Office Hours: China’s Real Estate Crisis, Career Transitions After the Military, and How to Teach Your Kids the Value of Money

Scott gives his thoughts on Beijing’s recent $78 billion fraud accusation against China real estate giant Evergrande. He then advises a listener who is making a career change after serving in the military. He wraps up with recommendations on how to teach your kids about money and investing in an engaging way. Music: https://www.davidcuttermusic.com / @dcuttermusic 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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• 1:27Scott Galloway?

  Welcome to the Prof G Pod's Office Hours. This is a part of the show where we answer your questions about business, big tech, entrepreneurship, and whatever else is on your mind. If you'd like to submit a question, please email a voice recording to [email protected]. Again, that's [email protected]. First question.

• 1:44Speaker 02

  Hi, Prof G. Brandon K. here from Toronto. What do you think the global economic fallout is going to be, if any, from the recent announcement about Chinese developer Evergrande accused of a historic $78 billion fraud? Do you think it's going to have an impact on... Our domestic market. Thanks a lot for your insight.

• 2:06Scott Galloway?

  Hi, Brandon from Toronto. It's interesting. I was asked at a conference, what are the, I think it's really interesting to talk about what are the most unimportant things being talked about every day in the media and what are the most important things not being talked about. Some analysts have said that every publicly traded real estate company in China is effectively bankrupt when you look at the assets and the liabilities. So some context here. Beijing has accused the real estate giant Evergrande of inflating revenue by 78 billion in 2019 and 2020. That means they're going to kill some people. And when I say kill, I mean, execute after they've had a quote unquote trial. You don't lose 78 billion dollars in, I mean, I would not want to be the, and I don't know what's happened, but I would not want to be a senior manager at Evergrande right now. Evergrande reportedly

• 2:51Scott Galloway?

  issued, is it Evergrande or Evergrande? Is it Latino? Is it muy grande? Is it a big ever? I don't know. But anyways, EG reportedly issued bonds based on these falsified financial results. They should run for president. Anyways, the China Securities Regulatory Commission, better known as CSRC, fined Hui Kayan, Evergrande's founder, 47 million yuan, or about six and a half million bucks, and imposed a lifetime ban on him from the securities market. The CSRC also fined Hangzhou Real Estate, Evergrande's main onshore unit, 4.2 billion yuan, 580 million, and other former executives faced penalties and market bans. So the firm was once China's largest real estate developer, but is now in liquidation due to a prolonged

• 3:31Scott Galloway?

  debt crisis. And now they're accused of committing a massive fraud. It's the most indebted real estate developer owing over 300 billion dollars. According to analysts, this crackdown indicates Beijing's strict stance against malpractice among developers. Yeah, doesn't appear, maybe a little ounce of prevention would have helped here, and serves as a warning for cooperation and debt restructuring. What impact? Will this have? No, nothing's ever as good or as bad as it seems, but this feels bad to me. According to the New York Times, China's leading officials are currently working to reduce the $18 trillion economies of reliance on construction, supposedly real estate was a huge part of their GDP growth, but how much of that GDP growth was real?

• 4:13Scott Galloway?

  The sector previously drove a third of China's growth and provided jobs for many of its people. According to the Wall Street Journal, the property crisis in China is expected to get worse as new home sales drop and developers burdened by debt struggle to secure financing for project completion. So what impact does this have? To give you a sense of the severity of the problem, I've heard analysts quote that about Chinese real estate has three and a half times the leverage as our real estate industry had when we went into the great financial recession, which was inspired by the subprime crisis, that their problem, their crisis, has three and a half times the undetonated or ticking time bombs known as the debt on this property. And you see these videos of these entire cities that are just empty.

• 4:55Scott Galloway?

  We're not talking about, oh, that's buildings underwater and 50% of it is not leased. We're talking about entire cities which have been financed with debt that obviously are generating absolutely no cash flow. So what could happen here? I guess the question is, who owns the debt? And is China willing to step in and provide some sort of stimulus or backstop, which probably isn't a good idea because that creates moral hazard? A lot of people say this could get really bad because China doesn't have a lot of experience in debt restructuring. Who are the bondholders here? What happens to them? Does this create a total crisis of confidence? Do they let these firms crash as you would in most capitalist economies, such that some people lose, some people win, people can come in and buy some of the debt for pennies

• 5:39Scott Galloway?

  on the dollar? But my sense is, if I were to predict what this means, it means that a ton of debt's going to have to be restructured, there's going to be a lot of firms that are going to go out of business. This is a real test for the market economy in China. I don't see it infecting, at least not yet. I would need to know what percentage of that debt is held by Western institutional investors, but a lot of capital has been leaving China for a while now. It's been out of vogue. And I imagine a lot of those bondholders divested. But beyond that, I don't really feel as if I have the domain expertise to predict what's going to happen here. But again, see above, three and a half times the leverage as what was placed on the residential real estate market before we went into the great

• 6:22Scott Galloway?

  financial recession. I appreciate the question. It's going to be interesting. Question number two.

• 6:28Speaker 03

  Hi, Scott. I'm an army officer in the niche field of marketing and economics and work with a group of high caliber army officers and civil servants on stewarding the army's employer brand. I'm six to 10 years from retirement and while I will have a pension when I retire, I'm saving at a rate that I'll have just under $2 million saved for retirement at the time. I have an MBA from a top 25 school and will have 10 plus years in business development and brand management when I leave the military. I'm having trouble deciding what I want to do following my career in the military, whether I should go to work for a startup or pre-IPO company, look into military leader transition programs at some large companies like JP Morgan Chase, or go back to school and work towards my PhD. What advice would you have for someone making a dramatic career change in their early 40s?

• 7:11Speaker 03

  And before you thank me for my service, I lived a chocolate peanut butter life, jumping out of planes and blowing shit up for 10 years.

• 7:18Scott Galloway?

  I'm sorry, brother. I'm going to thank you for your service. I think there are a lot of people out there that would like to take our Nespresso and Netflix away, or perhaps kill us. And I think a lot of Americans, because we've had such peace and prosperity, largely because of our innovation and that we have the finest train, the highest character, the deepest culture of warriors in the world, like yourself, that we get to enjoy our Nespresso and Netflix and not worry. And unfortunately, I think a lot of people don't appreciate that if we don't defend our shores, there are a lot of people that'll come for us and come for our shit. I'm exposed to a lot of people in the service for a variety of reasons, but I think it's a great training and I think it's a, I think it's wonderful that you're on the back end of that. And also, I might add that you're saving and you're,

• 8:03Scott Galloway?

  it looks like you're setting yourself up well for retirement, which means you're smart and you understand numbers and you have real discipline, which isn't a surprise, coming out of the armed services. Anyways, let's go in reverse order. Getting your PhD. Do you love school?

• 8:17Scott Galloway?

  Most of the PhDs I know are really good at school. They teach, they like the campus environment. They love the idea of teaching and doing research. Now, a tenure track person, which is usually why you get a PhD, I don't have a PhD. People oftentimes call me doctor, and I say, I'm not a doctor, I'm just an MBA. I'm what's called a clinical professor. But typically, PhDs pursuing a life in academia do a lot of peer-reviewed research. You find a domain, you go very deep, you become sort of an expert in a niche, you write these very wonky papers on a specific topic, other academics provide feedback, and you get as many citations as possible. So hopefully, you get tenure, which means they can't fire you, and then you become very unproductive and await on students in the form of student debt.

• 8:58Scott Galloway?

  A little much, that's probably a little too much. Anyways, that's your PhD if you want to go back and do that. I will say that being a professor at a university is, I think, one of the most underrated careers in the world. I just think it's an incredible way to make a living, flexibility. Generally speaking, I make fun of my colleagues, or I talk about higher ed in a disparaging light sometimes. There's a really low asshole factor, at least at NYU, and I bet that's true at most universities. They're generally like, nice people, pretty gentle people, and a total flexible schedule. No one cares if you're there or not, they just want you to do good work. It's inspiring to be around young people all the time that are kind of fresh-faced, and you feel like you're adding

• 9:41Scott Galloway?

  value. Also, I think that it's probably a nice transition from the armed services, because I would bet you're around a lot of young people and understand how to communicate and teach. And it's also where I've seen, not seen, where I've read, a lot of people who come out of the service have trouble is they lose a sense of purpose. They're working for a private company, doesn't have the same sense of camaraderie and purpose. And I do think you get some of that in academia. Okay, so that's a PhD. I would probably not go to a startup or pre-IPO company unless it's a great fit. I mean, pre-IPO companies, first off, we only hear about the ones that go public or they get bought for a ton of money. So economically, the variance is enormous. You can obviously do really well, but it's over.

• 10:27Scott Galloway?

  I think it's romanticized because we don't talk about the six of the seven small companies that go out of business. Also, I'm not sure the culture of the armed services suits itself well to a startup. I think it's kind of a command and control hierarchical brute force mentality in the armed services. And I'm sure there are special units that are much more entrepreneurial. And I'm sure battle is the ultimate of being kind of entrepreneurial or on your feet thinking, but I would do a sober analysis of the kind of environments you excel in, and I would imagine it's probably not suited to a pre-IPO or startup, in my view. Also, it sounds like you're in your 40s. That means you've probably collected a spouse and kids. And a startup and a pre-IPO company, it's really a young man's game.

• 11:10Scott Galloway?

  It's just, it's, you gotta go in 110%, in my view. My number one pick, if I had to stack rank them, based on the fact that I know about 2% of your full story here, would be going to work for a big company, which is vastly underrated. The American corporation is still the best entity ever invented to create wealth and at a fairly low stress level. Now, there's some bullshit. You'll get a memo from someone you don't even know who wrote it. It won't be signed saying, we're closing down this office. Or you, certain people get promoted and you can't figure out why and others. But generally speaking, the platform is so powerful. So a company like JP Morgan Chase, they attract world-class talent. They have world-class leadership.

• 11:52Scott Galloway?

  It's similar to the armed services where I think you're being reviewed a lot, and they take human capital very seriously. My last choice would be a pre-IPO or startup company. I think the romanticized, and my gut, my gut is that the culture you're coming from doesn't foot well to a small company. Sorry for the word salad. And again, thanks for protecting, protecting the homeland. We have one quick break before our final question. Stay with us.

• 12:22Scott Galloway?

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• 13:07Scott Galloway?

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• 13:25Scott Galloway?

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• 14:11Scott Galloway?

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• 14:36Scott Galloway?

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• 15:21Scott Galloway?

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• 15:44Scott Galloway?

  Welcome back. Question number three.

• 15:46Speaker 04

  Hey, Prof G. Long time, first time. Wanted to tell you I appreciate your unique perspective on life and your unique combination of skillset and knowledge base in many areas. Wanted to see if we could combine a couple of those, your financial knowledge and your understanding of family dynamics. I've got two boys, 14 and 16 years old, and I've tried to instill in them a connection, a visceral connection to understanding the value of time in investing and the value of committing to an investment plan. So, we started with the three jars, 20% to charity, 40% to save, and 40% to spend. They loved spending it, had no trouble saving it, and we did donate to charity, and I feel

• 16:28Speaker 04

  good about that, that they have learned the feeling of that and how fulfilling that can be. But they do have probably a couple hundred bucks sitting in a jar on their desk that they never did anything with in terms of saving. So, my question to you is, what exercise would you recommend to young boys, young kids, to really give them a visceral connection to the feeling of a committed investment plan with a long time horizon? That's my question. I appreciate your thoughts. Have a good one.

• 17:00Scott Galloway?

  Anonymous, thanks for the thoughtful question. The first thing is just trying to be as transparent. When I get these questions about parenting, I have massive imposter syndrome. I think I manicure my image to portray myself on Instagram and in this podcast as being just an outstanding father. I'm not. I think I'm struggling. Struggling is the wrong word. It's not the hardest thing I've ever done because some of, most of it is a lot of fun and rewarding, but you know, I don't fucking know what to do with Snap. I don't, my kid, before he goes to bed, wants to talk to his friends. I'm a total pushover, but I know he shouldn't be on social media, you know, before he goes to sleep. That's exactly the wrong thing to help him calm down and go to sleep.

• 17:44Scott Galloway?

  He's rude to his mother and I don't know how to weigh in and like, stop that. I don't, I mean, anyways, I do a lot of virtue signaling around parenting and being a dad and the bottom line is I'm, I am trying to figure this shit out. So I think I have this, my book Algebra of Wealth coming out, you know, 25 year olds can't imagine they're ever going to be 65. They, they literally can't imagine it. It's a flaw in the species because for the majority of the time on this planet, the majority of us didn't like, live past 35 or 38, our brain cannot wrap itself around the fact that, okay, if you're 40, you're probably going to be here another 60 years. I just don't think a 14 or 16 year old is going to be up for, okay, put a hundred dollars

• 18:26Scott Galloway?

  away and it, trust me, when you're, when you're, when you're 60, it's going to be, you know, 8,000. I don't think that's a solid argument for them. What I think you can do though, is two things. One, what a wonderful man did for me at the age of 13 and something I do with my boys. One, um, my mom's boyfriend, Terry, gave me $200 and said, go buy some stocks at one of those fancy brokerages downtown, um, in Westwood Village. And I went and I met this guy named Si Sero at Dean Witter. And I would call him every day. We bought, uh, I think it was 16 shares of Columbia Pictures at 12 and a half bucks. And every day I would call him from the phone booth. And we talk about the stock price movement and we try and connect it to the news.

• 19:09Scott Galloway?

  You know, Casey's Shadow is a bomb. Remember that movie? You're probably not old enough. Or Close Encounters of the Third Kind is a hit, or the Japanese might buy Columbia Pictures. Well, what does that mean? Well, when they, if they buy it, they have to pay a premium. So the stock would go up and every day, or was it every day? Maybe three or four times a week, he'd give me a small lesson in the markets. And so what I'm suggesting is maybe take some of that money and say, I want you guys to pick some companies that you like. You know, you got to get them attachment to it. And telling them to buy SPY or index funds, yeah, we know that's the right thing. That's not going to be a lot of fun for them. I don't think they're going to learn a lot there. Say, what companies do you think are really good companies? Because we're going to buy some stock and they might come back and go, oh, I think, you know, Nvidia or Epic Games or whatever they come back with.

• 19:53Scott Galloway?

  Epic's actually private, but, and then you say, okay, now, now let's talk about how expensive they are because it's not just buying the best company, it's buying the best company or good companies at a good price, right? You can see the lesson start to unfold here. Buy the stocks and then watch them. And quite frankly, they go up, they go down and them going down is a really important life lesson. I think one of my sons bought Doja Coin and it went down 80% of like the month. And I'm like, that's a great life lesson. But it's really exciting when you see that light bulb turn on, when they connect effort and risk with money, connecting that kind of time thing. I don't think that happens. I don't think you can do it at this age. Word salad way of saying, I think there's easier and more enjoyable things that will solidify the bond between

• 20:36Scott Galloway?

  father and son around connecting specific companies to specific stocks, risk capital, the volatility of the market, lessons in the market. Thanks so much for the question and 14 and 16 year old boys, what a blessing. That's all for this episode. If you'd like to submit a question, please email a voice recording to [email protected]. Again, that's [email protected].

• 21:08Scott Galloway?

  This episode was produced by Caroline Shageran. Jennifer Sanchez is our associate producer and Drew Burrows is our technical director. Thank you for listening to the Prop G Pod on the Vox Media Podcast Network. We will catch you on Saturday for No Mercy No Malice, as read by George Hahn, and on Monday with our weekly market show.

• 21:26Speaker 05

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