Pod Insights Prof G Markets Is AI CapEx Out of Control? + Bill Ackman’s IPO Failure About this episode Scott and Ed open the show by discussing the latest Fed meeting, Starbucks’ disappointing earnings, and Delta’s CrowdStrike problem. Then Scott shares his thoughts on Microsoft and Meta’s earnings and breaks down why capital expenditures have become so outrageous. Scott and Ed also discuss why Bill Ackman struggled to attract funds for his IPO, and what that says about a chronically online group of people. Note: For our analysis on Friday’s selloff, tune in to Prof G Markets on Thursday for our discussion with Mark Mahaney, Evercore’s Senior Managing Director and head of internet research.
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Transcript 8,386 words · 10 speakers
Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
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0:59 Scott Galloway? Today's numbers, 180,000 and 200,000. That's how many people attended the White Dudes for Harris fundraising event and White Women Answer the Call, which was the largest Zoom meeting in history. Let's turn this back to me. I asked a hero of mine, no joke, on the Zoom to say the following.
1:17 Speaker 04 I'm Luke Skywalker and I'm here to rescue you, Mr. Galloway.
1:33 Scott Galloway? Welcome to Prop G Markets. Today, we're discussing Microsoft and Meta earnings, Bill Ackman's failed IPO. Ed, that's right, the farm boy from Tatooine who went on to be one of the most powerful Jedi Knights battling the Sith. That's right, he gave a shout out to me, Ed. Jealous? Jealous? Do you even know what Star Wars is? Or do you just watch like Ariana Grande or Bridgerton? No, what is Star Wars?
1:59 Scott Galloway? My first sort of date, I was 13 and I took Pollock Humknock to the Star Wars premiere at the Abco Cinema in Westwood. If that was back when, I'm not exaggerating, I used to see a movie, I see two movies a week and I would see some movies five or seven times in the theater. Wow, that's awesome. Well, I'm glad you've enjoyed this walk down memory lane, Ed.
2:23 Scott Galloway? I can see the enthusiasm in your voice.
2:26 Ed Elson? Yeah, it's brimming, right? This white dudes for Harris thing that you joined. Have you been getting much shit from Fox people? Because I've been seeing, all I've been seeing on Fox News, you know, that's my favorite news program. All I've been seeing is people shitting on white dudes for Harris.
2:42 Scott Galloway? No, I actually, I get more shit. Fox and the far right has given up on me. I get shit from either the far left, or I'm convinced it's bots, from people who hate me or see me diametrically opposed to their economics.
2:54 Ed Elson? That's, by the way, that's one of my favorite biases of yours is any time that there's a negative comment about Prof G, you have a theory that it's a Russian bot invasion.
3:03 Scott Galloway? See, I believe what you just said was inspired by some sort of the GRU or the CCP. I don't really think you feel that way about the dog.
3:09 Ed Elson? Yeah, the CCP is something else.
3:11 Scott Galloway? It's you, it's you're clearly been weaponized by foreign adversaries. Hey, just because I'm paranoid doesn't mean I'm wrong. And by the way, when you get to my age, you're allowed to be a little bit paranoid.
3:18 Ed Elson? I agree. I like it.
3:19 Scott Galloway? Fox is saying essentially that it was very identity, it was the same identity politics that we always fall into and that if Trump tried to do it, he'd get criticized.
3:28 Ed Elson? They did not like the name.
3:30 Scott Galloway? Yeah, he would get criticized, but he would basically say, this is a thinly veiled KKK meeting to inspire the crazies. And when, when we did it, it was meant to sort of, and it was a nice vibe, kind of poke fun at the identity politics that the left is, is guilty of sometimes. But we weren't there to represent white guys' interests. No one, I listened to all the speeches, no one was talking about the power of white dudes or why we're not represented. It wasn't anything like that. It was really, I was really, I don't know if you, how much time you spent on it, it was a really nice vibe and we raised more than four million bucks. I shouldn't say we, it was this really talented guy. He pulled off something so impressive so fast. And if you think about, every presidential election usually has a technology at the
4:14 Scott Galloway? core of it, or media, you know, FDR was radio, JFK was TV, Trump was Twitter. People say it was with Obama, it was Google. And I used to think that this one would be short form video, this would be kind of the TikTok election. But now I'm wondering if it's going to be the Zoom election. All of these Zoom, have you been, I'm just, I assume almost everyone's been invited to a Zoom call, something for Harris or something.
4:37 Ed Elson? My bank account isn't big enough for that.
4:38 Scott Galloway? No, like, young men looking for love, Zoom for Harris. Luckiest podcaster in the world drafting off the heels of someone much more talented for Harris Zoom. That, you haven't got that call yet? You haven't got that call yet?
4:53 Ed Elson? No, but we could keep going. We should keep going with these ideas anymore.
4:57 Scott Galloway? Yeah, yeah. You're getting fed up. You used to laugh at my jokes. Now you realize now you feel some power. Now you're like, oh.
5:04 Ed Elson? Oh, come on.
5:06 Scott Galloway? So the big news, everyone comes up to me. I had someone come up to me and ask me yesterday and say, oh, we love your content. Ed has a girlfriend? So I am, this is, this is, this news has traveled all the way to Picken County, Ed. This is very exciting, very exciting.
5:22 Ed Elson? So exciting.
5:23 Scott Galloway? Yeah, clearly you're looking to move on.
5:25 Ed Elson? Okay, let's start with our monthly review of market vitals.
5:35 Ed Elson? The S and P 500 had its worst July in a decade, advancing about 1%. The dollar fell, Bitcoin rose marginally, and the yield on 10-year Treasuries declined. Shifting to the headlines, the Federal Reserve held interest rates steady, but acknowledged recent progress on inflation could allow them to cut rates soon. Second quarter revenue at Starbucks missed expectations as total same-store sales declined 3%. That metric was especially painful in China, the company's second largest market, where same-store sales fell 14%. And finally, Delta's CEO revealed that the CrowdStrike technology outage cost the company half a billion dollars. It took Delta longer than many other airlines to recover from the outage, and they ultimately had to cancel 5,000 flights over several days.
6:21 Ed Elson? The airline notified both CrowdStrike and Microsoft to prepare for litigation. Scott, your thoughts, starting with the Fed meeting?
6:29 Scott Galloway? All right. So look, this continues to be the kind of Goldilocks economy. There's 195 nations in the world, 194 I'll wish they were the same nation, and that is the US, at least economically. Even though the current Fed funds rate is at a 5.3% or two decade high, that historically is not that high. US GDP rose at almost, I think it was about 2.8% annualized in the second quarter, which is higher than economists had forecasted. And the unemployment rate's about 4%, which is still like historically low. That's basically full employment. And the S and P and Nasdaq both had their best days since February following the announcement. S and P up 1.6%, the Nasdaq up 2.6%, although I think it's down today. I just can't get over how bad the Democrats are messaging.
7:14 Scott Galloway? The American public feels like Bidenomics didn't work. The economy here is, there is no nation in the world that has an economy like ours right now. And it just amazes me that we've done, when I say we, Democrats have done such a shitty job communicating that. I'm curious, do you have any thoughts on why Americans feel so bad about the economy?
7:37 Ed Elson? Well, we've talked a little bit about this when we talked about it with, with Kyla Scanlon, this idea of the vibe session. But, you know, the data that we've seen is that generally speaking, consumer sentiment doesn't have anything to do with the economy. All it has to do with is politics. I mean, if you look at consumer sentiment by party, you know, Republicans were feeling good about the economy until Biden took over. And the same is true, or vice versa, for Democrats. So I think the takeaway from this Fed meeting, you know, this is probably the most decisive statement we've heard from Jerome Powell since we've started talking about this. He, he was still a little bit cryptic, but he did give us a timeline and he was pretty
8:21 Ed Elson? confident and clear about the direction of inflation. And most importantly, he mentioned the word September. He said, quote, "A reduction in the policy rate could be on the table as soon as September." So I think we can be pretty confident at this point. Rates will be cut at the next Fed meeting. The cutting cycle is about to begin, which will be good for the stock market. It'll also be really good for us because for the first time in my career as a podcaster, maybe I'll get to stop talking about Fed meetings every month.
8:51 Scott Galloway? Yeah, or maybe buying a house at some point.
8:53 Ed Elson? Yeah, that too.
8:55 Scott Galloway? So really interesting story, Starbucks, specifically Elliott, has kind of taken a stake. You could go through the S and P 500 and say, who has made the biggest betters, the most exposed to China? And those stocks are probably some of the worst reforming stocks in the S and P. And that is China, just as everyone uses the term AI in every earnings call. If you go back seven, eight years, it was the same, except everyone just repeated the word China over and over. And Starbucks kind of went all in on China. In the last five years, it's nearly doubled. Think about this, doubled its stores in the region. But sales over that same timeframe are down 0.4%. About one in five of their stores are now located in China. In addition to the lackluster spending, Starbucks faces competition from Chinese coffee chain. I think it's called Luken.
9:41 Scott Galloway? Whose beverages, get this, had cost a third of Starbucks and Elliot shows up. It's an amazing brand. It's stock price, I think is, I don't know if it's down or flat over the last five years, but it's been a pretty significant underperformer. I think they're going to take a page out of the playbook from their activist intervention at Salesforce. And I think they're going to say, stop the hallucination around growth and spending. You need to cut costs here. And so, for example, Starbucks is saying they plan to open an average of eight new stores every day through 2030. I think they're going to ask them to revise that. I mean, these stores used to have like an incredibly short payback period. And so you just keep opening more stores and I think the juice has been squeezed from that lemon.
10:25 Scott Galloway? We've seen same store sales decline for two straight quarters. So there might be over stored in some regions. You know, they'll probably urge them to invest more in their expanding higher margin pickup, delivery and drive through businesses while shutting down struggling brick and mortar locations. But this feels like a classic sort of Elliot, come in, hi, we're here to help. Meaning you need to cut costs or do the following things. And we'll go away quietly if the stock pops, which it might here. And if it doesn't, we'll go, we'll go gangster on you. But Elliot typically likes to go after the ones I've seen, big brands, big companies where they have liquidity such that they can deploy AUM. I also wonder if it's sort of the last, I'll call it the last battle of Howard Schultz. But Howard sort of left and come back is kind of the thing that wouldn't leave in the sense.
11:09 Scott Galloway? He's always announcing his retirement and then, and then coming back. And so I'll be curious if they get along here, like, like the kind of Benioff Elliot love affair. Again, this is all going to come down to the male ego, but starting or finishing where I started. China has become, you know, the anchor around everyone's neck. If you're exposed to China, you're just kind of hating life right now.
11:33 Ed Elson? Going back to Howard Schultz.
11:38 Ed Elson? So this is the former CEO of the company. He took up the job in 1986. He sort of turned Starbucks into the global iconic brand today. He's no longer the CEO. He's no longer on the board, but he has been publicly criticizing Starbucks and its management for the poor performance in the past few weeks.
11:57 Scott Galloway? That's helpful.
11:57 Ed Elson? Right?
11:58 Scott Galloway? Thanks. Thanks for that.
12:00 Ed Elson? This was a quote he said, quote, "The company has not executed the way I think it should have. Senior leaders need to, quote, "spend more time with those who wear the green apron." He went and said this on LinkedIn. He also went on a podcast and started talking about it. And this is the guy, as you mentioned, who's been the CEO three times. He came back to Starbucks in 2022 and his job when he came back as the interim was to facilitate a clean transition to the current CEO. And now he's going out to media outlets and he's shitposting the CEO and the rest of the board. And the thing I find ugliest about this is that Howard Schultz, as I said, this is a holistic problem with Starbucks. Howard Schultz is responsible for many of the problems that they're dealing with right now.
12:44 Ed Elson? We mentioned China as an example. This whole China investment thing, this was all Howard Schultz's idea. He was the one who was pro-China and who wanted to go and invest. And I think the status that they wanted to open up a store in China every nine hours. And now it's obviously backfiring on the company and he's shitposting them. So I'd like to get your take because this is a guy who's sort of the iconic American CEO. He is known as sort of an impeccable businessman, but I look at what he's doing now and I'm kind of like, this, this behavior is pretty childish.
13:16 Scott Galloway? Well, so just some disclosure. Howard Schultz and his VC firm, Mavron, run by this really wonderful, thoughtful guy named Dan Levitan, invested in my e-commerce incubator in 99, where I closed on my first round of funding, along with Goldman Sachs, JPMorgan. So we closed on our round in December 99. The concept was to punch out retail e-commerce companies. And as you can imagine, six months later, it just didn't work because the entire market imploded, which by the way is a good thing. I've always said that fast failure is the next best thing to success. But so I have a little bit of bias here. I do think that like Howard will go down as one of the great consumer CEOs of all time. He's created a tremendous amount of value. He's legitimately and deserves to be a billionaire. It's just really bad form to shitpost the company. Is that fair? Have I done that?
14:01 Scott Galloway? I don't think I've done that. Well, maybe I have. Well, shit, I don't know. But I'm a megalomaniac too. So anyways. Yeah, what he's doing is not helpful. What it signals to me is he's planning to be the CEO the fourth time, that he's making a play to come back.
14:17 Ed Elson? Can we get a hard prediction? Will Howard Schultz return again?
14:19 Scott Galloway? I don't know enough dynamics there. Let me put it this way, we have not heard. I'm almost entirely confident predicting Howard Schultz is not going to be quiet around this issue.
14:28 Ed Elson? Let's move on to Delta and CrowdStrike. Your thoughts on Delta's comments and the lawsuit?
14:34 Scott Galloway? I think the bigger learning here is that Lena Khan has never been more important to our economy, and she's the FTC Chair. The concentration in the tech industry is just too great. And what that means is, is that the entire fucking airline industry can be shut down, or most of it, except for the ones that had really rudimentary technology, Southwest, they were due for a break. You basically can have the airline industry in the largest economy nearly shut down, because these companies are dependent upon a small number of technology vendors. Since the outage, CrowdStrike has declined nearly 25%. I thought it was going to give up 10% and then go back. It's not, it's gone down further. Still think it's probably a buying opportunity, but this is, this to me says more about the
15:17 Scott Galloway? concentration of power and how it can impact consumers and the economy. The insurance, the settlement itself, they'll figure it out, they'll come to some sort of, they'll come to some sort of accommodation and all parties will move on. Am I missing anything here, Ed?
15:30 Ed Elson? Well, the only thing I would add is, you know, I listened to his comments on CNBC. This is the CEO of Delta, who is talking about, you know, what a disaster it was, and how upset he is about the whole thing. The way that I would describe those comments coming from a Fortune 500 CEO is small dick energy. And the reason that I say that is that if you think about the damage to Delta here, it's actually really significant. There's the financial damage, where you had 5, 6,000 flights canceled, and then they also had to cover all of the customers who were staying in hotels and all these other expenses associated. But there's also the reputational damage. And I would bet there are many people whose flights got canceled, who don't really know
16:14 Ed Elson? what CrowdStrike is, who kind of heard of it. And who ultimately believed that their vacation and their week was ruined by Delta. So I think this is a really big issue for Delta. I think it's big enough to warrant possibly a termination with CrowdStrike. Or at the very least, it warrants considering a termination with CrowdStrike and stating that publicly. I think it speaks to a larger point, which you've sort of hinted at here, which is, you know, why doesn't he just end it with CrowdStrike? Why doesn't he switch to another cybersecurity provider? And I think the answer is, one, these companies have gotten too big. And two, it would just suck to do that.
16:56 Ed Elson? You know, when it comes to enterprise SaaS and tech infrastructure, you end up with this deeply dependent relationship that makes it really hard to leave. CrowdStrike has, get this, a 95% retention rate over the 20 years of operation. 95% retention rate. Do we think that's because CrowdStrike has an incredible product? Or do we think it's because CrowdStrike has made it so that if you try to leave, it's a total nightmare?
17:24 Scott Galloway? Yeah, so you're exactly right. And you're making the same point. Ed Bastian is the CEO of Delta. He's not afraid to fire people or companies. I mean, but he can't. And my guess is that once CrowdStrike figured out an agreement with Microsoft and become more definitely integrated, and you have Microsoft, you're just trapped. So all you can do is sue them, but you can't actually fire them or switch them. And it goes to the point that the industry is too concentrated. Let me use this as a segue into talking about one of my favorite things, airlines. I would argue amongst the big three, well, actually it's Southwest too. I still think Delta's probably done the best job in an environment where it's increasingly difficult to establish any sort of differentiation. I was a Delta person before.
18:06 Ed Elson? Why'd you switch?
18:07 Scott Galloway? Because Daddy flies private now, and you knew that. Anyways.
18:13 Scott Galloway? Fucking jerk. Anyways. Gets a girlfriend and now he thinks he's like, "Why do you do that?" Anyways.
18:22 Scott Galloway? Delta's done a good job and they do, they do the least bad job of all the domestic carriers with the exception of JetBlue Mint. Think about the competition there. Consumers flying a company, they get angry, they can switch, but Delta can't switch. "Why don't you fly Delta anymore?"
18:44 Ed Elson? We'll be right back after the break with a look at Microsoft and Meta's earnings. And if you're enjoying the show so far, hit follow and leave us a review on Prof G Markets.
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20:29 Ed Elson? We're back with Prof G Markets. Microsoft posted earnings that beat expectations on the top and bottom lines. The stock fell, however, on its disappointing cloud results. Revenue from Azure and other cloud services slowed from the previous quarter and also fell short of expectations. That's the first time since 2022 that Microsoft has failed to meet or beat expectations for that segment. Meanwhile, investments in that area are accelerating. Capital expenditures rose 78% to $19 billion, with nearly all of it going to AI and the cloud. Scott, initial reactions to Microsoft's earnings.
21:04 Scott Galloway? What seemed to spook everybody was just the arms race and the spending race that all these companies have now entered into. And the stat that just blew my mind is that the capital expenditures of Amazon, Meta, Microsoft and Google will spend about $200 billion this year on CapEx, double what the US government spends on homeland security. The entire revenue production or entire revenue spawned by the AI companies, their front-end applications or what they get selling these chips is about $20 billion. But the analysis you guys have done has shown that there's been about $3 trillion in inspired increase in market capitalization. So we have an industry that loosely speaking is trading at 150x revenues, which is just striking and, you know, some people would argue is unsustainable.
21:49 Scott Galloway? But it was the CapEx that kind of freaked everybody out here. But their business, you know, every part of their business seems to be, seems to be on fire. What's interesting is that people talk about, investors talk about flows. And that is you can find the best company in Argentina, but if the flows are consistently out of the Argentinian market, the capital flows, the market's bigger than any individual company's performance. And the flows here are interesting, and that is when people start to have any wisp or concern around the future of AI and its valuation, their go-to is to go to the infrastructure place. The same thing happened to Cisco in 98, 99, where people started saying on the front end, they're not entirely sure what the winners and losers are, we'll just invest in the, in the infrastructure or the steel on the ground, if you will.
22:33 Scott Galloway? And we see this now in terms of flows, and that is the software layer, Microsoft, Meta, Google and Amazon, their CapEx is up 31%. But their revenue is only up nineteen percent, whereas the infrastructure players or the hardware layer, that's Nvidia, AMD and ARM, their capex is actually flat to down. It says minus eight percent twenty twenty two to twenty twenty four, but their revenues are up one hundred and forty six percent.
22:56 Ed Elson? Yeah, it's interesting that that Wall Street has really latched on to that capex issue, this this capex investing. But you know, there's a reason they're doing that. And that is, sales are slowing, but by the way, barely. Sales went from thirty in the in the cloud division for Microsoft, at least, sales went from thirty one percent two quarters ago to twenty nine percent last quarter. So sure, it's a slowdown, but it's still a crazy big number. But it's not actually slowing because there's a lack of demand. In fact, it's the opposite. There's too much demand. And according to Microsoft, they can't keep up with it. And so that's
23:37 Ed Elson? why they're making these huge capex investments, nineteen billion dollars in the previous quarter alone, which is up eighty percent year over year. We're kind of witnessing one of the largest capex investment movements in history, because it's not just Microsoft. This is Google, which doubled it last quarter. It's Meta as well, which we'll get to. It's Amazon too. Everyone is sort of full tilt on the AI capex. And we've discussed before how maybe there's a danger there that, you know, maybe they're investing too heavily in the space. You made the point that all the dogs are barking up the same tree. But the question that I would pose to you, based on this earnings report, is, you know, the demand is there. Companies
24:19 Ed Elson? want to pay them for the compute, and they can't keep up with it. So does big tech really have a choice, other than to just plow billions, tens of billions of dollars into AI capex?
24:35 Scott Galloway? Yeah, so. There's been a dramatic shift in the way the boards approach CapEx in terms of strategy. And generally speaking, when we're on a board and the CEO brought you, you know, a plan that included billion-dollar-plus CapEx, you were to say, okay, we want the lowest CapEx relative to the potential return, right? Would we rather do a billion-dollar CapEx or a series of 10, 100 million dollars that feel a little bit more reasonable and see what happens? Now, what's shifted, especially among big tech companies because of the dramatic increase in their price earnings ratios, or that is access to cheaper capital versus the rest of the economy.
25:17 Scott Galloway? It used to be, this is going to cost, this will give us advantage, but it'll cost a lot of money. Like, hmm, I don't know. Let's think about this. We want to be careful. Now, when someone, you know, Andy Jassy comes in or Jeff Bezos comes into the Amazon board and says, I think we can get everything we sell to people within 48 hours by building out this unbelievable infrastructure or fulfillment network that's largely been avoided because everyone just wants to be, you know, lowest cost in terms of how to get things from point A to point B, that we see an opportunity. And the board says, well, how much would that cost to be able to do that? We know consumers would love it. And Bezos goes, oh, it would be so much fucking money. It'd be tens of billions of dollars.
26:00 Scott Galloway? And the board hears that and goes, perfect. Because what these companies have is access to cheaper capital than anyone. So AI is not only presents a bold, brave new world with growth and potential for them, it positions them to leverage their core competence, and that is to outspend every other company in the economy, except for a few. So these companies, just as a large investor has to go big game hunting, because I remember I worked for a hedge fund and I used to bring him ideas and he'd say, I'm not interested in putting 50 million to work. I have to be able to put 500 million to work. These companies love AI because they, A, they see real potential and growth and that it's a seminal technology.
26:41 Scott Galloway? And B, it's a place they can put tens of billions of dollars to work because they have access to that money. And 99.9% of companies don't. So this is kind of, you can see why they're spending so much. And this is their, you know, it's kind of like capital as a weapon as that strategy was sort of forged by Amazon and then Netflix. And that is Get a leadership position, access to cheaper capital, and then just go gangster in terms of your spending, right? Netflix spending $17 billion a year on content, that's probably more than the entire media industry spent on content in the decade of the 80s. But that's, they love that because it plays to their advantage.
27:24 Scott Galloway? Anyways, I think this is a, this is a CapEx arms race that plays to their strengths and they're happy to engage in it.
27:31 Ed Elson? Moving on to Meta, who had a very strong quarter. Just run you through the numbers here. Revenue grew 22%. That's the fourth consecutive quarter of 20-plus percent sales growth for Meta. Net income rose 73%. Daily active users also grew. Here's a great stat from Mia. Over 40% of the world's population is currently using Meta's platforms on a daily basis. 40% of everyone on earth daily active user on a Meta platform. But CapEx is also still growing. As with Microsoft, record CapEx for Meta this quarter. And Zuckerberg said that number would continue to grow.
28:15 Ed Elson? Scott, your initial reactions to Meta's earnings?
28:18 Scott Galloway? I mean, I hate to admit it, arguably one of the best run businesses in the world. You know, I mean, the venom you cite that just comes out, 40% of the world's population is on a Meta platform every day. I bet 90% of, 90% of the world that advertisers have any interest in reaching are on this platform every day. And they have unbelievable ads deck, unbelievable technology. Ad impressions and average price per ad both increased 10%. EPS up 73%? Unbelievable, just absolutely unbelievable. And I hate to admit it because I don't like the company or the management team, but I'm on Meta platforms all the time.
28:53 Ed Elson? Yeah, I want to get your reaction to an article that came out about Meta last week. According to the Wall Street Journal, Facebook and Instagram have been running ads that have been steering users to illegal drug markets online. In other words, there are ads for drugs on Instagram now. Ads for cocaine, opioids, other drugs, and Meta has been collecting revenue on those ads. Thoughts on that news?
29:24 Scott Galloway? I think that the people running Meta are generally awful people. If you have the incentives to get wealthy. Which are everywhere in the United States. To be wealthy is to be loved. You will make a series of incremental rationalizations to do things that are perhaps bad for your customers and the nation. So the fact that they're running ads, they would run ads, you know, they would run ads for, I don't know, Tide Pods as launch if someone would pay for it and they thought they could get away with it. So I'm not, it's, it's one of those stories I file under the notion of shocking but not surprising. What are your thoughts?
30:01 Ed Elson? I think it's more of the same. And I think the question is whether this will
30:07 Ed Elson? instigate any changes. But my instinct is no, because you've been calling for changes on this very problem for years and years. So have our politicians, so has government. And we keep on hearing the same story every time. So I'm sort of beginning to develop kind of a nihilist view of it. And I'm starting to think that, you know, this isn't going to do much to Meta and it's not really going to do much to the bottom line.
30:41 Scott Galloway? Yeah, I don't know. I find the whole thing, the whole thing's discouraging, but you just can't, you can't get around it. The combination between, you know, genius management, an incredibly deep talent pool that is trading wellbeing for the Commonwealth, for shareholder value, feckless political leaders, a population that is addicted to the affirmation of others. It all adds up to a company that's going to be extraordinary for shareholders and has been.
31:11 Ed Elson? We'll be right back after the break with a look at Bill Ackman's failed IPO.
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32:38 Ed Elson? We're back with Prof G Markets. Bill Ackman has canceled his plans to take Pershing Square USA public this week. As we discussed on the show in June, Ackman sold 10% of his investment company to raise capital for his new, soon to be public fund. Then he hit the road to drum up investor support to the tune of $25 billion. But after weeks of lackluster interest, he cut that fundraising target twice.
33:21 Ed Elson? First to $4 billion and then to $2 billion. Now, he's pulling the listing all together and he says he's rethinking its structure to address investor concerns. Scott, a $25 billion closed end fund would have been the largest of its kind. Ackman went from eyeing a new record to slashing his target by more than 90%, canceling this thing altogether. You also made a prediction about this story a few months ago. Let's play that.
33:54 Scott Galloway? So just as BlackRock has lost a lot of business and taken a lot of grief for its impact investing and focus on ESG, Bill Ackman is kind of becoming the face of the kind of anti-ESG, and I think that he's going to lose some investors and come under some pressure. The first quarter that his fund underperforms the marketplace, I think people are going to accuse him of having taken his eye off the ball. And I think a lot of investors who actually appreciate impact investment and DI initiatives are pissed off at the way he's handled this are going to very loudly and publicly withdraw or redeem from his fund. I think we're going to start to hear from his investors about his activities. Reactions?
34:34 Scott Galloway? Me, other than I was right. First off, let's talk about every hedge fund manager or every private equity firm dreams of captive capital. Now, why is that? The way a hedge fund or alternative investment manager goes out of business is mismatched durations. What do I mean by that? You invest long, but you raise money short. So you invest in small companies or micro cap or even private investments that are illiquid, but your investors have redemption rights and overnight the economy goes down or for whatever reason, they don't like your performance and they put in a redemption notice. And you have to sell down your positions, which puts pressure on the value of those positions, thereby even decreasing an already
35:18 Scott Galloway? probably lackluster performance, resulting in more redemptions, and you enter into a doom loop. And even worse, if you have investments in illiquid assets and you start getting more redemptions than cash on hand or liquid investments, you have to put up something called a gate, which says, just kidding, I said you would get money back on 30 days notice or receipt of a redemption notice. Gates are up and you can't get your money back. Once you do that, you've effectively signaled the end of your fund, because once you bring your gates down again, everybody submits their redemption notice because they don't want to get caught again. Captive capital is every alternative investment manager's dream. And one way to do that, there's several ways to do that. What Apollo and Berkshire Hathaway have done is they've essentially started as insurance companies.
36:03 Scott Galloway? You have a massive amount of captive capital. Another way to do that is to take the company public because you get, while the share price, the people who bought into this IPO could sell their shares, that just puts pressure on the stock price, but Bill and the Pershing Square Fund would have their capital and it'd be captive and it'd be theirs and no one could call and ask for it back. Now, the other story here is that I think we have hit peak signaling or peak drunken texting or peak kind of bullshit from communication from people who think that they can go on CNBC with chunky glasses or that people are really fascinated by Bill's thoughts on DEI when he has absolutely no domain expertise here and some of his viewpoints are seen as somewhat aggressive and a bit reckless.
36:48 Scott Galloway? And lately, he's tweeted and now he deleted this tweet, a conspiracy theory that there was no proof that President Biden had actually signed his resignation letter, just weirdness like that. And when you're Ottawa Teachers or the Michigan State Pension Fund, you have so many choices of good fund managers who will underperform the S and P like every other fund manager, minus their fees. They'll say, you know, we just don't need to put up with this bullshit. And this kind of what I'll call tweeting for awareness, thinking if I'm famous, people will want to invest in my fund, hit, I think it's peak a few days ago when Kathy Wood put out the following tweet, open quote, "As a result, our trading-related capital
37:29 Scott Galloway? tax losses should offset trading-related capital tax gains for years, an underappreciated asset associated with our strategies." What is she saying there, Ed? I can't even tell you. I don't know what she's talking about. What she's claiming is that they've lost so much of other people's money who were stupid enough to invest in their fund, that it'll offset losses in the future, right? These losses will offset gains in the future and this is an underappreciated asset as a result of their strategy. Let me get this. This is a good thing that you've lost this much money? I mean, talking about trying to turn chicken shit into chicken salad and believing
38:11 Scott Galloway? your investors and people on Twitter are this fucking stupid. No, our losses, our destruction in your capital is a feature, not a bug. And she ended up deleting that tweet. But I think, I think in general, investors are just getting fed up with adventures in social engineering or commentary, or people trying to pretend they're anything more than just shitty fund managers by thinking they can spin shit a different way. And this is evidence of that. I mean, this market, this IPO went from him saying, I'm going to raise $25 billion to $2 billion to zero. That is pretty dramatic. The market has kind of spoken here, and that is, you know what?
38:52 Scott Galloway? Your day job should be getting us returns, positive returns, not trying to talk about social engineering or spin your losses into something positive. I think this is actually an interesting moment.
39:02 Ed Elson? There's this internet term you might have heard of, extremely online. I'm just going to read you the internet definition of extremely online. To be extremely online is to post and to see what has been posted as very important. It is also to risk misunderstanding what is seen on your screen as too representative of the rest of the world, to think our niches are bigger than they are. Whereas being online may simply be a matter of having a phone. To be extremely online would designate when the habits common to communicating the screens seep into our awareness and our identity and our behaviors regardless of the screen's presence. Now I'm going to read you Bill Ackman's sales pitch when he proposed a $25 billion
39:45 Ed Elson? offering, which went to four, and then two, and then zero. Quote, "I have built a relatively large following on Twitter. I have built up a large base of institutional and retail followers that follow our every move. Media interest is valuable in attracting investor interest and also in creating liquidity for our shareholders. I will be completely unrestricted in terms of my ability to update our shareholders about developments in the portfolio." This is the The internet definition of what it means to be extremely online. But I just love this story because for the first time, it's put a literal dollar number on the delusion of some of these extremely powerful and extremely online individuals.
40:29 Ed Elson? And the number is so big, it is so comical that I would expect and I would hope that it's kind of shaken Bill Ackman up. And it's kind of made him think, okay, maybe I don't have everything figured out.
40:44 Scott Galloway? Yeah, I thought I thought that was well said. It was, um, so lately I've gotten, uh, I found out I've gotten a bunch of shit online for some of the things I said about the election and the race and Trump's assassination or failed assassination attempt. And Meghan Kelly and some conservative podcasters said my comments.
41:03 Ed Elson? Elon Musk, sorry, I just want to point out Elon Musk said that your joke about Melania Trump was quote, mean and cruel. And that to me was one of the earliest indicators that the right has gone woke and that they have turned into into the snowflakes. But sorry, go ahead.
41:19 Scott Galloway? Yeah, and just because, uh, just to be clear, this is a joke. And I actually got it off of a meme is that Melania was seen yelling into a phone. You had one job.
41:27 Ed Elson? How cruel of you. How cruel of you to say that.
41:29 Scott Galloway? Yeah, whereas marking the disabled is just fine. So I went on, I haven't been on Twitter in a year and a half, but I went on because I wanted to see these comments. And the, the thought I had was that these folks say the most ridiculous things, but they've aggregated an audience of sycophants or bots, and they've blocked everybody that pushes back on them. And they'll say something ridiculous and they get all this positive reinforcement. And the thing that struck me was not only how delusional these people are, but just how small their world is. And that I thought, okay, I've been off of Twitter for a year and a half. And occasionally I do miss it because I'll get forwarded a link to an article and I'd like to see the article and I can't see it.
42:14 Scott Galloway? But what you realize when you're off Twitter is that it's not only a bubble, it's a really tiny bubble. It just doesn't have a hell of a lot of impact. It's an issue in communications, but these people, they enter into this self manicured, self reinforcing ideological bubble. And I bet online that Bill Ackman probably, when he's on Twitter all day tweeting, that he thinks, okay, my fund's going to be huge and people love me online and I put out something saying Harvard's D E I is whatever, and I get 50,000 likes and all this activity on Twitter. And what you forget is, nobody under the age of 30 uses Twitter.
42:57 Scott Galloway? The person, the person making investment decisions on the behalf of A D A or of, you know, the Florida State Pension Program, they're not on Twitter. And these folks have literally entered into an alternative universe where their idols are Elon Musk, or Kanye, or tech libertarian brothers who have a huge following online, all talking to each other, all reinforcing each other. And Senator Michael Bennet once said it to me, I was meeting with him about something and he said, I said, well, you know, Twitter, Twitter, you know, says this and this. And he's like, Scott, he's like, you're under the impression Twitter is a much more important place in the world than it actually is.
43:39 Scott Galloway? He's like, the majority of voters don't give a shit what Twitter thinks or what's happening on Twitter.
43:45 Ed Elson? You've said that to me before and it has, and it's struck me too, because you're off it now. And I, I forget what the situation was, but I said to you, everyone's talking about this. He said, no, no, no, everyone on Twitter in your small following might be talking about this. And it was absolutely right.
43:58 Scott Galloway? But that's what happens if you're on Twitter and you're on something all day, you are where you spend your time. And this is what has happened with Bill Ackman. These folks are all figuring out. That Twitter is its own world and it's a pretty small world. And that is not how fund managers or people in the real world are thinking. This is just how fucking toxic the platform is. I did not know Elon Musk said that about me and I'm already like just fucking angry.
44:23 Ed Elson? Don't worry, I tweeted about it. I defended you. I called him a snowflake.
44:28 Scott Galloway? I'm literally, let me get this. He goes on Jordan Peterson and says that his daughter who went through transition is dead to him, but I'm the cruel one.
44:38 Ed Elson? I believe he said how, what mean and cruel people they are.
44:43 Scott Galloway? That's how people describe us, mean and cruel. But the mean and cruel podcast, oh my God, watch out. Yeah, anyways, let's, let's move on. I feel like I need to shower.
44:54 Ed Elson? Okay, let's take a look at the week ahead.
44:57 Ed Elson? We'll see earnings from Palantir, Uber, Airbnb and Disney. And we'll also discuss Apple and Amazon's earnings. Scott, any predictions?
45:06 Scott Galloway? Well, I think, I think we said it. We've hit peak, peak tweet among alternative investment managers. I think the bloom is off the rose. I think people are like, just because you're on CNBC and have a large following on Twitter does not mean that your SPAC makes any fucking sense or that you can wallpaper over your shitty returns or that support for your anti DEI movement on Twitter translates into investors thinking they want to give you captive capital. I think there's going to be a lot of, I think there's going to be more discipline, not amongst politicians, because the person who started this and it worked for him was Trump. Trump would say outrageous things online and people, it tickled people's censors and it's worked for him. He is the Twitter president.
45:51 Scott Galloway? I don't think it's having that same sort of efficacy or results for financial managers. I think this is a much more serious business. Other people's money and the people allocating or making the biggest decisions around institutional investment just have a different criteria.
46:05 Ed Elson? This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weis, our executive producers are Jason Stavas and Catherine Dillon, Mia Silverio is our research lead, and Drew Burrows is our technical director. Thank you for listening to Prof G Markets from the Vox Media Podcast Network. If you liked what you heard, give us a follow and join us on Thursday for our conversation with Mark Mahaney, only on Prof G Markets.
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