The Stock Market Is Already Pricing In A Democratic Sweep

Scott Galloway and Ed Elson discuss how voters have been affected by the Trump administration’s economic policies and what that could mean for the midterm elections. Then, they break down the latest Big Tech earnings, including whether Google is a buy, why Scott continues to be impressed by Apple’s decision to stay out of the AI arms race, and why Ed thinks investors are right to focus on capital expenditures and financial discipline. Finally, they discuss Instagram Features, why it could spell trouble for Netflix, and how the streaming giant should respond. Subscribe to the Prof G Markets Youtube Channel Subscribe to the Prof G Markets newsletter Order "Notes on Being a Man," out now Note: We may earn revenue from some of the links we provide. Follow the podcast across socials @profgmarkets Follow Scott on Instagram Follow Ed on Instagram, X and Substack Send us your questions or comments by emailing [email protected] Learn more about your ad choices. Visit podcastchoices.com/adchoices

• 0:01Speaker 00

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• 1:54Speaker 00

  Today's number 73. That's the percentage of US adults who have a favorable view of the National Park Service, making it the most favorable federal agency in America. And true story, I went to a national park recently and I bitched about it the whole time and soon after I was canceled for making anti-yosemitic remarks.

• 2:25Speaker 04

  How are you doing? I see you're wearing your Virginia shirt.

• 2:27Speaker 00

  I am. I went to the football game last weekend, Parents Weekend, I think we talked about it. I'm super excited. My son's thriving and it's like a huge source of joy for me. You're always worried, there's always like this non-zero probability your kid's gonna head off to college and like not like it and then the whole house freaks out.

• 2:47Speaker 04

  Is he about the frat life? Is that, is that, is that calling him or no?

• 2:51Speaker 00

  I think he's pretty social, but I don't know if he's what I'd call a big partier. But he likes, you know, he likes being social and he's not like his dad who's trying to like fill a hole that can never be filled and wallpaper over his depression and anger with substances.

• 3:09Speaker 04

  Well, that's good. That's great.

• 3:10Speaker 00

  Speaking of which, Halloween, how's your Halloween going?

• 3:14Speaker 04

  This will be out just after Halloween, but it's gonna be good.

• 3:17Speaker 00

  Let's hope mom's still around. This is, we are one night into Halloween and I am already hurting.

• 3:22Speaker 04

  Yeah.

• 3:23Speaker 00

  Wow.

• 3:23Speaker 04

  I've actually, I've got five friends from London who are visiting for the weekend. So I've got to go take them out, have a good time.

• 3:30Speaker 00

  Oh, wow. What are you gonna do with them?

• 3:32Speaker 04

  We're gonna go, we're gonna have dinner and then we're gonna go to our, to one of my friends who's party, he's having a big Halloween party, it's gonna go all night. So we'll do that. And then I think they want to do like a pub crawl on Saturday, which I'm probably not gonna join them for, cause it sounds terrible. And, and then I'm heading off to London to join the mooch and Caddy Kay for midterm elections for the, for their livestream, for the rest of his politics. So I leave on Saturday night, which is a shame.

• 4:03Speaker 00

  I'm still stuck on the notion that you have five friends. I kind of had this sneaky suspicion that you're the Vivek Ramaswani of whatever high school you went to. Like super smart and everyone hates you. Is that not right? Is that not accurate?

• 4:18Speaker 04

  Wow.

• 4:19Speaker 00

  Is that not accurate? Is that unfair?

• 4:21Speaker 04

  Maybe we'll take a poll, see what they think.

• 4:23Speaker 00

  That's gonna be great. You're gonna show them a great time.

• 4:25Speaker 04

  I hope so. I think we're gonna have a good time. More importantly, what are you going as? It's always, it's always an important question.

• 4:30Speaker 00

  Oh, God. I had real trouble with the costume last night. I got a great costume, Larry David. It looked impeccable. It was hilarious.

• 4:38Speaker 04

  Do you have like the hair, are you doing something with hair or no?

• 4:41Speaker 00

  Yeah, I had the wig, I had the glasses, I had the khakis. I looked exactly like Larry David. It was genius and I'm like, I just can't do this. It makes me even more unfuckable than I am anyways. I just can't do this.

• 4:57Speaker 00

  I'm just too vain. And so then I put on Darth Vader and it was like this blousy thing and I looked like Delta Burke from Designing Women. I just looked ridiculous. And then, oh, I, I was really excited. I bought this amazing Spider-Man outfit and I've been working out and I want to show off my body. And that thing was too tight. I guess I've been gaining weight and not only that, I'm like, anyway, so zippers were flying and buttons were flying.

• 5:25Speaker 04

  Sounds quite stressful.

• 5:26Speaker 00

  I'm glad you recognize that. So I did what I always did, I, that I've done the last, that I did last Halloween. I put on my, I put on my Deadpool outfit. Huge crowd pleaser, except young people keep saying, oh my God, I love Iron Man. And I want to choke them. I'm like, I am not Iron Man. God. Anyways.

• 5:46Speaker 04

  So you're gonna go with Deadpool then? That's the plan?

• 5:48Speaker 00

  I did last night. I might try the Larry David again tonight if I'm a little bit more secure and in touch with my like, just decide, it's like.

• 5:54Speaker 04

  It's gonna be a hit. And then you can take it off at some point in the night, but you start out, crowd pleaser, you're the funniest guy in the room, everyone loves it. And then you can sort of take it off and be like, okay, I'm normal now.

• 6:05Speaker 00

  The key, I think, if I'm wearing the Larry David outfit is to do what I did last weekend at UVA, when somehow I ended up renting a white minivan. And that is as you're driving, you just gotta go, I like me. I like me. I feel good about me.

• 6:20Speaker 00

  By the way, minivan, they're incredible. I totally see why they sell so well. They're incredible. They're so easy to get in and out of and they got that automatic door thing and a ton of luggage. I don't know. I'm, I'm thinking about a minivan.

• 6:32Speaker 04

  I'm gonna be Tony Montana.

• 6:33Speaker 00

  Really? I like it. Is your, is your girlfriend going as Michelle Pfeiffer?

• 6:37Speaker 04

  Correct.

• 6:38Speaker 00

  Wow, that's a good one.

• 6:39Speaker 04

  That'll be good. That'll be good. I have a wig. I need to get myself like a cigar or something. I tried to order like a toy gun.

• 6:46Speaker 00

  No, no, no toy guns.

• 6:47Speaker 04

  I guess it's illegal. Amazon, Amazon is not happy with that. So we won't do that. But yeah, we'll see. I'll send you a photo.

• 6:58Speaker 00

  Right. Should we bust into the show?

• 7:00Speaker 04

  Let's do it. And by the way, if you like the show, please be sure to hit follow wherever you're listening or subscribe to us on YouTube and hit the bell icon to get all of our latest episodes. Thank you very much.

• 7:17Speaker 04

  September's personal consumption expenditures report showed inflation continuing to climb. Both headline and core PCE hit their highest annual rate since May, with headline inflation rising 3.6% year over year. That data came in just a day after the Fed decided to hold rates steady. Nonetheless, two officials dissented in favor of a quarter point hike. Chair Walsh also noted that financial and credit conditions have tightened for some businesses and households. So inflation remains a persistent problem and the Trump administration has faced plenty of blame for the state of the economy. But at the midterms tomorrow, we will get a better sense of how Americans really feel about this administration and how they have handled things.

• 8:01Speaker 04

  So Scott, inflation keeps going up, not really any surprises. PCE rose to 3.6%. Gas prices continue to go up. Diesel prices are up 77% year over year. Real wages fell 0.7% in September. That was the sixth straight month of declining earnings. Not great. And on Tuesday, I think it's gonna be a referendum on those numbers, how, how upset people really are. What are your expectations going into Tuesday?

• 8:37Speaker 00

  Well, that's the correct question, but what's weird is it feels like the mother of all bad things and all the moons are lining up against Republicans and for Democrats. And that is, according to the Washington Post, six in 10 families can't afford the basic costs of living in the battleground districts. So the place that the president is, or the current policies seem to be having the most damage are in swing states that are in play. The share of households that could not cover the basics rose by 2.1 percentage points in Republican-held districts and 1.7 in Democratic-held ones. In the past three years, rents in Republican-held battlegrounds have risen 9% compared to 4% in Democratic-held ones.

• 9:18Speaker 00

  So it, it just feels as if inflation is not only peaking at the exact wrong moment, or not inflation is peaking, but the, the people feeling of the impact or the negative sentiment on inflation, but it's especially bad in close races or in toss-up districts. Calci puts the odds of a blue wave as defined by Democrats win at least 218 House seats and at least 49 Senate seats in the November midterms at 82%. What was even interesting is there's now a technical term for tsunami. And that is Democrats get both the House and the Senate. And that's at about somewhere between, I saw in Calci, between now 65 and 67%.

• 10:00Speaker 00

  So there's a two in three chance now that there's a quote unquote tsunami for Democrats. And then they have a new category called super tsunami, where they get 54 seats in the Senate and a massive pickup in, in the House. I had on Prop G Nate Silver and he pointed that when Democrats last got a bunch of seats mid-cycle, 2018, it was D plus seven. Now D is polling plus nine. Typically, as you get closer, whoever's down closes. In other words, it tightens. What's unusual, it's so far, and the polls might be off, so far, it looks like it's not tightening, it's actually the Democrats are expanding.

• 10:48Speaker 00

  Their lead. And let's talk about voters in rural parts of America. Six in 10 rural voters disapprove of how Trump is handling the economy. The average Republican constituent drives 26% more miles than a Democratic constituent. So they're feeling the pain of higher gas prices. So this is just, it's just, it's like the, the sum of all fears for the Republican Party. I don't see any, I don't see any sort of bright spots right now. Do you have any thoughts on this?

• 11:15Speaker 04

  I'm in total agreement. I mean, you, you look back to the beginning of the year. If you were to say that the Democrats were going to take the House and the Senate at the midterms, people would say you were nuts. And, and you can look at the, the, the Kelsey data on that where it was, I think it's doubled over the course of the year. So there has been a massive sea change and it's obvious what the problem is. It's inflation. And people know how tariffs affected inflation. We saw that immediately. And then he doubled down on higher prices with the war in Iran. And so when you look at Trump's approval rating, you know, yes, it is hitting all time lows,

• 11:57Speaker 04

  but the, the topics on which he is most underwater are the economy and also inflation. And I just think that this is such a unique situation, such a unique moment, because usually when, when, when an economy is struggling or when you're seeing inflation, you're seeing higher prices, usually it's a little bit of a blame game on like, who's responsible? And, and it's very difficult to pin down who is actually at fault because economics is complicated and it's nuanced and there are multiple factors and you can never really pin anything down. But that's not the case this time around at all. Like, we know exactly who's responsible. We know exactly what caused this. It's Trump.

• 12:41Speaker 04

  It's his tariffs and his war in Iran. And everyone knows this. Usually there's debate, but literally everyone on both sides understands what the problem is. And I think your point is an important one, which is the people who are getting most screwed by his decisions are his base. It's the people who have historically supported him. It's the farmers who have to deal with diesel prices being up nearly 80% over the past year, which of course is a necessary input for fertilizer and therefore for growing crops, which is why farmers are struggling right now. It's, as you say, the rural voters who are the frequent drivers.

• 13:23Speaker 04

  You point out how much more those, those, those voters drive compared to Democratic districts and gas prices are up 40%. And then I think the other one is, is the real crucial demographic, which was so important in 2024, which is young men who have seen their wealth fall over the past four or so years by about 23%. And of course, the boomers have seen their wealth rise by about 37%. And this is going to be a big problem because 55% of young men voted for Trump in 2024. And now the polls are saying that actually this time around, it's going to be 26%. So all of the key demos have gotten screwed.

• 14:05Speaker 04

  And usually like, I say this all the time because I think that Trump really, really has screwed over the middle class and screwed over poor people, unlike any other president, at least in recent memory. But a lot of people say, well, they don't understand that. Like the American people, try getting the American people to like, understand the facts. But this time I think they do because the facts are so obvious. It's so clear what went wrong here. So I'm, I'm with you. I, I think it's a sweep. I think the Democrats take the House. I mean, certainly take the House. Question is, will they take the Senate? I think they will.

• 14:46Speaker 04

  And we can go into some of the state level data here because that's what's going to matter here. It's going to be the, it's going to basically rest on a few swing states like Maine, like Texas, Michigan, those, those are going to be the important states. But I, I think the Democrats crush it in all of those states because again, as you say, they're getting hit the hardest.

• 15:10Speaker 00

  Yeah. When you see Trump campaigning in Kansas or in South Carolina, that's not the map. It's tilting, the map is imploding. And they're pulling money out of what usually are battleground states because they've just given up on them. What's interesting, and you touched on this, it's really fascinating to see which cohorts pivot from one party to the other in between elections or inconsequential elections or sequential elections. And one of the biggest pivots from blue to red in 2024 was, was young people. And now people ages 18 to 29, get this, in 2024, 46% identified as Democrats, 47% Republicans, which shocks me, 18 to 29, the majority in 2024 or more identified as Republican.

• 15:55Speaker 00

  Today, it's Democrats or 54% of 18 to 29 year olds, people your age, identified with Democrats and 38% Republican. It's, I love this, where now it feels like the majority of the pollsters are saying it's a toss up between a tsunami and a super tsunami. And Fox News even just flipped South Carolina from likely Republican to toss up. And it's like, nothing indicates insecurity like a company or an organization that has a vested interest in things going the other way, covering its ass by saying, oh, this might go blue.

• 16:37Speaker 00

  So this is, I mean, I'm, I'm still holding my breath, waiting for what he's going to try and do next, whether it's, I don't know, offer people a million dollars if the Republicans hold on to the Senate. I'll be curious what he tries to come up with, but this feels, and again, what's interesting is a lot of the voting, I wonder what it is, I think it's about a third, the voting's already been decided. People like, I've already, have you already voted? I've already voted.

• 17:03Speaker 04

  I'm going to do it off to this.

• 17:04Speaker 00

  Vivek. That's my new nickname for you, Vivek. Oh my God, we're getting comments for you. All right. Philip, come on, folks. What is the likely, is there a non-zero probability that Ed was the Vivek Ramaswamy of his junior class in high school? What, I, I think there's a non-zero probability here. I just, I'm, I'm putting it out there. Anyways.

• 17:32Speaker 04

  No.

• 17:32Speaker 00

  No. Blue tsunami. Bunami. We're gone. Let's get this done.

• 17:39Speaker 04

  I mean, just looking at some of these states and, and how their economies have been specifically affected, like I think Maine is probably the most interesting because you would have expected, and the prediction markets did expect that, that it would, it would be red. But you've got Troy Jackson, the Senate candidate, who's Democrat at 61% right now on Kelsey. And you just look at the way Maine's economy works and what its strengths are and what its weaknesses are. And it all makes sense. Like for, for one, they rely on heating oil to heat up their homes more than any other state. It's like 50% of their homes is fuel oil, heating oil.

• 18:23Speaker 04

  And the cost of that has gone up 83% in the past year. So you're immediately, that's, that's half of, of the state is watching their energy prices just explode as a result, a direct result of Trump's policies. Then you have the Canada tariffs as well, which is also an issue because Maine's sends 40% of its exports to Canada. And so as soon as the Canada trade war breaks out, suddenly you're putting a huge dampener on Maine's economy. Plus they also have this giant logging industry, which is a huge part of their economy. And then Trump puts 50% tariffs on all of the logging equipment and all of the wood

• 19:04Speaker 04

  products, which just decimates the foresting industry in Maine. Like it's a perfect encapsulation of this is a state that wants to love Trump, that wants to like him, that, that identifies with the ethos and the culture of the Republican Party. But he alone has been so economically devastating to, to, to thousands of people across the state, to the point where I, I don't know, I mean, I don't know if they're going to swing blue, but they're probably not going to show up. They're probably not going to show up to the polls. I mean, if they're, if they're going to say anything about how gigantic of a disaster the past two years have been in their own lives, this is their moment to say it.

• 19:49Speaker 04

  So I do think that that is going to be likely. I think the same, we see very similar dynamics in Wisconsin, Texas, Iowa, where as you say, you know, one in five Iowans is employed by the agriculture industry, which has also gotten hit really, really hard by the increasing oil prices. So it just doesn't look good for the Republicans in any of these key swing states. I think the next question is like, what are the market implications of various outcomes? Like if the Democrats sweep, what happens? I think the first two things that we have been seeing already in the markets is that healthcare stocks could rise because you might see that a lot of these Medicaid cuts will be reversed. But again, that's already seemingly getting priced in right now because the healthcare

• 20:32Speaker 04

  sector is up more than 9% over the past three months. Defense stocks as well could fall. Again, that also happened over the summer. Maybe you see a rise in clean energy stocks. Maybe there is a slowdown in the AI boom. Maybe it could be the Democrats are going to get a bit more stringent on data centers. That could be one of the directions they go. So I think those are some of the things that we might see. But again, the fact that we're already beginning to see it in the stock market is indication further that investors really believe that come Tuesday, Democrats are going to win this thing. What do you think?

• 21:06Speaker 00

  I think it's already been priced in. And I think if you look at the markets, so first off, the polls, like Maine, in Maine, the polls don't seem to matter. So we don't know what's going to happen to Maine, but in places like South Carolina, that I think the last Republican or the last Democrat, they sent to Washington, resigned in 2002, but Darlene Graham is now at 78%. And what is her name? Her name is, oh, Annie Andrews is now at 28%. She was at 10% just a couple of months ago, and she's gaining right now. So it's, sweep is the base case, right?

• 21:49Speaker 00

  So the most exposed to getting hurt are probably pharma with undisclosed pricing deals with the White House. The company has assigned administration pricing agreements and House Democrats have floated the idea, if they have the power of, if they now run these committees of subpoenaing drug makers for the terms of those deals. I think it's going to hurt the oil majors. Democrats are trying, are tying high energy prices to broader cost pressures and plan oversight of corporate pricing and market concentration. I think it's, oil's going to come down, which is going to hurt them more. And there's already investigations over energy exploration in Venezuela, which matters most for a company like Chevron.

• 22:32Speaker 00

  I think defense contractors get hurt. Maybe the AI tech and data center build out, there'll probably be more pauses, if you will, private equity and single family rent, rental owners. The private equity is probably going to face more scrutiny. And companies close to the administration, ongoing Democratic investigations and some of his cronies that he's been carving up, TikTok and giving, giving to drug pricing deals, tariff refunds. You know, a Senate majority adds a second chamber issuing subpoenas. Some of the beneficiaries, the tariff exposed retailers, if we roll back the tariffs and

• 23:13Speaker 00

  there's more certainty around the tariffs going away or being reduced. Folks like Walmart, Target, Nike, Best Buy, I think actually benefited the Democrats sweep. And then ACA marketplace insurers like Centene, Oscar, Molina, making health subsidies permanent would just be good for those guys. So some winners and some losers. I just, the question is, has it already been priced in?

• 23:40Speaker 04

  I think sports betting companies are also very worried about this. And the number that I have to back that up is the fact that they spent $72 million on this midterm election cycle. DraftKings spent 34 million, FanDuel spent 27 million. You have to just think that these guys are desperate for the Democrats not to get in there and start regulating this gambling stuff.

• 24:04Speaker 00

  But the key word there is spend. What's so staggering about this race, obviously the outcome is going to be the most interesting thing, but post-election, I think what we're really going to, there's going to be a couple of big stories, but one of them is going to be that we have now spent more on this Senate race, this off-cycle midterm Senate race than we've spent on the presidential election in terms of money spent. So this isn't even a tail wagging the dog. This is a tail is wagging the dog so furiously, it's got its own weather system. I mean, and, and when you think about just how insane it is, I think about $800 million is going to go into the Senate race in Texas, $800 million and 330 of it, or 370 of it is coming from one man.

• 24:48Speaker 00

  And I think, you know, generally speaking, I think November 4th marks a lot of things. It marks a lame duck president, but I also think it kicks off a new era in America where we spent the last 40 years talking about how do you get wealthy? And we're going to spend the next 10 years with a lot more discussion around what are the obligations of wealth? And when one man, you know, numbers, but you can't really grasp the numbers. So Elon Musk has put, call it $400 million into the Texas race.

• 25:16Speaker 04

  366.

• 25:17Speaker 00

  366.

• 25:18Speaker 04

  Is the number.

• 25:18Speaker 00

  I would even think at some point the Supreme Court is going to go, Jesus, this is out of control. We have to do something about this. By the way, when you're with Caddy K and the mooch, my guess is that'll be topics one, two, and three is campaign finance reform. That is, I was with Senator Mark Kelly in Arizona, and I asked him, what is the first thing he would do if elected president? And a lot of them are saying that the number one issue is campaign finance reform.

• 25:42Speaker 04

  It's ridiculous. 366 million dollars. He has now spent, Elon has now spent more on this cycle than George Soros has spent his entire life. So it's gotten completely out of control. And, and you mentioned like the next, I mean, we talked a lot about how to build wealth and, and the next sort of era of politics and, and policy is going to be about how, how to keep it if you're already a billionaire. I mean, one of the big things to watch out for in this election will be Prop 40 in California. And talk about spending a lot of money on politics.

• 26:21Speaker 04

  Sergey Brin has spent $102 million to fight Prop 40, which is the wealth tax. So, I mean, this, this, these midterms are weirdly important on so many different levels. And you, you can see it in the amounts that people are spending, especially the amounts that billionaires are spending. They are very, very worried about how, how this election might turn out. We'll be right back after the break. And if you're enjoying the show, send it to a friend and please follow us on YouTube, Spotify, or wherever you get your podcasts.

• 27:08Speaker 00

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• 30:22Speaker 04

  We're back with Prof G Markets. Last week's earnings reports from Microsoft and Google gave investors a look at how two of the biggest players in big tech are performing, and the market's reaction could not have been more different. Microsoft shares jumped as much as 5% after the company beat expectations with revenue up 19% year over year. It also disclosed Azure revenue in its earnings statement for the first time, revealing that its cloud business grew 48% from a year earlier. Google shares, meanwhile, dropped more than 13%, wiping out $500 billion for its worst market cap loss ever. That pain came despite reporting 25% revenue growth in the third quarter.

• 31:02Speaker 04

  Investors were disappointed by weaker-than-expected search and advertising revenue and negative free cash flow. Scott, really interesting week for the hyperscalers because we have the Anthropic S1, which came out, which has polarized a lot of people as to whether that was great or whether that was bad or something in the middle. But then also, we have these big tech earnings coming out. Microsoft was great. Investors were very happy about it. Google's, on the surface, like, not terrible, I thought, at least from a revenue perspective. But investors were very, very freaked out about this idea that search revenue growth is beginning to decline and all of the fears that we were hearing about, I would say,

• 31:47Speaker 04

  two years ago, basically when ChatGPT was starting to gain steam, suddenly those fears have come back, where investors are saying, oh, my gosh, AI is going to kill Google search. That, plus the fact that the free cash flow is negative, and they're plowing more and more money into the AI data centers, something we're also seeing from Meta, something we're also seeing from Amazon. What do you make of this week in big tech land?

• 32:15Speaker 00

  I thought it was pretty shocking, and it's sort of the tale of two cities. It's the same AI arms race, but entirely opposite verdicts. Microsoft was up 5% on cash flow discipline, and Alphabet down double digits on cash burn. And the way I would describe it is both companies had amazing year-on-year revenue growth and really outstanding businesses. But I think it's two things that punished. Microsoft was able to thread the needle here, and that is they said, we're going to surprise to the upside on the top line and the bottom line. And what I think really excited people is their capex looked fairly disciplined. Now, granted, it's still unbelievable, it's still out of control, but it looks fairly disciplined.

• 32:59Speaker 04

  Compared to the alternatives.

• 33:01Speaker 00

  Yeah, and compared to Alphabet. And when Alphabet's executive admits on the earnings call that AI mode generates fewer ads, it's like the company confessing its flagship product cannibalizes its core business. So AI is a profit center that needs to be managed well for Microsoft in terms of capex. AI needs to be a profit center for Alphabet that needs to be managed well. It doesn't look like the capex was managed in as disciplined a fashion. In addition, AI is an existential threat to Alphabet because the world's most profitable, largest toll booth in history, Search, it appears like is kind of under attack. I don't know about you, but I think there's probably a lot of analysts listening and hearing the numbers.

• 33:44Speaker 00

  They see the capex of a company growing its AI business, but what they don't see, or what they also see, is that AI is an existential threat to their ability to generate the cash flow they need for capex for the arms race. And the anecdotal evidence, I don't know if you find this, I am now doing basic search on Claude. And at some point, that's just going to show up in the numbers. But what Microsoft did was unbelievable. Microsoft renovated with cash on hand, and Alphabet appears to be taking out second mortgages for the same renovation, which is going to result in kind of a different call from the bank, if you will.

• 34:25Speaker 00

  So really, two divergent results here, and the largest market cap erosion, single-day market cap erosion in the history of the company, that's a big deal.

• 34:36Speaker 04

  I'm less worried about the search revenue because I see the fact that it's growing, and it grew less than investors had expected. And I think that the reason there was such an allergic reaction on that front is that this is the boogeyman for the markets. This is the thing that they're obsessed with. Will ChatGPT kill Google? And we saw them have a premature reaction several years ago, which is when we went in and said, this thing's gotten overpunished. And so they've been, their antennae are up on this big question. And so as soon as they see even an inkling of a sign that maybe something bad is happening, suddenly they freak out and they panic about the whole situation.

• 35:18Speaker 04

  For me, I'd want to see, I would want to see more concrete evidence that that's actually happening. I'd want to see their search revenue flatline or even decline. That's something that would make me more confident in this idea that ChatGPT is going to eat Google's lunch. But then again, at the same time, Google also has Gemini. And so I think they've actually kept up on this AI race quite well. But I do think that the real problem, in my view, is that negative free cash flow. And to be clear, Google is not alone there, because we also know that Oracle's free cash flow is negative, Meta's free cash flow is negative now, Amazon's free cash flow is negative now.

• 36:01Speaker 04

  All of the hyperscalers have now entered into negative free cash flow because of how much money they're spending on the data centers. It's nearly $700 billion on capex in the past 12 months. That's up nearly 90% from a year ago. The only hyperscaler with positive free cash flow is Microsoft, which is great, but it still came down 27%. So the thing that worries me is the fact that these businesses can no longer use their profits to finance their goals, which is, in this case, to build data centers and build the AI revolution. And so you think about, okay, well, what can they do then if the most profitable companies

• 36:44Speaker 04

  in the world can't even use their profits to do whatever it is that they want to do? Well, then you'd say, okay, they can go to the cash on their balance sheet. And that's what a lot of people have pointed out. And to be fair, these guys have a lot of cash on hand. If you look at their cash and cash equivalents and their short-term investments, you've got Amazon with more than $120 billion, you've got Google with more than $250 billion. If you add all the hyperscalers together, it's nearly $600 billion, which is great. But then you look at how much capex is going to rise next year and the year after that. And if you add it all up, among the hyperscalers, the five of them, Oracle, Microsoft, Meta,

• 37:25Speaker 04

  Amazon, Google, over the next two years, it's estimated to be more than $2 trillion. So basically, what you have is like a one and a half trillion-dollar gap between how much money they're going to spend and how much money they actually have, because remember, they can't use the profits anymore, or the cash flows, because those cash flows are negative. So they have to get the money from somewhere else. And so then you think, okay, where is that money going to come from? And the answer is, they have to go to the capital markets and raise money. And that's why I was really, like, it felt really powerful that literally the day after

• 38:05Speaker 04

  Microsoft reports their earnings, they also announce a $25 billion bond sale. And that's just a week after Meta said, we're going to go raise $95 billion in the equity markets. So what was so great about these companies is how independent they were for so long. They were so strong, so profitable, they could do whatever they want. Who gives a shit about the market conditions? They don't need our money. But that has now completely changed. They need money from the capital markets, they need money from us, the investors. And if we decide that we don't want to give them that money, then they're screwed. They're just in a systemically more vulnerable position.

• 38:48Speaker 04

  And that, to me, is the real shift in what's happened here for big tech. There used to be these independent, or, excuse me, independent companies, do whatever they want, but now they have to go out there and they have to please investors and they have to convince them, don't worry, give us the money, we'll pay it back, we can raise it through the bonds, we can raise it through the equity, but just play the game with us. They're dependent on the capital markets now.

• 39:13Speaker 00

  I think of an historical analogy here around, the AI arms race is impacting everyone. And I think of, so basically, we were in an arms race, an actual arms race with the Soviet Union, and we had the economy and the growth and the capital to win. And we basically, the Soviet Union imploded on itself because it couldn't keep up with this type of military or defense mending and poor leadership and, et cetera. And it collapsed on itself, and that resulted in kind of a 40-year run as the world of hegemony, where basically the US was the only game in town. Everyone is in an arms race right now. And the companies are starting to say, all right, who?

• 39:58Speaker 00

  Who's going to survive? Who has the underlying capital survive? Now, to your earlier point about Alphabet. Every time in Alphabet's history, you've had this sort of check back. It's been a buying opportunity. And kind of pregnant with your comments is a really interesting question. And that is, is this a buying opportunity? Because if you look at Alphabet's PE right now, it's 14.6 versus the S and P at 19.5. Take your average S and P company, Caterpillar, P and G. These are great companies, Monza, whatever it is. You know, they're not Alphabet. YouTube is on fire. Google search, every time we keep, you know, rumors of its death have always been greatly exaggerated. I don't know what it was up.

• 40:43Speaker 00

  It's always up double digits. They have a booming cloud business. They have, if there's an agentic layer that emerges, they have relationships with millions of businesses and billions of consumers to start bridging the gap and start eating OpenAI or Anthropic's lunch. And it's trading at a lower PE multiple than your average S and P company. And obviously, when you look at how robust this business is, how diversified it is, how well run it is, the concentration of IQ there. I don't know, this to me feels like a buying opportunity. Your thoughts?

• 41:18Speaker 04

  One thing that I would just point out about the PE is that now that, now that Alphabet has invested all this money in Anthropic, those mockups on its, on its private stakes are being reflected in their income. So you have to take those PEs with a grain of salt.

• 41:35Speaker 00

  Great point.

• 41:35Speaker 04

  But still, it has, I mean, after the adjustment, my expectation is that it would be maybe like in line with, with the S and P, which still isn't expensive. So I think that I'm, I'm not fully sold. I want to look more into, into Google as a buying opportunity at these prices. But I, I don't think it's a sell. Like, I, I don't think that the way that the, the market is treating it, especially when it comes to the search revenue, is necessarily warranted. But like, you make an important point about big tech stocks and the hyperscales right now, which is like, these stocks, despite being systemic to the economy, have been unbelievably volatile this year.

• 42:17Speaker 04

  And, you know, as I've told you before, and as we've talked about on, on the show, like, I bought Meta this year and I bought Microsoft this year. And both of those investments have done extremely well. But if you were to look at those stocks on, over the past year, they look kind of lackluster. And it's because they've been going up and down so erratically throughout the course of the year. Because the reality is that there is so much uncertainty when it comes to tech right now, because of the amount that they're spending on the AI data centers, that like, investors are completely polarized as to what the actual reality is. And that wasn't the case for a very long time.

• 43:00Speaker 04

  It used to be that you could have a pretty strong understanding of what these businesses would look like this year and the next year, and even five years out. And that's what Wall Street loved about it, is it was so reliable, it was so dependable. You knew exactly what the businesses are. But those days are over. And what that means now is that the most valuable companies in the world are incredibly volatile, which means that if you are invested heavily in these companies, which you are, because everyone is, because they're systemic to, to the S and P, you're riding out quite a lot of volatility, specifically in those names. But it also means that if you want to be a bit of a trader and get out there and get active and start doing some stock picking, there are some serious opportunities.

• 43:45Speaker 04

  Like, you can go in and buy these dips and you can get paid really handsomely for doing so. And that, which is exactly what happened for me with those two names, Meta and Microsoft. Could be, I mean, Meta's down this week. Investors are very worried about that equity sale, which I think is completely reasonable. The fact that they need to keep on raising more money is concerning. You would think that because they're the most, one of the most profitable businesses ever, that they don't have to do that, but they do now. But these are really, these are jumpy names. Investors do not feel confident. There is very, very low levels of conviction. And when that happens, that usually means that there is both great opportunity to lose a lot of money,

• 44:30Speaker 04

  but also to make a lot of money too. So I think it's a good time to be a, a stock picker of tech names, is what I would say. Or at least it's a fun time to be a stock picker.

• 44:43Speaker 00

  I've spent a lot of time on boards. And basically, you kind of have two jobs on a board. I mean, three, if you're on the audit committee, just make sure there's not fraud. So let's assume you're able to do that. But the two primary roles of a director are, one, if and when to sell the company. But most importantly, your job is to make sure you have the right guy or gal. And I always said, there's always two board meetings. There's the actual board meeting, and then there's a board meeting in the parking lot when you're worried about the CEO and the two or three most powerful people on the board, which is usually the largest shareholder and two voices that everyone kind of nods because they've been on the board or they're very smart. And those people meet in the parking lot and say, I'm worried about Bob. And should we be talking about if Bob is the right guy and if we need to make a change?

• 45:25Speaker 00

  And I've spent a lot of time trying to assess out what are the attributes and behaviors of great CEOs? And one of the most underrated attributes, and I think core to a great CEO and a great leadership team is the following. It's not only what they decide to do, it's what they decide not to do. Do they have the discipline to say, this is a great idea, it's a great market? It's not the right idea, the right market for us at this moment? And of the mag seven to this point, of the mag seven, who has decided not to engage in the AI arms race?

• 46:00Speaker 04

  Apple.

• 46:01Speaker 00

  And who has the strongest year-to-date stock performance?

• 46:04Speaker 04

  I think it's Apple.

• 46:06Speaker 00

  Ding, ding, ding, ding. Apple has significantly outperformed the other six that are either the arms race or engaging in the arms race. And Apple does not get enough credit. They're constantly second guessed. Why don't you have a cheaper computer? Why aren't you in AI? Why aren't you in search? They have more discipline around what not to do than any company of that size. They didn't, they put one chip down on VR. I think they spent a billion dollars on it. Meta spent 60 on it. They are better at saying no. They pulled the plug on the car. I wanted them to have the car. I'm like, you gotta grow, do the car. And they're like, you know what? This isn't working out. We don't like the numbers here.

• 46:50Speaker 00

  We don't like the ship, pull, kill it. The only mag seven company that has not decided to play in traffic in the AI arms race is significantly outperforming the others who are in this AI arms race.

• 47:04Speaker 04

  In any other world, I would be instinctively agreeing with you on this because I'm such a sucker for discipline, you know, risk management. But I, I still think they've got this one wrong.

• 47:17Speaker 00

  You think staying out of this race was a bad idea for Apple?

• 47:20Speaker 04

  I do. Because, and as I've said about Apple, then, then what? What are you pursuing instead? That's what I want to see from that company. How is it that you're going, because to be clear, they've been, they've been very handsomely rewarded for their decision not to go into this, which, and I like that investors are rewarding them for that. I like that investors are saying like, you know, let's, let's not all become like too swept up in the hype and, and too deluded about this AI future. Let's be reasonable. And investors are rewarding them for that. But the thing that I want to see from Apple is like, okay, you're not taking that money to do the AI thing. What are you doing instead? And when it was the headset, I'm like, that's a dud, which it was. And the next thing appears to be the iPhone Duo.

• 48:05Speaker 04

  And I don't know if you've seen some of these reports, but those duos are breaking left and right. And not just because people are doing these breaking tests, but like, a lot of customers are reporting trying to open up that iPhone Duo and the screen just immediately cracks. And they go to the Apple Store and they say, hey, can you replace this? And Apple says, sorry, no, because our inventory currently is zero. So I'd want to see Apple saying, here's what we're going to do instead. But to me, I, I don't see that vision from them. Maybe John Turner will turn it around and, and he'll come up with an, an amazing product. And to be clear, he hasn't had nearly enough time to come up with a new strategy. But that is what I want to see from Apple. Because I also, I mean, there's risks in everything.

• 48:49Speaker 04

  There's risks in deciding to do something and also deciding not to do something. And I do think that there is some significant downside risk in not participating in AI. If AI turns out to be a, a huge revolution that, that creates huge amounts of profits for these companies. So, you know, it's, the, the futures are so uncertain for all of these companies. The thing that they have on their side is the fact that each of them have unbelievably good existing businesses. They all, I mean, Meta's got the ad business, Google's got search, Apple's got the iPhone. I mean, all, all of these companies are in a really, really strong position.

• 49:31Speaker 04

  And I think if we're trying to pick out like winners versus losers, I could see a correction coming. I, I mean, I just don't see how the boom and bust cycle doesn't play out as it always does in this case. But none of those companies are going to go bankrupt. They're not going to go bust. They're going to have their multiples reduced, probably. I don't think it'll be dramatic, but I think, I think it'll happen. The people who are going to get screwed are the are the companies whose only business is data centers and AI, i.e. the Neo clouds. And I think we're already starting to see that. Like, if there's an AI bubble, it's already popping for CoreWeave, for Iron, for Nebius, for all of these random data center names that people only started to to hear

• 50:13Speaker 04

  about over the past one, two, or three years. And we're already seeing that in the credit default swaps, which are skyrocketing, the stock prices, which are plummeting. So, I mean, I think those names are going to get going to get caught, especially as they become more and more reliant on sentiment in the capital markets because of their need to raise more capital. But it's it's a really interesting time to be a tech company.

• 50:42Speaker 00

  If you tried to distinguish between the winners and the losers in the markets right now, or how the market is behaving in terms of parsing winners from losers, it's the D word, it's discipline. We referenced Apple. They're like, fine, have at it, guys. Kill each other. We'll come in and we'll be the second mouse or a license. We'll pick a preferred AI provider and we'll do what we did with search, just get 98% gross margin licensing fee or whatever. The other company that's been rewarded lately is is Microsoft. Of the five hyperscalers, Microsoft is the only one that has remained cash flow positive.

• 51:15Speaker 04

  They're doing it right, I think. Yeah.

• 51:17Speaker 00

  Well, they've threaded the needle, right? Whereas whereas Google or Alphabet appears to be on the wrong side of the needle. But basically, the markets have already priced in except an expectation of exceptional growth from these businesses, and they're all delivering against that exceptional growth. Where it's parsing the winners from the losers is, does there appear to be an adult with both hands on the CapEx wheel here? Or not driving down this highway at all. But the two companies right now that the market likes the most are the one that's not playing in traffic, has said, I'm out. And two, the other one that appears to, it's the only one that's CapEx was lower than projected, right? The markets seem to like that right now. The markets need to say, we need to see

• 52:02Speaker 00

  the R on the I here. And part of that is not only about top line growth, but managing cost discipline.

• 52:09Speaker 04

  And I think on this one, the markets are right. Like, you know, I always love when I think the markets are wrong, because it means I can have a very hot contrarian take on things. But I think that they're, I mean, I don't think they're right about Apple personally, but with with Microsoft and the way that the things that they're prioritizing about CapEx and about discipline, I think is, I think is the right thing to be caring about. And I think Microsoft is a good example of that. I think Microsoft has done a good job here in terms of managing, playing in the game, but also not betting the farm on this game. And I think investors are rewarding them for that. And I think that's what should be happening. I mean, what will be interesting to see is how they

• 52:53Speaker 04

  respond to Anthropic, because jury's still out on that one.

• 52:57Speaker 00

  I want to put some numbers. The research team put together a great chart and we'll put it up here. The average annual infrastructure spending as a percentage of GDP for some other kind of transformative technologies. Canals were a transformative technology and 0.7% of GDP was allocated to those, to that innovation over a five year period, on average. Railroads is the one we always talk about, 1870 to 1890, 20 year period, on average, every year, 2.2% of GDP. Electrification, 20 year period, 1905 to 1925, a half a percent of GDP. Highways, from 56 to 73, 1.13%. Telecom and fiber, Latin for the internet, from

• 53:37Speaker 00

  1996 to 2003, 1.1%. AI, so far, the AI era, so to speak, 3.6% of GDP. So this just feels like

• 53:51Speaker 04

  It's big.

• 53:52Speaker 00

  I mean, the railroads did transform the world. They really did. But along the way, there was a ton of bankruptcies. Now, the good news is, or asking yourself, what could go right? Are we in for a crash? Or what I'd call a measured decline that gives everyone, in other words, the V looks like a slope, not not a severe down. I mean, are we starting, is some air in a healthy way, starting to come out of the bubble a little bit, as opposed to a pop?

• 54:21Speaker 04

  If you were to look at just the, you know, extremely levered AI names, like if you were looking at the Neo clouds, like, the bubbles popped. Those names are crashing. Like, that's what a crash looks like. But the difference is that with this AI build out, it's not just these new names that are participating in this whole thing. It's the big names, which might sound like, oh, my God, that's really dangerous. But at the same time, it's like, actually, it's less dangerous because those big names already have extremely strong preexisting businesses. So, you know, we're not seeing this gigantic crash that you might see as people start to get very worried about the bubble, because

• 55:04Speaker 04

  you have this this sort of support mechanism, where you've got a giant search business and you got a giant, giant ad business. I mean, it's, it's an interesting, it's an if the dynamics are very interesting, because it's almost as if there is more downside protection on this boom bust cycle than in previous ones, which is less dramatic and exciting and sensational, but ultimately better, because it means less pain if things go wrong. I know I'm going to get a lot of shit for that, for saying that, but it is what I believe.

• 55:39Speaker 00

  There are two scary things here that the media, I think, is is mostly missing. The first is that, so we didn't even mention it. The most, I thought the most interesting number, and what would have been the headline number from the Microsoft earnings call, any guesses? We're not even talking about it. And it was a staggering number. Any guesses?

• 56:07Speaker 04

  Compute growth, cloud revenue growth?

• 56:10Speaker 00

  I'll give you a hint, 60,000.

• 56:12Speaker 04

  I don't know.

• 56:12Speaker 00

  That's the number of buyouts that people are offering buyouts to.

• 56:15Speaker 04

  Yeah.

• 56:16Speaker 00

  I mean, this is, this is the fear. I've never, again, going back to trying to sound more important than I'm on, I've never been on a board where it's like, oh, our revenues are up 20% or 12%, and we just offered buyouts to 60,000 people. You've never heard that before. This is, this is the frightening part about AI, is you can massively grow your top line, beats on top and bottom, and the CEO says, oh, and try and reduce our headcount by 60,000 people? I mean, if you have any doubt that we have become shareholder nation, that the only thing that matters is earnings per share

• 57:00Speaker 00

  and year to date stock performance, 30 or 40 years ago, it would have been frontline news. Microsoft to to to offer buyouts to 60,000 people?

• 57:11Speaker 04

  Nearly a third of the workforce.

• 57:13Speaker 00

  Barely even mentioned, barely even mentioned. The other really frightening thing is I believe Nvidia has agreed to purchase or participate in the debt offering of Meta. So these deals

• 57:24Speaker 04

  There we go.

• 57:25Speaker 00

  And by the way,

• 57:26Speaker 04

  It's not good.

• 57:27Speaker 00

  Some of that money will be used to, wait for it, be used to buy Nvidia chips. So Nvidia is not only selling the picks and the shovels, they're financing the mine, and they own the bank that's loaning the money to finance the mine to buy those shovels. I mean, it is literally the mother of all circular circular deals here. And I used to do this in the 90s. We all kind of knew each other in the valley, and we were, we would oftentimes buy each other's products or make small investments in each other's companies, you know, to try and prop up the whole ecosystem. And when you think about how many companies, if you did an org chart, or a chart depicting where Nvidia has invested,

• 58:10Speaker 00

  it feels a lot, it feels eerily reminiscent to FTX in their heyday, and how Sam Bankman-Fried was investing in everything crypto and propping up the entire ecosystem. It feels like Nvidia is is in terms of financing and related party transactions and circular deals, that kind of, I would have thought that that would start scaring people. 60,000?

• 58:38Speaker 04

  I think it has, which is why the multiple has contracted. And, and, and, you know, that's why I don't think I can buy Nvidia, is for that reason. Like, even though the multiples come down.

• 58:49Speaker 00

  Don't tell that to Josh Brown.

• 58:51Speaker 04

  Exactly.

• 58:51Speaker 00

  Those are fighting words with Josh.

• 58:53Speaker 04

  That's why I can't do it because of that. I mean, this is just classic bubble behavior. And the FTX comparison, I think, is a good one, because what was it that that brought FTX down? It was a change in market sentiment. As soon as you leave yourself that exposed, and then suddenly the music stops, that's when the problems start to arise. And so, you know, again, it would be different if you were financing all of these operations independently, but that's not what's happening. They're becoming increasingly dependent on fundraising, as you point. If Meta needs Nvidia to go out and buy its equity or buy its debt, that tells you something about market sentiment and demand, which leaves you a lot more exposed. So that, yeah, that's the problem.

• 59:37Speaker 04

  We'll be right back. And for even more markets content, sign up for our newsletter at profgmarkets.com.

• 59:52Speaker 04

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• 1:01:10Speaker 05

  Hey Mitch, you've been trying to take down these games from the start. Film for IMAX. Make them remember you. The Hunger Games: Sunrise on the Reaping, November 20th, made at PD13. Bonjour, compadre. It's the

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  How do I negotiate so many great travel deals? My greatest gadget, the Priceline app. It's got hotel deals, flight deals, rental car deals, all of those deals in a bundle. Deals, game day deals, concert trip deals. No one deals more deals than Priceline.

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  Hold your horses, there's more. The app lets you filter hotels by neighborhood, vibe, star level, and amenities like pools and spas and beachfronts. And wait, I'm not done. Stop cutting me off.

• 1:01:55Speaker 04

  We're back with Prof G Markets. Meta is making a move into long-form video. Instagram announced new features that will let creators upload videos up to 90 minutes long and bring reels to Apple TV. This puts Instagram in more direct competition with YouTube. But there is one key difference. Unlike YouTube, Instagram won't share its ad revenue with creators. So Scott, this is just fascinating, especially for us, considering we are a podcast that posts our show to YouTube. It's a big part of our business. Meta is essentially saying, do it on our platform, do it on Instagram. 90-minute videos, podcasts, vlogs, interviews, all of that, all of that kind of media. I don't see a reason why we will not do that.

• 1:02:40Speaker 04

  This is not a zero-sum game. Our business is built on ads, selling ads, selling impressions. The more impressions we can make, the more influence and the more money we make. That's the way it works for most media businesses today. This, to me, seems like a good move by Meta that will genuinely cause problems for YouTube and for every other media company. What do you think?

• 1:03:08Speaker 00

  I think this is big. And this is how one small company is thinking about this. So the rub on this is they're not sharing any revenue, right? YouTube pays out, I think, about 50% of its revenue to creators. It's worked really well for them. Thus far, I think Instagram and their features has not said they're going to share any of the revenue. But at the same time, if you're prof G Media, what we're going to do, we're going to go hard at this because we can embed ads in our content, right? We can do host readovers as part of the show. And that will, I believe, be in there. And if we can get another 100, 200, 300,000 views on Instagram features, then we can sell that into our advertisers, right?

• 1:03:50Speaker 00

  Because, so Instagram isn't going to run ads and then do a revenue split. But I don't see any reason why we wouldn't be able to embed some sort of, you know, some sort of host readovers. The, Mark Zuckerberg is the best thief of IP in history. And he's clearly coming for YouTube. And just to give you a sense of the ecosystem, when you're talking about television, 49% of it or half of it is streaming. Cables, 19%, broadcast is 18%, others 14%. And then let's break down the streaming ecosystem. It used to be YouTube, low double digits, Netflix, high single digits. That delta has broadened dramatically.

• 1:04:31Speaker 00

  YouTube now sits at 16, Netflix is at 8, Disney's at 5, Prime Video at 4, Roku, interesting, 3%, which I believe News Corp just purchased, Paramount at 2.3, Tubi at 1.9, Peacock Plus, 1.6. Warner Brothers Discovery, this was shocking to me because this includes HBO, is at 1.4%. It truly is artisanal at this point. And I think Meta is absolutely coming for that 16% that YouTube commands right now. And the reason why we'll do it and go hard at it, at least initially, is that you gotta think that Meta with 3 billion users is going to game the algorithm and significantly over reward early adopters of features, right?

• 1:05:13Speaker 04

  Yes, so true.

• 1:05:15Speaker 00

  They're gonna, all of a sudden, you're gonna have Ed Ellison droning on for 70 minutes in your, in your

• 1:05:22Speaker 04

  And you will see it whether you like it or not.

• 1:05:24Speaker 00

  Right, and you're thinking like, where are the Great Dane puppies? And where's the, where's the woman talking about social justice who also happens to be really hot? That's in my feed. All of a sudden, I'm gonna have Ed, I'm like,

• 1:05:35Speaker 04

  Move over.

• 1:05:36Speaker 00

  I'm like,

• 1:05:36Speaker 04

  Ellison's here.

• 1:05:37Speaker 00

  I can survive Ed for 30 seconds, but wait, this won't end. But my point is, we'll go hard at this early to experiment. But also, you just gotta think, they're gonna juice, the first decent content, the first 10,000 creators that put up a reasonable 60 minutes of content or repurpose good content, Meta's gonna, Meta's gonna like, they're gonna, they're the drug dealer passing out free crack to third graders, right? They're gonna say, okay, would you like a little taste of hundreds of thousands of views for the early adopters? So as just one business, one small media business, we're gonna go hard at this.

• 1:06:19Speaker 04

  I think this is the perfect encapsulation of what the problem is for a company like Netflix. Because it says a lot that we are immediately down to do this. It tells you something about the way the media ecosystem works today, which is that it's not about contracts. We're not inking deals with Netflix or even YouTube. We're just trying to get our stuff out there. Wherever there are eyeballs, wherever there's attention, that's where we're trying to go. And we're not alone in that. That is the way most of this works. And so to me, this is an indictment of the traditional production budget model and honestly, the traditional streaming model.

• 1:07:03Speaker 04

  And this is, this shows you where things are headed, which is that it's all going into a user-generated content direction. Like you've got Netflix's production budget of $20 billion. Compare that to Meta's production budget of literally zero, because it's the users that are making the content. And I think that, you know, that might sound counterintuitive, like why, I mean, Meta doesn't pay its creators. That's a striking thing. How is it that there is literally billions of hours of content that is being produced every day on that platform, despite the fact that Meta isn't paying them? The reason that that is happening is because people think of media differently.

• 1:07:44Speaker 04

  And the reality is, people on Instagram, people on reels, people on, people on TikTok too, they want to get famous and they want to get followers and they want to get likes. And that in and of itself is a market, that is an ecosystem that drives more production, more user-generated content. And it's something that Meta has been able to exploit. In addition, they're basically telling people like us, you guys figure out how to make money yourselves. We're not going to pay you an ad share program. You guys go figure it out, figure out your third-party agreements. You can negotiate your own deals by yourself. You guys are adults, handle it yourself. That's exactly what we are doing, is what we've done with our YouTube model as well.

• 1:08:28Speaker 04

  And I think it's what a lot of other creators are going to be doing as well. And all of this means that that viewing time number for Netflix specifically, which has been falling quite precipitously over the past several years. Average viewing time per member on Netflix has fallen 26% in the past three years. That's going to keep going down. And I think it's really, really tough, considering that Netflix's stock is already down 44% in the past year. We know that they're getting killed by YouTube in terms of TV viewing time. And I think this really begs a very important question for Netflix, which is, what are you going to do about this? What is your plan?

• 1:09:10Speaker 04

  Because you're living in a very, very different world from what the world was five years ago. You used to be competing with HBO Max, you're competing with Meta, TikTok, YouTube. This is a very, very different media ecosystem. And I'm not totally sure what the answer is. I have been noodling on some ideas, but, you know, if you're on the Netflix board and you see this headline, what do you think and what do you do?

• 1:09:38Speaker 00

  Netflix faces an existential crisis of being lumped into media companies that are struggling, like Disney that pays, that gets commenced two-time sales in the marketplace versus it's at five now. And it used to be at eight or 10 because it was considered a tech company. They have to find, either acquire, you know, I initially thought, why wouldn't they merge with NBC Universal? They can go into parks. And I thought, they don't want to be in the media business. They want to be seen as a tech company with a media platform. I think it's gotta be something around trying to, as you put it, start to own or get into the clip economy and that a short-form video that plays well to a phone. You know, my idea was open source kind of TikTok with their 99% long-tail content.

• 1:10:21Speaker 00

  But they're, they're in a difficult spot. I think that they're basically saying, we need better content, that we haven't had our K-pop demon hunters. I actually think the content's really strong. I'm watching East of Eden, I think it's fantastic. They're saying, when they, when they fired Bella Bajaria, they're saying, we have the wrong cook and no one's eating at a buffet. And my knowledge is, I wonder if everyone's gone vegan and that is just fewer and fewer people are willing to sit down. I won't watch, I won't invest an hour in anything that doesn't have 90-plus% on Rotten Tomatoes. I mean, the bar is just becoming so high for what you're actually willing to spend that time on. Also, and this is just anecdotal, but I think it does show up in the earnings of Meta. I find that the best use of AI to date

• 1:11:07Speaker 00

  That people aren't really talking about is one that's invisible behind the curtain. And that is, I believe Instagram reels literally deploys AI to turn your brain inside out. It's as if it knows what I want before I want it. And I'm just, I can't get over. Like, I felt that way five or seven years ago, the first time I was on TikTok. I'm like, how did it figure out I like Great Danes? Like, how did it? How did it find some weird economist in South Africa talking about income inequality that I would be interested in? Like, how did it pick up on this? I believe the algorithm, everyone said, oh, TikTok, it's about the algo, right?

• 1:11:49Speaker 00

  I believe the algorithm now at Instagram, courtesy of the capex and AI, is dangerously addictive. I think it is. I think it is so good right now. And when they apply that to content that competes against YouTube, wow. I just, I'm really curious to see how these wars play out. But Netflix, I was actually looking at Netflix as a buy because I think the management team is so strong and a built in user base. But they don't want to consolidate with another media company because it just cements them as having the same problems as everybody else. They have to serve up a different type of food here. They have to get into short form that is really mobile friendly.

• 1:12:34Speaker 00

  Because the other thing that's just hard to ignore is that in that things are going really well, in the sense that

• 1:12:44Speaker 00

  the flow of capital has been pretty much one way. And that is, it's been from a bigger screen to a smaller screen to the smallest screen, right? In general, I know movies will pass $10 billion for the first time. Fine, it's a dead cap bounce. Movies is a shitty business. Television, still a huge business, maybe not growing, flat, fine, whatever. Any great content on a phone, champagne and cocaine, right? What's interesting is the biggest screen is actually doing really well right now. And that is the screen of IRL, right? Going out, concerts, meeting people in real life. That's actually picking up, which is a really encouraging sign. But I just, this ecosystem, I think that, I think that I'm summarizing, but I think Meta, Meta doesn't even look at Netflix.

• 1:13:29Speaker 00

  Meta is going to go after YouTube. And in general, just what this is showing is that our brains, we are evolving a new species of people who just don't have the attention for, to justify, to create the consumption, to justify the cap or the amount of money that's gone into content. We were saying this two or three years ago, like, how can they sustain this investment in content and original content? And the answer is, they can't. So I think it's only a matter of time before Netflix, one announces, you know, innovation acquisitions, developments of new things that give people a different type of food. Also, I think what's coming, they're going to announce they're going to reduce their content budget.

• 1:14:10Speaker 00

  They just can't, they're, they're in the arms race and they've, they've probably gone out too far. $20 billion? Anyways, I don't, so the answer is, I don't know what they do, other than trying to get into short form content and start to cut the content budget.

• 1:14:27Speaker 04

  You said something which I think is really interesting, which is like Netflix has always wanted to be seen as a tech company. And I think they have been successful in presenting themselves that way up until lately, where it's become clear that actually, no, you're basically like very similar to NBC Universal, very similar to Warner Brothers Discovery, Disney. You're not really a tech company. And I think what this comes down to, they are at this very important fork in the road, which is like, what actually are you? Like, like, are you, are you a media company or are you a tech company? And I think they're struggling because I don't think they know what they are. I don't think they've figured that out.

• 1:15:12Speaker 04

  I think that they're sort of dabbling with this idea of let's get into short form, let's get into having clips and being more of a sort of an aggregator of existing generated content, something similar to YouTube. But then also they're saying, no, we're going to also spend $20 billion on production and we're going to have high quality, premium content. We're going to become the sort of the luxury product of streaming. But then also there's, they're doing the ads as well, which was a new introduction a couple of years ago. So it's, it's almost like they haven't figured out what it is that they actually are. And it makes me think of Aswath Damodaran, who's like, you know, you're dealing with a bit of an identity crisis as a company right now. And I think for me, what do they have to do?

• 1:15:57Speaker 04

  They have to decide what they are. Because currently, Wall Street is not buying this. This idea that, oh, we're both at the same time, we're kind of interested in TVs, but also we're interested in the phones, we're interested in everything altogether. That's not working from, from both a cosmetic perspective in terms of the perception, but also from a business, business perspective. So in my view, it's like, you need to decide. I'm honestly, don't think that the tech company angle is going to work. I think it's going to kind of look like old guy wants to be young. Like, oh, we're into the streaming, we're like YouTube. I think, I think that that ship has sailed and it was a mistake. They should have kept up like YouTube.

• 1:16:40Speaker 04

  They should have invested heavily, but I think they should have done that two or three years ago, which is what we were suggesting two or three years ago. But I think if they try to enter that game now, it's going to be way too expensive, way too much competition. And it's going to be, they're kind of going to look like the meme, like, how do you do fellow kids? And it's, and it's not going to really work. So I'm starting to think maybe they just need to go all out media company, brand themselves as luxury premium, maybe that boosts the multiple, maybe they can charge higher prices. We have the greatest content in the world. It's a shittier business for sure, but it's something that I think they could pull off. But again, there is an identity crisis for Netflix and they have to decide who actually are we? Do you agree?

• 1:17:24Speaker 00

  They can never be a niche premium provider like HBO. They have to be mass. But yeah, I, I was looking at Netflix as a buy. I'm now thinking there's more pain there. Because I think it's going to be difficult to, it's going to be difficult to do any of this as quickly as the market wants.

• 1:17:43Speaker 04

  They need to figure out the story. If they figure out their story, everyone's going to be ready to, to buy, but they're like, they're in purgatory right now.

• 1:17:51Speaker 00

  Yep, agreed.

• 1:17:52Speaker 04

  Let's take a look at the week ahead. We'll see earnings from Apple, Palantir, AMD, Pfizer, Novo Nordisk, Uber, ARM and Qualcomm. We'll also get the employment report for October at the end of the week. But of course, the main event will be the midterms. Scott, any predictions?

• 1:18:06Speaker 00

  Yeah, my prediction is that Palantir beats and the stock falls. Palantir is trading at roughly 50 times sales, 50 times forward sales. In May, Palantir and Nvidia lost $120 billion to market cap the day after beating estimates. And at that multiple, a beat is the minimum. Anything short of a blowout is a sell on this thing at this, at this price. I mean, essentially, Palantir is the student who, even if they get an A, the expectation is that they're supposed to get an A plus. I just don't think, I don't think they can, I don't think that the market has become

• 1:18:45Speaker 00

  used to such incredible beats for a company trading at a PE of 16, much less a company trading at a forward price sales of 50x. In sum, I think some air is going to come out of Palantir. So the prediction is Palantir beats and the stock takes a fall.

• 1:19:05Speaker 04

  Okay. My prediction is going to bore you, but it's that the Democrats take the House and the Senate, sweep, blowout, predicted it earlier in the year, but doubling down today.

• 1:19:15Speaker 00

  Your lips to God's ears, my brother. Bring on the blue. Oh my gosh. And to think that we don't believe in the gun show just is inaccurate. Hello ladies. Daddy's going as Deadpool tonight. I've decided, I've decided.

• 1:19:29Speaker 04

  Looking big, looking big, I'll give you that.

• 1:19:31Speaker 00

  It's all the testosterone I'm taking.

• 1:19:34Speaker 04

  There we go. This episode was produced by Clay Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Jorge Corte, our research team is Dan Shalun, Kristin O'Donoghue and Mia Silverio. Jake McPherson is our social producer, 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. If you liked what you heard, give us a follow and tune in tomorrow for a fresh take on the markets.

• 1:20:34Speaker 04

  Welcome to the 50th Hunger Games! Witness the beginning of the revolution.

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