Prof G Markets: First Citizens Acquires SVB, Hindenburg Shorts Block, and Nike vs. Hermès

This week on Prof G Markets, Scott shares his thoughts on Silicon Valley Bank’s new owner and explains why distressed assets are some of the best places to invest. He also shares his thoughts on why he thinks Hindenburg’s latest short position might be a reach, and takes a look at the latest earnings from specialty retail including Lululemon, Nike, and Hermès. Learn more about your ad choices. Visit podcastchoices.com/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Scott Galloway?

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• 0:48Speaker 01

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• 1:18Scott Galloway?

  This week's number, 60,000 pounds. That's the cost of a new James Bond-inspired vacation called The Assignment, which includes training sessions with Daniel Craig's stunt double, poker games, and vodka martinis in locations across Europe. True story, I wouldn't start in a James Bond-themed porn movie. I was nervous, but I managed to come on cue.

• 1:42Scott Galloway?

  That's good.

• 1:54Scott Galloway?

  Welcome to Prop G Markets. Today, we're discussing First Citizens' acquisition of SVB, Hindenburg's short on Block, and Lululemon's latest earnings. Here with the news... Is Prop G Media Analyst and future porn star Ed Elson.

• 2:11Ed Elson?

  I have a better number for you. My number is 46. That's where the Prof G Pod ranks in all podcasts globally as of this week. That means we're one ahead of Megyn Kelly and 16 ahead of Logan Paul. Pretty good. What do you think, Scott?

• 2:26Scott Galloway?

  I'm obsessed with the affirmation of others. I'm addicted to it. That's my addiction. And I think it's important that people understand their addiction. I'm being semi-serious. As much as I joke about alcohol and THC, I don't think I'm addicted to either of those substances. I am addicted to the affirmation of strangers, but what it clearly is, is it's new downloads or new registrations, because I think it's more based on momentum than actual downloads.

• 2:50Ed Elson?

  Don't give it away.

• 2:50Scott Galloway?

  Yeah, because of the Bill Maher thing, we got a ton of new interest, new downloads, so it'll spike. But unfortunately, I think it'll come back down, but still.

• 2:58Ed Elson?

  But by the way, something else interesting. We're ranked 46 in the world, 65 in the US. So it's the internationals who are sort of carrying us.

• 3:07Scott Galloway?

  We're global. We overindex in South Africa and Brazil.

• 3:12Ed Elson?

  By the way, I think your door's ringing. It's your edible's delivery.

• 3:15Scott Galloway?

  My house is literally a, basically an Amazon distribution center. And that is, there is so much shit that comes in and out of this house. It's just, Amazon should just literally turn this place into a warehouse and okay, we'll keep 10% of everything they stock. But anyways, talk to me about today's news.

• 3:34Ed Elson?

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

• 3:43Ed Elson?

  The S and P 500 gained, the dollar fell, Bitcoin briefly hit $29,000, and the yield on 10-year treasuries was relatively stable. Shifting to the headlines. AMC's stock soared 21% after a report from The Intercept said Amazon is considering purchasing the theater chain.

• 4:02Ed Elson?

  Alibaba shares popped 14% after it announced plans to split its $220 billion conglomerate into six distinct business units through separate IPOs. Elon Musk, along with a thousand other tech leaders and researchers, signed a letter calling for a six-month moratorium on any further training of advanced AI models. They said that AI poses, quote, "profound risks to society and humanity." Federal prosecutors charged FTX founder Sam Bankman-Fried with foreign bribery. SBF allegedly paid Chinese officials $40 million to unfreeze accounts linked to his other company, Alameda Research. He now has 13 criminal counts pending against him.

• 4:44Ed Elson?

  And finally, the Commodity Futures Trading Commission is suing Binance and its CEO Chang Peng Zhao for, quote, "willful evasion of regulations," calling its exchange "illegal" and its compliance program "a sham." Scott, what are your thoughts here?

• 4:59Scott Galloway?

  AMC, I think this was a leak from AMC. I just don't buy, in famous last words, I don't see why Amazon would buy this company. Or I can see the kind of the industrial logic that they'd want to go vertical, give Amazon, give their internal production studio a front-end distribution in theaters. But it's just such a shitty business in decline. I've never seen them invest in a business that's in structural decline, which is movie theaters. So I don't, I wonder if somebody at AMC leaked this story.

• 5:34Ed Elson?

  As in made it up?

• 5:35Scott Galloway?

  Yeah, I wouldn't be surprised if maybe, who knows, maybe Amazon looked at it at some point, but I just don't buy it. We'll see. Alibaba, this is a great idea. This is actually kind of the most interesting business story of the week. Splitting into six companies is trying to unlock the company from the conglomerate tax. And what do we mean by that? CEOs like to acquire different assets or launch, in this case, launch different companies, taking advantage of the brand and their customer base. And oftentimes what they end up with is these corporate Frankensteins, where there's really very little synergy. And the market hates conglomerates because what the market wants is a CEO and a company that are singularly focused such that they can understand the company, understand its

• 6:19Scott Galloway?

  metrics, and hold that CEO accountable. And the CEO likes to acquire stuff because their compensation goes up because the bigger the company, the bigger the range that their benefits or their compensation consultants will tell them the CEO should be paid for. And they always love the idea of a hit acquisition that makes the world much easier than actually building something. But two thirds of acquisitions don't work out because people typically overpay. But you end up with these multi-headed hydras that kind of make no sense. And then the ultimate activist player, the go-to on activist investments is they come in and they break up companies. Because the way the market communicates its displeasure with conglomerates is it takes the shitty business in the conglomerate and it assigns that multiple to the entire company.

• 7:01Scott Galloway?

  So the disposition of assets when you're paying a conglomerate tax is accretive to shareholders. And an analyst did the work here at Alibaba and then, and this is the important part in the second part of the story, got the blessing of the CCP. And it strikes me that the CCP is on a bit of a charm tour right now. And that is Jack Ma showed up and seemed friendly and didn't have any visible scars. They didn't have, you know, jumper cables attached to his nipples saying, be, be, say nice things about communism. That was a little graphic. Anyways, but basically, it seems like Xi has figured out, okay, Chinese internet economy has just been smacked upside the head. And they've said, we've got to, we've got to show some growth here.

• 7:44Scott Galloway?

  We've got to show some, we've got to let our thoroughbreds run. And I think you're going to see more of this. I think you're going to see even some photo ops with American internet companies and their great partnerships. But basically, I think the frost is thawing in the Chinese internet sector and the Communist Party there is about to become a wind at their back as opposed to a wind in their face. This whole AI thing, this letter, I take anything Tristan Harris says seriously. However, I wonder if Elon Musk, if he had wrested control of OpenAI, which he tried to do, and my understanding was was kicked out, I wonder if he was in control of it, if he'd be advocating for a slowdown. And I'm all down to the notion of a slowdown. I understand the threat that this thing is technology that could get out ahead of us and it will obviously have some.

• 8:30Scott Galloway?

  Potential or could be potentially weaponized. The problem I have is unless China, Brazil, North Korea, Iran and Russia are going to sign the same go slow pact around AI, I think it could backfire on us. And that is, we knew that developing the hydrogen bomb would probably be a bad idea for the world, but if we stopped unilaterally the development of hydrogen bombs or splitting the atom, we knew it would be really bad for us. So my feeling is we should absolutely go full steam ahead, but we need regulatory bodies and then ideally some international cooperation to say, okay, this shit's scary. We should all agree to certain protocols. And then the last story on SBF, if there's any way to put someone in prison for like

• 9:13Scott Galloway?

  11 lifetimes, they're going to try it with this guy. It just seems like his sentencing hearing is going to go for, you know, 10 weeks. God, I just get the sense he is definitely going to pay for the sins of all of crypto. And then Binance, what's to stop Binance from meeting the same fate is FTX. What do you think happens here?

• 9:35Ed Elson?

  Well, there's no indication of fraud or a Ponzi scheme, though you never know with these crypto companies. What they're accusing them of is that they're letting US customers trade crypto derivatives without registering with the CFTC. Binance is not registered in the US, they're registered in the Cayman Islands. And basically what they've been doing is they've been trying to sort of, under the table, tell US customers how to become a user with Binance. And it's not necessarily the retail customers that the CFTC is worried about. It's their big, high-frequency trading firms that are, Binance is quote, VIP customers. And basically what Binance did is they said, you can't be a client unless you set up a

• 10:19Ed Elson?

  VPN, which will shield your IP address and will allow you to be a user on our platform. So all of this is just a problem of you haven't registered in our nation and that's a problem. As you mentioned, there's this comparison between Binance and FTX. I think back to last summer, when there was the first big crypto winter wave and you had Coinbase's revenue was down 60%, Celsius, that big crypto lender, they failed, so did BlockFi, so did Voyager.

• 10:50Ed Elson?

  Everything was collapsing and then amid the collapse, there was this one winner that was, for whatever reason, it was crushing it. And that was FTX. And FTX bailed out BlockFi, they bailed out Voyager, they were hosting conferences and hiring Tony Blair and Bill Clinton to come and speak about the future of crypto. And the question that we were asking was, what on earth is FTX doing right that everyone else is failing at? And it was that maybe they're just really good traders, or they have a nice regulatory environment in the Bahamas. And we said this, they're probably just doing something really shady and illegal. And we should have said it earlier and we should have said it more publicly, but we didn't have any evidence. And so the first thing, when FTX finally did collapse, the first thing I said is Binance is next.

• 11:35Ed Elson?

  Because the thesis here is very simple. If your business is predicated on existing outside of the law, and generally that means existing outside of the US, which has probably the strongest regulatory environment in the world, if that's the first pillar of your business, and second, your sector is in structural decline, there's just no way that you can win this game. You're bound to fail. So I think, you know, 12 months from now, Binance is probably not a company anymore.

• 11:59Scott Galloway?

  Wow, there you go. I like it.

• 12:01Ed Elson?

  We'll be right back after the break with a look at First Citizens' acquisition of Silicon Valley Bank.

• 12:16Scott Galloway?

  Support for the show comes from Superhuman. The pace of modern work can be relentless. You're getting a constant influx of messages from a ton of different apps. You haven't closed all your browser tabs in a year. Everything seems urgent and staying on top of it all feels like an impossible task. Superhuman Go is an AI chat that's always there when you need it, already aware of what you're doing and doesn't ask you to start from zero. Superhuman Go, from the makers of Grammarly, help you be the best version of yourself at work. It handles the repetitive stuff so you can focus on the work that only you can do. Whether you need to summarize an endless email thread or prep for a meeting that's happening in five minutes, Superhuman Go works inside the tools and sites you already use, your browser, inbox, docs, and your project tools. And its AI chat is available on the side of your browser and it's always ready.

• 13:01Scott Galloway?

  No new tabs, no switching apps, no losing your place. This is AI that works with you, not on top of you, so that you have the time and brain space to solve the problems that matter. Check it out, find out more at superhuman.com.

• 13:19Scott Galloway?

  Support for the show comes from Upwork. Trying to scale your business? At some point, you're probably going to hit a point where you need some help. Sometimes, the best way to break through that is bringing in the right talent at the right time. Upwork can help. Upwork is a one-stop platform where you can find, hire, and pay expert freelancers across more than 125 categories. Whether you need specialized skills for a single project or extra support to keep up with demand, it's easy to connect with experienced professionals, review their work, and find the right fit. You can move faster without taking on the commitment of full-time hires. And for businesses that need the very best talent, Upwork Business Plus provides access to the top 1% of freelancers on the platform. AI-powered matching connects you with qualified candidates in under six hours, cutting down the time spent searching.

• 14:02Scott Galloway?

  Upwork also takes care of contracts, payments, and other administrative tasks, so you can spend less time managing logistics and more time focused on what's next. Visit upwork.com/profg right now and post your job for free. That's upwork.com/profg to connect with top talent ready to help your business grow. That's U.P.W.O.R.K. com/profg. Upwork.com/profg.

• 14:36Ed Elson?

  We're back with Prof G Markets. It's official. Silicon Valley Bank has finally found a buyer: First Citizens Bank. First Citizens is based in North Carolina, and it calls itself the nation's largest family-controlled bank. It'll get SVB's $72 billion loan portfolio at a roughly 20% discount. It'll take over all of SVB's remaining $56 billion in deposits, and it'll also get a $35 billion line of credit from the FDIC to cover potential future losses. However, the FDIC will retain the long-term treasuries that sparked SVB's decline. Shares in First Citizens surged more than 50% after the news. So, Scott, the first time we discussed SVB, you predicted that a bank would come in and take it over, and the depositors would be safe.

• 15:21Ed Elson?

  That appears to have all happened. Did it go down in the way that you expected?

• 15:26Scott Galloway?

  I thought it was going to be a big bank that would want entree into the venture world. This was two regional banks making one bigger regional bank. The learning here is that of all the asset classes or all of the parts of the lifecycle, there's seed, venture, growth, public, public growth, mature, value, and then distressed. I have found on a risk-adjusted basis, the best place to invest is distressed. And it comes down to one thing, that you really need to be careful not to trust your instincts. And occasionally, when your instincts are really strong, you want to pause, try and put your emotion, your instincts aside,

• 16:07Scott Galloway?

  and think the other way. Develop a thesis that zags while everyone else is digging. Because humans will do almost anything to avoid pain. And when we come off the weekend where shareholders lost all of their money in SVP, you think, that must have hurt. I don't want to have that. I don't want to endure that kind of pain. And so the entire sector starts getting pummeled. And you immediately think, wow, I hate this sector. This whole sector's in trouble. It's probably my instincts are to short the sector or to sell my banking stocks. And that might be right, but at a minimum, you want to slow down and go, okay, instincts are rooted or cemented in us or implanted in our DNA over millions of years.

• 16:52Scott Galloway?

  And the way they get implanted is that they are the common emotion across the majority of the species. And that is, you are scared of fire, and so is the majority of your species. When everyone's running, when your first instinct is, I need to run from all bank stocks, you need to recognize that that instinct is probably prevalent across the majority.

• 17:16Scott Galloway?

  Of investors right now. Now, what does that mean? It means everyone's a seller. And when everyone's a seller, it means that decent companies that'll survive this mess get unfairly punished. So the babies that get thrown out with the bathwater. First Citizens is an example of that. And that is, this is a company that is basically built on the backs of failed banks. They've done this 11 times. They go to a failed bank and they say to the FDIC, they say, Dad, will you pay for this? Will you put me in business? And you absorb all of the downside because you're dad and you have more money than me, but I'll give you some of the upside. They've done this 11 times and as evidenced by the terms here, basically, they're saying, here, you take the shitty, dangerous explosive assets that have long-term maturities on them.

• 18:01Scott Galloway?

  I'll take the other assets. And basically you'll backstop me, finance the acquisition. And all I have to do is give you a portion of the upside. It's just a great deal. And First Citizens has not only made great money over time. Banks generally aren't that volatile. Upon the close of this deal, First Citizens shares went up 50%. There will be some regional banks here, some niche regional banks that have a great business, that have not experienced a run, that have not experienced large outflows. But their stock is off 30, 40, 50%. That's where the opportunity is. Your instincts and your emotions are your enemies around investing.

• 18:42Ed Elson?

  We were talking about First Republic last week. And First Republic's stock rose around 11% after the government said it would help any more struggling banks. It would provide further assistance. I mean, it's still way down compared to the beginning of the year, but it feels like maybe the contagion is subsiding.

• 18:59Scott Galloway?

  That's what it feels like. I don't think depositors are that scared. Even if, even with all the catastrophizing on CNBC, I think they say, well, if they bailed out those douchebags in the valley, they're going to bail out us in Kansas if something goes wrong at First Kansas.

• 19:14Ed Elson?

  How do you think history is going to remember this?

• 19:17Scott Galloway?

  I don't think this is going to be much of a, I think this will be a trivia question. A certain amount of leverage, a certain amount of bank failure that's ring fenced, again, sign of a healthy economy. I don't think, I think we look back on this more as just the color around it. There'll be a Netflix documentary, that maybe an original scripted program starring Jared Leto or, I don't know, Anne Hathaway or somebody. We'll see. Who would be good? Who would play Greg Becker?

• 19:44Ed Elson?

  He'd be good. It's a bold guy. You should do it.

• 19:47Scott Galloway?

  I like it. I like it. Everything's fine. Don't panic. Don't panic. As he's sweating and popping Xanax.

• 19:58Ed Elson?

  And selling.

• 19:59Scott Galloway?

  Yeah, and selling. On the other hand, hold on a second. It's my broker. Sell bitch, sell. I could, I could absolutely be that guy. I'm going to Hawaii. And he pissed out the Hawaii. That guy has like, I would argue, he doesn't have great judgment. Anyways, I don't think this is what I'd call historic financial event. I think it's a trivia question in a year.

• 20:19Ed Elson?

  Yeah. And just the final, I just want to end on this final point, which is, so this transaction will cost the FDIC $20 billion. All of that will be covered by the fees that the FDIC charged the banks. In other words, taxpayers haven't paid a penny on this and it feels like no one's actually lost money. So I guess the conclusion would be this turned out completely fine. But famous last words, we'll see what happens to the rest of the banking sector.

• 20:46Scott Galloway?

  It's just an important point. The FDIC is a separate off balance sheet insurance entity that charges fees to banks to cover bank runs like this. Now you could argue that every depositor is going to have to indirectly pay for this because the insurance that the bank is going to be charged for FDIC insurance is probably going to go up. But I think they have $120 billion in that reserve fund or in that insurance fund. They're asking the big banks to put in more. And I think their logic is the big banks are going to be the ones that benefit most from this because there'll be a flight of capital or a leaking of capital from small and regional banks to the big guys. The big guys will push back and say, well, why are we paying for the sins of these little banks?

• 21:31Scott Galloway?

  But the FDIC, think about this, this was the most expensive bank failure, I think in history. And it took out, what, 17, 18% of the insurance company's funds? And the reason why you have insurance is that's when there's a disaster, the insurance company comes in and makes everyone whole.

• 21:56Ed Elson?

  A few weeks ago, we covered an Adani Group exposé that was published by the US short seller Hindenburg Research. Well, last week, Hindenburg found itself a new target: Block, specifically Block's payments platform Cash App. According to Hindenburg, Cash App is a fraudulent business. The report accused Cash App of faking its user numbers with duplicate accounts, taking advantage of people with, quote, "predatory loans and fees", and it also alleged that Cash App is commonly used for illegal activity. As an example, it cited how hip-hop artists frequently rap about it in reference to drugs and murder. Block shares fell as much as 22% after that report was released. So Scott, let's take a look at what they're actually alleging, because frankly, I don't

• 22:41Ed Elson?

  find it compelling. You know, Hindenburg, I really respected for a long time. I think that they've done some amazing work with Adani Group, they did amazing work on Nicola, but this to me is, in your words, a giant nothing burger. So, one, they said that the user accounts are fake or they are duplicates. Their evidence for that is that some employees told them that. And I just don't really think that you can trust former employees who maybe were laid off, who have some reason to dislike Block as a company. Either way, that's one thing that they thought. Second, users are engaging in fraud. Lots of people engage in fraud. I don't really understand how that's Cash App's responsibility to prevent

• 23:23Ed Elson?

  fraud. I think that's the law's responsibility. And then, third, the thing that they hung their hat on is that rappers use Cash App in their lyrics. And that, to me, is the giant tell that this is actually not that big of a deal. And the thing that I was thinking about from a personal perspective, they said at the very top of the report, "We've been investigating Block for two years", which I assume was their way of saying, "We've done our research here". From my experience... When I've been writing research papers or doing research for you and I have a theory, I have a thesis that I want to prove and I spend too much time trying to prove that thesis. There's a certain point at which I will refuse to accept that my thesis wasn't true.

• 24:08Ed Elson?

  And to me, that's what's probably happened here. They've invested too much in making sure that they can bring this company down. They've invested money, they've shorted the company. They've also invested two years of their time and effort and their resources. To me, this is, actually hurts the credibility of Hindenburg as a serious short seller investigative firm.

• 24:28Scott Galloway?

  Yeah, I think, I think you're right. I think the temptation, when you've been as successful as Hindenburg, to keep doing what you do, that my guess is they have absolutely no problem raising money, even for, you know, not even captive capital, but if they call anyone right now and say, we have another idea. We're not going to tell you the idea, but we need a billion dollars. They're going to raise that money overnight. So this feels like a bridge too far. This feels like, for lack of a better term, that they're reaching. And rappers talking about Cash App, I not only don't see that as a negative, it's a positive. It means it's part of the, it's part of the zeitgeist. In addition, I don't, you know, the fake account stuff, I, I thought that was a problem. And then as you read further down in the report, the Hindenburg report,

• 25:10Scott Galloway?

  they say, as of now, that loophole has been closed. So I don't, I agree with you. I feel like this was a bridge too far. I feel like this is Bill Ackman's Herbalife. It won't play out as painfully for Hindenburg as Herbalife did for Ackman.

• 25:25Ed Elson?

  What, what, take us through what happened with Ackman and Herbalife.

• 25:29Scott Galloway?

  Bill Ackman put on a big short position in Herbalife, which is sort of a pyramid sales, household products and nutrition company where sort of like pyramid or multi, they call it multi-level selling. And I, I think Bill Ackman, I think it offended his sensibility. I think as a guy who flies around on a Gulfstream and had, probably has an amazing home in the Hamptons, he probably finds that type of selling is predatory and can't relate to it. And I, I'm sort of the same way. I would never. You know, I wouldn't want anyone I know involved in that type of multi-level marketing, whatever you call it. But he took a huge short position and he said things like the arrests are coming, which was probably irresponsible.

• 26:12Scott Galloway?

  I don't think anyone there had broken any laws. And because as activists do, they all hate each other because they all want to be the biggest swinging dick at the, you know, the Ira San Conference or, you know, have the biggest home in the Hamptons. Carl Icahn weighed in and went long Herbalife and said, you're full of shit. Maybe it's not, you know, your Neiman Marcus or Lululemon shopping day, but this is how a lot of middle America makes money and buys stuff. He went long and ultimately he was right. This feels a little bit like, it won't be as painful for Hindenburg, but I don't think, I don't think anything they've said about Block would connote the kind of like smoking

• 26:54Scott Galloway?

  gun that they found at Nicola, much less Adani Group.

• 26:58Ed Elson?

  Yeah. I mean, they point out things with the business that are just, you know, standard, this probably isn't a great business. For example, it's overvalued. It's like, you know, trading 13 times book value. Meanwhile, PayPal's at 10 and then all these smaller fintech companies like Robinhood and Affirm, they're trading closer to two. So that's fair. They pointed out that, you know, they're increasingly relying on non-GAAP adjustments. So that the GAAP loss, and that's basically their standard accounting loss was 541 million. And then after the adjustment that they had a non-GAAP profit of 613 million. So like, that's fair, but so are all these other companies.

• 27:40Ed Elson?

  When someone like Hindenburg does this, or Ackman makes these claims about Herbalife and they really go out on a limb to bring that company down. Do you think that there should be any level of legal recourse if in fact Block can prove that what they said isn't a problem? I mean, I don't even know what there is to prove. It's like, yeah, these rappers did say Cash App in the music video. But. What do you think about just the legal ramifications if you want to go gung ho on a short position?

• 28:14Scott Galloway?

  My understanding is, as long as you believe what you're saying, and as long as you have evidence to back it up, you can exaggerate, you just can't lie. And a lot of it is in the phrasing and the nomenclature, you know, that is, is it fraud or is it misleading or is it false advertising? Is it sex trafficking? I mean, what is it? It, you know, they use some pretty explosive language here. So Block responded exactly as they should have done with one small tweak, and that is, they responded with data. They went line on them by line on them across every accusation and backed it up with data and said, okay, you're right, when you applied for a credit card under the name Donald Trump, you could get it, that loophole has been closed. You're right, rappers reference our currency or our payment method as they reference other currencies and payment methods.

• 28:58Scott Galloway?

  I mean, have you ever heard the term Benjamin in a rap song? I think you have. So they refuted it with data. The only thing I wouldn't have done was they said they were investigating their legal options. I think that makes them look defensive. This is free speech. Your only legal recourse is when a company knows they're lying and spreads those lies, and those lies have direct provable economic harm, such as what we're seeing with the Dominion case against News Corp. I don't think they're going to find that here. I think the stock recovers and everybody just moves on.

• 29:30Ed Elson?

  Just final follow up. Don't you think that, I mean, Hindenburg, even if we are right, which is this company's fine, Hindenburg's still going to profit off of this because the terms of a short position only apply for a limited period of time. So they probably shorted with those options set to expire, you know, like this week. I mean, every time that Hindenburg has shorted a company, the company's value has gone down by an average of 15%. Like, this is a winning game irrespective of whether they're right or not. How do you reconcile that?

• 30:06Scott Galloway?

  Well, there's two things. The first is we don't know how those options were dated. If they massively went short the stock... You know, it depends how long they hold it. They might have thought this thing's going to get cut in half. Or if they bought puts, we don't know if those puts were dated this week or in a month from now. So we don't know how much money. If they, if they, if they knew, they would be able to hammer the stock for a week, but then it would recover. They could adjust to that in terms of the types of options and the durations on them. We don't know what they bought. The second thing is activists usually coming into a company. I know as an activist investor will move the stock in the short run. And you think, oh, it's a great strategy. Just go in, pop the stock.

• 30:49Scott Galloway?

  The question is, the reason you get that pop as an activist is you're seen as someone who's in it to win it. You're just not in there for the pop and then you bail. They can only do this so many times before that premium, that Hindenburg premium, or implosion, if you will, begins to diminish. Okay, we'll be right back after a quick break with a look at a few winners in the retail sector.

• 31:20Scott Galloway?

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• 32:28Speaker 03

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• 33:02Ed Elson?

  We're back with Profitec Markets. Athleja brand Lululemon reported fourth quarter earnings and it was a big time beat. Earnings came in at $4.40 per share versus 4.26 expected. Revenue rose 30% year over year to 2.8 billion. And the company issued guidance of $9.4 billion in 2023 revenue. That's compared to Wall Street's estimates of 9.1 billion. Lululemon shares popped 14% on the news. So Scott, this seems like a good entry point into a discussion of high end retail more generally. On the whole, the sector's been doing really well. Nike recently reported 20% annual revenue growth. So did Hermes and LVMH. We saw record revenues at Williams Sonoma and Alter.

• 33:47Ed Elson?

  This feels like a really big year for retail, but the headlines don't really seem to match. So, you know, weren't consumers supposed to be cutting back on spending?

• 33:56Scott Galloway?

  Yeah, it's just, has anyone heard from the recession? I mean, you're not seeing it in retail. You're not seeing it especially retail. I think some people would argue that the top decile of income earning households, which my guesses make a disproportionate amount of Lululemon's business are doing really well. U.S. retail sales surpassed 7 trillion for the first time in 2022. That's up a half a trillion dollars from 2021. Consumer spending increased almost 2%, 1.8% to be exact, month over month in January. That's the largest increase since March of 2021. And the Nasdaq 100 has entered a bull market, rising 20% from its December low. And the S and P 500 is up 5% year to date. So we have a bull market, consumer spending up, U.S. retail sales up. I mean, again, has anyone heard from the recession?

• 34:41Scott Galloway?

  And Lululemon is an incredibly well-run company. They have beat sales projections in 55 of its last 63 reporting periods. So that's just incredible. And year-to-date, their stock's up 13% after declining 20% in 2022. Nike's up 3%, the S&P's up 5%. And Lululemon, because of their reputation for consistently beating projections, trades at a 20x EBIT to EBITDA multiple. And their historic multiple has been 32, so some people might even argue it's a buy right here. Nike isn't as discounted. It's trading at 30x enterprise value to EBITDA. It's considered one of the best brands in the world. And speaking of the swoosh, their Q1 revenue increased 19% year-on-year. For a company of this size, that's nothing short of remarkable.

• 35:24Scott Galloway?

  The other kind of quick stat we didn't talk about, and this just blows my mind, is that the market capitalization of Hermès is now 192 billion versus Nike at 187 billion. So Hermès, the scarf company, and it does more than that, but they're famous for their scarves, is now worth more than Nike. Hermès trades at 16x sales, Nike at 4x. Hermès, their five-year total return is up 287%. Basically, it's quadrupled in the last five years versus the CAC 40. It's just up 5%. It's just striking. And Hermès is such an incredible lesson in scarcity.

• 36:07Scott Galloway?

  And essentially, our species is drawn to whatever is scarce because the things that were scarce were the things that could keep us alive. Food, especially sugary or fatty food, or mating opportunities were scarce. So we are obsessed with food. We're obsessed with sex. If any of us are ever in a position where our survival is threatened, we become quickly obsessed with survival. So scarcity is sort of the ultimate marketing strategy. And you can create it artificially. So if you want to buy a Birkin bag, You can go into a store and point at one and they're going to tell you there's a two year waiting list and kind of in a very pedantic way, kind of raise their nose and say, you know, not everyone gets to own a Birkin bag. And there is no super crazy AI driven semiconductor rare earth material that goes into a Birkin bag.

• 36:52Scott Galloway?

  They could make a lot of these, but they purposely constrict supply such that they create the illusion of scarcity, not unlike what US elite universities do by sitting on these multi-billion dollar endowments and not using them to expand their freshman seats because they become essentially the Birkin bag of a modern society where the ultimate luxury item for a Chinese parent or a Dutch parent is to send their kids to an elite American university. And as a result, we can charge kind of Hermes like margins. But essentially what Hermes has is a supply chain that makes beautiful products. Let's give them that. They are definitely artisans, but has done such a good job of being super disciplined

• 37:34Scott Galloway?

  around managing supply well below demand that they effectively have a cash spigot. And that is if they needed another half a billion dollars in EBITDA to meet earnings this year, it'd be super easy. They would just say, ship another 40,000 Birkin bags and ties and scarves to our distribution and they will get absorbed immediately. And that ability to manage any projection they make because literally an apocalypse could come and I'm not sure demand would fall below supply. And the market and analysts go, they're just going to hit their numbers because they have this tap of cash they can turn on at any moment.

• 38:11Ed Elson?

  Yeah, it kind of reminds me what you and Asworth say about Apple and Tim Cook, which is like, the thing that makes Apple so great isn't what they've done, it's what they haven't done. They could be releasing all of these products, all of these services, but they specifically choose not to, which is what inspires so much confidence in investors.

• 38:28Scott Galloway?

  Yeah, so look at Nike. Nike's probably said, our growth is going to be 8% this year, but they don't know that. They don't know that. If we go into recession, if the European market throws up or their, one of their spokespeople that, you know, Air Jordans go out of here, whatever it is, there's some uncertainty. There's around that 8% growth number and I don't know if that's what they're projecting. The certainty around Hermes being able to hit its growth number is nearly 100%. Because if they wanted to, they could grow 40% this year, but they're not. They want to grow 8 or 10% and they can easily, easily manage that. And the wealthiest man in the world has built his wealth on scarcity. The wealthiest man in the world sells stuff that we don't need, but we want. And that's Bernard Arnault.

• 39:13Scott Galloway?

  And Hermes is cut from the same cloth, if you will. A decent strategy around investing, or where you should go to work, and it's investing your financial capital or human capital, is to bet on the top 1%. All over the world, our governments have been weaponized by people with money. And they are able to implement a series of laws and policies that take wealth from the bottom 99% and crowd it into the top 1%. So the result is the top 1%, anything that caters to the top 1%, I don't care if it's Ferrari or Four Seasons, or Gulfstream, which is General Dynamics, or Hermes, is killing it. If you're managing a company in the luxury space and you're not doing well, the CEO should be fired. That means it's a management issue.

• 39:56Ed Elson?

  Let's go to Mia on the street.

• 39:58Speaker 04

  Do you own any luxury brand items? I do. Gucci, um, it's on the run.

• 40:06Speaker 05

  I have a pair of heels, but I don't wear them anywhere.

• 40:15Speaker 06

  I used to have Yeezys before, before, I don't even know if you can see, I'm selling them now, so if anybody's interested.

• 40:20Speaker 07

  Okay, so I have a YSL purse, but we go to Hawaii because Hawaii sells them for cheaper because they're competing with the Asian market.

• 40:28Speaker 04

  Good tip. Good tip. Is there something that you have your eye on, like a specially luxurious product that you're hoping to purchase at some point in your life?

• 40:37Speaker 05

  I've always wanted a Pro D'Amico bag.

• 40:40Speaker 08

  I want to be able to buy a good watch at some point. A Ferrari, to be honest.

• 40:45Speaker 04

  So would you spend like 30K on a purse, for instance? Someday, yeah. If I love it, yeah. Why not? Awesome, yes. I see that in your future. Um, and how do you feel about like a Birkin bag? I love it. It's one of the dream.

• 41:03Speaker 08

  I could not recognize one if I saw it.

• 41:05Speaker 04

  I really hate purses, so I'm purse adverse.

• 41:09Speaker 08

  If I were as rich as Drake, I'd probably be collecting them too.

• 41:14Speaker 04

  Luxury product in general is a manifest symbol of class division that harms most of humanity. It's also like false comfort to have things like that and it's false luxury. It's not true luxury. And what is true luxury then?

• 41:33Speaker 04

  Love. Sheesh, yeah, hell yeah, rock on.

• 41:41Speaker 04

  Sick. Um, and what does your luxury look like? Being so rich, you could throw money off a yacht. Why do you buy luxury purses? What do they mean to you?

• 41:51Speaker 07

  Okay, so, hmm, it's about status, you know? Yeah, so like you grow up seeing like all these like fancy things and you're like, ooh, I want that. But it's all a meaningless void.

• 42:08Speaker 04

  Ultimately is all meaningless void? Okay, okay. Would you spend $30,000 on a purse?

• 42:14Speaker 07

  Of course not. That can go towards your education, folks.

• 42:18Speaker 04

  So true, facts.

• 42:20Speaker 07

  You know, you don't really need all these things because I was listening to this other podcast about happiness and it's not about, you know, like all the things you collect. It's about experiences and all of that. But it's like you question, why do you even want these things, you know? Like this poline bag? Why, why, why do, why do I want this? I don't know.

• 42:42Speaker 04

  All right.

• 42:42Speaker 07

  You want to know what my name is?

• 42:43Speaker 04

  Yeah.

• 42:44Speaker 07

  Wealth.

• 42:50Speaker 04

  Is it?

• 42:50Speaker 07

  It is. You want to see my ID?

• 42:54Speaker 07

  It's wealth.

• 42:57Speaker 04

  Damn, that's crazy.

• 43:00Speaker 04

  Well, you chose the perfect person to talk about luxury. Sure did. All right, thank you, wealth. All right. Have a great rest of your day.

• 43:08Ed Elson?

  Thanks Mia. Let's take a look at the week ahead. We'll see job openings data from February and the unemployment rate from March. And this week also might be the calm before the earnings storm. First quarter earnings season kicks off next week and it starts with the big banks. Scott, what is your prediction?

• 43:25Scott Galloway?

  I think Hindenburg, assuming that they weren't in this like for a one week trade, I think they lose money on Block. I think Block is trading higher in 30 days than it was the day before Hindenburg came in. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Jason Stavris is our editor in chief. Mia Silverio is our research lead and Drew Burrows is our technical director. If you like what you heard, please follow, download and subscribe. Thank you for listening to Prop G Markets from the Vox Media Podcast Network. Join us on Wednesday for office hours and we'll be back with a fresh take, fresh, we're fresh around here, a fresh take on the markets on Monday.

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