Prof G Markets: Inflation, Interest Rates, Twitter, and AckSPAC

This week on Prof G Markets, Scott reads the tea leaves of the latest inflation and interest data, takes the market’s temperature on the latest twist to the Elon Musk-Twitter saga, and looks into the future of the SPAC. Inflation, Interest Rates, and Bond Yields US inflation rises 9.1% in June, more than expected, as prices keep climbing US weekly jobless claims hit 8-month high; labor market still tight | Reuters US Treasury Curve Inversion Deepens to Level Last Seen in 2007 - Bloomberg Twitter Twitter vs. Comparables AckSPAC Bill Ackman to wind up SPAC, return $4 billion to investors SPAC activity slows to lowest level since 2020 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Scott Galloway?

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• 0:49Speaker 01

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• 1:18Scott Galloway?

  This week, numero uno in our new markets podcast. I used to go to a pizza place called numero uno in Westwood Village when I was a teenager. I had my first date at the numero uno pizzeria. Anyways, welcome to our first markets podcast. So what is our objective with our markets pod? Our objective is simple, and that is we want you to be more economically and emotionally viable. Now, what does that mean? We want you to bust a move towards economic security. And once you're there, or hopefully along the way, that you have the opportunity to take economic stress off the table such that you can achieve real happiness with what is the number one driver of happiness, and that is developing deep and meaningful relationships. Now, how do we get there with economic security?

• 2:03Scott Galloway?

  I think there's this myth, and the myth is that if you're just talented and work hard, everything will fall into place. And this myth is fomented by very wealthy people who claim that they don't think about money, which is total bullshit. Bottom line is, You need to be good at money. There's a difference between being good at making money and being good at money. And you need to be educated about it. You need to understand it. And take it from me, those very wealthy people who claim they don't think about money are fucking obsessed with it. So you don't need to be obsessed with it, but you should be thoughtful about it. You should be educated about it and you should understand it. And we're going to try and help you here.

• 2:48Scott Galloway?

  Anyways, welcome to Prop G Markets. Today, we're discussing interest rates, bonds, and what the market thinks will happen in the Elon Musk Twitter saga and the latest from the SPAC market. Prop G analyst Mia Silverio, what is in the news today, Mia?

• 3:03Speaker 03

  The big news this week was that consumer inflation rose to a four decade high in June at the annual rate of 9.1%. That's higher than consensus predictions and higher than base rate of 8.6%. That report basically seals the deal that the Fed will raise interest rates by another 0.75% when they meet again on July 27th. They might even go further. An analysis of the futures market suggests that there's an 87% chance we'll see a full percentage point rise. Before the June inflation numbers, those odds were close to zero. But stepping back a second, why does the Fed raise rates to counter inflation?

• 3:40Scott Galloway?

  Well, inflation is simply too many dollars chasing too few products. So one way to solve it is to discourage people from spending money. And the way you encourage them to spend less money is you make things more expensive for them. Such that they say, okay, my interest rate's going up on my credit card, my house payment and my car, so I'm going to rein in my horns. I'm not going to be as aggressive around spending because some of my essentials have gotten more expensive. Essentially, what you have to do is you have to put the economy. Into a coma while ensuring you don't actually kill the economy. And the reason why I think you're going to see 100 basis point increase in interest rates from Jerome Powell, from the Fed, is because his idol and the book he references all the

• 4:25Scott Galloway?

  time is on Paul Volcker. And Paul Volcker is credited with forcing the country to take its medicine and took interest rates much, much higher and got a lot of grief for it, but ultimately it worked. And a lot of people would argue that Reagan's tenure from 80 to 88 and the bull market we've mostly enjoyed for the last 30 years is a function of the fact that interest rates were allowed to just come gradually down from highs that reached incredible highs. So in sum, we need to, we need to cool the economy and one way you do that is by increasing interest rates.

• 4:58Speaker 03

  Right, but despite June's inflation report, there are already some signs that this strategy is working. So consumer spending, for example, fell for the first time this year in May. Oil prices are back to where they were before the invasion of Ukraine and gas prices have been dropping all month. Other commodities like agricultural goods are getting cheaper. And remember all the talk about the crazy used car prices? Even those are starting to decline. So I wonder if the Fed really needs to keep raising rates. It already seems like it's working.

• 5:30Scott Galloway?

  Yeah, I don't know. That's still a staggering number and the inflation number still exceeded the estimates. And some of it is within the Fed's control and some of it isn't. If you look at inflation globally, it's everywhere. It's in the UK, it's, it's I think 15% in Russia, it's out of control in Turkey. So this is something that on a macro level is being driven by the war in Ukraine that has created a crisis, not only of confidence, but interrupted supply lines around agriculture and around energy. So as a result, there's been just a huge upward movement. Now, Theoretically, higher prices should force people or incentivize people to become more innovative and work double shifts and figure out new sources of oil production and even renew

• 6:15Scott Galloway?

  old alliances. It's no accident that we've decided to kiss and make up with Venezuela and that Biden is over kissing the hand, if you will, of the Saudi or the Kingdom of Saudi Arabia because we've decided it's more important to bring down energy prices than it is to wring our hands over some of the really suspect behavior or non-democratic behavior is probably the PG 13 way of saying it. So it's trying to open up supply, increase the number of products, and also decrease the number of dollars. An example of what you would not do, Gavin Newsom, governor of California, passed a inflation relief bill, or maybe it wasn't a bill, but announced that because of the surplus, you got to imagine there's a ton of people who've had huge stock market gains and as a result, the taxes in California

• 6:59Scott Galloway?

  registered against those capital gains have resulted in $100 billion surplus in California. So for all the shitposting about how terribly California is doing, they ended up with $100 billion surplus. And Governor Newsom, who should be called candidate Newsom as he's clearly running for president, has decided to give money back to any household in California that is making less than $500,000 a year or has household income of less than $500,000 a year. Now, he's calling it, I believe, the inflation relief payment, and that's an oxymoron. If you want to attack inflation or you want to dampen it, the last thing you would do is put more money in consumers' pockets. So it'll be very popular. Everybody loves to get a check. But it just gives you a sense for the misunderstanding of the economy.

• 7:42Scott Galloway?

  Not so much on our politicians. I'm sure he understands it or would like to think he understands it. But consumers will put all economic theory behind them if it means getting a check. But that in and among itself is inflationary.

• 7:53Speaker 03

  Just moving back to the Fed's strategy for a second.

• 7:56Scott Galloway?

  Yep.

• 7:56Speaker 03

  Isn't there a risk that the Fed goes too far and pushes us into a recession?

• 8:01Scott Galloway?

  Yeah.

• 8:01Speaker 03

  We saw something unusual in the bond market this week. Short and long-term treasury bonds are now inverted, meaning that the short-term bond is giving a better yields than the long-term bond. What's scary is that an inversion like this has preceded every recession since 1955. So do you think we're headed for a severe downturn?

• 8:20Scott Galloway?

  So first off, you look at the yield curve, and that is you take similar bonds. And you just look at their maturity dates and you look at the slope of the curve. And typically, if people are going to tie up money for 10 years versus five years, they demand a higher yield. So the yield curve is usually positive or slopes upward. When it's inverted, meaning that a 30-year bond is yielding less than a 10-year bond or a short-term bond, what it's effectively saying is that the marketplace is valuing safety over access to capital. And that is, it said, "Look, I don't feel great about the current environment, but I want to hold on to my money. So in order to give up my money in the short term and lock in a rate, it's got to be a higher rate because I don't know what the long-term holds."

• 9:02Scott Galloway?

  So in sum, an inverted yield curve usually kind of connotes insecurity or a lack of confidence in the marketplace. And yeah, 11 of the last 12 recessions, inverted yield curve has resulted in a recession. But something that David Yurmac, the head of the Finance Department at NYU Stern, said, and it's important to keep this in mind, "All of this is a random walk." And that is, everything is unprecedented until it happens. The coronavirus is unprecedented, the amount of stimulus, this inflation we have is kind of unprecedented, at least in the last four decades. It seems like it's sort of a done deal that we're headed into recession. One thing I've learned is that when everyone's pointing one way, you should look the other way. The thing that gives me some pause that we might not, in fact, go into recession, although

• 9:47Scott Galloway?

  it's hard to imagine interest rates going up this fast and this aggressively without a recession, is that everyone's saying we're headed into one. And I find that typically, when everyone's in agreement, it usually means something else is going to happen. In terms of them going too far, I don't think so. Because if you look at inflation, inflation usually tracks interest rates. The two are kind of close together and track each other. And in this instance, inflation is still well above where interest rates are. And everything is a matter of perspective. Now, what is perspective? Perspective is a photographic term, and that means you take the lens out to get more perspective on the object you're shooting.

• 10:27Scott Galloway?

  And if you take the lens out here, what you find is, sure, if we're looking at a six-month perspective...

• 10:35Scott Galloway?

  Mortgage rates have gone from 3% to 6%. That's a massive move. But if you take the perspective out 30 or 40 years, the first time I was looking at houses in the late 80s and early 90s, interest rates or mortgage rates were 10%. So interest rates still are not only historically low, but relative to inflation, they still seem inappropriately low. So the interest rates here, if anything, you would argue, are still too low. So I would not be, I'd be shocked if we didn't see 100 basis point increase from the Fed. And I don't think there's any signal that they're going to slow down for fear that they're going to cool the economy too much. People are spending money. We also have unemployment at record lows, historical lows. Still a ton of jobs out there, still multiple jobs available for every person looking for a job.

• 11:20Scott Galloway?

  So I don't think he's worried about putting us into a hard landing or a depression.

• 11:26Speaker 03

  Assuming you're right, and the Fed does raise rates by a full percent, what should investors expect?

• 11:33Scott Galloway?

  The honest answer is I don't know. I can just tell you what I'm doing, and that is I'm always invested in the market. You have to set this against your own personal needs, your own consumption needs, how old you are. I think as you get older, you want to be less risk aggressive because you don't have time to make the money back if you have a loss of capital. I'm always invested in the market. I've never been able to time the markets, and I don't think most people can. When the market gets really volatile like this, I make sure I'm diversified and I lower my leverage. I think debt plays a role in good investing, and sometimes you can have a little bit of debt at a low interest rate. I was able to borrow money against my stocks at 1%. And I thought it was a good idea and still think it was a good idea to borrow some of that money and invest in other things. What happens, though, is when you're worried about the market, you make sure that you're not levered.

• 12:15Scott Galloway?

  Warren Buffett said that how smart people get into trouble is with leverage. But I'm always in the market because if you look at the history of the market, there's a small number of days where the market absolutely rips up, where if you miss those days, your returns over the long term are far inferior, and it is impossible to time the markets, or at least I find it impossible. So I'm always invested, but occasionally I take my leverage up or down based on how bullish I'm feeling about the market. And as I get older, I try and be more and more diversified. The thing that kind of saved my ass here is that I shorted some stocks in the tech sector because I was so over invested in tech. Which has helped ease the pain of the incredible declines I've had in most of my

• 12:59Scott Galloway?

  growth stocks. I also about 18 months ago invested in an energy company which seemed very out of vogue. And that stock I think is up three or four X, which again has eased the pain of some of the drawdowns or the shit kicking I've had in some of these growth stocks. In some, I think it's impossible to tell what's going to happen. Nobody knows. 50% chance the market will go up, 50% chance it'll go down. But you want to be diversified. You want to be very careful with leverage. And as you get older, you want to do less leverage and absolutely ensure that you are very, very diversified.

• 13:35Speaker 03

  So Scott, I'd like to return to bonds for a second. We know that they're seen as a hedge against inflation. Does that mean I should own them if I want a diversified portfolio?

• 13:44Scott Galloway?

  I would have argued and recommended over the last 10 years. And again, I'll say what I've done. I haven't owned a single bond until just a year or two years ago. And that is, interest rates were so incredibly low. So having served on boards over the last 10, 15 years, I always thought that we were getting a great deal when we issued debt. That the amount of money or the interest we were paying to investors, the premium they were getting for taking the risk of investing in our company, was a good deal for the issuer. That the cash flows of the company were strong and predictable, but they weren't bulletproof. And we were having to pay or only had to pay three or 4% interest. So I would argue over the last decade until just very recently, bonds were just a bad deal. You just got so little yield in exchange for some risk. There was some risk there

• 14:27Scott Galloway?

  unless you were in treasuries. Having said that, we've seen interest rates tick up. And I think most financial advisors would argue that under the auspices of diversification, it's not a bad idea to have some bonds. Typically, people say the general split should be somewhere between kind of 60, 40, or 70, 30 equities to bonds. And I think that, I think that a responsible investing portfolio now does include some bonds, given the move in interest rates. Stay with us. We'll be right back to discuss the ongoing Twitter and Musk saga.

• 15:03Scott Galloway?

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• 17:14Scott Galloway?

  All right, Mia, enough is enough. Let's talk about my favorite story. What should we talk about?

• 17:19Speaker 03

  Let's talk about Elon and Twitter.

• 17:21Scott Galloway?

  Okay.

• 17:22Speaker 03

  So as I'm sure our listeners know, Elon is trying to get out of the deal to buy Twitter. Everyone is speculating on what will happen, but we wanted to take a more quantitative approach and look at what the market thinks. Twitter's market cap is 28 billion.

• 17:37Scott Galloway?

  Right.

• 17:37Speaker 03

  About what it was before Musk started buying stock. Meanwhile, social media and digital advertising sectors have crashed. Google is down 16%, Meta is down 20%, and Snap is down 63%. If Twitter's stock had traded somewhere in the middle of that pack, it would be worth about 15 billion. So where is that extra 13 billion coming from?

• 17:59Scott Galloway?

  Yeah, this is really interesting. So you're absolutely right. When Musk started acquiring shares, Twitter was about 32 bucks. And then it skyrocketed when he announced he'd taken a large stake and then it jumped to just about 52 or 53 dollars when he quote unquote signed an agreement. As the market incorrectly believed that when he signs an agreement, he's going to be, he's actually going to live up to that agreement. Anyways, longer talk show, but the natural level of Twitter, if it started, if it was at 32 bucks, its peers are down anywhere between 10 and 60% as you pointed out. So let's give them the benefit of the doubt and say they'd only be down by about a third. The natural level for Twitter's stock right now, without this exogenous Musk intervention, would be about 20, 22 bucks.

• 18:41Scott Galloway?

  So why is it trading at 36? And the best answer I can come up with, and it's something I hadn't realized until just today, is that, okay, does that mean people think this deal is going to close? No, I don't think that they believe that. Do they think, oh, the business has gotten stronger? No, I don't think that's it either. I think what's going on here is the following, that when you own one of the 900 million shares in Twitter, you have one 900 millionth. Of the ownership, you have a legal claim on a small piece of the IP, the assets and the cash flows. Equity is a synonym for ownership. But what you also have now, and this is why I think the market keeps the stock where it is,

• 19:24Scott Galloway?

  you have the rights to a legal claim against the wealthiest man in the world that he must pay you $54.20 per share. So while I don't think the market or Twitter shareholders have a lot of faith in the business necessarily, or a lot of faith in Elon Musk, what they do have faith in is the Delaware Chancery Court. And I think the market is saying that there is a very good probability that there will be a legal decision that includes additional compensation to the shareholders. Because Musk signed an agreement, an airtight agreement, I might add, that will force him, that the remedy will be, he will have to give every shareholder $54.20 a share. As a matter of fact, I think if the board were to settle for a lot less than that right now,

• 20:08Scott Galloway?

  they would be subject to shareholder suits. Twitter may in fact become a tracking stock based on the likelihood that this agreement is upheld, which I think it will be. So the premium here is not an Elon premium, it's not a deal closing premium. It's basically betting on the outcome of a legal case.

• 20:28Speaker 03

  So if Musk had to pay Twitter for the damage he has incurred, where would the money go? Would it be paid out in dividends to shareholders?

• 20:36Scott Galloway?

  That's a good question. What I believe Twitter's board, as evidenced by their complaint, and by the way, it's a really well-written complaint, indicates, is that they're trying to enforce the specific performance clause. What is that? It is a clause that says, if Twitter lives up to their side of the agreement, you are required to perform specifically that you show up with $54.20 and give it to every shareholder for the number of shares they have. So if in fact, the Delaware Chancery Court said, okay, you have to pay the shareholders $54.20 and then you own the shares, then it becomes, well, okay, I don't want to own this company. And Twitter board says, well, we don't want you to own it. They come to some sort of probably settlement. So say the settlement is $10 billion to go away.

• 21:21Scott Galloway?

  The full enforcement of the settlement would be to take the market capitalization of the company, say it was 20 billion, and the difference between 20 billion and 45 billion, you owe us 25 billion. I don't think it'll be that big. It'll be somewhere in between the 1 billion and call it 25 billion. Say they settle on 10 billion, that goes into the treasury of the company, and then the company gets to decide, specifically the board of directors and management, what happens with that 10 billion. They might issue a one-time dividend, that would be about 12 bucks a share to Twitter shareholders. They might decide to get aggressive and go make acquisitions. They might decide to just leave it on the balance sheet and use it for growth capital. In sum, it becomes an asset of the company that goes on to the balance sheet.

• 22:02Scott Galloway?

  And now the latest on the Ackman SPAC saga.

• 22:05Speaker 03

  So, two years ago, investor Bill Ackman launched the largest SPAC in history, a $4 billion fund. He tried to buy Universal Music Group, but the deal fell through. Now he's announced that he's shutting down the fund and returning the $4 billion to investors. Scott, can you explain what a SPAC is? And separately, do you think this is the end of the SPAC era?

• 22:29Scott Galloway?

  So, SPAC, Special Purpose Acquisition Corp., basically, a lot of times referred to as a blank check corporation. What it is, is a group of operators/bankers/fundraisers do all of the legal work and paperwork, and take it public. Take the company public and say, "We're a group of smart people. We're going to go try and find an acquisition target. Trust us." And the markets take them public, and investors buy that stock, and then they have a publicly traded stock. So it's that when they find an acquisition target, it's sort of just outwater and boom, overnight, that company becomes public. What does this do? It creates speed to market. It bypasses certain regulatory hurdles, and it gives people with a lot of contacts, or who are kind of deep in the market, or have

• 23:13Scott Galloway?

  a lot of domain expertise, the opportunity to go find a great private company, and try and convince them that I have the money ready to go. Overnight, you can be public. And the market, for a while, specifically from kind of late 2020 to late 2021, really liked SPACs. And when they would find an acquisition, when a SPAC would find an acquisition and do a deal, it's called de-SPACing. In Q1 2021...

• 23:38Scott Galloway?

  There were 300 new SPACs that went public and 81 of them found a deal and de-SPACed. In Q1 22, only 78 new SPACs and only 30 were able to find a target and de-SPAC. What do we have? We have 600 SPACs that is operating groups that have raised money and are looking for a target, still out there hunting. What does that mean? It is a great time to be a private company that is SPACable, so to speak, and it is a terrible time to be out there with capital that you raised or proceeds from a SPAC trying to find a target. Now, is that bad for the operators? Can they just give the money back to the investors? Yes, but they lose the legal fees. It costs you somewhere between 5 and 10 million bucks in investment banking and legal fees to do a SPAC. So

• 24:21Scott Galloway?

  they lose the cost to get a SPAC going. The majority of 2021 de-SPACs have underperformed the S&P 500. De-SPACed companies in aggregate have declined 50%, actually 47.8% since 2018. Think about this. SPACing has not worked for investors. And the SEC has announced they're going to have more stringent disclosure requirements now in place, which kind of reduces the attractiveness of SPACs. Your question, does this mean SPACs will go away? No, SPACs have been around for a long time. They were just very hot and very in vogue for about 18 months, and they're about to go back to where they've always been. And that is sort of an esoteric, a kind of weird instrument that works for some companies, usually kind of tier C companies that can't get public, the traditional REIT. But we've

• 25:05Scott Galloway?

  seen, I think, an end for at least a while of kind of the great SPAC mania that defined 2020 and 2021. Okay, the week ahead. Next week, we're going to see how the housing market responded to rising interest rates in June. Reports on both new housing starts and sales of existing homes will be released. Something tells me we're going to see a real cooling in the housing market. And on Wednesday, we're going to find out just how much Tesla has suffered based on the shitposting and distraction. Of its CEO who is pretending to buy a microblogging platform. They're releasing their Q2 earnings this week. Analysts expect a 75% year-over-year earnings jump. My prediction, my prediction, and I have been wrong. Anytime I use the word Tesla, I'm usually wrong.

• 25:47Scott Galloway?

  This company is still the most overvalued company in the world, and the market is looking for an excuse to take this company to the woodshed. And I think it's going to find it in China, specifically production problems in China. And the fact that the CEO is doing pretty much everything but anything to do with Tesla. He's managed to piss off the far left by saying that the Democratic Party is hateful. And he's also managed to piss off the spokesperson for the right, Donald Trump. So I think all of this is going to take a toll. And at some point, every stock here is getting beaten up pretty badly. And Tesla's actually held up. It's down 30 or 40%. So my prediction, my prediction, and again, don't trade on this because I usually get it wrong about Tesla.

• 26:31Scott Galloway?

  Pain. We'll see you on Wednesday for office hours.

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