How The AI Economy Could Collapse

Scott and Ed break down a wave of AI spending news. They also discuss the circular deal theory emerging in AI and why it concerns them from an antitrust perspective. Then they unpack data that demonstrates how lower income Americans are doing and examine why some of the traditional economic data has been distorted by inequality. Vote for Prof G Markets at the Signal Awards Subscribe to the Prof G Markets newsletter Order "The Algebra of Wealth," out now Subscribe to No Mercy / No Malice Follow the podcast across socials @profgmarkets Follow Scott on Instagram Follow Ed on Instagram and X 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.

• 0:00Speaker 00

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• 0:31Speaker 01

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• 0:59Scott Galloway?

  Today's number, 2,500%. That's the increase in Build-A-Bear stock over the last five years. Ed, Adam gave Sally three flowers and one stuffed animal. Kristen gave Sally five flowers and two stuffed animals. What does Sally have?

• 1:15Ed Elson?

  Eight flowers and three stuffed animals.

• 1:17Scott Galloway?

  She has cancer, Ed. She has cancer. She has cancer, Ed. You could be a little bit more empathetic. She has cancer.

• 1:29Scott Galloway?

  That's good. Oh, he's back.

• 1:43Scott Galloway?

  How are you, Ed?

• 1:43Ed Elson?

  I'm doing well after that.

• 1:44Scott Galloway?

  I'm gonna go out on a limb here, and based on the fact you were late, can't seem to like, literally get your head out of your ass right now, literally. I'm gonna go out on a limb and say that you are not a morning person.

• 1:56Ed Elson?

  I can be a morning person. I can be a morning person.

• 1:59Scott Galloway?

  You need NAD treatments. You know, I've been doing those, right?

• 2:02Ed Elson?

  But they're quite expensive, I've heard. We were doing some research on these NAD treatments. It's like, what is that, like, 300 a pop?

• 2:09Scott Galloway?

  Ed, Ed, Ed, Ed. I don't go to the fucking Walmart of NAD infusions. I have this nice Brazilian woman. They're always single mothers who are really attractive and they show up in figs and they couldn't be nicer. And they sit with me for an hour and a half. And I think part of the reason you think it's working is it makes you so fucking nauseous. You're like, oh, there's gotta be something good here. But I do find it keeps me kind of crisp. Crisp and clean. All right.

• 2:34Ed Elson?

  It's like steroids? What is it exactly?

• 2:37Scott Galloway?

  I don't know what the fuck it is. I just know everyone's doing it. I don't know what it is. It's something to do with mitochondrial repair. It's supposedly cellular repair. And you do, uh, be serious for a moment. I'm not recommending it, but it does feel, you do feel, it kind of clears that brain fog and you feel a little bit more. The way I would describe it is, for the next week or so, you feel as if you have a half a sip of coffee kind of every 15 or 30 minutes. You just feel a little crisper, a little crisper. I wouldn't do it at your age. I wouldn't do anything at your age. But at my age, I would do everything, which is what I'm doing. Anyways, this was very exciting banter and dialogue, Ed. Do you want to get to the headlines?

• 3:18Ed Elson?

  I would love to. Oh, actually, before we do that, before we do that, I will just note that we have been nominated for a Signal Award.

• 3:25Scott Galloway?

  That's right.

• 3:26Ed Elson?

  What is the Signal Award, you might ask?

• 3:29Scott Galloway?

  No, that's gonna help us.

• 3:31Ed Elson?

  This is an offshoot of the Webby Awards and they celebrate excellence in podcasting. So please, we need more awards. It really helps us. Why does it help us again?

• 3:42Scott Galloway?

  I think when we try and sell this Joey Bag of Donuts organization, we call it company. We put, we want, we've literally won every award. We've won every Webby, People's Choice Awards, the iHeartRadio Award, and Signal is trying to establish themselves. I just want to win such that I can go up and like 1970s Academy Awards. This Native American woman accepted the award from Marlon Brando, went up there and talked about it. It was the, I think it was the original wokeness and then. Anyways, I think anyone who says anything political on a stage with their award should immediately be stripped naked, tarred and feathered and have to watch Fox and MSNBC straight like that, like that episode in Clockwork Orange where they paste his eyelids back and

• 4:27Scott Galloway?

  he has to watch it. Again, references, Malcolm McDowell, references, Stanley.

• 4:32Ed Elson?

  You have to peel your eyes over to watch Joaquin Phoenix talk about the climate.

• 4:35Scott Galloway?

  Yeah, that's right. I love that. Now, see, there you go. Now, someone's awake. Someone's like, oh, look at him, he's stirring. He's stirring. Okay, get on to the headlines, Ed.

• 4:46Ed Elson?

  No, no, no, I'm not, I'm not done yet because I need to direct people to where they're going to vote for us and you're going to vote for us at vote dot signalaward.com and you will find us in the money and finance category and we're going to leave a link in the description to make it easy for you. So please vote for us. It's going to make me happy. Again, maybe I'll get a raise. That could be good for me.

• 5:12Scott Galloway?

  Yeah, don't hold your breath. All right, Ed, you're literally, it's clear, I'm going to have to carry this whole fucking joy, this whole sandbag of a show. Let's go. Let's get on with it.

• 5:23Ed Elson?

  Let's do it.

• 5:26Speaker 04

  Now is the time to fly. I hope you have plenty of the well at all.

• 5:33Ed Elson?

  Last week brought a massive wave of AI spending news. Nvidia announced a $100 billion investment in OpenAI to build data centers with more than 10 gigawatts of capacity powered by its chips. Oracle sold $18 billion in US investment grade bonds to finance its AI spending and OpenAI revealed progress on Project Stargate, opening its first Texas data center and announcing five more sites across America, which will cost $400 billion. According to the Wall Street Journal, the company may ultimately spend $1 trillion on AI infrastructure. How is OpenAI going to pay for all of this?

• 6:12Ed Elson?

  Well, we don't really know yet. And so this sort of brings us to what's something we were discussing last week, and we were discussing this with Gil Luria, who's the head of tech researcher at D A Davidson. And this is what we want to discuss with you, Scott, which is this circular deal theory that is emerging in AI, where we had Nvidia, who said they are going to invest $100 billion in OpenAI, and then OpenAI turns around and they say, OK, we're going to purchase three to four to $500 billion worth of Nvidia chips. And we're seeing this happen everywhere. We're seeing Microsoft investing in OpenAI, and then OpenAI commits to buy compute from Microsoft, and Oracle investing in the Stargate

• 6:57Ed Elson?

  project, which of course is most closely associated with OpenAI, and then OpenAI commits to buy billions of dollars worth of compute from Oracle, and then Oracle turns around and buys chips from Nvidia. Amazon invests in Anthropic, Anthropic buys the compute from Amazon. Basically, what we have here, again, we call it circular deal theory, but there's a lot of money in AI. It's moving these stocks up by billions of dollars, in some cases, tens to hundreds of billions of dollars. But the money is all moving in a circle. And so this got us to be a little bit concerned. It feels a little bit like financial engineering.

• 7:38Ed Elson?

  And we wanted to get your take on this. So Scott, your reactions to all of this AI spending we're seeing, and your reactions to the fact that the money appears to be moving in a circle.

• 7:48Scott Galloway?

  It feels eerily reminiscent of 99, and that is it feels like late stage boom, when things are, we're shit about to get real. And that is, so back in the 90s, we were starting e-commerce companies. And the only place that had any volume of sales was the AOL marketplace, because my father in law used to say, I'm not putting my credit card on the internet, and it's going to be stolen by some Ukrainian gangs. So AOL created this closed or walled garden. You've got mail. And it gave people the confidence to buy. People wouldn't buy things on the kind of world wild web. So AOL was the only place, the only thing happening in town.

• 8:30Scott Galloway?

  And what AOL was doing late in the cycle to try and maintain their growth projections and an elevated stock price was they would invest in a small e-commerce company or a big e-commerce company and take shares in it. And so it would be an asset on their balance sheet, the shares they got in exchange for the investment with the guarantee that that company would turn around and spend that money on AOL. And so it was just, these are technically, I think the term is related party transactions. When I started Profit, the brand strategy firm, I was leaving, wanted out of the services business. This again was late 99. I raised $15 million from Goldman Sachs, JP Morgan, Mavron, and a bunch of high net

• 9:11Scott Galloway?

  worth individuals to go start an e-commerce incubator in New York. I spent, I think, one or two million of that on consulting and strategy to position these concepts and come up with, you know, basically the business plan for all of the companies within, the company was called Brand Farm, on Profit. And then when Profit was purchased later in the year, I sold it. I think our initial offer was like 36 or 38 million. And they came back and said, we are going to reduce the price to 33 because that money that you were paid for services to Brand Farm is a related party transaction. In other words, the founder and chairman of the company, spending money from one of

• 9:54Scott Galloway?

  his companies on another one of his companies, creates the illusion of prosperity and that you didn't really go out in the marketplace and show, this business didn't go out and show that it can actually get this business and revenue on its own. So, and then when everything unwound, especially the AOL kind of deals, it all collapsed. And what we found is a lot of these software companies were selling shit to each other. One last story. Another company I started, Red Envelope, an e-commerce company, was having performance issues on the website. And I asked my partner, who was a tech guy, to do an audit of our technology. And the CEO said, great. And he came back and said, we have shitty tier two technology across the entire tech stack. And the only thing I can figure out is that the majority of these companies

• 10:40Scott Galloway?

  Our Sequoia-backed companies. And then it became clear, our CTO, who had come from Webvan, another Sequoia-backed company, that basically the chairman, or the new chairman of our company, a Sequoia partner, this probably the most famous venture capitalist in that era, was using Red Envelope as the dumping ground for his failed portfolio companies. This is kind of what you see in what I call late-stage trying to prop up shit. In addition, what you have here, essentially Nvidia is monetizing what you'd call a fully valued or inflated stock price. They're taking, you know, call it, how much are they investing?

• 11:20Scott Galloway?

  A hundred billion dollars, which is at a market cap of four billion, is approximately two and a half percent. They're taking a two and a half percent dilution on their stock to create an incremental hundred billion in top-line revenue for them, which will likely juice the stock more than two and a half percent. It's likely an accretive transaction, but it's a head fake. It's not really getting the hundred billion dollars in the full-body contact violence that is capitalism. That's one really bad thing about it. And it's usually indicative of kind of late-stage bubble, if you will. The other thing that's really bad about this is that if you have the premier chip company

• 12:01Scott Galloway?

  that has, responsible for like 90, 95% of compute around AI, and then you have the leading LLM that has 77% of queries, and they're coordinating with each other, that to me is just so ripe with antitrust. I mean, it's basically going to be, if the premier chipmaker is optimizing and giving better chips and create, building chips around the advantage and structure and nuance of OpenAI's business, they create a moat that no one else can compete with, which to me just strikes me of very obvious antitrust.

• 12:37Scott Galloway?

  Um violations that will suppress competition, that it will be make it very difficult for anyone else to compete in what is arguably the most exciting new technology. This in sum, this is illusory for shareholders reminiscent of late stage growth and the growth cycle and two raises all sorts, as it should in most administrations, real serious antitrust concerns. Your thoughts, Ed?

• 13:02Ed Elson?

  I think the dot com bubble comparison is the right one and I think I've been hesitant to make the analogy in the past because it seems like such an obvious one. You know, the internet's happening, internet's going to change everything. AI is happening, we're building AI, AI is going to change everything. But the more and more the AI story unfolds, the more and more clear it it becomes to me at least, that this really is looking almost identical to what happened with the dot com implosion. And, you know, you mentioned that, and you went through it, this experience where these

• 13:42Ed Elson?

  telecom giants were essentially going in and buying it, buying up shares and stakes in smaller startups and then the startups would turn around and buy their products. And in many cases, as you say, it was actually buying up equity stakes. I in a lot of cases, it was also debt financing. So you had companies like Motorola and Nokia and Lucent and Nortel and Cisco. These were all these companies that were in the business of building telecoms equipment. So switches, routers, fiber optic systems, fiber optic cable, all of the internet equivalent of what basically chips are today to build data centers.

• 14:25Ed Elson?

  So they were going around and they were building all of this equipment and they were, you know, receiving massive investor demand because everyone knew the internet is going to happen. And who are the picks and shovels of the internet? It's it's companies like Cisco. So they were building that stuff. And then in order to prop up demand or stoke demand for the equipment that they were building. They would go to the network operator companies, so companies like Windstar and companies like Global Crossing, and they would finance those companies and extend basically just billions of dollars in debt to them. I think it was over about $25 billion worth of loans

• 15:08Ed Elson?

  in around the year 2000. And they would say, okay, take on this debt and then you're going to turn around, take the money and spend it on us. And essentially what happened was they were right that the internet was going to happen and they were right to build all of this infrastructure, which ended up getting used. But what they were not right about was the artificial demand that they created through all of these related party transactions and through all of this vendor financing, through these, what we are calling circular deals. And so by the time you get to 2001, they've spent all of this money on all of

• 15:53Ed Elson?

  the infrastructure, on the fiber optics. And then you've got 90 to 95% of all of the fiber optic cable in America that was actually unused because the demand wasn't there. And then suddenly you see a downturn in the stock market, a change in sentiment. This is what we talk about when the music stops. And then by 2001, about half of those publicly listed telco providers in the US were bankrupt. So you had WorldCom imploding, which was the largest bankruptcy in America until Lehman Brothers in 2008, Global Crossing

• 16:34Ed Elson?

  filing for bankruptcy, fourth largest US bankruptcy ever at the time. And all of these companies that appeared to be incredible, I mean Cisco as well, I mean massive destruction in value at Cisco, all of these companies that looked to be kind of indestructible because there was all of this, what appeared to be demand, they all crashed and burned. And in the crossfire, you had a lot of people who, you know, real people who lost their jobs and lost a lot of money. Half a million people lost their jobs. The Dow Jones Communication Technology Index, which would basically be like the AI index of today, that dropped 86%.

• 17:17Ed Elson?

  So there was just two trillion dollars essentially in market cap that disappeared basically overnight. And this is, again, it is so similar to what's happening in AI because it's not to say that the internet was a bubble and that they were wrong. Of course, you know, the internet happened and there was a massive value creation. But the trouble was the timing. They overspent initially and then they mismanaged their finances. And then when there was a downturn and they didn't have the demand that they tried to create on their own, a lot of companies went out of business. It appears that the

• 17:56Ed Elson?

  exact same thing is happening in AI right now. The fact that you've got Oracle stock jumping 25% because OpenAI promised to spend $60 billion a year on their compute and that's money that OpenAI doesn't earn. So how is OpenAI going to get the money? Are they going to go raise it with debt? Or I guess they're going to get it because Nvidia is going to come and they're going to invest $100 billion. But then OpenAI says, no, we got to spend that money on Nvidia chips. So it's a very similar thing. Everyone's right. Of course, AI is going to happen. But what they're getting wrong is the timing on all of this. They are overspending now, but as soon as the music stops, you're going to

• 18:40Ed Elson?

  see something so similar to what happened in 2000.

• 18:43Scott Galloway?

  Yeah, it just cracks me up. You were born in 99, weren't you?

• 18:46Ed Elson?

  Yeah.

• 18:47Scott Galloway?

  I mean, you're not even scratching the surface here. Exodus Communications, Global Crossing bankrupt, Level 3 Communications, Quest Communications, Juniper Networks, Lucen Technologies. I mean, there were just all these companies that, and then you talked about Cisco. And it wasn't a question of whether the internet was going to happen. We knew it was going to happen. We just, they, valuations were based on valuations based on 20 years of demand in the future. I mean, I started a company called Aardvark Pets, online e-commerce for pets, trying to be the Williams-Snowick Pet Supplies. We were doing maybe $30,000 or $50,000 a month total. Well, actually, is that right? I can't remember if it was $30,000 to $50,000 a week or $30,000 to $50,000 a month. That would be a cute

• 19:32Scott Galloway?

  little e-commerce company now on Shopify, run by some nice woman in Winnipeg, Canada, selling God's eyes or macrame or something, right? Back then, that made us one of the 50 biggest e-commerce companies in the world. It's just the value, it's just in the cycle, the valuations got way out ahead of what was actually happening in the marketplace. And people forget from 99 to 2001, Cisco and Amazon lost 90% of their value. Obviously, Amazon went on to get it all back and more. It's up probably 100 fold since then. Cisco never really recovered, recovered, you know, it recovered, but never to the same extent. So it's not that there aren't some great companies here. It's just that the cycle and the froth has become so intense that these companies are now looking for sleights of hand

• 20:17Scott Galloway?

  to try and create the type of revenue that the market is expecting. And when you see that study from MIT saying 95% of corporations surveyed have said they're not getting the return they anticipated. You begin to worry that, okay, you don't need to worry that AI isn't going to have a big impact. It is. It's incredible technology. The question is, do the valuations reflect the actual dollar demand and ability to monetize this incredible technology right now? I had dinner last night with Greg Shove, who's the CEO of Section, which basically helps companies deploy AI by upskilling the employee base. And his business is booming because what's happened is where we are in the cycle is all of these corporations

• 21:00Scott Galloway?

  sign big site license agreements with Anthropic or OpenAI. And then six months in, they've realized their employees haven't adopted it and aren't deploying it, aren't using it. And so they're like, okay, we were hoping AI was going to change things. And what they're finding out is that people just aren't using it that much. So this is, this does feel like, okay, we have these valuations that are unsustainable based on current dollar volume, but we know this is the future. We know it's going to be huge. So let's do some, kind of some shell games. The other thing that sort of indicates to me is that based on the commitments OpenAI is making,

• 21:41Scott Galloway?

  I now believe they are probably going to try and go public in the next 12 months. Because in order to create this sort of capital that they're committing to. I don't know if they're going to do a private round of six or 800 billion. I don't know if the private markets are going to be there for them. Whereas they have built this unbelievable brand, the whole, the whole kind of umbrella brand of AI is enormous. This could be, I wouldn't be surprised if he announced what will be the biggest IPO in history. Because I don't know, I wonder if, if the private markets are looking at this thing and saying, I don't know. In other words, to, to your point, they might decide, okay, we need to go out at a one to three trillion dollar market cap. No private investor is going to do that. I know.

• 22:26Scott Galloway?

  Let's try and sell it to retail investors.

• 22:32Ed Elson?

  We'll be right back after the break. And for even more Prof G Markets content, sign up for our newsletter at profgmarkets.com/subscribe.

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• 24:25Ed Elson?

  We're back with Prof G Markets. Just to double down on the historical analogies here. So we made the analogy to the internet. I just want to point out that this is basically what happens whenever any transformative technology comes along. And, you know, you can look back at the 1800s, for example, when they were building the railroad, when the railroad first appeared. And what we saw was this massive overinvestment in railroad building. By the way, railroad capex accounted for about 20% of total US capex. You compare that to AI, which is actually only about 2% to 3% of all capex right now.

• 25:10Ed Elson?

  So you had this huge overinvestment in railroad infrastructure, which turned out in the long run to be worth it. But as soon as there was a downturn in the stock market in the seventies, in 1873, that was the panic of 1873, what you had was all of these railroad companies, all these railroad lines that couldn't cover their costs because they had overinvested. They got caught at a bad time and then many of those companies went bankrupt. We saw the same thing when the electric grid was being built out in the 1920s. Massive overinvestment, huge capex. And then 1929 comes along, you have another stock market crash. Andrew R. Sorkin is, he just wrote a book on this. We're going to have him on soon.

• 25:55Ed Elson?

  And again, you see a ton of bankruptcies for these companies. Same thing. Happens with telco and the internet in the late nineties and the early two thousands. And I just want to read you this quote from a Wall Street Journal article at the time during the dot com implosion. They said, quote, prudent risk management requires companies to maintain reserves for expected losses based on the probability of default and the expected magnitude of those losses given default and to hold capital to withstand unexpected losses that exceed those reserves. Regrettably, few companies have done this. So in other words, what they're saying is you need to be well managed financially. You cannot spend more money than you have.

• 26:40Ed Elson?

  And as soon as there's a downturn, you will get punished for that. And so in a funny way, when a technological revolution happens, at the beginning, it's all about the technology. It's all about who has the best technology and who's willing to build it. But as it progresses, it becomes more about who's not going to get too excited about this. Who's not going to over invest and get too crazy such that when whenever a downturn does occur or people start to wake up to what the demand really is, they don't get caught with their pants down. And so going with that analogy, I'm of the belief that this is probably going to happen in some way.

• 27:21Ed Elson?

  When you think about what are the companies that are financially mismanaging themselves? One company comes to mind for me and it's OpenAI. I mean, if we are to see a crash in some form, again, this doesn't mean that AI is useless, just means, I mean, recessions happen, crashes happen. If that does happen, what is the company that I think is going to get caught with their pants down and that could be ruined by this because of the mismanagement at the top? Not because of the technology again, but because of the finances? I think you've got to go with OpenAI. So I would pose the question to you, who gets burned in this scenario?

• 28:06Scott Galloway?

  Well, who gets burned is shareholders who are buying in late stage in the cycle. And the problem is it's very hard to time it. It's the shareholders that get burned. So a couple of things. If.

• 28:19Scott Galloway?

  A company like OpenAI and just the unprecedented levels of capex being seen here, I was fascinated by that chart that Mia put together, that any reasonable analysis of the technical capabilities of the underlying LLM, they're all converging, they're all, they're all basically becoming the same thing. It's, and so there's very little differentiation on a product level. So how do you differentiate supplier relationships? So OpenAI is saying, okay, let's try and figure out a way to have a better supplier relationship and have a kind of the inside track on chips similar to what Windows did with Intel, right? The Windel duopoly, so to speak.

• 29:00Scott Galloway?

  Another one is a capital war in that as they spend so much money and lock up so much compute and lock up maybe so much power generation or the only ones with the data storage that while capital is cheap, they build out incredible infrastructure. And that's what Amazon did. Amazon spent like no, no one's business. And in, I think it was in 99, someone put out a report saying, uh, Amazon's going to go bankrupt. A really credible analyst said, this is, this company has real bankruptcy risk because they're spending so much money. Sounds familiar, but they didn't. And then they came back and roared.

• 29:35Ed Elson?

  But Amazon was one of several, right? I mean, I mean, Amazon survived, but there are many other companies that were doing the same playbook that, that, that were destroyed.

• 29:47Scott Galloway?

  Everything from pets.com to, you know, flus, use your own current. I mean, there was just so, I mean, I can't tell you how many companies just got swept off the decks. But a company like OpenAI, it can raise so much capital so inexpensively. And, you know, Oracle is not going to bump them into bankruptcy if they can't make that $60 billion payment. At least I don't think they're going to. So this is, what they have said is the following. Sam Altman's vision of AI, I believe, is that most likely there can only be one. And that is there'll be an agentic layer controlled by one company that seamlessly speaks to every. I mean, there is a vision of AI where everything from me walking into my studio and AI sensors,

• 30:31Scott Galloway?

  turn on the lights, look at my skin tone, turn it up, turn it down. And then as soon as we're done, we say, read the credits. And AI-driven, sound editing, sound mixing, everything, video editing, AI takes over. And that AI could be 5, 10, 20% of GDP at some point. That it's just like one technical agentic layer that literally powers everything. Everything, right? I never order an Uber again. It knows what to do. The Uber's being driven by AI. Everything is just all kind of running through one LLM that will figure out a way to skim a lot of money off of the 10 or 20% of GDP that is flowing through, directed or enhanced by AI.

• 31:16Scott Galloway?

  And that Sam's vision is, look, if we're all having the same product, it's going to be who gets there first. So the spending is just extraordinary because these companies, including Anthropic, who I think their biggest investor is Amazon, says, okay, we've been to this playbook before. It's about who builds out the biggest infrastructure and who can raise the cheapest capital. So now that's not to say, you know, Amazon walked through the valley of death. Stock down 90%, but they survived. They were able to raise money and, you know, keep, keep going. It'll be really interesting here. I mean, going, just going back to AOL, Steve Case saw the writing on the wall. He said, okay, I've got a company that the marketplace thinks is worth 150 billion. So I need to cash out.

• 31:59Scott Galloway?

  I can't sell the company to a buyer or get cash out. What I do is I'm going to go to an old world economy company that sells things like books and records and movies. I'm going to ask for 51% of the company. And that was Time Warner. And basically for like 10 years, Time Warner employees were furious at AOL because their retirement was ruined. They basically took AOL shareholders in exchange for their basically declining melting ice cube that just kind of eventually just went away. AOL isn't really even around anymore. I think they just canceled their last business, the dial-up business. They managed to get $150 billion. They managed to get a half of an amazing company, an old economy company called Time Warner. So you're going to see, you're going to just see

• 32:42Scott Galloway?

  extraordinary transactions here. Not only the new stuff, but also the next stage of this that will kind of, kind of indicate we're in the late stage of the bubble is when these companies use their cheap capital to go buy more traditional technology and data firms that have cash flow and are more enduring. That would be kind of the next phase. But this is, it would be really interesting to look at, I mean, the GDP growth or whatever, the percentage of CapEx isn't as big as the stuff in the past, but also our system wasn't as linked to the stock market as it was then. You know, I think a half or two thirds of people are some way directly or indirectly linked to the stock market through the retirement plan or direct investment. Back then, I don't

• 33:27Scott Galloway?

  think a lot of people own stock in the railroads as a percentage of the population. I might be wrong. This is starting to feel very, again, the question isn't whether this technology is going to, going to pay off or going to, going to have an impact. The question is, do the current valuations in any way reflect what is actually going on in terms of companies spending money here and the return on investment, that they're actually, you know, how they're, how they're actually deploying AI. And corporations right now are sort of voting resoundingly saying, as of yet, it isn't living up to its expectations.

• 34:05Ed Elson?

  And I think the next phase is going to be that they start overlevering. I mean, that, that would be, I think, the next thing that we're looking for with OpenAI as an example. If they owe hundreds of billions, what was it, a trillion dollars to all of these companies? I mean, if that's how much they're going to buy, sure, they can go to the public markets, but I think they're going to have to start. Raising a lot of debt. I think they're going to have to borrow a lot of money here. And I think that's where we might start to see the warning signs show up. But to your point, you mentioned that from Sam Altman's perspective, it's, it's, you're basically describing an all or nothing scenario, where there's only going to be one winner.

• 34:49Scott Galloway?

  Yeah, there can only be one. They will, you're right, they will likely issue debt as Amazon did. It would be smart to issue debt because they'll get it really cheaply. They'll be able to sell a lot of it. So yeah, I think you're right. A debt offering is coming and I wouldn't be surprised if they, a lot of M and A and they, they announce an IPO.

• 35:08Ed Elson?

  We'll be right back after the break. If you're enjoying the show so far, be sure to give Prof G Markets a follow wherever you get your podcasts.

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• 37:01Ed Elson?

  We're back with Prof G Markets. The major indices all hit record highs last week, and by the biggest indicators, the economy looks strong. Second quarter GDP grew 3.8%, exceeding expectations of 3%. Corporate earnings are on track to rise 12% from last year, the third straight quarter of double-digit growth, and retail sales rose strongly in August. However, those headline numbers are a little misleading. As we discussed a couple of weeks ago, the top 10% of earners in America are now accounting for half of all consumer spending in the US. Put another way, the data is being distorted, and it's being distorted by rich people.

• 37:42Ed Elson?

  So we wanted to take a closer look at how lower-income Americans are doing. And when we look at the data, what we generally find is that lower-income Americans are actually struggling, and here are some of the data points we've found. So first off, sales of very cheap food items, foods that people buy one time to tough, so rice, canned tuna, beans, macaroni, those sales are rising significantly right now. Hamburger helper sales are up 15% through August. Meanwhile, we're seeing a pullback in demand from places like Chipotle and Applebee's and IHOP. On Yelp, searches for cheap eats are up 21% compared to last year. We can also look at the housing market.

• 38:25Ed Elson?

  Google searches for help with mortgage have surpassed levels last seen during the Great Recession. Also, healthcare. One-third of adults in the past year say that they've opted out of getting the healthcare they needed because of the cost. That's up nine percentage points since 2023. In sum, we're getting sort of a rosy picture of the economy from the official data from the government, but again, this doesn't account for the extent to which rich people are driving all of this data. And so we have to come up with some more creative ways to look at lower-income consumers. And what we're finding is that the data isn't great. Scott, your reactions?

• 39:04Scott Galloway?

  One of the most damaging metrics in history for American policy is the Nasdaq and the Dow Jones because it creates this illusion. Of prosperity. And the reality is that kind of the real economy, there's a lot of indications that it's not doing well. And we have a now we're becoming like a Venezuela or a third world country, where basically the top 10% have all the money. If the top 10% are basically responsible for 50% of consumer spending. I mean, and the market keeps hitting new highs. But again, I think we should start calling it the S and P 10. These companies, you know, they're responsible for 55% of the index's gains since 2021. So the last four years,

• 39:49Scott Galloway?

  the majority of the gains in the market have been from just 10 stocks, meaning the other 490 are just doing okay. And then these are the biggest companies, biggest and best companies in their sector. When you go further down the food chain, it gets, it gets really ugly. And there's a lot of kind of indications that the middle class and lower income houses are really struggling. It's just really tough out there. I think these tariffs have resulted in inflation, or inflation seems to be sticky. And we see growth slowing if it's not related to AI. So, and then the other one I've noticed is sort of a weird recession indicator. Because I follow dogs, or I mentioned dogs,

• 40:31Scott Galloway?

  I get served, the algorithm served me a lot of information on dogs. You know what I'm constantly getting? Is videos of little Coco, who is gonna be euthanized in three days. If someone doesn't get, come get the dog at the Brooklyn, you know, shelter. These, there are, there are so many dogs now up for adoption. And a little bit of research here shows that more pets are being surrendered to shelters right now. And surrenders are up 43% in Charlotte. Chicago shelters are now taking in an average of 56 animals a day, up from 42 last year. And in New York City, three animal care centers have stopped accepting new animals altogether. So that is sort of an indicator.

• 41:16Scott Galloway?

  One, there was a bump because of COVID and people wanted pets. But two, when people can't afford their dog and dogs, you know, they're not expensive, but they're real money, they turn it in. Anyway, I think that America knows deep down what's going on. The middle class and the lower income households are doing, are really having a tough time. And the sad part is I think America's kind of down with it. Because our superpower is that. We believe we're going to be someday in that top 10, maybe that top 1%. So we're not as worried about the bottom 90. And there's always a belief that it's like that Simpsons episode where the guy goes, he's like, yeah, hang him or, or, you know, whatever. And the guy next to him goes, you know, they're talking about us, right?

• 41:58Scott Galloway?

  And he's like, yeah, but wait till you see how I treat people like me when I'm rich. It's just the people, everybody in America, people know the lottery is stupid, but baby, my ticket's a winner. And I think it reflects something more disappointing in our society that it's like, I was thinking about Bob Iger. People don't like strong men. They either love the strong man or they hate them. But who everybody hates is the cowards that enable the strong man. And what I see here is, okay, we have, at some point, we have to realize it's more than just Donald Trump doing this. It's our elected representatives, including Democrats,

• 42:40Scott Galloway?

  who look the other way when we continue to transfer wealth from the bottom 90 to the top 10. This is a collective problem.

• 42:49Ed Elson?

  What do you think this is all headed? I mean, if the top 10% are basically driving the entire economy, if most of our economic indicators from the stock market to even GDP to even retail sales, like even, even the CPI is distorted by this inequality. I mean, we used to think that that was sort of an indication of the real economy. We're seeing how consumers are spending their money in the real world versus the stock market, which is a reflection of investor sentiment. But if consumers, if the consumer economy is now also distorted

• 43:29Ed Elson?

  by how rich and how economically powerful the top 10, 5, 1% are, and we, we can't even get a real handle on how lower income Americans are doing, to the extent that we are now looking at the sales of hamburger helper to get a real sense and to take the temperature of lower income Americans. I mean,

• 43:56Ed Elson?

  Play this out 10, 20, 30 years, where is this all headed?

• 43:59Scott Galloway?

  The obvious scenario is that the market's correct. That at some point, the jig is up. They're just, these companies can't justify their valuations. Either they find a trillion dollars in labor savings or the valuations get cut by 70%. And either way, you're going to have pretty serious tumult in the marketplace. I don't think there is kind of a soft, not a soft landing, but a soft acceleration from this point. I just don't think that's going to happen. I think you see a lot of chaos in the market. I think geopolitically, there's more chaos because a weakened America financially creates distractions. We're so distracted on Epstein and Kirk that Putin feels emboldened to send attack planes into Estonia and Poland.

• 44:42Scott Galloway?

  So when we're not strong and when we're not, we don't have a, when we have a sclerotic foreign policy, autocrats take advantage of that and start, you know, misbehaving. We, we, people will say, well, we can't be the world's policeman. Well, we were in coordination with our great allies. And guess what? The whole neighborhood called the world was much safer with us as the heading up this global police force of wealthy democracies. That was working and people didn't realize how well it was working until now, when it's, when it's no longer got consistency or alliances. The, the, that's the good scenario. The dark scenario is that we have an economic shock. A lot of young men who are angry get weaponized online.

• 45:26Scott Galloway?

  We have a strong man who has normalized putting troops into cities, puts them into cities during the election. And basically our constitutional, we have a constitutional crisis and there's no more elections and there's, there's violence. Yeah. So I think that, or, or, and I'm getting dystopian here, or just every region breaks up. And California says, we're tech, we're going to do a lot with Asia. The South says we're Republican in energy. The Midwest is like we're manufacturing and bluish and we do a lot of business with Canada. And the East Coast becomes financial services, doing business with a lot of people. And then they develop their own currencies, their own militaries.

• 46:10Scott Galloway?

  And basically, the US becomes the EU. It's no longer the United States. They just don't recognize each other's policies, don't recognize the federal government. And California stops sending 80 billion to DC. And Texas refuses to send their troops to, you know, to a Democratic administration that wants them to do whatever. So you could see a revolution that begins and ends with, in my opinion, sort of a thud, not a bang. You could see a big, pretty big economic unwinding. The other thing you probably, I think more likely, will see is Mumdami. What do I mean by that? We don't have a tendency to be able to spot the pendulum at the middle. We have a tendency to swing very hard to the other way.

• 46:54Scott Galloway?

  So I think that likely, assuming we have another free election, you're going to see an AOC-like character who is, in my view, I like AOC, but I would argue there's going to be an overcorrection to the left. We still just can't figure out a way to find a medium temperature. And the algorithms don't like moderates. The algorithms like people who are entirely different. And I think what's going on here is going to create a groundswell movement for just, we just want massively different. We want an incredible contrast to the current situation. And so a very charismatic, a guy like Bernie, if he was 10 years older, would be the leading candidate, younger, excuse me, 10 years younger, he'd be the leading candidate for president. If he was 10 years older, I don't know.

• 47:38Scott Galloway?

  Anyways, he, well, he'd be dead. But we're gonna, in my opinion.

• 47:45Scott Galloway?

  We're going to see a lot of people from the far left get a lot of traction. And that's not what I want. Unfortunately, I think the correct reaction would be a cooling in someone, someone in the middle. But I think that's what happens.

• 47:58Ed Elson?

  I think those characters are certainly going to show up more, but I mean, it seems that those are the kinds of characters that are only, the only ones that are really going hard at recognizing the problem, which I think is why they are resonating. I mean, Bernie, AOC, Mam Dhaney, I mean, all of the issues that we've just described, specifically the inequality issues and the affordability issues. Those are front and center of those campaigns. So, you know, that would explain why they're popular and they're doing a good job of communicating those messages. Both of these stories that we've covered here, they smell of recession.

• 48:40Ed Elson?

  You know, we talked about the dot com implosion. We talked about these leading indicators on how consumers actually aren't doing that well. Specifically, the majority of consumers and not, and not wealthy people. Mark Zandi said that, you know, based on his economic data and his models, we are on the precipice of a recession. That doesn't mean recession is happening. It's certainly coming. It means that there is a strong chance that it could happen. I get that these are kind of wishy washy terms, but that's what his model tells him. Any thoughts on recession risk? Do you think it's coming this year? I know it's, it's kind of dumb to try to predict when recession is coming.

• 49:22Ed Elson?

  And economists are always doing this, but just any thoughts on, do you think it's coming? I mean, are we close in your view?

• 49:30Scott Galloway?

  Jamie Dimon, the CEO of JP Morgan, had, I thought, the best statement on recessions. Someone asked him to find what a recession is, and he said something that happens every seven years. It's just a natural part of the cycle. We overspend, there's a slowdown, there's a chill in the markets and GDP contracts. It's just two quarters in a row, GDP contracting for two quarters in a row, technically defines a recession. We have had 17 years without, I think what most people would label. Actually, there was technically, I think, a recession a few years ago, but it didn't seem to bother anybody. We're just overdue in terms of the cycle. And if you, what I'm more worried about is some sort of stagflation or runaway inflation and some sort of civil unrest because. Essentially unrest always starts with one place.

• 50:15Scott Galloway?

  And that is with young men who are dissatisfied. And because they're more risk aggressive and they're willing to go down to the town square and risk getting shot and they're very angry. And that group right now, what, what, if you really want an indicator on the health of our economy, in my view, and by the way, I'm not saying young men are more important. I'm just saying the bottom line is young men are more prone to scale the walls of the capital. They're just, they're the ones that are more likely to take up arms and show up with pontoons or, uh, excuse me, torches and lanterns. And I think young men are doing really, really poorly right now. And so I think one economic shock, if you look at every major revolution or unrest or

• 50:56Scott Galloway?

  war in history, it's typically started by a strong man, supported by young disaffected men. And what I see is, and again, I've every, you know, I'm a hammer and everything I see is a nail, but there's no indices for looking at self-harm, deaths of despair and dissatisfaction among young people. All we know is that people my age, one, one in two of us feel good about America because we've had remarkable opportunities, many of us or most of us. And people your age, it's one in 10. That's not, that's not sustainable. When nine in 10 young people don't think the system is working, they're going to try and figure out a way to change the system. What we hope is that they change it at the ballot box.

• 51:39Scott Galloway?

  That's the optimistic vision of what happens. But it just would be, it would be ignoring the cyclical nature of markets, not to believe that in the next 12 or 24 months, we have recession and/or stagflation. Because what has happened here, we have been partying all night, didn't go to sleep, went to a rave in Brooklyn, then went to brunch, did mimosas and thought, I know, let's stay up another 24 hours and do meth. At some point, the mother of all hangovers is coming.

• 52:14Ed Elson?

  Let's take a look at the week ahead. We'll see consumer confidence data and the unemployment rate for September. We'll also see earnings from Nike and the EV tax credit is set to expire. So we'll be watching how that impacts sales going forward. Scott, do you have any predictions for us?

• 52:29Scott Galloway?

  I think that this part of the the program is the people running these huge tech companies look out and see, okay, these are smart people. Like, there is no fucking way I can justify this valuation based on organic growth. And I'm going to have to do something big and bold. I'm going to have to take $100 billion investment from Nvidia and then buy. I mean, just there, you're going to see some of the biggest strangest transactions. So what we're going to see, I believe, in the next six months is some of the biggest M and A deals and investment deals in history, similar to the one that just happened. And if I had to pick one right now, I think somebody, either an activist or an acquirer,

• 53:12Scott Galloway?

  is going to show up and try and take Disney out. I think it's just so vulnerable right now. It's a single stock company, single class, so it's actually can be wrecked. And it's a $200 billion company, so someone has to show up with a quarter of a trillion dollars or say 10 to 25 billion to kind of change the board. Those numbers were way too big. It was kind of too big to be bought, you know, too big to really be threatened. But now there are sharks in the water, there are megalodons that could actually show up with that kind of capital. If you're Nvidia or if you're Apple or, you know, and you're, Apple's trading, what, 33 or 35 times earnings and it's growing, you know, high single digits now. It was flat earlier in the year.

• 53:56Scott Galloway?

  You look at it and even though their culture is not to acquire companies, you're like, okay, if our credit card is preloaded with, with, you know, one or $2 trillion and it may go away really soon, what do you do? You go shopping because almost any acquisition at this point would be accretive because the current multiple on your existing stock is so high. So anyways, prediction, some of the biggest M and A deals in history are announced in the next six months.

• 54:24Ed Elson?

  This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Mia Salvario is our research lead. Our research associates are Isabella Kinsel, Dan Shalan and Kristin O'Donoghue. Drew Burrows is our technical director and Catherine Dillon is our executive producer. Thank you for listening to Prof G Markets from Prof G Media. Tune in tomorrow for a fresh take on the markets.

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