Power Lunch - Microsoft's Image Problem, Climate Disclosures & Fed Beige Book 3/6/24

Episode Date: March 6, 2024

CNBC’s Tyler Mathisen and Kelly Evans take you through the heart of the business day bringing you the latest developments and instant analysis on the stocks and stories driving the day’s agenda. “Power Lunch” delves into the economy, markets, politics, real estate, media, technology and more. The show sits at the intersection of power and money. “Power Lunch” gives viewers a full plate of CNBC’s award-winning business news coverage, plus a healthy dose of personality from the show’s anchors and the network’s top-notch roster of reporters and digital journalists.  Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Good afternoon, everyone, and welcome to Power Lunch alongside Courtney Reagan. I'm Tyler Matheson. Glad you could join us. Fed Chair J. Powell tells the markets to hold their horses. The Fed is not ready just yet to start cutting interest rates. We'll discuss that and also dig into the details of the beige book, which is out just now. Plus, another bombshell report on the problems with AI, Microsoft's co-pilot designer creating some questionable image of violence or sexualization. We'll explain more and hear what Microsoft is saying. doing about it. But first, let's give you a check on the markets as stocks are rebounding following yesterday's losses. We do see the major averages in positive territory across the board with the NASDAQ composite leading the way up 6 tenths of percent. S&P 500, higher by a half a percent,

and the Dow Jones Industrial is adding two-tenths of a percent. And we're also watching shares of New York Community Bank. So this stock is halted after losing nearly half its value on reports, it is seeking a cash infusion. Much more on this coming up. Let's get right to the big market story of the day. Jay Powell's congressional testimony. Steve Leesman has those details for us. Hi, Steve. Hey, Courtney, yeah, Fed chair, Jay Powell, maintained the economy's in good shape. The labor market's strong and inflation is coming down, but that the Fed needs more evidence on inflation coming down before cutting interest rates. Well, how much evidence? Maybe not as much as markets

previously thought. It's just more evidence that will give us more confidence that inflation is is on a path down to 2% sustainably. We're not looking for better inflation readings than we've had. We're just looking for more of them. And what will happen is that as we go forward, the 12-month inflation will continue to drop because it'll be lower than early last year. So in the first of two days of testimony before Congress, Powell,

also said the Fed can start cutting before inflation. It's 2%. He'd said that before. He doesn't believe the economy is close to recession and higher bank capital rules could well be reexamined. In fact, he said it's possible the Fed's controversial proposal for those higher capital levels could be withdrawn and reproposed on commercial real estate. Powell said there will be losses.

It is a serious problem, but most of the issues are with small and medium banks in specific locations and that the Fed is working with those banks right now. Add it all up and there was some modest but measurable increase in the probability of rate cuts. May is still seen as a long shot right now. It's up a little bit higher, but the futures market maintains its bet on June, Tyler, for that first cut. All right, Steve, hang in there. We're going to come back to you in just a minute after you have had some time to digest the beige book. We'll be right back to you.

Meantime, for more on Fed Chair Powell's testimony and whether today's market rebound is sustainable as regional bank worries rise. Let's bring in Nimrette Kong, chief investment officer and senior portfolio manager at North Star Asset Management. Nimret, welcome back. Good to have you with us. How concerning are the developments today out of New York Community Bank, having, they say, now, potentially, to raise capital? First of all, it's very unfortunate. I mean, we see these banks that's a crisis of confidence, and, you know, it does impact the small businesses, the people on the street who really have these relationships with these banks. So it is unfortunate.

In terms of this billing into more systemic problem, Chairman Powell talked about it. being closely monitored by the supervisors all across the country. This is a crisis that's probably going to play out over a number of years, right? But not sure at this point if it becomes into a full-blown crisis. I think the Fed will be clearly watching very closely if it spills into and it starts impacting smaller businesses to a bigger degree. So let's pivot then to interest rates in what the Fed chair said today. anything there, apart from the fact that it seems like what he said was what we already knew,

which is there are not going to be interest rate cuts in March, probably not in May, maybe not before the second half of the year. The market seems to be just fine with that. Tyler, it took us a long time to get out of the zero interest rate policy to finally a place where Fed has in some way really restored that Fed put. You know, we didn't have that for years. So having that ability to have that a more normalized interest rate environment is actually good. I think the tricky part is, and this is where Fed, the Chairman Powell talked about this,

and we'll find out more in the Bege book as well, it's a very much uneven economic growth. On one side, we have people who are benefiting from the financial assets, how the markets are doing. On the other side, the consumer is starting to feel stretched and strained. Now, does that spill into, you know, wider crisis, a wider problem? That's what we'll have to wait and see. But, yeah, we don't think there's any rush here to cut. The economy's on aggregate doing well. You know, the interest rates are providing a big savings boon to plenty of Americans on aggregate.

The economy is in a fine shape here. As we look at the markets, we've had a nice little rally here. The current pace of returns about 7%. Is it sustainable if we assume maybe that the Fed stays where they are so the monetary policy doesn't change substantially? Can we sustain the run we've had in equities? Right. Courtney, so we came off of a 26% return in 2023 last year. 7% if you analyze it, we're looking at 50% returns. Can it happen?

Of course it can. Probable? Not likely. 50% return, yeah. That's very high. Not likely, especially given where evaluations have started to. to climb up. The sentiment is starting to get quite bullish. So, you know, the market is due for a little bit of a pause here, for a little bit of a correction, right? And maybe there's

all these worries and fears about another regional crisis kind of triggers that. But, you know, if we take a longer-term view five to 10 years, the trajectory for markets is still upward. You have specific recommendations. I know you mentioned the consumer being stretched, which I found interesting. Obviously, we've just heard from a number of retailers. Target, Walmart, some of smaller ones, Abercrombie today actually doing fairly well, even though their shares under pressure. Putting it all together, what recommendations might you have looking forward for us? Yeah. So when we think it's an ideal hunting ground for active strategies because there are plenty of stocks in every sector, good balance sheets, not a lot of debt,

good fundamentals, lever to some of the big, big trends in the society. We actually think there's a lot of money to be made behind transitioning to clean energy sources. You know, there's money being spent by the government on the Inflation Reduction Act, the Chips Act. So some of the picks there, I have like an Eton, right? It's a major supplier in the electrical infrastructure as we transition to a more clean energy sources. Their products are being used in data centers. So talk about this whole AI-chip-driven boom that we're seeing.

company like Eaton is going to definitely benefit there. So you would go with an Eaton over a Nvidia or some of these other more pure play, AI and chipstocks names, valuation two stretch store? I think this is where the opportunities are. We look like a company like an Eaton or Lindy or even a defensive name like a Sprout's market that we have. We're looking at double-digit returns in earnings, growth, not a very stretched valuation, maybe a slight premium to the market, very little debt.

So you don't have to just pile into these household names to get the returns. All these names are set up to provide pretty nice compound returns over a number of years. Are you putting money into fixed income? Yes, of course. Because? Of the rates. You know, you're getting 5% rates, even, you know, the money market, the longer it stays in that 5%. That is interest rate coming back to the...

Lock in that rate now. And when rates come down, that bond or fixed income instrument is going to be... worth even more. Meantime, you're collecting the higher interest rate. Absolutely. So a good time to be going there. Nimerid, thank you very much. Good to have you back.

Thank you. Let's get back to Steve Leasman. He's got some details from the Bejibuquebuk as the Dow is higher by 100 points. Steve, what do you got? Yeah, thanks, Courtney. Economic activity, according to the Beasbuk, which is a collection of economic anecdotal evidence

about what's happening in the economy from the 12 Federal Reserve Bank districts. It's had an increase slightly since early January. Eight districts reported modest growth, Only one of the 12 districts noted a slight softening in economic activity. But maybe, maybe worrisome here is consumer spending inch down in recent weeks. Consumers were showing, according to the base book, heightened price sensitivity. Households were trading down and shifting some spending away from discretionary goods, according to the report here.

Demand for services, things like restaurants and hotels, declined due to elevated prices. Also, there might have been some weather effect, the report noted. supply bottlenecks normalized further. That was good. Both Red Sea and Panama Canal shipping disruptions were not having a noticeable pricing impact or supply impact at the time that the Bayesbook was written. A pickup in demand and residential real estate was noted, although inventories were still seen as being low. The growth outlook remained positive overall. A few other items here. Employment was up at a modest pace in most district. The labor market, the tightness that's out there, there were some easing further. with greater labor availability or labor supply availability.

Price pressures, a key to this report for the Federal Reserve, persisted, but there was some moderation seen in inflation. Freight and insurance costs were going up, including health costs or an employee portion of that. And then something that you'll appreciate here, Courtney, businesses were finding it harder to pass through higher costs to consumers. Yeah, very interesting, Steve. I definitely found it interesting about shifting away from the services. We've known about the goods for a while, but that would.

was a really interesting piece I'd like to dig into more. Steve, thank you so much for joining us, bringing us these highlights. Well, coming up, emissions, admissions, the SEC requiring corporate climate disclosures. We'll speak to SEC chair, Gary Gensler, that's next. Plus another black eye for the AI space, this time stemming from Microsoft. Those details when we return. All right, let's get now to the bond market reaction to both Chairman Powell's testimony and the beige book just out. Rick Santelli on the trading floor in Chicago. Hi, Rick. Hi, Tyler, indeed.

If we look at what's been going on, the beige book is interesting what happened with regard to Chairman Powell. Let's phrase it this way. He certainly didn't push interest rates any higher. But if you want to know the real culprit today for interest rates, flight to safety was the culprit and the reason New York Community Bank. Look at intraday of twos and tens, and you can clearly see right before noon.

Interest rates had their big drop no matter what part of the curve you looked at. That's when the news was hitting the wires about, Looking for capital infusion. And if you look at a two-day of twos and tens, what's fascinating here is we're under yesterday's lows, but at least we were. We took that out. That's always significant.

You build momentum to higher prices, lower yields, and we're going to go talk to a trader. See what the influences were overall today. Mike Palmer, how you doing, buddy? Good to see it. All right, we had so many moving parts today. What did you see in the marketplace, starting with the data and moving to J-Powl

and any other issues you may have noticed? Whenever Powell's going to speak, it's always a chance to be a market catalyst. We've seen this in the past. Today, we didn't see that. You know, a lot of times these numbers we've seen of late, they've been in line. They've been expected. We're talking about rates. Today's ADP jobs number was pretty much in line. That allows the story of Nvidia earnings or meta earnings, like sort of dominate market sentiment,

dominate market direction. So until Powell says something we don't expect, he's not going to be the catalyst, something else will. Now, there were benchmark revisions like there are to many data points. Today, it was about jolts. They did take away the $9 million handle of last month. month. I think that had some influence. What about New York Community Bank? My bond guys say that was the story. That was the big input into the buying spree that we saw just before noon Eastern.

Late spring of last year, we had the Silicon Valley Bank situation. That obviously kind of expanded to a number of other regions. You know what? We have breaking news. Breaking news. We're going to go back to the studio. All right, Rick. Thank you very much. Thank you, Rick. Yeah, we're going to get back to the latest chapter in the regional banking crisis. Leslie Picker is joining us with breaking news on New York Community Bank Corp. It's March again, Leslie. It's kind of a weird feeling. Hey, Court. Yeah, definitely a weird feeling, although there has now been a press release from

New York Community Bank Corp, saying that they have raised $1 billion from strategic investors. They list Liberty Strategic Capital, that's the firm managed by the former Treasury Secretary, Stephen Mnuchin, Hudson Bay Capital, Reverence Capital Partners, Citadel Securities, and institutional investors that are making that one billion dollar commitment in the company Liberty expected to invest 450 million Hudson Bay 250 and reverence will invest 200 million dollars at as part of the transaction they're also announcing a new CEO here they are saying that Joseph Otting the former comptroller of the currency will be the CEO of this firm and

Sandra Dinello who was just named CEO recently within the last week or so, he will be named non-executive chairman. And as also part of this transaction, we've got some details about the exact price per share of $2 per share. NYCB is selling and issuing to investors, common stock at a price of $2 per share. And there's a little bit of complexity involving that. They say that this deal is supposed to close on or around March 11th, subject to satisfaction of certain closing conditions and the receipt of any regulatory approvals required in connection with the rules of Otting and Donello, although he does have that experience with the OCC. So an interesting kind of twist to this story here as news and headlines that they

were seeking out investors sent that stock price plummeting 42% today before it was halted due to news pending. But now the news out that. that New York Community Bank Corp has secured investment of a billion dollars from a select group of private investors here. Guys, I'll send it back to you. This is really interesting, Leslie, and I don't mean to put you on the spot as I know this news just came out. You talked a little bit about Liberty Strategic, but Hudson Bay also with $250 million. That's the company that usually invests in retail real estate. Am I right? Yeah, no, it's interesting because I had heard earlier today that the discussions involving a capital

raised were skewed toward private market investors, that wasn't on my top list of investors to reach out to. I had gone to more of the usual suspects who participate in these types of deals. So it is an interesting kind of turn of events seeing these investors who are not, as you mentioned, Courtney, known necessarily for investing in regional banks and in this kind of manner. So, but given the state of things, a billion dollar injection of cash here, you've got a CEO change as part of it. You've got Secretary Mnuchin taking a seat on the board as well as three others, including Otting and some others from Hudson Bay and Reverence taking a board seat as well as part of this. We'll see, I believe that stock is still halted. we'll see what the investor response is once it resumes trading.

Leslie, we just had a guest on set, more of a market guest, but she was talking about the action that's gone on with New York Community Bank. She feels is more of a crisis of confidence, which in a way is a little bit of frightening if it's not necessarily based on fundamentals and just sort of people losing confidence in a company. I know you've been very focused on New York Community Bank specifically, but is there something else or other banks or we need to be watching out for, sort of, you know, as this contagion happens sometimes like we saw just a year ago.

Yeah, the confidence issue is a critical one, especially in the banking world, where you kind of get this cycle of events where you have depositors who can look at the stock price. The stock price is declining. They then get concerned, go take their money out. Then you have a bank run, and it kind of feeds on itself. That's not necessarily the case here. We haven't seen, and I don't believe it's in this press release that just came out, But we haven't seen much of an update as to the state of deposits since last month.

But we have no reason to believe that they have been running. One of the benefits that New York Community Bank Corp has is that a lot of its branches are under different brands like Flagstar, for example. So it's not as easy maybe for people to make the direct comparison that, oh, it's that stock price that's declining. My money is held at that bank because there is a little bit of brand differentiation there. But that said, confidence, if you're a bank management team, your number one job is to make sure that your depositors feel that they are confident having their money at your bank. It's important for regulators to feel confident in the path forward here. And this is a company that just last week cited material weakness in their internal controls, kind of creating more cloudiness surrounding that confidence picture that they're trying to project. And so that's one of the key reasons why we are seeing such dramatic declines more than 80% so far this year in New York Community Bank Corp.

Fascinating stuff. Leslie, thank you very much for bringing that with us. And I should clarify for the viewers, we now understand it is a different Hudson's Bay. So apologies for that if we made any confusion. But as Leslie, of course, just shared with us, that was breaking news. And the press release just came out. So we had very little details on some of those investors for that $1 billion infusion. All right, today the SEC has voted to approve new climate rules requiring publicly traded companies to disclose material risks posed by climate change to investors. The new rules somewhat watered down from what was proposed two years ago.

Here to discuss that and more is SEC Chair Gary Gensler. Chair Gensler, welcome. Good to have you with us. Good to be with you, Tyler and Courtney. I'm going to get to the climate rules that have just passed recently, but I want to begin with this news from involving New York Community Bank. I wonder what if any role the SEC has in ensuring the soundness of the bank and that the bank is in compliance with all securities regulations and disclosures with respect, for example, to having to raise more capital? Tyler, of course, I think your viewers would understand me not commenting on any one particular company. But if I could just say generally, we have a role with regard to public companies. and most of the largest banks in the U.S. are public companies.

And so it's really our role is about those disclosures they make and that they're making disclosures and have proper controls around those disclosures. And I know we'll get to climate in a moment, but that which we'll talk about in climate is also disclosure-based. But here, any one bank that's a public company, we have a role with regard to the economic. accounting, the disclosures, and the controls around those numbers.

So when something like this happens, when a bank says we have to come into the public market to raise additional capital, take me inside the SEC and tell me what's going on with you and your employees to make sure that all of the disclosures are. What kind of do you go into a kind of overdrive here? Do you say, well, we better start looking to see whether they've complied with all the disclosures that are required here or what? What happens? Well, again, you want to pull me into the news of the day, but if I can step back from the news of the day, we have a division of corporation finance, it has hundreds of people in it that do disclosure review, and they look at filings, and if a company is going public for the first time,

there's a long, more detailed review of it. If a company is already public, and they're making filing, then the export staff look at that. And we have an office in that disclosure review team that also looks at the accounting and ask pretty important questions of the issuers about their accounting and their controls. And if you look back, because this is public, I can say, you look back at something like Credit Suisse

two plus years ago, our expert staff was really asking, do you have the proper controls around your accounting? And as it turned out, they did not. Yeah, well, you've answered my questions. I'm going to move on now to the climate change rules that have just, I gather, been passed within the last couple of hours. Straight me out here as well, educate me. Are these rules, do these rules apply to the risks that companies may face from the effects of climate change or the risks that the companies pose in doing their businesses to the climate?

The Securities and Exchange Commission is merit neutral. We're agnostic with regard to climate risk itself. But we have a role to play about disclosures made by companies. So the rules we adopted today are about, I think, the first of what you said, Tyler. It's about investors making investment decisions and what risk it poses to investors. And it's grounded in materiality, a multi-debted. a multi-decade-old concept that companies disclose that which a reasonable investor would consider amongst the total mix of information in making just an investment decision or voting.

It's not about the climate itself. And Chairman Gensler, these are going to be rules, presumably, that apply to all companies, no matter what sector they operate in. So there's some standard in the way in which the information will be reported and released. Well, Courtney, it only applies to public companies or companies going public, but you're right. It's all those companies. But we did take a layered or tailored approach that as it relates to one metric, greenhouse gas metrics, that only applies to the larger companies, so-called large, accelerated and accelerated filers. And just even today, if one looks at the top thousand companies in the markets,

approximately 60% of them are already making information about their greenhouse gas emissions public. I think this rule today brings some more consistency and reliability to that which companies are already doing. I understand that there are some that believe these rules just add additional burdens to public companies that already have to report all sorts of other information. What's your argument for that? Well, investors are making decisions based on the information that many, hundreds and hundreds of companies are already releasing information about how they manage their greenhouse gas, how they manage their climate risk. companies are also often putting out targets and goals. This will make that information more reliable

for investors, but I think also for issuers, they'll have something in the U.S., based on our laws, based on our markets, that they can look to and say, ah, this is the rule that we can make these disclosures. But again, just that which is material to the investors. Let's talk about what are known as without getting too wonky here, but I like to get in touch with my inner wonk. And that is the scope three regulations. Explain what those are and why those were not included. They were, I guess, the most controversial part of some proposed rules in the past, why they were not a part of this end result. So many companies today, public companies, put out information about their,

greenhouse gas emissions that they have or their purchased energy. This is so-called scope one and scope two. But a fewer companies, but still a significant number, put out what they estimate, and it's generally just estimates, of the greenhouse gas emissions of their what's called value chain. There's suppliers on the one hand, their consumers on the other. And And when we proposed something there, we took a layered approach, but we got a lot of comments about it from the agricultural community, from small, medium-sized enterprises, for many non-public companies, and said, look, even for a public company to make estimates, they might have to start asking questions of the private companies, you know, a farmer in, or rancher in Montana. And so we looked at the comment file. We looked at the economics, and we decided, though investors are looking at that information, that at this time, we would not include that in any formal rule.

Let me just ask you one more thing. As Courtney pointed out, this affects a lot of companies across a lot of different sectors. I can well imagine that some companies in some sectors would have relatively small disclosures to make in this regard. And others in different sectors would have large, voluminous scores, hundreds of pages of worth of disclosures. Where do you think these rules are going to, quote, hit hardest? Tyler, I'm not sure anybody's going to have hundreds of pages. But I agree with you for many companies, if they determine that climate risk is not. material to their investors, then they have very small de minimis disclosures. On the other hand,

if they suffer a severe weather event that's significant to their financials, they would break that out in a footnote to their financials. If they're one of the larger companies and they determine that it's material to their investors to have some disclosure around greenhouse gas, emissions. They would have some disclosure as well. But the requirements are there grounded in. Is it material to your investors? And secondly, it's also about companies that make targets and goals. And if they're making a targeting goal that they're going to manage their own greenhouse gas emissions or manage their suppliers greenhouse gas emissions, then how are they managing towards their own targeting goal, again, if it's a material target or goal.

But that's the context. And so it's really, as you said, there's some sectors that the management will determine its material. There are already literally hundreds of companies that are making information available, and now will bring some regularity, but I would say consistency and reliability to those disclosures. And I think it will help limit and guard against greenwashing as well, the companies that are bragging about something that might not actually be valid. Very interesting.

Chair Gensler, always good to see you, sir. Thank you very much. Thank you for taking my... Thank you so much, Courtney and Tyler. Thank you for taking my questions and artfully answering them. Appreciate it. Well, further ahead on the show in what was supposed to be a windfall for the U.S. government, American taxpayers are now paying $1 million a month to maintain a

a Russian yacht. More on that when we return. Welcome to power lines. Let's get over to Dominic Chu now for a market flash on Pfizer. Don, what do you have? All right. So Courtney, Pfizer's in the news today after a federal appeals court ruled in the pharmaceutical giants favor with regard to a lawsuit brought by a conservative-leaning nonprofit group called Do No Harm that was brought back in 2022. Now, that lawsuit challenged a Pfizer-funded fellowship program designed to help boost the number of black, Hispanic, and Native American people who could possibly attain leadership positions at the company. The appellate court did rule that the organization lacked legal standing to challenge that fellowship program, due in part to its inability to identify any party in particular that was

actually harmed by Pfizer's alleged discriminatory practices. Pfizer did issue a statement praising the ruling and said it is an equal opportunity employer and it's proud of its commitment to diversity, equity, and inclusion. It's worth noting, though, here that Pfizer shares did not notably rack to these particular headlines, but the shares have been bouncing solidly higher after hitting roughly 11-year lows, Courtney, in Monday's trading session. I'll send things back over to you. Got it. Thank you very much, Dom. Yes, shares up 4%, but perhaps not necessarily on this news of Pfizer. Let's get over to Bertha Coombs now. She has our CNBC news update at this hour. Hi, Bertha. Hi, Courtney. The Supreme Court will hear former President Donald Trump's

presidential immunity argument next month. The High Court says it will consider whether he can be criminally prosecuted for his alleged efforts to return the 2020 election. Trump has argued presidents should have total immunity. Arguments on the matter are scheduled for April 25th. The decision is expected by the end of June. The presidential field shrinking some more this afternoon. Minnesota Representative Dean Phillips endorsed President Biden as he ended his long-shot bid for the White House today.

It came just hours after former UN Ambassador Nick Nicar Nikki Haley exited the race after losing all but one state in Super Tuesday nominating contests. And the average credit score just fell for the first time in a decade. According to a FICO report, it edged downed one point to 717 after hitting an all-time high of 718 at the beginning of 2023. The average nationwide score bottomed out at 686 back in 2009 during the house. housing crisis, climbing steadily over the last decade, and then rising to that new high during the COVID-19 pandemic, fueled by government stimulus in part and a spike in household saving. But still pretty healthy at 717.

Yeah, pretty good. Bertha, thank you. All right, coming up, Iyer growing for AI. First, we had Google's AI software delivering problematic results there. Now the same is happening at Microsoft. bring you that story now. Well, another example today of AI gone rogue and gone wrong, Microsoft's AI image generator creates violent and sexual images as well as ignoring copyright.

CNBC.com's Hayden Field wrote that story for us and spoke to the engineer who is making these issues public. She now joins us on set along with our own technology reporter, Steve Kovac. So, Hayden, if you would, just give me a little bit of a rundown for viewers that haven't been able to get to your full story yet about what actually happened here with Microsoft. Thanks, Courtney. So it is a crazy. story. This weekend, I heard from a Microsoft AI engineer who was really concerned about what he was finding in the co-pilot tool. He had been testing it for months, and he said that all the violent, sexualized, just crazy images that it had been generating, he had reported to Microsoft over the last

three months to no avail. He wasn't happy with how they had been handling his reports. And the craziest part is, I myself was able to recreate these same images that he was concerned about just yesterday. So violence, sexualized, just inappropriate images. Think kids with guns, demons and monsters next to abortion rights terminology, sexualized images of women in car accidents, you name it, just stuff you don't want to see from an AI image generator. So I guess that sort of goes to some of my questions. I mean, what are users potentially typing in that these images come up? I mean, are they typing exactly those descriptions or something else that generate something that doesn't match what they're looking for?

It's a little bit of both, but what I was surprised about is how simple the prompts can be. So if I just typed car accident, that's when those sexualized images of women popped up, just the term car accident. So not asking for it. Why does that happen? Why does that happen? So the training data that the AI is trained on to basically be able to do its job can be pretty nasty. You know, it's trained on the whole internet a lot of the time. And sometimes the people training these tools,

don't cut out toxic content when it goes into the AI model. So basically, what goes in must come out, and we're seeing that happen here. So I could put in what would seem to be an innocuous phrase, children at play, and I could get back a child predatory image of some sort, potentially. I'm not saying that is what you did or happened. Absolutely, you could.

You know, there's really no rhyme or reason here. Sometimes it happens, sometimes it doesn't. And then also, even if you are asking for problematic images, it will return them. So the guardrails they have in place, this engineer said they might be failing. Even copyright infringement. I saw Snow White on a vape. Oh, my gosh. So Steve, obviously, you know, Google and Sunder Pachaya have come out and talked about sort of their failings when it comes to Gemini.

What do we know from Microsoft? What are they doing if Hayden was just able to find these images yesterday, they better start working pretty quickly. Yeah. And we also know that Google pulled their tool. Now, Microsoft's not saying anything like that. They're just saying they take it seriously. They're looking into it. But what really stuck out to me here is the engineer that Hayden spoke with.

His entire job is to raise the... He's on what's called the Red Team. His entire job is to find problems like this, flag it internally and say, hey, guys, we need to fix this. This is a problem. He allegedly did that. He's saying, I did that. I went through all the proper channels.

And his superiors basically shoved him to the side and said no, to the point where he felt like he had to go to the press, where he felt like he had to go to the press, where he felt like he had to write a letter to the FTC, write a letter to Microsoft's board. And this reminds me of where we were, you know, 12 to 15 months ago at the birth of this AI revolution that we're in the middle of, all the companies, not just Microsoft, Google, everyone's saying, we're going to do this deliberately,

we're going to be safe about it, even more recently talking about how they're going to protect election integrity. When they can't even do their own systems and police themselves, why should we trust them when they say that? It creates an immediate lack of trust when you know their internal systems are failing and also saying, look, we're going to embrace regulation, but regulators have no appetite to do anything about it either. So they kind of get to do whatever they want. It just seems so wacky to me that Microsoft is coming up across a very similar problem that we've been talking about with Gemini. It clearly sounds like it was flagged.

Nothing was done about it. Steve, how hard is it to untrain AI or to retrain it, I guess, in this circumstance? How do you fix it? Yeah, but it's also, well, it's not how do you fix it? And believe me, that is a problem way above my head. But it's also, you know, you've got to, they're towing this line because this is very similar to what happened with Google a couple weeks ago, but different in a different way. Because Google, you could argue, put too many guardrails on there in order to be, you know,

overly cautious, I think is the way they framed it. Politically solicitous. Politically solicitous. Some people are calling it woke, whatever you want to call it. This is the opposite. There are no guardrails that, you know, or the guardrails are there. not working. For example, I tried some of the same things as Hayden did. Sometimes it worked, and sometimes it said, uh-uh, I can't do that image for you. So it's working sort of, but imperfectly.

And again, if it's being flagged internally and nothing is being done or these people are being told, you know, basically be quiet. That's not a good look for Microsoft who, you know, from the very beginning said, we're going to be responsible about this. We're going to get this right. And if they're not doing it internally, they have to look at their own systems, again, for reporting and really figure it out. When someone flags these issues, it's an issue. And there's also a lot of divisions too, right? So maybe this is a bigger problem than just the AI division.

So let me come back to something you said a moment ago. When you did this sort of spot check over the weekend and you put into the search engine, for lack of a better word, images of car accidents, you got back, created, not actual, but created AI images that include sexualized images. of women in car accidents, correct? Yes, or near car accidents. So sometimes sitting on the hood of the car, kneeling next to the car.

In lingerie. Like, yeah. So, yeah, it was very problematic. And the other interesting thing about this is this app, the co-pilot app, is rated E for everyone in the Android app store for any age to use. But it's 17 plus in the Apple store,

which doesn't make any sense to me either. Hayden, thank you very much. Thank you so much. Thank you so much. Thank you as well. Well, let's talk again about New York Community Bank shares resume trading, jumping higher, but now halted again for volatility after getting a cash infusion of more than a billion dollars from a consortium, including the company run by former Treasury Secretary, Steve Mnuchin. Power Lunch. We'll be right back.

Welcome back to Power Lunch. It's time for today's three-stock lunch. Hope you're hungry. We're looking at three names, making some big moves after reporting earnings. Here with our trades is Malcolm Etheridge, his CIC wealth management executive vice president and at CNBC. contributor. First up is crowd strike. So these shares are up around 11% after the company beat on the top and bottom lines that also provided a strong first quarter forecast. Malcolm, what's your take on crowd strike? So this is actually my favorite sector right now in all of the markets. Cyber security is the ultimate defensive sector, right? It's a non-discretionary expense, regardless of the size of the company. And worldwide spending on security and risk management solutions is expected to be of something like 14%. This year,

year over last year. And that says nothing of what it looks like for government agencies around the world. So with CrowdStrike being one of the two largest players in that space, I love this name right now, even with it running after earnings. All right, let's move on. Malcolm the Footlocker shares their tumbling after the company reported a holiday quarter loss. Weak guidance for the current year company in the midst of a turnaround just delayed its profitability goal by another or two years. You say buy. I would look at some of the data here and go bye-bye. Yes, I think the sell-off in this one is a little bit overblown if you just consider the shares had already been beaten down significantly since about June of last year. The company has plans

to move away from its dependence on malls and focus more on a new set of partnerships that they have, which is the reason that guidance has been so light. Plus, they have. Plus, they have plans to expand into Asia, right, with the partnership with the NBA. Expand further into Asia, I'd say. So with shares being down more than 45% now over the one year period, I think this actually looks like an attractive buying opportunity for anybody who's interested, who's been interested in this name for a while. What is the concept that is going to move them away from mall focused?

What is it? So they're turning to other partners who already have distribution to carry their products. So like partnering with the NBA, for example, example, potentially there's the idea of selling shoes at stadiums and at different NBA activations and things like that. So it gets their product out there without having to have the brick and mortar focus and the mall focus. Gotcha. I understand though it's going to take them a couple more years to get to their plan. At least that was, I think, what drove the stock lower initially. And finally, we do have Nordstrom. Despite beating analyst estimates on the

top and bottom line, shares sinking 16 percent today as the department store chain issued a muted outlook for 24. They're not alone though, Malcolm. A lot of companies are sort of worried about the consumer and the response. What's your trade on Nordstrom here? Yeah, so I consider this one a hold. I don't think it's necessarily time to go buying this dip, but I also don't think it's a screaming sell either, right? Similar to what we're talking about with Foot Locker, these guys are mall focused. And we all know the challenges that department stores have been up against with more people working from home permanently. And even those who have gone back, workplaces have shifted to a less formal wardrobe policy, which impacts what Nordstrom's core customers buying. But with that said, Nordstrom has managed

to return to pre-pandemic revenue numbers, which I think is encouraging. So I just don't, you know, feel good about the dependency on mall retail, but I don't necessarily think you have to go dumping those shares today either. Okay, fair enough, Nordstrom shares down 16 percent, and you're calling that one a hold. Malcolm Fethledge. Thank you very much for being here with us today for three-stock lunch. We have more Power Lunch coming up next. Welcome back to Power Lunch. U.S. taxpayers are a million dollars a month to maintain a yacht seized from a Russian oligarch. Robert Frank is here with the story. This is a good one, Robert. It is a good one.

For it, unless you're a U.S. taxpayer, of course, two years ago, U.S. Marshals commandeered that 348-foot yacht in Fiji named Amadea. The government says it is owned by Suleiman Karamov. He's a sanctioned Russian billionaire who made his fortune in mining. Now, the marshals sailed it to San Diego and began forfeiture proceedings to take possession and hopefully sell it. It was all part of that global dragnet to capture the private jets, the yachts, the mansions of all those Russian oligarchs used the cash to fund Ukraine's war effort. Well, it turns out wasn't that simple.

Oligarchs are masters at hiding their ownership through shell companies and straw owners. Attorneys for Edward Kudinatov, he's a non-sanctioned Russian billionaire, say he, in fact, is Amadea's owner. The U.S. says he's a proxy owner that emails from the yacht crew prove that Karimov, in fact, is the real owner. time, U.S. government and us taxpayers have to pay maintenance on that boat. As it sits in San Diego, that totals nearly $1 million a month. It includes $360,000 a month for crew, $75,000 for fuel, 165 grand for food, waste removal, other expenses. You've got to insure that boat, so that's included as well as dry dock repairs. Now, so far, the U.S. has spent over $20 million, the U.S. asking a court to sell the yacht. Valued at over $230 million.

because the U.S. says those fees are excessive to the U.S. taxpayer, which I would agree with. I'm so confused. Why are we paying for food? Why are we paying to maintain it? Can you dry dock the thing? I don't understand. Dry dock is even more expensive than having it sit in the water. Yachts, no surprise, are very expensive. Even if it's just sitting there, you have to wash it, you have to clean it, you have to maintain the engines. And that crew of 10, 12, 15 people, which is still a skeleton crew to maintain a 300 plus foot yacht is necessary to retain its value because ultimately the U.S. wants that money to give to Ukraine, so they don't want to destroy the value of the yacht. If there's an ownership dispute and who's got the title to this thing, that could slow any

kind of sale. The U.S. wants to sell it now, put the money in kind of escrow and then fight over that escrow. So at least, yes, they won't get the money now, but at least we won't have to be paying a million dollars a month to maintain it. So you're right. The actual purpose, proceeds could take months or years to actually receive and to get to Ukraine or whatever the U.S. end up doing with it. Better use of the money is to do what Ruth Goddisman did and give a billion dollars to med schools. Forget the yachts. I love that story.

That was a great story. You did it last week for it. Yeah, yeah. Fantastic. All right, thanks, Robert. And thank you for watching Palo Lime. Closing Bell starts right now.