Morning Brew Daily - Markets Brace After First Harris/Trump Debate & The Fed Bows to Big Banks

Episode Date: September 11, 2024

Episode 407: Neal and Toby recap the presidential debate between Donald Trump and Kamala Harris and what experts are saying about their economic policies. Then the big banks take on the Federal Reserve and Volkswagen comes face to face with manufacturing struggles in Germany. Next up the guys look at the new CEO's taking over at Starbucks and Red Lobster and if they can turn the coffee and seafood ships around. Finally, the viral 9-month cruise finally comes to an end. Get your Morning Brew Daily T-Shirt HERE: https://shop.morningbrew.com/products/morning-brew-radio-t-shirt?_pos=1&_sid=6b0bc409d&_ss=r&variant=45353879044316  Listen to Morning Brew Daily Here: https://link.chtbl.com/MBD Watch Morning Brew Daily Here: https://www.youtube.com/@MorningBrewDailyShow 00:00 - Remembering 9/11 02:30 - Presidential Debate on Economics 08:45 - Big banks vs The Fed  12:15 - Volkswagon woes  16:20 - Starbucks and Red Lobster overhaul  22:10 - 9-month Cruise ends 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 Toby Howell. Today, what Kamala Harris and Donald Trump said about their economic plans at last night's big debate. Then Royal Caribbean's nine-month cruise returned to port yesterday was the unlimited food and drink worth spending 275 days on the same boat as 650 strangers. It's Wednesday, September 11th.

Let's ride. Today marks the 23rd anniversary of the 9-11 terrorist attacks, which killed nearly 3,000 people at the World Trade Center in New York City, the Pentagon, and Somerset County, Pennsylvania. Earlier this week, New York firefighter officials revealed a sobering statistic. For the first time, more FDNY first responders have died from their exposure to toxins at ground zero, 370, then were killed on the day of the attacks, 343. union leaders are imploring Congress to extend funding for the World Trade Center Health Program, which runs out in 2028 through 2090 to ensure that every survivor is able to receive health care. The FDNY said urgency is needed right now because 9-11 is fading from people's memories. It is wild to think about, but the department soon plans to hire recruits born after September 11th, 2001. Right. So people around the country have found ways to continue to raise awareness.

for the firefighters and their ongoing struggles for health care. A lot of people participate in stair climbs today as a tribute to the firefighters on 9-11. That's where you climb the equivalent of the 110 stories in places like athletic stadiums or buildings to raise money for local fire departments. Another cool memorial event here in New York is the tunnel to towers 5K to honor this firefighter named Stephen Siller who ran through the Brooklyn Battery Tunnel, fully geared up, 60 pounds of gear on foot to the Twin Towers in order to carry out his duty. It had 40,000 participants last year and is held on the last Sunday of the month.

So just very touching, very inspiring to see how people continue to honor the men and women who lost her lives on this day, 23 years ago. In the biggest debate held in Philadelphia since Pat's versus G knows, Vice President Kamala Harris and former President Donald Trump squared off in their first and likely only debate last night. It comes at a pivotal moment in the campaign with less than two months left until election day and the race in a dead heat. Many topics were discussed at the debate, but we're here, of course, to focus on business and the economy, which as the number one issue for voters in the election, accounted for the first 17 minutes of conversation during the debate. The candidates were asked about their positions on inflation, tariffs, taxes, jobs, fracking, and more. Trump dinged tariffs over inflation, which has spiked under the Biden administration. while Harris focused on Trump's plan to cut taxes for corporations and the wealthy and discussed her own plans to increase the housing supply and help first-time homeowners. In terms of market reaction, traders signaled that Harris had the stronger debate, a major turnaround from Biden's performance in June, which caused him to drop out.

During the debate, Harris built a seven-point lead on the prediction market predicted after both candidates came into the event tied. Bitcoin, which Trump has also thrown his support behind, fell. 1%. Toby, what are your takeaways? I mean, I think you summed it up well that the first 17 minutes of this conversation was spent solely on the economy. Voters have just signaled that that is their top priority going into this election. It's also an issue that opinion polls have showed favored Trump. So it was really interesting to see Kamala Harris kind of put forth her economic vision for the country. One of the big things that was front and center was Trump's tariffs that he wants to propose on foreign goods. He's proposed this blanket 20 percent tariff on.

all goods imported into the United States. It jumps higher when you're talking about goods imported from China. Harris kind of pushed back on those and liken it to a sales tax on the middle class. Trump has painted them as saying, we're just making countries pay their fair share to America in a search. It won't lead to higher prices. So that was an interesting point to see them butt heads over something that is very central to Trump's economic policy.

Absolutely. It is a main focus of his economic policy. So Trump says tariffs will lead to more government revenue to pay for his tax cuts as well as protect domestic manufacturing jobs here in the United States. Economists have ran the numbers. They found that yes, tariffs do generate more revenue. He put a lot of tariffs on China during his previous presidency. Those raised tariff revenue by $70 billion. A new study by economists at the Peterson Institute calculated that a 10% tariff on all-emes.

imported products plus a 60% tariff would generate about $227 billion per year. Now, that's definitely not Trump change that would pay for certain plans. But then you have to look at the tax cuts that Trump introduced in 2017. Those were calculated by the nonpartisan Congressional Budget Office to cost more than $4 trillion over 10 years. So that $227 billion raised from tariffs is not really going to make a dent in that. And economists also say that tariffs on goods companies. into the country, make prices higher for consumers and businesses, it is essentially going to

perhaps stoke inflation again. And then Harris used that as an opportunity to steer the conversation towards her plan to offer these tax benefits, both to families and small businesses. She wants to expand the child tax credit to $6,000. She also brought up her $50,000 small business tax credit, saying that these are the backbone of the American economy. It is small businesses and families. Meanwhile, Trump obviously played up the inflation issue within voters. That was one of the first things out of his mouth is the economy in a better place now than it was four years ago. He called inflation a country buster. It breaks up country.

So definitely playing up the issue that is top of a lot of voters' mind, which is a lot of things are more expensive now than they were four years. Yeah, they are about 25 percent more expensive now than they were at the end of his presidency. You can point to a lot of reasons for that government spending and obviously the pandemic and broken supply chain. So Harris had to respond. And that is certainly something she has to respond to is what she's going to do about inflation. She focused on housing prices and bringing them down. She has a plan to build 3 million new housing units and wants to extend tax credits for first-time homeowners and also people who are buying houses as well. So she really focused on housing, which has not really been a big part of presidential campaigns in the years past.

Housing has just been a secondary issue, but inflation, housing prices have certainly come top to mind during this election. We'll actually get a new reading of inflation just today, the Consumer Price Index, which comes out every month. That could be a big factor in this election, too, because we know that inflation climbed to 9.1% at its peak a few years ago. now it's down to 2.9%. The Fed is not even focused on inflation anymore. They're more focused on protecting the job market. So a lot of focus on the economy at this debate. Last summer, in the wake of Silicon Valley Bank collapsing and setting off the worst banking crisis since 2008, the Federal Reserve proposed some tough love for banks to better safeguard the U.S. financial system. But like your high school X, sometimes people make promises that

they don't exactly keep. Fed, Vice Chair for Supervis. vision, Michael Barr unveiled the so-called tougher rules yesterday, and the proposal dubbed Basel 3 Endgame has a lot fewer teeth than initially expected. The original overhaul would have required the biggest banks in the world to boost their capital

requirements by about 19%. Instead, Fed officials paired back the proposal to a more demure 9% increase for big banks capital. This comes after a lot of whining and threats of litigation from top Wall Street execs, who

lobbied hard against what they saw as draconian new rules. Now, Barr and the Fed are hoping this new watered down version can escape legal scrutiny. Neil, what was it about the original proposal that had everyone from baking execs to even some Fed officials so up in arms? Yeah, well, as the Fed said, capital has cost too. They wanted the banks to put aside 19% more capital in a Rady done in a rainy day fund in reserves to cover for crises. Well, that capital sitting in that rainy day fund is not being put to work in the U.S. economy. And politicians on both sides of the aisle, as well as banking executives, say this capital that's set aside and not being lent out to the economy will just raise prices for consumers. It may crimp lending. You want to get a mortgage. Maybe you're a

risky borrow. Well, the banks can say, well, actually, we don't have that money for you right now. it's back in our rainy day fund. So they think that small business lending, too, could have been reduced. So that's why you saw actually Republicans and Democrats coming together being like, I don't know if 19% is a little too onerous on banks because we need banks to lend and lubricate the economy, get that money flowing out there. Meanwhile, banks also said that they would be put at a disadvantage compared to European banks and banks around the world, which are also implementing this Basel 3 endgame,

which is a very cool name for a banking rate. I do have to say. So the European and UK banks went ahead with capital requirements in the single digits and the U.S. ones, the Wells Fargo's Bank of America's, J.P. Morgan's in the world, we're going to have to put nearly 20 percent aside. So banks were arguing, look, do you want us to be competitive on the global stage? What you're asking us to do will not do that. And it did not fall on deaf ears. Now, critics will say that this makes the financial system more vulnerable to shocks because remember it was these proposals were drafted in the wake of that Silicon Valley bank implosion so maybe the hangover from another banking crisis was actually the perfect

backdrop to draw up these more conservative capital requirements but as we've kind of gotten some distance between that event happening and these proposals actually coming out it did appear to be a little bit too onerous a little bit too draconian and it did come after this very intense public relations campaign too, where a lot of people were going, they were literally running ads on national television saying, like, do not let these proposals be passed because it will kind of clog clog up the entire financial system. So interesting to see the Fed take a more pragmatic approach here and say, all right, we listen to your concerns. We think you're right. We're pairing down those regulations. And this is not also the end of the Basel 3 end game as well, because the Fed said,

This is still a first or second draft. We want your public comments. We're going to go back to the drawing board and hopefully put out a more final version in the coming months. Volkswagen is in free fall and it could take the entire German economy down with it. Two weeks ago, the largest company in the country made the shocking announcement that it was considering shutting down plants in Germany the first time it would close a German plant in its 87-year history. Then yesterday, in a step toward that potential shutdown, it scrapped a long-standing labor agreement that protected workers from layoffs since 1994. These moves are sending shockwaves through a country whose identity is tied to its auto industry,

and it's gotten fierce pushback from labor leaders and politicians. The problem for the maker of the beetle is that the world delivered it a punch buggy, and it had no punchback. Exects say they are short around 500,000 car sales a year, equivalent to about two factories worth of output. They say they have one to two years to slash costs and turn things around, or else things could go from bad to worse. Not only is this a horrible look for VW, it is a warning side for the broader German industrial economy, given the outsized role of the auto sector. I mean, VW itself employs almost 300,000 people in the country.

As one pro-business lawmaker declared, VW coughs and Germany goes down with the flu. Toby, what went wrong for VW here? I mean, if you just go back to kind of the turn of the 21st century, VW did very well, actually tapping into a market of Asian car consumers. It did better than the Detroit automakers, certainly, and it kind of rode that way for a long time. But then that ended up being a curse in disguise, if you will, because now its reliance on the Asian consumer is too much.

And now that all these low-priced EVs have flooded the Asian market, it just can't compete over there anymore. So it's forced Germany to confront this very almost symbolic moment of its industrial decline. It peaked around 2017 and has been on the decline ever since. Closing these factories for the first time is just a really tough pill to swallow, having to reduce kind of the labor agreements it's had with a lot of its employees. It's just been very tough, but there's nothing you can do when you are just not selling as many cars as you used to. you are being out-competed by these Asian automakers.

You have to cut costs, and this is the way that they see, the only path way they see forward is closing these factories. Yeah, and I mean, there's a long way to go before these factories get closed because there's going to be a huge emotional fight going on. Execs last week went before VW workers at their Walsford plan, which is their headquarters, and there were 20,000 employees showed up chanting. They had signs and posters,

And it was like Michael Scott going up in front of the Dunder-Mifflin board, but maybe even much worse. The execs were there very flustered. And it's just a very emotional thing because these plants across Germany are the lifeblood of their communities. It's so politically sensitive. If you think about even the American auto industry and when plants closed around the rust belt in the wake of 2008 financial crisis, just absolutely devastating for these communities. And that is what is happening in Germany. but VW just missed the boat on electric vehicles because they did not pivot hard enough.

And then they pivoted too hard. Meanwhile, they pivot right into a slowdown where EV sales in Europe in August were 70% lower than they were last year. Europe is making 2.5 million fewer cars now than they were five years ago. China is offering these low-priced entry-level electric vehicles, one in every five electric vehicles sold in the European market. is a Chinese car maker. And at the same time, countries have been reducing their incentives for EVs. So VW is just running up against this brick wall,

and it thinks it has no choice but to close these lauded German factories. The labor unions are absolutely going to push back. So we got a bitter fight on our hands. Up next, what it's like returning to real life after going on a nine-month cruise. Yamava Resort and Casino at San Manuel as California's number one entertainment destination for today's superstars.

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It's time to refresh your yard during spring backyard days at the Home Depot. Get low prices guaranteed on propane grills starting at $179, like the next grill three-burner gas grill. Or get $50 off a select Weber Spirit grill and bring big flavor to your backyard. Then set the scene with Hampton Bay string lights that bring it all together. Shop spring backyard days for seven days at the Home Depot. Now through May 6th. Exclusion supplies to homedipo.com slash price match for details. Starting a new job is never easy.

Where are the bathrooms? Are my coworkers cool or not? And it's even harder if your new home is riding the struggle bus, which is the situation to food industry execs Brian Nicol and Damola Atomolakan find themselves in as they are straightening their ties ready to begin their turnaround efforts at Starbucks and Red Lobster. First, Brian Nicol got the code to the Starbucks HQ at the beginning of this week and gave a preview of what his priorities are to turn the U.S. business around. The four areas he has his eye set on are the barista experience, morning service, its cafes, and the company's branding.

He wants to improve working conditions for baristas so they can pump out triple shot pumpkin spice lattes more quickly and also revamp its app and mobile ordering to make those early morning rushes a little less annoying for customers. Overall, the goal for Nichols' first 100 days on the job is getting back to Starbucks. Do you think he is on the right path, Neil? Well, he definitely wants to focus on the U.S. business, which is exactly what the godfather of Starbucks. I don't know what you want to call him. Howard Schultz, who's been CEO three times,

focused on in that very infamous LinkedIn letter that led to the firing of the former CEO. He said, focus on the U.S. business. I know you operate in 87 countries, but the experience that people are getting when they're going into Starbucks in the United States, your biggest market, your most important market, is terrible. Nicol really wants to have his cake and eat it too, because Starbucks has transitioned over the past few decades from a place where you lounge around, bring your laptop, hang out, you had this very coffee house vibe to a more of a Duncan style where you order on your phone

and you go in and grab it and go. I mean, at this point, digital orders and drive-thru account for 70% of Starbucks business in the United States. The problem is, Nicol wants to do both things. He wants to bring back the vibe of the third place where you can go chill at Starbucks. And at the same time, he wants to get more. through the system for people who want to order as they're on the go during their commute. I don't know how he wants to, how you can possibly square the, I want to really pick up my

coffee and get it really quickly, and also that I want to hang out here in the same place. He did in his note say, we should delineate between the people who want to stay and then the people who want to go. There's need to be clearly marked in our cafes. I think that is going to be a balance that is going to be tough to strike. It does seem like he understands the issues that a lot of. of Starbucks consumers are feeling, though. He mentioned that sometimes it can feel transactional when you go into Starbucks. The menus can feel overwhelming. The product can oftentimes be

inconsistent. The weights are too long, and then the handoffs are too hectic is what he hit upon. So it does feel like he knows what a lot of consumers are facing. Those are all problems that we've all experienced at one point where it just doesn't feel calming. It feels extremely kind of hectic when you step foot into these Starbucks's. Also, expectations are extremely high for this. I mean, remember, shares jumped around 20% when Nickel was first

instituted. A lot of critics are saying Starbucks is a lot more complicated than Chipotle was as well. Chipotle is just US-based. Starbucks is international. It's got all, it operates in 87 countries, so it's just a very large market. Maybe his magic dust won't work as well on such

a expansive business. But yeah, I mean, Nickel did very clearly state what his goals are. So we'll have, it almost feels like he's starting a presidency. He said, this is my first 100 day plan. This is what I hope to do. And we'll see if it kind of, he still has the magic touch that he can bring over from Chipotle. There is a similar hot shot CEO tasked with turning around the recently bankrupt seafood chain red lobster on our radar. You're probably less familiar with Damola, Adam Molokun, unless you are really locked into the CEO WonderKid scene. Atomolokun is just.

35 years old and finds himself in the CEO seat at Red Lobster after a successful stint as the head of the pan-Asian chain, P.F. Changs. Neil, if you could build a CEO in a lab, you'd come up with something similar to Adam Olikun. He played football at Brown, go Bruno, before jumping into the private equity world after graduating from Harvard Business School. He was installed at the top job at P.F. Chang's during 2020 and ushered the franchise through the fray to emerge with higher sales than pre-pandemic levels. now Red Lobster's lenders have tapped him to lead the cheddar biscuit purveyors back from the brink. Do we like this institution of the CEO? He seems like an absolute prodigy, won a debate competition in high school that earned him $10,000 and used it to buy a, to get his first stock portfolio.

So he's been locked in on the finance and business world for a young age. Apparently before he started this stint at Red Lobster, for three months this year, He went around to different locations in the country, looking at the interiors, trying all of the food. And he said, this is what he said. He's like, the brand is strong. People are very loyal to the Red Lobster brand. And the quality of the food that I was served is pretty good. But there were instances where the quality of the food was not pretty good.

And these promotions that the previous owner, Thai Union Ring, were devastating for the business. Remember this infamous $20 all you can eat, shrimp, deep. last year. They ran it every single day. It led to $11 million quarterly loss and eventually sank the company into bankruptcy. They shuttered more than 100 stores. So he's got to get back to what Red Lobster does well, which is make you think of New England, serve really solid food, update the interiors. I think this is a brand and a chain with a lot of loyalty and a lot of nostalgia. And I think his plan is to lean into that nostalgia, up the food quality, make sure that all, you know, the restaurants actually look good.

Don't do those stupid promotions. And maybe he'll be successful. I do love that Adam Olican, too, does whenever he gets the top job at a restaurant chain. He goes and moves to the city where it's headquarters. So with P.F. Chang's, he built a house in Scottsdale, Arizona. He did the same thing now. He's looking for a house in Orlando area, which is where Red Lobster is a headquartered. So it is interesting to see because Brian Nicol, the new Starbucks CEO, is super commuting.

from his home to Starbucks's HQ, whereas Adam Olican is all in. He's moving there. He's building houses. He wants to get down and dirty. Which job would you rather have? Starbucks CEO or Red Lobster? I mean, one gives me lobster, so I think I'm going for that one. I've had enough Starbucks in my life.

I could use a little cheddar biscuits. 274 nights, 65 countries, and a lot of TikTok videos later, Royal Caribbean's Ultimate World Cruise officially came to an end yesterday after nine long months at sea. Even for the most avid cruisers out there, this was a monumental journey. While other passengers rotated through on different legs of the journey, 650 Brave Souls were on board for the long haul, paying anywhere from 60 to 117 grand per person. A swarm of internet attention followed the cruise in the early days as everyone waited to see how the social experiment at sea would turn out. Tick-tok were posted, romances were

hinted at, and at one point a dead body of an elderly passenger was removed from the ship. She did pass away from natural causes. At the end of the day, though, most passengers escaped with more TikTok followers than horror stories as the interpersonal drama that some were hoping for never really materialized. But Neil, how good must it feel to sleep in a bed that isn't rocking from side to side anymore? I can't imagine nine months is so long. But looking at the details, I was like, man, I kind of wish I went on this because you visit all seven continents, 60 countries see some of the coolest sites in the world. Obviously, there are downsides that plenty of people will talk about. But one of the most interesting things about this

disembarkation process is that think about how much crap you collect from visiting 60 countries, all of the magnets you get, all the shock glasses, all of the souvenirs you pick up from the Taj Mahal from Rio de Janeiro. So there was actually a massive operation of offloading people's luggage and all the stuff they bought from the ship. Twelve weeks ago, they hired this company called Luggage Forward, which sent back around 1,000 bags over the course of the cruise. They actually had a representative from this company, come on board, help people pack their stuff.

And then at various ports over the past few weeks, they had them send, you know, they all descended on the nearest FedEx and started shipping stuff home. So I just can't imagine how much stuff you accumulate from when going to all these destinations around the world for the past nine months. Someone told the Washington Post that she started with six large bags in a trunk for the trip, and she returned home with 20 bags. So that is a lot of knick-knacks right there.

It was interesting, the social media phenomenon around this, because when it first started, there were people breaking down every interaction, every single TikTok posted from the people on the ship. It was almost like a reality TV show had kicked off. Unfortunately, though, people were hoping for like divorces to happen, where you're living on the same ship as your husband and wife for a long time. It just never really came to fruition. A lot of the people said the biggest thing we battled was just exhaustion.

Like there were so many port stops, especially around Europe. But they were very grateful. They said it was an incredible experience, seeing the icebergs in Antarctica, seeing Europe, seeing Africa. Just truly an amazing thing. And I think I already know your answer. But if you had the opportunity, would you sign up for a nine-month trip? Sure. And I think I might have the opportunity to do so because Royal Caribbean said they are offering another one.

And then this whole industry of longer cruises is seeing a boom along with the whole industry of cruising in general. Holland America, which specializes in longer cruises, said it's offering 25% more sailings of 25 days or longer compared with 2019. And then 117 more sailings of 50 or more days. So there is clearly demand for people to just move away from whatever they're doing here and escape to the ocean with a bunch of strangers. MBD at sea. I can see it at sea. Let's wrap it up there. Thanks so much for starting your morning with us and have a wonderful Wednesday.

For any feedback, questions, or comments on the show, send an email to Morning Brew Daily at morning brew.com. Also, we'd love it if you shared Morning Brew Daily with your friends, family, and coworkers. So you don't have to explain what the heck Basel 3 endgame is to them. If you need some inspo, Toby has here to help. I want you to share today's podcast with someone named Michael, Jacob, Emily, or Jessica, because those were the most popular baby names from the year I was born in 1997.

Figure we should just play the odds and use the most popular names from the most common age of our listeners. Just playing out here. Base rates, you learned a lot from thinking fast and slow. Okay, let's roll the credits. Emily Milliron is our executive producer. Raymond Lou is our producer.

Olivia Graham is our associate producer. Euchenawa Ogu is our technical director. Billy Minino is on audio. Hair and makeup is decompressing after that nine-month cruise. Devin Emery is our chief content officer and our show is a production of Morning Birth. Great show today, Neil. Let's run it back tomorrow.