Power Lunch - Rally For Real?, Failing Grades 11/6/23

Episode Date: November 6, 2023

Stocks are mostly higher today, as they try to build on the recent market rally. But we’ll talk to one of the biggest bears on Wall Street about whether or not the rally is for real.Plus, American students aren’t ‘making the grade’ anymore, as ACT scores fall to a 30-year low. How can our education system recover from Covid lockdowns to create future workers the economy needs? We’ll explore. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Power Lunch, everybody. Alongside Kelly Evans, I'm Tyler Matheson. And coming up today, stocks higher building slightly on the recent rally, but we'll talk to one of the biggest bears on the street about whether this rally is for real. Plus, U.S. students not making the grade, ACT college entrance exam scores 30-year low now. So how can the education system recovery will recover from the COVID lockdown to create the future workers American businesses will need? Kelly. Before that, let's get a check on the markets, which have turned lower this afternoon. The Dow giving up a more than 100-point gain. We're talking about almost single-digit declines for all the major averages. And they're coming off a huge week, pretty much best week of the year, up 6% for the major averages, up 8% for the Russell's small caps.

Utilities among the leaders today, Constellation Energy beating on earnings and revenue. It's up 6%. Dominion NRG also rising, upgraded at Barclays. But solar energy, getting crushed again. Solar Edge Down Grated by Wells Fargo. Their price target going to 82 from 190. Solar Edge down 75% this year, including today's 8.5% drop to below 70. And shares a Bumble or lower after CEO and founder Whitney Wolf Hurd announces she will step down as CEO. That's knocking Bumble down almost 6%.

Turning now to the markets, we might be coming off a hot stretch last week. But joining us now is one of the bigger bears on Wall Street with a year-end target of 3,800 on the S&P. and he's stuck with it all year, including midsummer when others capitulated. He's not bearish on everything, though, still finding opportunity. And what does Friday's job report say about his hope acronym? Here in studio is Michael Cantorowitz, chief investment strategist with Piper Sandler. It's great to have you here. Welcome. Thank you.

We missed the, well, was it the pool? No, no, the COVID setup. It was a good one. Yeah, one of the nicest homesets of any. You get an A. Indeed. But we're glad you made the trip here today. So let me ask you about the stock.

market where what a roller coaster ride its bed. You know, for part of the year, we literally saw people raising their price target to like 5,000 as we moved through the summer months. Boom, at that very moment we started to see stocks weekend again. Can you just take us on a retrospective of how you think we got here? Sure. You know, the beginning of the year, our view was that we'd have a much worse second half than the first half because we thought we would see what we're starting to see now, weaker employment, take the Fed off our back. And so the beginning of the beginning of the year, what we saw was the banking crisis, create a lot of liquidity, a lot of exuberance around AI, happened at the same time. And that's where we really saw this market bifurcate and the

Magnificent Seven were born, effectively. And so if you've been watching the S&P 500, you've seen a headline index that's done quite well this year, as high as almost 20% in July. But if you're an active stock picker, or if you're not necessarily buying large caps, it's been a very different tape. So we've had this bifurcated market all year. And I think we have not seen a recovery trade persist for more than two months. And that's small caps, deep value, you know, autos, retail, banks, because we're not in, we don't have the conditions for a broad macro recovery right now. So I think what we're going to continue to see is, you know, we're going to continue to see is, you know, back and forth between soft and hard landing, euphoria, or fear, and much of the tape remained

very bifurcated as the macro backdrop. So until last week's jobs report, you'd have to say, wouldn't you, that employment has held up remarkably well. It's been pretty good. I mean, the month prior was a knockout number. Now it was downgraded. I mean, they took back some of those jobs. But until this latest report, employment's been pretty good. It has been. It has been. been, if you're just looking at, again, the headline non-farm payrolls number, and that was the eighth in the last nine months we saw a negative revision. So what I look for in my process is not try to lean too much into one data point, like non-farm payrolls or unemployment claims, but instead really look for a broad set of data that have historically given you warning signs

to what perhaps we saw last Friday and what we may see. Are you seeing those warning signs now? We've seen them all year. Yeah. What are they? It's, it's, it's, it's, um, Fewer hours worked in the manufacturing sector. That's been declining all year. Fewer temp employment. That's been declining for about nine, ten months consecutively. Fewer small businesses, NFIB data, saying we're hiring. That's been declining.

Consumers saying that jobs are plentiful. That's been declining. I could literally sit here and go on and name 20 different data points that have historically given you a warning sign. It's not telling you when a recession is going to hit necessarily, but it's helping you understand whether or not we're really in the midst of these lags of policy. And I think, yes, last week's payrolls report,

ADP report, the continuation of rising continued unemployment claims, all fit with these other warning signs we've been seeing all year, and they're likely to get worse, not better, if we believe we still have much of the digestion of the lag of policy. You're probably as familiar with the arguments

about why we can have a soft landing or no landing. You know, Goldman has been very bullish all along. They always had very low recession odds for this year. I think they're still pretty low for next year. They say maybe the labor market can keep going long enough to kind of get us through this rough patch. Do you think hard landing? I mean, is that not only that a downturn is coming, but potentially a severe one? It's hard to know magnitude because, you know, I deal in a very quantitative perspective.

And you can't model what becomes a nonlinear event. Like when Lehman went bankrupt or when the tech bubble, popped. We didn't know the magnitude of the downturn. That has to do with how much tightenings occurred, what the secular backdrop is, too many variables to really plug in and have high confidence, more importantly, of the depth of the magnitude. What we could figure out is, are we heading towards recessionary data, or are we heading away from it? And I argue for much of this year, despite a lot of the headline data looking good and being very volatile, we've headed towards it. So forgive me for interrupting. The year-end target was 3,800, 3,800.

3850, something like that? And you've stuck with it, to your credit. We had, to be fair, we had a lower number to start the year, and I readjusted it higher in July, not because my outlook had changed, but because the market, the index, the seven stocks that carried the market, had gone up so much. I saw a stat today that the seven, maybe it's the top ten stocks account for 134% of the markets gain, because the average stock, the Equated S&P is down this year. And it's worth noting, we've had some, there are some in the best.

who are perma bears. But if 2021, if I'm not mistaken, you were one of the highest price targets on the street. So in defense of your framework, you've been all over the place. But what I wanted to get to was, do you still really believe that 3,800 is a year-end target? Or do you think 3,800 is something that may happen into the spring or summer of next year, given the fact that you see a lot of economic warning signs that aren't going to be helpful for corporate profits? Sure. I think it's possible to get to your end. I wouldn't say that I have as much conviction. as I did earlier just because of where we are. And really because if we get weak macro data,

if we get another bad payroll report or other weak data, it's arguably going to be positive for the market, as we saw last Friday, because people are not afraid of weak macro data. They're afraid of higher interest rates. We have to get through that fear. I don't know what level interest rates need to fall to until bad news becomes bad for equities.

Watch credit spreads. That'll tell you what. Oh, that's a really interesting point. So once we get through the couple of reports where people then go, yay, the Fed's going to cut rates. But as soon as we start to see that those spread dynamics change, maybe that's the sign of a trend. Last year was CPI coming down that gave us relief.

That's all good. If it's employment today providing that bond relief, that comes with a side of problems. Yeah, yeah. Michael, thank you. Good to have you in the House. Really appreciate it. All right, more details leaking out on the massive reorganization

underway at City, the corporate overhaul referred to internally as project. Bora Bora, which potentially includes deep job cuts across the board. CNBC.com banking reporter, Hugh Sond, is here with more on this. Hugh, welcome. Why the name Project Bora Bora? I mean, of all things. I mean, we'll get to the substance here, but I wonder about the cosmetics there. Yeah, it's a little bit tone-deaf.

You know, honestly, I don't really know why. Maybe it's somebody's idea of a great vacation place, but clearly, Citi Group employees aren't calm. They're very agitated. They're very anxious as this process unwind. because it's going to result in a lot of job cuts, Tyler. This stock hasn't gone anywhere, really, for a long, long time. Is that what's driving this process?

It's not just that, you know, Jane Fraser and three of her processors have struggled to really get a hold of, you know, this mess that is Citigroup. It's just that even in her tenure, which has been two and a half years, the stock is down 37 percent, which is the worst performance among her peers. Expenses have climbed about 20 percent during that time. And that really shows you the bind that she's under. You know, I think the story here, Tyler, is she's in a fix. And for her to get out of that situation, she's going to need to cut expenses.

And the way to do that is by getting rid of bodies. And where will those bodies come from? Are they executive bodies? Is it across the board? Is it U.S.? Is it foreign? What? Well, I think what's interesting here is this is one of those rare culls that's actually going to hit the senior levels

worse than it hits some of the junior level. You know, the sources that I've spoken to have talked about job cuts in the scope of at least 10%. Now, the higher that you climb in the orange chart at Citigroup, those numbers are going to look worse because Jane Frazier has been very clear about getting rid of regional heads, co-heads, people with overlapping responsibilities. And I've learned that even this month, you know, they're going to get rid of folks with, you know, to take a step back to Citigroup, they have a lot of people with a lot of nice titles. So, chiefs of staff, chief administrative officers, these are the types of things.

people who are going to get eliminated later this month. And the reason for that, Tyler, is, you know, clearly they've, you know, they've had a run of expense growth. She's talked about raising their returns to at least 11%. For her to get there, she's going to have to both grow revenue and cut expenses and probably use her capital, her balance sheet more effectively. Now, with revenue growth a little bit blurry for next year, clearly there's the possibility of recession, the possibility of greater credit losses.

you're really left with this one lever to pull, which is to cut expenses by getting rid of jobs. And Hugh, to that point, she can pull back on headcount, but how do you grow revenue at the same time? Well, that's kind of the conundrum she's in, Kelly. You know, she's getting rid of a bunch of overseas units. That hasn't even really flowed in to cutting expenses at this point. That is why, if you talk to people, I haven't spoken to one investor or one analyst who actually believes they're going to make their really modest return targets and their expense targets in the next few years. There is deep skepticism about the stock.

That's why it's trading at less than half of the average of U.S. peers and a third of the folks, the likes of J.P. Morgan and Morgan Stanley. Kelly. All right, Hugh, we have to leave it there. Hugh Sond, thank you for bringing this story to us. Meantime, China's President Xi Jinping will visit San Francisco next week. And while he's in the country, he will meet with some of the U.S.'s biggest CEO. Aymie Javvers in Washington with more on this.

Hi, Eamon. Hey, Tyler, you're right. Source is familiar with the event tell CNBC that some of the country's top CEOs are expected to dine with President Xi Jinping while he's in San Francisco for the Asia-Pacific Economic Cooperation Summit there next week. The dinner, which is expected to attract hundreds of attendees

to a hotel in downtown San Francisco, will be an opportunity for the Chinese leader to demonstrate to the U.S. government that Beijing has powerful friends here inside the United States, and also to show his domestic audience that he's being warmly welcomed in the United States. It'll be a dramatic moment, though, in the relationship between the two countries. Some of the top capitalists here in the United States breaking bread with the leader of the Chinese Communist Party. No specific CEO attendees are confirmed just yet, but you can imagine that a lot of companies are mulling over what their strategy is going to be for that dinner, Tyler.

What else is she going to do, and will he be meeting with and will there be at this dinner government officials, including all the way up to the Secretary of State, the President? Well, we don't know the full agenda of this meeting. There's been a pretty tight lid on exactly what is going to be on the agenda. We do expect Xi Jinping to have that face-to-face meeting with President Joe Biden, but we don't have a lot of details about exactly how that's going to take place. All of this happening at the Apex Summit with the Asian Pacific countries represent the economic development effort in that region, all attending as well.

So this is going to be a very big event in San Francisco next week. And it really is sort of this new superpower pull of economic power, each superpower trying to pull those countries into their own orbit. All that will be on display in San Francisco next week, Tyler. All right. Amen, thanks very much. Amon Jepard's reporting. Coming up, the big fail, nearly four years from the beginning of the COVID-19 pandemic,

and one question still lingers, were shutdowns a successful response to the virus or a simply failed experiment. We'll discuss that. Plus rate relief. With the Fed pausing on rate hikes, regional banks are getting a much-needed breather. The KRE ETF climbing 10% in a week to almost $43 a share. We'll dig into that group next. Check out the KRE Regional Bank Index. Kelly mentioned a moment or so ago. Up 9% in just the past week. Those banks rallying as they get some much-needed relief following the Fed's decision on interest rate. Chair Powell's press conference. Let's bring in Leslie Picker now for more on the regionals. Do tell Leslie.

Hey, Tyler. Yeah, regional's really, especially in the last week or so, moving inversely with rates. That's true today as well. You saw there the bank stocks in the red as yields take higher, but last week the decline in rates made for the best performance for KRE in three years. A new note by Bank of America this morning says, quote, peak interest rates do have the potential to serve as a mini-clearing event for bank stocks. There are four main reasons for that. Number one, it was clear from Q3 earnings that regional margins continue to be squeezed by higher deposit rates, which are correlated with interest rates.

So the concept of peak rates, if true, could relieve some funding cost pressures for banks. Number two and three, commercial real estate repricing and the potential for credit losses. Lower rates make those areas more palatable on bank balance sheets. And oh yeah, speaking of balance sheets, Lower rates help reverse some of those unrealized losses that we've seen over the past few years or so. According to the FDIC, those amounted to more than $558 billion at the end of Q2. We'll get Q3 composite figures next month from the FDIC. But remember, many banks took on more bond investments during the pandemic when they were flushed with deposits, but yields were low.

So more recently, as yield soared, the value of fixed rate bonds plummeted contributing to paper losses for the banks. Now, it's unlikely those losses will ever be realized, but it does impact tangible book value in the meantime. So in theory, when rates decline, TBV growth accelerates, guys. Lessa, I just want to ask you by follow-up late last week, there was a glitch that knocked out part of the banking transfer system. Several companies that I'm aware of couldn't pay their workers. What happened and has it been solved? How many were affected? Yeah, it's pretty interesting, Tyler.

According to the Fed, this was due to a processing issue with the electronic payments network, which operates the automated clearinghouse or ACH. That's the group that processes transaction. So on Friday, customers at Wells Fargo, J.P. Morgan Chase, Truist, U.S. Bank and Bank of America were impacted, although it was only a small proportion of depositors. Reports have shown that less than 1% of daily ACA. H volume was affected and the issue has reportedly since been resolved, guys. All right, Leslie, thank you very much. Leslie Picker reporting.

For more on the regional bank rally, let's bring in senior research analysts covering U.S. banks, David George of Robert W. Baird. David, thank you for joining us today. And we're making a lot out of this 10% move. Is it, are we making too much of it? No, I don't think so. And like you're like Leslie mentioned a moment ago, I think the movement and rates last week, Combine with the bullet point or two, I would add to your prior commentary is the first positioning

within the banks is very low. I think market participants are significantly underrepresented in bank stocks. And additionally, valuations of this group are extremely attractive from our standpoint. They are as cheap. If you look at them on a pre-provision net revenue basis, which is how we think about these stocks, they are as cheap as they were in both the COVID pandemic as well as the GFC. Those are the only two times, Kelly, when these stocks are cheaper. So given the moving rates, combined with sentiment and positioning, we think that the rally is justified. And we think over the next 18 months, there's still very significant upside in a lot of these names. I think the problem is a lot of people might feel that they want to wait until we get through the downturn that could be coming to kind of peek under the carpet, you know, that they don't feel comfortable yet until we move through the really down part of what could be, you know, the coming.

credit cycle? Yeah, that's right. And obviously, anytime we're making stock calls or longer-term calls, you have to have a view as to how the future is going to play out, which is obviously unknowable. Now, from our perspective, that is where valuation comes into play. If, from our standpoint, at least, if you have a high margin of safety, you've got the ability to withstand unexpected shocks. And that's essentially what we've experienced in this group over the last six months. What we have seen, Kelly, is a funding shock and the Fed tightening much more significantly than we've ever seen, at least in my 25-year career. And that resulted in a significant shock in funding costs of what is going to happen. And I think it's been kind of underreported and not

really discussed among market participants in the next 18 to 24 months. What we're going to see is a significant asset repricing on the heels of this Fed tightening. So what I mean by that is you're going to see positive repricing in both loans and securities. So with the group priced for what we think is permanent impairment and profitability, we think that you're going to see a mean reversion, so to speak, and in return on assets and equity for the banks over the next couple of years. And that should result in much higher stock prices for this group in our view. I was going to ask you what the level of patience required is here. But I think you just answered it. You said 12 to 18 months. Am I better off buying individual names here or going with the KRE with an ETF and just playing the sector?

I think you can do both. I think a lot of that that is really a portfolio management question rather than an individual stock question. And to your question on timing, it is always imperfect. And as you saw last week, we had a 10% move in the KRA. We had several stocks on our list at about 15 to 20%. So if you wait for the good news to come, you could miss half of the move. And even though this is a kind of an arguably boring group over the last decades on a day-to-day basis, if you wait for the good news to come, you tend to miss what we call kind of the easy money in these stocks. So I think it's important to really think about valuation and margin of safety. And many of these stocks, Tyler, are trading at five, six and seven times

earnings and have six and seven percent dividend yields that we think are more than secure here. So we're okay getting along these stocks, having imperfect and imperfect information and lack of visibility. If the stocks are 30 or 40 percent higher, we would feel differently given the uncertainties out there. But here, we think that pretty reasonable risk. And you don't feel that I've missed a big hunk of the easy money from last week, clearly. No. No, I think that 10% move is very warranted. And if the Fed is done and credit quality holds, you could see a 20 to 30 percent move in these stocks in a very short period of time.

This has happened many times. We've been doing this for 25 years. This has happened many times where you get one piece of good news and market participant sentiment in that group shifts meaningfully, and that can result in a meaningful move of these stocks, especially if you see any type of sector rotation out of some of these mega cap areas. like tech, where if you take, if portfolio managers decide to sell a small amount of Apple, Apple or Microsoft, that results in a lot of market cap to buy in a lot in what I would call a mid-cap sector like regional banks.

All right, David, thank you very much. David George, we appreciate your insights today. Thank you. Further ahead, the beleaguered Ivy League colleges and education in general struggling over the past year between shrinking scores on achievement tests, diversity debates, and growing anti-Semitism on campus. We're going to take a look at education when Power Lunch returns. Welcome back to Power Lunch, everybody. Bond yields bouncing back today after a sharp drop last week. Let's get to Rick Centelli in Chicago for the explanation. What's going on, Rick? I'll tell you, Tyler, if you're a technician, these are the glory days if you're trading the fixed income,

especially the U.S. Treasury market. Look at a two day of tens. Tyler, what you're referring to is that low made not too long after we had the jobs, jobs jobs report that was on the weak side. We violated 4.5% on an intraday basis. That's a key point, 4.5%. Because if you go back and look at an early October chart, we could clearly see that we came very close on a closing basis but failed to close above 5%, but did violate it on an intraday basis.

So, 4.5%, 5%. Those are big rounds. numbers and they work like a charm. As a matter of fact, the outside session on the 23rd had many traders short looking for higher yields. Many of them covered not only because of jobs Friday, but because of the weekend in geopolitical events. Right now you have what's referred to as a parallel shift on the yield curve. We're basically up eight basis points in the front. We're up eight basis points in the back. And if you look at a July of last year's start for that spread between twos and 10, basically early July 22's the last time was at zero or positive.

The reason I bring that up? Because many traders are looking for the long end to continue to outperform and re-steeping the curves. You know, we could all say the Fed may be done, and that's a big deal. But remember, the long end isn't under the Fed's thumb. And as long as they're not doing QE, the long end has a life of its own. Kelly, back to you. The life of its own. Rick, thank you very much. We appreciate it. Rick Santelli. Let's get to Dom Chu now for the CNBC News Update. Dom? Good afternoon, Kelly. The White House says the president and Israeli prime minister Benjamin Netanyahu spoke today about potential tactical pauses in strikes on Gaza. Those pauses, the White House says,

would potentially allow for the release of hostages or for more humanitarian aid to be delivered to Gaza. U.S. officials say not enough supplies are crossing the border right now with only 30 aid trucks entering Gaza within the last 24 hours. Senator Susan Collins and Angus King from Maine are asking the Army to provide a full account of interactions with the Army reservist who killed 18 people in a shooting at a bar and bowling alley in Lewiston last month. The governor of Maine says concerns about the shooter's mental health were brought to the attention of the Army National Reserve Unit.

The Army says it received the request and is working towards a response. And the Pope talked and joked with crows. Prouds of children this afternoon after a brief health scare earlier in the day. The Vatican said the 86-year-old pontiff, who is missing part of one lung, had been suffering from a cold when he decided he was not well enough to give a prepared speech in the morning. The Pope kissing babies and talking with kids. Kelly, I'll send things back over there. Oh, Don, thank you very much, Dom Choo. Still to come on Power Lunch, addressing the elephant in a room. A new book by Bethany McLean and Joe Nocera reflecting back on COVID-era shutdown.

and asking the hard question, were they a failure and what's the lasting impact? Bethany joins us next to answer that question. Welcome back to Power Launch. COVID-era lockdowns were put in place with the idea of keeping the public safe and holding the spread of the virus. But they ultimately led to the shuttering of schools and small businesses. And many Americans are still feeling the pain of that. Our next guest is now posing the questions, were the, posing and answering the question, were the lockdowns even worth it? Joining us here now for more is CNBC contributor Bethany McLean. She's also co-author of the new book, The Big Fail, what the pandemic revealed about who America protects and who it leaves behind.

And your co-author on that is my friend, Joan O'Sara, two of the best writers I know collaborating here. So congratulations on the book. Thank you. It's a very interesting argument. But let me go back and let's spin the clock back to the spring of 2020 and the summer. of 2020. At that time, there was no vaccine. At that time, there was very little known about the virulence of this virus. What was known was it was affecting a lot of people. So you argue that the lockdowns didn't really work, and in fact did a lot of damage. But at that time,

and into and through 2020, weren't the lockdowns an understandable public policy response to what was going on? So I think we can all draw the line as to when an understandable response became a mistake. And I agree it's a little bit of a slippery line. But I'd argue that we knew the costs were too high long before the end of 2020. And the reason I say that is because the data was pretty clear early on that kids weren't affected by this nearly as much, that they weren't dying from this and that the terrible outcomes were clustered in nursing homes and people who were older and in people who had preexisting conditions.

And so I think it was pretty clear early on who needed protecting and who didn't. And I also think it was pretty clear early on who was bearing the costs of lockdowns and who wasn't. In other words, if all of us, and I use the word us broadly, had lost our jobs, been unable to work from Zoom and been told we had to go be essential workers out on the front lines, you might have heard a lot more pushback to lockdowns in the media than elsewhere than you did. And so then my natural follow-up is we were sort of protecting everybody when really we needed to protect the vulnerable who were the elderly, those in nursing homes, who were in assisted living facilities and so on and so forth. So why then did lockdowns have such carry in many states?

why then did schools stay locked down as long as they did in my community for the full year of the 2021-22 school year? Yeah, so schools in America stayed closed in a way that is in quite a contrast to places in most of the rest of the world. And I think we have to ask ourselves why that was given the incredible amount of damage that that has done to really the least privileged children in our society and the people we all say we really want to protect the most. I think there are few reasons for it. I think teachers were legitimately afraid. And I don't think public health officials did a good job of communicating

what the real risks of this virus was and how it was transmitted, nor did we see a lot of huge headlines when it came out that transmission rates and schools that were open were actually pretty low. I think the children of a lot of privileged people were able to go back to school because private schools opened, whereas public schools didn't just think of California and Gavin Newsom. His kids were in school while the public schools in the state remain closed. And I think all of us began to make this incredibly unfortunate connection between what your politics were and what your stance on the virus should be. So once Donald Trump said, I want schools reopened, it became the thing to say, oh, no, no, schools can't be reopened.

just to show your opposition to Trump. And really, if you think about it, isn't that a tragedy? A lot of this book, Bethany, is really about the health care system. How much of the motivation behind it was to talk about those failings? What are the failings? And what, if anything, have we learned about it? Because the system seems to me today to be exactly what it was, you know, three, four years ago. Good point.

I'm not sure we have learned anything. I've become a little more cynical, as you guys probably have to over the course of my career, over what we learn and what what actually what actually changes. But yes, there was a study that came out after our book was published, unfortunately, that associated higher rates of COVID deaths, not to lockdowns or lack of lockdowns in the United States, but rather to trust in the system and access to health care beforehand. And so one of the points of our book is that the pandemic really exposed a lot of preexisting conditions in the U.S. that almost guaranteed that COVID was going to hit us particularly hard. And one of those is the dismal state of health care for,

for many people in this country. When we talk about the dismal state of health care, are we talking about government-provided health care? Are we talking about the private sector and the way that that's run? What would you say would be, you know, the policy recommendations, if any, to come out of us? I'd talk about really the conflation between the two.

We don't, we pretend that the hospital sector is for profit. And in some ways, it is an even big not for, well, it obviously is. We've big publicly traded hospital chains. and a lot of not-for-profits are now essentially run as for-profits as well. But we don't do a good job of saying, what are the preconditions for a hospital to be able to thrive? We pretend that it's kind of a free market referendum, but it really isn't. Government reimbursement policies dictate which hospitals survive and thrive and which ones don't.

And the hospitals that actually did the best are the ones that are the most skilled at taking advantage of government reimbursement systems. So I think one of the larger points of our book that we tried to get at is the responsibility of government to set the right rules, both for the free market and for society. Quick question, quick answer, if you might, Bethany. Why did so many public health officials, including Anthony Fauci, back the lockdowns? So I think they were desperate to do something. And I don't necessarily, it goes back to our leaders setting the right rules. I don't necessarily blame a scientist for saying what that scientist thought was the most effective way to stop the spread of COVID. What I do blame are our leaders for not saying, okay, this is what a scientist says, but what are all the other costs associated with lockdowns, small business closures, people dying from lack of access to health care for other conditions like cancer, kids not being able to be in school?

Are these tradeoffs worth it? And I think our leaders hid behind public health officials like Dr. Fauci. And so if you're going to be mad at anybody, don't be mad at Dr. Fauci for saying what he believed. Be mad at our elected officials for not being strong enough to say we're the ones who are supposed to be leading here. Bethany McLean, thank you very much. And I look forward to reading the whole book. Seems cool. Thank you.

Good to see you. Thank you. And coming up, we're going to dig more into this issue of school days. The pandemic dealing a big blow to the quality of education across America, including colleges and universities, as that list of headwinds continues to grow. we'll do a deep dive on the whole situation when Power Lunch returns. Welcome back to Power Lunch. We just spoke with Bethany McLean about the challenges that students and educators have faced post-pandemic. From the quarantines to kids then falling behind following extended periods of remote learning and staffing shortages, there have been plenty of difficulties to navigate. Now, data kind of puts that into quantified terms,

showing the average score on the ACT just fell to a new 30-year low. it's actually the sixth consecutive year of declines. Let's get some insight on the state of education and the impact this could have on the workforce over time with Arnie Duncan, former U.S. Secretary of Education and managing partner of Emerson Collective, and also Sal Khan, founder and CEO of the Khan Academy, a nonprofit educational organization.

Welcome to both of you. Really appreciate your time. Secretary Duncan, let me just start by asking one question, which is, are ACT scores going down because they're optional now? What's the tail and what's the dog here? Well, first of all, thanks for having us. I'm a huge fan of sales. We'll be able to do some work together.

So, no, whether it's the ACT, whether it's other metrics, by every measure, our education system is declining and our children are performing more and more poorly. So we don't need to be on. It's like a crisis. We don't need another wake-up call. We need to do some things very, very differently. And we get into the conversation, but let me just start by saying we have to make learning the constant and time the variable in education.

And historically, time has been the constant and learning has been the variable. And we have so many children who are so far behind, that they need more help after school, they need to be on school on Saturdays, weekends, over the summers. We have to have that kind of flexibility. One-size-fits-all mentality isn't fitting much of anyone. It wasn't before. And post-the-pand-pondemic, post-COVID, we have to think very differently. what's right for every single individual student.

How many need five meals a week? How many need 10 meals a week? How many need extra help in terms of their mental health? We have to think differently as adults to meet our kids where they are and help them go to where they need to go. Secretary Duncan, one of the things that has, I guess, arisen in the public discourse in recent years is that the culture wars have gotten into questions of the school curriculum. And my question for you is, isn't there a reasonable role, an important role even, for parents and their elective officials to play in determining not only what is taught, but how it is taught and what is read and when it is read in figuring out what should be in a school curriculum?

Don't parents and their elected officials have a role to play here? They absolutely do, and I'm always going to be the biggest opponent you can find for parent empowerment. But I want parents empowered not because of fear, not because we're trying to scare them, but out of hope and being very transparent with them where their children are. So let me just give you a couple of concrete examples. The vast majority of parents think their children are performing at grade level, usually 80 to 90 percent. Across the country is often 20 to 30 percent. There's a massive disconnect between how children are actually doing in terms of reading skills, mass skills, and what parents think. We've been lying to parents.

We've got to tell them the truth where they are. And then we've got to partner with parents. Parents are always going to be our children's first teachers and always be the most important teachers. We've got to empower parents and work with them to help their children be successful. And that's what I think parents are looking for is honest, transparent information. And let's work together all of us, all of us as adults, to get their children where they need. need to be. For me, if you drop out of high school, you basically have no good options. And in some form of higher education has to be the form for every high school graduate,

four-year university, two-year community college, trade technical technical vocational training, whatever it might be. That's what we need to unite behind with parents and other leaders. So I think the reason why the ACT test scores being so low has gotten and captured our attention so much is because we're looking for objective ways of measuring what's happening in the school system. And as other charts have pointed out, GPAs continue right. so it doesn't seem like that's the most trustworthy information. A lot of parents also looked at the curricula. Their kids were supposed to be learning in those years they were home

and were a little surprised that maybe it wasn't quite as rigorous or academic as they had always expected. So objectively speaking, how do we know how much our children are learning? And what do we do if we're looking for improvements in that regard? Well, objectively, we know, unequivocally, beyond a shadow of doubt. I'm sorry, Arnie, let me just go ahead and let's say. Sal, answer, Sal, go ahead. I probably say exactly what Arnie's about to say, and I'll double down what he just said,

that it really is all about transparency. If parents know, there's very few parents who would not want to take some action to do that, and now there are things that they should be able to do. And, you know, unfortunately, as bad as the pandemic was, and we do see these declines, even where ACT scores or SATs scores or state standardized test scores were pre-pandemic was not a place to aspire to, even a 20 on the ACT, if you look at the questions, not really showing that someone is college ready. Even before the pandemic, 60, 70% of students who show up at college. These are the kids who graduate from high school and then decide to go to

college. Roughly, the top half of students, most of them aren't ready to learn algebra yet, and the colleges know that, and they put them in remedial tracks. They're not ready to write yet. They're writing at best a middle school level. So this is a real problem. What we try to do is a not-for-profit is, hey, there are tools here. There's Khan Academy. You can go there. It's free. We're not-for-profit, funded by philanthropy. It gives parents, agents. It gives them control over what they can do and obviously it can be used in a classroom as well. But I'll just triply underlined what Arnie says.

We have to make this more transparent to parents and also give them things that they can do because not every parent is going to be able to afford tutors to be able to help their kids. How much, Sal, did the pandemic setback learning for, let's say, a high school freshman, which was what my son was when he, I said he was in high school, but he'd never been in the high school.

Yeah, you know, there's still research companies. I think it's clear that it did create a setback, and unfortunately I think it created a disparate setback, and it wasn't just academic. No. In circles, the social-emotional side, there are students who are still wearing masks because they don't want to show the bottom of their face. They haven't learned to kind of emot or feel comfortable with them. So I think that we have to wrestle with those social-emotional type of byproducts of it, but on the academic side, I think it's been very unequal. You see the averages

have gone down. But the reality is those of us who had resources or kids went to private schools, those kids kept learning. In certain cases, they even accelerated because their learning became more personalized. And a lot of other families, their kids are actually the ones that are bringing down the average because they got less support. Yeah. Interesting stuff. Thank you very much. Sal Khan and Arne Duncan. Thank you very much for your time today. Power lunch will be right back. Time for today's three-stock launch. CNBC Pro looking at ways to play. The recent market Bounce, screening for stocks that are up 10% or more off their 52-week low and up nearly 10% or more over the past month. Here with our trades is David Traynor, CEO of New Constructs and Investment Research Fund,

and we begin, David, with Amazon. Buy sell or hold? You know, we'd sell Amazon for sure. I mean, the company's valuation implies that's going to grow profits at 20% compounded annually for 20 years. and generate free cash flow of like $200 billion a year. And over the last five years, Amazon has burned $150 billion. So most folks kind of get the narrative on Amazon wrong.

They think it's a really profitable, great business. But I'm not so sure it really is as good as people think. So you would unload Amazon. All right. Moving on. Moving on to News Corp, which is up nearly 45% from its 52-week load. That's quite a move for you. Would you be chasing this one?

Are you buyer? Kelly, no. We think, you know, the media business in general is really competitively challenged, right? Anybody with a keyboard and an internet connection can create content. You know, we've seen this proliferation of free content. Most of it not so good, but, you know, people aren't all that discerning. So we think the business is fundamentally competitively challenged and the valuation at this point is extremely expensive. So we'd want to unload this one too. Unload it. All right. Well, unload it. That brings us to Dollar Tree. All right, Dollar Tree, what would you do with this one? Well, this company is definitely much better position. We think as the economy continues to slow and rates start to clamp down on economic activity, we'll see more consumers downshift into more of the Dollar Tree category of spending, and we think that's good for this business.

We still think it's a tad expensive. We tell investors to start nibbling around $100. So you'd wait to buy this one. How do you see the economy unfolding over the next six months? We had, we began with Michael Cantorwitz, who was pointing to a lot of warning signs that he sees in the economy, not exactly calling for a recession, but how do you see the economy unfolding? Tyler, I think it's going to be a really a slow sort of suffocation, right? It's not going to be the traditional sort of Bocor style, you know, crash everything and everything has to go to zero and we purge all the bad investment. I think for us to really have a real turnaround in our economy, Tyler, we've got to slowly kill off all the zombie stocks and the zombie companies. if we don't, it's just going to be back to buy the dip.

So this has got to be something that takes a while and really forces a long-term change in behavior. Very interesting. David Traynor, thank you very much. That's a phrase that's going to linger with me for the rest of the day, a slow suffocation in the economy. David Traynor, thank you, man. It's like pick your horror movie analogy.

Yeah, exactly. It's about to happen. Speaking of which, the Dow has gone back into the green. We started with a gain of 106 at the highest turned negative and now we're up by 12. All right, everybody. Thanks so much for watching Powerline.