Morning Brew Daily - What if the US Defaults?, Instagram vs. Twitter & Game Over for E-Sports?

Episode Date: May 22, 2023

Episode 64: Neal and Toby break down what would happen if the US defaults. Plus the guys talk about Instagram throwing its hat in the battle of text-based platforms. Then, is the allure of E-Sports starting to fade? A look into the stagnant industry and if it's time to give up on its future. Lastly, Cava gets ready for IPO, debt ceiling update, and a whale problem that is wreaking havoc in Europe that may be a sign of a killer whale revolution. Learn more about our sponsor, Brex: brex.com/brewdaily Learn more about our sponsor, Fidelity: https://fidelity.com/stocksbytheslice Listen Here: https://link.chtbl.com/MBD Watch 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 Freyman. And I'm Toby. Today on the pod, we're going to talk about what's at stake if Congress does not raise the debt ceiling. Hint, it is nothing good. And we'll talk about some surprising stats about the state of e-sports right now. Hint, it is also nothing good. Then we'll talk about how Mark Zuckerberg is copying yet another tech company.

Stick around to hear which one. Before finishing up with a terrifying story about killer whales rising up against humanity. Neil, it's Monday, May 22nd. Let's ride. All right, Neil, before we dive into the news, we have some news of our own. So getting feedback from you guys is a critical part of producing this podcast. Some of you like my blonde hair. Some of you don't.

Some of you love hair and makeup for setting boundaries. Others think they are lazy. But the one universal piece of feedback we've heard from everyone is that the show needs to come out earlier. So we've listened and we're going to do that. The show currently comes out at around 10 a.m. Eastern time, but starting next week, we are going to be releasing it at 7 a.m. This is big news. Not only for you guys, because you'll finally be able to listen to a morning show on your morning commute, but it's big news for us because now we're early morning people. We're already early morning people. I think this qualifies as like super early morning. early morning people. We'll see. It's going to be super interesting. I am excited to get a little bit more

life. We get more life. Be up at like 4 a.m. I know. I'm setting my alarm for 4.45. So you better believe I'm about to become one of those insufferable early morning people who make their entire personality, the fact that they wake up early. So sorry for that, everybody. All right. Stay tuned. Toby and I will document what it's like to get out before, but as other people are coming back from the bar. every day. There you go. Let's get into the news. So I'm going to borrow a bit of Gen Z slang to say, things are getting for real, for real on this debt ceiling debacle. Treasury Secretary Janet Yellen yesterday reiterated that the U.S. would likely start defaulting on its obligations on June 1st, which is next Thursday. So we'll talk about that on a 7 a.m. show, unless Congress raises the

debt ceiling above the current level of $31.4 trillion. Are they going to get a deal done? Well, freaking hope so, but talks will continue between Biden and House Speaker Kevin McCarthy today. I want to talk about less about the political back and forth because they're just going to keep talking. And I want to focus more today on what would happen if the U.S. were to default just to highlight what's at stake. Essentially, it means that the government will not be allowed to borrow more money to pay the people that it owes, leading to massive financial instability because U.S. bonds are considered the safest investments on our entire planet. I don't think there is another safer investment. So if we can't pay our IOUs, that is just terrible news across the global economy. Now, we don't know exactly what

will happen if we can't pay our bills because we've never defaulted before. So there's absolutely no precedent. But Toby and I are just going to do a quick rundown of some possible scenarios that have been floated out by experts about what would happen if we were to default. Yeah, let's speculate. So up first is stocks would more than likely crash. So remember, stock prices reflect kind of investor perception of future earning potential of a company. And if the future looks like one where the global economy is hamstrung and the U.S. can't pay its debts, then of course market prices are going to crash. So far, stocks really haven't moved that much, which is kind of wild because so many people expect a deal to get done.

But if we look back at the last time that the so-called X-state, the date where the U.S. might default, was this close. That was back in 2011 when Obama and Republicans were kind of deadlocked. Indexes dropped 20 percent, like a week out. So we probably are going to see some movement if we don't see some movement on the negotiations front. But that's the first scenario is that if we default stocks would definitely get wiped out. And then the next one is that the U.S. would not be able to write checks to its employees like military, personnel air traffic controllers safety inspectors others in critical jobs I should remind everyone that the US federal government is the largest

employer in the country with 4.2 million full-time employees so a failure to pay its workers would have just massive consequences across the economy and then you have these social services like Social Security there's 60 million 66 million people who get Social Security checks and it's unclear whether they would get their checks on time meanwhile Medicare Medicaid and food stamps could be disrupted as well. So you just kind of get a sense of how much the federal government spends here. And if it can't spend, that's a lot of people who rely on it. So that would be another, you know, huge consequence of just people not getting paid, some of, many of whom rely on the

federal government for their income, especially if they're older. For sure. Okay, the third scenario is that the U.S. dollar would drop. So right now, the U.S. dollar is kind of the de facto global reserve currency, roughly 60 percent of... It's not Bitcoin. It's not. It's not. Bitcoin, not yet. Roughly 60% of foreign currency exchanges still happen in U.S. dollars. And so if the U.S. defaults on debt, that could just absolutely tank the value of the dollar. This is a confidence thing, which is so much of the outcome from the debt defaulting is a confidence thing. If the global economy can't have confidence in the U.S. government to pay its bills to work through its own debt crisis, then why would they have confident in the U.S. dollar to remain the stable and

strong reserve currency that it currently is. So that would definitely be another ripple effect is people would lose confidence in the dollar and that would hamstring the entire global financial system. And all of our European vacations would cost a lot more. I know. And you went to Europe at a really just before this happened, yes. All right. And then a final consequence, not certainly not final, but the final one we're going to go over today is higher borrowing costs. So the fundamental rule of credit is that if you are seen as a riskier borrower, then your cost to borrow is higher. So if the U.S. defaults expect interest rates to go up across the economy from credit cards to mortgages, mortgage rates are already sky high right now at about 6.9%. But in the

case of a default, they would skyrocket up to 8.4% by September, according to Zillow. So that would essentially freeze the housing market if you have a mortgage. No one's paying 8.4% on a 30-year mortgage. The thing I think of is poor millennials, again, because they still can't buy homes and like the mortgage rates are going to go up. So again, these are all hypothetical scenarios that if we do default, but while you're seeing those headlines of the debt ceiling, debt ceiling, debt ceiling, these are kind of what's at stake. So hopefully that kind of puts it in perspective for you guys of, yeah, what is going on

with all these negotiations. Okay, let's move on. Today, META woke up to a slap on the wrist from European regulators, and that slap is definitely going to leave a mark. EU regulators fined meta $1.3 billion for illegally storing data from European users on its servers in the U.S. This is the largest privacy fine ever from the EU. And the fine centers on the flow of data between the U.S. and Europe, which the Computer and Communications Industry Association calls the busiest internet route in the world. So if META can bring its data transfer practice back into compliance with GDPR, which is general data, data,

protection regulation, which is that annoying law that pops up every time you try to open a website abroad. Cookies? Do you want cookies? Yeah, exactly. Everyone knows that. Then the fine will be erased. Neil, I'm actually totally on meta's side here because I freaking hate GDPR because it's

just a ridiculous. When you went to Spain, what was it like? Every single website I opened, you get nine questions about cookies. And it's just in the interest of protecting user data privacy, it just becomes so important. annoying because like I don't want to talk about cookies every time. But yeah, this is meta got fined. It's not looking, it's not great for them. No, but it's like 1% of their annual revenue and they're going to appeal and this thing is going to be a lengthy process. But yes, it is the top fine ever given out under GDPR. And the second biggest one was Amazon was fined by Luxembourg, which I didn't even know

had the power to find anyone. Punching above their weight. But it's really, it's actually pretty interesting looking into the backstory of this and it's all about this data sharing agreement between the US and the EU that was invalidated in 2020 because of concerns that U.S. spy agencies could snoop on Europeans' information that was stored in the U.S. So they are, the U.S. and the EU are currently working on another deal to be able to share data back and forth that alleviates the concerns of, you know, U.S. surveillance on Europeans' data stored in the U.S. But that hasn't happened yet. Meta is kind of, and other tech companies are kind of relying on the both sides to be able to figure something out. So they would be in compliance.

here? I think it's so funny how closely this mirrors the exact conversation going around with TikTok in that fact that the U.S. doesn't want U.S. data stored on Chinese data servers. So this is like very similar parallels. And so I think it's just interesting to see it play out. It seems like there is like a de-globalization going on in terms of data flows. Yeah. So it was a wild way. You're looking at like, you look, you look at like physical products to everyone, people during the pandemic, we're talking about like, oh, we need to make, we need to make our own goods on our own shores. And you're kind of seeing the same thing with bits and bites and data as well saying like, okay, we're collecting data on Americans. We need to store it on American soil.

For sure. And then we have some more meta news real quickly. Mark Zuckerberg is copying someone's homework again. A man who directly clone Snapchat stories and TikTok has now set his sites on Twitter. So now, so Twitter or meta is making a Twitter clone where users will be able to use their Instagram logins, and port over all their followers to this standalone text-based app. It will allow you to post stuff that looks exactly like tweets. It gives you 500 characters to post these, like, text-based ideas. I think this is a great idea of meta, especially because it integrates with your existing profile. That's the biggest deal.

I mean, if you go to these Twitter competitors like Blue Sky or Masked on, you have to build up your entire audience from scratch, which is for us with huge. Huge audiences. I don't want to do that. But if you already come with your, you know, if you're an influencer, creator with a huge Instagram following, and you can just port that over to another product, that seems like way more tantalizing and attractive than starting over from scratch.

So this is what he does. He jumps on the bandwagon and just absolutely dominates a new thing. And Reels is doing really well for them. That's their TikTok clone. I would say it's not, he doesn't have 100% hit rate. He tried a substack clone called Bulletin that they shuddered after a couple months and this live audio one that they tried to copy Clubhouse. Hey, you got to throw some darts out there.

He's throwing a lot of darts. This one, we'll see it. They said it could come in June. Yeah, it's coming. So I'm excited for it. All right, let's move on to e-sports, which is not living up to the hype at all. This weekend, the New York Times wrote a story about how the industry is sagging. Organizations are selling teams and skeptical investors are pulling their money as the

sports boom wears off. Everyone is doing some soul searching to figure out what is just going on here. Here's some evidence of the bust right now. Viewership of the 2023 spring season of the biggest U.S. E.S. E. Sports League was down 13% from a year earlier and down 32% from 2021. The Madison Square Garden company, which yes is Madison Square Garden, James Dolan, which paid more than $10 million to buy a majority stake in an e-sports team in 2016, is selling the team. And then the stock price for Phase Klan, which we talked about a month ago, it was our dog of the week one Friday, is going to be delisted by the NASDAQ. And the company said last week it was laying off another 40% of employees after first round of cuts in February.

So the e-sports industry is, at least in the U.S., is not looking great at all. It kind of makes me a little sad because I watched esports, especially back in, this wasn't even a pandemic thing, which was tempting to say, like, oh, everyone was watching it while you were stuck at home. but I remember when like Drake was playing live with Ninja in front of 400,000 people watching. I remember when Buga was a 16 year old who won $3 million in the Fortnite World Cup. This is not English. I know. These are memories I have because e-sports did go through that boom time and everyone was just so excited about it.

But I just truly think it has this uphill battle in terms of entertainment value because in order for games to be fun for the casual player to play, the game developers need to release updates. they need to change the meta, what the most powerful strategies are in order to keep the casual gamer involved. But professionals hate that because it would be like the NBA removing a three point line one season. And Steph Curry would just be like, what the heck, you just destroyed my entire career. This happens in Eastwards all the time with these game updates. So I just think the entire concept of a competitive gaming league just doesn't work because the games

changed so much. So that's my take of why Eastport. They have to appease the amateur gamer and the professional gamer, and that doesn't work in the professional gaming sense. Yeah, it's really difficult to please both at the same time because it is truly a different game. Like me playing Fortnite is not the same as someone with a mouse and keyboard playing Fortnite building a million miles a minute. So, yeah, I just think that there's, on the surface, it seemed like this was the next frontier, but I think there's some fundamental issues with these Eastwoods. I wouldn't write it off, though. I mean, there's these, every, every industry and technology has a boom and bus cycle.

Right. There was a boom. There's a bus now. But maybe it's an opportunity for these companies and the industry to figure out what are sustainable business models and what new avenues to pursue, you know, as they're cutting staff and getting streamlined. So I, like, definitely would not write off e-sports. I know.

And, I mean, video games, like the Zelda game just came out, said 10 million units in the first, in the first three days. So obviously video games are still popular. So you're right. We won't write it off yet. All right, before we jump into the next story, we're going to take a quick break. 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 3-burner gas grill.

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Learn more at Windows.com slash student offer. While supplies last, ends June 30th, terms at AKA.m.m.S. College PC. Neil, our favorite Mediterranean fast casual restaurant is preparing to IPO. That's right. Kava is preparing to go public and release some public financials in preparation for its initial public offering. Two numbers stood out to me, Neil. First, Kava's revenue increased 13% last year, which makes sense because it's absolutely delicious. and I freaking love it.

And two, it's still not profitable. It lost 37 million in 2021 and 59 million in 2022, but it does look like it's on the road to profitability. But Neil, bullish or bearish on Kava IPOing. I am bullish because people love Mediterranean food. They love Mediterranean food. Yes, you're right. You look at, you know, who's the longest living people on the planet?

And it's just, you know, these like random islands in Greece and they smoke cigarettes all day. they just eat Mediterranean food. Not that Kava is, you know, extremely authentic Mediterranean, but I hear so many, like, white people be like, I love hummus. I love hummus. And I'm like, all right, Kaaba, bullish. Um, no, another reason I'm bullish is because I'm bullish on the suburbs. Yeah, as I've written about in the brew and I've talked about here, Sweet Green increased its presence in the suburbs over the pandemic from a third of its entire real estate footprint to 50%. Meanwhile, I just read this morning, Kava has 80% of its, real estate portfolio in the suburbs where people are increasingly living and working.

So, Kava, for, you know, it's a great lunch option. You're bullish on the burbs, which are bullish on... I'm totally bullish on the burbs. I'm bullish on Mediterranean. But it'll be exciting just to have an IPO. I don't remember the last time there was like an exciting IPO. I remember when I was writing for the brew, like there was one every other week. I was like, oh, this is so fun.

Those didn't work out. I know. It's been the dog days ever since. And then I'm also bullish on that. this because right now, Kava only has 263 locations. Chipotle, which is like the gold standard

of the fast casual, over 3,000 locations. So clearly there's a ton of expansion opportunity ahead of Kava. And I also am bullish too because Kava's really good at digital too. 35% of their orders came from

digital. So they are expanding. A lot of these other like fast food restaurants have had to layer on the digital portion. It seems like Kava. Cava, like, already has that kind of figured out. So those are two reasons why I think Cava's going to do really well.

And, yeah, hopefully, again, I'm biased because I eat it two to three times a week. So it's very delicious. You're trying to get someone in Cava's penchant right now. Please. It is very clear. Give me a Cava card. This vast casual space is really kind of boom or bust because the two ends of the spectrum, you have Chipotle, which we talked about, is the Golden Child.

It's up 53% year to date. It's worth nearly $60 billion. It is a giant. Yeah. And then on the other hand, the Kava is always compared to Sweet Green. That has declined, you know, 82% from its IPO. That's probably its comp when you're looking at, looking at actual public offering. You're like, okay, how did Sweet Green do?

Sweet Green's down a lot, and it's worth less than $1 billion right now. Yeah. So we'll see if it's, you know. The Sweet Green hype has weared off a little bit, too. So we'll see if Kava can keep, you know, Kava definitely has, like, a very loyal following. For sure. There you go. All right, let's move to our winners of the weekend.

I will go first. Mine is the real estate broker Kurt Rappaport. And I can't imagine how much he partied this weekend, Mr. Rappaport, because he brokered the sale of a $200 million house in Malibu to Jay-Z and Beyonce. That's the largest ever purchase of a home in California and the second most expensive home sale in the country ever after Ken Griffin's $238 million apartment. here in New York City. I looked and the broker fee in California is 4.92%. So Kurt made basically a million bucks on his purchase and probably a lot more because he represented both sides. Have you seen this house? I am not a fan of it. It looks very, I mean, you wrote in the brew today.

It looks very super villainy because it's very minimalist, very isolated. Concrete. Yeah, very concrete vibes. But I mean, it's got a pool. It's got a great view. Like, they're going to be fine. It's a good house. Apparently this area is called Paradise Cove in Malibu. And it's home to a lot of billionaires. It's called Billionaires Row. Their neighbor, Jay-Z and Beyonce's neighbor is Mark Andreessen, who paid $177 million for a house. There's the co-founder of WhatsApp. And so that's the billionaire's row in Malibu.

And then we also have a billionaire's row here in New York City on 57th Street, which with those three huge skinny skyscrapers. So let's say this podcast does really well. And you can afford a home on either billionaires row in New York City or in Malibu. Which one is going to go in? In one, I get a ton of acreage. I get a great view. I'm definitely going to Malibu.

Although, it is kind of cool to be, like, in the clouds way up there. Like, I mean, it was just cloudy this weekend and, like, the entire upper half of the building. I don't know. You're literally looking down on people, so I could see both ways. So come on, people. Listen. Let's get Neil and I a little apartment up there.

Okay. My winner of the weekend is Michael Block. So, Neil, we both watch the PGA championship this weekend. And while Brooks Kepka, a member of the Saudi-funded Live Tour, winning his fifth major, was a pretty big storyline. He was kind of completely overshadowed by this 46-year-old dad named Michael Block. So Michael Block is a club pro, which even though it has pro in the name, is not as glamorous a life as Royal Macaroy and Justin Thomas, who are teeing it up for big money every week. Club pros are also known as teaching professionals, which means they pass exams in order to be certified to teach, like,

Mr. and Mrs. Johnson and 60-year-olds at the end of the range for 150 bucks an hour. Well, since this is the championship put on by the PGA, PGA teaching pros like Michael Block get a chance to play with the big boys, and boy, did he play well. He finished 15th place overall, beating the number one golfer in the world, John Rom, by six strokes, and netting himself $288,000 in the process. That amount of money would have taken him 1,920,000. lessons at $150 an hour to make. Oh, and he made a hole in one on Sunday. So have yourself a weekend, Mr. Block. It was very fun to watch. And he seemed like just a genuine, I think that is,

was the more of the story too. He played really well, but he just seemed like a regular dude. And every single interview where they were like, how are you feeling? Like, are you playing, you're playing with Rory McElroy tomorrow. And he just started and he's like, you're going to make me cry. You're going to make me cry. That was the sound bite of the weekend as you're going to make me cry because yeah I mean the dude was overwhelmed with just one how well he was playing and two just the support he was getting so just an awesome feel good story that makes all of us normal people feel like hey maybe maybe we have a shot it's never too late for us neal um okay neil i mentioned this story at the top of the show and i'm really excited to talk about it killer whales are attacking boats off the

coast of spain so earlier this month a group of three orcas began to ram a yacht eventually damaging its rudder causing it to sink, and that wasn't the first time this happened. In total, three boats have been sunk by orcas off the Iberian coast since 2020, which is just absolutely terrifying, if you ask me. Neal, are orcas rising up against humanity? What's going on here? So the leading theory, which is really fascinating, this is published in a paper last year, is that there's this female orca named White Gladys suffered this traumatic incident with a boat. They call it a critical moment of agony. It could have been she was trapped in an illegal fishing net or some bad incident with a boat that just like got incepted into her brain and then she just turned against boats completely.

And it would have been, you know, it wasn't isolated to her. That's the crazy part. She taught other adults in their pod to hate boats and then kids do what kids do and imitated them. So now there's just a bunch of orcas, you know, off the Spanish coast that just, you know, go after boats. I would say some of the scientists that were interviewed in a couple of the articles published about this said that this might be a playful thing. And the vast majority of incidents are not harmful at all. They're just kind of, you know, little tug here and there on the rudder. I am not on the scientist's side that this is playful at all because orcas are just so smart. Like we know that they're one of the smartest species outside of humans.

And I think this is tough look for Spain and like the Iberian coast. like, hey, bring your yacht to Spain where it may or may not be attacked and sunk by, like, vengeful killer whales. So I could see it, like, impacting tourism a little bit because, I mean, dang, did this headline kind of like go viral over the weekend where everyone's like, well, pack it up, humanity. Like, we're done here. Wait until they learn to walk. I know. Orcas are too smart for us. They, final fun fact about killer whales, orcas, they live all over the place. They are the most widely distributed mammals.

one of the most widely distributed mammals across the world other than humans and can you guess the other one The first thing that came to mind was bats for some reason it rhymes with bats cats rats rats Rats dang it rats orcas and humans we can live anywhere Triumvirate right there all right let's get into the week ahead preview do this real quick What you can you know pay attention to the week ahead. Rhonda Santis the governor of Florida and Disney arch nemesis is expected to announce his run for president week he's going to take on president or former president Trump and that is going to be quite a site to watch lot of content also in politics yes also in politics turkey's

runoff presidential election will take place on Sunday that is the most consequential election there in a generation for sure tomorrow the streaming service HBO max will just be renamed max mad max it's gonna get a lot of other discovery content due to the merger of those companies so you got HG TV and food network up against succession It'll be interesting to watch. I'm sure people will complain, but I think we talked about this month ago.

I don't think it's going to change anything. In movies, we have Disney's live action adaptation of The Little Mermaid that's going to be released on Friday. And then FastX just came out this past weekend. It did really well. It was the second biggest opening after Super Mario Bros. Vin Diesel must have not been wearing sleeves in it. That's right.

And then in sports, we have NBA NHL playoffs, the NBA conference series. Not interesting. Both are 3-0. and then on Sunday we have the Indianapolis 500 and the French Open will tee off not tee off we'll start without Rafael Nadal who's won 121 out of the 125 matches he's played there which is kind of just we're going to miss them insane to think about and obviously it's Memorial Day weekend it's a three-day weekend and we will have a special show for you on Monday so hope you all I was going to say hope you all have a great

weekend but we still have like five days left yeah but we have one to look forward too. That is our show. Toby and I, we didn't really mention it, but we are wearing the same sweatshirt the first time. YouTube comments are going to roast this for that, but we're twinning. We're ready. You can always email us with questions and comments at morning brew daily at morningbrew.com. Please reach out. I have to give a huge shout out to our entire crew who makes this possible. Bryce Belloff is our producer. Samantha Velas and Raymond Lou are the associate producers. Yuchena Wa Ogu is our technical director. Billy Minino is on audio. Hair and makeup, after they found out we were moving to 6 a.m. recordings, which is understandable.

Devin Emery is our chief content officer and our show is a production of Morning Brew. Great show today, Neil. Let's run it back tomorrow. Yamava Resort and Casino at San Manuel is California's number one entertainment destination for today's superstars. Catch the Jonas Brothers return 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 Yamava. Yama Theta.com, only at Yamaava Resort and Casino, celebrating its 40th anniversary.

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