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10% off your

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first month. That's

1:19

betterhelphelp.com/Prodigy. This week's number

1:22

one. We are

1:24

number one in this week's New York

1:26

Times bestseller rank for miscellaneous.

1:28

Miscellaneous? Seriously,

1:32

what the fuck? Welcome

1:34

to Prodigy Markets. Today

1:45

we're discussing first quarter earning season with

1:47

Aswat the Motoren, professor of finance at

1:49

NYU Stern School of Business. But

1:51

first, here with the news is

1:54

Prodigy media analyst and also not

1:56

miscellaneous, very focused, Mr.

1:58

Ed Elson. Ed, you

2:00

are speaking to the number one author

2:03

of the category, Miscellaneous. Is that literally

2:05

the weakest flex in the world? Yeah,

2:07

but you're number two in business. So that's, I don't know.

2:10

I think you're doing pretty well for yourself. Number two.

2:12

Who's number one? The same guy it is every

2:14

week. It's James Clear, Atomic Albert. That bitch! I

2:20

knew who it was. I just wanted to describe it. Literally,

2:23

is that, that's like, I

2:25

don't know, that's really, that's like getting a

2:27

hand job from your cousin at Thanksgiving. I

2:29

mean, it's okay. It feels okay. It

2:32

feels okay, but it's like, Miscellaneous?

2:36

Miscellaneous? God.

2:38

My agent and my

2:40

publisher is like, you're number one. The email said, I'm

2:42

like, oh God, I opened it up in Miscellaneous. I'm like,

2:47

it doesn't matter. You are now a number one New

2:49

York Times bestseller and that's what you, that's what you're

2:51

going to tell people. Yeah, it's going

2:53

to be pretty good. Fucking mature. Miscellaneous. Anyways,

2:56

I get to the headlines. Well, before we get

2:58

to the headlines, I just want to announce that

3:00

Proffg Markets is moving to its own dedicated feed,

3:03

which is exciting. We'll be releasing two episodes

3:05

per week on Mondays and Thursdays, starting on

3:07

May 20th. But the new

3:09

Proffg Markets feed is live right now. So

3:12

go subscribe to Proffg Markets. Type

3:15

it in wherever you get your podcasts. Yes. We want

3:17

you to spend more time on your phones. So we're

3:19

doubling up and

3:22

we are going to spend more time doing deep

3:24

dives around sectors and companies. We are committed to

3:27

your financial security in an entertaining and

3:29

illuminating way and also finding a career

3:32

and somewhat of a life for little

3:35

Ed, for little Eddie Elson. This is really

3:37

all about him. You know,

3:39

this is okay. He's learned

3:41

how to play baseball. We've enrolled him

3:44

in soccer just because he feels good

3:46

about himself. He feels good

3:48

about himself. So people need to go subscribe

3:50

to our new feed. Is that right? Yeah,

3:52

we have a new feed. It's called Proffg

3:54

Markets. It's separate from the Proffg Pod. So

3:56

you got to type it in, subscribe if

3:58

you want to get the. twice a week content.

4:00

Love it. All right, get to

4:03

the headlines, you self-promoting hoe. Go ahead, Ed.

4:05

Let's start with our weekly review of market vitals. The

4:15

S&P 500 rose, the dollar was

4:17

volatile, Bitcoin fell, and the yield on

4:19

ten year treasuries dropped. Shifting

4:21

to the headlines. The Federal

4:23

Reserve held interest rates steady, citing a

4:26

lack of further progress toward easing the

4:28

rates of inflation. Recent economic

4:30

data has challenged the case for cutting rates,

4:32

but Jerome Powell maintained that the Fed is

4:34

far from putting rate hikes back on the

4:37

table. Prices at

4:39

California fast food restaurants are up as

4:41

much as 10% since September. Wendy's

4:43

Chipotle and Chick-fil-A are just some of

4:45

the restaurants that raised menu prices following

4:48

the state's decision to increase the minimum

4:50

wage for fast food workers. Venture

4:53

capital firm General Catalyst is close to

4:55

raising almost $6 billion to invest in

4:57

tech startups. The firm will

4:59

distribute the money across many sectors, including

5:01

space, fintech, and climate in the US,

5:03

Europe, and India. The

5:05

Biden administration is moving to reclassify

5:07

marijuana as a less dangerous drug.

5:10

It's proposed to move the drug from

5:12

Schedule 1 classification to Schedule 3, meaning

5:14

it has an accepted medical use and

5:16

would be subject to fewer restrictions and

5:19

more favorable tax treatment. Cannabis

5:21

stocks soared on that announcement. And

5:24

finally, we saw a slew of big tech earnings

5:26

last week. Apple announced its largest ever share buyback

5:28

of $110 billion, and shares rose 3%. And

5:34

Amazon, Google, and Microsoft all reported

5:36

double-digit revenue growth, mostly driven by

5:38

huge sales in their cloud services

5:40

businesses. Those stocks also rose

5:42

across the board. Scott, your

5:44

thoughts? Scott Ginesh, CEO, Apple Well, in terms

5:47

of interest rates, it is a bit of

5:49

a surprise. Expectations have

5:51

shifted dramatically. The futures

5:53

are now expecting one rate cut in

5:56

24, the market at price in 5 or 6. I

6:00

also think the market's coming to the

6:02

conclusion that maybe interest rates that are what

6:04

you would call modest. I mean, historically, it would

6:06

be unfair to say interest rates are high or

6:08

you might even say they're

6:10

kind of mid to low based on if you go, you

6:12

know, it depends how your frame, how far back you go.

6:16

And there's this really interesting theory

6:18

that the amount of money that

6:20

is invested in short-term instruments is

6:22

greater than the debt owed on

6:24

consumer loans. So it's actually

6:26

been stimulative to the economy, that it hasn't

6:28

dampened the economy, that people are getting more

6:30

money from the interest on

6:33

their short-term instruments. And as a result, it

6:35

more than covers the additional debt they have or

6:38

the increase in interest rates and that has been

6:40

stimulative to the economy. And so it feels like,

6:42

okay, the punch bowl isn't back,

6:44

but I don't need punch. The

6:46

economy is sort of shrugging off the

6:49

fact that it doesn't look like we're going to have rate

6:51

cuts. Fast food, restaurant

6:53

prices, there's no free lunch here. Raising

6:56

minimum wage has had an impact on food

6:58

prices. I would argue it's worth it.

7:01

There's a price to be paid. When the inputs go

7:03

up in terms of price, whether it's the price of

7:05

food or the price of labor, they

7:08

can either pass it on to consumers

7:10

and hope that consumers don't go elsewhere.

7:12

And obviously that's inflationary or expensive

7:15

for consumers or the company can just absorb

7:17

the hit itself and that reduces their margins

7:19

and their share price goes down. I

7:22

think this is not a balanced scorecard. Absolutely

7:24

was the right thing to do. Living people

7:27

and people without kind of the opportunity to get

7:29

the certification you need to be in the information

7:31

economy need to make a living wage.

7:34

Also I think we get a free gift with

7:36

purchase here and that is I think fast food

7:38

should be more expensive. I

7:40

think it's unhealthy. I think it's resulted in what

7:42

is the COVID pandemic times two every year and

7:45

that is we have a absolutely out of control

7:47

obesity epidemic in this country. So

7:50

yeah, I'm all for it. You mentioned two

7:53

consequences from raising the minimum wage. One

7:56

is you pass it on to the

7:58

consumer, which means higher prices. you

8:00

absorb it, you just take a hit on your bottom

8:02

line. I would add a third one, which is you

8:05

just lay people off. And

8:07

we're already seeing that in California. Pizza

8:09

Hut laid off 1,200 delivery drivers. We've

8:11

seen layoffs at other fast food chains

8:13

in California, which raises an

8:16

important general economic principle, which

8:18

is when you increase the minimum

8:20

wage, you make labor more

8:22

expensive, and companies eliminate jobs.

8:25

I know you've been an advocate for increased

8:28

minimum wage for a long time. How

8:30

do you think about this trade-off? Any

8:32

time there's a change or a shift in the

8:34

economy, there's going to be winners and losers. I'm

8:36

not sure I'd buy into your initial premise that

8:39

you end up with workers being laid off, and

8:41

it's bad for low-wage workers.

8:44

Because for every additional dollar

8:46

you give a low-wage worker, about $1.21 is

8:49

added to the overall economy, because the multiplier effect is

8:51

greater when you put more money in the pockets of

8:53

low- and low-income workers because they spend

8:55

it all. And where you've seen

8:58

studies in California and Washington State around

9:00

the effects of increases

9:02

in minimum wage, that's the myth and the scare tactic,

9:04

that all these small businesses will go out of business,

9:07

and actually, these people won't be able to find jobs

9:09

and it'll be worse for them. I think that's bullshit.

9:12

Employment has never been stronger, and

9:15

there'll be some limited instances of a

9:17

burger bot making burgers or a shift

9:19

to automation, fine. But if

9:21

a taco truck or a fast food company

9:23

can't stay in business because it

9:25

can't afford to pay its people a living wage, then that

9:27

business should go out of business. And

9:29

if people are in an industry where it's sub-wage,

9:32

then we need to figure out a way to

9:34

retrain them. But the reality is

9:36

these companies are hugely profitable, most of them, and

9:39

they're absorbing the $20 increase in

9:42

$20 minimum wage, and then David takes out additional money and

9:44

he goes out and he buys more shit, which leads to

9:46

a growth in the economy, and more

9:48

jobs. So I think it's

9:50

a scare tactic among shareholders and

9:53

the entrenched who wanna maintain their margins. I

9:55

really, God, I'm sounding so Bernie

9:57

Sanders. I just don't buy it.

10:00

People making a living

10:02

wage or putting in place regulation

10:05

such that people are living in poverty working

10:07

40 hours a week. It's

10:09

hard for me to imagine that the world's wealthiest

10:12

economy can't figure that out. And anyone telling you

10:14

that their business can't make it or they're

10:16

gonna have to fire people, that really

10:18

is a misdirect at this point. Let's

10:20

talk about general catalysts. Full

10:22

disclosure, general catalyst is invested in everything I've

10:24

done for the last 10 years. Them

10:27

and Andries and Horowitz raised six and

10:29

seven point two billion respectively. This is

10:32

more of the same. There's just a

10:34

concentration of power. I mean

10:36

not only is it a small number of firms to get

10:38

all the deal flow, it's a small number of partners at

10:40

a small number of firms to get all the deal flow.

10:43

And the fear is that these funds get so

10:45

big that a key criteria

10:48

in where they invest is where

10:50

they can shove a ton of capital. So

10:53

it used to be VC firms kind of raised two to

10:55

three hundred million, made ten

10:58

to fifteen investments, initial investment three million, then maybe the

11:00

company's doing well. They put ten million, maybe they put

11:02

up to fifteen or twenty million in twenty

11:04

to, you know, fifteen to twenty investments. Now they need

11:06

to find things where at some point they can maybe

11:08

shovel a hundred or two hundred million into the company.

11:11

And I think that changes the dynamic. And you

11:13

just know what's gonna happen here. They're gonna invest

11:16

in cloud and AI because those companies A. offer

11:18

huge upside and B. are

11:20

just voracious monsters in terms of

11:22

their appetite for capital. But

11:24

this is kind of the same thing

11:26

and it's a little bit scary and that is that

11:30

not even the big but the giants

11:32

are becoming Megalodons. Well just

11:34

some data to put it in perspective. First

11:36

quarter of this year US

11:39

VC firms combined

11:42

raised nine billion dollars. And

11:44

now we've just seen two firms in

11:47

basically two weeks raised

11:49

thirteen billion. So I think that

11:51

sort of demonstrates your point. The other side of

11:53

this is that the VC industry has

11:55

just generally been bad over

11:58

the past couple of years. I mean, totally. VC funding

12:00

last year was down 60% from

12:03

the previous year. I think it was a third

12:06

of total funding in 2021. But

12:08

we've just seen two huge raises from

12:10

two massive names. My question to you

12:12

would be, do you think this could

12:15

be the moment that kind of jumpstarts

12:17

the broader VC industry? Do you think we'll

12:20

start to see some more headlines on

12:22

big fundraisers from other firms in America?

12:25

Yeah, the tier

12:27

ones of the world, the insides,

12:29

there'll be small niche firms

12:32

like Anaktivint or Lux Capital that are very

12:34

focused. They'll be able to raise money. And

12:36

then there'll be just these megalodons

12:39

because they're able to diversify. They

12:41

have great partnerships. They have really

12:43

well-run firms with great leadership. Hamontineja,

12:45

General Catalyst, this adult who's

12:47

very well respected. So they'll

12:49

either be niche and highly focused

12:52

and differentiated, or they're just going

12:54

to be giant, basically, asset allocators

12:56

that diversify for you. Where

12:58

I see the opportunity among central capital firms

13:00

right now is not where you would expect.

13:03

One, it's obviously shoveling money into AI.

13:06

But two, it's follow-on rounds in

13:08

good companies where valuations have come way down. What

13:10

do I mean by that? Series

13:12

B, C, and D, an SaaS company that's doing

13:15

really well, it was valued at 20, 30

13:18

times revenues two years ago. They

13:20

need more capital. The company's doing really well.

13:22

But the markets have recoupled and calibrated, and you

13:24

can invest at five to 10 times. So

13:27

I think where the real opportunity is, and I know

13:29

this is true at a lot of big VC firms,

13:32

is follow-on rounds taking advantage of their pro-ratter rights.

13:34

Meaning if they own 20% of the company in

13:36

any subsequent round, they have opportunity to put up

13:38

to 20% of the capital for the

13:40

next round. I think where these

13:42

firms have a lot of advantage, the firm

13:45

like General Catalyst probably has 300, I don't

13:48

know, it might be 500 as far as

13:50

I know, portfolio companies. And the

13:52

ones that are doing really well, their valuations

13:54

have come down. So this is the

13:56

opportunity to go in and get more of that firm for a

13:58

lot less. I think the opportunity,

14:01

the huge upside is

14:03

picking the right AI company, but on

14:05

a risk adjusted basis, the biggest opportunity

14:07

for that capital right now is

14:10

to take advantage of their pro rata rights

14:12

and invest in subsequent rounds at a much

14:14

lower valuation. Thoughts on marijuana going schedule three?

14:16

Well, you know, I don't know much about

14:18

marijuana. Did I? So

14:26

look, I think this is a good thing. Let

14:29

me be clear, and I got a lot of calls from mothers saying

14:33

that I shouldn't endorse or shouldn't romanticize drinking

14:36

or THC. Let me

14:38

put it this way. And this is my public service announcement. If you're

14:40

in high school or college, don't be that

14:42

guy that smokes pot every day or that gal. It's

14:45

not a good rap. It's not good for you. Anyways,

14:48

having said that, I do

14:50

think if you're like me and you love

14:52

to get high, if you're a better version

14:54

of yourself, a little fucked up, which the

14:57

dog is, then

14:59

I am trying to substitute THC and

15:01

edibles for alcohol. I've been listening to

15:03

too much Andrew Huberman and Peter Atte

15:05

who have literally declared war on alcohol.

15:07

They make it sound like if you

15:10

open a bottle of wine, you're gonna have a stroke.

15:13

So I'm trying to take down the alcohol.

15:15

I do edibles once or twice a week.

15:17

I could immediately turn this into about me.

15:20

I don't understand why this in any way

15:22

would be considered something more dangerous, more

15:25

illegal if you will than alcohol.

15:27

So I think this makes a lot of

15:29

sense. The industry has been a shitty industry

15:31

because it's the definition of over invested. Every

15:34

baby boomer in their fifties

15:36

and sixties who is a Democrat likes the

15:39

idea of investing in marijuana. And

15:41

so the field is over invested. It's over

15:43

regulated. It's state by state. So it's incredibly

15:45

hard to scale. It's hard even to get

15:47

a bank. So there's theft risk, it can

15:49

only take cash. I think it's a good

15:51

point that it's been a

15:53

terrible investment at least if

15:56

you're in it longterm because all these

15:58

stocks hit their high. around 2018-2019 when

16:01

the boom was really starting and

16:04

you know the stocks have soared

16:06

on this announcement like there's this company

16:08

Tilray which jumped 40%, Canopy Growth which

16:11

jumped 80% and

16:13

then the advisor shares cannabis ETF jumped

16:15

around 25% but they're still not anywhere

16:19

close to what they were to what

16:21

they were trading at in 2018-2019. I

16:25

was going to ask it sounds like the

16:27

answer is no. Are you invested in any

16:29

weed companies? I'm not. I just I think

16:31

it's a shitty business. I think it's over

16:33

invested and a regulatory nightmare. I'll give you

16:35

an example. Up until now,

16:38

pot businesses pay an effective tax rate of more

16:40

than 70% because get this, they

16:43

aren't permitted to deduct expenses

16:46

except for the cost of production. So Williams-Sonoma

16:49

if a store does a million dollars if a Williams-Sonoma

16:51

store does a million bucks and

16:53

its rent and its cost

16:55

of its employees to you know

16:57

give you give you hot apple cider that was

17:00

cured by apples raised in a farm in

17:02

Tibet or whatever it is they do. Say

17:05

it's got $900,000 and the store does a million.

17:07

The $100,000 in profit marijuana

17:09

store you can't deduct the cost of

17:12

retail and employees. So you pay taxes

17:14

on a million dollars. So

17:16

overnight it's unprofitable. These companies it's just these

17:19

companies have the odds just stacked against

17:21

them and it's too bad because marijuana could

17:23

be you know I

17:25

mean they're getting good tax revenue here but

17:27

they're essentially cutting off their noses fight their

17:30

face. The industry can't grow. Yeah

17:32

but to be clear I mean this

17:34

news the reason that the markets love

17:36

this so much is because marijuana is

17:38

now exempt from that provision

17:41

in the IRS code which said that

17:43

if you're selling a Schedule 1 or

17:45

a Schedule 2 drug you can't deduct

17:47

the business expenses. So that's what

17:49

all those jumps in the stock. That's the

17:51

reason it's happened. And then finally big

17:53

tech earnings we'll discuss it in

17:55

detail with Aswath but before we have him

17:57

on any reactions to. Amazon,

18:00

Microsoft, and Google's earnings. There's only a few companies

18:02

that can make the sort of staggering investments in

18:04

compute required in AI. And I

18:07

used to think they're getting to nosebleed territory

18:09

and they were overvalued. Now I'm beginning to

18:11

think, and it's dangerous, just throw in

18:13

the towel and invest in these companies. Cuz I

18:15

don't see, they feel unassailable at

18:17

this moment, which is same as last words.

18:19

But champagne and cocaine

18:22

cut in Ching as we

18:24

record this. Apple reported fiscal second

18:26

quarter earnings. It's increasing

18:28

its quarterly dividend, and it's

18:30

gonna repurchase an additional $110 billion

18:32

of stock. So

18:35

basically it's buying Boeing

18:38

or AT&T in the form of

18:40

a share buyback. So

18:42

this company continues to

18:45

just wow. We'll

18:47

be right back after the break for our Q1

18:49

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22:00

com at last year. We're

22:15

back with Prodigy Markets. First

22:17

quarter earning season is in full swing. That

22:20

means it's time for our coursely

22:22

review with Professor Aswath Demodarin, the

22:24

Kirchner Family Chair in Finance Education

22:26

and Professor of Finance at NYU

22:28

Stern's School of Business. Aswath,

22:31

thank you very much for joining us again. Thank

22:33

you for having me.

22:35

So let's start with big tech.

22:38

We saw earnings from Google, Microsoft,

22:40

and Amazon last week. All

22:42

of them saw double digit revenue

22:44

growth, largely due to this massive demand

22:46

in their cloud businesses. I mean, I'd

22:48

love to just start with your initial

22:51

reaction to those earnings,

22:53

Google, Microsoft. A

22:55

couple of weeks ago, I was in Brazil and I

22:57

did a session on AI and whether AI is a

23:02

revolutionary change, how it's rippling

23:04

through investing. One

23:06

of the things I talked about is we

23:08

often focus on the big winners in AI

23:11

by looking at AI products, right? In very

23:13

obvious AI chips and Adobe AI

23:15

products. But I think AI

23:17

brings with it demand for other stuff. Certainly

23:20

AI, chat GPT might have brought

23:22

it to our public consciousness, but

23:24

it's a convergence of two big

23:26

forces that have been exploding over

23:28

the last 15 years. One

23:31

is the collection of data, not

23:33

just numerical and financial data,

23:35

but data about your behavior and my

23:37

behavior that the big tech companies have

23:40

accumulated over time, which has

23:42

to be stored somewhere. And the other is incredibly,

23:44

almost insane computing power brought

23:46

to play. So

23:48

when we talk about AI, we're really

23:50

talking about big data plus computing power

23:53

on steroids. And

23:55

there will be the beneficiaries of

23:57

those companies that make money on

23:59

those. those two things, NVIDIA and the

24:01

computing power side. And the

24:03

big data for better or worse is in the

24:06

hands of the, it's not just the

24:08

cloud that you store it in,

24:10

but the companies that have exclusivity

24:12

to that data. So I've always

24:14

believed that in the AI space,

24:16

Google and Amazon are gonna start

24:18

with an advantage because no two

24:20

companies have as much exclusive data

24:23

as those two companies have. And since

24:25

AI requires that data for its power,

24:28

you're gonna start with an advantage. You

24:30

saw that not just in extended use

24:33

of the cloud and

24:35

the service and the revenues that come from it, but

24:38

you still gonna start to see it in

24:40

more explicit benefits that emerge from AI products

24:42

that come out of these companies that use

24:44

that data. So I mean,

24:46

to me, it's not

24:48

a surprise because of AI is playing out

24:51

as big as it is. You should see

24:53

those effects show up at those companies. I

24:55

think the other thing that would

24:58

reflect this is just the sheer amount

25:00

of spending that we're seeing on AI,

25:02

basically just AI capex. I mean, obviously

25:05

meta announced it'll increase spending on

25:07

AI and the stock, despite

25:10

some pretty remarkable earnings, it actually fell

25:12

on that news. We discussed that last week, but

25:14

then also we're seeing this with Google, Amazon

25:17

and Microsoft. So just some data

25:19

I'd like to point to regarding

25:21

cloud infrastructure, capital expenditures. So that's

25:24

data centers, power plants, GPUs, et

25:26

cetera. Last quarter, Google spent $12

25:29

billion on the cloud. Amazon

25:31

and Microsoft spent $14 billion each.

25:35

That's roughly triple what they were spending

25:37

around two years ago. So

25:39

it definitely feels as if every company, every

25:41

tech company is just doubling down on

25:43

AI. And Microsoft has

25:46

it from both the cloud

25:49

business as well as being this

25:51

partnership with OpenAI that's become one of the

25:54

great investments they could have ever made. But

25:56

I think that I'll be quite honest,

25:58

a big story. for me over

26:01

the last few weeks is

26:03

not the earnings season, but the fact that

26:05

two companies in the mix that you talked

26:08

about announced that they were going to start

26:10

paying dividends, right? Both Meta

26:12

and Google. And that to

26:14

me is revealing because it tells me what they think

26:16

about where they are in the life cycle. As you

26:18

know, I have this fixation about the corporate life cycle.

26:22

And announcing that you're going

26:24

to pay dividends is

26:26

like announcing you're going to wear

26:29

khakis. Which basically means,

26:31

hey, I'm not the, you know, ripped jeans

26:33

kind of, you know, I'm Where are my

26:35

doctors? Yeah, I'm growing up. I've got to

26:37

get a job. So in a sense, there

26:40

is this admission, at least internally, that this

26:42

is, you know, the glory days of this

26:45

easy, I mean, so the cloud business might

26:47

give them a boom right now. But

26:50

this is, I mean, they're recognizing

26:52

they're very different companies and what

26:54

they thought they were. I

26:56

mean, it's amazing, especially with Facebook and those

26:59

initial periods of Metaverse, you could still see the

27:01

diagonals of we're a growth company, we can go

27:03

to the Metaverse, we can do all kinds of

27:05

stuff. And I've got to

27:07

give Mark Zuckerberg credit. I mean, he's in

27:09

a sense grown up quickly, partly because he

27:11

got punished by the market so intensely. But

27:14

I think that is to me a big story

27:17

because it tells me that these companies are laying

27:19

the foundation because when you pay dividends, what you

27:21

do is you change your investor base. You're

27:25

calling in people into your

27:27

investor base who traditionally might have stayed

27:29

away from you, more value

27:31

oriented investors, and they might bring a lower

27:34

price, but they also bring in more stability.

27:36

These are not the people are saying, what

27:38

have you done for me lately? What are

27:40

you going to deliver 20% growth? And

27:44

that's why it's a big story because

27:46

I think they're preparing an investor base

27:48

for a more sobering decade going forward.

27:51

In spite of all the bubbling of AI

27:53

right now, looking forward, I think they see

27:56

more competition, less growth, and I

27:58

think that paying up dividends. and

28:00

it signals that that's

28:02

what they're seeing. Just a quick follow-up

28:04

specific to dividends. Amazon

28:06

is the only one you mentioned there that

28:09

did not issue a dividend, but the rest

28:11

of tech has, Google, Microsoft, and video, Apple.

28:14

Amazon's done more than $50

28:16

billion in free cash flow in the past 12 months.

28:20

Do you think they'll issue a dividend

28:22

anytime soon? There's the odd man left

28:24

out. I mean, I think it's a

28:26

question of what the price does and

28:28

how the market reacts to it. I

28:30

mean, I think they might be, it

28:33

might make sense for them to, but remember

28:35

these dividends are not big

28:37

dividends. They're almost like first

28:40

rounds in a much longer fight.

28:43

So I think if Amazon wants to get

28:45

a more mature, and I'm going to use

28:47

the word with quotes around it, investor base,

28:49

this might not be a bad idea because

28:51

I don't think you

28:53

want the

28:56

kinds of investors who invest in

28:58

GameStop and AMC buying your stock

29:00

because they might push your stock up

29:02

30% quickly, but they can

29:05

also push your stock down 30% for no good reason

29:07

at all. So I think that

29:09

there is a significant portion

29:11

of our investor base which

29:14

has gotten used to this, playing investing

29:16

as a game, that they're playing the

29:18

same way they do casino tables. I'm

29:21

a company. I want those investors

29:23

away from my company, not in my

29:25

company. So that's why it's interesting what

29:27

you said about, you sort of couch

29:29

the announcement to issue a dividend, not

29:32

as a negative thing, but almost a

29:35

signal sobriety or the days ahead

29:37

might not all be champagne and

29:39

cocaine. Something I

29:41

learned from you though is that

29:43

it reflects maturity to

29:45

recognize you're no longer a teenager, and

29:48

that if your core business is so strong

29:50

and is spinning off so much cash that

29:52

it's unlikely you could start a new business

29:55

or make an acquisition that could offer the

29:57

same cash flows as your current business, that

29:59

it's a failure. fairly efficient way to

30:01

return capital to shareholders.

30:03

Is that, I mean, to me, I saw

30:05

this as a good sign. Do you have

30:07

any evidence or research that shows the performance

30:09

of companies pre and post when they launch

30:11

a dividend? In fact, you

30:13

know, when you see companies initiate dividends,

30:15

it's often, you know, and you look

30:17

at earnings growth before and after, earnings

30:20

growth peaks about two quarters before dividends

30:23

get initiated. And after that, what you

30:25

see is earnings growth get much lower.

30:28

So I think in a sense, dividend

30:30

initiation is really signal of, hey, guys,

30:32

we got used to 20% growth in

30:34

our earnings or a different company

30:36

now. And we want you

30:38

to recognize that going in, it's

30:41

a sign of maturity to recognize that

30:43

going for a higher price now and

30:46

pushing up expectations that you cannot deliver

30:48

is actually a bad thing.

30:51

And I think these companies have come

30:54

to that recognition. And I think that

30:56

dividend payment might be the start of

30:58

that process of kind of

31:00

reorienting people's thinking about what the future

31:02

will hold. I didn't think

31:04

I'd be able to recommend these stocks after

31:06

their huge run-up. And then when I see

31:08

that their cloud business, which

31:11

they have made, just staggering, I think

31:13

we read or saw that across

31:15

the big seven or the magnificent seven,

31:18

they've invested something like $32 billion just

31:20

in infrastructure around AI. You

31:23

have the hottest growth segment

31:26

in the world, AI, which every company wants

31:28

to explore, build their own LLMs, but they

31:30

can't build it themselves. So they need to

31:33

rent it from a cloud-based provider.

31:35

In order to be a cloud-based provider that

31:38

can make the requisite investments to attract these

31:40

types of clients, you have

31:42

to make multi $10 billion investments.

31:44

So it's sequestered to just a

31:46

smaller and smaller number of firms.

31:50

It strikes me that the

31:52

champagne or the nitro-englycerin of

31:54

cloud and AI built on

31:56

top of cloud means that

31:58

the entire world's growth expenditure,

32:00

corporate world growth expenditure, is going

32:03

to be funneled into literally a

32:06

small handful of firms, which is one, great

32:08

for those shareholders, but two begs the question,

32:11

is this yet another speedballing

32:14

of concentration of power

32:16

where we should start thinking about antitrust? I mean, who's

32:18

going to be able to compete with these guys? It's

32:22

been one of my worries with AI.

32:24

I think this winner take all phenomena

32:26

we've been seeing build up over the

32:29

last two, three decades, which I think

32:31

you pointed to with when you

32:33

first looked at the tech companies. AI I

32:35

think is going to make it even more

32:37

winner take all. I'm

32:41

sure in the Clayton Christensen argument about

32:43

disruption 30 years ago that it always

32:46

comes from outsiders, and that's

32:48

the way it worked out with.com. With

32:51

AI, I don't think that's going

32:53

to apply. Here's why. You need

32:55

two big things for AI. You

32:57

need processing power in immense amounts

33:00

and control of data. It's

33:02

going to be very difficult for a newcomer

33:05

to even venture into this space because you're

33:07

going to get squashed. This

33:09

is one of those things where the biggest

33:12

tech companies might actually start off

33:14

with such an incredible advantage over

33:16

everybody else. It's

33:20

going to be tough to catch up with

33:22

them. The Mag 7 might

33:24

have an extended run of the Fangam if

33:26

you prefer to call it might have an

33:28

extended run, because AI actually

33:31

makes the strong even stronger. Just

33:34

like COVID made the strong

33:36

even stronger. This seems

33:38

to be another phase of

33:40

the strong will gain strength. There might be

33:42

a newcomer who creeps in. But the interesting

33:44

thing about the Mag 7 is when

33:48

one of the companies underperforms,

33:50

Apple for instance, somebody

33:52

else steps in and fills the gap.

33:55

It's almost like you hold all

33:57

seven or all 10 or whatever.

34:00

make the number, that the

34:02

collective group finds a way to

34:04

outperform the market because if

34:07

there's a loser there, the winner often is

34:09

another company in the same group. It's not

34:12

some outsider that's coming in. So

34:14

I worry that 20 years from

34:16

now, you're going to look at the S&P 500

34:18

and you're going to find even or any index,

34:20

you're going to find even more concentration at the

34:23

top than you did. Let's

34:25

create social and economic questions that

34:27

will get bigger over time. So

34:29

if you think Antitrust is, and

34:31

Alina Khan might think they're big, that question

34:33

is only going to get bigger five years

34:35

from now, 10 years from now. And

34:38

it might become even more difficult

34:40

to confront as these companies get

34:42

bigger. Along those lines

34:44

of, I mean, there's concentration,

34:47

sort of seven companies within the S&P

34:50

or within the NASDAQ. One

34:53

of the things I've been focused on a lot

34:55

and some of the cycling from you is just

34:57

the power of diversification. Now, the number one question

34:59

I get is, is it too late to buy

35:01

Nvidia? And I would say, I don't know, but

35:03

if you buy an index fund, 33

35:05

cents on the dollar are going to the

35:08

Magnificent Seven because they're weight adjusted. And

35:10

if the other 493 companies have

35:12

their day in the sun, you got 67 cents on those. What

35:15

I haven't done, or I haven't done much of, is

35:18

I haven't diversified geographically. And

35:20

it strikes me that if you think

35:22

about AI, I think we're 97% of the revenue and 140% of

35:26

the profits within, not only within the US,

35:28

but within a seven mile drive of FFO

35:30

International. Do you tell people, I

35:32

know you tell them to diversify, but

35:35

do you think it's a bad idea to

35:37

be pretty much all in on American markets?

35:39

I'll tell you the biggest problem we have,

35:41

I mean, I was in Latin America last

35:43

week and I was in Brazil or two

35:45

weeks ago. And I took the top 20

35:47

companies in the US and I put the

35:49

ages of those companies right next to the

35:51

companies. And a lot of the companies are

35:54

15, 20 years old. Facebook, if you think about it, is

35:56

not that old. And then I took

35:58

the top 20 companies in that in America and

36:00

I put them up. And they're ancient. And

36:04

I did the same thing with Europe. Ancient

36:07

companies, you do that. I mean, the

36:09

US in a sense is the outlier

36:11

in this in terms of young

36:13

companies not just breaking through but making

36:15

it to the top. I

36:18

think the more the EU acts, the more

36:20

convinced I am that Europe will never be

36:22

a player in AI because in

36:24

the interest of protecting consumers, they've actually

36:27

created a system where if you have

36:29

a young, smart person who's

36:33

got this incredible AI idea in

36:35

Europe, he's gonna get on a

36:37

plane, fly to Silicon Valley. And

36:39

it's not just that if you look at

36:41

the market, the total global market gap, the

36:43

US has actually increased its share of that

36:46

global market gap. Significantly,

36:48

and with China falling, you actually are

36:50

getting an even larger segment of global

36:52

market gap coming to the US. So

36:55

even if you held a global index

36:57

fund, you're gonna end up being

36:59

over invested in US

37:01

stocks because US equities

37:04

are just taking an increasing slice

37:06

of global equities. But

37:08

I don't even think of these companies as

37:10

US equities anymore. I mean, they might have

37:12

through the accident of history become incorporated in

37:14

the US. But these are

37:16

global giants, right?

37:18

They happen to be US companies. So when

37:20

you buy the S&P 500, you're

37:22

buying global companies that happen

37:25

to be US based. So

37:27

I think of my portfolio

37:29

primarily now as global companies. And to the

37:31

extent that global companies, the fact that most

37:34

of them are US based, I think reflects

37:36

the way the rest of the world seems

37:38

to be allowing or not allowing companies

37:42

to catch up with the 21st century. Now,

37:45

and I think, no, but

37:47

the US companies, you're seeing that explosion

37:49

of young companies take off. That's a

37:51

plus of what's happened in the US.

37:54

But the minus is when you have

37:56

these young companies explode, you're going to

37:58

create the... wouldn't be surprised

38:00

if within my lifetime, and it's

38:03

probably sooner rather than later, you get the

38:05

first trillionaire. It's only a matter of time

38:07

before it happens. So

38:10

I think you're going to see all those side

38:12

effects as well, greater, in

38:15

terms of income, wider disparities in income.

38:18

And we

38:20

have to be prepared for the consequences. Mason CASSIDY

38:22

Just on that idea of the concentration of power,

38:24

something Scott and I have been talking

38:26

about recently is this idea of interlocking

38:29

board directors. Basically,

38:32

you have a board director on one company, and then

38:34

they're also at the same time a director

38:38

of a competitor, or they have some

38:40

sort of financial interest in a competitor.

38:44

My feeling is that this is pervasive in

38:47

AI, just as the examples we've

38:49

looked at. Microsoft is involved

38:51

in OpenAI, but also Mistral and

38:53

also Inflection. Reid Hoffman is the

38:55

co-founder of Inflection, but he's also on the board

38:57

of Microsoft. Brett Taylor is

38:59

the chairman of OpenAI. He's also on the

39:02

board of Salesforce, which is invested in Anthroffic.

39:04

It's basically... Brett Taylor They probably all drink

39:06

in the same bar, and they

39:08

stay in the same

39:11

hotel. It's a very

39:13

incestuous component to this. But

39:16

I think that we get the corporate

39:18

governance we deserve. In 2004,

39:20

when Google went public and they said, we're

39:23

going to have two classes of shares, one

39:26

with 10 times the voting rights, they were breaking

39:28

from the pack because for a century in the

39:30

US, we were moving away from that model. Because

39:33

the New York Stock Exchange said, if you want to

39:35

be listed in the exchange, you cannot have two class

39:37

of shares. When Google announced

39:39

they're going to have two class of

39:41

shares, I expected institutional investors to rise

39:43

up and revolt and say, this is

39:45

not something that's acceptable. But

39:48

that's not what we saw. We

39:50

saw institutional investors say, that's okay, because

39:52

you guys are well run and well

39:54

managed. Almost like they were saying, a

39:57

benign dictatorship is okay because the

39:59

benign dictators. Facebook is

40:01

a dictatorship. I don't even know whether it's

40:04

benign or malignant, depending on what you think

40:06

about Mark Zuckerberg. But we

40:08

allowed Mark Zuckerberg to have the kind

40:10

of power that he did because as

40:13

investors we look the other way. Now

40:15

I remember in 2019 at

40:17

the peak of Facebook's issues, a money

40:20

manager complained to me that Mark

40:22

Zuckerberg, I mean he held a big stake in

40:24

Facebook, said Mark Zuckerberg is not listening to me.

40:27

And I said you know buying shares

40:29

in Facebook and complaining that Mark Zuckerberg is

40:32

not listening to me. It's like getting married

40:34

to a Kardashian and saying you know

40:36

cameras keep following you all over the

40:38

place. What exactly did you expect when

40:41

you married into a reality shows? Investors

40:44

in a sense have looked the

40:46

other way with tech companies in

40:48

terms of corporate governance. And

40:51

what you're talking about is a slice of that issue.

40:54

Corporate governance is dead at tech companies. If there's

40:56

going to be change here, it's not going to

40:58

come from the board of directors pushing for it.

41:01

It's going to come from outside and it's

41:03

going to come almost entirely from the price

41:05

dropping enough that they care. We

41:08

the reason Mark Zuckerberg woke up after

41:10

that metaverse fiasco is because the stock

41:12

price dropped so much. So

41:14

I think if you know it's unfortunate

41:17

because we talked we talked to

41:19

talk about corporate governance. We

41:21

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44:42

We're back with Rossi Markets. To

44:44

the pivot to entertainment and in

44:46

the concert world love to get

44:48

your general reactions to this paramount

44:50

drama. The Lunatics are running The

44:52

Asylum is my reacts. I am

44:54

in. This is caught. This is

44:56

exactly why you don't bind to

44:58

benign dictatorship treadmill Bizarre before you.

45:00

Before you comment, let me just

45:02

set the stage for our listeners,

45:04

which is paramount. They've been fielding

45:06

offers from several buyers including Sky

45:08

Don't Media which we discussed a

45:10

Polo. And then a little over

45:13

a week ago we learn that their

45:15

long time Ceo Bob Barker this is

45:17

now leaving the company and he's been

45:19

in missed. It appears a

45:21

spot with the controlling shareholder so Redstone

45:23

to controls it through her company National

45:26

Amusements does want to set the stage

45:28

us was go ahead and to me

45:30

I think we need to go back

45:32

to the to the original sin which

45:35

was when submitter Redstone was given. Boarding

45:38

says reaction has his such an

45:40

insanely good manager. So.

45:42

What harm is there in giving

45:44

him controlling power? In

45:46

perpetuity. And. That that I

45:49

remember I remember thinking but he's a

45:51

human being. he's going to get

45:53

older and he did any. got

45:55

dementia and. the voting

45:57

rights still stayed with them they

45:59

pass on to. So what we're seeing

46:01

is a residue of decisions made in the

46:03

80s and the 90s. So what

46:08

if Zuckerberg becomes, I mean, he will get to

46:10

be 80, 85. What if he

46:12

gets dementia? Who's going to

46:15

be running Facebook? This is a

46:17

problem we set ourselves up to

46:19

repeat on all these

46:21

big tech companies with voting shares with

46:24

different, or shares with different voting rights.

46:27

And Sherry Redstone is, you know, let's

46:29

face it, I mean, she

46:31

is eccentric. That's the

46:34

right word. And she

46:37

might not listen to reason, but she has

46:39

controlling power. So we know

46:41

the entertainment business, we need to

46:43

consolidate that this business is in

46:45

disruption, you can't do the things

46:47

you used to. And

46:50

there are only three players outside of

46:52

Netflix. Disney Warner

46:54

Brothers in Paramount. And the question is, where will

46:56

they go? Because everybody else is going to be

46:58

a side player. What I

47:00

saw happen with Sherry stepping

47:02

in and push, you know,

47:05

essentially putting a stop to

47:07

this process is, you know,

47:09

you're devising a pathway to

47:11

drive Paramount into essentially ruin

47:13

if you don't do something. There's

47:16

not a whole lot you're going to be able to do

47:18

as Paramount shareholders, because of something you

47:20

did 25 or 30 years ago. And

47:24

I want this almost to be etched

47:26

into people's memories the next time some

47:28

company comes along with voting and non-voting

47:30

shares. Yeah, but they never remember. We

47:33

need to make a Netflix movie about

47:35

Paramount in the years after and say,

47:37

hey, watch this movie over and over

47:39

again in case you're tempted to do

47:42

it. Because it's funny at one level,

47:46

they think about all the jobs and the

47:49

content you're putting at risk. It's a

47:52

tragedy, you know, in the making that

47:55

was born out of corporate governance

47:57

fiasco. At some point, you

47:59

think about running into the fire. I mean Warner

48:01

Brothers Discovery is now sub eight

48:03

bucks a share. It's got a market cap of $19.5

48:05

billion. Now granted,

48:07

it's enterprise value because of the debt. It's

48:10

much greater than that. I think it's got about 40 billion

48:12

in debt. But at some point

48:14

with a company like Paramount or Warner Brothers,

48:17

when they became trading as if they're going

48:19

out of business, isn't

48:21

there real upside potential there when these things

48:23

get left for debt? I'm amazed that, I

48:26

mean, maybe it's a governance issue that an

48:28

Apple, I mean, because Apple could buy this

48:30

with petty cash, right? And these companies. And

48:33

if you think about buying content for

48:35

entertainment, you're effectively getting an entire library

48:37

with each of these companies that you

48:39

can find better ways of using than

48:42

each of these companies are. So we

48:44

talk about winners getting bigger. This is

48:46

going to be the next phase, is

48:48

I have a feeling that a

48:50

lot of the existing entertainment companies are going

48:52

to become parts of the big tech

48:54

companies. And you

48:57

mix it up with all the other things

49:00

that come with these companies. It's

49:02

kind of a terrifying thought, but you're

49:04

getting your news from Apple, your entertainment

49:06

from Apple, I mean, it's, I

49:10

think it's only a matter of time. I think

49:12

the only reason the big tech companies are avoiding

49:14

it is, do you really want

49:16

to buy Paramount and have to deal

49:18

with Cherry Redstone? I think unless you

49:20

find a way to separate

49:23

her from the company, no tech

49:25

company will touch Paramount. It's

49:28

almost as if the presence

49:30

of some of these existing people

49:32

in the company makes

49:34

them toxic enough that nobody wants to touch them.

49:36

But you're right, at the right price, somebody's

49:39

going to be tempted. And

49:41

it's a morbid thought, but time sometimes

49:43

takes care of some of these problems,

49:45

so I'd keep a good

49:48

watch on Cherry Redstone's help. Because

49:51

no, that might be the dividing line of

49:53

what happens to Paramount. And we've been talking

49:55

about pretty high profile companies. Are

49:57

there any sectors or companies that you're looking at? Do

50:00

you think they've been kind of overlooked

50:02

and you see something interesting in the

50:04

markets, either overvalued or undervalued? I've been

50:06

track... I mean, as you

50:08

know, track markets on a monthly basis looking

50:10

at the equity risk premium. And

50:13

April, when I did the update,

50:15

April 1st, it was peak momentum

50:17

for markets. Everything looked amazing. If

50:19

you remember the story was inflation

50:21

has been conquered, you know, Fed's

50:23

going to cut rates, the economy

50:25

is back, and four weeks

50:27

late, it's amazing how much the mood

50:30

has shifted on

50:32

big questions, right? All

50:34

of a sudden there is this worry about is

50:36

the inflation as strong as we... is the economy

50:38

as strong as we thought it was? Maybe

50:41

inflation... I mean, I've read a few stories when maybe inflation

50:43

will never drop below 3%. Fed

50:46

rates, I wouldn't be surprised if

50:48

you saw the Fed raise rates

50:50

rather than cut rates during

50:52

the course of the year if inflation doesn't come

50:55

down. It

50:57

tells you how much markets are driven by

50:59

mood and momentum. And I think this

51:01

month will be a make or break month

51:03

because the mood continues to shift down. We'll

51:06

be heading into the summer in a

51:08

bad mood with momentum kind of against us

51:11

and you put on top of it a

51:13

presidential election and political instability. We

51:15

could be looking at a pretty bad

51:18

deal by the time we're done. And

51:20

it's across sectors and there's an adjustment. You're

51:22

going to see it cut across. So

51:25

for the moment, that's what I'm keeping my eye

51:27

on is that mood and momentum factor. There

51:30

isn't a sector that I can point

51:32

to that sector is obviously undervalued right

51:34

now. It's because collectively

51:36

I think everything's been pushed up

51:38

so much that you look at

51:40

beverages, you look at technology, everything

51:42

is trading at a much higher

51:45

multiple of everything than it did a

51:47

year ago, two years ago. But

51:49

I think you're just one big

51:51

correction away from things starting to pop on

51:53

to your rate of saying that's been pushed

51:55

down too much. I mean, I

51:57

think the entertainment space is an obvious space

51:59

where I can't buy Disney because

52:01

my son works at Disney, so I don't

52:03

want to create issues with them because I

52:05

That's one reason I don't value Disney or

52:08

write about Disney though I have lots of

52:10

thoughts about Disney because I use it in

52:12

my class but

52:14

to me one of one looks

52:16

interesting because it doesn't have

52:18

the Sherry Redstone effect that

52:21

I would get with Paramount and

52:23

I think the content I mean ultimately I

52:26

don't care if you're an entertainment giant without

52:28

the content What exactly are you going to

52:30

stream? So I think

52:33

the content is interesting enough and ultimately

52:35

I think somebody's got to be in

52:37

charge of content and Disney and Warner

52:39

still better at Creating

52:41

content than Netflix is you know Netflix

52:44

throws a lot more money, but it creates

52:46

a lot of crap along the way So

52:48

I think that to me there there

52:51

will be more businesses like that show

52:53

up on my radar Now

52:55

I'm interested in PayPal as a company

52:57

I'm amazed at how much the mood

53:00

is shifted against from PayPal being this

53:02

high-flying Financial service company too. It's

53:05

boring and you know nothing's happening I

53:07

have companies that I have on my list

53:09

that I haven't bought yet that I want

53:11

to wait through me and see what happens

53:14

Because I'm just one downturn in

53:17

the market away from saying what those companies

53:19

look good So and I

53:21

would say the same thing the person who says, you know

53:23

What can I ever buy Nvidia and my

53:25

reaction is in the last 15 years and

53:27

videos been cheap at least five times on

53:30

an intrinsic Value basis. It's not

53:32

been in no all all upswing I mean

53:34

the reason I bought in video in 2018

53:36

is people were beating it up saying this

53:38

is the end for Nvidia There

53:41

will be a time on every one of these

53:43

companies where it's the right time to buy it

53:45

might not be right now But

53:48

patience has its own rewards just

53:50

in terms of asset allocation I've

53:54

never owned bonds And

53:56

I have a lot of friends who manage credit funds

53:58

and they've said to me lately. Why

54:00

are you in equities? Did you think

54:02

the markets can be really volatile to think the

54:04

markets to go down Spam? Same answers? Sure I

54:06

can see it. And I said that. Luck.

54:09

I. Can get to it reasonable certainty, ten

54:12

to twelve percent a year and a credit

54:14

markets I now have mixed. I can find

54:16

a high quality debt and great companies. And.

54:19

Gets double digit returns and

54:21

nothing's guaranteed, but the number

54:23

you're getting, the return you're

54:25

getting on fairly low risk

54:27

assets has surged. Why wouldn't

54:29

you reallocate a recent your

54:31

portfolio strategy and allocate more

54:33

to credit? What are your

54:35

thoughts in? generally? Ride sixteen

54:37

Com clearly is for three

54:39

decades. It. Has equities or not,

54:41

they ride, you get. you are nothing keepers,

54:43

nothing on bonds. you. in Aaa rated bonds,

54:46

you were earning two three percent. and I

54:48

think that we have more choices now and

54:50

I think we need to look at those

54:53

choices I don't think you can make.

54:55

To be quite honest, the ten to twelve

54:57

percent with no risk comes from the fact

54:59

that when when lenders and bondholders look at

55:01

risk, it's always backward looking. Nice as me

55:04

know, default in the last decade based on

55:06

that, looks pretty safe. But.

55:08

We know that that at least

55:10

in bond markets default risk is

55:12

highly chlorinate which means said if

55:15

this trouble this a tipping point

55:17

where. All. Your bonds get into

55:19

trouble at the same time because of some

55:21

macro events. Two thousand and Eight was a

55:23

classic event Born said look save all of

55:25

a sensor to blow up on you but

55:27

I do think you can make solid returns.

55:30

I get so into this because I'm not

55:32

been a big think income bus and but

55:34

I am much more conscious about sweeping more

55:36

money to tables or I make five and

55:38

a half percent the or that's a lot

55:40

of money to leave on the table gathered

55:43

and costs. would I lock and bonds? The

55:45

reason I worry about bonds is the same

55:47

things that would. Bring equity markets down

55:49

or the things that bring Bornstein

55:51

even more. For. instance

55:53

getting inflation is your big worry that

55:56

at it's might explode it's going to

55:58

bring equity some minutes huh before was

56:00

for bonds because you have no pricing

56:02

power to increase your coupon. Your coupon

56:05

is stuck. So the 10 to 12%

56:07

is assuming that

56:10

you effectively are going to stay in

56:12

this debt and that you collect the

56:14

interest payments with no default. But

56:17

the price of debt, especially if it's

56:19

long-term debt, is a function of what's

56:21

happening to inflation and interest rates. And

56:24

as we saw in 2022, I mean, stocks

56:27

were down 20% because inflation went up. But

56:29

bonds had a return of minus 22%. It

56:34

was the worst year for the bond market in

56:36

a century. Inflation

56:39

is deadly for stocks, but it's even more

56:41

deadly for bonds. So it depends on what

56:43

you think your worry is for markets. My

56:45

worry more than the economy is inflation. Because

56:49

I, in my experience, inflation is

56:51

incredibly stubborn. You think you've conquered

56:53

it, but it finds a way

56:55

back. And I think, as

56:57

we've seen in the last three years, you think you've got

56:59

it nailed, but then it comes back because it seems to

57:01

seep in throughout the channels. And

57:03

if inflation is my worry, I'm

57:05

just as exposed, perhaps more so,

57:07

if I put my money in

57:09

long-term fixed income as

57:11

I am in equities. You also

57:13

recently wrote this piece on risk

57:16

in your blog, Musings on Markets, which I thought

57:19

was great. And you

57:21

brought up this distinction between

57:23

incremental risk and catastrophic

57:25

risk. The former is risk

57:27

to sales and earnings. The

57:30

latter is something that can kill

57:32

a company. I mean, I don't want

57:34

to waste your time, but I want to give

57:36

you a little bit of background to how I

57:39

wrote that paper. It started with an email I

57:41

got from somebody in Iceland reading,

57:43

who read my blog.

57:45

He said, look, I am an

57:47

appraiser in Iceland. And

57:50

one of my jobs is to appraise

57:53

the value of this company or business

57:55

called Blue Lagoon. Blue Lagoon is this

57:57

legendary Icelandic spa, and it's

57:59

been around. long time, it's great margins,

58:01

great profits, but it's facing an

58:03

existential threat, which is the volcanoes

58:06

that have become active in Iceland.

58:08

The lava is flowing in the

58:10

direction of the blue

58:12

lagoon. He said, how do I incorporate that

58:14

risk into

58:16

my value for the company? It's too late

58:18

to buy insurance, obviously, because the answer is go

58:20

buy insurance, build in the cost. So

58:23

it started me thinking about how do we

58:25

deal with catastrophic risk in investing in valuation.

58:27

So I was walking my dog on the

58:29

beach, which is where I do much of

58:32

my thinking. And I was

58:34

thinking about this and I said, before

58:38

I point fingers at other people not dealing

58:40

with catastrophic risk, I just walked out of

58:42

my house, which is two

58:44

blocks from the Pacific Ocean, and

58:47

sits on an earthquake fault. And I paid $2.5 million for

58:49

this house. Did I bring in catastrophic

58:54

risk into

58:56

the valuation of this house? I

58:58

mean, I'm one tsunami away, one

59:00

earthquake away from the house becoming

59:02

rubble. And my earthquake

59:04

insurance is very limited. It's not going to rebuild

59:07

the house and a tsunami, I don't even have

59:09

tsunami insurance. So I don't even know what would

59:11

happen if that happened. I

59:13

said, I'm not building it. And I think this

59:15

is part of a broader theme with catastrophic risk

59:17

in investing. You know what, we

59:19

deny it. We act like it's not there. And

59:22

I think there's a reason for it. You

59:25

know, I use this example of an apocalyptic

59:27

movie, Mad Max Beyond Thunderdome. I said, go

59:29

watch the movies, check to see how many

59:31

times people in that movie

59:34

check what their portfolio is doing. Nobody

59:37

does, right? It's survival, survival, survival.

59:40

So I think in a strange

59:42

way, as investors, as businesses, we

59:45

shut off catastrophic risk. We

59:47

pay $500 million for a

59:50

building in downtown Manhattan, even if we believe

59:53

that climate change is going to put

59:55

Manhattan under water, because our view

59:58

is, what's the point of even? bringing it

1:00:00

in. At that point, my portfolio won't matter

1:00:02

anyway. Life is going to come to a

1:00:04

standstill. I'm either going to live or not

1:00:06

live. I think that's

1:00:08

part of a broader issue in

1:00:11

business and investing. We tend to

1:00:13

ignore catastrophic risk entirely. In

1:00:15

fact, I think there might be lessons there

1:00:17

for the climate change folks, which is if

1:00:20

you preach catastrophe and you

1:00:23

ask people to behave better, it's

1:00:25

not going to happen. It's like telling people that they

1:00:27

have 60 days to live and say,

1:00:29

can you live more healthily? If I have 60

1:00:33

days to live, what difference does it make? If

1:00:36

you want people to behave

1:00:38

better, maybe less catastrophe forecasting

1:00:40

and more, there's hope and you

1:00:43

can change things. I think we're starting

1:00:47

to grapple with the question of catastrophic risk and

1:00:49

how to bring it in. It

1:00:51

was just very early

1:00:53

in the process and we're not very good at dealing with

1:00:55

it. Aswat Damodaran is a

1:00:58

professor of finance at the Stern School of

1:01:00

Business. Aswat, as always, we really appreciate your

1:01:02

time. Thank you, Scott. This

1:01:07

episode was produced by Claire Miller and

1:01:09

engineered by Benjamin Spencer. Our associate producers

1:01:11

are Jennifer Sanchez and Alison Weiss. Our

1:01:14

executive producers are Jason Stavros and Catherine

1:01:16

Dillon. Mia Silverio is our research lead

1:01:18

and Drew Burrows is our technical director.

1:01:21

Thank you for listening to Prof G Markets from

1:01:23

the Vox Media Podcast Network. Join us on Wednesday

1:01:25

for office hours and we'll be back with a

1:01:28

fresh take on markets every Monday. If

1:02:13

you enjoyed our discussion with Aswath, go check

1:02:15

out our conversation from last week with Josh

1:02:18

Wolf, the co-founder of Lux Capital, to hear

1:02:20

what he's most bearish and bullish on and

1:02:22

which of the Magnificent Seven he's most excited

1:02:24

about.