Morning Brew Daily - Wall Street Loves Private Credit & US-China Chip War Heats Up

Episode Date: December 4, 2024

Episode 467: Neal and Toby bring news from around the world starting with the fallout of South Korea’s President declaring martial law, then lifting it less than 24 hours later. And, China hits back against the US’ chip crackdown. Then, French lawmakers could force its prime minister to resign. Meanwhile, Wall Street is investing billions of dollars into private credit as it looks to bring it to the masses. Plus, ChatGPT may have all the answers on the Internet, but it can’t bring itself to recognize the name “David Mayer.” Lastly, notable headlines that close out your day. Download the Yahoo! Finance App (on the Play and App store) for real-time alerts on news and insights tailored to your portfolio and stock watchlists. 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. Listen to Morning Brew Daily Here: https://link.chtbl.com/MBD Watch Morning Brew Daily Here: https://www.youtube.com/@MorningBrewDailyShow 00:00 - 30 Under 30  03:00 - South Korea Turmoil 06:00 - China Chip Wars 09:00 - France Chaos 11:40 - Private Credit on Wall Street 17:00 - ChatGPT Glitch 21:45 - Headlines Learn more about your ad choices. Visit megaphone.fm/adchoices

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Good morning brew daily show. Neil Fryman. And I'm Toby Howell. Today, the mysterious man who broke chat GPT. Then what is private credit and why is it suddenly the hottest market on Wall Street? It's Wednesday, December 4th. Let's Ride. If you got a disappointed text from your parents yesterday, it was likely because Forbes dropped

their annual 30 under 30 lists celebrating movers and shakers in various industries who don't have lower back pain yet. Alex Cooper of Call Her Daddy fame highlighted this year's class. Jason Tatum wrote the success of his step-back jumper to snag a spot, and Jacob Alluredy got on for just being tall and handsome and really talented at acting, I guess. Neil, any takeaways from this year's crop of youths? Yeah, well, I didn't see your name, Toby. Oh, you had to bring it up.

I'm 33. Like, I don't even think about 30 under 30, but you're still under 30, and I was looking at your name. There's 20 different industries. I mean, this is not a 30-person list. This is a 600-person list. They choose from fintech, media, celebrities, sports. etc. And, you know, I just didn't see. I was looking from H and I, I went to I and there was no howl. Here's the thing, Neil. I got three more years, okay? My lower back pain hasn't kicked in yet.

So, yes, I didn't make it this year. But hey, there's always next year, right? And the year after that and the year after that. Now, a word from our sponsor, Yahoo Finance. Neil, the Olympics are long gone, but I still want to talk about gold, silver, and bronze today. For the last time, Toby, we are not doing a morning brew office Olympics. Curling with coworkers in the office chairs is not HR approved. No, I'm not talking about the MB Office Olympiad, which will happen at some point. I'm talking about Yahoo Finance's premium tiers. I have seen this on their site. They have three different tiers geared toward helping investors of all levels.

Bronze is aimed at more passive investors if you just want to monitor your 401ks or IRAs. Silver is best for your stock, ETF, and mutual fund investors. And finally, gold is a must have if you are actively trading stocks, options, crypto, and more. So what tier do you fall into? Oh, I'm tier purple, which just means I'm tier Yahoo Finance as a whole. Free premium, the whole shebang. If you want to check out the whole shebang or any of the tiers mentioned, head to yahoofinance.com. Lots of big news abroad to report on.

So we're going to kick off the show by discussing a trio of major happenings in South Korea, China, and France. South Korea plunged into chaos yesterday after President Yun Sukyoel abruptly declared martial law late Tuesday night, banning all, quote, political activities and enabling him to take control of the news media in the world's 13th largest economy. You said the measure was necessary because the opposition party was too sympathetic to adversary North Korea and threatened the country's constitutional order. Korean stocks plunged on this absolutely shocking news, and the country's currency, the wand cratered nearly 3% against the dollar. With the martial law declaration swiftly condemned as a dangerous cynical political ployed by other politicians, including Yun's own party, the National Assembly convened just a few hours later and voted to end martial law by account of, get this, 190 to zero.

Yun seemed to get the message and lifted the emergency martial law decree less than five hours after it began, prompting Korean stocks and the wand to rebound off their lows. Still, Toby, this unrest cannot spur investor confidence that South Korea has its political, house in order, especially since it's one of the most trade-reliant countries in the world. I was getting lots of text and conversations yesterday saying what is going on in South Korea right now. It truly was a wild day. I mean, you just look at the index that tracks 90 large mid-sized companies over in South Korea. It tumbled as much as 7% yesterday. It reached a 52-week low on just these fears of unrest in the country. 35 million shares of this index changed hands yesterday. That was 10 times the 30-day average volume. So clearly there was a lot of anxiety going on

within Korea's stock market. And you're right. It does. South Korea is a critical partner with the United States over there, just as kind of a hedge against China dominance in the region as well. But also, you are right. South Korea is uniquely situated as a major trade partner for a lot of nations as well. So that was why there's a lot of attention focused on this political unrest in the country. Yeah. And so moving forward, what's happening, now is that the central bank of Korea met and they said they would they would supply as much liquidity as needed. That seemed to calm markets. The Juan is back to about where it was before this whole shabing started. The stock market has increased and they're doing trading. So they're

haven't closed down the stock market. Meanwhile, Yun looks like he's going to be in some hot water for this ploy. The opposition party has brought measures to impeach him. And that'll move through the National Assembly in the next few days. His approval ratings were already below 20%. So maybe that was one reason why he took this step in the first place. Yeah, first time declaring martial law in the country since the 1980s. So clearly a big swing and a big miss at this point. Let's move on to China for our next international headline. China clapped back against recent U.S. trade restrictions by tightening export controls on critical raw materials used for semiconductor manufacturing, citing national security concerns.

The high-stakes game of tag, you're it, no, you're it, was set off when the U.S. limited China's access to its own advanced AI chips, as the two largest economies in the world gear up for round two of trade drama in Trump's second term. The list of materials on China's no-no list include gallium, germanium, and antimony, all necessary raw components of both semiconductor or battery manufacturing. What has Washington a little constant? off guard, though, was just how quick Beijing's response was. In previous instances, when the U.S. beefed up its no trade list in regards to China, Beijing usually waited months or weeks before responding, but this response came just one day later, Neil. Yeah, I mean, this has escalated to honestly

all-out supply chain warfare, how these critical semiconductors are made that power our modern economy is China has the raw materials, the tungstons of the world, the antimony, The galliums, the germaniums, things you may not think are critical to our modern economy, but they absolutely are because they're made to use semiconductors. They ship them to the United States and other developed economies that make chips. And then the United States sells them back to China that are extremely advanced. And now we have AI chips. So there's a very tightly interconnected global economy when it comes to semiconductors,

where there's a lot of billions of dollars of goods going back and forth. And these countries are at the same time adversaries, and they don't. want each other to make the most advanced semiconductors because those can be used in weapons and other advanced technologies. But at the same time, they need each other. So you see this delicate balance playing out. But that has, you know, happened for the past few years or so where there's been this, they call it, you know, tit for tat. It's been very these minor nicks. But now it looks like the gloves are off because these are both dramatic escalations this week. I do just want to reiterate how important these minerals are. The U.S. Geological Survey,

deems gallium germanium antimony among 50 minerals that the u.s are critical to the economic or national security of the u.s. and the problem is that china produces 98% of the world's gallium 60% of the world's germanium and between the periods of 2019 and 2022 the u.s imported all of its gallium and about half of its germanium so you talk about a delicate supply chain you talk about a someone who controls the world's supply of these critical minerals and that is why we're talking about such a, you know, delicate trade negotiation between these two powerhouses. Yeah, and major corporations like Nvidia and Intel are watching these extremely closely, and so are shareholders, because Nvidia got 12% of its entire quarterly revenue from China,

from selling its chips to China. So if the U.S. government blocks those sales, which it seems like it's going to be doing, then that cuts off a major sales source for the big chipmakers. and who knows what will happen with the incoming Trump administration, they appear to be even more hawkish on China. Finally, let's head to France, where the political dysfunction is on par with South Korea's. Today, French lawmakers will hold a no-confidence vote, and if it passes as expected, it will topple the government and send Prime Minister Michel Barnier packing with the shortest tenure of any since France's Fifth Republic was founded in 1958.

France's legislature has been fractured and at a stalemate since snap elections in July, but the near-term cause of an impending government collapse is a budget introduced by Barnier that has pleased no one. France has a rapidly ballooning deficit it needs to get under control, and Barnier went all out with the austerity measures to do that. The budget calls for slashing $42 billion in spending while raising taxes by more than $20 billion, which angered both the left and the right for different reasons. So that brings us to today's no-confidence vote, which has brought a great deal of uncertainty to Europe's second-largester. economy. Barnier has warmed of a storm in markets if he's dismissed from power, and borrowing rates are already soaring in France due to the political turmoil. Toby, if this vote passes,

France will have no functioning government and no budget with less than a month ago before the year-end deadline. That's uncharted territory. Yeah, this is a really high-stakes game of chicken right now. You have Le Pen and the French government just kind of staring each other down, and you have global investors looking on very closely because who is financing the country's huge debt load at this point, it is a lot of global investors. I just want to talk about the rate on the 10-year French notes right now. Usually they were considered one of the more safe haven assets in the euro area, but right now they are yielding comparable as Greek bonds during the height of the sovereign debt crisis over there. So whenever you're being compared to Greece, which is

the Eurozone's kind of ugly stepchild in terms of fiscal and finance. policy, you're not in a good spot right now. Right. So that's what borrowing costs are rising because investors are selling off their bonds because they're not confident in the French economy. Meanwhile, the French stock market has been lagging its peers in Europe for the majority of the year, the spread between its performance, the KAC 40 Index and Germany's Dax Index.

That is its biggest annual underperformance for France since 1993. Meanwhile, the benchmark equity index is on track for its worst year relative to European shares since 2010. And it looks like that slide can continue if the government enters this limbo space where they don't have a budget, they don't have a government with the year-end deadline rapidly approaching. You probably know BlackRock as the world's largest asset manager. A title that mostly stems from its index funds popular with everyday investors like you and me. But this week, it acquired HPS investment partners spending $12 billion to get into, the fast-growing world of private credit, which is suddenly one of the hottest markets on Wall Street.

HPS's business model involves lending money directly to companies, a job that's typically been reserved for banks. But as banks have dialed back the risk they take when lending post-financial crisis, private credit has swooped in to pick up the slack. HBS now manages nearly $150 billion in loans, making it a tasty target for an asset manager of BlackRock size. But why are these big money managers suddenly gaga for private credit. Well, if you're BlackRock and you already have $11 trillion under management, you are incentivized to find new alternative asset classes to get institutional investors excited about giving you their money. Historically, this world of private credit loans made to corporations and consumers has been difficult to actually trade, but the general

consensus is that outlook is outdated at this point. They're just loans, after all. Why does it matter if a bank or HPS, for example, makes them? So, Neil, now there's a bit of a rush to build up a trading market for this growing world of private credit. There is. I mean, BlackRock is $11.5 trillion, is the largest asset manager in the world. However, it trades about at the same value as private equity giants like KKR, Aries, Apollo, Global Management, who have pioneered this private credit model. And so you're saying, why does BlackRock, with its massive AUM so comparable to these much smaller companies, it's because BlackRock owns the market for ETS, which you can't charge a very high fee for because there's a very

competitive market. But in the private credit market, you can charge much higher fees. So you see BlackRock and a bunch of other big financial firms getting into the space going directly to companies sidestepping, the regulated bank sector who has retrenched from that since the financial crisis. and it's just ballooning. I mean, the market right now is worth $1.6 trillion, and it is expected to double in the next four years to $3 trillion. And $3 trillion in 2030, it was worth $41 billion in 2000. So it really has exploded over the last three decades. Now, it is small compared to the total

loans held by U.S. banks, which is $12.5 trillion. So it's about 25 percent of that. But it is exploding and you're seeing even more banks get traditional banks get into it as well. Well, one of the reasons why this market has traditionally been a little bit untouched is that institutions historically have kind of looked at these private assets as an alternative asset class, something that is a little too risky, whereas public loans are safer. But a lot of people have been looking at that and saying, what if that assumption is just basically wrong? Borrowers still want cheap money, investors still want great returns.

Why does it matter exactly where that loan? is coming from whether it was made by a bank or whether it was made by someone like HPS. So some people think that in a few years, we won't even be talking about public credit versus private credit anymore. It will just be one big mismatch. And I think what you're going to see is BlackRock accelerate that mismass because it has access to these big public loan portfolio now. And I think it's going to start integrating it after this acquisition of HPS.

Up next, the forbidden names chat GBT refuses to say. Many people have attempted to, quote, break the internet over the years, but one person seems to have finally broken chat GPT. His name is David Mayer. And who is he? No one has any idea. But over the weekend, Reddit Slews found that when you type the name David Mayer into chat GPT, anything mentioning this name prompts chat GPT to shut down. Responding either, I'm unable to produce a response or there was an error generating a response before terminating. this session. Hordes of people tried to solve this truly beguiling mystery and a number of theories

spread online. And then a plot twist. It was discovered that David Mayer isn't the only guy who ChatGBTGBT can't handle. Other guys named Brian Hood, Jonathan Turley, Jonathan Zittrain, David Faber, and Guido Scorza when typed into ChatGPT, caused a similar blocking mechanism. After staying silent for days, OpenAI, the maker of ChatGPT, finally responded to the controversy, claiming that the mayor problem was due to a system glitch. A spokesperson said one of our tools mistakenly flagged this name and prevented it from appearing in responses, which it shouldn't have.

We are working on a fix. Toby, I don't think this is going to satisfy the sluice out there. What in the large language model is going on? Well, there was a lot of conspiracy theories. A lot of people thought it was referring to David Mayor-day Rothschild, which is part of that, you know, a legendary Rothschild family. He actually talked to the Guardian and said,

it has nothing to do with him and it was just conspiracy theorizing because his family's name kind of gets a lot of play online. The real answer might be closer to just internet privacy laws. Open AI's policies in Europe makes it clear that you can actually delete your private data from its products. It's known as the quote right to be forgotten. So some people were thinking that maybe David Mayer was just this enterprising individual who said, I really don't want my name appearing in any of these models as with these other people. But, there are some interesting ties to JatchyBT from other people. One potential thread is that Brian Hood, for example, was this Australian mayor who Chachibit

falsely described as perpetrating a crime, something that he had actually reported, not the crime he didn't carry it out himself. So maybe it's one of those things that behind the scenes, chat GBT and opening eye were interfacing with these people saying, hey, we will remove you because our models falsely slandered you in the past. So it really did open up a box of worms here or a can of worms here. And I think opening eye would rather pin it all on a glitch rather than truly revealing what is going on behind the scenes here. Yeah, I mean, the key here is all these people somewhat have something in common.

I feel like I'm Charlie from, you know, it's always sunny in Philadelphia, like looking at that wall and trying to pin it all together. But there is a common thread in that a lot of these people had chatypD say something. not very nice about them. Jonathan Turley, that guy at GW, was a Fox News commentator. ChatGBTGBT, BT made up false claims about him last year, and it cited a Washington Post article that never existed. Jonathan Zittrain is an expert on what we talked about, the right to be forgotten, which you are able to do.

And Europe, Guido Scorza is on the board at Italy's Data Protection Authority. So it seems like it's possible. These people all reached out to ChatGBT, after realizing that chat chbtee got some things wrong about some of them and slandered them, saying, can you guys please OpenAI, under GDPR, the EU's data privacy rule, can you please take me off? But it does raise interesting questions. Yes, that is not necessarily a glitch that OpenAI was talking about. But it does raise interesting questions about these names or keywords that can cause

chat chabit to shut down. Let's say I'm building a website and I don't want OpenAI to be trained on my website. What if I just write like David Meyer, David Mayer, in the middle of it, and then it won't function? So, interesting questions on privacy, the right to be forgotten, how manipulative these large language models are. Yeah, it's just a reminder that these AI models are not these magic things that always produce the answers that you want. They are basically just auto complete, fancy auto complete things that predict what the next word is going to be written out. So every time you think about you're getting facts from this chap, I'd always remember that it is something that is pinned together by humans,

a model that was kind of molded probably by humans behind the scenes as well. So they're not just this spit-out magic answers box like people treat them as. Now let's sprint to the finish with some other headlines you should know about. Vietnamese real estate tycoon Truong Mai Lon is in a deadly race against time to raise $9 billion in order to escape the death penalty after losing her appeal yesterday against, a sentence for embezzling $12.5 billion over the span of a decade. This case is wild. While working at Saigon Commercial Bank, Lon was accused of using shell companies to write over 2,500 loans to herself, friends, and family. Given the sheer size of the fraud, the amount

stolen was equivalent to about 3% of Vietnam's 22 GDP. Lahn was sentenced to death in a trial earlier this year. But Vietnam's laws do allow a death sentence to be downgraded to life in prison if three quarters of the estimated losses are returned, which in this case comes out to $9 billion. Neil, is this even possible for her to pull off? So it appears that authorities have not seized her assets. They've just frozen them. And she was, as you mentioned, a real estate tycoon. So she has luxury properties all over Ho Chi Minh City that theoretically she could offload.

I have no idea whether those amount to $9 billion. She also owns shares and stakes in other businesses. And allegedly, she's also reached out to Frenchman. and family to help her out. Do I know whether these are going to add up to $9 billion in this race against the executioner, which is absolutely wild? I don't know, but it appears like she does have some avenues. But her lawyers are arguing that this negotiating process for selling these assets could be marred a bit

because I don't know if you've ever negotiated with someone, but I've never negotiated with someone on death row. You can probably get a better deal out of them than you could with somebody in a better leveraging position. Yeah, her lawyers are trying to say, hey, we do have the cash. We do have the assets here, but it's going to require time and effort to sell. And as you mentioned, you're probably not going to get a great deal at the negotiating table

when you have your back against the wall as she does. Is Donald Trump Jr. the new roaring kitty? Every company the president-elect son joined recently has enjoyed a massive spike in its share price following the announcement of his involvement. Just yesterday, shares of the small online marketplace public square jumped 270% in a single day on news that Donald Jr. was joining its board of directors. As of Monday's close, it was worth 72 million. Now, it's valued at $265 million. The company describes itself as a woke-free marketplace, connecting shoppers with businesses that, quote, refused to succumb to the progressive ideology overtaking corporate America.

And Toby, it's not the first stock to benefit from Don Jr.'s involvement. Yeah, last week, he joined the board of unusual machines, which was this very small U.S. drone drone component maker, and those shares jumped as much as 100%. So yeah, you are seeing DJT become this almost conservative roaring kitty. I do just want to drill into the fact that PSQ is a micro cap stock. It's got a market capitalization of only $265 million. But its revenue was $6.5 million, offering losses of $14 million. I couldn't help but compare it to the Elder Trump's company, Trump Media and Technology Group.

Remember, it reported third quarter in earnings of just $1 million in third quarter revenue and a $19 million loss, but PSQ is worth about $260 million. DJT is worth about $7.3 billion, so I guess there is still a Trump delta when it comes to junior versus senior. Pizza Hut is in its eat, pray, love era, unveiling a new design concept

as it aims to reinvent itself in the image of its more successful, fast, casual brothers. At a revamped restaurant in Plano, Texas, the chain has introduced a central Chipotle-esque pizza making station where customers can watch their pies being made. The redesign also includes modern interiors with touchscreen kiosks, heated cabinets for pickup orders, and a drive-thru featuring a Hut-and-Go menu aimed at reducing wait times.

Neil, I remember going to Pizza Hut as a kid with those weird red hut roofs. It was mainly a sit-down joint at this time, but it is far from just a sit-down joint at the point. Yeah, Domino's has changed this industry. You used to go out to pizza and sit there and eat it. Now that seems like somewhat a foreign concept unless you're going to the Big Three in New Haven, which was the last time I actually sat down at a pizza place. But now you just take it out.

There's been a commodification of pizza, thanks to Domino's, thanks to Papa John's. And Pizza Hut is obviously riding this wave. It's introducing all these, you know, snazzy mobile ordering kiosk in its stores like you would find entering a McDonald's. So this is a new era. But we're also seeing a pattern of chains. putting the actual food-making process out in front of people. That seems like a pattern. I mean, Subway, as part of its reinvention, wanted to get those deli slicers out from wherever,

behind the scenes where it was doing it and actually sliced meat in front of people. So that is another pattern that we're seeing in terms of the fast casual space, because this is a hyper-competitive industry, and Pizza Hut is not doing so well. Its parent company did experience a 1% decline in sales in the most recent quarter. Finally, what internet rabbit holes did y'all fall down this year? We know now after Wikipedia released its 25 most popular pages of 2024. The U.S. election, celebrities, and pop culture dominated the list, as well as Indian politics and sports.

Here are the top five Wikipedia articles from last year as ranked by page views. Number one, deaths in 2024. Number two, Kamala Harris. Number three, the 2024 United States presidential election. Number four, Lyle and Eric Menendez. Number five, Donald Trump. A few other things I want to call out. the deaths in X year page is an absolute dynasty, having never fallen below third place since

the list began in 2015. ChatGBT, GBT, which was number one in 2023, fell to number 12 this year, and Indian Premier League cricket at number six was way more popular than the 2024 Summer Olympics at number 14. Yeah, some names I am surprised that didn't make the top 25. I was just going back through the year and thinking of the big stories. Caitlin Clark feels like it was a huge year for her, but didn't crack the top 25. No one from the NFL or NBA either. There were soccer players, Ronaldo and Messi. Those are also two stalwarts on the list,

but I guess not big enough globally. And then, of course, Neil, you made fun of me at the beginning of the show for not making 30 under 30. I didn't see Neil Fryman, International Man of Mystery, on that list. I don't even think you have a Wikipedia. I don't have a Wikipedia. That's fine. I'm a nobody.

One thing I do want to mention is the power of Netflix. So the Menendez Brothers, which there was a document, Netflix documentary about recently were number four, the number four most viewed Wikipedia page across the entire world last year. And then there was another Netflix subject, Griselda Blanco, was a Colombian drug trafficker that had a Netflix miniseries about her. She was in the top 25 as well. And then I remember in 2022, the number one person that year, the number one page was Jeffrey Dahmer. It made me. So is it. Netflix is extremely powerful at, you know, moving culture. Yeah, it made me actually think that I need to renew my Netflix subscription because, you know, I didn't watch the Menandez, brother.

I had never heard of Griselda Blanco as well, so maybe I am missing out on a decent chunk of culture. That is all the time we have. Thanks so much for listening and have a wonderful Wednesday. For any questions, comments, or feedback, send an email to Morning Brew Daily at morningbrew.com. If you find that Morning Brew Daily helps you stay up to date with the world, then make like Paul Revere and spread the word to a friend, family, or coworker. It doesn't have to be in Boston, who you think might enjoy it too. For a specific sharing idea, here's Toby. I want you to share the pod with one of your siblings today.

Probably your sister, though, because it is my sister, Hannah's birthday today. So show your sisters some love because, you know, big sisters make the world go around. Send them this podcast and also send some good birthday vibes, Hannah's way. Let's roll the credits. Emily Milliron is our executive producer. Raymond Loo is our producer. Olivia Graham is our associate producer. Echenoa Ogu is our tech.

technical director, Billy Minino is on audio, hair makeup is looking for David Mayer, Devin Emory is our chief content officer, and our show is a production of Morning Brew. Great show, Danielle. Let's run it back tomorrow.