autonomous driving company, all to build on our infrastructure. We're up against a hard break, so I'm going to go to Bill for the last 30 seconds. If you could start this all over again and you had to do it today, what would you be building? Well, if you're saying trying to start another big software company, you and Paul call each other today. is the frontier. Paul and I had the advantage that very few people saw what we saw. We would say to people, why don't you realize this is going to be gigantic? And, you know, today, everyone knows that AI is the next thing.

You know, the number of robotics companies is huge. You know, the pace of improvement is huge. So it would be interesting for, you know, a small company, you know, NVIDIA's, the latest that rose from wherever they were up into that top-tier economic. Based on builds mails to me, he would be building GitHub copilot, he would be building M-G-6-5 copilot, and he would be building copilot. Yeah, and all, you know, software that can do write software. You know, I've always to believe that efficiently writing software, and so that's the ultimate goal of a software factory is to do it. Gentlemen, I want to thank you.

You bet? A very happy 50th birthday. Bill Gates, Satinadella, Steve Bomber. Now over to Scott Wattner with today's closing bell.