What’s A.I. Doing to Our Energy Bills?

0:10Hello and welcome to Slate Money, your guide to the business and finance news of the week. I'm Felix Salmon of Bloomberg. I'm here with Emily Peck of Axios.

0:20Felix Salmon: Hello. And Elizabeth Spiers of the New York Times. Hello. And we have news. It is not a slow summer week. It is all manner of stuff going on because there's a housing bill that got passed, and we're going to talk about that. There is an executive order by the governor of New York banning data centers, data center construction. We're going to talk about that. There is a massive arbitrage in the price of SK Hynix shares, depending on whether they're in New York or Seoul. We're going to talk about that. We have a Slate Plus segment on bank earnings, which is actually, weirdly, also a Slate Plus segment on Freedom Gas.

0:57So you should be a Slate Plus member to listen to that. It's a fun show. Stay tuned. It's all coming up on Slate Money.

1:34We'll see you next time. Thank you.

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2:22Felix Salmon: Slate Money is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day. But what policy changes should investors be watching? Listen to Washington Wise, an original podcast for investors from Charles Schwab, to hear the stories making news in Washington right now. Host Mike Townsend, Charles Schwab's Managing Director for Legislative and Regulatory Affairs, takes a nonpartisan look at the stories that matter most to investors, including policy initiatives for retirement savings, taxes and trade, inflation concerns, the Federal Reserve, and how regulatory developments can affect companies, sectors, and even the entire market.

3:04Felix Salmon: Mike and his guests offer their perspective on how policy changes could affect what you do with your portfolio. Download the latest episode and follow at schwab.com slash Washington Wise or wherever you listen. So let's start with data centers because Because my home state governor, who's also both of your home state governors, because we all three live in New York State, just signed a bill into law saying that no data centers can be built in New York State for the next year. Is that correct, Emily? You're looking skeptical. Was it a bill? No, it's an executive order. Oh, sorry. My bad. She just signed an executive order.

3:45She didn't even need the New York State Assembly to do this. She just unilaterally banned data center construction in New York State for the next year. And this is one of the few things that a politician can do these days that is popular among both Democrats and Republicans. It has bipartisan appeal because the electricity bill is too damn high. And we're all blaming data centers for the fact that our electricity bill has gone up. and therefore if we ban data centers, we can fight back at Sam Altman.

4:20Elizabeth Spiers: I'm going to push back on you a little there. I'm going to push back on you a little there. First of all, it's a moratorium of up to one year while a regulatory framework is developed. And this kind of stuff that they're looking to do is pretty reasonable. They want to assess the data center energy demand, water and use quality, air quality, and so on. And also they want some community buy-in, which if you are a politician in the current environment, when 70 % of people heavily oppose data centers, that's just a common sense thing to do. Even if you're a Republican, like you understand that this is...

4:52Right, this is what I would say. I mean, totally, this is electorally popular. And in a democracy, things happen that are popular.

4:59Elizabeth Spiers: It's also common sense, though. Wouldn't you want to understand the environmental and cost impacts before you issue regulatory permits? There's a business case for doing it, too. You're not issuing permits without fully understanding the cost in addition to the benefits of having them. So, yeah, like environmental review is one of those things that sounds perfectly reasonable, but is generally used in the real world as a way of stopping things from happening. It's very sort of NIMBY coded in its own way. I'm not saying that the environment doesn't matter, But it's also not as though environmental review just didn't exist here on two, you know?

5:40Felix Salmon: I think this is beyond environmental review. I listened to Governor Hochul on the Odd Lots podcast this morning. She talked about basically if these big data centers come in, they have to find a way to get electricity. It's not an automatic green flag for them to just use electricity that's currently available. Like they need to have a plan to either help bring in their own supply or some kind of concessions, some kind of pay for so the community's electric costs don't go up. Because that's like the top concern.

6:10Elizabeth Spiers: Yeah, we don't want it to strain the grid, especially whenever New York needs more investment in, you know, reinforcing what we already have. Right. So this is the big picture, which is that the grid expands constantly but slowly. And it is normally, you know, roughly just a tiny bit bigger than peak demand. And then as long as that's the case, everything is happy. What has happened with the advent of data centers is that demand has risen much more quickly than we can remember in recent decades. So there's been a much faster increase in demand than there has been in supply. You can't increase supply that quickly.

6:49And so the grids everywhere are strained. And that is causing electricity bills to rise. and I am totally aligned with Governor Hochul in this idea that if you want to build a data center, you don't want to just plug that into the mains, you know, and plug it into the grid. What's great is if you can be like, you know, I'm going to recommission a nuclear power plant. We have talked about doing this in New York State. It is going to power my data center. It's not even going to be connected to the grid. It's just going to be like a little off-the-grid combo of data center and power plant, and they can feed each other and the rest of us are unaffected and it shouldn't affect electricity bills.

7:28But ultimately, what it does do is it increases the amount of electricity being produced in the state. And that's a good thing because we want more power and especially we want more green power, which nuclear is. So that part of can you please not build data centers on the expectation you can just plug them into the grid and get all the electricity you need. I think that is eminently sensible. Yeah.

7:50Felix Salmon: And also another thing that I think maybe is getting lost, data centers have enormous power demands that's pushing up electricity prices like everywhere in the country. And data centers are kind of annoying because they don't employ that many people. Hochul made this point. Everyone's made this point. Like New York State has a deal with Micron to come here. But the idea there is like thousands of jobs will come too. But with data centers, the jobs are like construction jobs. And once the things are up and running, they're just sucking down electricity and they're not paying back any money to very many employees, whatever.

8:21Felix Salmon: So we know that. But even before this AI boom we're seeing now and the data center construction boom we're seeing now, we had an electricity shortfall in the United States. I did a What Next TBD a couple of years ago about problems with the overall grid in the US, which is sort of like aging. It's not optimized. It could be greener. There's all kinds of problems going into this. So I don't know, maybe there's a bright side here that because there's so much data center driven demand and so many complaints that like maybe we'll see some grid modernization and greening despite the white house best efforts right now even though they tried to stop this wind farms the offshore wind farms other projects like they they appear to be still moving forward because of this issue like because the demand is so great yeah and one of the things i just want to underline here is that yes precisely because the grid was already kind of stretch before this data center thing happened, the amount of marginal extra power demand that you need from data centers in order to send prices up a lot is actually quite low.

9:27Data centers are still not consuming a particularly large proportion of all electricity produced in the country. But you only need them to consume a small extra amount of electricity in the grand scheme of things in order for their effect on prices to be enormous. because once you reach 100 % of capacity, then things start breaking and prices have to go up a lot in order to persuade various other manufacturers or whoever to use less because that's the only thing you can do. You need prices to rise so much that someone somewhere uses less electricity.

10:02Felix Salmon: Supply and demand is so fun.

10:04Elizabeth Spiers: I mean, to that point, just to put some numbers behind that, PJM is estimating that prices are going to be up. They're going to add$16.4 billion in costs to rate payers based on what an auction just, they just paid$325 per megawatt for electricity in an auction. And that's up from - Per megawatt day, not per megawatt. Yeah, megawatt day. Up from$28.92 a couple of years ago. And so they're estimating that the increase for next year for rate payers will be$16.4 billion total. And that does include industrial rate payers too. But data centers account for 6.3 billion of that. Right. And remember, these are increases.

10:45These are, you know, increases over and above the large amounts of spending. And they're, you know, distributed across 100 million people. And in terms of how much that turns out to, in terms of how much does my electricity bill rise, it's not that easy to calculate. But there is definitely, depending on where you live, there has been a substantial increase in electricity bills, especially in New York State. Less so in places like Texas and Oklahoma, where there's a lot of renewable energy coming on stream, both solar and wind. And I think that the one bright spark here, just to bring China into the conversation one way, and we're going to start bringing it in another way in a minute.

11:26But the one bright spark here is that thanks to incredible productivity advances in solar panel manufacturing in China, the cost of solar energy is now mind-blowingly cheap. And it is an incredibly useful and cheap way of increasing capacity, increasing the amount of electricity in the country, and solar farms are being built out all over the place. You know, I go back and forth on rooftop solar. I've been a little bit skeptical that rooftop solar can help, but maybe it can. But certainly solar farms are huge and they aren't great baseline electricity because at night they don't produce a lot of electricity, but battery technology is coming along as well.

12:06So, you know, China is helping us out here in terms of being able to provide cheap electricity to America by the means of solar panels. China is also the main reason why opponents of this HOCUL bill are opposing this HOCUL bill. They're basically saying, look, electricity is all well and good, but we are in a sort of existential fight with China for control of the AI future. Data centers are basically just another way of saying AI. And if we can't have American data centers, that means we can't have American AI. everyone's going to start using Chinese AI, which is already like a fifth of the price of American AI.

12:46If you use like the Chinese models, they cost$5 per whatever, whereas the Chinese Americans cost$25. What China is going to wind up doing to AI what it has already done with electric vehicles, which is dominate the entire market, and we don't want that.

13:00Felix Salmon: Wait, before we talk about China, can we just go back like a few ticks to the issue of electricity costs? I feel like you're being a little dismissive of what's happened to Americans' electric bills over the past couple of years. Speaking personally, my electric bill is up 50 % over the past 10 years, which is like a lot of money. Isn't that pretty much in line with inflation? I don't think so. No, that's a lot more. I can check, but no. My mortgage payment, I mean, no. People's electric bills are up by a significant amount around the country. And I think if you live in New York City, you don't notice it as much because New York City electric bills are a joke.

13:38Felix Salmon: I mean, as far as I remember, Like you live in these tiny apartments and it doesn't cost that much to power them. But if we ask, say, like the listeners to write in and tell us about their electric bills, I bet they're pretty shocking. No, I definitely agree that like the number one issue in the midterm elections and in like this democracy or semblance of democracy that we live in is affordability. And utility bills are part of the affordability spectrum. And ultimately, electricity is a form of energy. A lot of it still, especially in New York, is made by burning hydrocarbons. And one of the reasons why electricity is expensive is because hydrocarbons are expensive.

14:18You know, it happened first, you know, starting with the Russian invasion of Ukraine. Then we had the U.S. war on Iran. And all of these things are making hydrocarbons more expensive. And that is also hurting. Like the effect of data centers is significant. The effect of global geopolitical unrest is also significant. There's a bunch of things that are causing energy prices to go up. And electricity prices are up, but they're not up nearly as much as diesel prices. You know, if you are operating in a world of using diesel to do anything, you're in a world of pain right now. If you're an airline burning jet fuel, God help you.

14:50You're in a terrible phase. Right.

14:52Felix Salmon: But like most Americans don't directly purchase diesel fuel, but almost everyone has an electric bill.

14:58Elizabeth Spiers: Yeah. Also, there are two things that if, you know, the administration wanted to take the edge off of this politically, they could do. And one is a lot of Trump's tariffs are affecting what you were talking about, the sort of Chinese production of solar panels, because some of the components are still tariffs. So it's increasing the amount of money people have to pay to build these things. But the other thing is that a lot of the costs are really being paid by industrial consumers and particularly American manufacturers, because they have to pay capacity rates that are similar to much larger companies like Amazon and Meta who really have an incentive to, you know, and the money to pay for this.

15:35Elizabeth Spiers: But in American manufacturing, you know, people are operating at very small margins. So when those capacity rates go up, it potentially puts, you know, smaller manufacturers out of business. So wait, what's the policy you're proposing? First of all, different capacity rates for companies like Amazon and smaller manufacturers with no margins. You're saying basically that smaller manufacturers should pay less for electricity than big companies? Yes. They're using less of it. It should be per wattage, if possible. I'm saying per kilowatt. No, no, no. Capacity fees, which are different. They're calculated based on an estimate of how much capacity the company might need.

16:15Elizabeth Spiers: So this isn't just paying per wattage. It's some of the fees that you pay on top of that. Yeah. I feel like at the margin, if you reduce the price of electricity to any given segment of the population, whether it's small manufacturers or individual households or anyone, reducing the price, as we know, tends to, at the margin, increase demand. And what you really want to do is decrease demand. We don't have enough electricity to go around. What Hochul is doing in her own way is trying to decrease demand by saying, stop building data centers. The real problem in any electricity grid is always peak demand, like around, you know, when there's a big heat wave or something, everyone's turning on their air conditioners at the same time.

16:54If you can't increase the total amount of energy in the grid, which is something which takes a very long time, what you have to do is find ways to reduce peak demand, which means trying to give incentives to manufacturers to do more of their electricity usage at night and that kind of thing. The policy response that I would love to see here, and I do think that Hochul has done this, is try and come up with ways to encourage people to use less electricity. And this is a kind of blunt force objects saying, well, let's not build data centers. I think there are interesting other ways to do it too.

17:29Elizabeth Spiers: A few weeks ago, Zoran put out just a pretty anodyne thing that was like, hey, don't maybe keep your air conditioner at some reasonable place instead of like 59 degrees. 78 is what you said. 78 is what you said, yeah. Even though there are people in red states giving exactly the same advice who are Republicans, and the reaction to it from a lot of people was like, oh, this is what socialism looks like. And so politically, it's who would you be asking to use less? Because I think consumers are already very priced. They already are strained under their electrical bills and they probably are not going crazy.

18:07Well, so I'll give you one example. Most people with at-home EV chargers, when they get home and they plug in their EV, it just starts recharging. It is very simple at the grid level or at the automobile level or at the EV charger level in various different places to sort of add in some programming to say, if I come home in the middle of the day and plug in my EV, don't start charging it until nighttime when electricity demand is much lower and we don't need to worry about peak demand anymore. Don't charge your EVs during periods of peak demand. This is kind of a no-brainer. It happens in a lot of the rest of the world.

18:48It really doesn't happen in America for reasons that basically everyone just wants everything when they want it on demand. And that's the sort of culture we're in. But we need to get away from that culture if we're going to actually affect demand. And this is one of the reasons why, you know, a small increase in demand for electricity ends up with a very large increase in price for electricity is because no one is willing or even at the margin feels able to meaningfully reduce their consumption of electricity. When was the last time your electricity usage went down?

19:18Elizabeth Spiers: I mean, how would you even message that, though, when everybody understands that the electricity hogs are the data centers? Going to consumers and saying, actually, this is your responsibility seems like it's not a good political decision, but I think it's not a very convincing argument. No, no, it's a very hard message politically, but it is necessary given that consumers, you know, ultimately consume an order of magnitude more electricity than data centers do.

19:43Felix Salmon: I guess for the policy, you don't put it in consumers' hands to be like, don't charge at this time or that time. You have to sort of figure out a way to. You can do it at the grid level, basically. At the grid level, yeah. Felix, while you were talking, don't be mad. I was looking at Fred. I love that. I am never mad at anyone looking at Fred. So, I mean, I was totally listening. But also, I just wanted to let you know that the CPI for electricity over the past 10 years is up about 48%, while the regular CPI over the past 10 years is just 40%. So the cost of electricity is risen. No, that's more.

20:20Felix Salmon: That's almost 10-point difference. Eight percentage points over 10 years. I'm rounding. It's 10. It's like… It's more. It's more. It's more. It's more. Yeah. Yeah. That's true. It's more. it's not a lot more but it's more it's more i mean i think it's a lot more but let's just tie up the bow here which is if we pick on data centers as like the easy boogeyman that everyone hates that we can pick on to try and make it look as though we're doing something about this electricity bill situation is it a reasonable worry should we be worried on a sort of geostrategic level that this is just playing into the hands of China in terms of the great AI race between the US and China.

21:07Felix Salmon: That's what I want to know.

21:08Elizabeth Spiers: To go back to the renewable conversation, if this were really, I feel like that's a little bit of a red herring, because if this were really a concern, one of the things that you would do is stop tariffing components that are necessary for renewables and stop preventing renewable projects from going forward, which the Trump administration is still doing, even with wind power, just by putting roadblocks in the permitting process and stonewalling the process that you have to use to get these things online, even though they're super, that's the fastest source to get online.

21:39Felix Salmon: I think the question simply is to succeed in the AI race to quote unquote win it, do you need to have a lot of data centers in your country? I don't understand if you do or you don't. Do you guys? So if we don't build these data centers, what then? Yeah, I think the short answer is yes. that Chinese AI models are powered by data centers in China, and US AI models are powered by data centers in the US. Is there some amazing neoliberal free market world in which you can divorce the model from the physical location of the data center and OpenAI and Anthropic can go and run their models in China? I'm not even sure that's possible in theory.

22:24It's certainly not possible in practice.

22:26Felix Salmon: Right now, as we're recording on Friday, everyone is talking about this new model from China. They have some company literally called Moonshot AI. They have some new model. It's way cheaper and open source. And the current vibe worry is that everyone's going to use the cheaper Chinese model. Anthropic and AI are going to suffer because they're totally overpriced. They're spending all this money. And long term, that might mean that China dominate They're open source, cheaper models dominate in AI. AI becomes a commodity that people use to do other things. In that world, maybe it's fine to have China running these models using their data centers.

23:06Felix Salmon: We use them cheaply. Open AI and anthropic fail, which would be interesting. Maybe not fail, but you know, they're not as big as everyone wants them to be or whatever. And turns out totally fine. We don't have data centers. Our power bills go back down. China takes on all the costs of running this commodity called artificial intelligence, and it's all good. What do you think of that? I love that utopian vision. I think that's great. I don't know anyone in the AI world who would be on board with that. And it's not just because, you know, they want their anthropic RSUs to be worth lots of money.

23:45Felix Salmon: I mean, they do. It is an article of faith among everyone from Dario Amadei to Demis Hesabas to Sam Altman to everyone that the governments have, both have and should have, but they do have a bunch of ability to see into these models, to control what they're doing, what they're not doing. And that having the model within your nation gives you an extremely important strategic advantage in the geopolitical sphere. Also, just the informational advantage, right? You don't want China controlling our knowledge. What about open source models? I mean, doesn't that... Whether it's open source or not, China still can use the information that is being churned out.

24:38If all you're doing is grabbing a model from China and then running it on a U.S. data center because it's open source and so you can just take that model and run it domestically, that's fine, but it doesn't solve the data center problem. If you're taking the model from China and you're running it on a Chinese data center, then everyone is just assuming that your information is going to wind up in the Chinese government one way or another.

25:04Felix Salmon: We don't want that. This is what Palantir has been talking about quite a lot, which is this idea that companies can't trust anyone to really not leak their data. And so Palantir is like, we will bring all of your AI thinking in-house onto servers that you actually own and are in your own buildings. You're not even going to use an open AI data center. You're going to use your own data center. And they're very much selling this to the Europeans. So like, you can't trust the Americans with your data. Therefore, you need to build your own data center and run the AI models on the site in Europe. That's the only way that you can trust that your information is safe.

25:45And so I do think the physical location of the data center is, everyone seems to be agreeing that it's a really important consideration.

25:54Felix Salmon: Okay. So, yeah, and Elizabeth is absolutely right that, you know, insofar as this is like an energy problem, there are ways to try and encourage more energy capacity in the U.S. But I do think that's a long, slow thing, which for various sort of Republican Party reasons isn't going to be happening anytime soon, which just leaves us with a sort of basic question. Do we continue to build data centers in the U.S. in the knowledge that they suck up electricity and electricity prices will continue to go up? Or do we not build data centers in the U.S. and see a bunch of strategic advantage moves to China?

26:32And it's an interesting question, and I can see arguments on both sides. Elizabeth, which one would you choose?

26:39Elizabeth Spiers: I don't think it's a binary. I think we need to be a little more cautious. I think Huckall's approach is smart, and I don't think that it longer term prevents data centers from being built here.

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31:01we should also talk about the thing that finally became law this week which is the housing act it's been what is it emily like 75 years since the federal government passed the housing act

31:12Felix Salmon: something like that yeah so they passed the 21st century road to housing and road is capitalized for some reason i guess it stands for something renewing opportunity in the american dream oh brilliant brilliant i want to talk about two different parts of this law let's start with the one that everyone knows about this which is that it started off life banning big wall street investment house private equity type people blackstone type people from either building new rental apartments or buying homes and turning them into rentals the ban on building new rental apartments got dropped out, thank Christ.

31:53But the ban on buying houses and turning them into rentals is in there. And I will be the first to admit that this is not going to have a huge effect. The number of houses that these companies have been buying up and turning into rentals is not enormous. And so in the grand scheme of things, it's not a big deal. But at the margin, it's just annoying to me because basically what these companies are doing, as I see it, is they're doing a sort of like rent versus buy calculation. And they're like, look, it is cheaper to buy than to rent in these places. So what we're going to do is we can convert housing from owner occupied to rentals.

32:31And in places where rentals are expensive, then that increases the supply of rentals and it makes it easier to rent. And basically what we're doing is we're exporting, we're reducing house price inflation, which I'm very happy that people are annoyed about now, Now we've finally got out of the world where everyone assumes that all voters just want house prices to go up all the time. Now we're worried that houses are too expensive. And so we're doing things like passing the spill to stop them being so expensive. But the way we're stopping house price inflation is by basically creating more rent inflation and renters are much less likely to vote.

33:04So I feel like what we're doing is at the margin, we're just reducing the supply of rental buildings in America. And that's bad.

33:12Elizabeth Spiers: I think you might be right about that because there's a precedent in the bill that says, first of all, it only affects companies, institutional investors that already own more than 350 single family homes. So the smaller institutions that have done this are completely untouched anyway. But I can't imagine that on a percentage basis or ratio basis, that's even remotely a major source of how rentals are moving onto the market, right?

33:36Felix Salmon: Well, I guess the argument that Senator Warren and some others are making is just like the private equity industry and institutional investors are like, hey, like this is a very small slice of the housing market. It's not going to have any effect overall. But then like Warren and others will say that's true nationwide. But there are some pockets of the country where private equity and institutional investors have come in and bought up so much single family housing stock that it has it has impacted prices in that area, both rentals and for single family. It increases the prices of homes, for sure.

34:07And that's what people are worried about. And my point is just that they worry much more about home prices than they do about rent. If they worried about rents, then they wouldn't do this.

34:16Felix Salmon: Yeah, that's probably true. Yeah, when I mentioned about rents, I think the senator was kind of like, what?

34:21Elizabeth Spiers: I think the political optics of it, though, are part of what's pushing it, too. It's you don't want large institutional investors who maybe don't have any real contact or investment in local communities. preferring that to say a local landlord or people who live in the communities? I mean, number one, because we're not banning the institutional investors from building like large multifamily rental units. Like that's how that happens. The way it happens is not like institutional investors buying up houses one by one. I mean, that does happen a little bit. But like if the bit about building got dropped out of the bill, which it should have done and was, then that is still going to happen.

34:59They're still going to build and that's still going to be like, you know, some company in New York owns a bunch of rental apartments in Arizona. I'm not worried about that. I think that's fine.

35:07Felix Salmon: Private equity started buying up single family homes in the wake of the housing crisis, you know, back in, I guess, in 08, 09, et cetera. And like, at that time, were they not providing a bit of a service? No one wanted to buy a lot of the house. The houses were sitting around empty. There was a vulture investors. They were going, they were providing a bid for houses that no one could afford to buy. And now houses are really expensive. We have this supply crunch. Although we should one day, someone, me, you, someone, what is the supply shortage? Some say a million, some say seven million. No one knows.

35:39Felix Salmon: No one understands what it is. Lawrence Young always says it's about two and a half million, I think. Who believes Lawrence Young? I mean, he's the NAR's chief economist. I mean, people do believe him. I'm sorry. I didn't mean to malign him. But anyways, but like now, yeah, with now with houses in shorter supply, especially affordable houses in shorter supply, they're not providing the service that they once did. Two other things I'll say about the institutional investor ban. One is I think it gave the bill, which does a lot of other stuff, the political support it needed to pass. Like that's why it passed is because people got really amped up about that.

36:12Yeah, it has that nice like anti-Wall Street populist tinge to it now so a bunch of Trumpers and a bunch of progressives can get behind it. Yeah, I can see that.

36:20Felix Salmon: I think that was really important for it.

36:22Elizabeth Spiers: One other factor that's just structural, a lot of this stuff has been sort of sitting on the docket for 30 years. So I think even Republicans needed some legislative wins. And so it was kind of a convenient time to go back when affordability is the biggest issue on everybody's agenda and say, what do we have in the backlog that we wanted to do and that makes sense? So stuff like, you know, Emily, you wrote about ending the chassis requirement for mobile homes. Chassis. It feels like a total common sense sort of thing that could have been done a long time ago. So that's. We're going to come to chassis in one second.

36:57But I mean, the big picture about home price affordability is that this bill for all that it's, you know, the first bill in 70 years or whatever, is going to have precisely zero effect on the number one thing that affects home price affordability, which is mortgage rates. and mortgage rates are 6.5 % right now. And so long as mortgage rates are at 6.5 % and house prices are well, even if house prices don't go up anymore, even like you would need house prices to come down a lot, like to the point at which people start feeling pain from house prices coming down. You know, they would need to come down 30, 40 % in order for houses to be affordable with mortgage rates of 6.5%.

37:36So the problem here is mortgage rates in terms of real problem in terms of house price affordability as mortgage rates. And none of this is going to help.

37:45Felix Salmon: I mean, yes. And there really isn't enough housing supply. And the bill does try to address that, you know, in these like all these kinds of like Okay, so talk about chassis. Chassis. So I didn't know what that was or how to pronounce it until recently because I am, you know, incapable of even driving. So a chassis is this steel thing that you put underneath the manufactured house that makes it a mobile home. Effectively, it lets you like transport it from where you build it to where you put it. And then it lets you move it again. And in 1974, because there was mobile homes and manufactured homes were being built shoddily, there was all different kinds of regulations depending on what part of the country you're in for these things, which is, by the way, how all housing regulation works.

38:32Felix Salmon: The federal government at the time was like into passing laws. So it passed a new housing code, a federal housing code. And part of the code said that manufactured homes had to have a permanent chassis. And even at that time, I have learned, thanks to an amazing Vox article, that the manufactured housing industry was like, what? We don't want to do this. It's so expensive. These costs extra and sometimes it doesn't need it. Like it doesn't get moved again. It turns out by like the year 2000, only 5 % of manufactured homes actually moved after they were, you know, planted the first time. Mobile homes are not mobile.

39:08Felix Salmon: Not mobile. So they have been fighting for years to get rid of the chassis requirement. And according to them, so we'll take it with a grain of salt, they say the builders that build the other kinds of homes that are built on site, not manufactured in a factory, have been pushing back and saying, no, no, we must have the permanent chassis. Not because of any like concern or, you know, because they just want, they want that leg up. They want a comparative advantage. So finally, manufactured home guys got their rule rollback in this legislation. And people are saying that A, it's going to save them a lot of money because it's$5 ,000 to$10 ,000 per chassis.

39:45Felix Salmon: So now they can reuse the chassis. I'm just going to keep saying it, chassis. They're going to reuse the chassis and that it's not just even about the cost savings, that by removing the chassis requirement, they can do better, cooler stuff with the manufactured homes, better homes. One of the things you mentioned, which is blindingly obvious once you think about it, but it never occurred to me, is if you remove the chassis requirement to have like a whopping great big steel thing underneath your house, guess what? You can have a basement now. Have a basement. You can have a house that's not, you know, how a manufactured house, you have like the staircase going up into it.

40:19Felix Salmon: You can have it closer to the ground. Yeah, you don't need to have that weird, like quasi-stoop. You can just walk straight in. Yeah, you don't need the quasi-stoop. And then there's hopes that there'll be more innovative. I sound like Felix. Designs and things like that because it's cheaper to make a house in a factory than it is to build a house on site for obvious reasons, right? You can do it inside. Weather's not a constraint. You can have a permanent workforce. You can have more control over your inventory and things like that. And I guess some Nordic countries, they build most of their houses in factories.

40:48Felix Salmon: I didn't take the time to look into that a little more, but I thought Felix might know or maybe Elizabeth. Modular housing is totally a thing. And again, it's something that has historically been used mostly in multifamily, but it totally can be used in single family. And prefab housing has been the housing of the future for the past 35 years. I've lost count of the number of articles I've read about. Here's some company doing prefab housing and it's going to revolutionize housing construction. and we're all going to be in prefab houses. And then that company goes bust and then here's some company, you know.

41:23But yes, I do think that the removal of the chassis requirement is going to help at the margin. I don't think it's going to bring us into the prefab utopia. But all of these things are useful.

41:33Elizabeth Spiers: It heavily helps lower income communities because number one, it's fast. If you're doing new builds, even for about the same price you would pay for a mobile home, you still have to go through permitting. It's going to take some time. There's just a lot more stuff that you have to do. And also it helps with zoning regulations in certain areas because at least where I grew up, there were zoning regulations about where you could and couldn't put mobile homes, but you could have something that is effectively the same as a mobile home that is not on a chassis. And it would be okay in the zoning laws to build from scratch.

42:07Elizabeth Spiers: And the fact that it did have a chassis actually knocked people out of certain neighborhoods. So I think where it helps is really people who are lower income and they need an option that they can have cheaply without going through a new build process. And for the middle classes, bless them, we've talked about them before. We'll talk about them again. ADUs, people. It makes those ADUs a lot easier to place in your backyard.

42:33Felix Salmon: Yeah. And the legislation, I think, encourages more ADUs, accessory dwelling units, and just like less permitting blocks. It's very abundance coded for people who know what that means. Everybody can have their tiny house in the backyard. Who doesn't love having a tiny house in the backyard? I mean, seems cool. Could be a good source of rental income, though. Who knows what that electric bill will be.

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45:19let's move on to my favorite subject of the week which is sk hynix arbitrage because you know we've been talking about highfalutin public policy stuff let's do core slate money finance nerd stuff emily you that you're the one who best articulated the state of affairs tell me what the question is and I will do my best to give you an answer.

45:42Felix Salmon: Why do shares of SK Hynix, the South Korean memory maker, cost more if you buy them in the U.S. market than they do if you buy them in the South Korean market? Why is there a price premium? Why are investors willing to pay more in the U.S. stock market for the same thing? Oh, that is a really good question. I have a theory. I have a theory too, but what is your theory? It's easier to buy the shares in the U.S. market than it is to buy them in the South Korean market. If you're American. If you're a U.S. If you're American. Americans have money and they like to buy this stuff. And it was billed as like a hot new thing.

46:18Felix Salmon: So they got all amped up about it. We talked about this last week when we talked about the SK Hynix IPO thing, where SK Hynix, for all that it is dominating the Korean stock market and has been soaring, you know, helping the KOSPI hit new records and all the rest of it, still looks cheap by the standards of AI-coded companies in America. If you look at its forward PE, it's still really low. And so Americans are like, yeah, compared to the price of NVIDIA, it's cheap. And SK Hynix provides NVIDIA with most of its memory that it needs on its chip. So let's buy SK Hynix. And they're kind of doing an NVIDIA SK Hynix arbitrage.

46:57They're like, SK Hynix might look expensive relative to the cost of buying the shares in Korea, but it still looks cheap relative to the cost of buying shares of NVIDIA in the US. So let's just buy SK Hynix in the US because it's quite difficult for American retail investors, at least to buy shares in Korea. But then the question is, why isn't there an arbitrage? Why aren't there institutional investors who are perfectly capable of buying shares in Korea? Why aren't the institutional investors just taking that demand and basically funneling it into Korea? Why is there like this 50 % premium for SK Hynix in the US versus Korea?

47:34And I remember, but I have to, you know, may a culprit on this one. This time last week on Slate Money, we were talking about SK Hynix and we were talking about the IPO. And I said, well, obviously, there's not going to be some big first day IPO pop because this is just ADRs of a company that exists in Korea. And so the price is anchored by the cost of the shares in Korea. I was so wrong about that. There was a big IPO pop. And what happened was the price of the shares in the United States went way higher than the price of the shares in Korea. and this is my favorite thing and this is why i really wanted to talk about it is because what we are talking about now is shares their stocks their securities we're not actually talking about a company anymore one of the things we talk about a lot on this show is like the difference between a share and a company and this is a prime example what we are talking about here is little casino chips that people are buying and selling and the korean stock market in particular has become a total casino.

48:31And the Koreans have been gambling on the Korean stock market and it's insanely volatile and it's completely crazy. And people are buying SK Hynix ADRs because they think they're going to go up and they're selling them when they think they're going to go down. And they're a new thing you can gamble with. And nominally, these are shares of a company and what we should care about is the value of the company. And what you can do is you can multiply the number of shares by the price of the share to get the value of the company and all that kind of stuff. But this shows the limit of that. This shows the limit of that kind of basic efficient markets hypothesis stuff, because really people are just gambling and there is a world in which those two prices will convert.

49:12It is possible they will converge, but it is also possible that they will diverge. And there's not a pure arbitrage, right? There are two reasons why there isn't a pure arbitrage. The first reason is just time zones. They don't trade during the same time. The second, much more important reason is that it is very easy to convert the American shares into Korean shares, but it is actually impossible to convert the Korean shares into American shares. You can take the ADRs and take them to Korea and convert them into 10 shares in Korea. You can do it that way, but unless you can do it the other way, you can't really do the arbitrage.

49:49And so, yeah, The capital controls in Korea are strict enough to make the arbitrage difficult. So the only other thing you can do is just sell one and buy the other and hope they converge. But there's no particular reason to believe that they'll converge at any time. So why would you do that?

50:05Elizabeth Spiers: Is that primarily because of regulatory restrictions in Korea? They have to grant the equity holders permission and there's some gambling restrictions that maybe apply? Well, the gambling restrictions don't apply to this particular constraint. But yeah, the Koreans in general are protective of their stock market and they don't want to make it easy for those shares to leave the country and for those investments to leave the country, which is what would need to happen in order to increase the supply of shares in New York to bring the price down in New York.

50:34Felix Salmon: What I've been wondering about, as you said, Felix, the South Korean stock market has been really volatile lately. And a lot of it's driven by retail investors who are buying these leveraged ETFs that sort of amplify gains and amplify losses and settle every day. And it's very chaotic. And their stock market is very much driven by AI, which we've talked about. I think like 55 % of the Kospi now is just Samsung and Hynex, I think. I have to check that. But should we be worried that this is all going down and is it going to mean something for the U.S. or like something systemic, do you think? No.

51:09Felix Salmon: Okay. There are always weird stock markets that get dominated by one or two companies. And it's fine. Canada has always been like that. Remember when Canada was dominated by Research in Motion and it was like half of the entire Canadian stock market? And then it was Potash Corporation of Saskatchewan. And then it was Shopify.

51:28Elizabeth Spiers: What about sector concentration? Yeah, like if you buy the COSPI, what you're doing is you're buying those two stocks. Everyone's aware that what you're doing is buying those two stocks. You're not investing in Korea as a country. You're just investing in those two stocks. And so you make the decision whether or not you want to buy those two stocks, and then you get a volatile asset.

51:46Felix Salmon: So what happens to South Korea when those two stocks, you know, they've gone up quite a lot. They're probably going to come down quite a lot, I would think. I don't know. Maybe not. But when they do. Yeah. So the people who are gambling on the stocks going up will lose money. And the people who are gambling on the stocks going down will make money. And the Korean economy will just keep on going because the Korean stock market, you know, as your beloved colleague Matt Phillips always says, the stock market is not the economy. Right. And especially in Korea, the stock market is not the economy. Especially in Korea, the stock market is just those two stocks.

52:17Felix Salmon: But when so many retail investors are invested in the stock market, it does become more like the economy. Do you know what I mean? I think that might be true.

52:27Elizabeth Spiers: There was a data point that something like 40 % of South Korea was below the poverty rate, and a lot of people are using savings and retirement funds to buy these stocks. Yeah, I mean, but that's two different things, right? The whole point is if you're below the poverty line, then you don't really have savings and retirement funds to blow on the stock market. I'm sure it is possible to find poor Koreans who should not be gambling on the stock market, who are gambling on the stock market. You know, it is possible to find poor Americans who should not be gambling on the lotteries. we have this issue with sports betting in America because that's now ubiquitous there are lots of there are lots of gambling type things that poor people do that they shouldn't be doing and that is bad you know but like I'm not more worried about Korean stocks and the wealth effect on Korea if they go down than I am about like I think this is a gambling problem not a wealth problem I guess is my point the other thing I just wanted to mention is that smart hedge funds have kind of learned their lesson.

53:24The two names that everyone knows in the hedge fund, the two great cautionary tales in the hedge fund universe, one is LTCM and the other one is MF Global. Both of them blew up because they saw an arbitrage. They were like, this thing trades at this price here and that price there. So if I buy the one here and sell the one there, then eventually they'll converge and I'll make money. And then they didn't converge, they diverged and then they lost money and then they blew up in order to place that trade in order to do the arbitrage number one you need to be able to short the adrs which is incredibly hard there aren't enough of them and getting a borrow is incredibly difficult but even if you can short the adrs you also need a theory of the case for why these two things are going to converge and there's no outside force there's no like you know if sk hynix gets acquired say by some bigger company and then every share gets paid out at the same amount then that is a forcing mechanism which would force the shares to be worth the same amount at a certain point.

54:25But absent that kind of a forcing mechanism, there's no particular reason why this arbitrage can't go on forever. Like, do you guys remember when Palm Pilot was a subsidiary of 3Com and then it issued its own stock and a market cap of Palm Pilot was like 10 times the market cap of 3Com, even though 3Com owned Palm Pilot? But like these weird arbitrages and artifacts do crop up in stock markets from time to time.

54:54Felix Salmon: Okay.

55:12But anyway, we should have a numbers round. Elizabeth, what's your number?

55:16Elizabeth Spiers: so my number is 55 million dollars and that's the amount of an equity around for a company called pool house they just opened a 21 000 square foot bar in london they kind of have you've ever seen golf simulators that you can go into bars and stuff and play tell me this is a swimming pool simulator no this is a billiards so they have a kind of like ai tracking camera projector thing where if you're playing pool and i suppose if you're bad at it and you want to try to be good. It'll show you the path of where the balls are supposed to go. And I sort of read this with interest because I'm a shitty pool player and I would probably try this.

55:54Elizabeth Spiers: But I'm kind of curious about how similar the golf market and the pool market are because it's the same major company that's doing both of these. And I just think of pool as the kind of sport that people play primarily while they're drunk at bars and golf still being a very competitive, rich person sport. Is the sort of golf customer the same as the pool customer? Like, I just don't think the pool customers care as much about... It's not like virtual tables. It's real pool tables, but then they just project lines on it. Real tables with virtual kind of displays. That's cool. I have this little game on my phone that I play a lot called Pocket Run Pool by our favorite friend of the pod, Zach Gage.

56:35And yeah, when you're trying to pot a ball in Pocket Run Pool, It shows you the line of where the ball is going, and it helps very much in terms of trying to work out whether it's going to go in the pocket. I could do with that in real life. I think this is a great advantage, and I'm sad I missed out on the$55 million equity round.

56:52Elizabeth Spiers: Well, next time you go back to London, you can get out of the pool hall. There you go. Try it. My number is 100 ,000, which is the number of dollars that was won on earned, let's say, on sports betting sites by a chap named Gabriel Perez. And Gabriel Perez was, up until recently, the teleprompter operator for Donald Trump. And so he would go onto the sports betting sites, you know, on the mention markets, and he'd be like, is Donald Trump going to mention Ukraine in this speech? And he would just read the speech and be like, yep, he's going to mention Ukraine. And he would bet on Donald Trump mentioning Ukraine, and he made$100 ,000.

57:33But now they have suspended him. So he can't do that anymore. I have to give you my favorite quote from White House spokesperson Davis Ingle saying, quote, the White House has strict ethics guidelines that we expect all staffers and officials to follow. So now you know, people. Ethics and scare quotes. There are strict ethics guidelines in the White House.

57:58Felix Salmon: I feel like you got to hand it to this guy because isn't Trump known for like going off teleprompter all the time? Oh, my God. So this is what he did, by the way. So he would have the speech right in front of him as prepared for delivery with, you know, Trump mentioning Ukraine. And then he would get to the bit of the speech where Trump was supposed to mention Ukraine and Trump would go off on a tangent and never get around to Ukraine. And then in real time, as Trump is giving the speech, he would go into the betting markets and close out the bet so that he didn't lose money on it. Good for him.

58:32With one hand, he's operating the teleprompter. And on the other hand, he's on couch.

58:36Felix Salmon: He's like saying, quick, cancel this bet. Fantastic. All right, Emily, what's your number? Okay, my number is$45.90. $45.90. That is the US price of the Zara death pants. These are pants sold at Zara. Wait, and do they make you die? What are the Zara death pants? I must know. You're not familiar? They're also called death trousers. These are very wide leg, silky looking pants that are kind of long. And women are tripping over their own pants, falling and posting about it on TikTok. One Toronto woman said, these pants nearly killed me. And, you know, she had to be sent to the hospital and got stitches.

59:19Felix Salmon: And I think people's tripping over their own pants that nearly kill them is sort of, if you want to think about it, if you want to go deep, there's a metaphor there for some things that are happening in our country. I'm just going to let you draw your own conclusions, your own hot takes.

59:33Elizabeth Spiers: Do people not know how to hem their pants? Or is this just like, it's now fashionable to have your pants just kind of like, they're so baggy and so loose and so flowy.

59:43Felix Salmon: I've done this. I've stepped on my own pants before. Do you not know how to hem your pants, Emily? Because I will admit, I do not know how to hem my pants. I have a very lovely woman named Lai who will hem my pants for me. But no, I do not hem my own pants. The whole thing is hilarious. Wait, Elizabeth is shaking her head. Elizabeth, do you hem your own pants? I do.

1:00:02Elizabeth Spiers: Not all of them, but I do if it's like jeans or something that I can manage.

1:00:06Felix Salmon: We're both like, wow. You can do us with your own pants? Do you have a sewing machine? Yeah, my mom used to do it.

1:00:12Elizabeth Spiers: I will hand do my jeans and stuff, but...

1:00:15Felix Salmon: You're superior. But when you say you do it by hand, do you mean you do it by hand or do you use the sewing machine? You can hand stitch, yes. Yeah, hand stitch. Wow. I know how to hand stitch, but I haven't done it since I was like six.

1:00:28Elizabeth Spiers: I mean, if it's like nice pants, I take them to the tailor because I'm not going to cut and, you know, like nice material.

1:00:34Felix Salmon: I just accept whatever's given to me. I'm like, these are a little long. These are a little short. And then you can do that because you're tall.

1:00:40Elizabeth Spiers: All of my pants have to be hemmed.

1:00:42Felix Salmon: Yeah. but that was the craziest part of these videos no one was like don't buy these pants don't wear these pants they were like what you need to do is roll them up there was tips and tricks but there was no like don't buy the pants do you know what i mean none of the tips were take them to the tailor no not that i saw they're 45 it costs more money to take them to the tailor than it does to buy them in the first place i guess that's fair could bring back skinny jeans and solve all the problem i regret the fact that we are ending this podcast on the notion of bringing back skinny jeans please do not bring back skinny jeans but with my apologies i will say that is it for us this week i have now left you on the idea of bringing back skinny jeans don't trip over your own pants don't trip over your own pants don't bring back skinny jeans do subscribe to slate Plus, because if you subscribe to Slate Plus, you will listen to us have a conversation about all of the money that is being made from the stock market by financial services companies.

1:01:43Otherwise, thanks for listening. Thanks for emailing us on SlateMoneyAtSlate.com. Thanks to Jessamyn Molly for producing. And we will be back with more Slate Money next week.

1:02:24Felix Salmon: Thank you. data such as comp ratios, recent performance reviews, tenure trends, and more. Then it can turn those insights into real action. It might recommend a 10 % spot bonus to retain a top performer based on the data. All you have to do is review the recommendation, tap confirm, and the bonus is added to the next payroll run. Rippling AI understands your workforce, systems, and workflows, helping you make faster, more informed decisions across your business. Don't settle for AI that's all talk. Head to rippling.ai slash slate and get AI that turns insight into action. That's R-I-P-P-L-I-N-G dot A-I slash slate.

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