Is the Inflation Reduction Act Working? & Why Warren Buffett is All In On the US Housing Market

0:00Stocks? ETFs? Or what about mutual funds? Choosing your investments is easier with Fidelity. Our step-by-step experience can help you pick out the right investments for you. Plus, with recurring investments, you can decide how much and how often to invest. Lastly, there's 24-7 help if and when you need it. To find your next investment, head to fidelity.com slash trading. Investing involves risk, including risk of loss. Fidelity Brokerage Services, LLC. Member NYSC SIPC. Good Morning Brew Daily Show. I am Neil Freiman. And I'm Toby Howell. On today's pod, we are celebrating the one-year anniversary of the Inflation Reduction Act, which does just about everything but tackle inflation.

0:40And the investor famous for the big short is back at it again with another big bet against Wall Street. Then we'll check in on the high inflation and higher interest rates in Argentina before ending with a murderous mystery involving dead ex-in-laws and mushrooms in Australia. It's Wednesday, August 16th. Let's ride.

1:05Toby, I got completely roasted by our listeners for saying yesterday that no one drinks twisted tea in our discussion of Duncan's new spiked ice tea line. Apparently, a lot of you love twisted tea, which in hindsight makes a lot of sense because in the sentence before I said it was unpopular, I also said it was by far the biggest player in the spiked ice tea market and Boston Beer Company's most lucrative product. Our inbox is flooded with people saying that it's a huge part of their summers and that in places like Oregon, people will sprint to liquor stores to get special flavors like a red, white, and blue icy pop in July.

1:42So jokes on me. I love when our listeners do this, when they pick up on one small thing that we said and say, wait a second, let's back up here for a second. So I do love it shows that they're listening very closely. It is more fun for me when they do it to you than to me, but thank you listeners. But you said just now that you know that Twisted Tea is popular. You're like, everyone loved it at Marquette. I was kind of smiling to myself and you just wanted this to happen. Yeah. This show moves along at a nice clip, so we can't always dwell on everything you say, but yes, some part of me wanted the Twisted Tea gang to rise up against you and they did.

2:20Well, I'm sorry for offending anyone. I will be more careful with my words in the future. Just because my bubble doesn't drink twisted tea does not mean that it is not popular across the country. OK, let's move on. Today marks one year since President Biden signed the Inflation Reduction Act into law, which is the single biggest piece of climate legislation ever enacted in the U.S. The IRA is not really about tackling inflation, but instead accelerating adoption of clean tech by unlocking historic sums of government cash to grease the wheels of renewable energy projects. In essence, it wants to turn the Rust Belt into the Green Belt.

2:57And the numbers are truly staggering. The IRA provides nearly$400 billion in direct government funding and another$367 billion in loans for environmental projects. It's got subsidies for companies making EV batteries, solar and wind energy equipment, and energy storage technology. There are tax credits for EV buyers, and there's lots of tax help for Americans who want to retrofit their homes to make them greener. The major questions hanging over the IRA one year in is, has it accomplished its goals? And even so, is dangling almost$1 trillion in government help the best way to go about greening our economy?

3:31I think my big takeaway from the IRA one year in is that it was just one of the worst branding exercises that Biden's ever done. He literally said at an event last week in Salt Lake City that, I wish I hadn't called it that because it has less to do with reducing inflation than it does to do with providing for alternatives that generate economic growth, those alternatives being more green focused. And so he literally came out in a minute and said, I really misnamed this thing, mislabeled it. And so in terms of political cachet, which is becoming more and more important as we enter an election year, it's been almost non-existent because a year in, Americans don't really know anything about the Inflation Reduction Act because they asked – a poll recently asked how many people are even aware of it.

4:18And more than seven in ten people said they have heard little or nothing at all about the law. So that's a big whiff for his kind of landmark piece of legislation. They need your marketing genius, Toby. Well, I think it happened during the height of the inflation boom. I think it was short-sighted. Short-sighted, right? Because they were like, OK, everyone's thinking about inflation now. Let's try to use this to show that Biden's doing something around inflation. And there are some measures to try to reduce the budget deficit and try to bring down prices through more production. But this is not about inflation at all.

4:50I think you cannot argue with the results of some of the projects that have been created because of the IRA and companies saying, Yeah, I mean, sure, we'll build a factory if you're giving us billions in aid. There have been$86 billion in private investment since the IRA was passed, 51 new or expanded plants for producing solar panels, 10 new factories for making EV batteries, and more than 100 ,000 clean energy jobs have been created. So if I'm Biden, he's doing a little tour right now, so is Yellen. I'm touting all of these numbers and saying, look, the government is really helping out and spurring private sector investment in these crucial areas to bring down emissions.

5:30Yeah, and one of the drumbeats has been that the law is designed to be private sector led, but then government enabled, which is not a bad kind of - Slogan in your marketing. Yeah, slogan. I like that. They should have said more of that. But then if we want to zoom out a little bit to some of the ripple effects from the IRA internationally, the European Union was looking pretty mad once this law was passed because what it did, it was such a focus on the domestic industry. It kind of axed European climate tech from being used in America. And so the EU was like, first it cheered because finally U.S.

6:08passed some sort of large scale climate legislation. And then they read closer and said, wait, this excludes us. So there is always just some wider effects from even domestic policy when it comes to the U.S. and environmental law. Right. This is something the U.S. hasn't done historically. They've let the free market work its magic. So, you know, maybe the U.S. isn't good at making solar panels. So rely on another country to make it and will import it for cheaper. But this is kind of what's known as like a protectionist economic policy, which is not what the U.S. has historically done. And we're going to provide subsidies for companies to make it on American soil, which is maybe good for us, maybe bad for us.

6:51But it's definitely bad for our trade partners who want to ship us goods. So we'll see how this plays out. It will definitely be judged on how much it reduces climate emissions. But already there is like a renewable energy revolution happening in the U.S. It's crazy to think about because we don't I don't know. It's kind of this frog boiling situation. But there are so many EV batteries getting EV battery plants getting made in places like Tennessee and all across the south. And what this has been really good for is red states. Like 80 percent of all investment is going to Republican districts that also oppose the plan.

7:27Neil, I can't wait to be sitting here in 2024 with you discussing year two of the Inflation Reduction Act and see how that's going. All right, let's move on and head to South America, where some stuff is going down, to say the least. To set the stage here, Argentina has inflation problems. And by inflation problems, I mean Charlie Brown balloon at the Macy's Day parade size inflation problems. Inflation currently sits at a 113 % year over year and is expected to rise another 10 % in August. And in order to try and wrestle that massive number under control, Argentina's central bank hiked its benchmark interest rate by a truly astounding 21 percentage points to 118%.

8:13Yes, America has a 5.5 % interest rate, while Argentina is rocking triple digits. But Neil, everything got turned upside down again this week after Javier Malay, an anti-establishment, ultra-right libertarian candidate, shocked the nation by receiving the largest share of primary votes ahead of the country's general election in October. Neil, this guy is one of a kind. He is wild. I mean, let's just start with his economic policies, which are, as you would say, unconventional. He wants to abolish the central bank and make the U.S. dollar Argentina's official currency. He's said the buying and selling of organs should be treated as just another market.

8:55And he's also said that climate change is a socialist lie. He has welcomed comparisons to former President Trump. And then in his personal life, I mean, it gets even crazier. He used to be a goalkeeper for a second division soccer team. He was in a rock band that covered the Rolling Stones. He was a television pundit, and he has five clone dogs named after conservative economists like Milton Friedman. So this guy, plus he has crazy hair, and he's named like the wig or something. That's his nickname. So he is the most memeable presidential candidate to happen since President Trump. And he has similarly unconventional, unorthodox views about the economy, which is not really assuaging investors there that things will be OK, given they're, you know, they're on the verge of economic crisis right now.

9:41Right. He kind of follows in the footsteps of some other right wing kind of populist Central and South American leaders. I mean, in El Salvador, you have the popularity of President Bukele and then Brazil with Bolsonaro. So there does seem to be like this very kind of tough on crime, very anti-establishment friends and admirers of Trump uprising or wave sweeping through South and Central America. But if we want to zoom out to the macro environment a little bit of what's going on in Argentina's economy, it's kind of staring down at six recession in the last decade. Argentina's government decided to devalue the local currency, which is the peso, by 20 % on Monday.

10:21And that is when a devaluation occurs when the government changes the fixed exchange rate of its currency, usually based against the U.S. dollar. And Argentina said it would hold that exchange rate at 350 pesos to$1 until the election, just kind of in a bid to lend a little bit of stability to this really fragile economy right now. So there's a ton going on ahead of these elections. Yeah, the scare is that they'll tip into hyperinflation. I mean, right now, the largest denomination, peso, bacon, the largest one is worth less than three dollars. So you have Argentinians going to going to dinner with huge sacks of cash to pay.

10:59It's just really not a good situation. And this this primary election led just another bout of a lot of uncertainty into the country. So we will have to pay attention with what happens there. Let's move on to some finance stuff. We are in the thick of 13F season. And if that doesn't mean anything to you, it didn't to me either until I started this job. Full disclosure, the 13F form is a report that large institutional investors like hedge funds need to file with the SEC every quarter. They're pretty cool because you can see which stocks investors are buying and selling. And that tells us what companies or industries these finance bigwigs are bullish and bearish on.

11:37So let's start with probably the best known investor, Warren Buffett. And the big news with him is that Buffett's Berkshire Hathaway is betting big on the housing market. Buffett piled into large U.S. homebuilders Lenar, D.R. Horton and NVR last quarter. And it's an interesting move. Essentially, no one in America wants to sell their house right now because they all locked into a low mortgage rate during the pandemic. And if they sell, they're going to have to move and pay a mortgage rate close to 7 percent. So that's kind of frozen things over in the housing market. Still, home builder stocks have been ripping this year, and each of the stocks that Buffett bought is up at least 30 % in 2023.

12:14It's just helpful to be making a product that is in such short supply as housing is in the U.S. right now. Yeah, it does. On the surface, it felt like a very weird bet from Buffett because according to Fannie Mae's July National Housing Survey, only 18 % of the country thinks it's a good time to buy a home. So when you see that number, you say, why the heck is Warren Buffett doubling down on home building? But then I think his bet boils down to a few things. One, he's either very bullish on a rebound in that America's housing optimism, which I don't actually think he is because it's at 18 % right now, or that he's confident that interest rates will eventually settle down and it will just become a little bit more attractive to buy a home once again.

12:55But then, yeah, you're totally right in the sense that once the economy or as the economy continues to improve and housing inventory stays low, suddenly it's going to be in very high demand new home building. So I think that's generally where his head's at. But it did feel like a weird thing to see Buffett just doubling down on the housing market when confidence is so low from buyers. All right, let's move on to another investor, Michael Burry, the big short guy who became famous for correctly predicting the collapse of the housing market in 2008. He has bet more than$1.6 billion on a Wall Street crash by buying put options in the NASDAQ and the S &P 500.

13:37A lot of people on the internet pay attention to what Michael Burry does because of his famous pedigree in the last financial crisis. So he is putting like 90 % of his portfolio behind shorting the stock market. The only asterisk on that$1.6 billion number is that is the notional value of the bet. The market value, which is what he actually paid for the puts, is likely to be a lot smaller than that$1.6 billion bet. But still, it is interesting to see these two kind of titans of industry making opposing bets. Also, there is one, I already said there's an asterisk, but there's another asterisk, is that technically he may have already sold these options because the filing is from June, The data is listed on June 30th.

14:21So they could be a little out of date at this point. But still, at one point, he did bet against the future of the stock market. So you see you have Buffett on one side, you got Burry on the other. And it makes for a nice narrative. I mean, Buffett's big thing. He always says, always bet on America. That's his slogan. Yeah. Although, don't bet against Michael Burry because I looked at what his returns are. He has recorded an annualized return of 56 % over the last three years. So he still has his fastball. He wasn't a one-hit wonder by any stretch of imagination. So don't bet against Burry either.

14:51All right, Neil, before we jump into our next story, we're gonna take a quick break. In America, half of every dollar spent on brand medicines goes to entities who don't make them. While middlemen like PBMs and 340B hospitals drive up costs, Biopharma is investing$500 billion in new infrastructure and manufacturing here at home and helping patients buy medicines directly at lower prices. Tell Washington to end middleman markups and put American patients first. Visit phrma.org slash middleman. Close your eyes, exhale, feel your body relax, and let go of whatever you're carrying today. Well, I'm letting go of the worry that I wouldn't get my new contacts in time for this class.

15:39I got them delivered free from 1-800-CONTACTS. Oh my gosh, they're so fast. And breathe. Oh, sorry. I almost couldn't breathe when I saw the discount they gave me on my first order. Oh, sorry. Namaste. Visit 1-800-CONTACTS.com today to save on your first order. 1-800-CONTACTS All right, Neil, we see a lot of mergers poking around the business news world, but this week, two in particular caught our eye. First up, we have the famous gum brand Bazooka, which sold yesterday to private equity brand Apex Partners for around$700 million. It represents a pretty nice haul for the sellers who include former Disney CEO Michael Eisner.

16:21I say that because the current owner, Madison Dearborn, agreed to take the company public via SPAC at a$1.3 billion valuation in 2021. But that was when Topps trading cards was included in the deal. See, Bazooka was actually a division of Topps before Topps was acquired by Fanatics for$500 million. It's a little confusing. But Bazooka remained in Madison Dearborn's hands, and now the confectionery business alone is worth$700 million. So if we do the math, Topps sold for$500 million and Bazooka for$700 million. That's$1.2 billion right there, a little less than the$1.3 billion valuation it was going to go public at.

16:59But given the way backs have performed i think they actually came out ahead in this in terms of uh yeah and eisner paid 385 million dollars for both tops and bazooka which i didn't know that bazooka was a part of tops but both american icons right as baseball trading cards and gum wrapped in comics right it used to be you would buy baseball cards and get a little pack of gum and now these i mean huge huge brands at this point although it is interesting because apparently bazooka the namesake bazooka gum only accounts around two percent of bazooka's annual sales they also make things like ring pop push pops juicy drop and baby bottle pops so any anything in like the i don't know what to call this candy candy non non-chocolate confectionary right but also you are like sucking on them so it is whatever whatever that category is called but yes that is the traditional candy uh category i mean i'm a big ring pop guy i they push like 40 million of those a year it's amazing how big like 700 million is just a number that is is way bigger than i would have ever expected to be associated well i think in this food industry right now you either have to go like all in on the healthy thing or just go all in on the non-healthy and embrace that i think that's what crispy cream does levain bakery like those those companies print money and it's just because they're saying we're not going to even try to be healthy.

18:23We know you want to indulge at times. We know you want a ring pop. We know you want to chew some super sugary gum. So we're going to go in on that. And it's worth$700 million. Yeah. Okay, Neil, let's get into our second acquisition that I want to highlight, and that's the underwear brand Parade, which sold to a licensee of Fruit of the Loom for an undisclosed amount. Now, Parade is kind of like the underwear brand for Gen Z in that it's very digitally native. You see tons of their ads on Instagram. But also in the way it's positioned itself as kind of an anti-Victoria's Secret. It's a lot more welcoming to different body types and a lot more affordable.

18:58So, Neil, what do you think about this deal? Okay. Did anything strike you as a little weird about this? I don't know. Tell me. Well, the founder, who is 26-year-old Columbia Dropout, who's Kami Tellez, she is not going to be a part of the new company. They kind of dumped her. Yeah, they're pushing her. So why? And this company was valued last at$200 million per aid in three years. So it's a pretty good growth story, but why would you not keep the founder on who grew this company? And she said in a Slack message that she's not making even a single dollar in the sale of Parade. I don't think it's so much anything to do with her or the company.

19:35I do think that it's just more, it shows that the DTC boom, the winter is still upon us because venture capital money slowed down and they're just not as attractive businesses anymore because they can't just burn money in the sake of growth. So to me, it just showcased that we're in a DTC winter. And that will so much. Yeah, I guess my takeaway is that they couldn't find any more funding and they had to sell. I don't know whether it is at a discount to the 200 million dollars. But in an email to employees, the founder said, I push for this deal so that parade would have a future and to protect all of you and ensure your positions.

20:09That sounds like it was not going to be going, you know, super successful going forward if this deal did not take place. So I don't know whether this is, I mean, obviously this is a huge success story for a DTC brand that started online and is now kind of making its way into brick and mortar and Target like that. But for some reason, I was just thinking this, like a lot of stuff is a little weird with this. Yeah, it was a bit of a - Why would you not keep on the founder? I guess, yeah. I mean, we'll, maybe reports will emerge, but the other thing is, yeah, I just think that you need the weight of a big brand behind you these days.

20:44So it could just have been a distribution play. Either way, it seems like they follow the modern apparel playbook and what's the trends in underwear and are doing really well. All right. Let's move on to it seems we can't go a single year without a major traffic jam at a canal, Toby. The 2023 edition is at the Panama Canal, where a severe drought has shrunk water levels to the point where the Canal Authority made the decision to limit the number of ships passing through. As we all learn from the ever given getting stuck in the Suez Canal, clogged waterways, especially one as important as the Panama Canal, is no good for supply chains.

21:21The Panama Canal handles more than 3 % of world trade by volume and is especially important for retailers on the East Coast receiving electronics and clothing from China. It's also a crucial artery for South American fruit and veg heading to West Coast of Europe. And those products can't hang out in ships for that long without going bad. except bananas. They don't taste good until they've had a brown coating. I do not like unripe bananas. Anyway, Google Maps is showing a lot of red in the entrance to the canal right now. As of Friday, there are 264 ships waiting to cross, a 16 % increase compared to last year.

21:57I think that we're almost dodging a bullet right now because one, it's been kind of like the slower summer season. And then also just demand for exported goods in general has been down, especially coming in from China. So even though we're seeing a shipping buildup, we're not in the thick of shipping season. So it could get really ugly, though, because it is coming. Black Friday is coming up. Christmas season, holiday shopping season is around the corner. So I do think right now we are just now hearing about this story, but it could become a much, much larger story, especially if the dry season.

22:30Yeah, this is the wet season. This is the wet season, and it's so dry right now. Yeah. The Panama Canal is just kind of cool to nerd out on and look into the engineering things. It is the only maritime route that is dependent on freshwater, which is interesting. The Suez Canal is just, you know, saltwater. And you need more than 50 million gallons of water for each ship to cross. There's obviously this huge system of interlocking locks where ships go in and then, you know, the water level rises to another level. And then it's kind of like this broken down elevator escalator. And it's just like an engineering marvel that was built 110 years ago.

23:05It takes eight hours to go through, but still it saves weeks. Imagine you're going from L.A. or San Francisco to New York. You'd have to go all the way around South America, and now you can just kind of crash through Panama. It saves 22 days. So, yeah, even though it takes eight hours to get through and you might have to wait for a little bit, if you're waiting less than 21 days and you're going to end up saving time, Panama Canal is goaded. I do love nerding out. Also, final fact about Panama. It is the only country where you can watch the sun rise in the Pacific and set in the Atlantic or technically the Caribbean Sea because of the way the isthmus goes north at that little juncture.

23:43So very fun fact. I think it was on a Snapple can one day. We love Twisted Tea and we love Snapple facts as well. All right, Neil. We have an absolutely wild story to finish the pod today. It reads like we're beginning a true crime podcast, to be honest. Back in July, an Australian woman had two sets of couples, including her ex-husband's parents, over for a dinner party where she served them beef wellington. But then less than a week later, three of the four guests ended up dead and one was in the hospital in critical condition, while the host of the gathering remained mysteriously fine. So police suspect that the guests had likely eaten a death cap mushroom, one of the deadliest species on earth.

24:23The host defended herself saying she bought normal button mushrooms from a local supermarket chain and some dried ones from an Asian grocery store. But the Australian Mushroom Growers Association has pushed back on that narrative saying that death caps only grow in the wild so she couldn't have bought them at any grocery store. So Neil, details are still emerging from this case that we'll get into in a bit. But what did you make of this mushroom mystery? this I you mentioned it like if a podcast does not start about this and you know a couple days then I will be very surprised it sparked a huge media frenzy in Australia I mean there is all the elements of just this thriller where it's a small town and everyone knows each other and you have a woman that you know fed them freaking poisonous mushrooms potentially is denying it There's an estranged husband in the mix that fell mysteriously ill last year.

25:17So this is kind of all the ingredients for something that is going to spark this immediate firestorm over there. And, you know, all of the police and she is saying, like, leave us alone. Journalists stop calling. But you can't you know, you as a person, you just can't help but be interested in trying to solve this mystery. The sensationalist detail that recently emerged is that she amended one of her previous statements that saying that she actually had thrown out a food dehydrator to a dump right after she served them lunch. And that is because her ex-husband text her, is that what you used to poison them?

25:54And so her narrative is that she panicked and said, oh my gosh, they might take my kids away if like they find this food dehydrator. dehydrator so she threw it away in a dump but a lot of people are using that as like a detail to uh say that she is guilty but yeah neil just out of curiosity and since this is a business podcast how big do you think the global mushroom market is according to a report i found not expecting i know the business i was just curious like how many mushrooms are selling so in in terms of billions how big do you think it is um i'll say i'm gonna go out so if an underwear brand is valued at 200 million.