Pod Insights The Prof G Pod with Scott Galloway Prof G Markets: Ozempic’s Market Impacts and Surging Bond Yields — with Downtown Josh Brown About this episode This week on Prof G Markets, Scott shares his thoughts on which stocks and sectors could get a boost or take a hit from Ozempic’s increasing popularity. Then, Josh Brown, CEO of Ritholtz Wealth, joins the show to help break down why bond yields have surged the past few weeks.
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Transcript Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
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1:07 Scott Galloway? This week's number, 93%. That's the percentage of malls with a Cheesecake Factory that are current on their loans. That's compared to 72% of malls without the restaurant. True story, my wife got kicked out of a Cheesecake Factory for breastfeeding. Hey, when I'm thirsty, I'm thirsty.
1:37 Scott Galloway? Welcome to Prof G Markets. Today, we're discussing Ozempic's second-order effects and surging bond yields. Here with the news is Prof G media analyst, Ed Elson. I like how you call yourself a media analyst. You really think that's more impressive? How's that working for you in the bars? I'm a media analyst. How's that working, Ed?
1:56 Ed Elson? Give me a new title. What should I call myself?
1:58 Scott Galloway? Oh, hands down, General Counsel of Australia. That's the gangster title.
2:02 Ed Elson? What do you call yourself to people? Entrepreneur?
2:04 Scott Galloway? Dog! Yeah, prof, professor.
2:07 Ed Elson? Does that work?
2:08 Scott Galloway? What do I call myself? Angry, upset, erectile, dysfunctional? I don't know. What do you call yourself? Angry, depressed? Hit the headlines, news. Hit the lines of head.
2:17 Ed Elson? Let's start with our weekly review of market vitals.
2:25 Ed Elson? The S and P 500 fell, the dollar hit its strongest level in almost a year, Bitcoin rose and Treasury yields surged. More on that later. Shifting to the headlines. WeWork announced it will miss $95 million in interest payments on its debt. That move may add pressure on the company's lenders as WeWork attempts to negotiate more favorable terms. Wonder Group, a food delivery startup, is acquiring Blue Apron for $103 million. That's down significantly from its nearly $2 billion valuation at the time of its IPO six years ago. ByteDance is buying back shares from US employees in a deal that values the company at roughly $224 billion. That's 26% lower than what the company was worth earlier this year.
3:09 Ed Elson? Anthropic is raising up to $2 billion in new funding, distinct from Amazon's investment, which we discussed last week. The AI startup is seeking a valuation between $20 and $30 billion. That's five times its valuation from seven months ago. And finally, redacted portions of the FTC's lawsuit against Amazon claim the company used an algorithm named Project Nessie to raise its own prices. It then tracked the company's competitors to test if they would follow Amazon's lead. The algorithm is no longer in use, but according to the FTC, it successfully raised prices across e-commerce and improved Amazon's profits. Here we go. What are your thoughts, Scott?
3:49 Scott Galloway? So this pricing thing, essentially, Amazon is with algorithms and crawlers and the massive amount of capital and technical prowess they have. They can go out and basically they set the price for the internet, for e-commerce essentially. I actually think it's an important piece of evidence and also I think we need to frame it through the lens of, I would do the same thing if I were them. It's just that our laws say, once you're at a point where for whatever reason, skills, access to data, capital, continuing to do what makes the most sense for your own shareholders ends up creating an unhealthy ecosystem. Anthropic, I gotta be honest, I love this because, do you know who has a huge stake in Anthropic? FTX.
4:31 Scott Galloway? And guess who's been buying claims against a maker of FTX? Yours truly. So I've been buying these claims. They invested about $500 million in Anthropic, I think, two or three years ago. So it's got to be worth at least $2 billion and it might be worth as much as $4 or $5 billion. The court administrator, the bankruptcy administrator, might be able to capture forty to fifty cents on the dollar just from their investment in Anthropic, unless I'm missing something, we'll see. I've had great insights like this before that ended up not being so great, Ed.
5:01 Ed Elson? Well, it's just, sorry, I just want to add one thing on Anthropic, get your take on this. So that same report revealed that it's generated a hundred million dollars in annualized revenue. So at that valuation, assuming the low end, twenty billion, that means that the deal's valuing the company at two hundred times revenue. And then you compare that to OpenAI, which is already seeking a high valuation of around eighty times revenue. And then you compare it to, to public tech stocks like Microsoft was at eleven X, Meta's at seven, Google's at six. That valuation seems totally absurd to me. Do you agree?
5:39 Scott Galloway? I wouldn't call it absurd. I'd call it fucking crazy. My understanding is OpenAI has a run rate of five hundred million and is raising it ninety billion, meaning a hundred and eighty times revenues. And Anthropic is raising somewhere between two hundred and three hundred. There's just no getting around it. When you're raising money, if OpenAI can close around at ninety billion, to get the kind of venture returns one expects, that is three to ten X, you're talking about a company that's going to be one of the twenty or thirty most valuable companies in the world, just to get its investors a return. So I would argue that we're at, in terms of valuation, we're at peak AI. And that if I were an employee at one of these companies, I would be doing anything I could to sell
6:21 Scott Galloway? into the secondary market of these valuations. I think this is just extraordinary. And that's not to say that these companies won't be enduring and that at some point they might not be worth more. But I think out in front of us, call it in twelve to thirty-six months, these companies are not going to trade at that valuation. Just as Amazon hit a ridiculous several hundred times earnings in ninety-nine and came down ninety percent and then went way back over the next twenty years. I think the same thing could happen here. But in terms of a trade, I would argue that the, you know, the juice has been squeezed here. I think this is just crazy. ByteDance, the thing that struck me, I actually think at two hundred and twenty-four billion, I mean, let me put it this way, would you rather have?
7:05 Scott Galloway? Would you rather own ByteDance at 224 billion or OpenAI at 90?
7:10 Ed Elson? ByteDance for sure, in my opinion.
7:12 Scott Galloway? Hundred percent. I think, I would argue ByteDance is undervalued. My understanding is its current revenue run rate and its growth, next year it will do more revenue than Meta. Do I have that right?
7:23 Ed Elson? The only revenue that we've seen is from Q1 of this year, and that was 25 billion. So, you know, we could just assume it's 100 billion. Meta did 29 billion in the first quarter of this year. So it's creeping up on Meta for sure.
7:37 Scott Galloway? Right, and ByteDance is growing faster. So it looks like next year it should blow by Meta, which I think has a valuation of 780 billion. And if ByteDance is about to blow by Meta and is growing faster, you would argue, well, okay, Meta has more diversity of revenues. It has Facebook, it has WhatsApp, it has Instagram. So you could argue it deserves higher multiple because of its diversity of its cash flow streams. But in terms of growth, ByteDance is growing faster. So either Meta is overvalued or ByteDance is undervalued is the way I would argue. And then comparing it to AI, it's hard to compare anything to AI right now. Blue Apron, so I called this back in 2017.
8:20 Scott Galloway? The company has enormous acquisition costs. It spent $460 for each new customer in 2016. Despite all those new users, Blue Apron's revenue growth has been flat since Q1 of 2015. Their IPO down round was likely the nail in the coffin. What Wall Street doesn't get, paying high cost of customer acquisition and investing insane amounts in fulfillment, doesn't work when you have 60% customer churn. At some point, like we saw with FlashSides, there will be a major correction. I had spent a big part of my career in e-commerce and consulting to Catalog companies like Williams Sonoma, and it's kind of like, it's all about retention,
9:01 Scott Galloway? churn, average order value, lifetime value. And as part of the S1, when you looked at Blue Apron, it was clear they just had no business. That something like 60 or 70% of people who use Blue Apron churned out within six months. They just couldn't hold on to people and they were spending a lot more. They'd built a shitty business that when it scaled, just, you know, just lost more money. It was sort of, it was sort of WeWork, except sending kale and, you know, cashews to people, or whatever it is you millennials eat. Whoever bought it, I would imagine is gonna, you know, has a way to offer more products into this group. But, you know, that's off 95% from its peak. Sort of similar along the same lines, WeWork, although I would
9:42 Scott Galloway? argue WeWork, they say in hotels, here's some fascinating insight from the general consulate. If you're the guy that wants to own the Four Seasons of Manhattan, there's some psychic income there, but usually the first owner loses money. The second owner, which is oftentimes the bank, or the people who lent you the money for your ego project, come in, they're not operators, and they also lose money, just not as much. Supposedly, it's usually the third owner of a hotel that makes money. Somebody who understands hotels, comes in and buys it for 40 or 60 cents of what it originally cost to build the thing, and then they make money. I think, I think, the next owner of WeWork, I think it's gonna go into bankruptcy, but I think the next owner's gonna make money. Now, why is that? Retail is kind of tailor-made for the US bankruptcy
10:24 Scott Galloway? process. Because when a company declares bankruptcy, a retailer, and the end of the day, WeWork is a retailer. They're selling desk space. They're selling an environment and desk space. You could say it's a cross between a hotel and a retailer. But when they declare bankruptcy, they can then go through and cherry pick all the leases and all the locations they want to hold on to. So if WeWork has 1,200 locations around the world, I don't know how many they have, they can go, they can just shut down 600 of them, get out from under the lease commitments, because they have bankruptcy. And with the other 600 that are making money, they can say to 200 of them that are just on the edge, you either cut your lease costs for us, or we're just going to give you the keys back. They can seriously right-size the cost here. And there is value in WeWork.
11:09 Scott Galloway? It's a global brand. People, a lot of customers are really happy with WeWork. I think they do a good job. So the ability to go in and leverage all of that capital that was invested and cherry pick the 200, 300, 600 of the 1,200 locations that are making money and right-size the cost dramatically, I think the next owner of WeWork is going to make money here.
11:31 Ed Elson? I was going to ask you if you would have any interest in going in yourself. It's $130 million market cap. Could you put a group together and go in and sort of complete the WeWork story? That would make headlines.
11:42 Scott Galloway? Yeah, I think, I don't know if it has debt, but my guess is, or the debt is the leases. My guess is it's the bondholders that are going on the business. And I wouldn't be surprised if the equity gets wiped out. So I think the way you'd play this is you'd go in and buy the debt. My activist days, I mean, I'm old. You know, I just want to sit in my basement in Marlon with my dog and wait for the ass cancer. That's where I am. No, I'm not going to, I'm not going to put together a group. I think that people are so fatigued around this thing that it would be hard to raise money for, but that's when you make money.
12:18 Ed Elson? We'll be right back after a quick break with a look at Ozempic's market impacts.
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13:46 Scott Galloway? Support for the show comes from Vanta. As AI adoption grows, so does your company's security risks and requirements. New frameworks, audits, and vendors keep piling on, but your team isn't getting any bigger. Most compliance tools promise automation, but you're really stuck doing all the work by hand, chasing screenshots, validating controls, and playing catch-up when audit season comes around again. Vanta works differently. The Agentic Trust Platform is built to scale with you, not slow you down. With over 1,400 automated tests across 400-plus integrations, Vanta collects evidence and monitors your controls year-round, cutting your audit prep by 82%. Plus, you can access the Vanta Agent everywhere you work, whether your team is in Vanta every day or living in tools including Claude or Cursor. Want proof?
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14:57 Ed Elson? We're back with Prof G Markets. A Barclays Strategist report warned that weight loss drugs such as Ozempic could threaten the fast food industry and even proposed buying credit default swaps on big names, including McDonald's and Pepsi. In other words, short McDonald's credit. The report added that these drugs could affect a number of other industries. For example, anecdotal evidence suggests Ozempic dampens our addictive relationship with alcohol and cigarettes, which could weaken demand at companies like Altria and Constellation Brands. Barclays additionally recommends credit protection against healthcare companies such as HCA and Boston Scientific, which generates significant revenue treating weight-related health issues. Scott, this is a fascinating one. What do you make of this?
15:41 Scott Galloway? So Goldman Sachs put out a report saying that they think AI technologies will increase GDP 1.2% a year because of increases in productivity. The Milken Institute estimates that obesity-related costs in the United States are $1.7 trillion a year. It's everything from diabetes to hip replacements to depression to the additional fuel it takes to fly a plane with obese people on it. It's a $1.7 trillion drag on the economy each year. And if you think of the economy as being $25 trillion, you're talking about 6.8% in
16:21 Scott Galloway? costs that could potentially be reduced 50, 70, 90%. So if you want to talk about something that's accretive to the economy, everyone's talking about AI, but this drug, specifically the ability to take America's populace from 40% obesity rate stay down to 10 or 5, or who knows, maybe even 0 or near 0, I think you're talking about something that has 2 to 4 times the impact on the economy as AI. So I think this is the biggest business story of the year. Novo Nordisk, the pharma company behind Ozempic and Wegovy, became the most valuable company in Europe this September, surpassing LVMH. I don't know what kind of IP protection, but I think they could become one of the most valuable companies in the world. At 400 billion, it's worth almost as much as Denmark's annual GDP, where it's headquartered.
17:05 Scott Galloway? This past quarter, Novo Nordisk, I'm just going to call it N2, added 2% to Danish economic growth. Individuals on Ozempic lose on average 11% of their body weight over six months. The drugs also reduce the risk of heart attacks, strokes and cardiovascular deaths by 20%. There's even, I even saw some data saying that people on Ozempic reduce their drinking by 60%. The prescriptions are up fourfold from 2020 to 2022. 73% of Americans are overweight or obese. I think three in four people are overweight or obese. And it's not just obese people. I know people who aren't obese who are taking this thing. It's like, can't lose that extra 20 or 30 pounds. Morgan Stanley predicts 24 million people,
17:49 Scott Galloway? that's 7% of US population, could be taking GLP-1 drugs like Ozempic by 2035. And according to research, each patient will register on average a 24% reduction in total calorie intake per day. Collectively, that's a 22 billion calorie reduction intake per day, equivalent to over 36 million Big Macs that won't be eaten. If McDonald's sold 36 million fewer Big Macs per day, the company would register a revenue decline of $18 billion per quarter. I mean, you just got to think the fast food industry is going to get kicked in the nuts here. Nobody, Ed, nobody, you're not from America, so let me just help you. Nobody walks into an RB's and thinks this was a really good decision.
18:33 Scott Galloway? The inclination to come to a place where they drop off gelatinous cubes that they heat up and then slice and kind of parades or mimics or pretends to be beef. Nobody goes in and thinks, yeah, I wish I could come back here more often. We referenced United Airlines could save $80 million a year if the average passenger weight falls by 10 pounds, according to a Jefferies analyst. Fuel and labor are the two largest expenses for carriers, with fuel accounting for about 25% of costs. Exercise health companies, they say they're going to start prescribing these drugs and they pick up. We could see alcohol really taking on the chin. I think both.
19:13 Scott Galloway? The kind of double whammy of people moving to more exotic drugs and CBD and PepsiCo. Can you imagine what's going to happen to them? PepsiCo, Coca-Cola, all the guys handing you over to the diabetes industrial complex where you're going to spend $10,000 or $15,000 a year on diabetes medication. And then you're going to go in for your first knee transplant and then you're going to buy a scooter and then you're going to, I mean, my God, it's just everywhere.
19:37 Ed Elson? Well, so just some statistics. So you mentioned 40% of America is obese. That number's up from 31% in 1999. And then if you look at the performance of some of the stocks that they're warning about. So let's look at Pepsi, General Mills and McDonald's. In that same period, those stocks have increased 700%, 760% and 1,200% respectively. And then you compare that to the S and P, which in that same period gained around 250%. So in McDonald's case, in the past two decades, it's outperformed the S and P by five times. I assume you think it's fair to say that the stock prices of those food companies are basically directly correlated with obesity rates in America.
20:21 Scott Galloway? Well, it's not me. Look at the data. You just, you just cited the data, right? As the, as America gets fatter, these stocks, boom. What happens when they, what happens when America gets skinnier?
20:32 Ed Elson? That's basically my question, which is just from a purely investing perspective. These guys are suggesting, okay, maybe you should buy some protection against these companies' credit. What about the stock? Do you think this is enough to go short these companies' stock?
20:47 Scott Galloway? I think there's a big play. And let me be clear, this is investment advice because my advice to anybody is just to buy ETFs, low cost, Vanguard ETF and index funds because it's hard to beat the market and all of us like to think we can beat the market. But everything I'm talking about, some hedge fund with a million PhDs has already traded on and it's likely already priced in. Having said that. I think if you raised money as a manager and said, I'm the Ozempic fund, or I'm the obesity fund, or I'm the skinny fund, whatever you want to call it, and I'm going short, all of these companies that would register a substantial, you know, McDonald's, Walmart, the company that owns Jack in the Box and Wendy's,
21:31 Scott Galloway? the companies that own all the donut places, the hospital complexes, there's going to be a lot of hospital networks that are going to really suffer here when people aren't coming in for their lap band surgery or their diabetes medication. What happens? I mean, there's so many knock on effects. What happens to Moderna when COVID-19 isn't as big a killer? Because 82 to 88% of all mortality, there was a pre-existing condition, a comorbidity present, and almost all of the comorbidities were obesity related. What happens when COVID and pandemic sweep through, but we have a skinny population that quite frankly doesn't die from this thing? It's more like the, you know, the flu.
22:16 Scott Galloway? What happens when a society becomes healthier?
22:21 Ed Elson? We'll be right back after the break with a look at the bond sell-off.
22:32 Scott Galloway? Support for the show comes from Vanta. As AI adoption grows, so does your company's security risks and requirements. New frameworks, audits, and vendors keep piling on, but your team isn't getting any bigger. Most compliance tools promise automation, but you're really stuck doing all the work by hand, chasing screenshots, validating controls, and playing catch up when audit season comes around again. Vanta works differently. The regentic trust platform is built to scale with you, not slow you down. With over 1,400 automated tests across 400-plus integrations, Vanta collects evidence and monitors your controls year-round, cutting your audit prep by 82%. Plus, you can access the Vanta agent everywhere you work, whether your team is in Vanta every day or living in tools including Claude or Cursor. Want proof?
23:17 Scott Galloway? Over 16,000 fast-growing companies like Ramp, Ryder, and Harvey save time and resources while scaling fast with Vanta. Learn more at vanta.com/profg and get $1,000 off. That's spelled V-A-N-T-A dot com slash prof G for $1,000 off.
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24:13 Ed Elson? We're back with Prof you Markets. On Tuesday, the yield on 30-year U.S. Treasuries hit a 16-year high of 4.95%. As a reminder, bond yields rise as bond prices fall. And surging yields indicates that there's been a significant sell-off in long-term U.S. debt. That bond sell-off follows a run of strong economic data. Job openings, for example, rose unexpectedly last month. In addition, the Federal Reserve has indicated it will keep interest rates higher for longer to suppress demand and finish off inflation. Now, today, we wanted to discuss this topic with someone closer to the bond markets. So we're joined by Josh Brown, who is the CEO of Ritholtz Wealth. Josh, thanks for coming on.
24:55 Josh Brown? Ed, when you announce things, it sounds so official.
24:58 Scott Galloway? Doesn't it? Yeah.
25:00 Ed Elson? That's the only reason I'm here.
25:01 Scott Galloway? Can you imagine what we could have done with his looks and that accent?
25:04 Josh Brown? Forget about it. Forget about it.
25:06 Scott Galloway? Get to the questions, Ed. Enough screwing around.
25:10 Ed Elson? So the first question is just, we're seeing this huge sell-off in bonds, particularly long-duration bonds. Why is that happening?
25:17 Josh Brown? So there's an old saw on Wall Street that says the bond market is the smart money. But I think this year, we have to add something to the end of that. The bond market is the smart money if we're talking about short-term bonds. Because if you think about what's gone on in the last 18 months as the Federal Reserve began hiking rates starting last March, the two-year bond yield has actually been very accurate and way ahead of the Fed. And in most respects, the Fed has been following the two-year bond yield higher. And that two-year bond yield, it's not magic. It's basically the sum total of all of the predictions of people who are buying and selling bonds about where things are headed.
26:01 Josh Brown? And so that two-year yield was rising faster than the Fed was hiking rates. You know, the Fed operates on overnight rates. And that has been a pretty good predictor of where rates would go. And, you know, to a large degree, the bond market was very smart. Not at the long end. The long end had to be dragged up here, kicking and screaming. It's taken a year and a half for the long end of the curve, talking about 20-year Treasuries, 30-year Treasuries, the longest dated maturities. Even the 10-year has lagged by a huge degree. And that's why we had what's called an inverted yield curve. It is unnatural for short-term borrowing rates to be as significantly higher than
26:46 Josh Brown? long-term borrowing rates have been. That curve is now uninverting, meaning normalizing. And what that represents is that the long end of the bond curve was extremely wrong for all this time and is now catching up to the reality of what's actually happening.
27:04 Ed Elson? So we're seeing basically the fastest interest rate increases in US history. And you described, you know, the two-year yield catching up to the Fed's decisions. But when you look at the economy, those interest rate hikes haven't really taken effect. So, you know, we were just talking about the job openings, which rose in August up from 8.9 million in July. And economists had expected that that number would drop. And then you look at GDP growth, the economy is expanding. It grew 2.4% in the second quarter. Unemployment rate is going up a little bit, but only slightly. Historically, it remains pretty low. Why do you think that these interest rate increases haven't caught up to the economy so far?
27:47 Ed Elson? How does that relate to the yields that we're seeing in long duration bonds?
27:51 Josh Brown? It turns out, and this is the thing when they write the textbook chapter about this this period of time, this is what what will be the the gist. It turns out that the economy is way less sensitive to short term or overnight interest rates right now than it had been historically. Think about why. You had basically a two year, almost three year period of time where companies could refinance and then refinance again and then refinance again. And there simply was not the need to have rates reset on a lot of debt. Homeowners did the same thing. Think about the people you know who own homes. Most of them spent the majority of 2021 bragging about how low they got their their mortgage rate to be.
28:36 Josh Brown? The consequence of that is when the Fed starts hiking rates, there is a severe lag relative to history in terms of when we start to feel the effects of it in the economy. Corporate balance sheets went into this rate hiking cycle in the best shape they've ever been in. Most most homeowners, like a typical household, went into this rate hiking cycle as flush with cash as it's ever been. And go on down the list. All of the people who would normally be affected by higher borrowing rates, there was just a a huge period of time before it actually mattered. And in some places, it still doesn't matter. Put that aside, typically where you would see the most sensitivity to rates would be in the housing market.
29:19 Josh Brown? You would see historically, you take rates from from, well, you take a mortgage rate from three to seven percent under normal circle, and we're not in normal circumstances. Under normal circumstances, you would have probably seen home prices drop 20%. Why didn't that happen? Because people are locked into these low rates. They're in no rush to sell. We've got different demographic phenomena in the form of people retiring and not giving up their primary home. Retirement home is now a four letter word. In the aftermath of COVID, not a lot of seniors are in a rush to go off to one of these places, given, you know, what, what, what happened during the pandemic. So you've got a lot of reasons why people will not sell. In the absence of selling, you don't get
30:04 Josh Brown? that decline in home prices. There's just not enough supply. Go through all of the major metropolitan markets that make up the, the Case-Shiller Home Price Index, and you just are not finding enough supply come on to move prices lower. And perversely, because there are so few homes for sale, and because there's still going to be this percentage of people that have to buy a house no matter what the mortgage costs, we actually still have bidding wars in, in, in some markets. So the Fed has not been able to affect the housing market as it historically had, and a lot of that is still coming from the, that weirdness is still emanating outward from 2020 and 2021. So that's, I think, the
30:46 Josh Brown? main reason why we really haven't seen prices reset, and we haven't seen a bigger economic impact. Companies just don't need to borrow, they're flush with cash, and homeowners are just, they refuse to sell, in many cases, and don't need to.
31:03 Scott Galloway? Josh, if, if the equity premium that you get for buying stocks has been starched out because of the increase in interest rates, in a very reductive way, isn't it a good time to sell stocks and buy credit?
31:15 Josh Brown? This is the big push and pull that's been affecting the markets all summer. It probably started at the end of July. Stock prices topped out so far for the year, and we've really seen people have trouble, people that are operating on this model, they've had trouble rationalizing owning certain areas of the stock market relative to what they can get, risk-free, in effectively overnight bonds. A six-month T-bill yielding north of 5%, why am I going to buy the equity of, for example, a utility stock that's currently yielding 3%? You say to yourself, so let me get this straight. I can have a risk-free six-month yield of 5%.
31:58 Josh Brown? Or I could be in the equity of a REIT. Like I could be in a utility stock. I could be in a consumer packaged food company. I'm getting a lower dividend payment and I have all the volatility of the stock market. And people are opting for the former, not the latter. And that's what has created this huge burst in volatility that we've been living through in the last six weeks.
32:20 Scott Galloway? But stocks really haven't come down. I mean, there's been a little bit of a curve. It doesn't, it doesn't make any sense to me. You think, okay, interest rates go up, stocks come down, but the stocks have not come down anywhere close to proportionally.
32:32 Josh Brown? I, I think we have to qualify what we mean when we say stocks. If we're referring to the S and P 500, it is absolutely true that there's been a much more resilient tone. Look, Apple's in a 12% drawdown. Tesla's in a 40% drawdown. We can't say stocks haven't come down. But I think, I think what we can say is that the larger the market cap of the company, the less of a drawdown we've experienced. And actually, we did this research last week. If you break the stock market, the Russell 1000, so this is all the large caps that trade, not just S and P. If you take the Russell 1000, you break those companies up into deciles. The thing that has determined whether or not your share price is higher on the year is the size of the market cap.
33:17 Josh Brown? So the top two deciles are the only deciles where the stocks on average are up on the year. The bottom eight deciles, so eight, let's say 800 of the Russell 1000 on average are actually negative. And it's pretty cleanly delineated by how big the company is. And that makes sense. That makes sense because think about it. A company like Apple that's got access to hundreds of billions of dollars worth of cash. When they sell bonds, they effectively sell bonds at a AAA rating. It's almost like a sovereign country whose house is in order selling bonds. Why would Apple be sensitive to a higher interest rate? It doesn't hurt them one bit. Maybe there's a second derivative where it hurts their potential consumer.
34:02 Josh Brown? We haven't seen that show up in, in the earnings or in the demand for their products at all, not yet at least. So that, that's what you say the stock market, Scott, is important. You're referring to the S and P 500. The S and P 500 is by definition dominated by these larger market cap companies, and these are the companies that have the least need to refinance at higher rates and will be therefore hurt the least by higher interest rates.
34:28 Scott Galloway? Should really be the S and P seven, right?
34:30 Josh Brown? The magnificent seven. The Russell 2000 is in a huge decline. The Russell 2000 are the smallest 2000 publicly traded companies in the US market. These are not tech companies for the most part. These are biotech, smaller banks, industrials, healthcare companies. They they have gotten absolutely killed. So we have to be careful when we say the stock market did this, the stock market did that. There's a lot of strength in the Apples and the Microsofts, and that is masking all of the weakness below the surface.
35:03 Ed Elson? Do you think that there's more pain ahead? I mean, when when interest rates were rising, everyone said recession is coming. And now, I mean, you make a good point about the magnificent seven. And it sounds like what you're also suggesting is that there's going to be more refinancing ahead. So where do you stand on the recession question? Do you feel like maybe in the next six or eight months, there could be a recession coming?
35:25 Josh Brown? There could always be a recession coming in any six or eight month period, and I won't be the person that sees it first. Here's what I want to tell you. It is not impossible to have rates where they are today and have a stock market perform well. And as evidence, go back to the 1990s. Do you know what the average yield on the 10 year treasury was throughout the 1990s decade? It's about 5.2%. Pretty much where we are now. So the the the shock here is the speed with which rates have moved, the reason for why they're moving, sticky inflation, right? And now the new question is, well, for how long will
36:06 Josh Brown? they quote unquote, stay up here? Meaning, we have gotten so accustomed in the investment markets that at some point, something would break, and then the Fed would have to step in and start cutting rates. I mean, this is basically what life has been for the last 30 years. The lesson that Alan Greenspan took away from 1987 was that he could prevent a stock market crash from spilling over into the real economy. He did it. He cut rates during the crash and actually, most people don't know this, the S and P 500 finished 1987 positive, literally. So that was the takeaway. And then every crisis since then, it was the same playbook. Not long after, nine years later, 1998, you had a global currency
36:48 Josh Brown? crisis, Asia had a meltdown, Russia devalued the ruble, the Fed was cutting rates into an expanding economy. We're not cutting rates to save GDP growth or for employment's sake. Literally, they cut rates to save the market. And guess what? It worked. 1999 is one of the greatest stock market years in history. So this has been the playbook. The Fed has done this over and over and over again. That is what the market has come to expect. We used to call it the Greenspan put. Now we call it the Fed put. So now the question is, well, the Fed has hiked a lot. Nothing has really broken yet of consequence. We lost a couple of banks out West that were doing stupid shit and we probably should have lost them anyway. But we really haven't had a systemic issue. So when will the Fed be cutting
37:33 Josh Brown? rates? That's still how people are thinking about the next upside catalyst. It's crazy, but this is what we've become accustomed to. If you started trading and investing in the last 20 years, it's all you know. The Fed has to cut rates sooner or later. So now it's this higher for longer question. I can't resolve it, but let me say this. From 1958 through today, nominal yields, this is important, the distinction, nominal yields, not inflation adjusted, averaged 5.7%. So we're at five and a quarter. So we are well within the history going back to 1958. Real rates, uh, real yields. So what that means is the nominal yield minus whatever the inflation rate is, averaged
38:16 Josh Brown? 2%. We are just hitting 2% now in real rates. If the 10-year is at 4.7 and we think inflation should finish the year 2.7 to 3, we're just about 2% real yields, which- Again, is normal. What's not normal is what's gone on in the last month. Long-term yields have been moving. At the end of June, you had a 30-year at 3.85%, and this week it's at 4.85%. The TLT, which is the ETF that owns long-term bonds, that's where, if you're following along at home, that's where you can see the damage. Absolutely hammered. The TLT is down 43%
39:01 Josh Brown? from the highs of late 2020, back when we thought interest rates would be zero forever and we were all going to die of the pandemic. Short duration is now not moving anymore. BIL is the ETF you can use to see short-term treasury bonds. That is done moving, and so all of the action this past month is in the long. And remember how I started this off? I told you, long-term bonds are first now figuring out what the short-dated bonds have known for a year and a half.
39:31 Scott Galloway? Josh, if you think about 2024.
39:33 Josh Brown? I try not to.
39:35 Scott Galloway? But if you're forced to, aren't we just so overdue for an actual recession at the same time? You usually don't have them in election years. Doesn't it feel like at some point, and I, back to your point, if you predict a recession for long enough, eventually you'll be right. But doesn't it feel like we've been dancing in the raindrops for so long? And there are so many winds that are slowly picking up in our face?
39:57 Josh Brown? Well, you need a shock. People are not all of a sudden going to, of their own volition, decide it's a recession and curtail their lifestyle accordingly. So you need something to happen. In 2000, it was the tech bubble blowing up. It was a very mild recession. In fact, most people didn't feel it at all. If they weren't invested in NASDAQ stocks, you have to almost convince them that there was one.
40:20 Scott Galloway? Fuck, I got run over by a truck. I literally. I got run over by it. You mean, there was something outside of the technologies? I was living in San Francisco. It started to come like a red envelope. I literally like that was that was Vietnam for me.
40:34 Josh Brown? You were the the pets.com stock.
40:36 Scott Galloway? Yeah.
40:37 Josh Brown? All right. But most people, but you'll concede, most people weren't.
40:39 Scott Galloway? Agreed.
40:40 Josh Brown? What happened five years later in the great financial crisis is different. It affected everyone. This is not that. We do not have borrowers extended to the extent that they were. The credit quality of the recent vintage mortgages that are buying all these homes is way better. The banks have significant regulation. If they want to play fast and loose with lending, they can't. They can't hold this up on their balance sheet. They've got to mark their portfolio to market if it's held for sale. If it's held for maturity, that's a separate portfolio and that's treated differently. But the financial controls are there. Yes, there's shadow banking. Yes, there are some lenders doing some crazy shit over the last couple of years.
41:22 Josh Brown? But nobody that's systemically important, and that's a really big difference between whatever we're about to go through in 2024 versus what we've gone through historically. So you need the shock. What is the exogenous shock? That's going to happen. That's going to all of a sudden make the recession real. Until then, look, in last year, 2022, they were doing these CFO surveys. They were asking like thousands of CFOs at public companies like, is it recession? And unanimously, they said, yeah, recession's coming. So paradoxically, if everybody gets themselves prepared for a recession, it's hard to have one because you don't have people acting out the way that they normally would at the tail end of a boom.
42:07 Josh Brown? So we might have almost like talked ourselves out of a recession this year. I don't think we can forestall it forever. A recession is always coming. But like, the timing is really difficult, and then the severity, and then the duration. What if we had a two-quarter recession? I would argue Silicon Valley had a recession last year. In fact, the tech layoffs peaked in January of 2023. We had mass layoff announcements every day of the week in the entirety of the second half of 2022. And then look at startup valuations, Scott. You know more about this than I do. It's it's possible that we had a localized tech and telecom and media recession.
42:49 Josh Brown? It affected Netflix way more than it affected somebody who owns a gas station. And, you know, we've had those before. In 2015, 2016, Texas had a recession. Most people don't understand that. A price of oil collapsed. And if you lived in Oklahoma, Texas, certain parts of certain regions, you know, you experienced what felt like a recession. We have clients that are executives of oil companies. They told us about it. So it is possible to have a rolling recession that doesn't go nationwide, all segments, all regions, all at once. And that becomes a trickier world to navigate if if that's where we are. But that fragmentation lines up with the fragmentation that we're seeing everywhere else.
43:31 Josh Brown? I was listening to Warren Littlefield talk about the 1990s and the must see TV era and how Cosby would get a 52 share. That means 52% of the people watching television were watching Cosby. That doesn't that world doesn't exist anymore. So if you have that level of fragmentation elsewhere in the economy, why couldn't we say overall, certain parts of the country or certain cities might have a recession and others might avoid it?
43:58 Scott Galloway? If you were to pick one thing, Josh, that we're missing about the economy and the markets right now, where you think there's some dissonance or disconnect between reality and what's being reported in media, what would it be?
44:08 Josh Brown? I'm hearing a lot about the the death of the 6040 portfolio. I've been hearing it since January. Most of the people saying it, they're journalists, you know, writing articles that you will click on. So I get it. I understand the the mentality. The 6040 portfolio right now, today, is actually a healthier proposition than at any time in the last 15 years. I want you to think about this. There are no rules of thumb in the market that work. There's no right PE to buy stocks at, price earnings ratio. There's no right dividend level. There's, there, there's nothing that works formulaically. So much so that we could say, oh, yes, this is the right answer to that. There's something that gets really close.
44:52 Josh Brown? The relationship between starting yields of a bond portfolio and their subsequent forward returns is really strong. Like, I mean, like an R squared, like 93% or something. Meaning if starting yields for long duration bonds of a 30-year treasury are 5% right now. There is a extremely high, almost 100% probability that your returns over the next 30 years from this starting point will be something on the order of 5% a year. Now, it's lumpy. You're not gonna get, it's not gonna line up each year. Oh, there's my 5%. That ain't how it works. You're gonna have a lot of volatility in the price along the way.
45:36 Josh Brown? But if you think about a 10-year treasury yielding 5%, you could almost set your watch to the idea that 10 years from now, you will have received a 5% return. That's total return. Not just the, the income, the coupon, but the price and the yield. So if we know that that relationship is almost as close as you get to an iron law of finance, that starting yields today will dictate forward returns. If we know that, then arguably, the 60-40 has never made more sense in the last decade and a half than it makes today. I'm giving you a starting yield. Let's say you buy the Barclays Aggregate Bond Index. That's like the S and P 500, but for fixed income.
46:21 Josh Brown? It's almost all treasuries and a little bit of, um, very highly rated corporates. Right? If I'm giving that to you at 4.5%, there's a very high likelihood that over the next 10 years, you'll be able to look back and say, wow, I earned about 4.5% a year. So that's a really good starting point for the fixed income portion of a 60-40, way better than three years ago, when the best you could hope for from the bonds was low volatility and virtually no return. So as a portfolio manager, as a financial advisor, as somebody that's helping people make this decision with tens of millions, hundreds of millions of dollars, that's one of the biggest misconceptions that I want to clear up. Two. Spreads have not blown out. And until they do, I'm going to define that in a minute.
47:06 Josh Brown? Until they do, stop saying recession. It's like ludicrous. What are spreads? Credit spreads. When you buy a corporate bond, you're getting a higher interest rate than you would get from an equivalent maturity in a treasury. So if I lend money, for example, to Microsoft. I should be, maybe Microsoft's a bad example. It's almost like a sovereign nation. Let's say, any other stock you could think of. Salesforce.com. If I buy a 10-year bond from them, I should be getting a higher return than if I buy a 10-year treasury. Why? I'm accepting more risk, therefore, I should be getting more income for taking that additional risk. This is like 101, okay? All right.
47:50 Josh Brown? Until we see a scenario where the yields on corporate bonds are blowing out, meaning going substantially higher than the equivalent maturity treasury bond, then we are not in a situation where recession is even on the menu. That will be one of the things that happens that tells you things are deteriorating. When people are less willing to accept the risk of those corporate bonds, therefore, the bonds sell off, therefore, the yields go higher on those bonds. That will be when you know that we are truly pricing in a deterioration in the landscape. The bond investors will be a lot more risk averse than the equity investors. They will not hold a bond that they don't think they're going to get paid back on.
48:35 Josh Brown? And you will see spreads blow out. You'll see the treasury yield stand still, and you'll see the corporate bond yield start to shriek higher. And that's a canary in the coal mine that just has not happened yet. And in fact, you want to laugh? Look at year-to-date. High-yield bonds, junk bonds, and investment-grade corporate bonds are actually outperforming treasuries year-to-date. Not only are they not pricing in any kind of deterioration, they're actually doing better than treasuries, which is perverse. It shouldn't be that way, but it is that way. And I don't think most people understand that.
49:10 Scott Galloway? Just to wrap up here, and I really enjoy hanging out with you and Barry. My sense is, one of the amazing things about the market is that, at the end of the day, none of us know.
49:19 Josh Brown? Barry knows, the rest of us don't know.
49:21 Scott Galloway? Other than Barry. But but the we do know some things. You were talking about the 5% rule. The only truisms I've come to is that one diversification and two patience or just time. That if you're diversified and you're willing to put stuff away for a while, you know, pick any five S and P stocks since the beginning of the S and P. If you hold them for 10 years, no one's ever lost money. Isn't it the end of the day, the only thing we know is diversification and and time?
49:54 Josh Brown? You have to have a philosophy that says, long term, overall, I'm willing to bet that American companies are going to increase their profits and that investors are going to be willing to pay more for those profits as time goes on. You have to be, you have to make that bet to be a long term investor. Your fundamental backdrop of everything that you do has to be that companies get better, products get better, technological advances occur, and the quality of life improves. And as a result, more money is made because the company's doing that or doing that with a profit motive. If you have a world philosophy that differs from that, you're probably not going to be a great investor. You might be a great trader.
50:40 Josh Brown? And some of the better, shorter term macro traders are way more bearish than that statement I just made. But for most people that are not going to try to fight the world and convince 100 million investors that I'm right, you're wrong. Like for most normal people who are just going to allocate and be patient, that has to be the philosophy that you have. I think the the real thing that I would want to say, though, especially to your audience. Ed, how old are you? 24. Okay. Do you want the stock market to go up or down this year? Ups, please. Why? Want to make money. But you're buying, you're buying stocks. On a regular basis. Okay. If you haven't figured out the trick yet. I do CNBC and the audience skews rich and old. Not like too old. I love the audience, but they're older. They're not you.
51:25 Josh Brown? They're not 24. Oh, but boss, CNBC, the average age of a CNBC viewer is dead. All right, all right, all right. Jesus Christ. Stop. It's it's older than our our elected leaders. Fine, listen to me. The CNBC audience, they have most of the money that they're ever going to make already invested. Of course, they want the market to go higher. Yeah, yeah. That's not you. You are a forced buyer of stocks and bonds. Every two weeks, when you get your paycheck, assuming Scott is paying you. Some someone will be paying you. For the next 50 years, you have no choice but to buy into a 401K, into an IRA. You're a forced buyer. Why on earth would you be rooting for higher prices?
52:07 Josh Brown? Why do you want to buy stocks from my parents at higher prices? How does that serve your interests? It doesn't. Yep. The number one thing I want this audience to hear from me. You have got to flip your mentality around. If you're not using the money inside of the next two years and you're a forced saver. By the way, I am, I'm 46. I'm allocating a 401K, adding to it every two weeks, right? If you're a forced buyer and not using the money, why on earth would you want to be buying at ever higher prices? It makes absolutely no sense. Now, the one thing that younger people should root for the market to at least be stable for is they're probably the first people to get fired.
52:48 Josh Brown? When share prices drop and companies start letting people off and restructuring. Okay, fine. So from that standpoint, you're probably not rooting for a crash. You should absolutely not be rooting for 14% annual returns. Because all that's doing is guaranteeing that you're going to be paying more and more and more for your investments. You want to buy low. Nothing could be better for your generation, Ed, than a lost decade where stocks are volatile but go nowhere. Because in the subsequent decade, when we go from Dow 35,000 to 55,000, you will have accumulated.
53:23 Josh Brown? That much more, that many more shares in these companies. And again, you are forced to. We have organized this country around a 401K. Literally, it's the only way to survive is to have an investment portfolio. Almost nobody can live on their wages alone throughout the course of their lifespan. So I want you to stop rooting for new record highs and focus on your career. And let the markets do what they will do and never feel despondent about sell offs or volatility. Those things are helping you accumulate more stock as time goes on.
53:56 Scott Galloway? That's great advice.
53:57 Josh Brown? Awesome.
53:58 Scott Galloway? Josh Brown is the co-founder and CEO of Ritholtz Wealth Management, a New York City-based investment advisory firm managing more than $4 billion in assets for individuals, corporate retirement plans and foundations. Josh, I just love, I love how you just kind of break it down. And I think you're just a huge asset. You're, whenever I see you on CNBC, I actually turn up the volume.
54:20 Josh Brown? Thank you, Scott.
54:21 Scott Galloway? Thanks, brother.
54:33 Ed Elson? Okay, let's take a look at the week ahead. We'll see the consumer price and producer price indices for September, and we'll see the minutes from the Federal Reserve's last meeting. And finally, third quarter earnings season kicks off with JP Morgan, Citibank, Wells Fargo and PNC reporting. Scott, do you have any predictions for us?
54:51 Scott Galloway? We're beating a dead horse here, but the indices that track the snack food industrial complex and some of the bigger retailers that sell foodstuffs, Krogers, Walmart, PepsiCo, Coca-Cola, I think we're going to see fairly serious drawdowns. And there's just going to be more and more in the media about the impact of these breakthrough drugs.
55:17 Scott Galloway? This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our executive producers are Jason Stavert and Catherine Dillon. Mia Silverio is our research lead and Drew Burrows is our technical director. Thank you for listening to Prop G Markets from the Vox Media Podcast Network. Join us on Wednesday for office hours and we'll be back with a fresh take on markets every Monday.
56:16 Scott Galloway? If you love social media and are interested in working with us, we have an open, part-time social media editor role. Reach out to [email protected] .
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