The Prof G Pod with Scott Galloway - Prof G Markets: Apple's High Yield Savings Accounts, Shifting to Bonds, and AI vs. IP

Episode Date: April 24, 2023

This week on Prof G Markets, Scott shares his thoughts on how Apple just became one of the largest banks by market capitalization in the world. He also explains why he’s thinking of shifting some of his portfolio to bonds, and discusses why Reddit wants to charge AI companies for access to its API. Learn more about your ad choices. Visit podcastchoices.com/adchoices

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NMLS 1617539. This week's number, $500. That's how much the South Korean government is paying reclusive kids per month to go outside. I spent my entire childhood inside. As a matter of fact, I used to walk in on my parents having sex all the time. Worst 45 minutes of my life. Welcome to Prop G Markets. Today, we're discussing Apple's high-yield savings account. That's right. That was a good segue.

And a roundup of the latest developments in AI. Here with the news is Prop G media analyst Ed Elson. Ed, how are you? I'm terrible, Scott. I've had the worst two weeks of my life without you. Really? Oh, that's right. I missed you. So what have you been doing the last two weeks? Did you go on vacation? What did you do? I was still working, working on No Mercy, fact-checking your book, which, by the way, I think is going to be your best book ever, not to give too much away.

That's right. And what is it you like so much about my book, Ed? Can we talk about it? I don't know if we've gotten the go-ahead to talk about what this book is. I don't know if you've heard, but I own this taco stand. We can talk about whatever the fuck I want. It's called The Algebra of Wealth, and it basically takes a lot of the insights that we've developed on this podcast and puts them in writing with extremely actionable advice for young people and honestly up to any age about how to get rich and how to build financial security. And I just was going through and fact-checking stuff and there weren't too many errors, but it was incredibly informative. And I'm just, I can't wait for this book to release. Yeah. Well, thanks for saying that. We tried to do something. I have figured it out, but it took me a long time and I thought to myself, how could I have figured it out sooner?

And that's what we're trying to do here. But anyways, enough about how awesome we are. Talk to us about the news. Let's start with our weekly review of market vitals. The S&P 500 was stable as earnings rolled in. The dollar was also stable. Bitcoin hit a high for the year above $30,000 before plunging again. And the yield on 10-year treasuries tumbled after four straight days of gains. Shifting to the headlines. UK inflation hit 10.1% year over year in March. That's down slightly from 10.4% a month earlier, but still a disappointment. UK inflation hasn't dropped below double digits since last summer.

China's economy expanded 4.5% in the first quarter of the year. That's a strong rebound from 2022. Throughout last year, GDP growth was roughly 3% as the country dealt with its zero COVID policy. Meanwhile, India is set to surpass China as the world's most populous nation by 2023. Side note, Apple also just opened its first flagship store in India, which has the second largest smartphone market in the world. Tesla reported earnings, and it was a miss. First quarter profits declined 24% year over year. That's largely due to the company's recent price cuts. Its most popular car model is now 30% cheaper than it was at the beginning of the year.

And Tesla shares fell more than 8% after its report. And finally, Netflix missed expectations on revenue but beat on earnings per share. It also announced it will delay its crackdown on password sharing until the second quarter. The company anticipates that will boost subscriptions and revenue when viewers are booted off of shared accounts and forced to pay up. Your thoughts, Scott? So the Netflix one is interesting. You would think, why wouldn't they crack down on passport sharing just as a general practice? And I guess a certain amount of breakage or leakage or sharing is a good way to get people hooked on content and then move in and say, all right, now it's time to pay. So let them steal it, give it to, you know, it's almost

like a free trial if you let people borrow their passwords and then they get hooked on a certain program or that type of programming. And then the additional paying customers will get when they clamp down, you know, pays for the lost revenue. Tesla, it's just super interesting. That's dramatic. Think about that. A car that is 30% less than it was at the beginning of the year. I mean, can you imagine if you bought the car in November of last year and now it's 30% cheaper? And then the big one, I think population is going to be a big issue. I'm fascinated by demographics. India being the most populous nation in the world is really fascinating. About 30 years ago, if you had asked a bunch of analysts who was going to be the economic superpower of the 21st century, it would have been split. Some

would have bet on China, some would have bet on India. And China, obviously, incredible manufacturing, huge consumer economy. There are some real efficiencies to an autocracy. You can kind of just get shit done really quickly. But India was a democracy, largest democracy in the world, more English speakers. So we thought being kind of biased towards our system, a lot of people thought India was going to be the economic juggernaut to watch out for. And boy, did we get it wrong. China has blown by India. A lot of it is population, though. When you have a huge middle class and you have innovation and an economy that's growing, you end up with a ton of consumption and an economy that just booms.

What they also have is there's something called the dependency index, and that is what percentage of the population is being supported by people who are still working. China, because of its one-child policy, is going to end up with a large dependence ratio at some point. So I think a lot of smart people who are informed by really intelligent economists, i.e. Apple, have decided they need to start investing in India. And the number that I find really shocking is the UK's inflation is at 10%. It's by far the highest in all of Europe. And you really see it in food prices here. I think food's up 16 or 17%. And there are just few nations that could have fucked themselves more, other than maybe Russia's invasion of Ukraine, than what Britain did with Brexit. It just, they basically made all their goods more expensive, and at the same time, reduced exports, bringing down salaries, or bringing down economic growth.

So the standard of living for all citizens, or the majority of citizens in the United Kingdom, has declined. And at the end of the day, the government is supposed to prevent these boneheaded decisions. This was just a disaster. David Cameron, absolutely strategic blunder, thinking that this would be rejected. It wasn't. It passed. Few people have done more damage to the UK than Nigel Farage. And I wonder how they get out of this. I wonder if it's a slow burn back or, I mean, I'm just fascinated by this, what is probably the biggest self-inflicted wound of the last 50 years in the West. And that is, well, it was probably more, I don't know, maybe Iraq. I just want to

shift back to Tesla for a second. So something I was seeing on Twitter today, Tesla used to boast that it had basically the highest margins of any other what's called an OEM, which is an original equipment manufacturer, i.e. you're a car company and you're making your own cars. That used to be their big point of differentiation. That's no longer the case with these price cuts. So just some numbers here. Tesla's gross margins now are 19%. And you compare that to Stellantis, which is 19.6. Volkswagen, 20.1, Mercedes-Benz was 22.1, and the European average is 20%. And then obviously luxury, which is a whole different ballgame, that's 31%. So it feels like this is a big hit to Tesla.

Do you look at the margins situation and look at the price cuts as a big problem for the business going forward? Margin is a great litmus test of your differentiation. So brand is synonymous with differentiation. And then kind of the ultimate litmus test of differentiation is your margins. And there's really kind of two ways to build a business or add stakeholder value. One is to pursue a differentiation strategy in LVMH. Dior or a Celine bag is highly differentiated in the eyes of the end consumer. Walmart's products are not differentiated. They sell ginger ale and Tide. That's an operations play where they try to be as efficient as possible. Their differentiation is operations and getting you more for less, if you will. So margins are a pretty insightful tell around differentiation.

And what do you have here in the EV market? You have an incredible decline and implosion and differentiation brought by competition. And that is a Tesla was wildly differentiated as in singular just two or three years ago. You wanted to buy an EV coupe that could go zero to 60 in three seconds and had a range of 300 plus miles. It was not only differentiated, it was unique. It was the only one. And for a long time, its differentiation was reflected through incredible margins. Now, what's happened? Everyone's piled in. Everyone's trying to grab share. So it's very competitive from a pricing standpoint, and they've been forced to lower their prices, which impacts their margins. Also, they've had some exogenous reasons to lower their prices, and that is tax credits.

But this is mostly the field just getting much more crowded and pricing pressure that results in a hit to margins. They also probably are decided to stay ahead of the curve because they want to get to a certain scale. Manufacturing and the auto business is a business of scale because once you make those multi-billion dollar investments in a factory, you want to punch out a lot of cars. So my guess is they've done the math and said it's better to go for share. It's better to maintain share leadership, get to scale. But this is a massive, there's just no getting around it. This is a huge hit to margins. I think we're going to see the stock come down dramatically.

I think the company is going to begin to look like a traditional automobile firm, and that is a lower margin, difficult manufacturing-based business. And all the analysts who tried to pretend it was a software company to justify these ridiculous multiples on EBITDA are going to realize it's a company that wraps steel around four tires and a motor, and it's a software company to justify these ridiculous multiples on EBITDA are going to realize it's a company that wraps steel around four tires and a motor. And it's a great company, but already its margins have gone from singular to kind of industry standard. Okay. We'll be right back after the break with a look at Apple's high yield savings accounts. Stay with us. The Capital Ideas Podcast now features a series hosted by Capital Group CEO, Mike Gitlin. Through the words and experiences of investment professionals, you'll discover what differentiates

their investment approach, what learnings have shifted their career trajectories? And how do they find their next great idea? Invest 30 minutes in an episode today. Subscribe wherever you get your podcasts. Published by Capital Client Group, Inc. Hello, I'm Esther Perel, psychotherapist and host of the podcast, Where Should We Begin? Which delves into the multiple layers of relationships, mostly romantic. But in this special series, I focus on our relationships with our colleagues,

business partners and managers. Listen in as I talk to co-workers facing their own challenges with one another and get the real work done. Tune into Housework, a special series from Where Should We Begin, sponsored by Klaviyo. We're back with ProfgMarkets. Apple has teamed up with Goldman Sachs to launch high-yield savings accounts for Apple Card users. The savings accounts will offer 4.15% in annual yield, which is more than 10 times the national average. It's also higher than what's offered by many big name competitors, including American

Express, Barclays, and even Goldman Sachs' consumer unit, Marcus. The account has no fees, no minimum deposit, and can be set up from within the wallet app. So Scott, Apple says Goldman is operating these savings accounts. I take that to mean Goldman is doing the banking and Apple is just leveraging its technology. But Apple also has one of the biggest balance sheets in the world. It's got $129 billion in assets, $21 billion of that is cash. Do you think the goal here for Apple is to eventually become its own independent bank? I don't know. I don't know if they need to.

I think they want to focus on what they're good at. But effectively, by becoming a bank, they're now the largest market cap bank in the world. And what I was thinking about here was we talk a lot about the absence of friction in tech being a danger, that a run on the bank can happen in an hour. Emails go out to everyone's phone, everyone reads their phone in a meeting, and it says, withdraw your funds from SVB. And they have an app, and they can initiate a wire and withdraw all of their funds in five or 10 minutes flat. There's just an absence of friction, and that has a lot of externalities, a lot of bad things. To me, this brings home the power and the potential of Apple because of a lack of friction.

And that is I use Apple Pay and then maybe it pops up when I pay for something saying, do you wanna round up this purchase and put it into a savings account, which yields on average five or 10 times what a traditional savings account does. And I say, yes. And then it says another problem. Would you like us to do this for every purchase? And do you want us to round up purchases under $10 to the nearest dollar, purchases over $100 up to the nearest $10? And then it says, we estimate that you will

do $700 or $800 a year. And then in 10 years, if you do this for 10 years, at 4.2%, you're going to have $25,000. They can so easily get money and assets and start providing financial services. And the analog or the kind of digital old school analog was you walk by a bank and it says three months CD, 3.4%. And you're like, wow, that's a great rate. I'll come back tomorrow. What is the likelihood you'll find something better to do than going to the bank during business hours, wait in line, find out about this, fill out paperwork, transfer funds, fill out more paperwork. Well, guess what? All you need is an iPhone and you can make those sorts

of transfers. I want to go back to that 4.15% rate. So as Apple said, that's 10 times higher than the national average, which is 0.37%. That's the rate, that's the annual percentage yield that you get on an average US savings account. And to me, that is crazy, because in the past year, Jerome Powell has raised the Fed funds rate, that's the risk-free rate, from 0.2% to 4.6%. That's in 12 months. And meanwhile, the average interest rate on a savings account has barely moved. So I did some research on this, and every time that interest rates rise, the rise in the deposit rate barely moves with it. And then as soon as it declines, it sinks like a rock. And it turns out that there's a term for this idea of the percentage of federal rate rises

that pass through to savings account interest rate rises. And it's called deposit beta. And right now, deposit betas are at historic lows. It's around 20%. In other words, every percentage point that Jerome Powell raises rates, you'll only have a 0.2% rise in savings account interest rates. So my question to you, Scott, is this seems unfair for depositors, for just regular consumers with savings accounts. Why is that happening? So George Carlin, I remember watching one of his stand-ups, of course, on TikTok,

and he said something really that really struck me as insightful. He said that just because companies and institutions aren't directly coordinating doesn't mean there isn't a conspiracy. And I think that banks wink and nod at each other and never put it down an email. But when interest rates go up, it's very sticky and very slow to pass on that incremental increase in interest rates to their depositors. And yet when interest rates come down, it's immediate. Sorry, we're cutting the interest rate we're giving you. The same is true of gas prices. Oil prices skyrocket, boom. You see it, the price of the pump immediately in a step change increase. Oil prices come down and they gradually come down,

they lag. And there's an asymmetry of information in that as most consumers are really busy, especially retail banking clients, and they aren't following the Fed. And they're used to getting 0.4% on their money. They're busy. Maybe they don't really the fed and they're used to getting 0.4 on their money they're busy maybe they don't really understand basic finance one of the big deltas in america or the big deltas in people's knowledge base is there's a lot of incredibly well-educated people that understand how to do derivatives understand how to do calculus but don't understand the interest rates on their deposits and what it means and that they need to track this stuff. Because the difference, 4% doesn't sound like a lot of money, but 4% versus 1% on $100,000

over four or five years, that pays rent for your daughter at college. And it compounds. So you want to be very sensitive and constantly, even putting out alerts, looking at interest rate increases. People don't think about the interest rates they pay on their credit card because it doesn't seem like a lot when it's only, if it's 18% a year, well, that's only 1.5% a month. Well, guess what? That year flies by and instead of paying 400 bucks, you're paying 472 and you keep rolling it. And before you know it, you owe double what you used to owe just four years later. So there is a conspiracy to make it really slow on movements and things you have to pay consumers or prices you pass through when it's a benefit to the corporation. And there's a direct correlation when it moves away from the

consumer. And what it all comes down to is consumers need to be thoughtful and on their toes and really need to understand this stuff. What Apple's doing here is clear. They have decided that in their next earnings call, they want to say, we launched this and we have $7 jillion in deposits almost overnight. The cocktail, the nitro and the glycerin of that frictionless ability to make deposits vis-a-vis the interface with the billion wealthiest people in the world and the fact that they can afford to offer an above market interest rate they are going to grab deposits like crazy when they announce that in just a few weeks or a few months they are now one of the biggest banks by deposits.

Oh my gosh, the greed glands are going to get going for analysts and go, oh my God, Apple could become one of the biggest financial services companies in the world just overnight. Yeah, I think another second order effect you'll see is that as everyone learns about this APY rate that they're offering, the competition for higher yields is just going to increase, which is ultimately going to have an inflationary effect on all savings account rates. I mean, you just won't be allowed to be offering a 0.37% rate on a savings account because everyone knows, oh, well, this company, Apple, they offer 4.15%. So it almost feels like what Apple has done will be more consequential to consumer savings rates than anything that Jerome Powell has done in the past 12 months. while we've been in a zero interest rate environment, no one cared about APYs. Like, who gives a shit about interest rates on savings accounts? Because you weren't really getting any.

Yeah, the difference between 0.2 and 0.22 didn't really mean much. Exactly. And now everyone's waking up to the fact that, oh, we can get money for our money. And we're seeing all this interest in bonds and in money market funds and in treasuries. It's starting to feel like the global investment strategy is kind of changing. So my question to you is, has your personal investment strategy changed in the same way that the world seems to be? It has. But first, it's important, again, just to reinforce how important it is that people are good at money. And people say, well, I don't think about money. Well, you better think about money. Because if you want to be good at it, you want to be

economically secure, just the way Roger Federer thinks about tennis a lot, you need to be thinking about money. You need to understand it. You need to understand some of the basics. And we talked about the inflation rate of 10 plus percent here in the UK. If you're one of these people not monitoring your bank account, and if you're not monitoring, I find your money, it means you're fucking up. It means the situation is worse than you think. So say they're one of those people that's getting 0.3% on their savings and inflation is 10%. That means effectively, if you're making 80,000 pounds, congratulations this year, you got a 10% pay cut. 10% inflation, 0.3% on your savings. You are now effectively have purchasing power that has

declined 9.7%. That's like your boss calling you in and saying, you no longer make 80,000 pounds a year, you make 72,000. So you need to be all over this stuff and always looking for yield and always looking for the lowest interest rate possible. Even if it means taking money off a credit card and putting it onto another credit card because it's offering a lower apy even if it means taking a loan against your house to pay off high interest credit cards you always want to be figuring out ways to reduce the interest you are paying on anything and increase the interest rate that you are getting as it relates to my own investment strategy, it has impacted it. And that is, for the first time, I'm actually thinking about investing in credit vehicles or

better known as bonds. I have never, I think I owned one bond once. I think I owned a bond in Gannett, the newspaper company, because I invested with Apollo. It was a good yield. I liked newspapers. It felt like a pretty safe credit. I only owned it for about a year. But I'm thinking about buying bonds again. I've always owned stocks. And the primary benefit of bonds is, one, they produce cash flow. They have yield, usually, or a coupon payment or interest payment paid to the owner of the bond. And also, they're, generally generally speaking a safer bet because if the company goes out of business, right? So say Bed Bath & Beyond is kind of careening towards bankruptcy,

but there is some value there, the brand, the business, the stores that are profitable. So say it's worth a half a billion dollars. If it has $400 million in debt, the debtors get paid back that $400 million first, and then the equity would split the remaining $100 million. If it gets sold for $300 million, then the bondholders get that $300 million. They get 60 cents on the dollar, and the equity gets wiped out. The bottom line is debt holders or the bondholders are at the top of the cap structure, meaning they get their money back first. So it's, generally speaking speaking a better or an easier way not to lose money. But the hard part is over the last 20 years, you haven't gotten really paid for that

risk. You haven't gotten paid much. Now that interest rates have accelerated, you can get decent yield in a vehicle that is traditionally has a little bit less downside or possible downside is a little bit safer, and you get real yield. So for the first time, I'm looking at buying credit instruments or buying bonds because I'm also at a stage in my life where I'm not looking to get rich. I'm always looking to get wealthier, but I'm especially looking to not get poor again. And so a transition from equities to bonds kind of makes sense given where I am in my life and kind of my risk inflection. What kinds of bonds are you looking at? Is it just corporate

bonds or treasuries? What are you looking at? I would buy a mix. And one of the things I'd probably go into a bond fund. And one of the things we talk about in the book is the importance of diversification. And that is you just never know. So I probably wouldn't buy a single company's bond. I might buy, if the banks that lent money to Twitter offered Twitter bonds, I would buy that debt because I think it'll trade at a huge interest rate. And I think Elon Musk is such a narcissist that he'll never let those bonds default because he wouldn't want the loss of face. And I think he's going to make a shit ton of money off of SpaceX. So we'll have the money to pay those interest rates on those bonds. But anyways, what I'll probably do is just invest in a bond fund. And that is I'll pick some sort of

index fund or some sort of mutual fund, low cost, low fees that invest in credit across a certain type of sector or region or certain type of company. We'll be right back after a quick break with a look at the latest in AI. Hey, it's Scott Galloway, and on our podcast, Pivot, we are bringing you a special series about the basics of artificial intelligence. We're answering all your questions. What should you use it for? What tools are right for you? Thank you. Tune into AI Basics, How and When to Use AI, a special series from Pivot sponsored by AWS, wherever you get your podcasts. What software do you use at work? The answer to that question is probably more complicated than you want it to be.

The average U.S. company deploys more than 100 apps, and ideas about the work we do can be radically changed by the tools we use to do it. So what is enterprise software anyway? What is productivity software? How will AI affect both? And how are these tools changing the way we use our computers to make stuff, communicate, and plan for the future? In this three-part special series, Decoder is surveying the IT landscape presented by AWS. Check it out wherever you get your podcasts. We're back with Prof G Markets. Social media platform Reddit said it will start charging companies for access to its API. That stands for Application Programming Interface, and it's the

method through which other entities can download and process your data. This will have serious implications for AI companies like Google and OpenAI that use Reddit's conversations to train their algorithms. Meanwhile, Reddit is preparing to go public this year. The company makes most of its money through ads, but plans to announce prices for its API access in the coming weeks. So, Scott, this is the latest development in a larger story that's been unfolding, and that is all these generative AI programs like ChatGPT and Stable Diffusion and so on. The reason they're so powerful is because they've been able to collect basically the entire corpus of data on the internet for free, and then they use that data to generate their own content.

Now, Reddit is not the first one to do this. Twitter recently started charging for its API as well. But the message that a lot of these tech companies are now sending is essentially, sorry, our content and our data is no longer free. Where do you stand on this issue? I think it's fascinating. I think generative AI or these large language models have an obligation to figure out some sort of licensing agreement.

If they're going to come in and grab the shelves of all of your data and use that to inform the product that ultimately they spit out on the other end based on a query, they technically owe you money. If a radio station plays a bunch of Madonna songs, there is a licensing group that represents most or all artists that they send a check to. If they play a Madonna song 3,000 times, they have a calculation and they send the rights group $3,000 to go to Madonna. The rights group holds on to 10% of it and they send Madonna or Warner or whoever label it is $2,700. And I think that's what needs to happen here. I was on the board of the New York Times. I don't know if you knew that, Ed. I only mention it about every 48 hours.

But I remember saying, and I'm not playing revisionist historian here, when I first went on the board, we need to shut off the crawlers from Google. We need to sit down with the new houses at Condé Nast and the Murdochs at News Corp and the folks that own the FT basically stop all crawling of our data by Google, wrap it all into one big licensing agreement, and then go to Microsoft, who had a viable search engine at the time, Bing, and say, who wants the most precious, valuable, aspirational content for their search engine, and basically get into a bidding war? The reason that they refused to do it was, A, they all hated each other more than they hated Google because they were stupid. They didn't realize their real enemy was Google, not News Corp or the FT or Pearson or whoever.

And also, they were worried about antitrust. But the same thing needs to happen here. The content providers need to, whether it's Getty Images or, you know, Musk is saying that they've been crawling his Twitter API. I don't know how true that is. But if I can go to ChatGPT and I can say, write a blog post about failing young men in the voice of Scott Galloway, and it comes back with a 1500 word blog post on struggling men with a bunch of dad jokes and it attempts to be in my voice it's clear that the large language model has ate digested absorbed a bunch of our content and if someone is able to monetize that content specifically the end user and or chat gpt and they have crawled my content as a means of informing what they

expect right on the other end, shouldn't we be compensated? So I think this is going to end up ideally somewhere around where the music industry ended up. And there's also a strategy around here. Adobe has their own generative AI model around imagery. And one of the things they're advertising as a feature is that they own the IP or its fair use design, meaning that no one will ever get sued here because they own the data or they have rights for use of it. So I think this

is a big issue. Where it ends up is I do think they end up striking deals with the original creators. The impact it will have, though, is similar to streaming. It will be sort of a winner take most. And that is the artists that have the most work that's kind of, I don't know, the most iconic that these generative AI models want to absorb and inform their work will make a lot of money. And there'll be a small amount of money for the long tail. But I think it's coming. And I think it makes sense. And I think they're smart. I think they need to bind together to present one unified front to the AI community. Yeah, the other big story in this AI IP issue was the AI Drake song that came out a few days ago. And basically, someone used an AI generator to create a song that sounded like Drake featuring The Weeknd, sounded like

The Weeknd. It got more than 600,000 streams on Spotify in just a couple days until Universal Music Group got it taken down. And now Universal Music Group is telling all these streaming platforms that you have to block the AI systems from scraping their music. It feels like this could happen in the film industry too. But here's a more nuanced example. What about content that users create? So say I create a blog post or I just message my friends or I have a conversation on Reddit. And Reddit technically owns the content there

because it's part of their API. But ultimately, I was the creator, even though I wasn't necessarily trying to profit from it. And ultimately, these AI models will profit off of the content that I created. So how do you think about it from the perspective of just your average user who's messaging and creating content online? And do you think the rules still apply there? I get it in theory, but I don't think they're going to be entitled to or get payment,

and nor do I think that'll stop them from continuing to post. When you post content on Reddit, implicit in that is an exchange of value. You're posting content on Reddit to enter into a dialogue, maybe to get some street cred, to ask a question,

to build awareness of your ability to analyze the fundamentals of a certain stock, to express your viewpoint, to influence others. So Reddit has figured out technology and made expenditures to create that community and those network effects. And I think they are entitled, in fact, to compensation. Now, if an artist is putting out content and they're working hard and they're spending a lot of money, and then that content, as referenced in your example around Drake, is used to create another song that is driven, informed, inspired by a Drake song, I think he and his record label are entitled to compensation. But when we post blogs, when we post content on different platforms, I think that

the value exchange has already happened. And if Reddit can garner additional income, then that will give them the economic motivation and incentive to make the experience better and more rewarding for you. But the idea of trying to compensate, and a lot of people have talked about this, to use the blockchain such that every individual or user of social media platform gets a portion of the advertising revenues that they create, I've always thought that's bullshit and a logistical and tracking nightmare. That implicit in your posting content is that there's an exchange there of value that is worth it to you. Drake puts out music because he wants to make money and he spends a lot of money trying to produce it and distribute it. He doesn't go to MySpace and put up music

just hoping to get distribution. There will probably be forums for new artists who will say, go ahead and use my content, but just credit me or reference me. Yeah. It sort of reminds me of the economic differences between America and China, because in China, they have extremely weak intellectual property laws. They have barely any copyright laws. And it basically creates this economy of counterfeit products from, you know, like designer handbags and smartphones and enterprise software. And there's actually a name for this, which is Shanjai. And it's basically describes this copycat culture economy in China. And it's all by design, right?

Because what it's allowed them to do is unleash this power of scale. They can create all these phones, all these algorithms. And it's been a positive for them. But it feels like in America's case, if we don't start cracking down on this stuff and cracking down on these AI models and the content they use, we're basically signing up to becoming a Shanghai nation where your IP is not necessarily protected, everyone can copy each other, and it's kind of a game of who can produce it the fastest and at the greatest scale. So I guess the question that we should be asking ourselves and that I'd ask you is, do we want to become that? Do we want to become a culture of produce, produce, produce at the expense of originators getting the credit and

probably the compensation that they would want? My view is, by the way, no, I don't want that. Selfishly, I would want to get credit for things. But how do you see it? the way, America was in that business for the 18th and 19th centuries. We used to go steal manufacturing and textile technology out of Europe. We would actually kidnap artisans, and we would basically rip off technology and manufacturing technology and build factories up and down the eastern seaboard. And we basically stole their IP, and we printed money. Now China's doing the same thing to us. Eventually, an economy evolves into more of an artisanal economy, and that is they have their own original ideas. So you talk your own book. If you're France and you have luxury brands, you are really into hardcore IP protection. If you're India or you're Vietnam or you're China, where you can take something and replicate it and produce it at a

lower cost, you are very much into the IP theft business. But we have always been, or not always, but for the last, I'd call it, 1,500 years, been in the business of being artisans and innovation. And we have very, very extensive detailed treaties with China that says, okay, we know people copy Microsoft Office, but it can't be state-supported, it can't be institutional, you have to crack down on it. And in exchange, we'll continue to buy your goods. So this is a huge dance done by corporations and economies everywhere. Okay, final AI point tangentially related. So there were these two research papers that came out demonstrating what ChatGPT can do. The first paper was titled, Can Chat GPT Decipher FedSpeak? And the answer was a resounding yes. It successfully figured out

if central bank statements were hawkish or dovish. The second paper was titled, Can Chat GPT Forecast Stock Price Movements? The answer again was yes. The AI evaluated news headlines about public companies and then accurately predicted whether it would move up or down. Should Wall Street analysts be worried about their jobs? firm research. And that is, I forget his name, there was some amazing Solomon analyst who was the best telco analyst. And he used to go into every telco that Solomon Brothers was looking to do their IPO and say, I'll write research on you. Everyone will be aware of you. I'll wink, wink, put a high price target on you if you give us investment banking business. And these research analysts were making 10 and 20 million bucks a year. And then people realized that these guys just turned into whores and weren't giving honest advice. And so they made them separate the banking business from the research business. And because research could no longer win investment banking business for the investment bank,

research analysts started making a lot less money. They were less profitable and slowly but surely, the majority of them got laid off. So the research community has already been decimated. Now you could argue it created a vacuum in a market for independent analysts like Lynn Alden or some companies like Sanford Bernstein doing good independent research. I think there'll always be a market for independent. Ultimately, there will be generative AI that looks at what other people are doing and starches out the margin, similar to an arbitrage. But I think for the next two, three, five, maybe even 10 years, there's going to be an arms race here. And similar to quant trading, where the initial quant guys found signals and were able to discern signal from noise and make millions of bets every day on small price movements, you're going to see a new breed of hedge fund managers who will make a shit ton of

money who kind of get an edge using generative AI. I think it's a really exciting field. Now, what gets even weirder is your ability to predict their tone and their language and interest rates. I think that is super interesting. But over time, it gets arbitraged out. I'm not as worried about it. Everyone else, and you didn't ask me this, thinks it's kind of this doomsday machine. I find everyone who claims it's a doomsday machine and thinks we should pause just wants to catch up

and is totally full of shit. See above Elon Musk. But yeah, it's going to create alpha or whatever you want to call it. It's going to create some outsized returns for a hedge fund that figures this shit out. Thanks, Scott. Let's take a look at the week ahead. We'll see the US GDP for the first quarter, as well as the personal consumption expenditures index for March. And it's also a big earnings week. We've got Meta, Microsoft, Google, Amazon,

UBS, First Republic, Exxon, and Chevron all reporting earnings. Do you have any predictions for us? Yeah. So Apple in their next earnings report, if it's in the next couple of weeks, not this one, but the next one where they have distance from the launch of their banking product is going to report just monstrous inflows of capital and the market's going to go crazy. And on that day, Apple stock will go up and some of the biggest banks in America, their stock will go down because all

of a sudden everyone will be like, fuck, here comes Apple. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Jason Stavers and Catherine Dillon are the executive producers. 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. You held me in kind reunion As the waters and the dove flies In love Happy 420. I forgot to say that.

Will you celebrate? Oh, you know it. And you know how I'll celebrate. Gosh, where are those Doritos? Support for the show comes from Alex Partners. Did you know that almost 90% of executives see potential for growth from digital disruption? With 37% seeing significant or extremely high positive impact on revenue growth. In Alex Partners 2024 Digital Disruption Report, you can learn the best path to turning that disruption into growth for your business. Thank you. Available at www.alexpartners.com slash Vox. That's www.alexpartners.com slash V-O-X.

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