Morning Brew Daily - Economic Implications of US-China Meeting & Climate Change Costs $150B a Year

Episode Date: November 15, 2023

Episode 192: Neal and Toby discuss the historic meeting between President Biden and Chinese President Xi Jinping in San Francisco and how it will impact the global economy. Plus, inflation is finally cooling and the $150 billion a year cost of climate change. Also, Wall Street bankers' bonuses won't be as big and the phone trying to bring iMessage to Android. Finally, the Maine soccer team that won the state title for Lewiston. Listen to Morning Brew Daily Here: https://link.chtbl.com/MBD Watch Morning Brew Daily Here: https://www.youtube.com/@MorningBrewDailyShow Checkout Morning Brew Learning Here: https://learning.morningbrew.com/allaccess Learn more about your ad choices. Visit megaphone.fm/adchoices

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Good morning brew daily show. I'm Neil Fryman. And I'm Toby Howell. On today's pod, President Biden and President Xi break sourdough in a historic face-to-face meeting in San Francisco. Then everyone get excited because the inflation reading came in yesterday and it was cooler than the other side of your pillow. It's Wednesday, November 15th. Let's ride. So just like everyone listening out there, Neil and I have been getting our holiday plans in order. Neil, make sure you bring over the mashed potatoes when you come over for Thanksgiving.

But part of our holiday planning is to record. some special shows for you all. And one idea we've been mulling over for a while is doing a mailback episode where Neil and I answer questions from you all. Right. You send us tons of emails, leave thoughtful comments in our YouTube videos, which sounds like an oxymoron, but it's true.

So on Black Friday, we are going to devote an entire episode to answering your questions, which means over the next few days, please send us anything you've always wanted to ask to our email, Morning Brew Daily at morningbrew.com, and use the subject line,

Q and A, so it's easier to categorize. And as far as questions are concerned, anything is fair game. All right, let's check in on our presenting sponsor, Brex. Neil, the most annoying thing as an employee is when you have to do stuff that isn't your job. You mean how we have to do our own hair and makeup because somebody is slacking off? I was thinking more along the lines of dealing with annoying expense busy work. Oh. Brex makes it so easy to expense stuff that you can get back to your actual job quicker than you can say,

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Let's head to the news. Whatever meeting you've got on your calendar today, it's probably not as important as the one going down in San Francisco this afternoon. There on the sidelines of the Asia-Pacific Economic Cooperation Summit, President Biden and Chinese President Xi Jinping will meet face-to-face for the first time in a year. And this is a meeting that could definitely not have been in email. Relations between the U.S. and China have reached their lowest point in decades with tit for tat trade restrictions, growing animosity, and who could forget that Chinese spy balloon that floated onto American skies earlier this year. There is major concern that the U.S. and China, the two world's superpowers, are heading to military confrontation as China gets more aggressive around Taiwan. Or that could not happen, which is what Biden and Xi aimed to do. ahead of the meeting, both leaders said they wanted to repair the relationship and position it more as an intense economic competition based on mutual respect rather than open hostility. To put it in terms, sports fans would understand more of an Alcaraz versus Djokovic situation rather than Michigan versus Ohio State. Toby, what are you looking forward to this meeting? I'm looking forward to the fact that China's economic performance in the post-COVID era is kind of a main factor here that makes people more optimistic for a more productive summer.

than normal because China has not really bounced back in a way that a lot of people expected. It's got this increasingly aging population, higher than normal levels of youth unemployment, a real estate market that's teetering on the verge of a meltdown and an exodus and foreign investment as well. So that gives a lot more leverage to the U.S. versus if China had roared back from COVID like many expected. And she is actually shouldering a lot of the blame here. His strict COVID lockdown policies hurt the country's ability to bounce back. And he's also been cracking down on industry in the company. So all this to say that China's not coming in to this summit in a position of immense power. And so it could be more open to compromise like we've discussed.

Yeah, it was just a few years ago where a lot of economic commentators said it was just a matter of time before China eclipses the U.S. in terms of its economy. There was no way it wasn't going to beat the U.S. to become the world's number one economic superpower. But in 2021, China's GDP was 75% the size of the U.S. is. And in the third quarter now, that has slipped to 64%, which is where it was in 2017. So this is causing a lot of reflection for people looking at China. And they're saying, you know what? Maybe this economy is not on a rocket ship. After all, it's economy has slowed in the post-COVID era. Those lockdowns hammered it hard. And we've talked about there's a lot of youth malaise there. There's this concept of lying down. And we've talked about this on the show,

how a lot of China's youth are moving back in with their parents because they don't see a lot of opportunity. Xi Jinping is cracked down on the private sector like crazines, cost it $1 trillion. So they're looking at businesses and business formation and entrepreneurship and saying the government is not really fostering this ability to succeed. Yeah, this is certainly a business first conference, first and foremost, rather than all the geopolitical stuff that's going on. I mean, for instance, Taiwan, which is always in a precarious geopolitical position in that region. They're sending the CEO of the Taiwan Semiconductor manufacturing company, so not a diplomatic representative, even though there are diplomatic

representatives here. And then there's going to be this very exclusive dinner with a lot of CEOs. $2,000 ahead. Neil, that is a hot ticket to get there. Absolutely. And yeah, you said they're breaking sourdough. And I'm sure a lot of the conversation will be around just figuring out what the temperature check is on China in terms of their attitude towards U.S. businesses right now, because so many have such a big stake over there. Tesla has manufacturing over there. Apple obviously has a massive footprint still. Even as they're trying to wean themselves off, obviously they want a good relationship with China. Yeah, they need Chinese consumers. I mean, China is the second most populous country,

but Apple gets a fifth of their sales from China, and they still need to have a working business relationship. It's also a big deal for San Francisco. I mean, what was the last time San Francisco hosted a major summit. We've talked a lot about on the show about how San Francisco is trying to repair its image. And the governor of California, Gavin Newsom, caught a little heat this week for saying, I know folks are saying, oh, they're just cleaning up this place because all these fancy leaders are coming to town. I had a family reunion in San Francisco 10 years ago.

So I think that was the last major big diplomatic event that happened in SF. Neil, the people at home can't see it. But I have a smile on my face right now. because the act of living isn't as painfully expensive right now. The inflation data for October came out, and it was unchanged from the previous month. The last time I was this excited for something to be flat, I was making crapes for the first time. Now, it's not all sunshine and rainbows. Inflation still increased 3.2% from a year ago, despite being unchanged month over month.

And the thing about 3.2% inflation is it isn't the 2% number the Fed is targeting. Still, the core inflation gauge, which strips away volatile food and gas prices, rose at the slowest pace since September of 2021. And it might just be that softer inflation data that Jerome Powell has been looking for to justify the end of this rate hiking cycle. Neil, there were price slowed downs across the economy and the CPI's Bassett of Good, but some sectors fared better than others. Yeah, give me shelter because we need to talk about shelter prices, which account for

a third of the overall CPI index. Shelter prices is just a proxy for rent prices. They climbed 0.3%, which was half the prior month's pace. And because they account for such a large share of overall inflation, rent prices, growing rent prices had kept up inflation numbers above the Fed's target for many months. And there was a lot of anticipation about when would rent prices start to go down, when would red prices start to go down? Because leases are much, you know, You can't just go up to a lease and change the price sign like you can at a gas station. So there had been this long anticipation about when rent prices would finally be cooling, and it seems like they are, and that's dragging the overall inflation picture down with it.

Yeah, and then everyone was kind of parting yesterday, but most of all stocks, the S&P finished Tuesday up about 2%. The NASP was up even more than that. They're all excited about this prospect of maybe cheaper money in the future. Longer-term bond yields also fell yesterday, which would help ease that. of mortgage costs and other loans. And then also, Loki, it was a fantastic day for the Vanguard real estate investment trust, which is super sensitive to interest rates.

It was up nearly 6% yesterday. So everyone go check your 401Ks, see if you have a little Vanguard reed in there. I will check. That's interesting news to me. This is, yeah, I think stocks climbed yesterday because this was the foundation of the soft landing that the Fed had hoped for the ability to bring down inflation for. from a 9% peak last year to 2% levels without sending the economy into a recession. No one wants to declare victory because that is just bad news when you do that.

But it does seem like all the conditions are there, a softer job market without completely sending the job market into a tailspin. That has happened. So it's pretty good news without declaring victory that the Fed has achieved this so-called soft landing. and the question now becomes, will they cut rates next year? Yeah, it does. I think they will still leave them elevated for the time being because, again, we're not at 2% yet.

It's that last mile that people are talking about. But I do think this was the market finally saying we feel confident that there won't be any more hikes, which has always been the boogeyman. And then finally, you said there's core CPI, which excludes gas prices, but we should talk about gas prices because so many are, so many gas stations around the country are below $2.99 a gallon. And so that's pretty good news. And Gas Puddy came out with this report yesterday saying Thanksgiving roadtrippers, which I don't know if you're road tripping for Thanksgiving. I'm flying. Well, either way, for Thanksgiving roadtrippers are going to be saving $1.2 billion this year on gas compared to last year.

That's a lot of mashed potatoes, Neil. Okay. Climate change is here in the U.S. nowhere is safe. And it's costing the country $150 billion each year. That's according to the National Climate Assessment, the premier climate assessment, the premier climate report released once every four years by the government. For the first time, the report included a section on the economic consequences of climate change, given the growing interest around how businesses, household finances, and markets will be impacted by shifting weather patterns, and the conclusions were striking.

The U.S. now experiences an extreme weather event that tops $1 billion in damages every three weeks. In the 1980s, when adjusted for inflation, that happened just once every four months. So far this year, there have been $25 billion weather disasters, many of which have been fueled by a hotter climate, already topping the record of $22 billion disasters from 2020. This report was a wake-up call that the U.S. needs to both address the fact that climate change is already wreaking havoc on our economy and drastically ramp up emissions cuts so things don't get worse. Yeah, one of the big kind of findings of this report is this breakthrough of attribution science for, and that is basically a signing that you can definitively show how climate change is affecting

extreme weather events, and that has allowed scientists to kind of pinpoint some of these economic figures that were speaking about before it was a little harder to directly attribute things to climate change, but now we can. And obviously, it's always going to affect industries that rely on certain climate conditions like ski resorts, farming, fisheries, these industries that really need certain weather conditions in order to perform. But it also just affects everything from crop harvest to how productive workers are in the summer. So this is, again, a widespread issue. Obviously, I don't need to explain to people how big climate change is,

but it certainly affects the economy in various ways. And one of the conclusions was the U.S. is not on track to meet our goals. Emissions fell less than 1% a year on average from 2005 to 2019, but to meet the Paris Agreement Accords of trying to keep temperatures, from rising over two degrees Celsius over pre-industrial levels by 2050, we would have to ramp up our emissions cuts by 6% a year. And the Biden administration tried to use this report to say, look at all of the green jobs that we've created. Look at all the private investment in renewable energies that has happened because of our stimulus packages and our subsidies toward these

industries. But this report is showing that we're not even close to there. To be fair, though, we are doing better than other major world polluters like China, like India. We've actually, our admissions actually have declined between 2005 and 2019. They've fallen around 12%. But again, if we want to be on pace, we'd have to increase that decline by 6% a year annually. And just to put that in perspective, current U.S. emissions have been decreasing by less than 1% per year. So yes, we are doing better than everyone else, relatively speaking, but we still need to speed it up. All right, Neil, before we jump into the next half of our show, we're going to take a quick break.

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Neil, it's time to crack out our tiny violins because, much like those craps I made, bonuses across the finance industry are getting thin. Overall investment banker bonuses are projected to fall by as much as 25% this year, and that's falling on the heels of last year in which Wall Street bonuses saw their biggest drop since the Great Recession. The main reason for the drop is that it was just a fairly met year on Wall Street. Remember, even though we are doing some reserve victory laps at the beginning of the show talking about the end potentially of rate hikes, we've still been in a high-rate environment all year. plus there was a little old banking crisis that we had back in March that led to the implosion of multiple regional banks.

So yes, bonus season is likely going to look a little sparse for any profession that involves wearing a Patagonia jacket, Neil. You said it was a May year, but I'll go even bigger than that. I think it was a pretty bad year. A bleat year? I don't know what's worse than May, but it is going to be possibly one of the worst year in a decade for M&A. They just haven't been any deals. And that's how the worst declines for any bonuses is in investment banking. And investment bankers underwrite deals.

They underwrite IPOs. They underwrite mergers. And those things just haven't happened this year. They haven't bounced back in a big way. So all of M&A has basically dried up in our post-COVID world. After a huge boom in 2020 and 2021, you know, there was supposed to be an IPO renaissance, but 80% of all IPO since 2020 are now underwater. So it's just kind of a bleak environment out there for banks, and the compensation is reflecting that.

The one bright spot in kind of, I mentioned like the finance industry, the padagonia vest wearing industry, wealth management was a bright spot with bonuses expected to come in 5% higher. And that's because even though on Wall Street, it's been a man or blea year, the market has done very, very well as we've discussed on the show. And so wealth managers have a great gig. As long as the market's going up, their performance goes up as well. So that was one of the bright spots in terms of like this bonus landscape. Yeah, Goldman Sachs is trying to move. And all of these banks really are trying to move more into wealth management

because that's where the money is being had these days. Speaking of Goldman, Goldman, even though we've talked about how bonuses across the board are falling, Goldman is actually looking at bumping up bonuses because they are looking for standouts in their trading and investment baking division because those divisions account for 68% of their overall revenue. And it's still, even though it hasn't been a great year on, Wall Street is still hyper-competitive, and so they want to reward the people who are bringing in the

most money for them. So I do think it was almost a tactical play because right after this report about the bonuses drops, Goldman released an exclusive report with Reuters that said, oh, actually, we're looking at bumping up bonuses. So I think this might be kind of a power grab to get some of those all-star performers. There is a war for talent, and these big banks are losing a lot of talent to boutique funds and hedge funds that are snagging them away from the Morgan Stanley's, the JP Morgan's, the Goldman Sachs of the world. So you can't lower bonuses account for the majority of employees' compensation. They get very well paid over the course of the year, but this is a big chunk, and a lot of

bankers look forward to this bonus every single year. And you can't just not pay them because they're just going to leave and go to somewhere else because this other hedge fund that's doing fine is going to take them. So it speaks to a larger battle for talent across Wall Street, and the big banks are doing everything they can to not hemorrhage star performers from going to smaller, high-performing hedge funds and other private investment vehicles. Okay, anyone listening to this get kicked out of a group chat because they have green bubbles instead of blue ones?

Only me? Okay, well, a startup wants to help us become a part of society again. The phone startup, nothing, is launching a feature called Nothing Chats that lets Android users, those of us with green text bubbles, use iMessage and join our friends. in Blue Bubble Paradise. Nothing Chats is expected to launch on Friday and is only available to owners of Nothing's phone too. So if you don't have that phone, then you can't use it.

And Nothing's CEO is aware that this is not going to forever change the world of text messaging, but instead it's intended to start a conversation. And that conversation is Apple uses its blue bubbles associated with iMessage to gain loyalty among users and keep them locked in the iPhone ecosystem. It sounds kind of dumb, but on survey after survey, You see that people say that the stigma of having a green bubble is enough to prevent them from leaving Apple.

It's very powerful. Yeah, absolutely. And you know more than ever. Even though we're entering this great era of kind of smartphone parity that's coming to the market, a lot of phones out there perform on the same level as Apple. So one of the main modes Apple still has is its brand. And a huge part of that brand is the exclusivity of these freaking blue bubbles. So to see a company kind of go after that, I do think Apple may pick up.

potentially retaliate because, again, this is such a big thing for them. And Nothing CEO kind of hinted at that. He said, I do think whatever we do is going to be passed along within Cupertino, but we're so small that it will be a really bad, it will look really bad if Apple takes any action. So I do think this is part a good feature for nothing's actual users. And it also is kind of an epic games-esque stand against everything Apple stands for the exclusivity that it exudes. So I will, I don't think Apple will. pursue legal action, but I can definitely see them, like, removing this store and their side that is nothing. And they may not have a choice eventually because Europe, as it's done with so many

other tech features and tech companies, appears to be possibly cracking down on iMessage and wondering whether the Apple iMessage exclusivity violates the Digital Markets Act, which aims to increase competition and level the playing field for tech companies and their software across the EU. Yeah, the EU is a, I've mentioned Thornton's side. The EU is a massive thorn in Apple's side right now. How do you heard of nothing beforehand? Yeah, I have.

It was a big deal when this phone came out because it was, it's a cool looking phone. You can see the inside of it. They've also released some earbuds that were really popular as well. It's just not often you get a new hardware company. So whenever they, something like this comes out, it causes a bit of a wave. They haven't sold that many phones. They said they've sold in the, six figure, so at least over 100,000. So it's not, again, setting the world on fire,

but you do see why kind of they're trying to break into the Apple hedge money, if you want. A lot of the tech sites had reviews of this, nothing, this second phone, nothing phone too. They're like, this is a pretty solid mid-range phones. It costs $599. I just never heard of it. Yeah, I said the playing field is getting more level than the other. So that's why Apple loves its blue bubbles. All right. Let's move on to our final story. Louisston, Maine, a lot of things. It's a small, predominantly white Catholic mill town, home to thousands of Somali refugees. It's a site of a tragic mass shooting just over two weeks ago, and it's also the home of the Lewiston Blue Devils, the new Class A boys soccer state champions. This city has been

through enormous pain in the last month, but all that was forgotten for a brief moment as the boys who promised to, quote, do it for the city, got it done in the first period of overtime. A willing mayor and a cheaper cost of living made Lewiston a popular landing spot for tens of thousands of Somali refugees in the early 2000s fleeing a civil war in their own country. And it was the children of that initial wave of immigrants who helped raise a title that will end up meeting so much to this city. It's not often we come across a story that merges triumph in tragedy so seamlessly, but we just wanted to take a moment at the end of our show today to recognize Lewiston

and the incredible story behind this soccer team. because, Neil, it is an incredible story. Yeah, I mean, first of all, the power of sports to lift up communities after a tragedy is undefeated. I'm thinking about the Yankees games after 9-11 or that first Saints game back to the Superdome after Hurricane Katrina when they blocked the punt and everyone went wild. So it really is amazing how it gives you goosebumps, how sports just a victory like this can really raise a community up and make everyone feel good for a brief moment after they've endured a lot of pain.

Yeah, and I just want to hit it. on the, I mentioned the Somali immigrants came to this small town. It is a wild story, but it was kind of the mayor back in the 2000s, saw this opportunity to provide asylum to a lot of these refugees. And a lot of the Somali immigrants say that they feel like they saved Lewiston in a way because when they began to arrive, the town's housing vacancy rates stood at 20%. It was this kind of just small main town that wasn't doing very well. And suddenly you have this influx of new people and now they've integrated into the culture in a way that they're a very important part of the soccer team. They actually won a state title back in 2015.

Yeah, they're kind of a juggernaut. They've won four state titles in 10 years. They're borderline juggernaut, I would say. Four and 10th, dynasty. That's better than I've ever done. But yeah, just an awesome story on so many angles. And, yeah, of course, in the wake of the mass shooting, you love to see a town kind of rally around a team like this. Yeah, there was.

The story is made national news. as the Smalley's came in and helped this town revive itself, there was a book that was written about it called One Goal, which is specifically about the Blue Devil soccer team and the wave of Somali refugees that came into there. And I just, from personal experience, I grew up also in a similar New England town. I mean, it was bigger than Lewiston, Springfield, Mass,

but we also have a lot of Somali refugees. My family had worked with them, and they also played soccer, and it was just like a lot of these towns in New England after all the factories had left, have faced declining populations and one way to help revive them and replenish your labor forces

to welcome refugees and immigrants, and that's what a lot of these cities are doing. Yeah, I used to live in Maine, and one of my favorite things there was I was working on bringing a USL team to Portland, and actually on Monday, the city council voted to unanimously approve plans for a stadium. So you had people literally dancing in city hall

celebrating this, and the immigrant population was such a big portion and supporter of this. And after they got approved, they all went and played footsall at night. So it was really cool to see, and it just shows kind of like the unifying power. Is Maine the new center of the soccer universe? It is about to be because check out this new team. You're going to see some crazy fandom come out of there, so I'm really excited to see them kick on. Okay.

That is our show for Wednesday. Have a great hump day, everyone. Remember to send us your questions for the Black Friday Mailbag episode to Morning Brew Daily at MorningBrew.com. Let's roll the credits. Emily Milliron is our editor and producer. Samantha Velas is our associate producer. Eugenua Ogu is our technical director. Billy Minino is on audio.

Hair and makeup is nervous about their end-of-year bonus. And frankly, they should be. Devin Emery is our chief content officer and our show is a production of Morning Brew. Great. Shut today, Neil. Let's run it back tomorrow. Yamava Resort and Casino at San Manuel

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