Wall Street Brings Back Bigger Bonuses & Trouble in Mega-City Neom Paradise?

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0:29Good Morning Brew Daily Show. I'm Neil Freiman. And I'm Toby Howell. Today, now's a good time to get back in touch with your friends in finance. They're about to be rolling in end-of-year bonuses. Ben, Saudi Arabia's megacity in the desert, Neom, just lost its CEO and could be in trouble. It's Wednesday, November 13th. Let's ride.

0:53I've got some really exciting news to share. It's a project a bunch of us have been working on for months. Morning Brew is releasing a book, a crossword puzzle book, in fact. As brew readers know, several days of the week, we publish a crossword at the end of our daily newsletter, and it's consistently among the most popular pieces of content anywhere across the company. We've been blessed to have two crossword constructors, Jack and Mary, who make these fun, inventive puzzles you can't find anywhere else. So we decided to compile 101 of those crosswords, along with some never-before-seen ones, into a physical book.

1:29If you have a crossword lover in your family, I can't think of a better gift for the holidays. I'm gonna buy 10 myself for all the puzzlers in my life. This book is awesome. One thing you didn't call out is that, Neil, you are the editor of this book. And one fun feature is that you did every puzzle in the book. I can attest, I saw you scribbling away and recording your time. So there is a little thing on each page that shows Neil's time. So if you're competitive and you wanna see if your crossword medal can stand up to Neil's Crossword medal, try and beat them. If you are competitive and you want to get in on this and take on Neil, you can pre-order the book at shop.morningbrew.com.

2:07Again, the holidays are coming up. This is such an easy gift. So take on Neil and check out shop.morningbrew.com to check out the Morning Brew Crossword book. Now a word from our sponsor, Sage. Not the herb, but the platform built for CFOs to make your life easier. Neil, every once in a while, some technology comes around that transforms an industry. The iPhone from Apple, the Model 3 from Tesla, the beefy seven-layer burrito from Taco Bell. There are disruptors all around us. And Sage is that force in the finance world. If you are a CFO, you need to be taking advantage of technology's transformative impact on finance.

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3:10When did making plans get this complicated? It's time to streamline with WhatsApp, the secure messaging app that brings the whole group together. Use polls to settle dinner plans. Send event invites and pin messages so no one forgets mom's 60th. And never miss a meme or milestone. All protected with end-to-end encryption. It's time for WhatsApp. Message privately with everyone. Learn more at whatsapp.com. Like a beautiful sourdough loaf in the proving drawer, bonuses on Wall Street are set to rise across the industry for the first time since 2021. Investment bankers, traders, and wealth managers, basically anyone who might rock a rollie and a Patagonia vest to work, all had above average years thanks to an increase in corporate dealmaking and a stock market run-up.

3:58According to an analysis by Johnson Associates, every single business area is expected to see pay jumps this year except for real estate investing and retail and commercial banking. Now bonuses are still not back to the frenzied heights of 2021 when deal volume exploded, SPACs became a thing, and companies were going public left and right. But it's clear that Wall Street is emerging from the muted spell over the past two years where activity and bonuses actually fell. The star of this year's show is debt underwriters, the bankers who work on those deals where corporations need to refinance or raise new debt.

4:31It may not be the sexiest role on Wall Street, but this year it will be the most lucrative. Debt underwriters are expected to collect bonuses that are anywhere from 25 % to 35 % higher than last year. Big picture, 2024 bonuses are set to rise for nearly every subset of the finance industry, making it the second biggest end of year windfall for bankers in the last five years and easing interest rates and a thawing M &A market mean that 2025 could be even bigger. Yeah, we're coming off of a weird time for investment bankers. The last two years were kind of muted. There wasn't a lot of things going on.

5:07The IPO market got very clogged up. We weren't seeing any of these big M &A deals. But as the interest rates have started to thaw, you have started to see more of these mergers popping up. I mean, some that we've talked about on the show are the pending merger between Kelenova's snack business and its sale to Mars, which is a$36 billion deal. We've talked about the private credit market as well. Boeing just raised a huge amount of debt to try to pull itself out of its nosedive. That is something that Bank of America, Citigroup, JP Morgan, Wells Fargo, all these big investment banks are getting in on and taking fees from.

5:43So we are starting to see a thawing. We're starting to see more of these companies being more active, really, across M &A, across IPO market, and across just the private credit market as well. So that is why you're seeing some of these increase in bonuses after two years of it not increasing and actually going down. No, I mean, but if that Mars deal comes to pass. That's so much money for banks. Goldman Sachs is said to make$90 million on that deal if it should happen. So that's how much the M &A market means to these banks. Let's talk about just the amount of bonuses that these Wall Streeters get because it is a large chunk of their pay.

6:21The average bonus last year on Wall Street was$176 ,500. And the average Wall Street salary total was$471 ,370. That's nearly five times the average of the New Yorker's average salary. But you can see that's like a pretty big chunk. So it is a big deal when these end-of-year bonuses come through. And a lot of what happens on Wall Street drives the larger New York economy as well. Right. Let's talk about that because I can hear some people rolling their eyes right now saying like, oh, the world's tiniest violins bonuses were down the last two years. But it does impact New York City and New York State's economy as a whole.

7:01The industry accounted for around$28 billion in state tax revenue, which is over a quarter of the state's entire collections last year. And then if you zoom in on the city level, it accounted for$5.4 billion in city tax revenue. So as bonuses go, if they go down, that's less tax revenue for the city, which less tax revenue for them to spend on public works and the transportation authority and all sorts of things. It does filter down through the economy. So even though no one is that sad if bonuses are going from the six-figure range to the lower six-figure range, it still does have broader impacts.

7:36And going forward, I think there's a lot of optimism around the banking sector at the end of this year and next year as well. We've talked about interest rates going down. Anytime there's stock market volatility is also good for their trading divisions. It looks like The IPO market, which has been frozen over for the past two years, is starting to get going again. We talked about M &A as well, and that's been reflected in the stock prices at these banks. I mean, there's five big Wall Street banks, JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley. All of those share prices have increased by 35 % or more over the last year, And they've only skyrocketed since the election last Tuesday and optimism that there could be more deregulation around the financial sector.

8:22The only ugly stepchild that we should mention, I mentioned it in the intro to this story, but retail and commercial bankers are expected to see smaller end of year bonuses. That's because in the higher rate atmosphere of the last couple of years, loan demand has just really been weaker. And then commercial real estate has just been an absolute disaster recently. The office sector has just been continuing to slub. People haven't returned to office in the same amount since pre-COVID day. So that's why bonuses are flat on the year. So there are still some weak points, but they are kind of what you'd expect.

8:56Commercial office real estate has been just a tough, tough business to be in. The manufacturing conglomerate Honeywell is like LeBron James on the Lakers, an aging superstar who represents the last holdout of a bygone era. But its time may be running out, and it won't be J.J. Reddick putting it out to pasture. Yesterday, activist investor Elliott Management said it has built a giant$5 billion stake in Honeywell and is urging the sprawling company to split up into two distinct businesses. It's the biggest single bet ever by Elliott, which has also taken on corporate giants like Southwest Airlines and Starbucks by acquiring a boatload of shares and pushing for changes.

9:34Honeywell might be the biggest company you interact with on a daily basis, but never really think about. Valued at$150 billion, it makes everything from airplane cockpits to tools for warehouses to home thermostats. And that might be the problem. Elliott thinks this mashup of disparate businesses, the hallmark of the conglomerate model, is inefficient and weighing down the share price. So it wants to split it into two separate companies, the aerospace division and automation. If it succeeds in forcing a breakup of Honeywell, it could mean the end of one of the few American conglomerates left standing.

10:07Yeah, the writing has been on the wall for conglomerates for years now. I mean, one of the most famous ones, GE, which was one of the biggest companies in the world in the 80s and 90s, is now broken up into two separate businesses. Three. Three separate businesses. The thinking behind these splits is that the belief is that bloat drags down performance. It used to be conglomerates could combine back offices and just increase efficiencies that way. But now investors are increasingly wanting you to shave off these businesses, become a little bit more focused, and they think that's the pathway to better return.

10:40So GE has split up. Johnson & Johnson has split up. Kellogg's. Kellogg's. You can go down the line. What used to be the era of conglomerates is now becoming the era of specialized companies. Right. And let's talk a little bit about what's happening at Honeywell specifically. specifically, Elliott says that their share price has lagged. It's risen 12 % since the start of the year compared to the S &P's 26 % growth. It has this aerospace business, which drives 40 % of the revenue. That's growing really fast. And then it has this automation business where they provide tools to warehouses and buildings.

11:15And that has been lagging. So it thinks that that section has been a drag on the overall share price. So it says, why don't we follow the path of the other conglomerates that have broken up. GE has unlocked$200 billion in shareholder value since it's split up. Let's get more focused. Let's get more streamlined. And that's its argument. And it's saying that there's a lot of examples of conglomerates that have broken up in the last five years to point to and saying this is a good idea. I also found a conglomerate that does work, though. Eaton is an industrial conglomerate that does compete on a lot of the same industries that Honeywell does.

11:49It has done very well since 2016. It's up 400 percent compared to Honeywell's more muted 78 % growth. And the way that it did that is via planting and pruning, as this Bloomberg article described it. They sold businesses valued at$5 billion that had annual sales growth of 2.5%, profit margins of 12%. They replaced those businesses with acquisitions worth$7 billion, annual sales growth of 7 % and 27 % margins. That's the planting. The other part was the pruning. So you do have to be very cognizant of the companies you're bringing into your portfolio and the companies that maybe you're offloading as well.

12:25So they kind of do work, but you need to treat them like a garden. You can't let one business kind of sprawl over and susume other businesses, but you also can't let the underperforming businesses kind of take away nutrients and oxygen from the good businesses. So I do think there is a world where conglomerates can work, but there are plenty of examples of instances where breaking them up does lead to better shareholder growth. Would you say Amazon is a conglomerate? I mean, I don't know because they They don't do a ton of M &A. They do everything from AWS, cloud services, to automated driving and e-commerce.

13:00There's very disparate businesses. It kind of has the whole – and it has a movie division and a TV division. It's very much the hallmark of a modern-day conglomerate. I guess they just don't – they're not as active in the M &A space. Like they don't buy that many companies. Most of it – yeah, like AWS is homegrown. maybe someone who works at Amazon tell us if you think that you self-identify as a conglomerate. There is trouble in paradise if your version of paradise is a megacity in the desert. Neom, the futuristic project currently under construction in the middle of the Saudi Arabian desert, lost its CEO Nadmi al-Nassar yesterday in a surprise exit, according to a report from the Wall Street Journal.

13:39While the report didn't cite a specific reason for his departure, Neom has been running into delays and cost overruns for years now. It turns out that it is really freaking hard to build a giant futuristic city in the desert. Saudi Crown Pins Mohammed bin Salman is the brainchild behind turning barren sand into the world's largest construction project. Neom was meant to be anchored by two mirrored skyscrapers dubbed The Line, stretching 106 miles complete with hidden trains, mountain ski resorts, and 9 million residents. but the project has repeatedly been downside from that 100-mile vision, first to 10 miles and later to just one and a half miles in length, which is still the biggest building in the world.

14:21But Nasser is now out, and the future of the project is looking a little shaky, Neil. Yeah, there's been a lot of warning signs that this project was running into many delays, engineering challenges, and I guess that's what comes with trying to build a megacity on a piece of land the size of Massachusetts. These guys have bragged about how big their construction project won. Recently, an official said that they currently are using one fifth of all of the steel produced in the world. So something of this size, it's hard to actually pull off. As we're seeing, there's been a bunch of executive departures recently, as well as, you know, capped off by by the CEO, the CEO leaving yesterday.

15:02But clearly all is not well in Neom. And it comes at a very critical time because Saudi Arabia is spending over a trillion dollars, not just on Neom, but on all these other initiatives to transform its economy away from fossil fuels and oil and natural gas into a modern economy that relies on things like entertainment and tech and other forms of innovation. So this is and this is the centerpiece of the plan. So if this doesn't go well, then the entire transformation is certainly on rocky footing. Part of the issue is exactly what you said. the price tag has just gone exponential. In 2017, when this project was first announced, they slapped a$500 billion price tag on it.

15:40The cost of the line alone, which is just one part of the project, is probably going to be well over$2 trillion based on estimates. And Saudi Arabia thought that they could fund most of this on their own, but they also expected foreign money to come in and help out with some of the costs. That foreign money has really not shown up very well because it is extremely risky to put money into development that is literally being constructed in the desert. And so that is the issue that Saudi Arabia is looking at kind of their checkbook and saying, wait a second, even we can't afford this right now. So maybe that is one of the reasons too why some of the project is facing these headwinds.

16:16Up next, let's talk Amazon smart glasses.

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16:49Lowe's knows how to help make your home holiday ready for less. Get Select Style Selections Vinyl Flooring for just$1.99 per square foot and have it installed before the festivities begin. Our team can help you every step of the way. See a Lowe's Red Vest Associate or visit lowes.com slash holiday install to get started. Lowe's. We help you save. Basic install only. Date restrictions apply. Subject to availability. Install by independent contractors. See Associate for details. Contiguous U.S. only. Amazon might have figured out a way to get you your packages even faster. According to Reuters, the company is working on a project that would equip its delivery drivers with smart glasses that more easily guide them right to your door.

17:33The glasses would contain a small embedded screen that provide drivers with turn-by-turn navigation, helping them determine things like which direction to go after getting off an elevator and even avoiding the belligerent dog in your neighborhood. Amazon hopes that the high-tech eyewear could shave seconds off delivery times. But when you're doing as much volume as Amazon, drivers visit more than 100 customers per shift. Those seconds can add up quickly. And Amazon doesn't need any glasses to see the competition. Its biggest rival, Walmart, has been beefing up its delivery arm, cutting prices and offering more incentives to delivery drivers ahead of the holiday shopping season.

18:10Toby, these glasses appear to be years out still, if they get used at all. But it's another interesting use case for what appears to be a rapidly growing category. You can roll your eyes a little bit about Amazon equipping their delivery drivers with like these Jarvis-esque glasses that are giving you turn-by-turn navigation. But I read some articles written by former delivery drivers, and they said one of the worst parts of the job is you walk into a complex, you can't find the elevator. It's like a labyrinth in front of you. So having those turn-by-turn navigation would be very helpful. That being said, there are a lot of issues and challenges with doing that.

18:44mapping the internal hallways or the streets in front of residences is very difficult. It's not like Google Maps where you can just drive a car down and get street view. You have to know the internal intricacies of actual building complexes. So that is one aspect that has been challenging. Plus, they're just running into the same issues that a lot of these glasses manufacturers run into. One is battery life. Trying to get glasses to last an entire eight-hour shift is an issue. then also they could just be heavy and ugly, which is something drivers don't wanna deal with either. And what Amazon is trying to solve is what's known as this last mile of delivery.

19:21Even though it's the last mile, it accounts for half of all the costs associated with delivery. Just sending something on a truck across a highway to a warehouse, super easy, super cheap, but getting it from that warehouse to someone's door, extremely expensive, extremely time incentive. So if they can solve that and really shave off seconds, then that can really boost their business. And they're facing definitely intense competition from Walmart. But let's talk about the glasses segment in general, because Amazon, you said there's a lot of technical challenges involved in this, but it seems like pretty much every big tech company is throwing their hat in the ring with this.

19:58Probably the most successful one is Meta with their Meta Ray-Ban. They sell it for about$300. And every single earnings call, Zuck is talking about how much they're selling. That has been hugely successful. Amazon does have smart glasses, which you wouldn't know about because they don't sell. They sold, they called Echo Frames. And I guess this is what these glasses would be based on, those particular frames. But they sell less than 10 ,000 of them. Apple is apparently going to try to introduce smart glasses as well. Snap also has some. I would say Snap and Meta are the leaders and these other ones are all playing catch up.

20:32But Amazon's in an interesting place because it's doing it in the enterprise market for its workers and not necessarily for its consumers because consumers don't want it at this moment. I had no idea that Amazon Echo Frames were a thing at all, but I do think it is interesting to see the different explorations, the different use cases for smart glasses. Meta clearly sees it as, one, a tool for capturing content. It has a camera that you can film what you're seeing in front of you, but also they have tools to interact with the world around you. They embedded it with their AI so you can ask Meta, like, what am I looking at right now?

21:03But that enterprise use case, you haven't seen from a ton of companies. So I do think Amazon solving, they just want to solve that last mile of delivery. Like it's everyone is trying it. They've tried, they've thrown drones at it. They've thrown autonomous vehicles at it. What you need is just a quicker way to do it. So I do think that they will invest a decent amount of resources into trying to bring this to reality because the upside is just so much. Well, I'll tell you where you've seen these enterprise use cases before and it's where smart glasses go to die because when they don't work for the consumer market, all these companies pivot them to enterprise and trying to sell them to companies.

21:39I mean, if you think of things like Google Glass, Magic Leaf, Microsoft HoloLens, all of those tried to be consumer-facing products. And when that didn't work out, they said, okay, we'll sell them to companies. And so those things you don't hear about anymore because they are not viable businesses. So Amazon's starting with enterprise. They always do that, though. That's their bread and butter. So we'll see if Amazon can do it. But maybe in a few years, you'll see your delivery driver being all bespeckled. and looking like a cyborg a little bit. All right, let's spread to the finish with some final headlines.

22:11First, it was a meme. Then it was a cryptocurrency. Now it's an unofficial government program. Yesterday, President-elect Trump announced the creation of DOGE, the Department of Government Efficiency, which will be led by Elon Musk and biotech entrepreneur Vivek Ramaswamy. The goal of DOGE, according to Trump, is to dismantle government bureaucracy slash excess regulations, cut wasteful expenditures, and restructure federal agencies. Just to be clear, this is not an official government department, and Trump said Doge would operate and provide advice from outside of the government. Toby, this has been a project pushed by Musk for months, especially the name.

22:49It points to his influence with the new administration. It really does. Dogecoin, which has nothing to do with this Department of Government Efficiency other than sharing the same acronym name, surged 20 % to 30 % after the news. As of this morning, Dogecoin has a market cap of$55 billion. Ford has a market cap of$44 billion. So yes, not yet clear if this will exist within the federal government or outside. An official government agency can only be created with an act of Congress. So it does look like it will be outside. But just a funny timeline that we live in that a cryptocurrency named after a dog is surging because a organization was named a similar name.