Morning Brew Daily - Historic Wildfires Engulf LA & The Biggest Problem with Cars is... Software?

Episode Date: January 9, 2025

Episode 493: Neal and Kyle recap the wildfires devastating the Los Angeles area and its neighborhoods and dig into some of the causes and effects from one of the worst wildfires in history. Then, Bill Ackman makes a strong case to privatize Freddie Mac and Fannie Mae. Also, cars becoming too high-tech have a downside: annoying software fixes. Plus, Neal shares his numbers from the week on Chick-fil-A’s lemon squeezing robots, declining red wine drinking, and teddy bears. Lastly, a round up of the biggest headlines of the day.  Subscribe to Morning Brew Daily for more of the news you need to start your day. Share the show with a friend, and leave us a review on your favorite podcast app. Checkout public.com/morningbrew for more Listen to Morning Brew Daily Here: https://link.chtbl.com/MBD Watch Morning Brew Daily Here: https://www.youtube.com/@MorningBrewDailyShow 00:00 - Jimmy Carter 02:00 - LA Wildfires 07:45 - Bill Ackman Bets Big on Fannie Mae  12:10 - Car Software Issues  16:50 - Neal’s Numbers  23:15 - Headlines  Learn more about your ad choices. Visit megaphone.fm/adchoices

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pwc.com slash US slash brew AI. That's pwc.com slash us slash brew AI. Good morning brew daily show. I'm Neil Fryman. And I'm Kyle Hagey. Today, the latest on the wildfires that continue to devastate Los Angeles. And the under the radar stock that Bill Ackman hopes will net him a 1,200% return. It's Thursday, January 9th.

Let's ride. While the country's focus remains on the fires in California, today the U.S. is also observing a national day of morning and the funeral for Jimmy Carter, the first former president to live to 100. That means things won't totally operate as normal. U.S. flags will be flown at half staff starting today for the next 30 days. Post offices will be closed and most mail won't be delivered. And Kyle, you don't need to check your brokerage account because the New York Stock Exchange and the NASDAQ are shutting down to honor the former president, a tradition that dates back to Abraham Lincoln's assassination in 1865. Very interesting. I feel like Jimmy Carter would want us trading stock.

on today. So we got to look into that, but RIP to President Carter. And I'm not a presidential scholar, but I will say his dedication to habitat for humanity and like building homes all throughout his life in post-presidency is amazing. So thank you, President Carter, for your great service to this country. We start the show in Los Angeles where the wildfires that started earlier this week continue to run rampant. The Palisades fire that is ablaze on the seaside area between Malibu and Santa Monica has grown to more than 17,000 acres. with very little to zero containment. It is destroyed at least 1,000 structures,

making it the most destructive ever in L.A. County. In addition to the Palisades Fire, there's at least three other subsequent wildfires happening, Eden, Hurst, and Brown that are all affecting the L.A. metro area. Over 100,000 people have already been evacuated. All schools in the L.A. Unified School District, which is the nation's second largest,

are closed today. Governor Newsom has declared a state of emergency, and as of now, at least five people have been killed. Now, pictures are worth a thousand words, and this story is no exception. Scenes of the devastation played out on X and traditional media outlets, and the images are just devastating. Neil, I was texting with friends who live down there, who have family that have had to evacuate, people even who thought they would be clear, maybe aren't anymore.

Very scary, and I'm hoping we can get this under control, ASAP. Very scary. I mean, apocalyptic, hellscape, out of a horror movie, the big one. That's what they're all, you know, those are the words that have been used to describe these fires. And you mentioned a couple of the fires. Well, a new one even broke out overnight in Hollywood Hills, causing even more evacuations. They're saying Sunset Boulevard, that iconic street is just lies in ruins. It's even approaching that iconic Hollywood sign.

And I think, you know, it just, it's very rare to have a wildfire of this size in an urban environment like Los Angeles and its environs. So, you know, early estimates, it's very early. These fires haven't even, they're still raging and even growing early estimates say that the damages and economic loss from these fires will be $52 billion to $57 billion. That's per acueather. It will be one of the costliest fires on record, but also one of the costliest natural disasters in U.S. history. And let's talk about how this started. So Los Angeles is bone dry right now. It has seen 0.16 inches of rain over the past eight months, and that combined with the Santa Ana winds, which are 100-mile-per-hour gusting.

So basically, hurricane-level winds combined with bone-dry conditions have led to the outbreak of fires in these areas. Meanwhile, climate change has its fingerprints all over this, what they're calling hydroclimate whiplash. Over the past two winters, Los Angeles has actually had a lot of rain before. this one, which allowed a lot of this, you know, brush and grasses to grow. But that's basically fuel for the fire. So the fact that you go from extremely wet conditions in one winter to extremely bone-dried conditions and another combined with the winds have led to this absolute devastation. Right. And UCLA climate scientist Daniel Swain, who's been all over the news, he called this, quote, an atmospheric blow dryer, you know, about the point of these winds. Like, it is not a good

situation. You have all of these different variables now happening at once, and we're seeing the devastation that that's happening. The business angle, you know, not that you want to go there right away, but the insurance angle of this is really interesting because the latest estimates by J.P. Morgan said 13,000 homes are at risk. The losses from the fire to those homes could be upwards of $10 billion, but there's been a lot of changes in the insurance market in California because unfortunately and these wildfires aren't, you know, they're pretty common in L.A. And a lot of the insurance companies have had to pull back in terms of offering people coverage. And the state and all state and other big insurance and state farm, other big insurance players in the state,

have kind of gone back and forth of how to navigate this. Many homeowners actually that live in the area had their insurance kind of clawed back a few years back because it just wasn't affordable for insurance companies to insure these areas. So that's going to be kind of the angle that happens after we, get these fires under control is how do we recover from this incident? Right. So I want to put some numbers to that. State Farm cancel. Let's talk, let's focus on the 90272 zip code, which is that the central part of Pacific Palisades, which has been essentially burned to the ground. It's that wealthy enclave between Malibu and Santa Monica that has, you know, been, suffered from the one of the

biggest fires around Los Angeles. State Farm last year canceled 69% of its policies in that particular neighborhood saying the business model just wasn't there. The wildfires were too freaking. We've seen insurers pull away from these, you know, at-risk areas all over. Meanwhile, so, so as State Farm pulls out, who do homeowners turn to for insurance? There's something called the Fair Plan, which is California's insurer of last resort. It's doubled its size over the past five years. In that particular zip code, it grew, coverage grew 85% between 2022, and 2024. So it is a massive test for the fair plan. There's a lot of questions about whether it has the resources and the know-how to handle these claims or has the money to service them.

So we can see a massive cratering in the insurance market here with huge implications for going forward. But I think the big picture here is that life in Los Angeles has just become unlivable at the current moment. Schools are closed. Businesses have closed businesses have been burned down. There's no sporting events, a bunch of Hollywood events that were set to go on, like premieres and the SAG Awards, like, just have been canceled. So utter devastation in Los Angeles. They say that the winds are dying down going forward into the week. So that is some good news, but there's no rain in the forecast. So it looks like the fires may only continue to grow before we get a handle on them.

Yeah, well, we'll continue to monitor the situation. Obviously, keep this whole area in our prayers. Like, hopefully this gets under control, as you said. there might be some relief in a couple days, and then the rebuild will have to begin. We need to talk about one of the most booming assets around. No, it's not Nvidia or anything related to Bitcoin. It's not a meme stock either. It's Fannie Mae, the 87-year-old government-backed home loan giant. After another 9.5% gain yesterday, it skyrocketed 250% since the election in November. Most of that is thanks to the promotional efforts of one guy, Bill Ackman, the billionaire

investor who has built a large following on social media. According to Bloomberg, Ackman bought Fannie Mae at an average of $2.40 a share and predicts it will be taking public next year at around $31. That would mint him a 1,200 percent return. But there's a long way to go. Fannie closed yesterday at $4.98 a share. Okay, so why is Ackman betting on Fannie Mae and why is it skyrocketing? It is a bold wager that the incoming Trump administration is going to unwind government

control of Fannie Mae and its younger rival, Freddie Mac, and list them on the stock exchange in the coming years. It's a sort of pie in the sky hope that would make a lot of hedge funders like Ackman really rich, but potentially royal the mortgage market and raise loan rates for home buyers, concerns that have stalled these privatization efforts in the past. Kyle, I'm not even sure anyone knew this was a possibility, but huge, huge implications if the government were to decide to relinquish its supervision of Fannie Mae and Freddie Mac. Yeah, I mean, I got to give kudos to Bill Ackman. He's done the impossible.

He helped me learn finally what Fannie Mae and Freddie Mac actually are. I mean, this is really interesting. They're these government-sponsored enterprises that were created by Congress in the 30s to basically help. Fannie Mae in the 30s, Freddie Mac later. Correct. And then Fannie Mae in the 30s and then to help basically the U.S. mortgage market. Now, these two companies, Fannie Mae and Freddie Mac, they support around 70% of all U.S. mortgages. and I actually found out in 2024, Fannie Mae had 4.3 trillion assets, which is the largest company in the world or in the U.S. in terms of assets they have.

So these are massive players. And the other thing I think is interesting outside of this privatization effort is how people are trying to influence this administration. I think in Trump won, it was like you go on Fox News. That's where the guy is. Now it feels like you go direct and you like lay out these large theseses on X, which is obviously. If you're Bill Ackman, that's absolutely way. If you're Bill Ackman, obviously, which is controlled by Elon, one of Trump's biggest financial backers. So how we influence this administration, how people influence this administration, I think is also another part of this story.

So the government took control of Fannie Mae and Freddie Back post-financial crisis. Essentially, it bailed them out. Now they own 80% of shares. That's the big problem here about making these private is how do you unwind the government position in these massive, companies while keeping the mortgage market fluid, liquid, that's what they're supposed to do. The idea is they buy mortgages, Fannie Mae and Freddie Mac, buy mortgages that package them up into securities and then sell them to investors. That creates liquidity.

And the fact that they're sponsored by the government makes them safe. They're essentially the American bonds, right? Their risk-free assets, which allows this to happen and keeps mortgage loans from going, loan rates from going through the roof. So the question for privatization, and it's been tried before, and the first Trump administration tried it, COVID disrupted plans, there's a big question looming overhead about how do you not completely send markets into chaos when you unwind these big government positions and make these companies private? So that's the big question facing this incoming Trump administration. It's unclear. I know Bill Ackman wants them to because he stands to make so much money off this.

A lot of other hedge funders do as well. but the big question is, how do you do this without messing up the mortgage market? And it's unclear whether the Trump administration will want to take that on. Exactly. And like the Treasury Department and the federal housing finance agency last week, like said, this is how we would do it. And even looking at that plan, a lot of people are like, we got to slow this down because it could have major ripple effects throughout the whole economy, to your point. Let's move on to our next story. If you think your most important technology is sitting in your pocket or on your desk,

you might be wrong. Why? Because increasingly so, the most important technology is sitting in your garage. That's right, with the rise of electric vehicles and sophisticated digital info and safety systems in old school gas guzzlers, car owners are now more reliant on software to drive value from their cars than ever before. Now, while the idea of a BMW giving you the power of heated seats via an over-the-air update sounds incredible, it's not that easy. Traditional carmakers have sprawling legacy in old electrical systems, and they have to integrate code written by suppliers. In fact, software fixes made up 15% of U.S. recalls last year, which is up 6% from five years ago, according to the National Highway Traffic Safety Administration.

As software becomes more and more important, it appears the upstart competitors are in a better position to succeed. Gartner, which ranked carmakers on digital performance last year, the top seven were all Chinese and U.S. EV makers, including familiar names like Tesla and Rivian. the traditional manufacturers posted a terrible score of 33 out of 100, according to Gartner. Neil, you were talking about your love of BMW yesterday. Do you have... Just their naming. I can't afford a car.

Do you have faith in the ability for traditional automakers to get ahead of this curve on software? We're going to see. We saw the future of the car industry this week at CES in Las Vegas. It's turned into basically a car show at this point. You add Hyundai, Honda, these other automakers, BMW, go before this. audience and show off their the latest tech in their cars because that's the differentiating factor. We saw some absolutely crazy things.

Interior lighting aimed at reducing motion sickness. Holographic dashboards displayed on windshield. AI powered voice assistance with these infotainment systems are coming to your car. These are absolutely coming. I know you think your car is pretty high tech at this point. It's a long way from just turning a knob to turn down or up the AC. So that comes with a host of opportunities. It also comes with a host of challenges like you were talking about servicing and upgrading these cars.

It's completely different than when you need to change a part than when you need to debug a system or send an over-the-air software update like Apple does. Now cars need to have that capability. But the fact is, the opportunity is massive. There are estimates that, you know, in a couple decades, software upgrades will account for 40% of total automotive revenues up from 3% currently. And not just these updates. Accenture said that digital source. services could generate as much as $3.5 trillion annually for carmakers by the 2040. So we're going to see this whole ecosystem, I think, of apps and updates and software that people can purchase

from their car, which I think I love that we were like, do not distracted, don't drive distracted. And now we're like, but what if we put a hologram in the passenger seat while you drive? But I think being a car manufacturer went from just a hardware product now to you have to be excellent in hardware and you have to be excellent in software. I think Tesla was a pioneer here in the over-the-air updates, really leaning in on the software and other car companies have a lot of catching up to do. I mean, you see, like, car play from Apple being, like, a real selling point for other cars. Obviously, Apple was working on its own car, which, you know, they shut down, but it's clear that the tech industry is kind of moving into the car space. I think it's really

fascinating. And then you add in self-driving cars where, like, you can just press a button and then put Netflix on your screen and you'll arrive at a McDonald's in 15 minutes. Like, sign me up. Up next, Neal's numbers. Own it all. Pay off your home, travel for life, drive a Ferrari. In celebration of the world premiere of the Monopoly, big board buck slot machine by aristocrat gaming, Yamava Resort and Casino at San Manuel is giving one person a $1.6 million dream package.

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First up, they say when life gives you lemons, make lemonade. but when life gives you as many lemons as Chick-fil-A deals with, call in the robots to help make that lemonade. A report from Bloomberg found that a new robot army enlisted by Chick-fil-A to mechanically squeeze lemons has saved up to 10,000 hours of work a day across all of its locations and improved safety, too, because all that human squeezing led to many finger injuries. Should really have named this one, Neal's digits.

Anyway, the idea is to free up human workers from squeezing citrus and focus more on getting customers in and out of stores faster, something that every restaurant chain has at the top of their to-do list this year. Chick-fil-A's are even more packed than others, with the average location bringing in about twice as much in annual sales as the typical McDonald's in 2023. Kyle, this feels like the year that restaurant automation will take the next big step, whether it's Chick-fil-A's lemon squeezers, sweet green salad-making robot,

Chipotle's avocado slicer, or Taco Bell and Wendy's using AI to take people's orders at the drive-thru. Yeah, it's a really interesting space, and I feel like Chick-Fleigh is always kind of ahead of the curve in terms of customer satisfaction. And the acceptance rate to get a Chick-Fleigh franchise is 0.15%. So these are, like, really hard businesses to own because they know what they're doing at the corporate level. And I think we're only going to continue to see automation, as you've alluded, across the food industry, you know, automated menus, general AI efficiencies. And now robots that can replace human labor like, you know, squeezing lemons. We just need to talk about quickly how many lemons, Chick-fil-A deals with.

This one facility, north of Los Angeles, receives 30 to 35 truckloads of lemons every day, each carrying 50,000 pounds of lemons. And actually what this automation allows them to do is use more of the lemon and squeeze more of the juice from it, not only literally, but metaphorically, because they've started selling the scents of the lemon, the peels and all of the refuse that don't go into the lemonade to fragrance.

and perfume companies, so they're able to make money on the entire lemon because of these robots. They don't have to get someone chick-fil-a perfume for their birthday. My second number is about the existential crisis facing one of the world's most famous industries, red wine in France. People are just totally bored of Bordeaux. They're saying no to no art. They're bypassing Baudelaire. Consumption of red wine in France has plunged about 90% since the 70s, according to a local industry association. And across all wines, has fallen 80% since 1945. People in the

wine making business say that if these trendlines continue, there won't be a French wine industry anymore, though the crisis has reached ahead. Now it's been decades in the making with each successive generation drinking less wine than the one before it. Gen Z purchases half the wine volume of older millennials

preferring rosé, beer, liquor, or increasingly alcohol-free options. Kyle, for these wine producers to stay alive, they're going to need to pivot. White wine, orange wine, low-alcohol wine, canned investing in tourism to their facilities are all options, but they need to make a move now. Because while there are many words to describe wine, there's only one word to describe France's red wine problems existential.

I love this idea of bringing people to their facilities. And I think you hit the nail on the head. So much of drinking because of these trends we're seeing where like generations are drinking less than the previous generation has become very much about experience. And I think being able to drive experiences around alcohol is how people are going to win. Or like canned cocktails and canned wine. wine, and that feels very unfrench, so they are going to have to, I think, pivot in some ways. And I love this quote in the story.

It was with every generation of France, we see the change. If the grandfather drank 300 liters of red wine, the father drinks 180, and the son, 30, said CIVB board member, Jean-Pierre Duran. So we'll see how this plays out. But, Neil, are you? A percent drop. Yeah, huge. Are you a red or a white wine guy? I like both, you know, I think in the winter months, I like drinking rent.

I guess I'm part of the 10% that is still drinking French wine, but truly a crisis. And, you know, it does seem like red wine is being impacted the most out of all the types, that heavily tannic one specifically. So it's just consumers change and this industry needs to change with it or else it will cease to exist. For my final number, the HL's Hershey Bears just set a new record when they collected 1002,343 stuffed animals as part of their annual teddy bear toss game on Sunday. It's part of a growing tradition in which sports teams, especially in hockey, host a game where people come in with teddy bears and throw them on the ice or field after the home team scores

their first goal. The Hershey Bears say they donate the toys to 35 local and regional charities, such as food banks and autism societies. But 102,000 is just an astronomical number. You've got to check out the video to see the Jubilation in action. There were about 10,000 people at this game, which means each person brought 10 stuffed animals on average to hurl on the ice. It also smashes the bear's previous record of 74,000 stuff animals collected at a single game

last year. Kyle, in terms of sports rituals, the teddy bear toss is up there in terms of spectacle and impact. I've never heard of this before. This rocks. I absolutely love this. And what's funny is during this game, there was like a premature shot and people thought in one corner it was the goal.

So they started throwing teddy bears. And then they were like, wait, this actually wasn't the goal. Take the teddy bears back. This is the cutest thing. People brought their kids out on the ice after the players to take photos with the teddy bears. I think we need to bring this to the NHL. My team is- So the NHL is one of the few leagues that bans this practice because you're not allowed to throw anything on ice.

Hockey fans do love throwing things on the ice, though. Hattrick. I'm thinking Minnesota Wild, you can't probably put like wild cats on the ice, but we need to bring this to the NHL. We've got to change the rules. So it started in 1993 with a Canadian hockey team and spread throughout the Canadian hockey league. and then went to, you know, went international essentially.

The record right now, Hershey Bears don't have it with $102,000. The record right now is a Polish soccer club who collected in a single game, 109,470s. So Hershey Bears, next time, let's beat the record from the Polish soccer team. Let's get at least 110,000 stuffed animals.

I love it. Let's sprint to the finish with some final headlines. Scrolling through Facebook Marketplace always turns up some surprising finds, but don't be surprised when you start seeing eBay listings. Meta said yesterday that it would now allow some listings from eBay to show up in its popular marketplace, sending eBay stock soaring to its highest level since 2021. Meta's not doing this to play nice with arrival.

It was forced to by the European Union's antitrust arm, which found it was stifling competition by linking its marketplace platform to the main Facebook app. Last November, Meta was fined $821 million by the EU for this infraction. It's interesting. I think this is a common theme where you see the U.S. innovate and then the EU regulates, but then it does affect how the U.S. companies operate. They're going to run this test in part in the U.S. So the EU driving regulation that maybe the U.S. is not capable of. Remember MoviePass, the app that gave you unlimited access to movies at the theater for $10 a month? It seemed too good to be true because turns out it was too illegal to be true. The former CEO of Movie Pass's parent company, Theorette, or Farnsworth, pleaded guilty to security fraud and conspiracy, which means he could face up to 25 years in prison. The DOJ alleged that Farnsworth ran a quote, money losing gimmick and knowingly made false statements like the fact that Movie Pass's business model existed in order to boost

the stock rights and attract investors. Sentencing is set for a later date, Kyle, this company was always fishy from the very beginning, but it was great for consumers. Movie Pass is the gift that keeps on giving, which is funny because that essentially was their unsustainable business model. But I love the DOJ also said that they falsely claimed that this analytic company would use AI to generate revenue. So this guy, this movie pass was also ahead of the curve of just saying AI will fix everything. I cannot wait for the movie pass movie.

Well, I'm not paying full price for that. History will be made tonight when Penn State faces Notre Dame in the college football semifinals. That's because whoever wins this game, a black head coach will have a chance to win a national championship at the highest level of college football for the first time in history. Penn State is led by James Franklin and Notre Dame is coached by Marcus Freeman, who both acknowledged the significance of the moment and said they hoped it was an opportunity to grow the number of black coaches on college sidelines.

College football has lagged other big-time sports in terms of black coaching representation. The first Super Bowl featuring black head coaches was 18 years ago in 2007 when Tony Dungey's Indianapolis Colts defeated Lovie Smith, Chicago Bears. And in college basketball, four black coaches have won it all, the first being John Thompson's Georgetown team back in 1984. It was cool. James Franklin, the coach of Penn State, talked about that Tony Dungee-Lovey Smith game, saying he saw it when he was younger and how it was like such a big moment in his life. And now it's very cool that he gets to almost live out another similar situation. Well, James Franklin always has the knock on him that he can't win the big game. So we'll see if he can do that tonight.

I'm pulling for Penn State. If Toby lived in the Italian town of Belcastro, he might be in jail right now. because the mayor of the village has banned residents from becoming seriously ill. Antonio Torkia recently issued a proclamation that people there are to avoid contracting any illness that may require emergency medical assistance. That sounds like a joke. It mostly is. The mayor said the ban on being sick was obviously a humorous provocation meant to highlight the lack of adequate health care in the economically depressed region, which sits on the toe of Italy's boot. 18 of the area's hospitals have closed since 2009, and the nearest emergency department is more than 28 miles away,

serviced by a road with an 18-mile-per-hour speed limit. Yeah, we got to make sure Toby does not go to Calabria right now. Like, it would be bad news. It was interesting. In 2022, Cuba sent 497 doctors to the region, and the regional government governor said that that actually helped save the hospital system. So shout out to the Cuban doctors coming in for the save in Italy.

Okay, let's wrap it up there. Thanks for starting your morning. with us and have a wonderful Thursday. For any questions, comments, or feedback, send an email to Morning Brew Daily at Morningbrew.com. Let's roll the credits. Emily Milliron is our executive producer. Raymond Liu is our producer.

Olivia Graham is our associate producer. Echenoa Ogu is our technical director. Billy Menino is on audio. Hair and makeup has been recalled for a software bug. Devin Emery is our chief content officer and our shows of production of Morning Brew. Let's run and back tomorrow.