Prof G Markets: Goldman’s Earnings Slump, an ETF for Options Trading, and Fractional Jet Ownership

Scott breaks down the big bank earnings and explains why Goldman seems to be struggling more than its competitors. He then shares his thoughts on an ETF that makes options trading more accessible for retail investors. Finally, he discusses the different business models of private aviation and why fractional jet ownership is on the rise. 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, 273%. That's how much tequila and mezcal sales have grown in the last 20 years. But you know what they say about tequila? I don't remember.

• 1:41Scott Galloway?

  Welcome to Prop G Markets. Today, we're discussing bank earnings and ETF for options trading and fractional jet ownership. Here with the news is Prop G media analyst and recent visitor to London that blew me off, too cool for school, doesn't want to hang out with his boss, just signs the backs of the checks that I sign the front of, which is Latin for "you're supposed to be nice to me, Ed." Ed Elson. Ed, what's the good word?

• 2:10Ed Elson?

  Well, you're coming to New York this weekend. I just checked your calendar, so you want to hang out in my hometown now?

• 2:15Scott Galloway?

  I'm busy.

• 2:16Ed Elson?

  Oh, okay.

• 2:17Scott Galloway?

  I'm there for a day. I'm actually breaking up the trip. I'm going out to the West Coast. And at my age, if you cross too many time zones midair, you can slip and break a hip. And so I break up the trip. I go into New York, go to my pad. I'm going to see actually my sister, maybe hook up with my posse, which is Netflix and edibles on my couch. And then the next day, I fly out to, I'm going to a conference in Napa Valley. And then from Napa Valley, I am in a conference for two days. And then I go meet some college buddies in Las Vegas at the Sphere to see you two, which I'm very excited about.

• 2:54Ed Elson?

  Nice.

• 2:55Scott Galloway?

  And then I'm in Vegas for two days and then I go to LA for Halloween weekend, where I am going as Deadpool, but Deadpool after the fire. I have someone who's going to come put scars on me because I've been told I look like-

• 3:09Ed Elson?

  Ryan Reynolds, right?

• 3:10Scott Galloway?

  No, but it's never just you look like Ryan Reynolds. It's like you look like Ryan Reynolds after the fire. Or you look like Ryan Reynolds' uncle. But anyways-

• 3:19Ed Elson?

  Disease, yeah.

• 3:20Scott Galloway?

  That's my, that's my line.

• 3:21Ed Elson?

  How much do those Sphere tickets cost, by the way? I've heard varying reports.

• 3:25Scott Galloway?

  The tickets I got, I think they're like four, 600 bucks a pop.

• 3:28Ed Elson?

  It's actually not as much as I'd think.

• 3:29Scott Galloway?

  I mean, I've heard nothing but rave reviews. And I heard some people actually take, not that I would know. I hear some people take hallucinogens or mushroom chocolates before seeing it, so.

• 3:42Ed Elson?

  You know, they make, per day, they make half a million on ads. You just sign an ad sponsorship, put that thing on the, on the dome. That's half a million right there. Such a good idea.

• 3:53Scott Galloway?

  It's, it's really innovative. It's, I think it's arguably going to win, I don't know, most innovative circular venue.

• 4:00Ed Elson?

  The Webby Award for best venue.

• 4:02Scott Galloway?

  Yeah. By the way, what the fuck is with the Webby Award? We were 90, 10, and then we end up with a silver. And I don't understand what that means. Daddy-

• 4:09Ed Elson?

  Unbelievable.

• 4:09Scott Galloway?

  Daddy wants his award. Like, where do I accept? Where do, I mean, I don't get it.

• 4:15Ed Elson?

  Yeah, no, the whole thing's broken because we got a silver award, apparently. And I look at our competitors and they also got a silver award.

• 4:23Scott Galloway?

  For the fraction of the votes.

• 4:24Ed Elson?

  The day before they announced the award, we were at 90 and they were at 5 and 5, so.

• 4:29Scott Galloway?

  I'm going on strike.

• 4:30Ed Elson?

  But thanks to everyone who voted for us anyway.

• 4:33Scott Galloway?

  Yeah.

• 4:33Ed Elson?

  It means a lot.

• 4:34Scott Galloway?

  Yeah, we're very excited. Anyways, what's in the news? What's going on?

• 4:38Ed Elson?

  Let's start with our weekly review of MarketVitals.

• 4:47Ed Elson?

  The S and P 500 declined, the dollar was stable, bitcoin rose and the yield on 10 year treasuries climbed back to a 16 year high. Shifting to the headlines, health insurance premiums for families in the US rose 7% this year to an average of roughly $24,000. That increase has accelerated from last year when costs rose about 1%. Nvidia shares fell nearly 5% after the US government announced it would restrict AI chip exports to China. Still, the company is up about 200% this year. OpenAI CEO Sam Altman said the company is generating revenue at a rate of $1.3 billion per year. For context, OpenAI's total revenue last year was $28 million.

• 5:31Ed Elson?

  Tesla reported third quarter results that missed on both revenue and earnings. That hasn't happened since 2019. The stock dropped 7%. Meanwhile, Netflix beat expectations on revenue and earnings and reported a surge in third quarter subscribers. The company also announced price hikes for its basic and premium plans and lifted its free cash flow forecast for the year. The stock rose more than 15% after that news. Scott, reactions?

• 5:57Scott Galloway?

  So in the UK, they spend about 6,500 bucks per person for healthcare. In the US, we spend almost double that. I think it's about 12 and a half K. And despite that, people live longer in the UK, are less obese and less depressed. So in some, US healthcare could best be described as one might describe San Francisco, expensive but bad. US healthcare is just such a shit show. And I do think it comes back to the fact that the insurance industry is in the middle. 45 cents on the dollar that goes to insurance ends up with profits and administration. And even if you have an inefficient government, they're not going to get a 45% bogey. It's all going to ideally end up back in patient delivery.

• 6:43Scott Galloway?

  Yeah, so it's just the health insurance and the health lobby, it just continues to soak people. I mean, I think I told you, I don't have health insurance, or I didn't have it for a while, because if you can afford not to have it, you shouldn't have it. It's also another transfer of wealth from the young to the old, because old people, insurance companies actually, I believe, lose money on, and young people, people like you, you need to go to the doctor about once every 10 years. You know, you don't need a colonoscopy, you're not going to have a baby, not that there's anything wrong with that if you decide to have one. Your healthcare costs are nil. Occasionally, you want someone to give you an IV after drinking too much, but that's not really healthcare. And, you know, you go in and get tested for STIs every once in a while. But other than that, healthcare

• 7:28Scott Galloway?

  means nothing for young people, and/or most young people, and old people need a shit ton of it.

• 7:34Ed Elson?

  The other question that I was asking after seeing this news is, why is this happening now? You know, why didn't insurance costs rise 7% last year when everything else was rising 7%? And then the answer that I learned was that, basically, in some areas of the economy, it takes a long time for inflation to take effect. And what happened here was the hospitals and the insurers only negotiate their fees every few years. So you had all these hospital providers like HCA and McKesson and all these guys, who saw their costs rising in 2021 and 2022, but they couldn't immediately pass on those costs to the consumer until they negotiated their contracts with the insurance companies. And that happened in 2023. So only now are healthcare consumers feeling that pain. And it feels like the

• 8:18Ed Elson?

  next question you have to ask is, are there any other sectors that are susceptible to this sort of inflation lag? And if there are, there probably are, it's entirely possible that the effects of inflation haven't fully come due yet, and that there's potentially more pain ahead. And if that's true, it would ultimately lend itself to your prediction, which is that, you know, you have a suspicion that a recession's on its way.

• 8:41Scott Galloway?

  Yeah, it definitely feels mostly because every economist says we're going to have a soft landing. I mean, if there has ever been a, an ignorance of crowds, it's with economists. But it continues to be, US healthcare continues to be a perfect example of how lobbyists figure out a way to get in between the consumer. And the provider and weaponize government create all sorts of regulations such that insurance companies and hospital systems can get in the middle and charge unfair rents. One of the really negative things about healthcare is that when you're not paying directly for services, there's no watchdog. And that is you might decide, you might go in, you know, you check your bill at the restaurant. Most people check when they get a bill, they check it.

• 9:23Speaker 03

  You check your bill at the restaurant? I don't believe that.

• 9:25Scott Galloway?

  Well, I don't, but, but most people do, right? That's not true. Did I check my? Yeah, anyways, it doesn't matter. So, but no one, there's no one, consumer scrutiny, consumer vigilance is a key to keeping prices down. And there's very little consumer vigilance because people assume it'll be insurance or they don't understand their billing. So I'm actually really, I think the US, the UK healthcare system, I believe, is actually far superior. Nvidia, you know, I saw what the motor kind of summarized it, he said, unless Nvidia finds another category as big as AI and owns it the way they own AI, it's overvalued. So I think this is beginning to rationalize, the valuation is beginning to rationalize.

• 10:10Scott Galloway?

  Tesla, this is a pretty serious slowdown. The revenue growth slowed to 9% from 64% last year. Gross margins declined to 18% from 25%. So what is that, like a 25% reduction in margins? And Musk said about the, or cautioned about the Cybertruck or optimism around the Cybertruck.

• 10:29Speaker 03

  Yeah, I mean, we dug our own grave with Cybertruck, you know, nobody, nobody digs grave better than themselves. And so.

• 10:36Scott Galloway?

  I don't know what he means by that. I don't, I think the Cybertruck is so strange looking, but I don't entirely get it. The multiple's coming down, but still enterprise value to EBITDA on Tesla is 43x versus Ford and GM at 7 and 5x and BMW at 4x. So we'll see, but the road is littered with people who underestimated.

• 11:00Scott Galloway?

  Tesla.

• 11:00Ed Elson?

  The other thing he said is that Cybertruck reservations are off the charts. He said that there are, there are more than a million Cybertruck reservations. The thing that's weird is you look at Tesla's customer deposit numbers and it's actually down nearly 20% from a year ago. So the thing that I'm thinking is like, how, how could deposit for the most hyped car in the entire fleet be off the charts while deposits overall are down? And I think it's just down to this fundamental lack of professionalism that comes with these earnings every time. It's just you can't, you can't fully believe anything that this company tells you at this point.

• 11:36Scott Galloway?

  Yeah, I would say when you say company, I mean Elon Musk.

• 11:38Ed Elson?

  Yeah.

• 11:38Scott Galloway?

  And that is you can't trust anything he says. And he doesn't, he doesn't feel any fidelity or any sort of, I mean, when we used to prep for earnings calls and the companies I've been involved in, we literally fact checked the shit out of everything. Can we say this? And he doesn't seem to be bound by those same standards. But I think the story of the week is Netflix adding nine million subscribers in Q3 above, that's in contrast to the six million expected. So, I mean, that's, that's an enormous beat. It's the biggest quarterly net out total for the company since it added 10 million subscribers in Q2 of 2020, as we were all stuck at home. Shares increased 18% Thursday morning after the firm announced it would also raise prices

• 12:20Scott Galloway?

  for basic and premium subscribers in the US, UK and France effective immediately. In the US, prices for the basic service will rise by two bucks to 11.99, while premium subscription will rise three bucks to 22.99. So basically make a 20 and 15% increase in prices, which really should help their margins, assuming that they don't inspire additional churn. Executives noted that the cancel reaction to their crackdown on password sharing was smaller than expected. This company just has so much strength and I'm convinced that the head of the WGA actually works for Netflix. Because by forcing everyone to stop spending, it just became, they all flocked to the place with the deepest content pool, which was Netflix.

• 13:03Scott Galloway?

  They essentially ceded advantage to the one player that could cut their costs and develop a huge cash pile while adding subscribers because they could continue to produce content overseas. And what do you know, they massively beat on subscribers. Meanwhile, all of the other competitors who hire writers and actors have come out of this thing a shadow themselves. So they have succeeded in literally turning the industry into a near monopoly. And that monopoly power is Netflix. And Netflix could not have orchestrated, if they'd said, how can we massively increase our leverage, our profit, our growth,

• 13:46Scott Galloway?

  and our strategic advantage relative to our competitors? I know, get the writers to go on strike for 140 days such that we can have a unilateral pause in spending for domestic production. We have international production. And then as an industry, you're seeing what basic economics would tell you. That we have an industry that's spending way too much money and is unsustainable economically. There's going to be consolidation, there's going to be cost cutting, and there's going to be price increases. What you see, you see an activist at News Corp., you see an activist at Disney. I think you're probably going to see an activist at Warner Brothers Discovery. And meanwhile, Netflix is just kind of running away with it. We'll be right back after a quick break with a look at bank earnings.

• 14:37Scott Galloway?

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• 17:03Ed Elson?

  We're back with Prof G Markets. The big banks kicked off earnings season last week and overall the results were positive. JPMorgan Chase, Citigroup, Wells Fargo and Bank of America all reported strong earnings that beat expectations. This was mostly due to the positive impact of rising interest rates. As rates have risen, banks have been able to charge more for mortgages and loans translating to higher net interest income. There were however, two odd ones out. Morgan Stanley's profits fell 9%. The company cited a significant drop off in investment banking activity. Meanwhile, at Goldman Sachs, profits fell 33%. Now, most of that decline is a reflection of Goldman unwinding its consumer banking efforts, which we've discussed on this program before.

• 17:48Ed Elson?

  Nevertheless, that is the company's eighth consecutive profit decline. Morgan Stanley and Goldman Sachs shares fell 6.5% and 2% respectively. Scott, two very different pictures here. What is happening in the banking industry?

• 18:03Scott Galloway?

  It's pretty simple. If your business is largely skewed towards investment banking and M&A, you did poorly. M&A volume is at multi-decade lows. No one's going public because, we talked about this, the IPO market has become less appealing and while there's been a bit of a thaw, I mean Goldman was the lead bookrunner for Instacart and Klaviyo and was one of four banks heading up to arm IPO. Whenever there's a deal, Goldman is still the premier of the aspirational investment banking firm. But, the market hates bipolar companies. And that is, if you had a company, if you had a company that was doing 1 billion, 1.2 and then 1.5 billion in profits, so what is that?

• 18:47Scott Galloway?

  That's 1, 2.2, 3.7 billion in total profits, right? Over three years. And then you had a company that did 1, 4 and 2, a total of 7, the first company would be worth a lot more. Because investors don't like surprises. They like stability, they like consistent cash flows. And the reason why they love subscription businesses is they can kind of model out churn and what's going to happen with that business. And other transactional businesses are much harder to predict. Does Lululemon have the right merchandise in this season? You know, does Goldman Sachs get a big, you know, huge M and A transactions this quarter? So Goldman and Morgan Stanley are trying to move more into the wealth management business

• 19:30Scott Galloway?

  because AUM and managing the wealth of high net worth people is much more consistent. People generally don't leave, you know, they're AUM and their market performance goes up and down, but generally speaking, I think they get between 50 bips and 1% of AUM under management. It's a nice, steady growing business and that business gets a much greater multiple. The guys who killed it, it's very simple. They're in the business of taking money into Chase Bank or Wells Fargo or into Citi or into B of A, you're depositing your check and they take it and they lend it out overnight. Or if you want a six month certificate of deposit, they give you, I don't know, 3% and then they loan the money out for a mortgage at 7%. Actually, they're probably giving you close to a 5%.

• 20:13Scott Galloway?

  But where's that spread between what they had to pay savers versus what they could earn lending that money out? That spread was, you know, kind of call it, they pay you 1% two years ago and loan it out at two and a half. So that spread was one and a half or one and a quarter, has expanded to two, somewhere between two and three, the delta, which means their margins are up 50 to 100%. So it's as good to be Jamie Dimon or whoever runs Wells Fargo, I have no idea. And then if M and A volume comes back like crazy and there's a ton of IPOs, then boom, Morgan Stanley and Goldman are going to outperform the other guys. So let me back up, let's talk about some revenues here. Investment banking revenue was less than half of what it was two years ago and accounted

• 20:55Scott Galloway?

  for only 13% of revenues this quarter, this is talking about Goldman Sachs, compared to 27% of revenues in Q3 2021. In contrast, JP Morgan, Wells Fargo and Citibank all have much more robust consumer divisions. For example, JP Morgan Consumer Banking Division accounted for 46% of its revenues and nearly 45% of its net income this quarter. Morgan Stanley and Goldman, both relying on investment banking, as we said, have declined more than 10% year to day and JP Morgan has increased more than 11%.

• 21:26Ed Elson?

  So first off, you mean, you mentioned the investment banking, the CFO Bank of America had a great quote. He said, quote, "Investment banking can come back very, very quickly. It's just that we've grown tired of predicting when that might be," which I think is a great summation of the bipolar point. But the other point I wanted to make is this theme of net interest income, which is the boon for all of these companies this quarter. What is net interest income? It's the interest you make from lending minus the interest you pay out on customer deposits, as you mentioned. Now, the average annual percentage yield on a US bank savings account is currently 0.46%. That is 12 times lower than the Fed Fund's overnight rate.

• 22:11Ed Elson?

  And, you know, you'll say, okay, well, it's downstream of the Fed rate, interest rates aren't one to one, there are a lot of factors. Okay. My response, rewind three years ago to 2020, where interest rates were near zero. The average APY on a US bank savings account, 0.46%.

• 22:32Ed Elson?

  APYs have not changed on savings accounts. In other words, these banks have collected all of the upside on the interest that they're receiving from the loans that they put out there, but on the interest paid out to customers and customer deposits, nothing is changing. How is that possible?

• 22:51Scott Galloway?

  It's an outrage. So Ed, welcome to capitalism where you have concentrated markets when you have very few players. Look at the oil industry. Look at gas stations. When oil prices are up 10%, you can bet almost immediately you're going to see an increase at the pump. But when they plummet, they come down much more slowly. They're much stickier. And that's what's happening here. Eventually they'll have to increase CD deposit rates, but right now it's Lollapalooza. It's like consumers. You know, I don't want to say they haven't noticed, but consumers were used to such low rates that if you go from 46 bips to 1.46, they think, wow, that's amazing despite the fact that interest rates have gone up 500% and they're now charging you 8% on

• 23:35Scott Galloway?

  a mortgage. So this is a great time to be in the business of consumer lending.

• 23:40Ed Elson?

  You might find this interesting. First Republic, which JP Morgan acquired over the summer, when JP Morgan broke out its earnings, it gave revenue and profit numbers, including the gains from First Republic and excluding them. And in this quarter alone, the revenues from First Republic were $2 billion. How much did they pay First Republic? $10 billion. So, you know, they're going to make back what they paid for this thing in 18 months. And it feels like, at least from my perspective, this is maybe, this was maybe the best acquisition of the year.

• 24:17Scott Galloway?

  This is like adopting a problem child and the government pays you $100,000 a month to look after this thing. You knew, you knew the bank that, you know, there was only a few that had the capital to take this thing over, that they were going to get it at a sweetheart deal with all sorts of guarantees and backstops on the downside. Yeah, this was going to be, you knew, you knew whoever got these things, when Janet Yellen called Jamie Dimon or whoever and said, can you take this? They said, well, okay, I will and I'll do it fast, but you're going to give me a deal that is so bulletproof because he's still taking an ad veil from the hangover of when they foisted Bear Stearns on them. So they made it such a, look, we need to give the markets certainty here and we need to get these deals done and we will basically give you a free option on these banks. I

• 25:02Scott Galloway?

  think the deal was if they lose money, we'll pay for the losses, but you'll keep the upside. And, and the run stopped. All the people left their assets in these banks, specifically when they were now owned by a company with a much bigger balance sheet. And it goes back to a theme that we've had here, and that is there's a lot of money to be made running into the fire. That when things are really ugly, when SVB implodes, that's when you want to think about running into the banking sector.

• 25:41Ed Elson?

  Last month, the first ETF to trade zero-day options launched in the US. What are zero-day options? Well, they're like any other option, except the contract has a maturity date of 24 hours or less. In other words, it's a bet on how much the price of a stock will rise or fall within a day. Now, in the past few years, these types of options have exploded. Zero-day trading volume now accounts for 43% of total S&P 500 options volume. That's up from 21% just two years ago. And this new ETF, known as the Defiance Nasdaq Enhanced Option Income ETF, is capitalizing on that. How is it doing it? By writing and selling zero-day put options on the Nasdaq 100.

• 26:23Ed Elson?

  Put another way, each time someone bets that the Nasdaq will go down within 24 hours, the Defiance ETF takes the other side of that trade. And so far, it's working. The Defiance ETF has returned 1.5% since it launched a month ago. Whether that will last, however, is another question. Zero-day options trading was popularized by retail traders in 2021, and although it's attracted some institutional attention, it is still associated with significant risks. Scott, you've adopted a similar strategy, writing covered calls, and we discussed that on our February 13th episode. What do you make of this zero-day options ETF?

• 27:03Scott Galloway?

  Well, the broader trend around same-day options is a little bit scary, and I think there's some systemic risks that I don't entirely understand. But it's tapping into this need for DOPA, that people want to play options. And the majority of the people who buy these options are retail investors, and the majority of the people who write them are institutional. And it taps into a flaw in our species around a need for DOPA, thinking that time will go slower than it does. The majority of the time, stocks don't move a lot during the day. They have to pay a premium for these things. So I think it's a really interesting product. I actually am drawn to this. So what happens when you write an option? Someone says, I think Netflix is going to go down. And so trading at 410.

• 27:47Scott Galloway?

  So they pay a dollar or $2 for an option that says, you have to buy it for me at 410. So if it goes down, you have to buy a share for me at 410. And I paid you $2 for that put. If I wrote the put, I get $2 in premium. Now, if it goes to 405, I've got to buy the share from you at 410. Minus the $2 premium, I lose $3. But more often than not, in a strategy like this, the option's going to expire worthless, and you're going to get to hold on to the premium. The way to describe this, though, is that your downside is almost unlimited. When you're writing calls, I should say, your downside is unlimited because technically the stock could go to the moon that day, although that's unlikely.

• 28:32Scott Galloway?

  When you're writing puts, your downside is limited by the full value of the stock, which is still a lot. So it's kind of a low-cost way to collect income, but it's dangerous. And what's happened with me sometimes is if I write covered calls against Airbnb, and I say, all right, it's trading at $125, I'm going to sell or write calls at $125 that are expiring on Friday, and I get $2 premium. If it jumps to 140, I have two choices. I either got to deliver those shares at 125 and go to market and buy them so far. I'm out $13 per share, which is a lot, or I can sell my underlying shares to cover the cost.

• 29:13Scott Galloway?

  So it's a dangerous strategy, but when it works, it's a really high-return strategy. Mostly, though, it's tapping into a few things. One, it's tapping into the option premium that's probably greater than the risk as represented by retail investors who are horny for these things. Two, it's not really a part of the market. It's pure speculation. I mean, this really is Vegas. And three, it's a, it's definitely a high risk, high return strategy.

• 29:44Ed Elson?

  Yeah, the stat that you mentioned, I, retail investors account for half of options trading volume. And then you compare that to, you know, just regular securities trading volume and it's around 20%. So basically there is for sure a demand and a hunger for these casino-like options contracts in the retail market that does not exist in the institutional market. And there is also a hunger and a demand in the institutional market to sell those options. So, you know, if you're selling an option, there's a one in two chance that you're selling it to a retail investor. And there's also a high likelihood that that retail investor is some kid who got into day trading during the pandemic. In fact,

• 30:28Ed Elson?

  it's, it's a 15% chance, 15% of retail traders only started investing during the pandemic. Two in five of them are Gen Z or millennial. So I want to bring up an ethical question, which is, do you believe that it is acceptable for institutional investors to be capitalizing on the inexperience, the impatience, and frankly, the addiction of retail investors? Or am I being overly cynical?

• 30:58Scott Galloway?

  You don't have any friends on Wall Street. And a lot of people would say, well, Ed, all of these people who entered into the market is a good thing because we want more participation from Main Street in stocks, which have been a fantastic way to aggregate wealth. Now, is this stocks? No, it's essentially gambling. And the fact that retail investors are on the buy side, a kid who has some money and is playing with Robinhood or same day options says, oh, I think the Netflix earnings are coming out. I think Netflix is a great company. I'm going to buy calls that expire today and I get to watch it and it's fun and I get a Dope ahead. That type of trading strategy usually doesn't work out pretty well and you want to be on the other side of that. I have never, I don't think I've bought options in years.

• 31:41Scott Galloway?

  I've been writing them because my philosophy is that people looking for that DOPA hit are being driven by emotion and emotion is your enemy. And in this instance, I want emotion to be my ally. And that is, I think that the premium that people are receiving is greater than the risk. I mean, there's a few things. One, you have to have substantial capital or margin power to cover a black swan event. So there's a limited number of people who can write options, whereas anyone can buy them. I wrote a lot of covered calls in 2021 and I made a lot of money. I made some money in 22 and in 23, I've been absolutely crushed because I've been writing calls and the market for the NASDAQ absolutely skyrocketed

• 32:25Scott Galloway?

  in the first half of 2023. So writing covered calls is essentially trying to get rent on your current options. It's a way of hedging, getting additional cash flow from them. It's still dangerous, but it's not as dangerous because if the stock pops, you've just lost the upside because the underlying stock you've written the option against goes up in value. This is much more dangerous. This is writing naked options or naked calls. But I like the strategy and what they're doing is they're diversifying, they're writing them against the entire market. So the black swan event probably isn't as, isn't as likely, but it represents another trend and that is the market has really become more about speculation

• 33:06Scott Galloway?

  than financing companies. And I think it was Stanley Druckenmiller said that of the $8 trillion in transactions in the market every year, only about 300 billion goes to IPOs or secondaries. So what does that mean? That means what? 95% of market transactions are one person betting the other doesn't know what they're doing and is kind of speculating. But I like this product and I think it's an interesting way to potentially kind of be on the, what I would call the right side of the trade and that is selling these things into DOPA hungry retail investors.

• 33:43Ed Elson?

  We'll be right back after the break with a look at private jets.

• 33:57Scott Galloway?

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• 35:44Ed Elson?

  We're back with Prof G Markets. A year ago on this show, we discussed how the private aviation industry took off during the COVID pandemic. Today, one area of that trend in particular is still on the rise: fractional jet ownership. With fractional programs, wealthy individuals can buy a share of a plane, affording them a certain number of flight hours per year, and the freedom of taking a trip at little notice. Meanwhile, the operator handles the hassle of managing pilots, maintenance, hangar space, and fuel. The price tag for owning 1/16 of an average midsize aircraft: $1.7 million.

• 36:20Ed Elson?

  Nonetheless, it's a price people are increasingly willing to pay. Fractional operators like NetJet and Flexjet saw a 5.2% increase in flights for the first three quarters of this year. And in the past four years, fractional flights are up 43%. Scott, you're a PJ fan. What do you think of a fractional PJ ownership?

• 36:40Scott Galloway?

  So there's really kind of three basic segments of the market. The first is charter, and that is there's a lot of planes out there, a lot of operators, empty legs, owners who want to utilize a fallow asset. And they will put it into a pool and charter operators try and find buyers who are interested in going from Houston to Las Vegas and back, you know, taking their buddies to, you know, to see the sphere or whatever. And you call a charter broker and he says, I can get you there on a Challenger 300 and back from Vegas for 30 or 40 grand, something like that. Then there is full ownership of a plane. So I owned a plane for several years. And that is awesome because the thing about charter is that unfortunately, the worst

• 37:22Scott Galloway?

  thing about charter is you do the math and you do the math on every trip. And you start thinking, do I really want to pay 30 or 40 grand to take me and my buddies to Vegas when we can just jump on JetBlue or American for 400 or 600 bucks a pop each? But when you buy an entire plane or you commit to a plane, basically you get, at least for me, I did the math, I get 13 to 17 days a year at home that I otherwise wouldn't get. So owning a plane is amazing because what you do is you write one big check a year. My plane costs 11 or 12 million dollars in the secondhand market, about a Challenger 300, and then about a million and a half a year. I did charter it out a little bit.

• 38:04Ed Elson?

  Is that a million and a half a year, including the income coming in from charter?

• 38:09Scott Galloway?

  Yeah, it's crazy town expensive. I decided to sell my plane, one, because I got self-conscious about how much shit I was spewing into the air. Two, it's too much plane for Europe in terms of flying domestically, everything so close here, but it's too little plane to get across the pond. And three, it was just so goddamn expensive. Now, here we are, a year and a half later, and I am dramatically less interesting, not being an owner of a private plane, Ed. And I want to be much more interesting. And now I'm thinking about fractional. And Flexjet will give you... One eighth ownership of a Gulfstream 650, which can get you and your family anywhere for six, call it six and a half, six and three quarter million. They say the plane is worth 50,

• 38:52Scott Galloway?

  eighth of it, that's six and a half million, and at about 1.2 million dollars a year in costs. In exchange, you get 100 hours of flight time on the Gulfstream G650. But the real benefit of fractional ownership, beyond the fact that they manage everything, they manage the pilots, the plane is available, they manage everything, you just have an app, I think you just give them 48 hours notice, is that you can arb down and up. So if I'm in the US and I don't need a plane of that size or that performance, it's just, say, me and one other person, I can arbitrage down to, say, a Phenom 300 at a rate of two to one, so I can get 200 hours. So the

• 39:33Scott Galloway?

  ability to throttle up or throttle down into different types of planes, given their scale, because they have a fleet of 150 planes, the fact that it's brain dead in terms of the actual operations and logistics, I was managing pilots. I was trying to figure out the right healthcare plan and manage, I mean, that's sort of not true. I paid $8,000 a month to a flight management company to manage all that shit. You were not organizing the pilot. But occasionally they'll call me and say, you know, Bob wants to move to Houston. I'm like, oh, okay, tell Bob, thanks for working with us. By the way, pilots are strange people, or strange people, Ed. Anyways. It's a crazy job. It is a crazy job. It's like sheer boredom, occasionally interrupted by moments of sheer

• 40:14Scott Galloway?

  terror. But not managing anything here, and you can arbitrage up and down, I think it's, it's actually, it just makes a ton of sense. And I think you're going to see more of it. There's just no getting around it. It's an interesting industry. I think it's going to continue to grow. You're probably going to see prices come down. It went crazy, or prices of planes, which I monitor very closely. It went crazy in the pandemic, and it's starting to cool off a little bit, and charter rates are down 20 or 30% because a lot of, you know, a lot of people have decided that they don't, you know, people were so freaked out about being in airports and because of COVID. But fractional just makes a ton of sense because very few people get full utilization of their plane. Are you gonna do it?

• 40:57Scott Galloway?

  I'm always looking at it. I'm feeling not as financially confident this year. See, above, I lost a ton of money writing options to shitheads like you who correctly predicted that an Nvidia would go up 7 million percent. So I don't feel as flush as I used to. I feel insecure about the economy in 2024. I just want to be the guy that buys, you know, one eighth of a Gulfstream 650 and then I wake up the next morning and the Nasdaq's off 40%.

• 41:26Ed Elson?

  Let's take a look at the week ahead. We'll see earnings from Amazon, Google, Microsoft, and Meta. We'll also see third quarter GDP data and the personal consumption expenditure index for September. Do you have any predictions for us?

• 41:40Scott Galloway?

  I think you're going to see an activist at Warner Brothers Discovery. There's an activist in News Corp. now. There's an activist at Disney. These assets are becoming distressed assets. They're becoming fairly cheap. And I think an activist is going to come in and say, this needs to be a cleaner story. Get rid of the melting ice cube that is the cable assets and let's have, let's have, in the case of Warner Brothers Discovery, let's have a giant streaming network and a movie studio. But let's get out of this shitty business that makes the story harder to tell. And, you know, if you go into Warner Brothers Discovery right now, which is trading at about 1050, could it go to eight bucks? Yeah. But it's, I think there's a greater likelihood that it would go to 15 or 16. So I think this is a good trade for an activist investor that has a lot of capital they're looking

• 42:24Scott Galloway?

  to put into play. So anyways, prediction, in the next 90 days, we're going to see an activist pop up and file a 13D at Warner Brothers Discovery.

• 42:33Ed Elson?

  Do you really need an activist to come in and tell them that? I mean, everything you say, I agree, but it's like, shed cable assets. Like, it's sort of the most obvious thing. Like, surely Zasloff is thinking about this. Do you think that you need someone to come in there and muscle their way in for him to do that?

• 42:54Scott Galloway?

  I think you'd be surprised. I think, for example, I think that oftentimes these boards are full of what I call gridiron grates, or what I affectionately refer to as FIPS, and that is formerly important people who don't own any shares and want to make a quarter or half a million bucks, showing up for free dinner every three months and thinking big thoughts about the future of software. Whereas an activist who owns a shit ton of Shares, and I've been this guy on these boards, goes in and actually meets with the CFO and says, why the fuck is everyone in this room paying themselves $120 million in aggregate when your stock is off 30%? They'll start asking very uncomfortable questions because boards inevitably, that don't have activists, inevitably end up being your buddies from the country club and they're all just kind of there to be nice to the CEO.

• 43:39Scott Galloway?

  And CEOs are generally always the former fraternity or sorority rush chair. They're incredibly likable people and never really say, all right, what would it mean if I laid off one in five of my friends? Would anyone notice? And I just don't, I know these companies, I know, you know, I work with them, they don't know what cost cutting is.

• 44:01Ed Elson?

  I want to see you in your activist days. You need to put together a syndicate or something.

• 44:06Scott Galloway?

  You think so?

• 44:07Ed Elson?

  Get involved. I'd love to see you just tearing these boards apart.

• 44:12Scott Galloway?

  Yeah, I think they mostly tore me apart. I think they mostly ignored me and I left with my tail between my legs. Yeah, no, it wasn't. Anyways, we'll put together a group. If you get our numbers up bad, we'll go, we'll go after the Game of Thrones and Girls franchise known as Warner Brothers Discovery. It'll be, it'll be Shark Week every week for the dog. It'll be Dog Week. Dog Week. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our executive producers are Jason Stavert and Catherine Dillon. Mia Slavero is our research lead and Drew Burrows is our technical director. 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 on markets every Monday.

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