Prof G Markets - Markets are Ignoring Catastrophic Risks — ft. Aswath Damodaran

Episode Date: February 20, 2026

Scott Galloway and Ed Elson are joined by Professor Aswath Damodaran. They discuss the unraveling global order, unpack the “catastrophic risks” that are on his radar, and get his take on the software selloff. Plus, he breaks down whether he would prefer Anthropic or OpenAI in his portfolio.  Aswath Damodaran is the Kerschner Family Chair in Finance Education and Professor of Finance at NYU’s Stern School of Business. You can read his research on Musings on Markets. Resist and Unsubscribe Check out our latest Prof G Markets newsletter Follow Prof G Markets on Instagram Follow Ed on Instagram, X and Substack Follow Scott on Instagram Send us your questions or comments by emailing [e-mail] Learn more about your ad choices. Visit podcastchoices.com/adchoices

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if that could actually be the punchline. So insensitive. You and your, you and your millennial white privilege. What did you go to Princeton? Listen to me. Markets are bigger than us. What you have here is a structural change in the world distribution. Cash is trash. Stocks look pretty attractive. Something's going to break.

Forget about it. How about that Singapore number? 792K. It's pretty good. I think they're getting the better end of the bargain because if someone from Singapore wins the Olympics, did you know Singapore has mandatory national service similar to Israel, and Singapore is the most religiously diverse nation in the world? and they very deftly decided that we are going to be so prone to ethnic violence with all this religious heterogeneity that we need to get people more focused on the flag.

And so they decided to do national service. I think it's a great move. You also go to jail if you leave gum on the ground. But is that not true? That's actually not true. It's an offense. But I will tell you this, though. I was in Singapore about a month ago.

And you have never seen a guy. my age, go through his luggage more carefully to make sure that that joint from two years ago wasn't floating around in a pocket somewhere. Has that ever happened to you? You accidentally had some detritus. Detritis? Yeah, some leftover paraphernalia. Detritus. I thought that was some sort of gum disease. I think I saw my periodontas for that. Now, I usually, I have a very healthy fear of prison, and I don't travel with edibles or, I do travel with prostitutes. Gave in the luggage. That was dark.

Just like the kind of guy who would think Africa is a country, not a continent. That was dark, Ed. No, I don't travel with edibles. No, I've never, I've never, I've had, I lose stuff at TSA. They don't find stuff on me, although they did pull aside Drew one time when I went to Mexico and brought him with me because I need to. you know, my technical support animal, Drew Burroughs, to make sure that I could set up, and they pulled him aside, and they basically said he had to pay, I don't know,

a couple hundred bucks or a couple thousand bucks to get our equipment back. But, you know, that's Mexico. That's just part of what you, you go through when you go to Mexico. But no, have you ever been caught with drugs, Ed? No, that wasn't the point of that question. No, I haven't. Thank God. Have you ever been arrested?

Have you ever gotten in trouble with the law? No, I've never been arrested. I have never been called several times by people who have been arrested. I'm that guy they call because I assume I'm rich and that I know I have contacts. And so I get those calls from prison. I've had three calls from people who have been arrested just in the last, it feels like the last year, but it's probably the last two years. Wow, that's, they want you to bail them out?

Well, unfortunately, I learned this. There's not a whole hell of a lot. can do. What you do is you immediately try and call a lawyer, you go down to the station, and all you can do is provide sort of emotional reassurance and have a lawyer lined up. It depends when it happens. I know way too much about this, which probably speaks to my friend group. But it's mostly stupid shit like DUIs and stuff, which isn't stupid, which is dangerous. And Africa is a continent on a country. But there's not a hell of a lot you can do. other than make sure you've lined up a really good lawyer.

But I think people under the impression, like, I'm going to show up with a bag full of cash and just spring them or something. It doesn't work that way. Sometimes you can just show up with a much of cash and make bail. Right. But generally speaking, if you get arrested, what happens is your lawyer says, well, he or she's going to go through the system

and it's going to be a few hours or a day. What you don't want is to be in a smaller jurisdiction arrested on a Friday. after like 5 p.m. because that means you're not seeing the judge till Monday. This is good to know. I did not know that if I ever get in trouble with the law, I can hit you up. You won't bail me out, but you'll offer some emotional reassurance and line up a lawyer, which is all I need. That's great. I'm going to come up with nicknames for your prison name and just make fun of you. Honestly, that would be great. White bread. That would be great. White bread. Tasty ed.

Tasty ed. All right, should we get into our conversation with Professor Aswath-Damodran? We should. Let's do it. All right, here is our conversation with Professor Aswath-Demotron, the Kirshner Family Chair in Finance, Education and Professor of Finance at NYU Stern School of Business. Professor Demodran, thank you for joining us once again on Profji Markets. Thank you for having me. So last time you came on, it was probably our biggest episode of the year.

It was striking to both me and Scott. It was striking to our audience. A lot of people were writing about it. A lot of people were talking about it. Because your view was that valuations across the board were too high. And you told us that there was no place to hide in stocks. That was how you framed it. And we had a wide-ranging conversation.

And one of the conclusions that you put forward is that perhaps, you know, the traditional wisdom in stock market investing was maybe not as true anymore, at least not right now, based on valuations you were looking at getting into collectibles. How has your position changed or not changed since we last spoke? Do you still believe that there is no place to hide in stocks? If you look at the level of the S&P 500, the time that we talked in, I think, early November, so about the same level as it's today. The market's kind of flat, and it's, you know, you've had up days and down days, you've had periods of crisis.

Here's my biggest issue. One is if this were, the equity risk premiums that we're seeing in the market, what people are pricing stocks to earn is roughly what they were pricing in in 2005, 2006, 2004, going back in history. And I think that if you just looked at the numbers, there are ways you can justify it. You can say, oh, what's a big deal? The real issue that you face is, I think the potential for catastrophic changes is much greater now than perhaps at any time in the last 70 years. Catastrophic changes in what way? I mean, after the Second World War, we put together an economic order centered around the U.S. and the U.S. dollar, and that's coming apart. You can see an acceptance that it's coming apart.

You saw it last week in the political discussions you saw in Europe about where are we going next. But clearly, now, the old system is coming apart. There's nothing to replace it. That's where the catastrophic risk component comes in. And the market seems to essentially be blowing by saying, it doesn't matter. We're going to figure out a way. And just like we did on COVID, and maybe that's part of what's going on here is people are saying markets are resilient enough.

They're going to find a way even through this dramatic change in how the global economy is run to find the other side. And I think that what investors don't seem to be factoring in is there are going to be pitfalls along the way that have to get priced in. So my concern with stocks is not the 1999 level of concern, which is, hey, stocks are crazy. You can't justify this pricing. It is, we can justify the pricing. We assume that there's no catastrophic risk to worry about. But if you do bring in catastrophic risk, then the market becomes worrisome across the board.

Whether it's Mag 7, not Mag 7, global equities, U.S. equities, collectively, there seems to be too much of an acceptance that we'll figure away through this without serious pain. I'm already feeling bearish again. So I guess one thing I would push back on, it sounds like what you're describing is a collapse in the global order, the way the global economy is set up, which to me sounds like a U.S. problem. I don't think so, Ed, and here's why. No, right? I mean, the U.S. has benefited from the world economic order, but so has, you know, much of the rest of the world. Europe has lived in the reflected protection of the U.S. for 70 years and essentially been able to focus entirely an economy building, leaving defense and the expense of defending Europe to the U.S.

So this is not just a U.S. prompt. The U.S. might have more to lose than everybody else because it's been at the center of the post-World War to economic order. But it's not just the U.S. I have a feeling that this is going to be pain that percolates in every direction, that this adjustment. It's not so much a collapse, but there's got to be a new economic order that comes out of this. How we get from where we are now to that new economic order is what we should be thinking about. And I don't think it's going to be as painless and as easy as markets seem to be pricing in. I mean, how do you go from the U.S. dollar as the central currency to something else?

Because there's nothing else out there right now that can replace the U.S. dollar as a global currency. So I think that that transition, more than a collapse, is what's going to be painful. Because there are going to be, there are going to be some businesses. They're going to find a way to get to the other side easily, and other businesses are going to struggle more. But I think that struggle's got to be priced in more, and whether that means a correction of 10%, 20%, 25%, we can debate. Because I think that that correction has to occur somewhere along the way as this transition plays out. Do you think that the correction will be a function of a slowdown in the fundamentals of businesses all across the board, or is it more of a sentiment? multiple problem that you're describing. Because the reason I bring this up is I feel as though a lot of

investors in the markets are beginning to feel this. We're seeing this, you know, we saw it at Davos. As you say, most people agree something about the world order is changing. We're seeing a lot more attention being paid to the deficit spending in the US. And we did see a rotation in terms of capital flows last year out of the US, or maybe out of the US, actually too harsh, because the S&P did rise. But ultimately, you know, every other market besides the U.S. saw big, big returns. You know, emerging markets up more than 30 percent. The world minus U.S. ETF up 30 percent as well. To me, it almost seems as though one response from investors would just be, okay, let's just shift our capital allocation out of the U.S., invest in a little

bit more in Europe, invest in a little bit more in Latin America. I don't see how this necessarily means that everyone's going to pull back wholesale. It's not just a rotation in geopolitics. It's a rotation in business economics as well, which is, and you're seeing this with the talk of AI and technology changing businesses. And here's the conundrum that investors face. If we're purely a geographical shift, you're saying, let's shift out of the U.S. That's our problem. We're overinvest in the U.S., let's invest elsewhere. But the problem is the businesses that are best positioned to take advantage of the business transformation happen to be U.S. companies.

So if you're going to rotate out of the U.S., and by the extension, you're going to rotate out of technology and the big technological disruptors in the U.S., I don't see how you maintain balance. So that's why I don't think it's going to be last year, as you pointed out. The S&P 500 did well. the rest of the world did better, but much of that better came from the dollar becoming weaker, not from those markets delivering higher local currency returns. In fact, I computed the local currency returns and the dollar returns.

The dollar returns are much more impressive because you get that extra 9, 10% boost in your returns, if you're a European stock market, if you're building the dollar depreciation. So I do think we're going to continue to see some weakness in the dollar translating into money moving out of the U.S. but there are limits to how much you can move out of the U.S. Without ending up being underinvested in the business is our best position to take advantage of the economic change. I mean, again, I don't mean to sound catastrophic, but I'm saying, you know, put on your seatbelts because they're going to be adjustments.

And the question you asked about fundamentals and perceptions is a good one. And I'll take one sector where you're seeing this play out. Let's take software. If you look at the margins for software last year, they stayed impressive, the gross margins for 75%. percent of you. They look very much like the previous year. Revenue growth was pretty good, but clearly the perception has changed. Software stocks are down 25 to 30 percent because there's a concern that AI is going to eat away at margins. And I think it's well placed. Collectively,

I think software is ripe for disruption because it's so fat. So many layers of profits you can go after. But I think that when you get those corrections, you're often going to get across-the-board or perception is going to mean marking down the price of all software companies, but some of them are going to find a way through this disruption to emerge as winners. So I think the same process is going to play out at the market-wide level, which is you're going to see sell-offs, and then you're going to see people re-examining some companies saying, hey, these companies are going to find a way in the new economic structure to be successes.

So that's why it's going to be a back and forth. It's not going to be a one-way adjustment or everything gets marked down, we stay down, it's going to be a process where markets are learning, even as things are unfolding, what this process is going to do to company profits. So Aswath, let's double-click on that. You've seen some of the most iconic software firms off 30, 40 percent, and as a multiple on free cash flow, they're trading at some of them at all-time lows. And Ed's thesis, and I think I agree with is that it might be a buying opportunity, because when I look at the, if I think of their integration in businesses, there's, the tip of the iceberg is, all right, what can be done using AI now, but below the surface is they have billing set up, they have UI, they have relationships with the company. I can't even imagine, even my last company L2, we used Salesforce to track our leads. The idea of getting just a sales team of five or six people to retrain them on another product,

I don't care if it was 50% less expensive. We wouldn't have done it. So is this an opportunity? Have these companies been oversold? The Adobe's, the Service Now's, the sales forces? I think collectively, yes. And I think that that almost always happens when you have worries about a catastrophe. I mean, I think back 15 years when fossil fuel stocks went to,

into free fall. This was in the early years of ESG and COPE where people thought, hey, this is the end for fossil fuels. And they went into free fall. And then eventually they recovered because it turned out that the threat was not to a core business. The fossil fuels was still required. I agree with you that the sales forces of the world and the oracles are much more sticky businesses than we let on. So if you look at them, the software is only a small piece of the puzzle. It's actually the least, you know, of all the comparative modes, it's the least of their modes. You could probably replicate their software pretty easily. But once they get adopted, they squirrel their way.

Now, if that's the right word, into your systems, your data, your processes, and they become part of your company. So it's not just replacing software. It's an entire system. Here's how I think it's going to play out. And I think this is where the software companies are looking. The problem is much of what they do now with people, which is what the expensive part is, to track these processes, can be done by AI. And they're offering AI products that effectively do what their regular products are doing. But I think one of the mistakes they're making is what brick and mortar retail firms initially made with online retail, which is they worry about cannibalization.

So they can't go in full force with an AI product, even if it's a really good one. the same way that somebody who has nothing to lose can go in. So I think what you're looking for as an investor is which of these companies are using AI in a way that they're willing to give up their existing product sales and replace them with AI. Those companies will make it. And which of the companies want to have their cake and eat it too, which is sell their existing products, charge the prices they do, get the high margins and offer AI as a side product,

but they're not willing to jump in. So I think that the adaptable companies in this mix will be the ones that make it. As an investor, you're looking to see how they're incorporating AI into their product mix and into their business. My prediction is the first thing that's going to get hidden software is not the revenue number. It's going to be the margin number. You're going to see margins come down even at the companies that survive. And it's been a long, great run for software.

I mean, I invested in software in the 1980s when it was first coming. coming out. It's been 40 years of really great margins. And I think that in many ways, like every other business that gets disrupted, there'll be a new steady state of lower margins, perhaps greater scale with AI, things that you could not do with traditional software. And some companies are going to navigate that divide better than others. I mean, I think the B2B companies have to be more wary because costs are going to drive a lot of choices. B2C companies, I mean, I own Adobe, and I will hold on to Adobe even through the down days because I think it is a more robust software model because of what it does. I could be completely wrong, but I think we need to, you're right.

I think right now it's a broad brush. All software companies are getting sold off. But I think that I would track not just what these companies deliver is earning, because that might be too late to get the signal, but what they're doing in terms of product mix. And, I mean, given that this requires talking to customers, the more you can talk to people who buy their products and services and ask, what are they offering with AI? What's different? How's the pricing of their AI product? We'll give you some insight into which of these companies are going to come out as successes from this and which of these companies are going to falter and fail. It strikes me that they're just going to come under pricing pressure.

And if you think of 10 or 20% of their expenses are related to people who have a CS degree from Carnegie Mellon actually building the product with software, what's to say that they won't be able to reduce that expense internally, pass on the savings to their clients while protecting their margins? Because as someone who sat on boards of software companies, and software has been a gift that keeps on giving, we're going to grow our revenues 11%, and we're going to grow our employment. and 8% and our EBITA 12 to 15%. That's generally the story of software for the last 30 years. My thesis is there are so many fatty deposits that can be easily taken out of these software companies and they can pass those savings on. Well, it might be hit to their top line.

Like you said, I think their margins and their cash flows. It just strikes me. The last time we spoke to you, we had a difficult time zeroing in on what felt like a buying opportunity. And our thesis has been that if you were to buy a basket of these software companies that have shed, you know, half a trillion to a trillion dollars, that you'd be, that this, it feels like the first buy signal in a while. I think what you're describing is what I would call an adaptable software company. You're saying the software companies that adapt to this, adjust their cost structures quickly, might be able to keep their margin sign. That's a plausible pathway. But we've been around organizations that have to downsize. This is a very different game for them than the game they've been playing. And some of them, I think, are incapable of playing the downsizing game very well because

it's just not used to it. So maybe the things to watch is with software companies respond quickly and start reducing their workforces, adjusting their costs, and you're going to start to get that information pretty quickly. And those will be the companies rather than a basket of odds. So maybe we need to create a basket of software companies where cost, not where their operating expenses have dropped by 10% in the last two quarters. That might be a better basket to focus on the basket of all software companies.

Because I remember writing about disruption 20 years ago, and I said, look, if you want a perfect target for a disruption, you want to pick a company with high margins, and it's incredibly slow to respond to change because they keep, I mean, we've seen, I mean, we're in a business, education where you see how slow change is. No. If software were run like education, then we can safely predict that software would crash and burn, that in a year or two or three years from there would be no business. I do think that the more inflexible you are as a company, the less you learn from what's happening around you, the more danger you're exposed to. So rather than buy an entire software basket, I would look at a subset of software companies where you're looking at adaptability, how quickly they're adjusting to cost and adjusting the cost structure down. and keeping their margins stable. And that subset, I think, is where you'd go if you wanted to buy these companies.

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In a world of generic AI, don't sound like everyone else. With Gramerly, you never will. Download Grammarly for free at Grammarly.com. It's grammarly.com. We're back with Profi Markets. I want to focus in on two companies, to the two biggest LLMs, Anthropic and OpenAI, which I would argue are technically public companies. You can buy shares in the secondary market.

I believe Anthropics raising at 350, OpenAI, I believe it's trying to close around at 850. I'm curious what you think of those respective valuations on the companies. And our thesis has been that Anthropic is actually, I don't call it underpriced, we think that there's going to be a flip in valuation, that Anthropic has more momentum, more enterprise, and that Open AI is a bit more consumer, more vulnerable, and quite frankly, it's just endured a lot of negative PR, which feels like negative momentum. Have you looked at either or both of these companies in the respective valuations? I think I'd pick Anthropic purely based on the ego of the people running the company. This is a space where I think if you have

smart, egotistical people running the company, you're in danger because they're going to over, they're going to overplay their cards. And with Sam Altman, my feeling is he might be a smart guy. He might have a good set of cards, but he's always going to overplay those cards because he believes his cards are better than they truly are. So, remember purely, you know, because this is going to be a space where you require managers, again, the adaptable word comes in to learn from what's going on and change the way they behave. I'm not sure Open AI is capable of that learning and change that Anthropic is. I mean, I find, you know, to be quite honest, from an intrinsic value standpoint,

I would be hard-pressed to invest in any of these companies at the existing pricing, because collectively the pricing just seems too rich to me. But on a relative basis, if you need an LLM in your portfolio, you're much better off with, I mean, Anthropic is lucky in terms of who it competes against, It's open AI, you know, basically you can go down the list. And given that pure group, it might be the best of the LLMs to have in your portfolio if you want one in your portfolio. I'm not particularly eager to have any of them in my portfolio. So for me, they all look pretty richly priced.

But if you force me, I'd pick anthropic over open AI. One thing that's so interesting about this dynamic is the fact that they are both private, which seems like a setup that we've never really had before, the idea that the two largest names in the largest, hardest space in the world are not publicly traded. Are you bringing an X-A-I into the mix as well? X-A-I would be another example as well. And I think one thing that has been kind of frustrating for me as someone who follows the markets

as an investor as well, we saw this gigantic destruction in value in software as a result of these AI tools, $2 trillion in market value just erased over the past couple of weeks because the idea is Anthropics is going to change the game, Open AI is going to change the game. And yet I haven't been able to see how those stock prices are moving.

I mean, presumably you'd think, okay, well then did the $2 trillion just get transferred to Open AI and Anthropic? Is that what's happening? But I don't know because they're private. So I'd be interested to hear your view. on how new this is and how this changes the dynamics of being an investor when we're seeing one of the largest technological revolutions in a really long time.

This is a process that's been unfolding for 20 years now. There's private market, a gray market almost, not quite public, not quite private, where you get public market investors invest. I mean, I think of Uber raising, you know, and it was $65 billion, raising money from Fidelity and Tiro Price and the Saudi investment fund, effectively looking like a public company on many dimensions, but staying private. The problem with staying private is there might be pricing out there, but it's often stale, and it'll often lag the real world. It would be nice to observe what the LLMs are being priced at, but I think there's a, you know, your initial lead in, I think,

was a very critical one. You talked about value destroyed in one business and a value create in another one. One of my problems with the AI pitch for much of the last two years was, hey, look at all the good stuff that will come from AI. We gave the market the benefits of all the good stuff that came from AI. We pushed the market up. But nobody seemed to be talking about the disrupted and what it would mean for them. So software, in my view, is the first card to be dealt out of that deck. And there will be other cards that come. I mean, how much is Accenture going to be worth?

when AI becomes as powerful as people. If AI advocates are right about what it can do, there are a whole host of other businesses that are ripe for disruption just like software is. So I think this might just be the opening leaden into a play where we see what happens to the disrupted. The disruptors are off the market. So that's not good for the overall public equity market

because if the disrupted show up as a decline in public equity value and the private companies are not part of the public equity market, the index has to reflect that loss, but it won't reflect the gain. So if nothing else for the health of the equity market, you're hoping that these companies go public because then at least you can get a more complete accounting for both the pluses and the minuses. Yeah, I mean, when these moments like what we saw in software occur,

our view, at least on this podcast, my view has been, this is when you want to start getting active in the markets, because it seems as though there is so much uncertainty, there's so much confusion, so much fear about what may happen, that people kind of throw their models out of the window and they kind of, more simply speaking, they act a little bit less rationally. They're not thinking, they're not projecting cash flows in the way that they were in the past because they're just so frightened about what may be or what may not be. And to me, those seem like, the moments where you want to buy.

But, and that's what I did, by the way. But also in my head is your voice saying that actually the whole thing is overvalued. That there's another layer of risk, another layer of catastrophe that isn't being acknowledged, that isn't being priced in yet, which makes me think, well, am I thinking too small here? Am I making a mistake by looking just at software? should I be looking at the entire world and the fact that there is an entire global order that could collapse here

and what might that do to valuations? You can have your cake and eat it to it. You can buy software and sell short on the index if that is what you're concerned about. If you feel confident enough that your picks, net, are going to be good picks

after correcting for the market risk. So that possibility exists, but, you know, it is costly to do it, buying insurance against market collapses is always costly. But if that concern becomes large enough that it's getting in the way of you investing, then my suggestion is buy those stocks in this disruption that you think are being beaten up too much and buy protection against a market correction at the same time. And that's a possibility that didn't exist 40 years ago,

that you can do relatively easily today. So I think there's a way you can do this. but then you're going to be giving up some of your upside. If markets continue to go up and, you know, but it'll give you that self-assurance of, hey, I did the right thing. I'm going to win on my winners, but the market is not going to take me down, even though I was right on the companies that I pay.

Now, I think that, you're right about the uncertainty issue. I do a session on uncertainty where I talk about the most common reactions, human beings have investors by extension have. The first is denial, which is you say, what uncertainty? I don't see any uncertainty. The second is mental accounting, which is you do something that worked for you seven years ago in another uncertain setting.

You know, it's completely different, but you do it anyway. The third is outsourcing. What do you do? You ask McKinsey what to do. You ask Goldman Sachs what to do. Now, which is what a lot of people are doing with AI. I have no idea.

As if the Goldman Sachs, AI analyst is some special insight. And the fourth and the most, you know, the oldest response to uncertainties. you get down on your knees, you look up to the heaven, say, please God, tell me where to invest. I think that those are things that people do all the time, but I do agree with you. That it's during uncertainty,

that the payoff to being systematic, to trying to do your homework is greatest. Because that's when market mistakes explode. So whether it's software in this first round or something else in the second round, I would look at the sector and then start to go through the sector and start to separate the adaptable from the non-adaptable because there will be companies that get through this and come out not just intact but perhaps as winners because there have fewer players left in the game. They'll have less competition after this thing plays out. So I agree with you on that, but it's not for the faint of heart.

It is going to come with a lot of ups and downs, more downs initially than ups. I describe investing as an act of faith, faith that you're right about your assessment of value, and faith that the markets will adjust your value. Faith, because if you ask me to prove that a particular software company's cheap, I can't do it. And if you ask me to prove that even if it's cheap, that the price will adjust to that value that you got, I can't prove that either. Investing is all about faith, and your faith will be tested. Might as well be open and honest about the fact.

anybody who claims that they have absolute certainty that software is undervalued. They're jumping in. I have zero interest in following. This is not a space where you can be absolutely sure about anything. You're going to be wrong and you have to be willing to admit when you're wrong.

And that's the other thing I'd build into investment philosophy. What are the things you're going to track to see if your investment bed is playing off? So maybe layoffs are the thing you want to track. And the company that you're doing acts like nothing's happening. It's in denial.

maybe no matter how good it looked to you at the initial round, you might say that's not the company I wanted. So being willing to say I was wrong and go back and revisit the company you pick might be an integral part of the strategy working for you in the long term. On the catastrophic risk that you feel that it is underpriced right now that is not being, the investors not paying enough attention to, what are some data points or signals or events that have led you to believe? in this notion that there are greater risks than we really understand? I'm going to give you a strange answer. I've never been one to track the price of gold and silver. And last year was a phenomenally good year for gold and silver. Gold was up almost 70 percent, silver was up 150 percent. But what made it so unusual was gold and silver usually go up either during periods of hyperinflation, not just high inflation, but hyperinflation, 1970s.

or during severe market crises where markets are down 30, 40 percent. Neither was true in 2025. So saying, why did they go up? There's a segment of the market that has always been into the gold and silver. They form the base of the market. They hold gold and silver, and that's all they hold. What makes gold and silver prices go up is that that market segment gets bigger by attracting people who normally invests in stocks and bonds.

So I think that when I look at the people who are warning me about catastrophic risk, it's not the usual doomsayers, not the guy on Times Square saying the end of the world is coming. These are people who are normally pretty level-headed, who talk about equity. So one of my worries about catastrophic risk comes from the people who are warning about catastrophic risk. We're not normally people who do this. I mean, there are people who have been yelling, you know, the end of the world is coming for 17, 16, 20 years. I'm not interested in them. These are people who are not normally in that group who are in that group.

At the same time, you get these fissures show up in politics that you've never seen before. And those things, you know, will it ultimately play or think, whether it was the tariffs or whether it was NATO's challenges or what's coming next. I think that those are things that are small cracks at the moment, but the cracks that could very quickly become much bigger issues. So it's a collection of things, not one particular thing. But you can start to watch, for instance, the price of insurance against catastrophic risk and start tracking because insurance companies are going to catch the people who are most exposed at catastrophic risk soon as, because they're going to try to buy protection. So I'm going to try to keep my eyes on those potential indicators.

So, you know, high-yield bonds. So the rates on high-yield bonds tend to go up when people start to worry about catastrophic risk. That hasn't happened yet. So maybe those will be the advance indicators is when you start to see those prices start to go up, you have to start thinking about creating protections for yourself against that catastrophic risk. Is that not kind of an example of the outsourcing that you describe when there is uncertainty, which is you're not necessarily looking at. the catastrophic risk in and of itself.

What you're describing is there is a feeling out there. And investors are kind of saying and showing. Absolutely. But here's the difference. Outsourcing traditionally has been to call in experts. Yeah. And ask them, what's a catastrophic risk? I'm suggesting crowdsourcing that.

And basically, we're doing for catastrophic risk, what we've done for restaurant reviews, right? We no longer read the New York Times restaurant review. we go to Yupp. And I think this draws on Phil Tetlock's argument, which is if you're worried about big risk, don't listen to the experts. They're going to kind of misestimate that risk. Focus on a crowd estimate of that risk.

And I think that that's basically, that's the difference. You are outside because what are the choice do you have? You can do naval gazing and try to assess that catastrophic risk, but the truth is you will never have enough information, no matter how much you read. to make that assessment. Let the crowd do it, because they're going to get that collection of knowledge coming from very different parts

of the world and very different businesses making the judgment. And you're absolutely right. You have to crowdsource some of your work. Otherwise, you're going to drive yourself crazy. So a couple questions.

The first is you mentioned a reference to dollar. And while the Trump administration and investors will highlight that the S&P was up, I think was up 17% last year, if you adjust for the dollars, drop in value against other major currencies, the S&P underperformed almost every other major market.

And it does feel as if the U.S. dollar is under attack and the catastrophizing around the dollar losing its status of reserve currency, you know, rumors of the dollar's demise have been greatly exaggerated, except it does feel wobbly right now. Curious to get your thoughts on the dollar and how it intersects with different markets. I think it is wobbly because I think it's wobbly for for multiple reasons. One is concerns about the Fed and inflation play out in what currency a trust. Part of the trust in the dollar came out again, or that post-second world war, acceptance of the dollar is the replacement for gold. I mean, that's effectively what happened. The gold standard is the dollar standard, and the dollar standard is accepted

initially because the dollar itself was convertible into gold longer than in any of the currency, until 1971, 72, at least technically convertible into gold. I think that more you worry about inflation and central bank independence, the more you worry about the currency as well. So that's one component. Second is you can't separate the economic from the political. The dollar centrality here in the global economy came from the U.S. being the policemen for the world, essentially being a center of global political universe. And what you're getting, not just in the U.S., but across the world where countries are stepping back into their local domains and saying, look, now this global stuff, it's not for us.

Now, even though I think it's too late to kind of step back from it, I think that's going to play out in the dollar being the international currency, you know, of choice. So it is wobbly, but what keeps it there is what do you replace it with? Because if you look at every other choice, it comes with a whole load of issues as well, right? Are you going to replace the euro? I'm not sure you want to go there. because the euro has its own frictions. Are you going to replace it with the Chinese yuan?

I don't think people are willing to make that transition either because you feel like you're jumping out from the frying pan into the fire. So what keeps the dollar there is there is no obvious alternative. Maybe there will be one that gets figured out. Maybe the dollar will revert back to being a currency that people trust. But I think that right now the dollar is wobbly, but I can't think of an obvious replacement for it. We'll be right back.

And for even more markets insights, please sign up for our newsletter at profjeemarkets.com slash subscribe. We're back with Profi markets. I'm trying to get insight into a political race or earnings estimates. I would go to either pollsters or I'd go to, you know, name the Bolgeracket Investment Bank analysts to try and get some insight. Not the culture of a party market? You read my mind. And now I find myself increasingly going to Kalshi and finding it is increasingly a better predictor, the wisdom of crowds. One, what do you think of this phenomena?

And two, what do you think Kalshi and Polly Market are both kind of threatening or flirting with the idea of going public? And we've seen a massive, I think, transition of market capitalization from the betting companies to the prediction market. So one, your view overall on a meta level of these prediction markets, and two, looking at these companies as potential stocks to own. It goes back to what I said to Ed earlier about the catastrophic risk assessment, that the crowd judgment is more reliable than expert judgment. And what I think you get with both culturally and pollen, and both have their own frictions and issues that we have to get through, is you getting a crowd judgment. And that crowd judgment, I mean, these markets are not always, not every cult she, you know, market is a good one because some are very liquid and lightly traded and one big trade can move it. But if you take the big, you know, I track both Kulshi and Polymarket during the presidential election. And actually I wrote a piece about how well or badly they did against, you know, 538.com and all the other sites, the pollster sites. And it clearly, they clearly can. conveyed information much more quickly. They responded much more quickly to what was happening in the ecosystem and with a lot less bias. In fact, I recently saw a study where they compared, I think,

Kulli and Polymarkets predictions for the feds, you know, rate corrections and rate adjustments relative to experts and they discovered that they did better than the experts did forecasting things that they should have the most expertise in. So I think that they will continue to evolve and play a role. It comes with a whole host of things we have to deal with in terms of potential side costs, right? I mean, you see this in sports betting, right? With Fandowl and draft games, allowing you to bet on small piece of things. It's also brought, you know, problems with people playing games with it and effectively exploiting it to take advantage. And I think that's going to come. But I do think that they will continue to prevail and grow because they

deliver better predictions. Now, when they go public, will I buy into them? The question is, what's proprietary about what either does? They have a platform, a lot of players, and I think there's a stickiness there for the moment, but I think the stickiness is not deeply embedded yet. Both are very young platforms. So if you came up with a third platform with lower transactions cost and ease of trading, you know, that might be my concern. I think the overall business is going to grow, but the companies that end up dominating the business will be a shifting target. Because I think it's still evolving as to what the competitive advantages are in these markets and which one you would want to bet on if you wanted to bet across them.

I mean, Kalshi's initial benefit was a polymarket, I think for a long time, required. You know, it had to be in cryptos in a different setting. The transactions cost involved were greater. But I think they will continue to see the transaction cost issue come to the first. forefront and how well these markets are actually structured, because they have a lot of testing to go through. They're still very young markets, and they haven't been quite tested in terms of the prices they deliver. But on both counts, let's face it, the original crowd judgments came from financial markets. I mean, it's in a strange way people are making a case for market

efficiency that was done in the 1960s, which is given a choice between trusting an active money manager or trusting the market, which one would you go with, the early University of Chicago judgment was go with the market. It's a crowd judgment. 60 years later, through a different route, we've arrived at the same conclusion about a whole array of things we do out there that are predictions, where the crowd judgment is replacing the expert and delivering a better result. Are you saying that you would have been better off in the 60s just buying the S&P versus going

into the alternative investment market with its fees? Absolutely. The only reason you didn't know you were better off was you got one statement every year from a mutual fund saying, look how well we did for you. We made 9.8%. You had no pure groups to compare.

I mean, active investing has always been problematic. It's always underperformed the S&P 500 or the index that's best suited to compare it to. But for a long time, that underperformance was, not clearly visible to many people invested in, and the choices that you had were limited. Until you get to this century, if you didn't like the way your mutual fund was run,

you had to buy the S&P 500 index fund. It was that or nothing. Today, you can buy an index fund that repair software. You can buy an index fund of software companies. You can have ETFs. You've now created passive investing choices. And I think that it's opened the door for active investing to get disrupted and has.

Today, if you look at market share of passive investing vehicles, ETFs and index funds, versus active investors for the first time in history, more than 50% of money in the market comes from passive vehicles, which carries its own consequences. And you can have an entire session talking about what those consequences are. But it is, in fact, always been true, but now we can do something about it.

I feel like what we're describing is a respect for the, the efficient markets hypothesis, which is the idea that markets are the real experts, because markets are translating and filtering through and communicating all these different signals, all these different data points. And so generally speaking, the markets are the best at pricing in and predicting the future, which is something that I generally agree with. At the same time, I also know that you're someone who doesn't always believe in that hypothesis, an example being you believe that in certain situations, valuations can be too high

and that certain risks are not being properly priced in or appreciated by markets. And I find this to be one of the difficult things in investing. It's kind of a paradox. It's like, on the one hand, we have to respect the predictive powers of markets. On the other hand, sometimes every once in a while, we might think, actually, I think they've got something wrong. I think I know something that the crowd doesn't. So I guess my question for you, how do you decide which one to believe and when you should believe one or the other? It's a great question because in many ways it creates a tension

between the wisdom of crowds, which is the heart of all crowdfunding, which technology is bought in full time into, and the madness of crowds, which is one of my favorite books. It goes back 200 years, which is crowds can sometimes do strange things caught up in the mood at the moment. And I think that tension continued. So even when you believe in efficient markets, you have to accept the fact that markets can make some humongous mistakes because the crowd basically does the wrong thing. And the question is, can you take advantage of those mistakes?

I think when you talked about what it is that makes market special, it's two things. One is that markets are aggregators of information. I remember a story that Gene Farmer told me in the early 80s. I was his TA for, I was his RA for a couple of summers when he came to UCLA. And Gene Farmer has, of course, won the Nobel Prize for his efficient market work. And he said, if you have a market, we have 100 people, each of whom brings in one small piece of information. The market price, markets are unwell, will aggregate that information because each person will trade that piece. So it's an aggregator of information.

And the second advantage of markets have is you're putting money behind your words. An expert gets on CNBC. You can say whatever you want, right? There's no money behind it. You can say outrageous things because you know that if that event happens, even with small you're going to look like a guru, an expert because of saying it. Markets have real money in their aggregators. But markets can go off the tracks and it's a tension I face every day as an active investor.

Of course, you invest in index funds, you basically made your choice. You're saying madness versus wisdom. Wisdom wins out over madness in the long term. I'm incapable of catching that madness when it happens. I'm going to go with index funds. The very fact that I actively invest in stocks means that I hold on to the hope that when there is this madness and it happens, I am able to overcome my own psychological issues because when crowds go mad, it's very difficult to actually go against the crowd. You're cutting against a conventional wisdom.

So right now you buy a software company, everybody is saying, what's wrong with you? Why would you buy this disrupted sector? You've got to live with that psychological discomfort. But if you can do it, I do think you can take advantage of the madness of crowds, but I can't offer guarantees. That's a faith part. So it's entirely possible. You could try and try and have nothing to show for it 50 years from now after 50 years of active investment. Just going back to the catastrophic risk, which I'm,

I'm sorry, I'm a little obsessed with right now. One thing that I keep on thinking is markets may look very different in three or four years if Trump is out of office. It seems that a lot of the concern and the uncertainty and the risks that are being discussed right now, whether it's because of what we're saying with Davos or the increased deficit spending in the big, beautiful bill, or, you know, threatening to invade allies of NATO nations, et cetera, et cetera. It's all very much a Trump story that seems to be driving a lot of the uncertainty, which makes me think, well, if Trump isn't in office, then maybe we live in a very different world. But then the question, of course, becomes, is this permanent?

Have things changed for good? What is your view on this question? I think a lot of the things that Trump has kind of pushed the front of things that have been, evolving happening under the surface before. He's been somebody who's pushed it to the forefront. Let's take an example, right, the independence of the Fed. I think Fed independence has been chipped away gradually over the last few decades, partly because the Fed's become too full of itself.

Now, too full of itself in what way? I mean, the Fed actually seems to have bought into this notion that it can set interest rates. It can drive the economy. And you can go back and blame Alan Greenspan. in 2001 saying, I will not let the U.S. economy go into recession after 9-11. Now, there's the hubris of central banking kind of caught up in its own sales pitch. So the independence of the Fed has been slipping away the minute the Fed decided to put itself into the public domain.

I didn't, I mean, I'd tell people, 40 years ago, if you'd ask me to name anybody but the Fed chair, I wouldn't have been able to name a single person on the Fed, the FOMC. Today, they're all making speeches. They're on CNBC. They're touting their own, no, different views about where the market is going. I think so. The independence of Fed has been an issue well before Trump came along. Of course, he's pushed to the forefront with this, you know, back and forth Jerome Powell

and what, you know, what Kevin Walsh is going to do. So you take terrorists, right? Again, you can say this was Trump's doing, but this is something that got kicked into process about a decade ago when the blowback to global. globalization started politically first. And then economically where people said you told us globalization was going to be great for us. And I'm talking about the people who were disrupted in the global. So if you think of globalization as a disruption of how business were run, they were the disrupted there.

But they were often forgotten. They ended up becoming the drivers of political change. So starting, you know, the first Trump election, but, you know, with Brexit, you can go through a whole series of political movements. you can argue that this unraveling, or at least the pushback against globalization, was something that happened before Trump. So I think in many ways, as you see Trump pushed these issues to the forefront, his going away is not going to make them go away either. There are underlying political and economic forces that came in before he became president

would continue after he leaves. And I have a feeling in that 20, 28 and 2030, you might not be talking about Trump, but you might be talking about somebody in Europe who's risen to the top of the ranks who brings Trump-like attitudes towards globalization and the global and global economy. This is a shift that I think will outlast Trump, and we have to adjust to a different world order than the one we were used to 20 years ago or even 15 years ago. You'd mentioned a high-margin company that hasn't innovated, it doesn't adapt very quickly

is right for disruption. Obviously, ground zero, you know, check, check, check, higher education. And yet, applications up, margin power up, is it the fact we have a duopoly?

Is it artificial scarcity? One, I do not see anything resembling disruption in the numbers. And two, is that a dangerous thing to say? What are your views? I just looked at all the data on applications. There are some things happening. People want to send their kids south. They don't want them to send them to a protest. They want them to go to football games and join fraternies and sororities, not protests. It's how I read. The only thing I sussed out of the application trends that I see nothing, nothing indicating any sort of disruption that I won't say you've been predicting, but I've been predicting for a decade. I think two things. One is the price fixing in college education.

is obvious to, I mean, in a world which is comparative, you should expect to see tuition vary from 15,000 at some schools to 100,000 for others, right? I mean, you don't see that. So clearly there's some, there's clearly price fixing. The second is the federal government has subsidized this price fixing with its, I mean, look at the size of the student loan. It's trillions of dollars. That combination has insulated universities from feeling the consequences of their only,

If you raise tuition by 6% and any other business, you should see some blowback, but the way the system is structured is it's been buffered. Now, I do think that you're seeing the change in graduate schools, MBA programs, increasing number of one-year master's programs. So what's the big deal? Because people look at two years and saying, that's $200,000, and unless I'm going to go work for an investment bank or an hedge fund, how the heck am I going to get my money back?

So you're starting to see. So I need demotering's class, but I don't need gas. I don't need Gallowes. Is that what you were saying? But I think in one year, they can take both our classes and dispense with a lot of other classes. And you're seeing this as Stern

as a bunch of nine-month programs focused on fashion and entertainment because there's no way you can get a two-year MBA and get your money back if you're going to go back into fashion or entertainment. There's not enough of parents. So I think that's where you're going to start to see things. A four-year is going to come under pressure,

maybe go to three years, and then the graduate schools are going to get shorter. Because you have six years, if you have undergraduate and graduate and graduate and you pay full tuition along the way, I didn't see how you make your money back. It's just not going to happen. The second is there's a lagged effect. We're still preparing our kids for the white-collar world

that dominated for the last 30 years. You don't want your kid to be a factory worker because you saw what disruption did to that. But what AHA is doing in a sense is it's disrupting. but that effect is going to take a while to start to show up. So maybe in the next generation, people will be pulling their kids out of college and sending them to plumbing or, you know, electrician school

because that's where the payoff is going to be greater. That might not be such a bad thing for the world, actually, to have fewer people going through four-year programs that teach them very little in life skills that they can actually use to make a living. So, but it is going to be slow because it is, you know, the parents often still make the choice of whether you go to school or not. It's not the kids themselves. I have the feeling that the disruption would have been a lot faster if kids bore the costs and then they said, how am I going to make my money back?

You know, so we, you know, as a parent, I buffered my kids from having to deal with the, I admit it openly. And I did it because I wouldn't want them to worry about having the money to go. go to college, but maybe that's not a good thing. Because in a sense, they can now take, I mean, I heard a couple of college students the other day talking about why would anybody graduate in four years? Take an extra year. That's when you have fun. You know, if you actually, that's a lot of money to have fun, an extra $150,000.

You know, if you had to pay that money, would you stay for a fifth year? I don't think so. So I think that we've insulated the people in our university. from the financial consequences, either the parents paying for the tuition or the federal government coming in and giving them financing at the tuition. It'd be interesting to see

because I think there was a cap that was put on the tuition aid at 50,000 and a number of universities this year have actually lowered their tuition to match the federal cap at 50,000 so you could qualify for the... It'll be interesting to see whether there are things

that the government can do to kind of drive down the cost of university education, but the promise for that to happen, universities can't keep that you teach three classes a year and you take the seventh year off for tenured faculty. So there's a whole system that's been built on this, this, you know, on a tuition that you can pass through to students that will not survive if you alter that system.

So this year was a terrible year for econ for PhDs looking for new faculty, new jobs. The market for PhDs has dropped off significantly. So you're going to start to see that play out first and then maybe the ripple effects. But you're right, Scott, you and I have been calling for the disruption, but I think it's been such a slow motion disruption that you don't notice it inside the universities yet. And until that pain is felt inside the disrupted, you're not going to it change. Final question from me, Outlook for

2006, I mean, if you look at the U.S. stock market right now, perhaps even looking at emerging markets, maybe European markets, but I guess I'm really interested in what you think is going to happen to U.S. stocks by the end of this year. What would be your outlook? I think it's where due for, if not a correctioneer, a flat or a normal year. I have a feeling that this is the year where the economy is going to do better than we expected, but markets are going to do worse than people think.

And that's going to be the reverse of what we've seen for quite a few years now. So that would be my prediction. Aswath Demodran is the Kirshner family chair in finance education and professor of finance at NYU Stern School of Business, where he teaches corporate finance and valuation. You can also read his research on his blog, Musings on Markets. Professor Demoderan, always appreciate your time. Thank you.

Thank you, Ed. Thanks, Aswell. Thank you, Scott. Ed, what did you think? I'm always blown away by that guy. God, there was a lot in there. I think that the catastrophic risk that he brought up at the very beginning of the show is extremely, I don't know, significant, concerning, but I do think that it needs to be taken with a grain of salt.

And I think if we had maybe three or four hours, I'd want to drill down exactly what are his genuine concerns, because a lot of the stuff that he was pointing to was just price action. And as I said, you know, that that's a signal, but it isn't everything. And I'm not saying that he's predicting the end of the world, but I think his point is that there's a lot of catastrophic risk out there that isn't being fully acknowledged. I don't know if I fully agree with that. I think that, you know, gold prices rising as much as they have is an example of that, of that risk being acknowledged. I guess his point is that we're not quite seeing it in the stock market.

It's something that we really need to drill down on. I also want to get Ray Dalio back on the podcast because as of this week, he wrote an article, he said it's official. The world order has broken down. And he's been talking about this and writing about this for years. The world order is on its way to collapse. American hegemony is on its way out. That's going to mean the rise of gold. Of course, that is exactly what happened.

And now his view is, it is over. So there's a lot of catastrophizing out there. And to Aswath's point, it's not coming from the usual suspects. It's coming from people who are pretty rational and reasonable and who have been for a really long time. But I think that is my big question mark following that podcast that I'm going to be thinking about and digging into. So I'm starting, and I'm in the midst of selling down my U.S. stocks for a variety of reasons,

but he makes me feel better about it because it's always, I think what makes you a great investor, it's like when you summit Everest, people celebrate, and that's a big thing, they plant a flag. But what they fail to realize are immediately that fact, Mountaineers enters their brain, and that is the majority of fatalities are on the way down. and I think what separates good from great investors is when to sell. It's very difficult, you know, it's very hard to know when to sell. And when I look at the U.S. market right now, and Aswath, I think, in a more measured way, I just think there's so much more downside risk baked into the U.S. market right now.

This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our research team is Dan Shalon, is about. Lekinsel, Chris Nodonoghue and Mia Silverio, Drew Burrows is our technical director and Catherine Dillon is our executive producer. Thank you for listening to ProfG Markets from Profugee Media. If you liked what you heard, give us a follow and join us for a fresh take on Markets on Monday.