Morning Brew Daily - Inflation Needs to Chill & How Fake Parts Got In Airplanes

Episode Date: October 13, 2023

Episode 169: Neal and Toby discuss the latest inflation report and how it has impacted markets and mortgage rates. Plus, why the US and Qatar have agreed to stop Iran from accessing $6 billion and how one company was making fake parts that infiltrated airplane fleets. The guys share their stock and dog of the week and TikTok fights a ban in Montana. Finally, what is the Vesuvius Challenge? Listen to Morning Brew Daily Here: https://link.chtbl.com/MBD Watch Morning Brew Daily Here: https://www.youtube.com/@MorningBrewDailyShow 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, we'll discuss a massive scam involving airline engine parts. Then the September inflation report came in, and spoiler alert, inflation still isn't at the 2% level Jerome Powell yearns for. It's Friday, October 13th. Let's ride. All right, Neil, it's time to announce our mug giveaway winners.

So for anyone who missed some episodes this week, we put out a call to take a picture of where you listen to Morning Brew Daily and tag us on Instagram or Twitter for a chance to win one of three Morning Brew Daily mugs. But you know what, Neil, we got so many responses and we had so much fun looking through all your picks. We couldn't just pick three winners. Instead, we had our producer, Emily, go through and pick five winners from the hundreds of submissions. And the winners are, imaginary drum roll please. Juliana Book Knight, J.C. Johnson, Maria Dubsova, dual dire, and Brooke Lee. We'll DM you all later today to snag your shipping info,

so keep an eye out for that. We appreciate you all so much for listening, and to everyone who didn't win, we absolutely love seeing some of your faces. It's great to see the faces behind the numbers, so keep the picks coming, even if there's no mug on the line. Thank you again for everyone who submitted, and we'll definitely do one of these going forward.

Before we jump into the show, we have a quick word from our sponsor, Yahoo Finance. Neil, Yahoo Finance is the fast week of financial resources on the internet. It's a one-stop solution with trusted news market data and also a supportive community that can help you make informed decisions. Yeah, so Friday is when we choose a stock of the week and a dog of the week. So you know I was perusing the site last night to prepare for this morning show. I think I found a good pick, but I'll let listeners judge for themselves. So if you want access to trusted news, in-depth analysis, and comprehensive market data, go to finance.com to learn more or download the Yahoo Finance mobile app to get it directly on your phone.

Pepsi prebiotic cola in original and cherry vanilla. That Pepsi taste you love with just 30 calories and no artificial sweeteners. Pepsi Prebiotic Cola. Unbelievably Pepsi. To start the show today, let's talk about our good friend, the Influenital. inflation report. Prices rose 3.7% in September, which is obviously not the 2% number that Jerome Powell has his sights set on. Now, my mom taught me that pointing fingers is never nice, but housing costs, especially rent, were by far the largest driver of September inflation.

The index for shelter, which accounts for about one-third of the CPI index, was up 0.6% for the month and 7.2% from a year ago. That means on a monthly basis, shelter costs accounted for more than half of the rise in the CPI reading. So even though there are signs that rent is falling from the pandemic highs we saw, it's going to take time for those lower prices to manifest in these inflation readings. Neil, I also want to talk about mortgage rates a little. They're still on the rise, even as inflation has slowed its role just a bit, topping 7.5 for the first time in more than two decades.

But I don't want to get too far ahead of ourselves. What did you make of this latest inflation report and the market's reaction to it? that the decline towards 2% is taking a lot longer than people expected. The Fed has raised interest rates to 22-year highs, but this last mile, the last mile is the hardest. And when you've looked at what corporations are doing, it's not surprising that prices are increasing. Just this week, Chipotle confirmed that it was going to hike menu prices, the fourth increase

in just two years. Netflix is also expected to raise its prices of its ad-free tier once the actor's strike ends. Disney is also raising prices at some of its at Disney World and at Disneyland. And then Pepsi had its earnings report yesterday or two days ago and also said it was raising prices continuing into the next year because of inflation. So, I mean, the report is reflecting real life of these companies raising prices. Yeah, I would say we've reached almost this homeo-sense. stasis point. It's not necessarily a good point to be of this slightly elevated inflation.

That's too big of a word. Stasis, yeah, especially at this hour. But I would say everything feels like it's cooling off a bit. Some of the supply chain bottleneck issues have cleared up a bit, which has helped cool prices just a little bit. And then the Fed also has moved so aggressively to raise rates. So it does feel like a lot of things are pointing towards inflation eventually going down, even though we are still seeing it very sticky. And then my takeaway, too, is that the stock market hardly reacted to this report at all. And obviously, there are other things going on in the world, but it doesn't seem like the inflation report is driving these big swings like we saw in previous months. No, because it wasn't so drastically hot that it caused major havoc. But what will be good now is that we have earnings season coming up.

And we've had a few trickle of reports this week so far. But this morning, banks are reporting and they really kick off earning season. The Fed and investors have only been able to go off these big macro reports of the jobs report and the inflation report. And they're so high level. And now we're going to be able to see exactly what specific corporations are doing. Like the ones I just mentioned that, you know, like Pepsi just said it was going to continue to raise prices during its own earnings report.

Now we're going to see a lot more companies talk about that. And then just real quickly, I mentioned mortgage rates. They've been on the rise five months in a row. They're above 7%, which is just numbers we haven't seen in years. There's also falling demand. So a measure of house tours and other signs of early demand by Redfin fell to its lowest level in nearly a year. So not only our house is just incredibly unaffordable. That's trickling down to people not having demand for them.

Yeah. So it's very confusing why at the top you mentioned that shelter costs counted for so much of the inflation. The housing prices have just not got down even as mortgage rates have gone to 7.5 percent. And there's private research that shows that housing costs are going down, but it has yet to show up in the government data. And yet we've been saying that for six months, and they still haven't come down. So we're still waiting. They are sticky. Okay, let's head back to the Middle East and discuss how the Israel-Hamas war is having major geopolitical ripple effects across the region. I don't think we mentioned it on the pod, but last month, the U.S. agreed to free up $6 billion in frozen Iranian

oil revenue in exchange for the release of five Americans who were imprisoned in Iran. Now, following Hamas's terror attack in Israel, Iran will not be able to tap into those funds. Deputy Treasury Secretary Wali Adyemo told House Democrats yesterday that the $6 billion isn't going anywhere anytime soon. The money is currently sitting in a restricted bank account in Qatar, which agreed with the U.S. to block Iran from accessing it. The Biden administration had come under bipartisan pressure to block the disbursement of the $6 billion due to Iran's longstanding backing of Hamas, which the U.S. and EU deem a terrorist group. Iran spends an estimated $100 million a year supporting Hamas with weapons, military training, and logistics assistance. Whether Iran was

directly involved in the massacre of more than 1,200 Israelis last Saturday is still not yet known. And on Sunday right after the Wall Street Journal reported that Iranian security officials helped plan the attack and gave the final sign off. But no other news organization confirmed that report. And more recent investigations claim that Iran was just as surprised as everyone else. This move will assuage Biden's critics, but Iran will definitely not be pleased with the U.S. for not fulfilling its side of the bargain. Not that the U.S. will care since it views Iran as an accomplice to truly barbaric acts against innocent people.

Yeah. I mean, this just shows how quickly this war has reshaped U.S. relations in the region. Things changed within the span of a week. It is interesting, too, because when the attacks first broke out, a lot of people pointed to this $6 billion and say, essentially that the U.S. helped fund these attacks. So now we are getting more clarity around the fact that none of those funds had been dispersed yet. And there's also very, very strict guidelines on how those funds can be used. They have to be used for humanitarian aid. They actually are not released to the Iranian government either.

They're released to Iranian groups that are supposed to disperse them for humanitarian issues. So it is good to see more details come out and the fact that none of those funds have dispersed. Critics said that $6 billion in humanitarian aid doesn't really mean anything because of the fungibility of money. $6 billion is $6 billion. It frees up $6 billion elsewhere. And Iran is a known state sponsor of terrorism. But you're right. This shows how the Biden administration was working with Iran, to try to revive this nuclear deal that President Obama reached in 2015 and Trump pulled out of.

So there was like growing talks between the two sides. This war has completely changed the calculus on that. And as good, the two sides, the relationship cannot be icier now. Yeah. And it's also so Qatar is the intermediary that's holding onto the funds. And right now it's kind of just a handshake agreement between the U.S. and Qatar. So things could change in very quickly as well. because they might just decide that it's time to release the funds.

Obviously, there's a lot of things up in the air, and it's not exactly a concrete situation on either side. This is the last time we're going to be talking about this topic for the week. So before we move on, I just want to address that the news coming out of Israel has been extremely distressing. A lot of people know someone who have been affected by the attacks. So I would just encourage you to reach out to them to make sure they're doing okay. They might not be.

I know many people have messaged me over the past few days, and that support has been really helpful in dealing with an awful situation. Moving on to our next story, I am about to introduce you to the fire fest of airplane parts. Bloomberg uncovered a massive fraud involving bogus aircraft parts that have somehow found their way into planes flown all over the world. The discovery was made this spring by a crew in Lisbon, Portugal, who was examining an engine when they found that a replacement part contained paperwork that had been forged. The reference and purchase order numbers were not correct, and the signature did not come from a company employee. Once the alarm was raised, more bogus parts were found. And since that first discovery, bogus parts have been found in 126 engines, and it's not just any engine. It's the CFM 56, and we all know about the CFM 56. It is the most widely flown engine by far with more than 22,000 units in service. In fact, a CFM-56 powered plane takes off every two seconds around the globe.

So this definitely has the aviation industry, which prides itself on being the safest transportation method on high alert and wondering how these parts ended up on these planes. So how did they end up on these planes? The mastermind appears to be an entrepreneur named Jose Alejandro Zamora Yarrala, who eight years ago founded a parts distributor called AOG Technics in London. Over the years, he grew this business from a small player to one with more than $2 million in profits a year, all thanks to allegedly selling engine parts with falsified documents and what lawyers call sophisticated deception on an industrial scale.

Yeah, it was just a straight-up scam. There was forged LinkedIn accounts so that they of fake employees at the company and obviously lots of forced signatures as well. And now you're looking at the aviation industry and the word contamination is kind of spreading because who knows how many of these parts really made it into the most widely used engine the industry. So it's a bit of a scary and nervy time, and it's finally making the aviation industry kind of come to terms with the fact that parts distribution is one of the shadier aspects of the entire airline business. It relies on trust. It's like, I know my my vendors. I know the people

I work with. I trust you to give me good parts. There's so many moving parts with all, like, think about how many parts go into an aircraft engine, let alone an aircraft in general. So that trust has been broken and I think this this whole industry, this parts industry, is self-regulated and it's not under the purview of the FAA or any other airline regulator. So it just relies on people-to-people relationships and that trust has been completely broken now that Zamora has blown that up. Right. They, reading up on it, they described it as a very clubby, very insider-y feeling industry where, yeah, you just trust your airplanes parts distributor. I also just want to talk about the profits that AOG brought in.

And it's so interesting because you can clearly see when the fraud kind of started to take place. Its first year in business, at end of the year, with 7,800 pounds in cash, and then 2019, 18,000 pounds in cash. And then by 2020, randomly, it reported 2.43 million pounds in cash. So you can clearly see where it started to take off.

And that, to me, is very indicative of fraudulent practices taking place. And I just want to address the people who are like, I'm getting on a plane this weekend. I'm kind of freaked out. It does not appear like there is an immediate safety risk. These components, while not new, are not so old. They are just used masquerading as new products. And authorities say that there's really not an immediate safety risk. And there's been zero reported engine failures so far.

So, again, even though there is risk, there hasn't been any widespread. What happens now is all these airlines need to go through. all of their manifest for their parts and see which ones they bought from A-O-G and get rid of them. And it's going to be a painstaking process, but it's what has to happen. It has to happen. All right, Neil, we're going to take a quick break, but don't go anywhere because we have Stock of the Week, Dog the Week, coming up right after this. It's time to refresh your yard during spring backyard days at the Home Depot.

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where we look at one stock that just found 20 bucks in its winter coat pocket and one stock that accidentally lost its wallet at the club. As always, we are just humble podcasters who may or may not have also lost their wallet at the club at some point. So please do not take any of this as financial advice. Neil, I won the pre-show slam poetry competition, so I'm up first. And my stock of the week is Novo Nordisk, the maker of OZempic. Novo Nordus has become a regular contender for this award every week because of OZempex's growing list of beneficial side effects beyond just weight loss.

The latest news is that on Tuesday it decided to halt a large clinical trial testing OZempex effects on kidney disease. But in this case, halting was a good thing because the data overwhelmingly found that the treatment did in fact have a kidney benefit, so there was no need to continue. Remember, OZempic was originally formulated as a diabetes medication, and about one third of type two diabetes patients develop chronic kidney disease. So this latest study confirms that OZMPIC can help out in that department as well. Neil Novo Nordisk is now up 10.5% over the last five days, 91% over the last five days. 91% over the last year in a cemented its hold on the title of Europe's most valuable company. What can't it do? I don't know, but we could have chosen dialysis companies as dogs of the week because those shares absolutely cratered.

They lost billions in the whole industry after this trial came out, lost billions of dollars in market value. And you had this one giant in the space called DeVita, kind of poor. cold water in this study saying that it was a little skeptical that these benefits would be as widespread as possible and it said that you know the ozone is just going to have narrow benefits but obviously its whole entire business

is threatened if these trials do come true yeah we've talked about shorting junk food stocks how airlines might benefit from a slimmer society the butterfly effects are just truly insane and now we're talking about kidney dialysis there was some cold water poured on that this week there uh maybe last

week was this huge fracas around, you know, a bunch of analysts said that these consumer goods companies and snack companies were going to feel the pain. But Pepsi reported earnings this week said it had no, saw no effects of the OZempic. Also Constellation Brands, which is a major brewer, said people are still drinking beer. So if these effects do come to pass, they haven't shown up yet according to these companies. Okay, my dog of the week is Delta Airlines because its coffee is now worse than Alaska's. Not really, but shares were down more than 3% this week after the company reported its Q3 earnings. On the surface, things looked pretty good. Profits jumped 60% in the summer with everyone traveling to Europe, and it forecasted steady demand for the rest of the year.

But a quick peek under the fuselage revealed some areas of concern in Detroit and Los Angeles. I'm going to take a quick pause to see if our listeners can guess why those two cities might be paying points for Delta. Okay, if you thought strikes by Hollywood talent and the United Auto Workers Union, you would be correct. Delta has a disproportionate exposure to the entertainment and auto sector, given its 70% market share at Detroit's airport, and almost 20% share at LAX, making it the biggest carrier at each of those airports. Delta's president said that those two strikes dented business travel to and from those cities, which proved to be a drag on business. So it's interesting to hear that the airline

industry has a vested stake in these strikes being over. It's so interesting. I would have failed that quiz that you just gave because maybe eventually I would have gotten to it, but not in the time. You would have gotten it. Yeah. 30 seconds you would have gotten it. So it is incredible, again, to see we talk about ripple effects all the time. Now it's coming to the airline industry. That said, though, Delta did say that there is still strong domestic travel demand. Demand for overseas trips has stayed strong throughout the autumn season. And then plus, it has seen a pickup in business travel overall since Labor Day. So even though these two cities are denting its bottom line a little bit.

Delta is trying to put forth the narrative that the travel boom is not over. It's still happening. It's still in full force even if these strikes are affecting these two airports. It looks like these strikes are not going to end anytime soon. There have been developments this week where the actors union and the Hollywood Studios

broke off talks abruptly accusing each other of bullying and the auto workers union is still expanding or strike is still expanding. A top Ford execs said that the company has reached its limit on one it can offer So I guess the pain at Detroit and LAX are still going to be felt by Delta because these strikes seem to be like they are going to continue for the foreseeable future. Okay, back when we were a small upstart podcast in May, we discussed how Montana became the first state to pass a law that bans TikTok, not just on government devices like dozens of other states and the federal government, but for the general public.

Under this law, TikTok is banned from offering services in Montana and app store operators would be penalized for providing the app for. download. After that law passed, TikTok sued on free speech grounds, and yesterday this legal battle finally found its way into court for a hearing. It did not go very well for Montana. The judge had sharp words for the state's legislature and attorney general, calling its arguments for the ban paternalistic and saying Montana hasn't produced evidence that supports its law. Montana says it's trying just to protect its residence privacy because TikTok is owned by the Chinese company Bydance, and that data could find its way into Chinese government's hands. But the judge said the state isn't showing the receipts that TikTok users data was being stolen or misused.

He also said the argument that Montana wanted to protect TikTok users was confusing because they were volunteering that data up in the first place. And that was the paternalistic part I've mentioned before. However, in the judge, in the end, the judge said that both sides presented compelling arguments and didn't really indicate whether he was leaning one side or the other. TikTok wants him to issue a temporary injunction to block the ban from going into effect in January. The pursuit of this band, first of all, it was giving me nostalgic vibes because we did. It was one of the first stories we talked about on this show, which is crazy to think about now. But the pursuit of the band has always confused me because how are you supposed to enforce it? That's always been the question that's been on the top of my mind.

What would happen to people in Montana who downloaded the app before the band is supposed to go in effect on January 1st? Are you supposed to, I don't know, delete it? Just a handshake agreement. Everyone go delete it. And so they always have passed that off by saying the onus of complying with the ban would just lie on TikTok. So again, TikTok would have to enforce a ban of its own app within a state border. So again, whether or not this ban goes through, like the enforcement issue is always going to be a problem. But it did seem like the judge was considering it at least.

Like he is considering both sides, even though he did point out some of the faulty bits of Montana's argument. He also taught, he said Montana, look, you can probably take steps to it. address what you're concerned about, which is the data sharing of U.S. users to China, without completely banning the app. He mentioned a couple of things you could do. He even said the Attorney General could go on TV and warn residents against using TikTok that fell short of a ban, but he said they haven't provided evidence that supports this ban. And the question now is, it's kind of a technical question, but the question is, the legal question is whether Montana even needs to provide evidence to support its ban or whether, you know, like, what threshold of evidence or facts

doesn't need to show for this ban to be legal? I think it's so funny, too, the judge is a 77-year-old. His last major ruling was on whether wolves should be added back to the endangered species list. And now he's determining the fate of TikTok within the borders of his... He seems sharp. Yeah, he seems on it, but I just think it's funny that they're like, dang, I was just at wolves.

Now I'm out of TikTok ban. All right, Neil, our final story of the week is one that takes us back to. to ancient Rome. There's this collection of 2,000-year-old papyrus scrolls that survived the famous eruption of Mount Vesuvius that researchers discovered actually all the way back in 1752, but the problem with finding 2,000-year-old carbonized scrolls is that they kind of crumble to pieces if you try to unroll them. So we essentially gave up on trying to open them back in the 19th century, but recently a new approach has been developed over the past 20 years that helps us peer inside the scrolls without actually touching them.

It uses the same technology present in a CT scan as well as advancements in AI to determine what is ink and what's not. And yesterday it was announced that the first word from one of the texts had been discovered. That word, let's ride. Just funny. The word is, and I'm going to butcher the pronunciation of this, is Popeye, oh gosh. Just say what it means. Poferis, which is ancient Greek for purple. I did not take ancient Greek in college, as you can tell.

Now, this was a big announcement for the so-called Vesuvius Challenge, which was launched in March to help speed up the process of reading the text. It's backed by Silicon Valley investors and offers cash prizes to researchers who extract eligible words from the scrolls. Neil, if we can pull more words from these scrolls, it could totally change the world of classical scholarship because the vast majority of ancient Latin and Greek texts have been lost. Yeah, did you know that of Sophocles' plays? He wrote 120 plays. We only have seven. It's crazy. Yeah, you don't even think about what has been lost.

So the fact that we can use computer imaging and AI and machine learning to read stuff that has been lost for 2,000 years is really cool. I love the whole idea of this citizen science. It's super cool. Offering cash prizes to random people who take it upon themselves at night in their part-time on weekends to use their expertise in computer and machine learning or computer science, whatever they're going. at to develop our understanding of the classical world. It's just super cool. It reminds me of the superconductor race. I think offering, like, this just to me is incentives are aligned. When you dangle huge cash prizes for people who are smart, they are going to pursue it. And if it's, if it's working towards the goal of preserving history and finding things that we haven't ever seen

before, it is just super cool to think about. And I just think about all the applications that we could use this model for across disciplines. Yeah. And just to kind of zoom, on this citizen science that is taking place. There was this one guy who found this so-called crackle pattern that looks like ink just by staring at the CT scans for hours, which eventually proved that the ink was there. So he noticed this crackle pattern. And then a college intern at SpaceX saw the crackle pattern being discussed on Discord and began spending his evenings and weekends building a machine learning model to kind of train

and decipher this crackle pattern. and then which each new crackle found the model improved. Other people started working on it as well. So it literally just permeated through Discord channels, through social media, through people just working on the nights in the weekend to go from just visually identifying something to building models around it. And now researchers are pretty excited that we might be able to decode the entire thing. What do you think they were talking about with the purple? Yeah, that's what I wanted.

Well, purple is a very royal, I mean, it is a royal color. So maybe there's some hot gossip about like this person's purple robe or to. Well, the library who belonged to is Julius Caesar's father-in-law. So again, I think there's some gossip in there. That's what I'm hoping. Some Roman gossip. Toby wants something to spill the tea. Okay, that is a wrap for our shows on the week.

I hope everyone is able to recharge this weekend. Please take some time off of social media. That is mostly a reminder to myself. Probably also need a change out of this sweatshirt, which I've been in for four straight days. If you want to reach us, our email is Morning Brewdaily at Morning Brew.com. Let's roll the credits. Emily Milliron is our editor and producer. Samantha Velas and Raymond Lou are associate producers. Euchenowa Ogu is our technical director. Billy Menino is on audio. Hair and makeup walked under a ladder, got bit by a black cat, and opened an umbrella

inside. Devin Emery is our chief content officer and our show is a production of Morning Brew. Great show today, Neil. I wish you all well. Yamava Resort and Casino at San Manuel is California's number one entertainment destination for today's superstars. Catch the The Jonas Brothers returned to the Yamava Theater stage on April 30th, the powerful vocals of Demi Lovato on May 17th, and the signature Southern Country Rock of Eric Church on July 19th. Tickets on sale now at Yamavatheater.com, only at Yamava Resort and Casino, celebrating its 40th anniversary. You in? Must be 21 to enter.