Prof G Markets: First Quarter Review — with Aswath Damodaran

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Support for this episode comes from The Current Report ORG. From data privacy to the future of TV, retail media, and beyond, the world of digital marketing is constantly in flux. So how can you keep up? Well, the current report is there for you. Each week, marketing leaders on the cutting edge give you the latest insight. So, if it's creating a buzz, they'll be talking about it.Subscribe to the current report wherever you get your podcasts. Support for Prop G comes from Better Help ORG. Some stress can be a good thing. Research shows that without it, we tend to feel bored, complacent, and generally checked out. But when the stress mounts and things get less manageable, our performance dips,and we can feel overwhelmed, exhausted, and totally helpless. I have been here. I have been paralyzed with anxiety before, and that's not good for anybody. BetterHelp ORG online therapy offers a safe space to work through unneeded stress and get things off your chest. BetterHelp ORG is a convenient, affordable way to give talk therapy a try.It's entirely online and flexible enough to fit into any schedule. You can fill out a brief questionnaire to get matched with a licensed therapist ready to help you lighten your emotional load. Get it off your chest with BetterHelp. Visit BetterHelp.com slash Profi today to get 10% off your first month. That's BetterHelp ORG, help.com slash profi. This week's number one. We are number one in this week's New York Times ORG bestseller rank for Miscellaneous. Miscellaneous?Seriously, what the fuck?

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Welcome to Propji Markets ORG.

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Today we're discussing first quarter earning season with Aswat the Motor PERSON and Professor of Finance at NYU Stern School of Business ORG. But first, here with the news is Prop G PRODUCT media analyst and also not miscellaneous, very focused.Mr. Ed PERSON, Elson, Ed, you are speaking to the number one author of the category, miscellaneous. Is that literally the weakest flex in the world?

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Yeah, but you're number two in business. So that's, I don't know. I think you've done pretty well for yourself. Number two. Who's number one? The same guy it is every week.It's James Clea, Atomic Abbott PERSON. That bitch!

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I knew who it was.

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I just wanted to describe that, bitch.

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Literally, is that, that's like, I don't know, that's really, that's like getting a hand job from your cousin at Thanksgiving.

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I mean, it's okay.

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It feels okay.

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It feels okay, but it's like miscellaneous, miscellaneous?

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Miscellaneous? God.

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My agent and my publisher, like, you're number one, the email said. I'm like, oh, God, I open it up. In miscellaneous, I'm like, oh. It doesn't matter. You are now a number one New York Times bestseller, and that's what you're going to tell people. Yeah, don't be so fucking mature.

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It's miscellaneous. Anyways, I get to the headlines. Well, before we get to the headlines,

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I just want to announce that Profi Markets ORG is moving to its own dedicated feed, which is exciting.

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We'll be releasing two episodes

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per week on Mondays and Thursdays starting on May 20th. But the new ProfG Markets ORG feed is live right now. So go subscribe to ProfG Markets ORG. Type it in wherever you get your podcasts.

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Yes, we want you to spend more time on your phones, so we're doubling up. And we are going to spend more time doing deep dives around sectors and companies. We are committed to your financial security in an entertaining and illuminating way and also finding a career and, you know, somewhat of a life for little Ed PERSON.

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For little Eddie Elson PERSON, this is really all about him.

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You know, this is okay. He's learned how to play baseball.

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We've enrolled him in soccer just to see, just because he feels good about himself. He feels good about himself. So people need to go subscribe to our new feed. Is that right?

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Yeah, we have a new feed. It's called Prof G PRODUCT Markets. It's separate from the Prof G pod. So you've got to type it in, subscribe if you want to get the twice a week content.

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Love it, love it. All right. Get to the headlines. You self-promoting. Ho. Go ahead, Ed. Let's start with our weekly review of Market Vitals ORG.

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The S&P 500 rose. The dollar was volatile, Bitcoin fell, and the yield on 10-year treasuries dropped.

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Shifting to the headlines. The Federal Reserve held interest rates steady,

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citing a lack of further progress toward easing the rate of inflation. Recent economic data has challenged the case for cutting rates, but Jerome Powell maintained that the Fed ORG is far from putting rate heights back on the table. Prices at California fast food restaurants are up as much as 10% since September. Wendy's Chipotle and Chick-fil-A ORG are just some of the restaurants that raised menu prices following the state's decision to increase the minimum wage for fast food workers. Venture capital firm General Catalyst ORG is close to raising almost $6 billionto invest in tech startups. The firm will distribute the money across many sectors, including space, fintech and climate in the US, Europe and India GPE. The Biden PERSON administration is moving to reclassify marijuana as a less dangerous drug. It's proposed to move the drug from Schedule I classification to Schedule 3, meaning it has an accepted medical use and would be subject to fewer restrictions and more favorable tax treatment. Cannabis stocks soared on that announcement.And finally, we saw a slew of big tech earnings last week. Apple announced its largest ever share buyback of $110 billion, and shares rose 3%. And Amazon, Google, and Microsoft ORG all reported double-digit revenue growth, mostly driven by huge sales in their cloud services businesses. Those stocks also rose across the board. Scott PERSON, your thoughts?

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Well, in terms of interest rates, it is a bit of a surprise. Expectations have shifted dramatically. Interest rate futures are now expecting one rate cut in 24. The market had priced in five or six. But I also think the market's coming to the conclusion that may be interest rates that are what you would call modest. I mean, historically, it would be unfair to say interest rates are high, or you might even say they're kind of mid to low based on if you go, you know, it depends how your frame, how far back you go. And there's this really interesting theory that the amount of money that is invested in short-term instruments is greater than the debt owed on consumer loans. So it's actually been stimulative to the economy, that it hasn't dampen the economy, that people are getting more money from the interest on their short-term instruments. And as a result, it more than covers the additional debt they have or the increase in interestrates, and that has been stimulative of the economy. And so it feels like, okay, the punch bowl isn't back, but I don't need punch. It's, the economy is sort of shrugging off the fact that it doesn't look like we're going to have rate cuts. Fast food restaurant prices, there's no free lunch here. Raising minimum wage has had an impact on food prices. I would argue it's worth it. There's, there's a price to be paid. When the inputs go up in terms of price, whether it's the price of food or the price of labor, they can either pass it on to consumers and hope thatconsumers don't go elsewhere. And obviously, that's inflationary or expensive for consumers, or the company can just absorb the hit itself, and that reduces their margins and their share price goes down. I think this is on a balanced scorecard absolutely was the right thing to do. Young people and people without kind of the opportunity to get the certification you need to be in the information economy need to make a living wage. Also, I think we get a free gift with purchase here, and that is I think fast food should be more expensive. I think it's unhealthy. I think it's resulted inwhat is the COVID pandemic times two every year, and that is we have a absolutely out of control obesity epidemic in this country. So, yeah, I'm all for it.

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You mentioned two consequences from raising the minimum wage. One is you pass it on to the consumer, which means higher prices, you absorb it, you just take a hit on your bottom line. I would add a third one, which is you just lay people off. And we're already seeing that in California. Pizza Hut laid off 1,200 delivery drivers. We've seen layoffs at other fast food chains in California,which raises an important general economic principle, which is when you increase the minimum wage, you make labor more expensive, and companies eliminate jobs. I know you've been an advocate for increased minimum wage for a long time. How do you think about this tradeoff?

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Anytime there's a change or a shift in the economy, there's going to be winners and losers. I'm not sure I'd buy into your initial premise that you end up with workers being laid off, and it's bad for low-wage workers because for every dollar, additional dollar you give a low-wage worker, about $1.21 is added to the overall economy because the multiplier effect is greater when you put more money in the pockets of low-income workers because they spend it all.And where you've seen studies in California and Washington State GPE around the effects of increases in minimum wage, that's the myth and the scare tactic, that all these small businesses will go out of business and actually these people won't be

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able to find jobs and it'll be worse for them. I think that's bullshit. Employment has never been

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stronger and there'll be some limited instances of a burger bot making burgers or a shift to automation, fine. But if a taco truck or a fast food company can't stay in business because it can't afford to pay its people a living wage, then that business should go out of business. And if people are in an industry where it's subwage, then we need to figure out a way to retrain them. But the reality is these companies are hugely profitable, most of them, and they're absorbing the $20 increase in $20 minimum wage. And then David PERSON takes that additional money, and he goes out and he buys more shit, which leads to a growth in the economy, and more jobs.So I think it's a scare tactic among shareholders and the entrenched to want to maintain their margins. I really, like, God, I'm sounding so Bernie Sanders PERSON. I just don't buy it. People making a living wage or putting in place regulation such that people are living in poverty working 40 hours a week, it's hard for me to imagine that the world's wealthiest economy can't figure that out. And anyone telling you that their business can't make it or they're going to have to fire people, that really is a misdirect at this point. Let's talk about General Catalyst. Full disclosure, General Catalyst is invested in everything I've done for the last 10 years. Them and Andrews and Horowitz raised 6 and 7.2 billion respectively. This is more of the same. There's just a concentration of power. I mean, not only is it a small number of firms to get all the deal flow. It's a small number of partners at a small number of firms to get all the deal flow. And the fear is that these funds get sobig that a key criteria in where they invest is where they can shove a ton of capital. So it used to be VC firms kind of raised two to 300 million, made, you know, 10 to 15 investments, initial investment, three million, then maybe the company's doing well. They put 10 million. Maybe they put up to 15 or 20 million and 20 to, you know, 15 to 20 investments. Now they need to find things where at some point they can maybe shovel 100 or 200 million into the company. And I think that changes the dynamic. And you just know what's going to happen here. They're going to invest in cloud and AI because those companies,A, offer huge upside. And B, are just voracious monsters in terms of their appetite for capital. But this is, this is kind of the same thing, and it's a little bit scary, and that is not even the big, but the giants are becoming megalodons.

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Well, just some data to put it in perspective. First quarter of this year, U.S. VC firms combined, raised $9 billion, and now we've just seen two firms in basically two weeks, raised $9 billion, and now we've just seen two firms in basically two weeks, raised $13 billion. So I think that sort of demonstrates your point. The other side of this is that the VC industry has just generally been bad over the past couple of years. I mean, total VC funding last year was down 60% from the previous year. I think it was a third of total fundingin 2021. But, you know, we've just seen two huge races from two massive names. My question to you would be, do you think this could be the moment that kind of jumpstarts the broader VC industry? Do you think we'll start to see some more headlines on big fundraisers from other firms in America GPE?

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Yeah. The, you know, the tier ones of the world, the insights, you know, there'll be small niche firms like an act event or Lux Capital ORG that are very focused that'll be able to raise money, and then there'll be just these megaladons because they're able to diversify, they have great partnerships, they have really well-run firms with a great leadership from Monteneha at General Catalysts ORG is, you know, this adult who's very well respected. So they'll either be niche and highly focused and differentiated or they're just going to be giant, basically, asset allocators that diversify for you. Where I see the opportunity amongstcentral capital firms right now is not where you would expect. One, it's obviously shoveling money into AI, but two, it's follow-on rounds in good companies where valuations have come way down. What do I mean by that? Series B, C, and D, and a SaaS company that's doing really well. It was valued at 20, 30 times revenues two years ago. They need more capital. The company's doing really well, but the markets have recalibrated and you can invest at five to ten times. So I think where the real opportunity is, and I know this is true at a lot of big VC firms, is follow-on rounds taking advantage of their pro rata rights, meaning if they own20% of the company in any subsequent round, they have opportunity to put up to 20% of the capital in for the next round. I think where these firms have a lot of advantage, as a firm like General Catalyst, probably has 300, I don't know, it might be 500 as far as I know, portfolio companies, and the ones that are doing really well, their valuations have come down. So this is the opportunity to go in and get more of that firm for a lot less. So it's, I think the opportunity, the huge upside is picking the right AI company, but on a risk-adjusted basis, the biggest opportunity for that capital right now is to take advantage of their pro rata rights and invest in subsequent rounds at a much lower valuation.

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Thoughts on marijuana going Schedule 3?

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Well, you know, I don't know much about marijuana. Ed PERSON. So, look, I think this is a good thing. Let me be clear, and I got a lot of calls from mothers saying that I shouldn't endorse or shouldn't romanticize drinking or THC. Let me put it this way. This is my public service announcement. If you're in high school or college, don't be that guy that smokes pot every day or that gal.It's not a good rap. It's not good for you. Anyways, having said that, I do think if you're like me and you love to get high, if you're a better version of yourself a little fucked up, which the dog is, then I am trying to substitute THC and edibles for alcohol. I've been listening to too much Andrew Hubermanand Peter Atta PERSON, who have literally declared war on alcohol. They make it sound like if you open a bottle of wine, you're going to have a stroke.

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So I'm trying to take down the alcohol.

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I do edibles once or twice a week. I could immediately turn this into about me. I don't understand why this in any way would be considered something more dangerous, quote unquote, more illegal, if you will, than alcohol. So I think this makes a lot of sense. The industry has been a shitty industry because it's the definition of over-invested.Every baby boomer in their 50s and 60s, who is a Democrat NORP, likes the idea of investing in marijuana. And so the field is over-invested. It's over-regulated. It's state-by-state. So it's incredibly hard to scale. It's hard even to get a bank. So there's deft risk because you can only take cash.

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I think it's a good point that it's been a terrible investment, at least if you're in it long term, because all these stocks hit their highs around 2018, 2019 when the boom was really starting. And, you know, the stocks have soared on this announcement, like there's this company, Tilray, which jumped 40%, canopy growth, which jumped 80%, and then the advisor shares cannabis ETF jumped around 25%. But they're still not anywhere close to what they were, to what they were trading at in 2018, 2019. I was going to ask,it sounds like the answer is no. Are you invested in any weed companies? I'm not. I just,

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I think it's a shitty business. I think it's over-invested and a regulatory nightmare. I'll give me an example. Up until now, pot businesses pay an effective tax rate of more than 70% because, get this, they aren't permitted to deduct expenses except for the cost of production. So William Sonoma, if a store does a million dollars, if a William Sonoma store does a million bucks and its rent and its cost of its employees to, you know, give you hot apple cider that was cured by apples raised in a farm in Tibet GPE or whateverit is they do. Say it's got $900,000 in the store does a million. It's $100,000 in profit. Marijuana store, you can't deduct the cost of retail and employees. So you pay taxes on a million dollars. So overnight, it's unprofitable. These companies have the odds just stacked against them.And it's too bad because marijuana could be, you know, I mean, they're getting good tax revenue here, but they're essentially cutting off their nose despite their face. The industry can't grow.

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Yeah, but to be clear, I mean, this news, the reason that the markets love this so much is because marijuana is now exempt from that provision in the IRS ORG code, which said that if you're selling a Schedule 1 or a Schedule 2 drug, you can't deduct the business expenses. So that's what all those jumps in the stock.That's the reason those happened. And then finally, big tech earnings. We'll discuss it in detail with Aswath PERSON, but before we have him on, any reactions to Amazon, Microsoft, and Google ORG's earnings.

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There's only a few companies that can make this sort of staggering investments in compute required in AI. And I used to think they were getting to nosebleed territory and they were overvalue. And now I'm beginning to think, you know, and it's dangerous. It's throwing the towel and invest in these companies because I don't see, they feel unassailable at this moment, which is famous last words. But champagne and cocaine, Ka and Ching, as we record this, Apple ORG reported fiscal second

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quarter earnings, it's increasingly, it's quarterly dividend, and it's going to repurchase an additional $110 billion of stock. So basically, it's buying Boeing or AT&T ORG in the form of a share

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buyback. So this company continues to just, wow.

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We'll be right back off to the break for our Q1 review with Professor Aswath PERSON to motoring.

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We're back with Prof.com ORG We're back with Prof. First quarter earning season is in full swing. That means it's time for our coarsely review with Professor Aswath Demoderin PERSON, the Kirshner PERSON family chair in finance education, and Professor of Finance at NYU Stern's School of Business ORG.Aswath PERSON, thank you very much for joining us again. Thank you for having me. So let's start with big tech. We saw earnings from Google, Microsoft, and Amazon last week. All of them saw double-digit revenue growth largely due to this massive demand in their cloud businesses. I mean, I'd love to just start with your initial reaction to those earnings, Google, Microsoft, and Amazon ORG.

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A couple of weeks ago, I was in Brazil GPE, and I did a session on AI and, you know, whether AI is a revolutionary change, how it's rippling through investing.

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And one of the things I talked about is we often focus on the big winners in AI,

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but looking at AI products, right? In video obvious, AI chips and, you know, Adobe ORG, AI products. But I think AI brings with a demand for other stuff. Ultimately, AI, now, chat GPT, might have brought it to our public consciousness, but it's a convergence of two big forces that have been exploding over the last 15 years. One is the collectionof data, not just numerical and financial data, but data about your behavior and my behavior that the big tech companies have accumulated over time, which has to be stored somewhere. And the other is incredibly almost insane computing power brought to play. So when we talk about AI, we're really talking about big data plus computing power on steroids. And there will be the beneficiaries of those companies that make money on those two things, Nvidia and the computing power side. And the big data for better or worse is in thehands of the, it's not just the cloud that you store it in, but the companies that have exclusivity to that data. So I've always believed that in the AI space, Google ORG and Amazon are going to start with an advantage because no two companies have as much exclusive data as those two companies have. And since AI requires the data for its power, you're going to start with an advantage.You saw that not just an extended use of the cloud and the service and the revenues that come from it, but you're still going to start to see it in more explicit benefits that emerge from AI products that come out of these companies that use their data. So, to me, it's not a surprise because of AI is playing out as big as it is.You should see those effects show up at those companies.

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I think the other thing that would reflect this is just the sheer amount of spending that we're

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seeing on AI, basically just AI CAPEX.

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I mean, obviously, meta announced it'll increase seeing on AI, basically just AI CAPEX. I mean, obviously, meta-announced it'll increase spending on AI and the stock, despite some pretty remarkable earnings, it actually fell on that news. We discussed that last week. But then also we're seeing thiswith Google, Amazon ORG, and Microsoft ORG. So just some data I'd like to point to regarding cloud infrastructure capital expenditures. So that's data centers, power plants, GPUs, etc. Last quarter, Google spent $12 billion on the cloud.Amazon and Microsoft spent $14 billion each. That's roughly triple what they were spending around two years ago. So it definitely feels as if every company, every tech company is just doubling down on AI.

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And Microsoft ORG has it from both the cloud business as well as being this partnership with Open AI ORG that's become one of the great investments they could have ever made.

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But I think that I'll be quite honest.

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The big story for me over the last few weeks is not the earnings season, but the fact that two companies

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in the mix that you talked about announced that they were going to start paying dividends, both MEDA and Google ORG. And that to me is revealing because it tells me what they think about where they are in the life cycle. As you know, I have this fixation about the corporate life cycle. And announcing that you're going to paydividends is like, you know, announcing you're going to wear khakis, which basically means, hey, I'm not, you know, rip jeans kind of, you know. Where are my dockers? Yeah, I'm growing up.

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I'm going to get a job. So in a sense, there is this admission at least internally that this is, you know, the glory days of just easy, I mean, so the cloud business might give them a boom right now. But this is, I mean, they're recognizing their very different companies than what they thought they were. I mean, it's amazing, especially with Facebook ORG and those initial periods of the metaverse.You could still see the diagrams of, we're a growth company. We can go into the metaverse. We can do all kinds of stuff. And I've got to give Mark Zuckerberg credit I mean he's in a sense grown up quickly partly because you got punished by the market so

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intensely but I think that is to me a big story because it tells me that these companies are laying the foundation because when you pay dividends what you do is you change your investor base your calling in people into your investor base who traditionally might have stayed away from you, more value-oriented investors. And they might bring a lower price, but they also bring in more stability. These are not the people who are saying, what have you done for me lately?When are you going to deliver 20% growth? And that's why it's a big story, because I think they're preparing an investor base for a more sobering decade going forward. In spite of all the bubbling of AI right now, looking forward, I think they see more competition, less growth, and I think that paying of dividends signals that that's what

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they're seeing. Just a quick follow-up specific to dividends. Amazon ORG is the only one you mentioned there that did not issue a dividend, but the rest of tech has, Google, Microsoft, and Vidia, Apple ORG. Amazon's done, you know, more than $50 billion in free cash flow in the past 12 months. Do you think they'll issue a dividend anytime soon? They're the odd man left out.

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I mean, I think, you know, it's a question of, I think, what the price does and how the market reacts to it. And, I mean, I think they might be, you know, it might make sense for them to, I mean, remember, these dividends are not big dividends. They're almost like, you know, first rounds in a much longer fight. So I think if Amazon ORG wants to get a more mature, and I'm going to use the word withquotes around it, investor base, this might not be a bad idea because I don't think you want the kinds of investors who invest in GameStop and AMC ORG buying your stock because they might push your stock up 30% quickly, but they can also push your stock down 30% for no good reason at all. So I think that there is a significant portion of our investor base which has gotten used to this, you know, playing investing as a game. They're playing the same way they do casino tables. And if I'm a company, I want those investors away from my company, not in my company.

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So, Aswath PERSON, it's interesting what you said about. You sort of couch the announcement to issue a dividend, not as a negative thing, but almost a signal sobriety or the days ahead might not all be champagne and cocaine. Something I learned from you, though, is that it reflects maturity to recognize you no longer a teenager. And that if your core business is so strong and is spinning off so much cash that it's unlikely you could start a new business or make an acquisition that could offer the same cash flows as your current business, that it's a fairly efficient way to return capital to shareholders. Is that, I mean, to me, I saw this as a good sign. Do you have any evidence or research that shows the performance of companies pre and postwhen they launch a dividend?

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In fact, you know, when you see companies initiate dividends, it's often, and you look

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at earnings growth before and after, earnings growth peaks about two quarters before dividends get initiated. And after that, what you see is earnings growth get much lower. So I think in a sense, dividend initiation is really a signal of, hey, guys, we've got used to 20% growth in our earnings.

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We're a different company now. And we want you to recognize that going in. It's a sign of maturity to recognize that going for a higher price now and pushing up expectations that you cannot deliver is actually a bad thing. And I think these companies have come to that recognition and I think that dividend payment might be the start of that process of kind of reorienting people's thinking about what the future will hold.

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I didn't think I'd be able to recommend these stocks after their huge run-up. And then when I see that their cloud business, which they have made just staggering, I think we read or saw that across the Big Seven or the Magnificent Seven, they've invested something like $32 billion just in infrastructure around AI. You have the hottest growth segment in the world, AI, which every company wants to explore, build their own LLMs, but they can't build it themselves,so they need to rent it from a cloud-based provider. In order to be a cloud-based provider that can make the requisite investments to attract these types of clients, you have to make multi-10 billion dollar investments, so it's sequestered to just a smaller and smaller number of firms. One, it strikes me that the champagne or the nitro and glycerin of cloud and AI built on top of cloud means that the entire world's growth expenditure, corporate world growth expenditure, is going to be funneled into literallya small handful of firms, which is one, great for those shareholders. But two begs the question, is this yet another speedballing of concentration of power where we should start thinking about antitrust? I mean, who's going to be able to compete with these guys?

Speaker 21941.32s - 2082.7s

You know, it's been one of my worries with AI. I think this winner take-all phenomenon we've been seeing build up over the last two, three decades, which I think you pointed to when you first looked at the tech companies, AI, I think, is going to make it even more winner-take-all. And I'm sure in the Clayton Christensen argument about disruption 30 years ago that it always comes from outsiders. And that's the way it worked out with dot com.With AI, I don't think that's going to apply. And here's why. You need two big things for AI. You need processing power in immense amounts and control of data. So it's going to be very difficult for a newcomer to even venture into the space because you're going to get squashed.This is one of those things where the biggest tech companies might actually start off with such an incredible advantage over everybody else that, you know,they're going to be, it's going to be tough to catch up with them. So the Mag 7 PRODUCT might have an extended runner. The Fangam PRODUCT, if you prefer to call it, might have an extended run because AI actually makes the strong even stronger. Just like COVID made the strong even stronger.This seems to be another face of the strong will gain strength. There might be a newcomer who creeps in. But the interesting thing about the Mag 7 PRODUCT is when one of the strong will gain strength. There might be a newcomer who creeps in, but the interesting thing about the Mag 7 is when one of the companies underperforms, Apple ORG, for instance, somebody else steps in and fills the gap.So it's almost like, you know, you hold all seven or all 10 or whatever you make the number, that the collective group finds a way to outperform the market because if there's a loser there, the winner often is another company in the same group. It's not some outsider that'scoming in. So I worry that 20 years from now, you're going to look at the S&P 500 and you're going to find even, or any index, you're going to find even more concentration at the top than you did, which creates social and economic questions that will get bigger over time. So if you think antitrust is, and Elena Khan PERSON might think they're big. That question is only going to get bigger five years from now, 10 years from now. And it might become even more difficult to confront as these companies

Speaker 42082.7s - 2140.1s

get bigger. Along those lines of, I mean, there's concentration, sort of seven companies within the S&P ORG or within the NASDAQ, one of the things I've been focused on a lot, and some of this I gleaned from you, is just the power of diversification. You know, the number one question I get is, is it too late to buy Nvidia? And I would say, I don't know, but if you buy an index fund, 33 cents on the dollar are going to, to the Magnificent 7 because they're weight adjusted,and if the other 493 companies have their day in the sun, you've got 67 cents in those. What I haven't done, or I haven't done much of, is I haven't diversified geographically. And it strikes me that if you think about AI, I think we're 97% of the revenue and 140% of the profits within, not only within the U.S., but within a seven-mile drive of SFO International ORG. Do you tell people, I know you tell them to diversify, but do you think it's a bad idea to be pretty much all in on American NORP markets?

Speaker 22145.66s - 2303.92s

I'll tell you the biggest problem we have. I mean, I was in Latin America last week, and I was in Brazil, or two weeks ago. And I took the top 20 companies in the U.S. GPE, and I put the ages of those companies right next to the companies. And a lot of the companies are 15, 20 years old. Facebook ORG, if you think about it, is not that old. And then I took the top 20 companies in Latin America LOC, and I put them up. And they're ancient. They're, you know, and I did the same thingwith Europe. Ancient companies. You do that? I mean, the U.S. GPE in a sense is the outlier in this in terms of young companies, not just breaking through, but making it to the top. I think the more the EU acts, the more convinced I am that Europe LOC will never be a player in AI because in the interest of protecting consumers, they've actually created a system where if you have a young, smart, you know, person who's got this incredible AI idea in Europe LOC, he's going to get on a plane, fly to SiliconValley. And it's not just that if you look at the market, the total global market gap, the U.S. has actually increased its share of that global market gap significantly. And with China GPE falling, you actually are getting an even larger segment of global market gap coming to the U.S. GPE So even if you held a global index fund, you're going to end up being overinvested in U.S. GPE stocks because U.S. equities are just taking an increasing slice of global equities. But I don't even think of these companies as U.S. GPE equities anymore.I mean, they might have, through the accident of history, become incorporated in the U.S. But these are global giants, right? They happen to be U.S. GPE companies. So when you buy the S&P 500, you're buying global companies that happen to be U.S. GPE companies. So when you buy the S&P 500, you're buying global companies that happen to be U.S.-based GPE. So I think of my portfolio primarily now as global companies, and to the extent that global companies, the fact that most of them are U.S.-based GPE, I think, reflects the way therest of the world seems to be allowing or not allowing companies to catch up with the 21st century. allowing companies to catch up with the 21st century. And I think, you know, with the U.S. GPE companies, you're seeing that explosion of young companies take off. That's a plus of what's happened in the U.S. The minus is when you have these young companies explored, you're going to create a bit. I wouldn't be surprised if within my lifetime, and it's probably sooner rather than later,you get the first trillion there. It's only a matter of time before it happens. So I think you're going to see all those side effects as well, greater, you know, in terms of income, wider disparities in income, you know, and, you know, we have to be prepared for the consequences. Just on that idea of the

Speaker 32303.92s - 2345.36s

concentration of power, something Scott PERSON and I have been consequences. Just on that idea of the concentration of power, something Scott PERSON and I have been talking about recently is this idea of interlocking board directors. Basically, you know, you have a board director on one company, and then they're also, at the same time, a director of a competitor, or they have some sort of, like, financial interest in a competitor.And, you know, my feeling is that this is pervasive in AI, just as the examples we've looked at, Microsoft is involved in Open AI ORG, but also Mistral and also Infliction ORG. Reed Hoffman is the co-founder of Infliction ORG, but he's also on the board of Microsoft ORG.Brett Taylor's, the chairman of Open AI ORG, he's also on the board of Salesforce ORG, which is invested in Anthropic Mistral ORG. It's basically...

Speaker 22345.36s - 2444.1s

They probably all drink at the same bar and they stay at the same hotels. Right. I mean, it's a very, it's very incestuous component to this. And, but I think that we get the corporate governance we deserve. I mean, in 2004, when Google went public and they said, we're going to have two classes of shares, one with 10 times the voting rights, they were breaking from the back because for a century in the U.S. GPE, we were moving away from that model.Because the New York Stock Exchange said, if you want to be listed in the exchange, you cannot have two class of shares. When Google announced we're going to have two classes of shares, I expected institutional investors to rise up and revolt and say, this is not something that's acceptable, but that's not what we saw. We saw institutional investors, that's okay because you guys are well run and well man. It's almost like they were saying a benign dictatorship is okay because they're benign dictators. Facebook ORG is a dictatorship. I don't even know whether it's benign or malignant,depending on what do you think about Mark Zuckerberg, but we allowed Mark Zuckerberg to have the kind of power that he did because as investors, we looked the other way. Now, I remember in 2019 at the peak of Facebook's issues, a money manager complained to me that Mark Zuckerberg, I mean, he held a big stake in Facebook ORG. He said, Mark Zuckerberg is not listening to me. And I said, you know, buying shares in Facebook and complaining that Mark Zuckerberg is not listening to him.It's like getting married to a Kardashian PERSON and saying, you know, cameras keep following you all over the place. What exactly did you expect when you married into a reality shows family?

Speaker 02444.7s - 2447.42s

Now, investors in a sense have looked the other

Speaker 42447.42s - 2452.4s

way with tech companies in terms of corporate governance. And what you're talking about is a slice

Speaker 22452.4s - 2504.84s

of that issue. Corporate governance is dead at tech companies. If there's going to be a change it, it's not going to come from the board of directors pushing for it. It's going to come from outside. And it's going to come almost entirely from the price dropping enough that they care. The reason Mark Zuckerberg woke up after that metaverse fiasco is because the stock price drops so much. So I think if you, you know, it's unfortunate because we talk to talk about corporate governance. We started measuring corporate governance 20 years ago. It's course.But we've actually let corporate governance become worse because we spend more time talking about it than following through with actions. We'll be right back.

Speaker 42507.76s - 2650.5s

Support for today's show comes from public.com. Everyone always wants to tell you about what you should do with your money. Where should it go? What should you spend it on? But how often do you hear about what your money can do for you? That's what they want to talk about at public.com.Public ORG is an investing platform with a mission to make the public markets work for all people. They started by introducing the world to fractional investing, and they also offer a high-yield cash account. How do I know all of this? Well, it's because I am an investor in public. Why am I an investor? Because I think these are good people. I hate payment for order flow. They don't do that. And I think they're generally interested in fomenting a generation of investors, not gamblers. At public.com, you can access an industry leading 5.1% APY with a high-yield cash account with zero fees and no subscriptions required. Plus, you can get unlimited transfers and withdrawals and it's FDIC insured up to $5 million. So if you want to see what an industry leading 5.1%APY will look like, you can check out public.com. This is a paid endorsement for public investing. 5.1% APY has a March 26, 2024, and is subject to change. Full disclosures and terms and conditions can be found in the podcast description, U.S. GPE members only. Support for this episode of Prop G comes from Masterclass PRODUCT. Life isn't like the movies, and the movies learning something new is simple. It's a 60-second montage with a killer score, or they just plug something into your brain,and suddenly, you know, kung fu, if it were, only that easy. But here in the real world, we have to learn the old-fashioned way with time, dedication, and insight from great teachers. At least we have platforms like Masterclass PRODUCT. Masterclass helps you learn anywhere on the go by giving you access to hundreds of classes taught by world-class minds and experts in every field.Study music with Danny Elfman, storytelling with David Sedaris, and acting with Samuel L. Jackson PERSON. I like Masterclass PRODUCT. I wanted to listen to Bob Iger PERSON talk about management. I think it's kind of a cheap and cheerful way to hear from people who've obviously been very successful and have some insight. And right now, our listeners will get an additional 15% off an annual membership at masterclass.com slash prof.G. Get 15% off right now at masterclass.com slash profg.This episode is brought to you by Shopify ORG.

Speaker 02655.12s - 2683.84s

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Speaker 32684.22s - 2690s

Just a pivot to entertainment and the content world. I'd love to get your general reactions to this Paramount ORG drama.

Speaker 22690.32s - 2699.92s

The lunatics are running the asylum is my reaction, right? I mean, this is exactly why you don't bind to benign dictatorships, right?

Speaker 32700.04s - 2730.3s

Well, sorry, before you comment, let me just set the stage for our listeners, which is, you know, Paramount ORG. They've been fielding offers from several buyers, including Skydance Media, which we've discussed Apollo. And then a little over a week ago, we learned that their longtime CEO, Bob Backish PERSON, is now leaving the company. And he's been in this, it appears a spat with the controlling shareholder, Sherry Redstone PERSON, who controls it through her company national amusements. I just wanted to set that stage. Asworth PERSON, go ahead. Thank you.

Speaker 22730.46s - 2736.78s

I mean, I think we need to go back to the original sin, which was when Subner Redstone PERSON was given

Speaker 32736.78s - 2743.74s

these boarding shares, the reaction was he's such an insanely good manager. So what harm is there

Speaker 22743.74s - 2851.42s

in giving him controlling power in perpetuity? And at that time, I remember thinking, but he is a human being. He's going to get older and he did and he got dementia. And the voting rights still stayed with them. They passed on to, so what we're seeing is the residue of decisions made in the 80s and the 90s. So what if Zuckerberg turns, I mean, he will get to be 80, 85? What if he gets dementia?Who's going to be running Facebook ORG? This is a problem we set ourselves up to repeat on all these big tech companies with voting shares with different, or shares with different voting rights. And Sherry Redstone PERSON is, you know, let's face it, I mean, she is eccentric to, you know, that's the right word. And, you know, she might not listen to reason,but she has controlling power. So we know the entertainment business. We need to consolidate that this business is in disruption. You can't do the things you used to. And there are only three players outside of Netflix ORG. It's Disney Warner Brothers and Paramount ORG.And the question is, where will they go? Because everybody else is going to be a side player. What I saw happen with Sherry stepping in and push, you know, essentially putting a stop to this process is, you know, you're devising a pathway to drive Paramount ORG into essentially ruin if you don't do something. There's not a whole lot you're going to be able to do as Paramount shareholders because of something you did 25 or 30 years ago. And I want this almost to be etched into people's memories the next time some company comes along with voting and non-voting shares.

Speaker 42851.58s - 2853.06s

Yeah, but they never remember.

Speaker 22853.32s - 2880.3s

We need to make a Netflix movie about Paramount ORG in the years after and say, hey, watch this movie over and over again in case you're tempted to do it because it's funny at one level, but I think about all the jobs and the content you're putting at risk, it's a tragedy, you know, in the making that was born out of corporate governance fiasco. At some point, do you think about running into the fire?

Speaker 42880.5s - 2904.6s

I mean, Warner Brothers' discovery is now sub-eight bucks a share. It's got a market cap of $19.5 billion. Now, granted, its enterprise value because of the debt is much greater than that. I think it's got about $40 billion in debt. But at some point with a company like Paramount or Warner Brothers, when they became trading as if they're going out of business, isn't there real upside potential there when these things get left for debt?

Speaker 22904.9s - 2911.6s

I'm amazed that I mean, maybe it's a governance issue that an Apple ORG, I mean, because Apple could buy this with petty cash, right?

Speaker 42911.64s - 2935.32s

Any of these companies. And if you think about buying content for entertainment, you're effectively getting an entire library with each of these companies that you can find better ways of using than each of these companies are.So we talk about winners getting bigger. This is going to be the next phase, as I have a feeling, that a lot of the existing entertainment companies are going to become parts of the big tech companies.

Speaker 22936.1s - 2992.8s

And, you know, you mix it up with all the other things that come with these companies. It's kind of a terrifying thought, but you're getting your news from Apple ORG, your entertainment from Apple ORG. I mean, it's a, it's, I think it's only a matter of time. I think the only reason the big tech companies are avoiding it is do you really want to buy Paramount ORG and have to deal with Cherry Redstone PERSON? I think unless you find a way to separate her from the company, no tech company will touch Paramount ORG.So it's almost as if the presence of some of these existing people in the company makes them toxic enough that nobody wants to touch them. But you're right. At the right price, somebody's going to be tempted. And it's a morbid thought. But time sometimes takes care of some of these problems.So I'd keep a good watch on Sherry Redstone's PERSON health because, no, that might be the dividing

Speaker 42992.8s - 3005.98s

line of what happens to Paramount ORG. And we've been talking about pretty high profile companies. Are there any sectors or companies that you're looking at where you think they've been kind of overlooked and you see something interesting in the markets, either overvalued or undervalued?

Speaker 23006.3s - 3229.52s

I've been tracked, I mean, as you know, it tracked markets on a monthly basis looking at the equity risk premium. And April, when I did the update, April 1st, it was peak momentum for markets. Everything looked amazing.If you remember, the story was inflation has been conquered, you know, Fed ORG's going to cut rates, the economy is back, and four weeks late, Fed ORG's going to cut rates. The economy is back. And four weeks late, it's amazing how much the mood has shifted on big questions, right? All of a sudden, there's this worry about, is the inflation as strong as we, is the economy as strong as we thought it was? I mean, I've read a few stories, but maybe inflation will never drop below 3%.Fed ORG rates, I wouldn't be surprised if you saw the Fed raise rates rather than cut rates during the course of the year if inflation doesn't come down. But it tells you how much markets are driven by mood and momentum. And I think this month will be a make or break month because the mood continues to shift down. We'll be heading into the summer in a bad mood with momentum kind of against us.And you put on top of it a presidential election and political instability. We could be looking at a pretty bad year by the time we're done. And it's across sectors and there's an adjustment.You're going to see it cut across. So for the moment, that's what I'm keeping my own is that mood and momentum factor. There isn't a sector that I can point to say that sector is obviously undervalued right now. It's because collectively I think everything's been pushed up so much that you look at beverages, you look at technology. Everything is trading at a much higher multiple of everything than it did a year ago, two years ago. But I think you're just one big correction away fromthings starting to pop onto your radar saying that's been pushed down too much. I mean, I think the entertainment space is an obvious space where I can't buy Disney ORG because my son works at Disney ORG, so I don't want to create issues with them because that's one reason I can't buy Disney because my son works at Disney, so I don't want to create issues with them because that's one reason I don't value Disney or write about Disney ORG, though I have lots of thoughts about Disneybecause I use it in my class. But to me, Warner looks interesting because it doesn't have the Sherry Redstone PERSON effect that I would get with Paramount ORG. And I think the content, I mean, ultimately, I don't care if you're an entertainment giant.Without the content, what exactly are you going to stream? So I think the content is interesting enough. And ultimately, I think somebody's got to be in charge of content. And Disney and Warner are still better at creating content than Netflix ORG is. Netflix ORG throws a lot more money, but it creates a lot of crap along the way. So I think that to me, there will be more businesses like that show up on my radar.Now, I'm interested in PayPal ORG as a company. I'm amazed at how much the mood has shifted against, from PayPal ORG being this high-flying financial service company too. It's boring and, you boring and nothing's happening. I have companies that I have on my list that I haven't bought yet that I want to wait through me and see what happensbecause I'm just one downturn in the market away from saying, oh, those companies look good. And I would say the same thing to the person who says, you know, can I ever buy Nvidia? And my reaction is in the last 15 years, Nvidia's been cheap at least five timeson an intrinsic value basis. It's not been an, you know, all upswing. I mean, the reason I bought Nvidia in 2018 is people were beating it up saying this is the end for Invidia. There will be a time on every one of these companieswhere it's the right time to buy. It might not be right now, but patience has its own rewards.

Speaker 43230.12s - 3276.5s

Just in terms of asset allocation, I've never owned bonds. And I have a lot of friends who manage credit funds. And they've said to me, like, Scott PERSON, why are you in equities? Do you think the markets could be really volatile? Do you think the markets could go down substantially? And the answer is, sure, I can see it. And they said that, look, I can get you with reasonable certainty, 10 to 12 percent a year in the credit markets right now. I can find you high quality debt in great companies and get you double digit returns. And nothing's guaranteed. But the number you're getting, the return you're getting on fairly low-risk assets has surged. Why wouldn't you reallocate or rethink your portfoliostrategy and allocate more to credit? What are your thoughts? In generally, you're right,

Speaker 23276.64s - 3432.66s

fixed income clearly is, for a decade, it is equities on nothing, right? You earn nothing on T-Bills, nothing on bonds, even AAA ORG-rated bonds. You're earning two, three percent. And I think that we have more choices now, and I think we need to look at those choices. I don't think you can make, to be quite honest, that 10 to 12 percent with no risk comes from the fact that when lenders and bondholders look at risk, it's always backward looking. There's been no default in the last decade.Based on that, it looks pretty safe. But we know that at least in bond markets, default risk is highly correlated, which means that if there's trouble, there's a tipping point where all your bonds get into trouble at the same time because of some macro event. 2008 was a classic event. Bonds that look safe, all of a sudden start to blow up on you.But I do think you can make solid returns. I tiptoe into this because I've not been a big fixed income person, but I'm much more conscious about sweeping my money into tables where I make 5.5% a year. That's a lot of money to leave on the table if you have it in cash. Would I lock in bonds? The reason I worry about bondsis the same things that would bring equity markets down are the things that will bring bonds down even more. For instance, if you think inflation is your big worry that it might explode, it's going to bring equities down, but it's going to be far worse for bonds because you have no pricing power to increase your coupon. Your coupon is stuck. So the 10 to 12% is assuming that you effectively are going to stay in this debt and that you collect the interest payments with no default. But the price of debt, especially with long-term debt,is a function of what's happening to inflation and interest rates. As we saw in 2022, I mean, stocks were down 20% because inflation went up. But bonds had a return of minus 22%. It was the worst year for the bond market in a century. Inflation is deadly for stocks, but it's even more deadly for bonds. So it depends on what do you think your worry is for markets. My worry more than the economy is inflation. Because I, in my experience, inflation is incrediblystubborn. You think you've conquered it, but it finds a way back. And I think as we've seen in the last three years, you think you've got it nailed, but then it comes back because it seems to seep and through other channels. And if inflation is my worry, I'm just as exports, perhaps more so if I put my money in long-term fixed income as I am in equities.

Speaker 33432.66s - 3453.14s

You also recently wrote this piece on risk in your blog, Musings on Markets WORK_OF_ART, which I thought was great. And you brought up this distinction between incremental risk and catastrophic risk. The former is, you know, risk to sales and earnings. The latter is, you know, something that can kill a company.

Speaker 23453.14s - 3656.1s

I mean, I don't want to waste your time, but I want to give you a little bit of background to how I wrote that paper. It started with an email. I got from somebody in Iceland GPE reading, you know, who read my blog, he said, look, you know, I am an appraiser in Iceland. And one of my jobs is to appraise the value of this company or business called Blue Lagoon. Blue Lagoon is this legendary Icelandic NORP spa. And it's been around a long time. It's great margins, great profits, but it's facing an existentialthreat, which is the volcanoes that have become active in Iceland GPE. The lava is flowing in the direction of the blue lagoon. He said, how do I incorporate that risk into my value for the company? It's too late to buy insurance, obviously, because the answer is go buy insurance, build in the cost. So it started me thinking about how do we deal with catastrophic risk in investing in valuation?So I was walking my dog on the beach, which is where I do much of my thinking. And I was thinking about this, and I said, you know, before I point fingers at other people not dealing with catastrophic risk, I just walked out of my house, which is two blocks from the Pacific Ocean and sits on an earthquake fault. And I paid two and a half million dollars for this house. Did I bring in catastrophic risk into the valuation of this house? I mean, I'm one tsunamiaway or one earthquake away from the house becoming rubble. And my earthquake insurance is very limited. It's not going to rebuild a house and a tsunami. I don't even have tsunami insurance. So I don't even know what would happen if that happened. I said, I'm not building it. And I think this is part of a broader theme with catastrophic risk in investing.You know what? We deny it. We act like it's not there. And I think there's a reason for it. You know, I use this example of an apocalyptic movie, Mad Max Beyond Thunderdome WORK_OF_ART.I said, go watch the movies. Check to see how many times people in that movie check what their portfolios doing. Nobody does, right? It's survival, survival, survival. So I think in a strange way, as investors, as businesses,we shut off catastrophic risk. We pay $500 million for a building in downtown Manhattan GPE, even if we believe that climate change is going to put Manhattan under water because of you is what's the point of even bringing it in? At that point, my portfolio won't matter anyway. Life is going to come to a standstill. I'm either going to live or not live. And I think that's part of a broader issue.In business and investing, we tend to ignore catastrophic risk entirely. In fact, I think there might be lessons there for the climate change folks, which is if you preach catastrophe and you ask people to behave better,it's not going to happen. It's like telling people that they have 60 days to live and saying, can you live more healthily? If I have 60 days to live, what difference does it make? So if you want people to behave better, maybe less catastrophe forecasting and more there is hope and you can change things. But I think it's part of it. I mean, I think we're starting to grapple with the question of catastrophic risk and how to bring it in. But we're just very early in the process and we're not very good at dealing with it.

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Aswatta Motorin is a professor of finance at the Stern School of Business. Aswath PERSON, as always, we really appreciate your time. Thank you, Scott PERSON.

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This episode was produced by Claire Miller and engineered by Benjamin Spencer PERSON. Our associate

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producers are Jennifer Sanchez and Alison Weiss. Our executive producers are Jason Stavis PERSON and

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Catherine Dillon. Mia Silverio is our research lead and Drew Burroughs PERSON is our technical director.

Speaker 33681.48s - 3745.1s

Thank you for listening to Prof G Markets from the Vox Media Podcast Network ORG. Join us on Wednesday for office hours, and we'll be back with a fresh take on markets every Monday. Help me in kind reunion love, love. If you enjoyed our discussion with Asworth PERSON, go check out our conversation from last week with Josh Wolfe PERSON, the co-founder of Lux Capital ORG, to hear what he's most bearish and bullish on and which of the magnificent seven he's most excited about.