Morning Brew Daily - Hedge Funds Cash-In on Disasters & Exxon Mobil Bites Back

Episode Date: January 23, 2024

Episode 241: Neal and Toby discuss the record-breaking profits hedge funds made by betting big on catastrophes. Then, a breakthrough in science as the world’s first malaria vaccine program is rolled out in Africa. Plus, oil giant Exxon Mobil pushes back on climate proposals. Toby explains what’s behind the “mob wife” trend. Lastly, why AI won’t be taking away jobs just yet and why “blue zone” is the latest buzzword for the real estate industry. 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 brewaI. Good morning, Brutely Show. I'm Neil Freiman. And I'm Toby Howe. Today, the surprising strategy

that had hedge fund scoring record returns this year. Then we hit a huge milestone for global health yesterday as some kids in Cameroon became the first humans ever to get a shot to prevent malaria. It's Tuesday, January 23rd. Let's ride.

Nothing says romantic date night. like two for 25 apps at Applebee's apparently. Yesterday, Applebee's began offering a subscription date night pass for $200 that covers up to $30 of food and non-alcoholic beverages once a week for 52 weeks ending in January 2025. When it went live yesterday morning, it sold out within a minute and crashed the website. Applebee's didn't say how many date night passes were bought, but tons of people were apparently unable to purchase one because they complained very loudly. on social media about the limited availability. I feel like this is one of those ideas the marketing team cooks up after four margaritas at Applebee's, but it clearly clicked.

Four dollaritas at Applebee's. So back in my day, the Applebee's two for 20 meal was the hottest deal around in the spot of a few date nights for me in high school. But now they've rolled out this movie pass for meals. I feel like this is kind of the marketing team or some MBAs gone wild. We're like, we should make eating a subscription process. So I don't know. feel like maybe this is the over-optimization of everything, but I would-

It worked. It absolutely worked, but if you're a high school student, would you bust out the Applebee's $200 date night cards? Certainly. I mean, there's so many good memories from Appleby's. You don't get to it a lot in New York City, but, you know, when you lived in the suburbs, I remember at College Park, Maryland, where I went to college, we would go to Applebee's a lot, and there was one major reason why, and that was because they had Dollar Long Island

Ice Tees. which is like, you know, that's like a light to a bunch of moss of college. Absolutely. Before we jump into the show today, we have a quick word from our sponsor, VIM. VIM is great because it is such a flexible solution, whether you're an enterprise-sized operation or run a small business. They're there to help with data security and recovery. You've heard us preach the power of radical resilience this year, and that's what sets

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where hedge funds particularly killed it, wagering on natural disasters. Hedge funds that expose themselves to risk against natural disasters delivered results that were more than double an industry benchmark. Simply put, it was the best strategy of any alternative investment last year. Here's how it works. Basically, the cost of natural disasters has become so huge in the past few decades that insurers and other organizations like Amtrak, Google, the New York City Transportation Authority, just can't afford to take on all of that risk.

So they've increasingly turned to Wall Street to share the financial burden of potential disasters. They issue what are known as cat bonds, short for catastrophic bonds, that investors like hedge funds can buy. It's a high-risk, high-reward strategy, of course. The risk being, you could be on the hook for hundreds of millions of dollars when a hurricane smacks into Florida. But if we have a relatively chill hurricane season like last year, your bet could pay off in a big way. And it paid off in a massive way. Cap bonds are actually good for the insurance industry as a whole because it shifts some of that burden, some of that risk away from the insurers and over to people who theoretically can afford to pay it a little better, like hedge funds, like pensions, like very rich people. So I didn't know that this was an asset class, but this asset class kind of dominated the hedge fund industry this last year. I will say, though, that it's not just cap bonds that propelled hedge funds to this awesome year. I mean, equities had a fantastic year.

The S&P, as we've mentioned before, reached all-time high. Dow reached all-time high. So it was just kind of a perfect storm for a lot of these hedge funds to have these. Yeah, perfect. Oh, man. Didn't even mean to do that. But no, but I do want to talk about CAGVONs because, I know, maybe our listeners didn't know about it. We didn't know a ton about this sliver of the financial world, you know, really until

yesterday and we started looking into it when these hedge funds were posting crazy returns. The market has doubled since 2013. It's now exceeding $41 billion. So this is another way for hedge funds to say, well, we have a ton of money. Basically, it is so high risk, but it's high reward because you're taking on, you could be on the hook for hundreds of millions of dollars in losses. There were investors who bought a cap bond from PG&E, the California utility, it's worth $200 million. Then there was that campfire in paradise that year. They lost everything.

You're on the hook for everything. in exchange for absorbing all that risk, the returns they require are very meaty, very profitable. So this is one way for insurers to spread the risk. They typically had done that through the reinsurance market. There are a bunch of reinsurers that basically insure the insurers. This is just another way for, you know, the insurers to say, hey, Wall Street, you're pretty wealthy. Why don't you help us out here?

I do just want to run through kind of who did the best in the health. hedge fund industry this past year. So it was TCI, which made $12.9 billion for investors, ended up 33% up 33% last year compared to 24% for the S&P. Citadel also ripped. They made $8.1 billion in profits. And here's a fun hedge fund factory. Citadel is the best performing hedge fund ever of all time. It recently took over from Bridgewater, which is Ray Dahlia's hedge fund, which has actually been falling in recent years. Bridgewater, lost money last year, lost $2.6 billion. So it is interesting to see kind of this reshuffling at the very, very top, at the apex of the hedge fund industry in its Citadel from Ken Griffin.

But going back to TCI, so you're saying equities did well. And we've been talking about all these very mysterious investment strategies, very sophisticated like cat bonds. But really, the reason they did so well is because they bought stocks. They bet on particular stocks. They're just like you. And they're in your Robin Hood account. Their biggest holdings were Alphabet Canadian National Railway, Visa and General Electric. Sometimes it's best to just buy stocks. Stocks go up. All right, let's move on.

The world's first malaria vaccine is here and is rolling out in Cameroon as we speak. This vaccine has been a long time coming and has the chance to rewrite public health in Africa for decades to come. The Who, which approved the vaccine, will play a huge role in fighting an infection that kills more than 600,000 people a year, most of whom are children who live in sub-Sahara Africa. The rollout is starting in Cameroon, but if all goes to planned, we'll expand to 19 more African countries this year. One of the challenges facing public health officials, though, is that the vaccine requires four doses for maximum effect, so establishing trust to stave off any potential hesitancy

will be a crucial part of the rollout. Neil, this has been a really tricky vaccine to nail down because the parasites that cause malaria can mutate quickly to resist other treatments. But after years, Glaxo-Smith-Kline, which produced the vaccine, says Moskirix is ready to go. Moskirics. Okay. Yeah, no, this is a devastating disease. It kills 600,000 people every year.

95% of those deaths happen in Africa, and most of those are among children. So this is, you know, public health experts are saying this could save tens of thousands of lives. The vaccine is not as effective as the COVID ones, which were at, like, 60 to 70% effectiveness. This one is 30% effectiveness. So it has to be coupled with other treatments like bed nets and malaria tablets. And together, they say this could prevent 90% of malaria. But this one vaccine is not going to be the silver bullet. Right.

It's not a silver bullet. It starts to wear off in month. It also doesn't stop transmission of the disease. So, again, it's not, as you said, you just take the vaccine and suddenly you're protected forever. So it's definitely something that should be used augmented by other preventative measures. But yeah, there are stories of people in Cameroon already waiting multiple hours to get the vaccine. And it's not just the human toll that's motivating people. There's also this economic burden that comes along with fighting the disease. If you live in a neighborhood with

lots of mosquitoes, you do have to invest a decent part of your income in things like mosquito nets. So there is kind of this financial as well as, like, obviously, you want your children to be as safe as possible. So they kind of go hand in hand with this vaccine rollout. And as we've learned a lot about vaccine rollouts over the past few years, I would say. And And one of the main things that I think we all realize is important is communication, public health messaging, getting out into the community and communicating what's going on with, you know, what is the safety, what are the risks, blah, blah, blah. So that's what they're doing all across Africa.

This is expected to roll out to 20 countries, but you can see that public health experts are making a very concerted push to just talk with families, especially when you're vaccinating your kids. People are worried. There's a little hesitancy out there. So it's very important to just like communicate and that's really half the battle. Developing the vaccine is 50% and then making sure that people use it and understand it is the other half. Drama is going down in the Exxon boardroom. The oil giant is suing two of its own shareholders to block them from putting forward a proposal to push the company to set more aggressive emissions targets,

saying it amounts to self-sabotage. This is a very unusual move and represents the first time a U.S. oil, company has sued its own investors to block a proposal. Typically, if you don't want a motion to come up at your annual meeting, you can submit a petition with the SEC to have it removed. But under the Biden administration, the SEC has been less inclined to allow companies to block shareholder proposals. So Exxon is sidestepping the SEC and taking this fight to the courts. And let's talk a bit about these two shareholders, Arjuna Capital, and follow this. For more than a decade, they've been taking stakes in companies and pushing them to adopt more socially conscious policies.

This is kind of their schick. Arjuna's founders say their principles were influenced by their study of yoga, and their name is a reference to a figure in the Hindu scripture, Bhagavad Gita. So we've got a battle between Exxon Mobil and a couple of yogis that has implications far beyond this particular case. Yeah, thank you for the background of Arjuna there. Follow this, the Amsterdam-based firm, says that Exxon is potentially running scared. Their quote was, apparently the board fear shareholders will vote in favor of emissions reductions targets. Which is technically true.

You can say that it's an extremist agenda that will harm shareholders, but let the shareholders decide. That being said, shareholders of the company did overwhelming vote to reject calls for stronger measures to mitigate climate change in previous vote. So, again, it is probably one of those things where you probably want the shareholders at the end of the day to make the decision. But you see how both sides here are saying this is an unwanted nuisance if you're Exxon. And then for Arjuna, follow this saying, let the people vote. Well, yeah. Exxon, they're such a thorn in the side of Exxon, but Exxon's contention, and the reason they want this to be thrown out, they're saying it's not necessarily the content

of it. I'm sure they don't want to cut emissions as drastically as possible because they make a lot of money on oil. But what they're asking the judge to rule on is, like, we, they put forward a very similar proposal in 2022 and 23, and both of those earn 10% of the vote. And apparently there's a provision that says you can't just keep. like rehashing the same exact proposal year after year, it's a waste of everyone's time. So that's kind of the thing they're hanging their hat on in saying this is just a repetition.

This is just more of the same. And shareholders have shown that, you know, the path we're on is the right one. Yeah, it would have a big impact on future shareholder petitions, if you will. If the court rules in favor of Exxon, it could kind of generate stricter scrutiny around these shareholder votes, like you said. So this does have far-reaching impacts just beyond the oil industry. And it speaks to the larger play of ESG, which is environmental, social governance. That has been huge in recent years.

That's what Arjuna and follow this are kind of pushing for. There's been this swell over the past decade. But ESG has kind of receded a little bit, kind of like what we're seeing with DEI, the other diversity, equity, and inclusion word that – or term that a bunch of corporations are using. And there's been $14 billion in outflows from sustainable funds this past year. All right, before we jump into the next part of our show, we're going to take a quick break. Study and play.

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I'll break it down for you on today's edition of Tovey's Trans, where I, a Gen Zier with no attention span, educate my millennial co-host, Neil, about a new trend I have my eye on. The days of quiet luxury or the clean girl aesthetic are long gone. Now people are dressing with a whole lot more Bada Bing. The quote, mob wife aesthetic is a look that involves wearing big fur coats, lots of leather, animal prints that don't really match, big hair, and of course, stacks of gold jewelry. Just think Sopranos because that's pretty much exactly what it is inspired by. The 25th anniversary of the show in the 25 second clips,

HBO has been posting on TikTok, has caused this specific way of dressing to come back into style. According to the second-hand shopping platform, Deepop, searches for leper print are up 213% and gold hoop earrings are up 70%. And it all adds up to a much louder, much more performative, ostentatious closing trend

than other trends we've seen come out of TikTok. Someone is going to write their PhD thesis on this mob wife trend and study how these things kind of originate and disseminate through various networks because everywhere, from low culture to high culture, you're seeing it happen. Obviously, the Sopranos 25th anniversary played a large part.

Celebrities like Dula Lipa, Jennifer Lawrence were rocking the look. Fur coats were all over the runway at Paris Fashion Week. Then you just have regular TikTokers talking about it. So, like, from your, I mean, I'm going to put you in the PhD hot seat here. You're doing your PhD on this. Like, how do these things, where do they start and how do they kind of get distributed through our culture? I think it just shows the circular nature of fashion. This is not the only trend to originate and then go out of style and then come back into style. This happens with fashion all the time. I mean, like indie slees is coming back into style. So these are not new trends by any sense. And it can take just a small little trigger to send it back into mainstream culture again.

And I think that trigger was kind of the culmination of the Sopranos discourse we've seen this year. But I also just want to nail down the fact that this trend is not just what you're wearing. it's also just kind of a way of carrying yourself, the word chutzpah, or, I mean, I said Bada being at the beginning of this segment, but it's more about the confidence that you carry yourself with, not necessarily exactly the clothes that you're wearing. So I think people are kind of, they're stepping back out into the world, they're going out again. And so that is also a through line that you can see that has propelled this trend into the mainstream. Very maximalist vibe. But does this actually, when this kind of thing kind of happens on TikTok, does this actually drive shopping trends? Like, are we, Are people going out and buying these things? And say I'm a clothing brand, do I change my offering? Am I just, like, getting on the phone with my supplier and be like, give me all the animal prints that you have because I think these are going to sell really quickly?

Do you think, like, if you were a clothing brand, like, would you change your offerings? Would you do something to attract the mob wife aesthetic? I mean, as long as it's on brand, because if you are, I don't know, Target and you start rolling out big fur coats, it's just not on brand. So I do think a lot of this is a trend that it's looking backwards. So a lot of these stuff is like thrifted stuff. And that's why we're seeing on Deepop those increase in surges. So I don't necessarily think that this one is something you can just hop on really quickly.

It has to be part of like your brand DNA. So I don't know. Go to the thrift stores. Just word on the street is a lot more of my, my girlfriends, my girlfriend's friends, are saying that fur coats are definitely back in style. So I think this trend is going to stick around, at least for the winter when fur coats you can wear them. Okay, researchers at MIT are out here doing the Lord's work. Publishing a study that finds AI taking our jobs will happen much slower and less dramatically than other reports have suggested.

Why? Because for now, human workers are just cheaper than setting up pricey AI systems. So a business owner that's measuring every dollar in and every dollar out probably couldn't justify replacing workers with robots even if they wanted to. It just doesn't make financial sense. And to reach this conclusion, the researchers investigated the cost. attractiveness of automating various tasks at workplaces with a special focus on places where computer vision was implemented. So this would be like having a computer inspect the final product coming off an assembly

line for quality control instead of a human. And after running their experiment, the scientists found that for just 23% of workers measured in terms of dollar wages, it would make economic sense to be supplanted by a computer vision model. So a significant limitation in this experiment by only looking at the impacts of visual analysis, and not text-based language models like chat, JBT. But for now, I guess humans can take comfort in knowing that we're too cheap to replace. Yeah, if you believe this report, it means that AI adoption will move a little bit slower than a lot of AI bowls have expected.

One of the example side of the study was a baker doing quality control checks at a bakery, something that does require eyesight, requires vision. Technically, AI can do that, but the upfront cost of training an AI system just makes it way pricier than paying a human to do it. Plus, that comprises that exact quality control aspect of their job comprises only 6% of a Baker's duty. So, again, why would you train a highly specialized, highly expensive AI system to do something that only takes up 6% of a human being's time? So it was a little bit more of a holistic look at like, all right, let's drill down into what exactly these AI systems would be doing. And is it actually cost effective? And it turns out it's not that cost effective. Right.

They said to set up a from-scratch AI system to do the task of what this baker does, it would cost $165,000 to deploy, and then $123,000 a year in maintenance on top of that. So you can just kind of see the costs are ballooning. They say at the end of their paper, they're like, hey, AI people, if you want your stuff to be implemented, you've got to get your costs down. But what was interesting to me also is this is AI, and I think this further hammers home the point that AI is not going to be the, not going to impact every industry equally. They said where computer vision might be favorable, where it could replace workers, is in sectors like retail, transportation, warehousing, health care, looking at diagnostic images.

But if you're working in, say, real estate, construction, mining, doing things where you're using your eyes, using your hand, you're probably a little more protected against AI. So this is something that we've seen over a bunch of different AI studies is that it's going to impact certain sectors. a lot more, a lot more quickly than it is others. Speaking of one of those sectors you just mentioned, let's move on to our final story of the day. Real estate agents have come up with a new way to convince you you found your dream home selling in, quote, certified blue zones.

If that term sounds familiar, you may have heard it on this show last year when we covered a Netflix documentary that came out all about blue zones. The term was coined by an explorer for National Geographic, Dan Butner, to describe places around the world where people regularly live to 100 years old and beyond. The common traits found in these communities are usually staying active, eating plant-based meals and forming strong social ties with your neighbors and friends. If that sounds pretty idealic as a place to live,

the real estate industry thinks so as well. Blue Zones, the company, born from Butner's two decades of research, goes around and certifies places that meet healthy lifestyle criteria. So far, 80 places in the U.S. has been certified, and other developers are trying to mimic them as well. well, is the real estate industry trying to co-opt a genuine health concept or are blue zones and the certification and all that, just a bit of a money grab deal? The first one.

Yeah, I mean, you look at what types of projects are trying to be designated as quote-unquote blue zones. There's one luxury tower in Miami that costs $600 million to build. They're trying to make a blue zone designation out of it. But when you look at what was the concept of a blue zone to begin with, it's this very humble living off the land, you know, very, you know, nothing that would resemble a luxury tower in Miami. So I think, you know, real estate people in the industry, credit to them, they're some of the best marketers in the world. They've invented entire neighborhoods all over the world.

Fidei, Tribeca, Soho, Nolita, Dumbo, and now they're just hopping on the Blue Zone trend. Yeah, I don't know if it's like benign or not because maybe it's fine, but the thing is Blue Zones is a company, and you have to pay Blue Zones. Localities have paid up to $40 million to get this Blue Zone designation. I guess that's just part of your marketing budget. It is part of your marketing budget, but also there are some incentives that are aligned here because some of these initiatives are not just funded by municipalities or funded by health care, insurance companies, who have a vested interest in keeping a population more healthy, more hardy.

And so stuff like not smoke or smoking bans, adding biking pass, other group activities. It is kind of a win-win for everyone involved. But if we go back to that $600 million condominium, it does seem like what they did is put in basically a mall of longevity where you can get all these longevity services. But again, that is not what make a blue zone, a blue zone. It is things like the community involvement. It is stuff that you can't just reverse engineer. So I think that's where people start to take a more skeptical lens to this because putting a mall of longevity is not the same as like farming with your neighbors. Right. Or just, you know, have having a plant-based diet that, you know, you have a bunch of fish nearby.

Anyway, I think this is, yeah, I think whatever the next, like, trend is, wellness trend is going to come along. We'll see people move away from blue zones and go to that. So that's what I think is going to happen. And we have to end it there. Have a great Tuesday, everyone. Toby, what is our swing thought of the day? Today's swing thought comes from my favorite athlete of all time, the marathoner,

Elliot Kipchogi, quote, only the disciplined ones in life are free. if you are undisciplined, you are a slave to your moods and your passions. So going to the gym or going for a run might feel like a burden sometimes, restricting your freedom. But the flip side may be leading an unhealthy lifestyle governed by fickle desires that leads to complications in the long run. So remember that you're in control of your life. And if you don't, your life ends up controlling you? Oh, my God.

This one hits home because I'm not very disciplined. But you said you were on the beach this weekend with a corona in hand. And you're doing dry January. You're on a really warm beach with a. Corona in hand and you put the Corona down. Me and Kipchogi, we're both mental titans of our sectors, if you will. All right, that is

very impressive. If you want to get in touch with us, don't hesitate to write to our email Morning Brew Daily at MorningBrew.com. Let's roll the credits. Samantha Bellas is our editor and producer. Gabby Lazano and Raymond Lou are associate producers. Yucheno Ogu is our technical director. Billy Minino is on audio. Hair and makeup

is scalping Applebee's date night subscriptions if anyone is interested. Devin Emery is our chief content office. and our show is a production of Morning Brew. Great show you die, Neil. Let's run it back tomorrow. Enjoy more ways to save at Ralph's, like low prices in every aisle. And when you download the Ralph's app, you can clip and save more with digital coupons every week. Plus, you can earn fuel points to save up to $1 per gallon at the pump.

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