Pod Insights The Prof G Pod with Scott Galloway Prof G Markets: Tesla’s Earnings Beat, Chevron’s Share Buybacks, and Elliott’s Salesforce Stake About this episode This week on Prof G Markets, Scott reflects on Tesla’s latest earnings, semi-truck deliveries, and price cuts. He then offers his thoughts on the ugly side of share repurchasing programs, and explains why this will be the year of the activist investor.
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Transcript 5,908 words · 14 speakers
Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
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1:32 Scott Galloway? This week's number, 31. That's the number of Abrams tanks the US is sending to Ukraine. History teaches us appeasement does not work. The best way to end a war is to win it.
1:59 Scott Galloway? Welcome to PropG Markets. Today, we're discussing Tesla's earnings, Chevron's share buybacks, and Elliott's activist stake in Salesforce. Here with the news is PropG Media Analyst Ed Elson. Ed, what is going on?
2:13 Ed Elson? I was just talking to our producer Scott, and they told me that you've come up with this new business strategy. Apparently, if we want to beat CNBC, PropG Media employees need to become, quote, "more freaky."
2:25 Scott Galloway? That's right.
2:31 Ed Elson? Could you elaborate on that?
2:32 Scott Galloway? All strategy comes down to answering one question. What can we do that is really, really hard? Right? We want to find something we can do well that is really hard for other people. And what I think about is I think of CNBC as not as much our competition, but an aspirational goal. I actually like CNBC. I learn a lot there. But what we want to do is we want to go places that CNBC can't. And what can we do? We can be more honest and more transparent and more educational. That's not the business they're in.
3:03 Ed Elson? I like that.
3:03 Scott Galloway? We can be more crisp. They've got to fill 12 or 14 hours of programming a day, which means if you watch CNBC long enough, you're going to have people come on and contradict someone exactly three hours before that. They have to be somewhat sanitized or starched. And that is, I like it when we're offbeat, off color, provocative, crazy. So we want to do things like, I think the idea, I'm like, at the end of the show, we should do karaoke to an 80s song. The bottom line is my charge to you and the rest of the team is we need to let our freak flag fly.
3:37 Ed Elson? It's a strange managerial decision, but we could do it.
3:40 Scott Galloway? Good. All right, get to the news.
3:42 Ed Elson? Let's start with our weekly review of market vitals.
3:51 Ed Elson? The S and P 500 climbed on reassuring economic data. The dollar was stable. Bitcoin reached above 23,000. I'm shocked by that. And the yield on 10-year treasuries fell. Shifting to the headlines. The US economy grew at a higher than expected 2.9% rate for the fourth quarter as measured by GDP. That's still a slowdown from the third quarter's 3.2% rate. And year over year, growth was just 1%. The Department of Justice filed an antitrust lawsuit against Google alleging it's abusing its dominance over digital advertising. If it goes through, Google could be forced to sell parts of its ad business, which accounts for roughly 80% of its revenue.
4:33 Ed Elson? Hindenburg Research, which famously exposed and shorted the fraudulent car company Nicola, we had an unpack about that a few months ago. Hindenburg has shorted Adani Group, accusing the conglomerate of stock manipulation and accounting fraud. Almost immediately, Adani's companies lost $12 billion in market value. And finally, Ken Griffin's Citadel posted a record $16 billion in profit for 2022. That makes Citadel the best performing hedge fund in history in terms of overall net gains. And for context, this year, the top 20 hedge funds posted $22.4 billion in profits combined. Scott, do you have any thoughts here?
5:13 Scott Galloway? The DOJ's antitrust suit against Google, I hope it goes through. I feel like it's Groundhog Decade. We've been talking about this forever. I think what's going on at Hindenburg Research, kind of calling out some of these companies and doing the work and saying this doesn't make any sense. I think it's capitalism at its best, where someone gets economic motivation to, you know, basically call a spade a spade. I love this stuff. I think it's really interesting. Ken Griffin Citadel, $16 billion in profit in 2022, a year that I would bet the majority of alternative investment funds lost money. 2022 was, I think, the eighth worst year for the market on record. What strikes me is that the most profitable artificial intelligence firm in history so far is in fact Citadel.
5:58 Scott Galloway? Because if you look at Citadel's competitive advantage, they've taken 200-plus disparate data sets, whether it's LinkedIn data or Robinhood trading data. And they feed it into an algorithm and they have a data scientist that says, all right, when traders or investors at Robinhood, who are retail investors, are buying this way at this volume across this type of stock, it usually indicates that the stock is about to do. X and they can trade against that or create alpha there. And they have a massive number of inputs and they have speed. They've built all sorts of models and all sorts of infrastructure. And I think it's effectively their predictive models or their AI, if you will, that has resulted in a hedge fund that has had unparalleled performance.
6:42 Scott Galloway? And I wonder if the advances in AI are going to democratize it. And you're going to see sort of a leveling of the playing field, if you will.
6:48 Ed Elson? Yeah, it's so interesting because when I was reading these headlines, they were reporting that Citadel is the greatest hedge fund ever. And I'd always thought of Citadel as a market maker. I didn't think of it as a hedge fund. And then as I looked into it, what they're actually saying is the hedge fund arm of Citadel is what has returned $16 billion in profit for 2022. The market making operation is a completely different business. And then the other thing that's crazy is how much this benefits Ken Griffin, because Ken Griffin owns 80% of that company. And, you know, we talk about Bezos and Elon and their net worth going up by five to 10 billion at swings at a time.
7:31 Ed Elson? Ken Griffin, if he owns 80% of the company and he's taking a, let's just call it a 20% carry of that 16, he made $3 billion in cash last year, which no one else is doing. So my, my takeaway from this is bravo, Ken Griffin.
7:56 Ed Elson? Tesla reported record revenue and record profit in fourth quarter earnings last week. Revenue came in at $24 billion. That's up 37% from the year before. And profit was $3.7 billion. That's up 59% from last year. These results are coming after the company cut prices to stoke demand in January. And now, according to Elon Musk, Tesla is, quote, seeing orders at almost twice the rate of production. Tesla shares rose 5% in after hours trading, but the stock is still down 48% from a year ago. Scott, one of your predictions for 2023 was that Tesla So it posts record revenue, check. But also that Tesla's stock would get cut in half. You made that prediction in November.
8:41 Ed Elson? It's down around 15% from then. It was down more before, but it's sort of bounced back in the last month or so. Do you still believe that your prediction is going to come true?
8:51 Scott Galloway? This is a great earnings report. You got to get the company to do. The only thing that was not ideal was the gross margins on the car are at 24% versus 26% expected. And that's a function of them lowering prices. That's just simple competitive pressure. There's just more cars to choose from. They needed to move cars off the lot. I think it was the first time they ever actually had to offer discounts. But their margins are now off 10% from 27% in Q4 of 2021 down to 24%. And I think that's going to be one way. I don't think they're going to recover as there's more and more competition. But the revenues here on Europe, 51%, that's incredible. Net income, almost 14 billion, which is doubled. And keep in mind, they only went profitable in 2020.
9:35 Scott Galloway? So then in the last 12 months, Tesla is earning more profits than General Motors, which is just, just striking. And it's a function of its brand and it's more of a software company. People would argue that a manufacturing company. So those margins are especially impressive. So growth plus better margins equals just better market capitalization and better EBITDA. I would argue that something we do as investors that is not a good idea is that we anchor off of history. And that is, you got to look at a stock where it's trading right now and where it has been. Really doesn't make a lot of difference over the long term. And if you look at Tesla right now, if you look at its multiples, you look at its multiple on revenues, it's multiple on earnings.
10:17 Scott Galloway? It's just still trading at just an enormous premium to the rest of the market. Yeah, true, it's, it's been cut in half, but it's still crazy expensive.
10:27 Ed Elson? Yeah, let me just, let me just take us through the multiples right now. Mercedes, so price to earnings ratio for Mercedes, 5.6. Ford, 5.7. Renault, 7.7. Honda, 8.2. Tesla is 44.6 price to earnings ratio. So it's still crazy high.
10:46 Scott Galloway? Yeah, and it deserves a premium. The question is, does it deserve 5X the premium? And I think the answer is no. So again, I'm sticking to this prediction. As F. Scott Fitzgerald said, intelligence is the ability to hold two contrary thoughts in your mind at the same time. This company will continue to perform really well. Record deliveries, record revenues, record top and bottom line, and its stock will decline, in my view, dramatically. I just think it's, I still think it's overvalued.
11:15 Ed Elson? So some separate news to the earnings. Last week, Tesla delivered 15 semi trucks to Pepsi. And this is something that Tesla shareholders have been waiting forever for. It's the first big delivery. And one of the big questions you were addressing is, is something that everyone's asking, is this a car company? Or is it something more? And I think the Tesla bulls would point to this and say, no, Tesla's going to take over the trucking industry and the transportation industry. Heavy duty trucking is a $200 billion market. This is so much more than a car company.
11:46 Scott Galloway? This is basically an autonomous driving play, I would think. Because if there's one place that autonomous driving makes a ton of sense, and Jason Stavers, our editor in chief, pointed this out, it's in long haul trucking. Tesla has invested a great deal of money in autonomous driving. However, having said that, autonomous driving is definitely one of those technologies where the performance has not kept pace with the promise. And that is, it is taking much longer than we'd anticipated. And I love the quote from Bill Gates, I think he made it 10 or 20 years ago. He said, "Technology that's supposed to take 10 years oftentimes takes three, and the technology that's supposed to take three years often takes 10." I thought that was really interesting, and I would argue that autonomous driving is
12:31 Scott Galloway? the latter. It was supposed to be here. Just in 2018, 2019, we were supposedly on the cusp of millions of self-driving cars, and it hasn't happened. So it feels to me like it's five or six years off, and that the promise of a Tesla truck was to say to these organizations, you're going to dramatically reduce costs and increase utilization. I mean, Elon Musk is such a great... A salesperson, he says, he has this great metric. He says that once a car is self-driving, it becomes 10 to 20 times more productive. And that makes sense, right? I have a Tesla. I park it. I turn on a switch and I can rent it out while I'm sleeping. Okay, go get people or transport stuff for people or whatever.
13:15 Scott Galloway? Go pick up someone from the airport and just start making money or monetizing the asset while I'm in my sleep. It's a really compelling thought. The first place should be in long haul trucking. It doesn't appear to be happening as fast as we'd hoped.
13:28 Ed Elson? And then finally, something we mentioned are these price cuts. So Tesla prices came down around 20% in January. I think it's important to mention here that with that discount, two of their cars, the Model 3 and the Model Y, both of them are now going to be eligible for the Inflation Reduction Act's tax credit. And what that basically says is that under a certain price, which they've reached, you get $7,500 off, covered by the government. And to me, what they're doing here is just trying to make Tesla super affordable. And in the past, Tesla has been a very much a luxury brand. But it feels like maybe they're pivoting away from that. So do you have any insights into the branding side of this? Do you think that this is a good idea that they're trying to make Tesla more affordable?
14:11 Ed Elson? They're taking advantage of these tax credits, but they're probably going to lose this luxury footing that they've had since their inception.
14:19 Scott Galloway? I don't think so. I think they can pull this off. You know, BMW has a three series. It's not an inexpensive car. Generally, cars are going to kind of have three models, like good, better, best. And then they have a general positioning and they're built on the same platforms. It's a business of scale. If you buy a Q7 from Audi, you're also buying a Porsche Cayenne and you're also buying a Volkswagen Torek. They're all built on the same platform. They just have different finishes. But within each model range, even at the luxury range, they usually have the three series, the five series and the seven series. That's BMW. So kind of going up and down the food chain, I think they can still maintain that luxury positioning. It's still an expensive car. They still offer, you know, $140,000, I think it is, Balkan X.
15:03 Scott Galloway? So yeah, they can pull this off.
15:14 Ed Elson? Energy giant Chevron is planning a $75 billion stock buyback after it registered record profits in 2022. The company will also increase its dividend payouts, and this program will launch in early April. Chevron's current market cap is $350 billion, which means that this program is worth almost a quarter of the company's total value. Chevron shares rose 4% on the news. So Scott, let's start with a more basic question here. What is a stock buyback? And why do companies do it?
15:49 Scott Galloway? It's a way of returning capital to shareholders. So it's basically a company says, we are a profitable company. We have positive cash flow. We end up with a billion dollars in cash at the end of the year. And we don't have an immediate plan or growth strategy where we could deploy with a decent ROI hurdle at billion dollars. So we go out and with that billion dollars, we buy our own shares back. And we reduce the number of shares from, say, 100 million to 90 million outstanding, meaning if we do, you know, a billion in profits, instead of having a $10 EPS, we have an $11 EPS, which should take the price of shares up, which is sort of a tax efficient way, if you will, of returning capital to shareholders.
16:34 Scott Galloway? If it was a dividend, they'd get taxed. This way, ideally or theoretically, the value of their shares goes up. And if they don't sell them, they're growing the value of their shares in a tax deferred manner. Now oftentimes, share buybacks, I mean, some people call it financial engineering. Some people would accuse management of lacking vision when they don't put capital to work. And also because management is largely compensated based on the value of shares, because the majority of their compensation, sometimes 90, 95, 98% of their compensation comes from options tied to the stock price, that they would rather just go, take all of their excess capital and do share buybacks, thereby juicing in the short term the stock price and increasing their compensation. And that's sometimes not the best thing for the economy, because a small number of people
17:20 Scott Galloway? Own the majority of shares in companies. And would that capital be better spent, if you will, or be better for the economy, better for the Commonwealth? If people or companies were motivated to build new factories, hire more people, try and innovate more in R and D. So it makes sense. And I believe there's legislation that's passed that has said that there will be greater taxes on share buybacks. Also, also, Ed, what is really ugly is when companies, specifically airlines who did this, take all of their excess cash, buy back stock, juicing the stock price, and then go hat in hand to government saying, we need a bailout because why? We don't have any cash because we use it to buy back stock. And what do you know?
18:03 Scott Galloway? I made a shit ton of money, but now we're all in this together. And what this creates is a situation where we're capitalists on the way up and then socialists on the way down, looking for bailouts in a company or an economy where you have capitalism and private capture on the way up. But government bailouts on the way down, that's neither socialist nor capitalist, it's croneist. And it's wrong. So I think, I think any company that's had a certain level of share buybacks shouldn't be eligible for government bailouts. Go out of business.
18:33 Ed Elson? Yeah, I was, I was just going to bring this up, which is two years ago during COVID, the government gave the oil and gas industry $10 billion in tax cuts and loans. And so it just feels crazy to me that now, two years later, all these companies are seeing record profits now. Chevron apparently has $75 billion to play with. And their response isn't to, you know, reinvest that capital back into the business, which would help them survive another macro incident, or maybe help them move faster towards sustainable energy. No, instead their response is, we're going to cash out shareholders with dividends. And we're also going to pump up the stock price with buybacks. So isn't this just really financially irresponsible and on a higher level, just wrong?
19:16 Scott Galloway? To a point, because, you know, companies don't grow forever. At some point, they've kind of, I don't want to say maximized their position, but they're not, they're profitable. They're doing what they're supposed to be doing. They're aggregating cash. And to tell them to mandate that they spend all of their cash again on growth means they're going to make probably a lot of dumb decisions. So a certain level of stock buybacks kind of makes sense. And also, sometimes you're just taking the shares back to where they were a few years previous because you will have to issue additional shares for compensation of management. So the natural pool of shares increases on its own. But when you're just optimized for share repurchases and you're not seeing investments
20:00 Scott Galloway? and you're seeing a lot of, you know, what I'll call compensation without investment, it's a tough one. I think the government landed in the right place and that is, okay, you're not going to make this illegal, you're not going to inhibit it, but you're going to tax it.
20:14 Ed Elson? Okay, we'll be right back after a quick break with a look at Elliot's activist investment in Salesforce.
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22:53 Ed Elson? We're back with Prof G Markets. Activist investor Elliott Management has taken a multi-billion dollar stake in cloud software firm Salesforce. Elliott's strategic position is unclear, but people familiar with the matter say shareholders are concerned that CEO Marc Benioff has become distracted. One of those distractions they fear is celebrities. One source said Matthew McConaughey and Will.i.am are frequently involved in strategy discussions at the company. Another source said, no, it's just casual business discussions. Either way, they appear to be around. But Elliott hasn't brought up any of these concerns. The only public statement we've seen came from managing partner Jesse Kohn, who said,
23:37 Ed Elson? quote, "We have developed a deep respect for Marc Benioff and what he has built, and we look forward to working constructively with Salesforce." Salesforce shares are down 30% in the past year. Scott, another activist play. This is coming right after our discussion of Nelson Peltz and Disney and their proxy fight. What are your initial reactions to this one?
23:59 Scott Galloway? You're going to see more activist activity this year than we've seen in a long time. And it's not because management is behaving poorly or they've made bad decisions. It's because the market is down or a lot of the biggest companies, a lot of the best companies have had their stocks cut by 50%. And Salesforce is right in that sweet spot. It's a great company. It's a cloud company. Unbelievable relationships, unbelievable cash flow, and it's got very strong management. Now, they've had some hits. Brett Taylor, co-CEO, left and people still, I don't think, really understand why. That reflects poorly on Mark and succession strategy. He was a young man and well thought of among the troops. You know, I'm a bit conflicted because I know both Jesse and Mark and they're both thoughtful, smart people.
24:42 Scott Galloway? Does Salesforce probably need to trim some costs? Probably. But I don't, I mean, I've been to some, not social events, but quote unquote, business events invited by Mark and Will I Am was there. But I also know Mark well enough to know that he is very focused on business and very bright and exceptionally hardworking, exceptionally committed to the company. So I think that effectively Elliot's motivation for investing in this company is not what they think Mark has done wrong, but what he's done right. Specifically, it's a great company and the market's taken it down 50%. And I think what they'll do is, I think they'll just mostly stand by for a year and hope
25:26 Scott Galloway? that the market takes it back up again on its own. And if it doesn't, then they'll come in with kind of a finer, you know, scalpel and say, okay, Mark, we would like to see the following two or three changes.
25:38 Ed Elson? What was the nature of that Salesforce event? And what was Will I Am doing there?
25:43 Scott Galloway? Mark is a tech guy, pulls together, he would do Dreamforce, these huge events, then he would do smaller events and there'd be some entertainment component, but then he'd want to talk about business and everyone would go around it. And I've only been to a couple of them, but almost all of them do this, almost. And look, these are humans. If I were a billionaire, I would get a kick out of hanging out with Matthew McConaughey, but they're not dumb. These guys, you know, they, I remember, I was advising a hedge fund that was hugely successful from 2006 to 2008, and I'll go nameless, but I remember walking into the kitchen one day at the snack room and Martin
26:24 Scott Galloway? Scorsese was in there. And I'm like, oh, it's Martin Scorsese. And the reason why is that this hedge fund manager had become a billionaire and his wife had decided that she was a film producer now. Why? Because they had billions of dollars and they could produce films. And Martin Scorsese was now hanging around the office. Wealthy people have options and they get access to stuff. And especially in Hollywood, you find a lot of artists who are very drawn to capital who will finally let them make their art, i.e. a shitty independent film or a critically acclaimed independent film that makes no money.
27:03 Ed Elson? Just to push back though, I mean, Salesforce, down 30% on the year, they were in the bottom 10th of the S and P 500 last year. The CEO left, they had two other executives leave. They're laying off 10% of the workforce. They're probably going to lay off more. Don't you think even being seen with these people, even the idea of having fun and hanging out with Matthew McConaughey, when you're a public company CEO, you just have an obligation when times are tough to not look like you're having fun? I mean, it's just, it's such easy bait for people to say, he's distracted, he doesn't know what he's doing, he's just trying to have a good time.
27:42 Scott Galloway? I think what you're saying is, there's a lot of veracity to what you're saying. I think that optics matter. And one thing that activists always want when a stock is down is focus.
27:54 Scott Galloway? And they don't want you, they don't want to see distractions, whether it's non-core businesses, whether it's buying a social media platform, or whether it's hanging out with celebs, the one thing they always say is they're always like, focus. And I just know both of these guys, they're both really smart, reasonable people. I think this is gonna, I don't think this is gonna end up in a proxy fight. I don't see that happening here.
28:18 Ed Elson? Yeah. See, I was having doubts about whether Elliot actually trusts Benioff as the CEO. But from what I'm gathering, you think that they probably do.
28:27 Scott Galloway? Well, I don't know. But then the question also becomes, does Marc Benioff want to be CEO for much longer?
28:32 Ed Elson? Yeah.
28:32 Scott Galloway? Marc is, you know, what is left for Marc to accomplish? He might say, okay, I want to get this thing back on its footing. But he's sort of checked every professional box in history, worked at Oracle, started a competitor and built, built one of the most valuable companies in the world, and arguably one of the two or three most valuable cloud companies in history. And it's worth, I don't know, what's he worth, 30 or 50 billion dollars? So he's probably, I don't think he would mind the idea of a succession strategy. It just all comes down to the individual. I don't know Marc well, but I know him and he strikes me as a very kind of self-actualized guy that really enjoys life. And I wouldn't be surprised if he says, look, I'm gonna get this back on its feet, I'm gonna name a successor, and we're kind of off to the next generation of Salesforce.
29:16 Ed Elson? So apparently Marc Benioff takes business advice from Will I Am and Matthew McConaughey. But if you wanted celebrity business advice, who would you talk to? Here's Mia on the street.
29:28 Speaker 03 Okay, so my question is, would you take business advice from a celebrity?
29:32 Speaker 04 Absolutely.
29:33 Speaker 03 Wow, such conviction. Which celebrity?
29:36 Speaker 05 It would be Oprah Winfrey. Mr. Donald Glover.
29:40 Speaker 04 Um, there's a few. I'd probably go with Joe Rogan.
29:42 Speaker 06 Warren Buffett popped mine immediately. But like a Kim Kardashian, probably not.
29:47 Speaker 07 Yeah, yeah, yeah.
29:48 Speaker 08 Although she has her own business, so maybe so.
29:51 Speaker 09 I'd honestly take business advice from one of the Kardashians because although there's like nepotism involved, they know what they're doing and they would probably give me good advice.
30:01 Speaker 10 Well, I mean, Kim Kardashian knows business more than most. So that's one that's one I would listen to if they had something to say.
30:10 Speaker 11 Kris Jenner, like honestly, no, because she's on top of it. Or like Yolanda Hadid, like the mothers, Beyonce's mom, what's her name?
30:21 Speaker 08 Beyonce's mom.
30:22 Speaker 11 Beyonce's Beyonce's mom. Hey, girl, hit me up, Ms. Knowles.
30:27 Speaker 12 So I would take business advice from one person only, Madonna. I think that she's unhinged and chaotic, and I am also unhinged and chaotic in certain ways. And I don't know, she's always like treated herself and her work as a commodity as a performer. And I think that's really fucking cool. And that's something that I've always kind of like dug about her making herself and your personality and your entire being kind of a business itself. Also, I feel like she's probably somebody who's like a dad type that knows about like stocks and bonds and I don't know why, but I feel like she has that.
31:07 Speaker 08 Unhinged, dad type, knows about stocks and bonds, personality as a brand. Is Scott the Madonna of business?
31:19 Ed Elson? Let's take a look at the week ahead. We'll see January data on consumer confidence, job openings, quits, and the unemployment rate. And we'll also hear from Fed Chair Jerome Powell. Economists are expecting a 25 basis point interest rate hike. And we've also got a big earnings week. Apple, Amazon, Google, and Meta are reporting. So are Snap, Spotify, Match Group, Peloton, Ford, GM, and Exxon. Scott, do you have any predictions?
31:48 Scott Galloway? My prediction is that when we look back in 12 months on the investment that Satya Nadella and Microsoft made at OpenAI of $1 billion in 2019, we're going to see that as visionary. Everyone's talking about the $10 billion investment now, but the $1 billion investment getting in early. Is going to be one of the best investments in corporate history, specifically whether or not AI lives up to the hype. It's going to give Microsoft the opportunity to bring new life to something that was already kind of dead and buried, and that is Bing. And I predict that Bing, under the auspices of an AI-driven Bing, whether they call it Bing powered by ChatGPT or Bing AI, or whatever they're going to call it, is going to double or triple its market share, and it's going to take a $1.5 trillion stock
32:33 Scott Galloway? or company to 1.7 or maybe 2 trillion. And that $10 billion, while it seems a lot, is going to add a few hundred billion dollars in market capitalization to Microsoft. And people are going to realize that that early investment in AI was a visionary move by Microsoft and Satya Nadella. That's all for this episode. Our producers are Claire Miller and Jason Stavert. Special thanks to Catherine Dillon, Ed Ellison, Mia Silverio, and the PropG Media team. If you like what you heard, please follow, download, and subscribe. Thank you for listening to PropG Markets from the Vox Media Podcast Network. Join us on Wednesday for office hours, and we'll be back with a fresh take on markets every Monday.
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