The Prof G Pod with Scott Galloway - Prof G Markets: (HBO) Max, Chipotle & Cava’s IPO, Private Equity’s Public Sales, and the TikTok Ban

Episode Date: May 29, 2023

This week on Prof G Markets, Scott shares his thoughts on what he thinks is the worst ever rebrand: HBO’s shift to Max. He then takes a look at fast casual restaurant Cava’s IPO filing and examines why its competitor Chipotle is one of the best performing stocks this year. Scott also discusses why private equity firms hold on to shares of companies in the public markets (hint: it’s a racket). Finally, in this week’s Unpack, we hear about each of the legal challenges Montana’s TikTok ban will face. Learn more about your ad choices. Visit podcastchoices.com/adchoices

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cards, savings accounts, mortgage rates, and more. NerdWallet, finance smarter. NerdWallet Compare Incorporated. NMLS 1617539. This week's number, 13. In an attempt to evade overweight baggage fees, a teenage traveler wore 13 pounds of clothing. The airline charged her the fee anyway. So no joke here, but a serious offer. If you're out there, this teenager, send us a message. You have an internship with Prop G.ets. Today, we're discussing one, Kava's IPO and the fast casual restaurant industry. Two, how private equity makes money in the public markets. And then three, an unpack on Montana's attempt to ban TikTok. Here with the news is someone wearing only 12 and a half pounds of clothing and makeup, Prop G media analyst Ed Elson. Ed, what is going on? I'm good, Scott. I'm busy. I've got college reunions this weekend, and then I'm going

to Costa Rica on Wednesday. What, like six-month reunions? Aren't you? How old are you again? My second year. Your second year reunion. Okay, you are definitely overpaid. You've only been out of college for two years. That's right. They have two-year reunions. Yeah, yeah.

It's a huge deal. Yeah, that's why Princeton has an endowment the size of Costa Rica and yet continues to reject 92% of their applicants is because they raise money. If you do, in fact, give money back to them, do it from your side hustle, whatever that is, raising hypoallergenic labradoodles. But no, I don't want any property money to go back to Princeton. Are we clear reunion committee in Ed Elson? raising hypoallergenic labradoodles. But no, I don't want any property money to go back to Princeton. Are we clear reunion committee and Ed Elson?

At least for the next five years, then I'll start to want to give back probably. They're very convincing with their donation strategies. Well, they really need it. I mean, what's Princeton's endowment? I think it's something like

$7 million per student. They really need your money. That is absolutely the best use of funds for me right now is to help Princeton advance the trajectory of the children of wealthy people and freakishly remarkable kids from other households that help smear Vaseline over the lens of their mendacious fuckery and income inequality. Anyways, on to the news. There's actually one final stat you might like. This Princeton reunions thing is consistently the largest single beer order in the United States annually. Princeton people drink beer? I would have thought it'd be like, you know, the more Pimms cups are ordered special order from, wow, beer. Yeah, three straight days just drinking beer. So I'll be on good form next week. I gotta

be honest. I like Princeton or I hate them less now. I hate them less now. Get to the news, Ed. Let's start with our weekly review of market vitals. The S&P was down. Bitcoin continued its month of declines, and the yield on 10-year treasuries climbed. Shifting to the headlines. Fitch, a top three credit rating agency, placed the US AAA rating on watch for a potential downgrade as debt ceiling negotiations drag on in Washington. The government could default as soon as this week if Congress doesn't raise the debt ceiling. UK inflation dropped to 8.7% year-over-year in April. That's down from 10.1% in March. But it was still higher than the Bank of England's forecast of 8.4%.

Adidas cut ties with Kanye West last October. But it's sitting on $1.3 billion worth of Yeezys. So it's announced it will start selling them again. A quote, significant amount of the proceeds will go to organizations combating racism and anti-Semitism, though Adidas did not specify what that amount will actually be. For Scott's take on the Kanye debacle, check out our episode from October 31st. HBO Max has changed its name to Max. The content is the same, but HBO is now a sub-brand alongside the broader Time Warner Discovery catalog.

And finally, NVIDIA stocks soared almost 30% after its second quarter revenue forecasts shattered expectations. NVIDIA has added more than $500 billion in market value so far this year amid the AI frenzy, and it is well positioned to become the first trillion dollar chip maker. Scott, what are your thoughts? Well, first off, let's just talk about the kind of the, I don't know, the most important company that doesn't get that much news, and that's NVIDIA. And there's just not getting around it. This company is a juggernaut, and

chips are now center of a national defense debate, but it's, you know, I would say with the exception of vaccines, what is a more important product than chips? And NVIDIA appears to be the best of a very important sector. HBO Max, this will go down in history as a first ballot hall of fame, head up your ass brand strategy move. There's something in brand strategy. We spent two sessions in my brand strategy course called Brand Architecture. And in an era of M&A and consolidation, when all of a sudden, Norwest owns Wells Fargo, and Wells Fargo is the better brand than a Minneapolis commercial bank that specializes in mortgages, what do you do?

You say, Wells Fargo and Norwest Company, and then ultimately you drop Norwest and it becomes Wells Fargo. When Dayton Hudson starts this cool retailer called Target, you know, Dayton Hudson, Target, Target, a Dayton Hudson company, and then just Target, and then the whole thing becomes Target as Dayton Hudson fades to black. There's Dotson, which was a nice brand in the 70s. When I was at, I think it was Emelita Elementary School. Our principal was just the coolest cat. True story. He would roll up to the faculty parking lot about second period, clearly hungover. And after, you know, having a lovely over for a little Lancer's wine and listen to the Fifth Dimension,

he would show up about 11 in the morning and he'd had this silver Datsun 240Z, which was sort of the closest that the Japanese got to a Porsche. It was such an incredible sports coupe. It was just a really unique design, great performance. We'd be playing tetherball or handball, but essentially it would be like a Who concert when Principal Euclidson would roll up in his 240Z, and we would rush the fence to see the 240Z. And then what does Datsun do? The Stipsa corporate have this ego thing where they want a global brand, and it was called Nissan and other markets. So they trashed the brand. And in the weirdest brand architecture transition move, it had the Datsun logo on the front and then the Nissan logo on the back.

So it was like, oh, it's a Datsun there. It goes, no, it's a Nissan. But this takes the cake. HBO, a brand is a series of intangible associations that result in a rational trial or margin. And those associations are built slowly over time. You can't really buy or build a brand. It's like nine women can't have a baby in a month. The same is true of a brand. You can't build a brand like it. You could have infinite capital

and you couldn't build a brand like HBO in two, three, five, maybe even 10 years. And HBO means a level of quality program that is so tapped into the cultural zeitgeist and has such incredible execution as a function of HBO's culture, which was able to basically be a flyweight that could kick the shit out of Larry Holmes. They were spending $2 or $3 billion a year on content. Netflix was spending $17 billion. And yet, what are we all talking about? We're all talking about succession. What did we used to talk about? Game of Thrones? They consistently figure out a way to put out the most culturally relevant content, and they're taking that brand and immolating it so they can call it Max? I mean, this is just, this is an outrage, Ash. This is an outrage. And by the way, we're changing the name of the Prop G show to HBO, and you're just going to see what happens.

Let me just push back on this. I actually like this rebrand. I said I liked it on Twitter. I said I just think it sounds cleaner. And I got a lot of pushback, a lot of unfollows, interestingly. But the way I see it is, you know, you just made the analogy of the Datsun logo on the front, Nissan logo on the back. Isn't that sort of what's going on here with HBO Max combining the two? I mean, the best situation maybe for you would be you just call the streamer

HBO. But there are all of these other production companies, they have to now transition getting the Discovery Plus content onto the Max platform. Don't you think that Max is just kind of cleaner? Plus, the HBO production studio is still going to exist. You're still going to see HBO Original, The Last of Us, HBO Original, Game of Thrones. You're still going to have that brand existing. But this, to me, just feels cleaner. Plus, they've got that bullseye through the a in the max

which is sort of a hat tip to the hbo brand what do you think of that well first off let's let's nod to your logic and let's change the name of your educational institution to prince because it's cleaner ed it's cleaner so you're the university formerly known as Prince. Like, the notion that we're going to change something to Max and take decades of branding in intangible associations, what you had with HBO is anything on HBO, I would trial. That I had so much confidence and trust in that brand. And brand is sort of synonymous with differentiation and trust. And the thing about HBO that made it so successful wasn't the shows that were on it. It was the shows that weren't on it. And that is the bar is just a little bit higher. Whereas Netflix is like, you know, we're going to green light pretty much everything. Amazon is essentially we're the

Walmart. We just, hey, you want to sell through us anything. It actually has more content than any streaming network. HBO was the luxury brand it was the armez bag the birken bag the chanel of media and it was also at incredible self-expressive benefit i remember parties in the 70s in southern california where my dad was trying to fuck everyone that wasn't his wife he would literally go up to them and then one of his first one part of his rap was oh in our household we only watch hbo Like that was some big flex. Or maybe it was the early 80s. I don't know. Anyways, he saw that as a sign of prestige. I mean, this thing called on so many brand attributes, even internally. I think that they were going to have a much easier time attracting talent, the best writers, the best actors to an

HBO production as opposed to a Max production. And I think that similar to every bad decision made in brand strategy, it all circles back or can be reverse engineered back to a 50 or 60-year-old something individual who realizes they're going to die and their ego starts to take over all their decisions. And I'm sure because he didn't come from HBO and he didn't invent it. He was at Discovery. He's pissed off the whole thing isn't called Discovery. He wants to have his name on something original, the guy who built Max, and he's destroyed shareholder value. A brand of this equity is literally capturing lightning in a bottle over and over for decades, and to just trash it and say, oh, now we're Max?

I mean, this will go down first ballot hall of fame of stupid fucking decisions. Anyways, before you say anything really dumb, I'm going to keep going here. Adidas, I feel for them. They made us, I like to call them Adidas because, you know, I live in Europe now. I live in Europe. I like Adidas. I think they, I think they showed real metal by saying, you know, sorry, in Europe now. I live in Europe. I like Adidas. I think they showed real metal by saying, you know, sorry, Kanye, that shit just don't, that kind of anti-Semitic weirdness, just that dog don't hunt here regardless of the economic harm. And I think their stock, that was a buying opportunity when it went down. And I think it's ripped back 1.3 billion. My

question would be, and it's easy to be a purist and heckle from the cheap seats. You know, my question would be, is any of that money going to go to him? And if it does, you know, then it's easy to be a purist and heckle from the cheap seats. You know, my question would be, is any of that money going to go to him? And if it does, you know, then it's sort of uncomfortable. But selling a bunch of Yeezys, they will actually probably clear up pretty fast because they'll probably become collector's items. Sorry, I just want to push back. I mean, we talked about this issue on no mercy, no malice. And one of the things that we pointed out is that at certain points, corporations need to draw a line just to sort of remind ourselves that a line even exists in the first place. And we commended Adidas for taking action about this. Doesn't this kind of nullify everything they did? I mean, it's the epitome of all talk, no action. Shouldn't we be

making, I don't know, maybe a bigger deal out of this? 1.3 billion, right? They're not producing anymore. They severed the relationship. I mean, I just, I empathize with the board members here, like $1.3 billion. If that shit, if we just burn it just burn it and we say to the world, aren't we pure? Okay, that puts us in a hole that makes it harder for us to compete with Nike, makes it harder for us to be economically viable and continue to be a good company that makes the right decision in the long term. So I sort of give them a hall pass here. It's a lot of money. They're trying to say we're going to donate some of this money to causes that are directly trying to combat the venom and weirdness that came out of Kanye's mouth.

But $1.3 billion, that's a serious hit to the company and employees and the stakeholders. And like I said, it's just so easy to be a purist outside the company walls. But, you know, I think that they should do what you suggest and they should just change the brand name to DOS. Like DOS boot. That's cleaner, isn't it? DOS. It's clean. Jesus, I can't believe you think this, HPO. I can't.

I seriously can't get over it. That makes me question every decision we've made about you, Ed. UT inflation coming down to 8.7%. I'm really happy about that. I like the new PM. He strikes me as really reasonable. The debt crisis, I'm calling it. I think we do what we always do.

I think we go right up to the edge here. I think Speaker McCarthy is, I hate to use the R word, but I do think he's reasonable. I think in a back room, they've winked and nodded at each other and said, okay, I got a, he said, Mr. President, I got to pretend I'm fucking crazy to keep the crazies in line and pretend that I'm hearing them and acting crazy. And we'll get right up to the eve of this thing. But this would just be, this is just mutually assured destruction. Everyone would come out of this looking terrible.

All of a sudden, the military would stop getting paid. Our vendors would stop getting paid. Social security recipients would stop. That's the people we got to be worried about is the seniors. You want to see an insurrection? I mean, when they start storming the movie set where Murder, She Wrote is filmed and they find out it's no longer in production, watch out. They're coming for you. I thought that was funny. I was expecting a laugh from you, Ed. You don't even know what murder she wrote is, do you? I bet they're not going to watch that at the 24-month reunion at Prince. We'll be right back after the break with hosted by Capital Group CEO, Mike Gitlin.

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We're back with Prof G Markets. Fast casual Mediterranean restaurant chain Carver has filed to raise $100 million in an IPO. Carver's S1 registration statement shows strong growth. Revenue is up 28% year over year, and there are now 263 restaurant locations across 22 states. That's up from 164 in 2021. However, the company is not yet profitable and lost $60 million last year. Other publicly listed fast casual chains include Sweetgreen and Chipotle. Sweetgreen had an initially successful IPO in 2021, but it got hammered in the downturn. The stock's fallen 80% since it went public. Meanwhile, Chipotle has been one of the best performing stocks this year, up 48%. So, Scott, you were on the board of Panera Bread, which is sort of a pioneer of the fast casual category.

What do you make of Carver's IPO? Well, I'm pulling for it because I know the people at Panera and they're super smart and super hardworking. And if this goes well, it probably sets up for a warm reception in the public markets for Panera. So I'm pulling for it. The revenue grew 13% in 2022. They want to open about 40 new restaurants. That will be, I think, about a 15% growth. It's probably a really good time to open restaurants right now because typically opening restaurants, the key cost driver or the risk is the cost you get the real estate for. And I can't imagine, I mean, for the first time in probably since 2009, the tenant has leverage over the

landlords. That's good for Kava. I know that commodity prices are up, which has hurt margins. We were feeling that at Panera, but I imagine they're starting to come down. So we'll see. I wonder if Sweetgreen's problem, I think Sweetgreen's been hammered by people not returning to the office. I bet that's a big kind of lunchtime thing in urban centers where there's big offices. You're young and eat at shitty places. What is Kava?

Well, Kava's just a fast, casual, i.e. healthy, slightly higher quality, slightly more expensive fast food restaurant. We've seen this massive explosion in this category in the last few decades. So in 2009, there were 17,000 fast casual restaurants in the U.S. It was a $19 billion market. By 2018, that number had doubled to 35,000 restaurants. It had grown into a $48 billion market. The global market is expected to reach $209 billion in annual sales by 2027. So it definitely feels like this is a global consumer shift from traditional fast food to fast casual. So I guess my question to you,

especially given your experience at Panera Bread, would be what is changing about consumer preferences in the food industry? And do you think that we're going to see a decline in the staple fast food brands? The only insight I would have is that think of them not as much as restaurants, but as distribution centers. Now over 50%, I believe, of purchases at Panera originate digitally. People buy online, pick up in store. COVID sort of accelerated that trend, and they had to build in new capabilities. And COVID, to a certain extent, gave them cloud cover to make these types of investments. I mean, the innovation is pretty striking. I still think, I mean, the other thing that just always amazed everybody was Chipotle, Panera, and Starbucks had similar NPS scores, somewhere, I think, in the low 60s.

Could you explain what NPS means? Net promoter score is basically, you're likely to tell someone else, would you recommend this to a friend, would you not? And then it's a ratio of those that creates an NPS. That is seen as a very simple metric that kind of connotes the value of the product. Would you recommend it to a friend at the end of the day? The NPS for Chick-fil-A is like low 80s. I mean, Chick-fil-A is a phenomena. And I would argue the reason they've done that is because of their compensation strategy. They lend money to people who want to be store managers. So there's an owner there at all times. And if you really think about great restaurants and great retail, it's kind of a function of the level of vested interest or ownership that someone has running the store because you can just feel it. When you're in a restaurant where the owner's there, just everything works better. I always feel like the food is, I don't want to say last, but the culture, the cost of the real estate, and then figuring out a way to create more

dollars per square foot through digital technology. What's interesting is Chipotle only spends 5% of their total revenue on occupancy. And we used to, in specialty retail, have this basic metric. And that was, if you could get below 12% of your revenue going to the occupancy costs, you had a model that worked. What actually to the occupancy costs, you had a model that worked. What actually are the occupancy costs? What is- Rent. Rent and utilities. Four-wall unit economics. That 5% number, occupancy as a percentage of total revenue, isn't because they have better deals. It's because they run so much revenue through those stores. I mean, Chipotle is just a business juggernaut.

It's valued at an enterprise value to EBITDA of 36 times. That's greater than Apple, Amazon, or Alphabet. So if you want a tech stock, invest in Chipotle, or at least it's got big tech-like valuations. That probably means you should avoid it, quite frankly. Kava, my guess is they won't get the same multiple, but the most important thing about them is not what they say about Kava, not what they says about Fast Casual, but what it'll say about the state of the IPO market. That's what everyone will take from this. Private equity firms can make a big return when their portfolio companies go public. But typically, that payday doesn't materialize right away.

In fact, only 3% of private equity firms fully exit at the IPO. Instead, they sell their stakes slowly, in incremental sales known as follow-ons. The average PE firm finishes selling its stake three years after the IPO. That includes the initial six-month lock-up period, which is standard in IPOs. And many private equity firms hold for even longer, some for more than a decade, as they hope to sell above the IPO price. But this year has proven to be an unusual one for

follow-ons. New data shows that private equity-backed follow-on sales are up 180% year over year, but almost two-thirds of those deals were priced below the company's IPO price. One example is Blackstone. Two months ago, the private equity giant sold its remaining stake in dating app Bumble for half of what it was worth when Bumble went public in 2021. In other words, private equity firms are scrambling to sell their stakes, but they're doing so at massive discounts. So my question to you, Scott, but they're doing so at massive discounts. So my question to you, Scott, why are they doing this? Because they can do math. And that is, if you look at, I remember meeting a guy named Don Valentine, who was, I think, the founder of Sequoia Capital. And this

must have been 20, 25 years ago. And he said the biggest mistake they made was not holding on to the equity of their companies who went public. And they invest in companies like Amazon and Google. And a lot of private equity players in B.C. said, you know, looked at these unbelievable growth companies that turned into just giants. If we'd held on to this company two, three, ten years post-IPO, we would have made a zillion percent. But then the entire retail market got horny for those types of returns and started piling into total shit, you know, like Virgin Galactic and, I mean, just stupid shit, right? Things that made absolutely no sense. And these guys look at basic things like price earnings, and they realize that regardless of the heat, regardless of what's in trend or off trend, ultimately fundamentals raise their head. And when you're looking at a company like Bumble, I'm sure they did the math and said, okay, let's value it against Match. Let's value it against other companies growing at the same amount. And

even at half of where it was trading in its IPO price, ignore the IPO price. And this is what you're supposed to do as an investor. You're supposed to ignore history. You're not supposed to anchor off past prices. I have trouble buying any stock. I look at NVIDIA. They're a great stock, but it's up 140% this year. I shouldn't buy. But the reality is you should just look at it here today. And what's happened to it makes no sense. And so the PE guys look at a stock like Bumble and they go, okay, even though it's been cut in half, it's still overvalued. And so we should get the hell out of Dodge. So one thing I didn't realize is, but it's totally obvious now that I know, when you hold on to those public holdings, you still get to charge a management fee. So the management fee is around 1-2% for private equity and VC firms, which basically creates an incentive to continue to hold on to your public holdings and just some data. I didn't really realize this. As you said, private equity firms are not supposed to be investing in the public markets, but the average period at which a private equity firm sells its stake is three years after the IPO.

In roughly a quarter of deals, private equity firms retain around half of their holdings after five years. It feels like there's this strange incentive for the general partners to keep charging fees by holding on to their stake for as long as possible. Do you think that that's accurate? Am I being too cynical there? I just love it when the student becomes the master. Yeah, you're figuring out this is a racket. Yeah. And that is, this is typically, roughly speaking, the life of an asset manager. He or she outperforms the market. They raise a few hundred million dollars. And with

that money, they're all over everything and they can be really nimble. They can go into smaller companies. You know, the whole world is their universe. And they can be all over stuff and apply a small group of really talented people to finding great opportunities. And they only need a few. And then because they post great returns, they go out and they're able to raise a lot more capital, which means they have to put more capital to work, which limits the investments they can make. It means that they have to hire more people that maybe aren't as talented as the original investors. But all of a sudden, their returns become secondary to that 2% management fee. If you're a billion-dollar credit fund and

you post great returns and you're able to go out and raise 5, 10, and 20, on January 1, you make $400 million. And so your incentive becomes just to not do worse than the market. And what you find, especially over the last 10 years, the way you would categorize or largely brand the hedge fund industry is expensive, but bad. And that is the returns have not only been the same as the S&P, they've been worse because no one will pay a hedge fund 2 and 20 to buy Apple or Nvidia. It's like, boss, I can do that on my own. So in sum, if you were to say, you know, the whole market is a giant head fake. The whole market is just basically a bunch of jazz hands and a bunch of people waving their arms.

Trust your instincts. This is an industry that is largely built on marketing, fear of missing out, and wanting to feel like you're smarter than the other institution or the other investors. So I invest with the hot manager. But it's mostly, what's the term? It's mostly bullshit. So a couple of things. It just reminds me of this bet that Warren Buffett made back in 2008, where he made this bet with his hedge fund protege partners and said, I bet you that if I invest in the S&P 500, you can invest in whatever assets you want. I bet you that my returns over 10 years

will beat yours. He was losing in the first two or three years. And then eventually in year eight, Protege just gave up because the S&P was outperforming. So two questions. One, why do people invest in private equity? And two, do you think that we should just be getting rid called Della and James, I think it was called. And I called my partner and I said, oh, my God. I think I was 29 at the time. I'd made a little bit of money in a company I started called Profit, maybe 30. I'm like, good news of good news. Kleiner Perkins, the premier VC fund, will let us co-invest with them in this wedding registry called Dell and James. So we scraped together everything we had, a quarter of a million bucks. 18 months later, it was a zero.

What? Yeah. Well, this is the internet. The thing made no sense. The technology never worked. It just went straight to zero. Let's fast forward. I've learned my lesson. I will not pay fees. And this is a story of privilege because I get to co-invest with really smart private equity and VCs, and they are smart. But unless I can co-invest without fees, I don't do it. I just sit right off the bat. And most people don't have access. I'm considered, quote unquote, a value-add partner in some of this shit, which again, talk about jazz hands and a head fake. But occasionally, a VC or a private equity fund will call and say, we're making a meteoritech investment. We'd like you involved. And I usually

not only say I'm not going to pay fees, but sometimes I ask for additional options. So I pay negative fees, if you will. You should never pay fees, Ed, because it's exciting. And as much as you want to believe that you're smart and can identify better managers who've gotten a lot of press and are on CNBC a lot and they'll make you feel like you're getting to invest in something differentiated with people who are smarter than you, they may not know less than you, but they don't know a lot more. The key is diversification and low fees. All right, we'll be right back after a quick break with an unpack on the legal challenges

facing Montana's TikTok ban. Hello, I'm Esther Perel, psychotherapist and host of the podcast, Where Should We Begin? Thank you. 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. What software do you use at work? The answer to that question is probably more complicated than you want it to be. The average US 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? We're back with Profit Markets. Montana made headlines when it passed a statewide ban on TikTok, threatening the company and app store operators $10,000 fines for every user. TikTok users are exempt, but if the ban takes effect on January 1st as scheduled, they presumably won't be able to use the app inside the state's borders. Last week on Markets, Scott predicted the ban would be struck down by the courts. TikTok users and the company itself have already filed two separate lawsuits.

For more on the legal challenges to Montana's TikTok ban and how they would apply to an anticipated federal ban of the app, here's Profiteer Media's editor-in-chief and former attorney Jason Stavis with this week's Unpacked. Yeah, I think right off the top, every legal analyst that's taken a real look at Montana's ban will tell you this is not going to survive court review. And it's informative to understand why. And I think it also sheds some light on some of the challenges that proposed federal bans on TikTok might take. One of the challenges for Montana is that they, with this ban, they have stepped into at least two pretty significant areas that the Constitution reserves for the federal

government. The first is interstate commerce. So states can manage the commerce that takes place within their own state. But what they can't do is burden commerce between the states. So California can't, for example, ban Oregon wine in California. They can ban wine, but not Oregon wine specifically. Now, TikTok is clearly a nationwide platform, and there's a lot of commerce on TikTok, advertising, people selling things, etc. And so by trying to carve Montana out of that system, Montana is limiting the ability of people outside Montana to reach in, people in Montana to reach out,

and also interfering with people who are not Montana residents, but happen to be passing through Montana or do business with people in Montana that somehow connected with their use of TikTok. The next area is even more of a problem, right? The stated reason for this ban, or one of them anyway,

is the concern that the Chinese government will somehow use TikTok to harm citizens of Montana. Well, that is very clearly within the realm of foreign policy. And foreign policy is very much something that the Constitution reserves to the federal government, for good reason, right? The U.S. should speak with one voice when it communicates outside. If we had 50 different governments all managing their own little mini foreign policies, it would be something of a mess. So courts are going to be very suspicious of a state law which purports to act in the foreign policy arena.

The third problem with the Montana ban could have been avoided, and that is that this ban is likely to be considered what's called a bill of attainder. Bill of attainders have a colorful history. 600 years ago, Henry VIII was a big fan of bills of attainder. A bill of attainder is essentially a law that is passed to punish an individual. So normally when we want to punish an individual, we take them to court, right? And they get the due process of a court, potentially a jury and everything else. Well, Henry VIII didn't want to take some of his political enemies to court, right? And they get the due process of a court, potentially a jury, and everything else. Well, Henry VIII didn't want to take

some of his political enemies to court. So he simply had Parliament, which he controlled, pass a law saying someone had committed various crimes. He used bills of attainder to execute, among other people, Thomas Cromwell and his fifth wife, Catherine. So when the framers drafted the Constitution, they said, we do not want George Washington deciding he can have his political opponents executed, so no bills of attainder.

Now, this is actually a very easy problem to get around, and the federal bans that are being considered do this. All Montana had to do was say a certain class of companies, social media companies that are owned by adversarial governments, for example, are subject to this ban. Or they could have said companies subject to this ban will be determined by the executive, by the governor, based on some principles. That is a typical way that Congress and state legislatures get around this issue. And it's also just more principled because it makes everything somewhat more clear. Instead, though, Montana, I mean, the ban itself, the statute is called a ban on TikTok. Then we get to two more challenges.

And I should say all three of those are probably enough to have the Montana ban knocked out. And courts will likely rely on those straightforward problems. But there are two very significant issues with this ban, which also apply to a federal ban. The first, which has gotten a lot of ventilation in the press, is that TikTok is a popular platform for speech. Courts do not allow the Congress to burden free speech unnecessarily. Here, TikTok will say, and TikTok users will say, look, TikTok allows us to communicate with so many people around the country and around the world in unique ways. And the proof of that is simply the popularity of TikTok, right? The government can say, sure, but there's other ways

you can communicate. But it's quite clear that TikTok offers people something they can't get anywhere else. That's why so many people are flocking to TikTok. So courts will be very suspicious of a government attempt to limit that speech. And by banning the app entirely, they're completely eliminating that speech. And by banning the app entirely, they're completely eliminating that speech. There's another significant constitutional infirmity with these bans, though, that hasn't gotten as much attention, but I think is a very serious one.

And that is the fact that TikTok accounts are valuable property for people who use them to make an income. And this is something that we're seeing in Montana right now. The first lawsuit against this statute was not filed by TikTok, but was filed by a group of TikTok users. And they're very sympathetic plaintiffs, right? So for example, you have a former Marine who makes

TikToks about life as a veteran, and she makes a significant portion of her income through her TikTok account. And then they have the wife of a rancher who TikToks about rural life. She has tripled her family's household income on the basis of her TikTok account. So a TikTok ban takes that property away. The Constitution was put in place in substantial part to protect property rights from government intrusion. The government can't take your property without due process, meaning they have to give you an opportunity to defend your property. And if they take it for no other good reason, they have to compensate you for it. So it seems very unlikely, and I haven't seen any effort by these TikTok bans that are being proposed to develop some sort of compensation program or some sort of system for protecting the property rights of people who've

built up some pretty substantial businesses on their TikTok accounts. If the federal government passes a ban and they bring these arguments to court, what courts will do is they will weigh these issues, the burden on speech and the burden on property rights, against the potential threat. A challenge for the government is that the threat is largely hypothetical, right? They don't have evidence or much evidence that the Chinese government is actually doing any of the things that we're concerned about. The other thing courts will do is they will say, is this the most narrowly tailored thing that you could do to prevent

this harm? And here, I think the government has a real problem justifying a TikTok ban, because the harms here are not really TikTok itself, but other things that the government of China or potentially TikTok are going to do. So I think courts and challengers to these laws can genuinely say, hey, why don't you do this? Why don't you enforce data privacy laws? Why don't you enforce disclosure laws? Or if the things that China is supposedly going to do are not yet illegal, make those things illegal. Make manipulating these accounts illegal, right? Make spying on Americans illegal, and then not going to last. But it has served a useful function, which is that these conversations are often hard to pin down in the abstract. But when you get a law and you get a court case and lawyers begin to write briefs and pull plaintiffs into the situation, a lot of these issues get clearer and it becomes more apparent what is going to pass constitutional review and what's not. Yeah, and people talk about it more, including this podcast. Scott, you've come out in favor of a nationwide ban of TikTok. You cited the risks of

Chinese government interference. Do you think it's worth it for Congress to take on what, as Jason has pointed out, looks like a very tough legal fight? Jason's points are really interesting. I think that the net effect of this will be helping TikTok because people are busy and what they will see is that courts in the U.S. struck down a ban, which will make it more difficult to actually ban TikTok, which should be done through a new law passed by Congress. And that law has been proposed, the Restrict Act, which would give the Commerce Department the rights to ban a media outlet that is hosted in a country that is deemed adversarial. I think the list is Venezuela, North Korea, Iran, Russia, and China. That would be a law the federal government could then apply if it saw TikTok as a threat. That is how laws are made and

how they're enforced. When a governor starts trying to pass laws that are going to be overturned because they don't hold up in court, that is a waste of everybody's time and in the end makes it less likely that the federal government is going to get to put in place a law that creates a systemic solution to do this correctly. Let's take a look at the week ahead. We've got earnings from Salesforce, Broadcom, Lululemon, Nordstrom, and Macy's. We'll see the unemployment rate for April, and we'll also see if Congress can come to an agreement on the debt ceiling. Treasury Secretary Janet Yellen previously warned the U.S. government could run out of money to pay its bills by June 1st. That's this Thursday.

Scott, any predictions? I have a short-term and a long-term prediction, or medium-term. So regarding the debt ceiling, 11th hour resolution, I think the incentives are just too great for both parties or all parties to avoid this. So I think the markets appear to think a deal is going to get done. I believe a deal is going to get done. That's my short-term prediction. My long-term prediction is that Linda Iaccarino will be fired from Twitter or will resign. Listening to that shit show that was the Governor DeSantis announcement for his run for president where they basically made the escalators announcement of Trump look sophisticated and elegant. This thing was just such a shit show. It was like 2014 called and wants his podcast back. And Ms. Giaccarino, who is a talented woman and people really like her, she has a great relationship with advertisers, is coming into an environment where you've had a 60% decline in advertising dollars.

She's been tasked with recapturing a lot of that advertising revenue. And this is what's going to happen. Advertising is not going to recover. She's been given an impossible task. She will be blamed for all of his dumbass first ballot Hall of Fame stupid decisions, and she will either resign or be fired. Linda Iaccarino's tenure at Twitter will be less than 12 months. They have poured a billion gallons of honey on her and sent her hunting for bears. This episode was produced by Claireire miller and engineered by benjamin spencer jason stavers and katherine dylan are the executive producers mia silverio is our research lead and drew burrows is

our technical director thank you for listening to property markets from the box media podcast network join us on wednesday for office hours and we'll be back with a fresh take on markets every monday Take on markets every Monday. As the world turns And the dark clouds And the moon 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.

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