Morning Brew Daily - Capital One Buying Discover & The US Billion $$$ Chip Expansion

Episode Date: February 20, 2024

Episode 262: Neal and Toby break down the massive credit card deal between Capital One and Discover Financial. Plus, Donald Trump has to pay over $355 million after being convicted of business fraud in New York and the billion dollar chip expansion project being funded in the United States. The guys share their winners of the weekend and why Air Canada is honoring a refund policy created by their chat bot. And finally, a preview of the week ahead. Listen to Morning Brew Daily Here: https://link.chtbl.com/MBD Watch Morning Brew Daily Here: https://www.youtube.com/@MorningBrewDailyShow Options are not suitable for all investors and carry significant risk. Certain complex options strategies carry additional risk. Options can be risky and are not suitable for all investors. See the Characteristics and Risks of Standardized Options to learn more. For each options transaction, Public Investing shares 50% of their order flow revenue as a rebate to help reduce your trading costs. This rebate will be displayed as a negative number in the “Additional Fees” column of your Trade Confirmation Statement and will be immediately reflected in the total dollars paid or received for the transaction. Order flow rebates are only issued for options trades and not for transactions involving other assets, including equities. For more information, refer to the Fee Schedule. All investing involves the risk of loss, including loss of principal. Brokerage services for US-listed, registered securities, options and bonds in a self-directed account are offered by Open to the Public Investing, Inc., member FINRA & SIPC. See public.com/#disclosures-main for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

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pwc.com slash U.S. slash brew AI. That's pwc.com slash us slash brew AI. Good morning brew daily show. I'm Neil Freiman. And I'm Toby Howell. Today, why is Donald Trump

selling $400 high top sneakers? Then you might want to think twice about trusting the AI chatbots that give you info on airline websites. It's Tuesday, February 20th. Let's ride. It's been four days since our interview with Mark Zuckerberg dropped.

of all, go listen if you haven't already. Second of all, you guys have sent this thing to the moon. The YouTube video just cruised past 100,000 views, and the episode is on track to be our most listened ever. So thank you all for helping make that possible. Neil, any takeaways now that it's been out in the world for a while? Well, I did not realize how many times I would have to reassure people that it wasn't AI generated. In fact, I had to convince myself in the first 10, 20 minutes, that we're not talking to an AI version of Mark Zuckerberg, but that is the world we live in in 2024. We dropped the interview one day after OpenAI released its text to video generator, SORA, and now you just

can't believe anything you see. It was truly, like, you're not making that up. I was in group chats with my friends going like, Toby, is this real? Because you just can't know these days. My big takeaway, too, is that Tim Cook needs to respond. I mean, there was definitely some Apple versus met attention in the interview. Again, go listen if you haven't. So if anyone out there is connected to Apple's PR team or anything like that, you have our email. Before we jump into the show, let's hear a quick word from today's sponsor, Veem. Veem is lucking out this month, Neil. Oh, for sure. They're getting the Zuckerberg listener bump from Friday, and it's a leap year, so I think we're contractually obligated to repeat these ads in 2028.

But that's a good thing because then more people will be able to make their businesses radically resilient with Veem. You're right. Better data protection and recovery is something that stands the test of time. If you're interested in protecting your data, head to veem.com today. That's VEEAM.com. It's time to refresh your yard during spring backyard days at the Home Depot. Get low prices guaranteed on propane grills starting at $179, like the next grill 3-burner gas grill, or get $50 off a select Weber Spirit grill and bring big flavor to your backyard.

Then set the scene with Hampton Bay string lights that bring it all together. Shop spring backyard days for seven days at the Home Depot. Now through May 6th. Exclusion supplies, see Home Depot.com slash price match for details. Sometimes news gets a little slow over a long weekend, but not this long weekend because, as we all enjoyed our day off on Monday, Capital One executed a bid to acquire Discover Financial Services for more than $35 billion, representing a 26% premium from its closing stock price.

At the time of buying Capital One was sitting at around a $1. $52 billion market cap while Discover was in that $28 billion range, but combined, suddenly they operate a network that is a much bigger player in the payments ecosystem and now operate the number one U.S. credit card company by loan volume. Capital One is the ninth largest bank in the country, but bats above its weight as a credit card issuer. We've all heard Samuel L. Jackson ask what's in our wallet at one time or another, but up to this point they have used Visa or MasterCard to power most of its cards. Now that they've added Discover to the fold, the plan is to start switching over some cards onto the Card Network that they now own. Overall, Discover's

network is still kind of small potatoes compared to Visa and MasterCard's Duopoly, but it's still potatoes that Capital One is interested in sheffing something up with. Yeah. I mean, so there's two kind of groups here in the credit card space. You have the issuers, which are banks. They're the lenders. When you apply for a credit card, you go through the issuer. And then there is the network, which is dominated by Visa and MasterCard. Discover does have a network. And these are the companies that facilitate the transactions between the issuers and the merchant. They create all the infrastructure. And they make a lot of money. I mean, Visa and MasterCard are huge companies. So Capital One wants to go up against Visa and MasterCard with Discover,

which is the rare breed, which is both a credit card issuer, it's bank, and it creates the network as well. Yeah, it's actually discovers closer to American Express, which both issues and is a card network. Visa and MasterCard do not directly issue credit cards. So it is kind of like all squares are rectangle or all rectangles are squares, but not all squares are rectangles. I think I got that right. The first thing that a lot of people think about when you see a merger of this size is, is it going to trigger some antitrust scrutiny? And some analysts aren't that worried because stopping this deal would likely make regulators kind of come to terms of the fact that they've let Visa and MasterCard.

amassed this big, big market share in this industry. So if you cut down this deal, then you're basically ceding power to those two. But there is obviously going to be scrutiny around this too, just because the sheer size of the company. Yeah. Meanwhile, Capital One doesn't want Discover just for the network. Capital One wants to get into more wealthy customer base. Right now, that's dominated by JP Morgan Chase and American Express. You go to the steakhouse, you drop down your huge Amex card, but Capital One sees a lot of potential in getting clients that are more interested in the dining experiences, the travel rewards. And last year, it acquired a digital concierge service, which I don't know these type of companies exist, called Velocity Black. And so with Discover, it's getting a client base that has a better credit scores.

Capital One has typically not attracted those kind of customers. So it wants to go after American Express and JPMorgan in that space as well. These two companies, though, are a bit of, I don't want to say damaged goods, but they're coming off a little bit of a bumpy streak. Discover and Capital One both recorded declines in fourth quarter profits, 62 and 43 percent respectively. And then also Discover has been kind of, there's some scrutiny around it from misclassifying certain credit card accounts back all the way in 2007. they're paying out $365 million to merchants. Also, there's another consent order they received from the FDIC in October to improve its consumer compliance operations. So, again, these are two companies that haven't been smooth sailing recently combining to try to shore things up a little bit.

Yeah, I do think you're going to see a lot of regulator scrutiny around this. It's not just a big merger. It's one of the biggest mergers we've seen in years, but it's also a bank merger. And people just get very spooked when you see banks consolidating. like this. But as we all know, we're going to see a bunch of Capital One ads no matter what on March Madness with Sam Jackson and all the rest of that crew. Okay, imagine you went to Sneaker Con in Philadelphia this weekend and you're hoping to add some rare footwear to your collection. Who is the last person you'd think would show up to that event? I think Donald

Trump would be up there. In a major surprise, the former president took the Sneaker Con stage on Saturday to announce a new line of gold high top sneakers called the Never Surrender Line, which went for $399 a piece. And I say went because the $1,000 in stock sold out within hours. The timing of the sneaker drop was not lost on people. Just a day before, a judge ordered Trump to pay about $350 million in penalties, plus another $100 million in interest in a civil fraud trial that found Trump and his business associates fudged financial data in order to secure lower interest rates from banks. Trump and others are banned for three years from taking leadership roles in companies in

New York State. Trump said he'd appeal the ruling, but the threat of a $450 million fine, plus another $85 million he has to pay in another case will be a major dent in his bank account as he tries to retake the White House. Time to start selling sneakers, I guess. Yeah, the timing of these two events was certainly funny. I mean, the sneakers itself, if you haven't seen them, that they are, I mean, in a word gold. They are very gold. And you know what stinks is that I actually love gold on sneakers? So I was like,

I don't know. They look pretty cool to me, but they're very over the top. But yes, if we're thinking about what kind of precedent does this ruling set in New York, that's what has a lot of people spooked about this ruling is that if you are a business person in New York, can you still feel confident that you won't have kind of like the state, the Attorney General coming after you? If you are a law vying citizen and you're doing everything correctly, that's what Governor Kathy Haukel told business owners that there's nothing to worry about as long as you are being an honest person. But that was kind of the first thing that people thought of is what precedent is in New York? Yeah, some people were like, oh, I don't want to do business in New York because if they can

go after Trump, they can go after anybody. The other side of that coin is saying, well, I'm New York. I'm setting strong legal precedents around doing business here. You're not going to get swindled by anybody. We're creating a strong legal framework. Having a strong legal framework anywhere in any jurisdiction is what facilitates business. So that is the sort of rejoinder to that saying, look, we're creating a very stable ecosystem here in New York. We pay a zillion dollars in rent, so I don't think businesses are leaving New York and mass because of this.

Yeah, absolutely not. This is going to hurt, by the way. It's hurt Trump's bank account. Anywhere between 13 to 18 percent of his money, depending on which kind of estimate you look at his net worth, you might have to sell off some New York properties to pay it. It is just a lot of money. And again, you're not going to amass 300. $150 million by just selling sneakers, but I guess you can try.

Yeah, no, what is it? $400 a piece and he sold $1,000, so that's $400,000. Not going to make a huge dent, but this guy can kind of turn on the money spigot at any point. He's made a billion dollars since leaving office, according to the Washington Post. So he does have these assets that he can sell off or ways to generate income. But he has paid so much in legal fees. $53 million in the past year alone. And he's got four criminal trials coming up.

Bloomberg reported that his legal war chest is going to run out by the summary. He might have to dip into R&C funds to help pay it. And this could wipe out about half of his assets if he has to pay. He's still appealing the ruling. So we'll see. I mean, this is, I mean, it's a half a billion dollars. Even for a very rich person, it's a half a billion dollars. Absolutely.

Let's move on. Like that one overzealous guest at your Super Bowl party, the U.S. government is also going to town on chips. The Commerce Department just gave semiconductor maker Global Foundries a $1.5 billion grant to expand its facilities in New York and Vermont. This is the first time the government has put its money where its mouth is as they kick off a program to reinvigorate domestic chip production. This is the first award but won't be the last. Intel, TSMC, Samsung, and Micron have all submitted applications to snag some cash to support semiconductor manufacturing projects and states from Arizona to Texas. These grants are coming from the $39 billion set aside by the Chipsack passed back in 2022,

which at the time felt sizable, but was Sam Altman asking for $7 trillion in funding to boost global chipmaking abilities, suddenly feels like a pittance. Regardless, it's exciting to see this program kicking off, but it's been a minute since the chip act was introduced. Can you quickly get the people back up to speed? Well, go back to 2020 and 2021. The two words we were saying over and over again was chip shortage, Because of the supply chain chaos, automakers had to idle their plants for weeks. Because everything is made with chips, TVs, phones, cars, anything you think of as a high-tech gadget right now or even a low-tech gadget is made with chips.

So seeing the writing on the wall that foreign countries couldn't be reliable in our new globalized world to supply chips for things like the military, too. There's national security interests here. the Biden administration launched this Chips Act, $52 billion worth, to spur manufacturing domestically. It's extremely expensive. It's extremely complicated to put up a chip factory anywhere in the United States. It's much more expensive than overseas. So the Biden administration thought it had to dangle grants and other tax incentives to companies to start building here so we can secure a chip source. Yeah, you touched on everything there. I mean, part of it is just because it was so annoying for companies to not have any supply available. But then also, there is this growing call to reinvigorate the U.S. specifically because back in 1990, we accounted for 37% of semiconductor production in the world.

Now it's down to 12% in 2020. So this was like, come on, guys, let's all rally together and do this. It is so funny, though, after hearing that $7 trillion number. It's a different type of chip. That's an AI advanced chip. And I think the one that we're talking about the one that Sam Altman is kind of pursuing. I think these are different class of chips. That's intended to train AI systems.

These are more conventional chips. Not to say they're not advanced, but yes, it requires so much money. When you look at the capital expenditures of the companies, I mean, TSM is pouring $40 billion into its Phoenix, Arizona plan. And it's just taking so long to get off the ground. One thing that these companies are running into is huge labor shortages. There aren't skilled workers able to upman these plants. And so you're seeing these timelines being pushed out and pushed out, 27, 28, until they start getting going.

So I think that's frustrating a lot of people. And finally, the one thing that is kind of concerning some people is that this is a foray into industrial policy for the U.S. government, something that they don't often do, honestly, because what the problem arises is that you can, have the government kind of picking winners. They pick and choose which companies they want to give grants to. So that has some people who have pushed back, even though on the whole people say, yes, let's return manufacturing ability to the U.S. If you have the government kind of influencing industrial production, that's something that gets people a little up in arms. All right, let's take a moment to hear from our wonderful sponsors, but stick around because Neil is about to drop some scintillating plain facts after the break. Study and play.

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I won the pre-show latte art competition with an epic tulip, so I get to go first. And my winner is anyone who is traveling east in a plane over the northeast on Saturday, because it was like picking up an endless supply of stars in Mario Kart. Pushed along by the 265 mile per hour tailwind at cruising altitude, at least three commercial aircraft are flying at more than 800 miles. hour. A Virgin Atlantic flight headed from Dulles to London arrived 45 minutes early, and an American Airlines flight traveling from Philly to Doha reached nearly 840 miles per hour, which is among the fastest speeds ever recorded for a commercial jet. I got all my physics majors listening to this saying, why didn't anyone hear anything? Didn't these planes break the sound barrier? It's true, Mach 1 is about 767 miles per hour at sea level, but the planes did not

break the sound barrier because they were still flying at standard cruising speed relative to the surrounding air. It's just that the surrounding air was also moving extremely fast, and I totally know what that means. Okay, this is how I was thinking about it. I need physics majors to check in on me, but I was thinking about it is when you go on a moving walkway in an airport, you're still walking the same speed, but certainly your speed that you're traveling is much faster. I still understand why you wouldn't break the sound. I guess it's because sound barrier is you interacting with air, and so that's why you hear the, the sound. But yeah, this just gets to be fired up, honestly.

It's 140 miles per hour. It seems incredibly fast. Also, arriving 20 minutes early to your destination. Sometimes, this is a hot take, but sometimes arriving that early is almost worse. Because if you coordinated with someone to pick you up from the airport, suddenly they're all stressed out and they're mad at you for arriving early. So, but still, very cool. And thank you for explaining those things.

You hear a lot about pre-boarding beers. I've never heard of the post-plane exit beer. If you have so much time in the airport, you might as well indulge. And you know what? Let's fly to Europe, Neil. We can pop over there in just a few hours. My winner of the weekend is Ozempic in China. I was shocked to learn how well the diabetes turned weight loss drug was selling in China,

mostly because I was shocked to learn about the amount of obese people. There are around 200 million obese adults in China and an additional 400 million who are overweight, which is the most in the world. The market for the GLP 1 class drug. drugs in China was worth around $1.7 billion in 2023, with more than 80% of that coming from diabetes prescriptions, which makes sense, given that OZEPIC isn't actually approved for weight loss yet. That hasn't stopped e-commerce sites, though. You can buy a shot of the so-called miracle drugs just by declaring you've been diagnosed with diabetes, no proof necessary.

Neil, we've always talked about the U.S. in its obesity problem, but China has the world's largest obese population. Yeah, I mean, I've learned one thing from doing a year of this podcast since it's that if you think there's a big market for something in the U.S., it's always going to be at least twice or three times as big in China. And I guess I shouldn't be surprised that it's the same with OZMPIC and Wagovi. I think it's so interesting, though, the role that these online retailers are playing. You can buy a dosage of OZMP for around $139 on J.D.com, which is a site over there. That's higher than the nationally issued insurance plan, but also way cheaper than the U.S. Remember, some users are paying almost $1,000 a month in the U.S., so it is interesting that you can literally just go online and buy some of these shots, which differs from here in America.

Let's move on. If you've ever interacted with an airline chat bot before, listen to the tale of poor Jake Moffitt. Jake was trying to book a flight from Vancouver to Toronto the day his grandmother died, so he had. headed to Air Canada's site to see how their bereavement rates worked. He ended up interacting with the chat bot, which explained that he should book the flight immediately, then request a full refund within 90 days. The only problem was that info was inaccurate and not reflective of Air Canada's actual policies. When he went to ask for a refund Air Canada, refused to give it to him, offering a coupon

for a future flight instead, despite Moffitt showing a screenshot from the chat bot that clearly stated otherwise. Moffat filed a small claims complaint, but Ayr Canada fought back saying that Moffat should never have trusted the chatbot and the airline should not be held to the chatbot's word. Eventually, the court ruled that Air Canada was on the hook for at least a partial refund, which it eventually paid, and now it appears the chatbot has been taken down from its website. But, Neil, this was a saga that opens up a legal can of worms on if companies should be held to the words of their non-human AI powered chatbods. Big L for Air Canada, but I think this might be. be the first case where a company is being held liable for wrong information presented by its AI chatbot, which you're right, opens up a huge legal can of worms. I think other companies,

other airlines that have chatbots on their website are looking at this ruling and saying, well, we got to make sure this thing is presenting accurate information, or we have to put a disclaimer somewhere saying not to trust the chat bot, which is also probably a terrible solution. So you can bet that a bunch of other companies are looking at this rule and saying, I got to get my chatbot ducks in order because I, as a company, am liable for what it says. It is such a bad look for, because how would anyone ever expect? And this was what was brought up in the case with P.A. is why should I ever think to double check something that is coming from you?

Why should I go to another part of your website to find your actual bereavement policy? Also, just the fact that you're denying a refund to someone who is flying to go see his recently to see his grandmother or just flying to see his family. Also, what is interesting is Air Canada is so all in on automation that they are reportedly investing more in their AI capabilities than it would take to actually just pay people to run customer support. We've all gone to an airline website before and been directed to talk to a chat bot rather than an actual agent because usually they're taken up. But if Air Canada had just paid their people, it would be less than the amount that they're investing in automation. So it is kind of ironic that this cost-saving measures ended up costing them more money. Yeah, I think they disabled their chatbot now, which maybe is a smart move.

This ties into the argument that corporations might be the first entity, the first type of interest group that will advocate for the legal rights of AI and robots because then it gets them off the hook. That is interesting. That they end up advocating against their own technology in order to, yeah, separate the liability. That's what Air Canada offered. Okay, I know it's Tuesday, but let's pretend it's still Monday and do our typical week ahead preview because there is a lot happening that we want you to prepare for. First up, if all goes to plan this week, a U.S. spacecraft will make a soft landing on the moon for the first time since 1972.

The Odysseus Lunar Lander from Intuitive Machines had a successful launch last Thursday and is on its way to the South Polar region of the Moon, which it's hoping to touch down on this Thursday. This mission is crucial for NASA's push into private partnerships, considering the last time a U.S. company tried to land on the moon in January, it ended in disaster. I'm pumped. I'm rooting for it. I love that you have to clarify that it's a soft landing that they're pursuing to because we can slam our spacecraft into the surface of the moon with the best of them. Yeah. Is Odysseus a good omen? I mean, Odysseus got home after a while.

It just took a while. It just took a while. This is not going to take a while. This is a fastball pitch straight to the moon. It's going to take a week. So we will definitely be watching on Thursday for that possibly historic landing. Big week for retail earnings. too, the American shopper will be the star of the show when Walmart and Home Depot report their earnings for the holiday quarter. I think I said rapport with Home Depot. But even more important than those retail giants is NVIDIA reporting earnings on Wednesday. And in the past year, its earnings have largely set the tone for the rest of the stock market because the chipmaker is the bellwether for AI. In the past week, Nvidia topped Amazon and Alphabet and Market

Cap to become the third most valuable U.S. company behind Apple and Microsoft. petition to make invidia earnings a national holiday. We should all just have the day off for work, because if it goes well, then everyone's going to be making money in their stock accounts anyway. So let's just take the day off. Expectations are sky high. Over at National Harbor in Maryland, Donald Trump and Argentinian President Javier Miele will be among the speakers at the conservative political action conference. A prominent gathering of conservatives that kicked off Wednesday. It's expected to be an apprentice-style audition for Republicans vying to become Trump's running mate.

in the upcoming election, should he secure the nomination? I wonder if anyone will rock the Trump shoes. I have a feeling. You have to imagine. Yes, I think the answer is yes. What else? The MLS season starts Wednesday with Lino Messi and Inter-Miami facing Real Salt Lake. I did not realize this, but all of the matches at the beginning of the season are going

to have replacement officials because the actual reps are locked in a labor dispute with the league. I can't think of anything more entertaining than MLS plus replacement reps. It is going to be on real television. it's going to be a madhouse. In other sports news, baseball returns with spring training games on Thursday. Toby, I need you to weigh in on this heated debate. Do you think Bryce Harper should move the first base? I think Bryce Harper should, I don't.

Honestly, I have no take on that. That's going to be in your corner. I wish I had something for you there. But I was just going to advocate for this being a national holiday as well, Neil, because I know you're very excited about this. Yeah, but you also live in spring training bill down in southwest Florida. But the big news, obviously, over the offseason MLB is Shohei Otani going to the Dodgers with that gargantuan contract, which he's delayed until the end years of that deal. Exciting news for all of us who bingedged Avatar, the last airbedder during COVID, a live action adaptation of the beloved animated series premieres on Netflix on Thursday.

All that people are saying is just please be good, please be good, because we've already had a live action remake that went horribly, horribly wrong. So fingers crossed for this one. All right, that is our show for this Tuesday. Loki, the best part of a long weekend is that the next week is a short one. I feel like no one talks about that. As always, you can send any thoughts or feedback on the show to Morning Brew Daily at Morningbrew.com. Let's roll the credits. Emily, Milliron is back from Vacay as our editor and producer.

Nothing happened while you were away, Emily. You didn't miss anything. Raymond Liu is our associate producer. Yuchinawa Ogu is our technical director. Billy Minino is on audio. We are not liable for anything hair and makeup may spit out. Devin Emery is our chief content officer and our show is a production of Morning Brew.

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