The Prof G Pod with Scott Galloway - Prof G Markets: Hindenburg Shorts Roblox + Germany’s Shrinking Economy

Episode Date: October 14, 2024

Follow Prof G Markets: Apple Podcasts Spotify  Scott and Ed open the show by discussing the ongoing machinist strike at Boeing, Amazon’s new AI tool for delivery drivers, the DOJ’s suggested remedies for the Google antitrust case, and a potential delay in Cerebras Systems’ IPO. Then they break down Hindenburg’s accusations against Roblox and discuss why its business model is so problematic. Finally, they break down Germany’s economic issues and why the country’s lack of spending might be the root cause of its problems. For our take on the Tesla robotaxi event and the stock’s resulting drawdown, tune in on Thursday.   Order "The Algebra of Wealth," out now Subscribe to No Mercy / No Malice Follow the podcast across socials @profgpod: Instagram Threads X Reddit Learn more about your ad choices. Visit podcastchoices.com/adchoices

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Ready, set, grow. Go to ConstantContact.ca and start your free trial today. Go to ConstantContact.ca for your free trial. ConstantContact.ca Today's number, $1,100. That's the cost of a platinum bar on Costco's website. Ed Chustoy. I saw my doctor yesterday and showed him my asshole, which had blood coming out of it,

and he just kept pushing his cart down the Costco aisle. Clean up aisle two. Welcome to Prof G Markets. That kind of humor, as you get older, you'll get it. You made that one up, surely. I made that one up? No, no, no. I found that one online. You got that one. You think I'm a sick fuck. Anyways, welcome to Prof G Markets. Today, we're discussing Hindenburg's short report on Roblox and Germany's shrinking economy.

Farfen Nugent. Now it's just Farfen. But here with the news is Prof G. It says banter. All right, Ed. Hey, Ed, what are you doing? Hey, Ed. What's going on, young person?

Have you seen anything good on that TikTok? Actually, I did. I did want to bring up something I saw on TikTok. Have you seen Trump's interview with Andrew Schultz, the comedian, that just came out recently? I haven't. There's this amazing clip that reminded me of you. He's talking about how a lot of people criticize him for rambling.

And he says that actually I don't ramble. Actually, it's a new word that I've created. It's called weaving. I weave in and out of topics in a way that only a genius can do. I feel like you might relate to that, no? I like non sequiturs. I think people like them. I think the majority of the news that we talk about,

everyone's already heard before, they want some weaving and bobbing. Although, yeah, is it the weave? I don't know if we weave. Anyways, I think we're looking for excuses to talk about anything but the actual news. I do want to hear about LA, though, because your time's coming to

an end. I need to hear if you've hung out with any famous people, if you've done any drugs, if you've gone to any nice restaurants. Let's just get the final round up before you return to the East. Well, you know me. I did have dinner last night with a very talented celebrity, but I like to keep my personal relationships and friendships private. I just don't like to name drop. So I can't go into it. Will Arnett. I had dinner with Will Arnett.

There we go. That's awesome. How is he? He's kind of how you would imagine when he's funny. He's very thoughtful. More successful than our podcast. Yeah. Like one of the three most successful podcasts in the world, Smartless.

And the thing that really struck me, of course, I'm very luxe, is he's very handsome. Did he share any secrets on how to get a $100 million deal? Yeah, have your co-hosts be Jason Bateman and Sean Hayes. So I took copious notes on that. Have you spent much time in LA, Ed? I lived there for a month a couple of years ago.

Why was that? I forget. You just right out of school? No, no, no. It was while I was working for you. I just got an Airbnb with three of my buddies and we just lived there. It was all right. But I think you want to get really rich first.

I think that's the vibe. That's the move in LA. Yeah, I think that's the vibe in any city, especially though in LA. I actually remember this, and I'm not virtuously saying what a great boss I am. For some reason, I had a shit ton of alcohol in my room. Yeah, that's right. You sent me a bunch of alcohol. Yeah.

And we drank all of it. It was great. And we had a toast in your honor. That's what you call employee benefits here at Prop G Media. Exactly. Yeah, my boss is a raging alcoholic and buys too much alcohol. And I appreciate it. And with that, let's move on to what we're here to do, which is talk about the markets.

Let's start with our weekly review of market vitals. The S&P 500 climbed, the dollar rose, Bitcoin fell, and the yield on 10-year treasuries increased. Shifting to the headlines. Boeing withdrew a contract offer after negotiations with the Machinists Union broke down. The offer would have given workers a 30% raise over four years, and the strike, which is nearing its one month mark, will cost Boeing an estimated $1 billion per month. Amazon announced an AI tool for deliveries that will shorten routes by roughly 30 minutes. The tool, which will be rolled out to 1,000 vans next year, will help drivers more efficiently identify which packages need to be delivered at each stop. The Justice Department

is considering recommending a breakup of Google as one of the potential remedies for its antitrust case. However, Judge Amit Mehta will not make a decision on the final remedy until next summer. Google stock fell nearly 2% on that news. And finally, Cerebris Systems may postpone its IPO due to a national security review of G42's investment in the company. As we discussed last week, UAE-based G42 is both an investor in Cerebris and its largest customer. Scott, your thoughts, starting with the breakdown of this negotiation between the machinist union and Boeing? Generally speaking, I think there needs to be a construct for transferring wealth back from kind of the owners to the earners. And you have this kind

of out-of-control income inequality where the entire company, the organization of a business is shaped around the notion of how do we get the value of the shares up, which does benefit the economy on some levels, but massively benefits the people who get the majority of their compensation from options on shares, which is senior management. And the way you totally optimize for shareholders, quite frankly, is that every turn you try and keep wages as low as possible. The objective is to underpay people such that you can transfer money to shareholders, increase the share price, and then the top 20, 30 people in the company get their Gulfstream or their Boeing business jet. The strike here is really, you know, it's a function of how well the industry is doing

and also the leverage point. At what point in the cycle are they striking? And in this instance, it's somewhere in between, in terms of their leverage and their timing, it's somewhere in between where the riders were with no leverage in a shrinking industry and where the longshoremen were with a ton of leverage in an incredibly sensitive time. Boeing's offered a 30% pay increase. The union is asking for a 40% increase over four years. I just think they're pretty close. They're going to figure this out. The average Boeing machinist makes $75,000 a year.

So it's not like this is a pretty highly skilled job. And the thing, the data that struck me that we had pulled together is that their wages have only increased 8% over the last 10 years. And in that same period, consumer prices are up 40%. So the purchasing power and prosperity of Boeing workers has gone down the last 10 years. And the problem is that Boeing has, what's the term? They've shit the bed the last few years. So they don't have a ton of leverage. It's still a good company. It's still a profitable company. They're going to figure this out. This gets done. What are your thoughts? So this has been building up for a while.

And actually a few years ago, the union told their members that they should start saving up, because they should expect a pretty significant strike in the next few years, which I think is really responsible. And it just shows, you know, that this is actually quite warranted, the idea that they have said, you know, this is a very coordinated move, it's a coordinated attack, and we need to stockpile for several years. And so here they are in 2024. Boeing is in an extremely tenuous position itself. The stock has crashed. Their credit rating is on the verge of being downgraded to junk. They have $60 billion of debt on the balance sheet. And as we have discussed before, their doors are also flying

off of their aircraft mid-flight. So it is a very strange dynamic where neither party has much leverage at all. They're both sort of being kicked in the balls, Boeing by the stock market and Boeing's workers by Boeing. And so when I look at this, I am sort of struggling myself to assess where this is going to land in terms of a negotiation. I am a little surprised that Boeing didn't agree or were not down to meet their demands of 40%. They were down to, say, 30%. But perhaps it just speaks to how bad of a position Boeing is in right now, the fact that they cannot make those demands. So this is a confusing one for me, and I'm not sure I have a perfect handle on where this is going to land. Well, unfortunately for him, the Boeing CEO said in the last earnings call, when talking about

some of the challenges they face, he said, well, when God closes a window, he opens a door. And that was just the wrong thing to say in an earnings call on Boeing. Let's get to the next story. Okay, let's talk about how Amazon is using AI to transform delivery routes. Do you have any thoughts on that story? It's the boring shit that moves shareholder value. The fun stuff that people want to talk about, social and everything. You know, when I was running Altura,

I was a consultant. They want to talk about innovation and big splashy ideas and Instagram. They want the fun stuff. The stuff that moves shareholder value is really boring shit, like reducing a red envelope. The best thing we could have done for shareholder value, and we try to get focused on it, is how do we reduce returns? You know, how do we cut load times on the pages? Because if your load time's longer than a third of a second, 20% of the people bounce. It's the boring shit that moves shareholder value. And with AI, we're talking about, you know, the fun stuff and the kind of dramatic, cool things it can do. But where AI really impacts the economy is around productivity and efficiency. And what they're saying with AI is that they can shorten the typical delivery route by 30 minutes.

Given that Amazon has 390,000 delivery workers who earn about $19.40 per hour to deliver seven days per week, this reduction would save Amazon approximately $1.4 billion a year. And then if you assign the multiple, you know, this one innovation around AI potentially could increase valuation or the market share or the market capitalization of the company by $25 to $30 billion in value by using AI to just speed up the routes, if you will. This stuff, I would imagine the real impact on the economy is going to be these little incremental fixes around efficiency that help people. I mean, the ultimate business strategy, the ultimate shareholder strategy is the same strategy as Walmart and China as an economy, and that is more for less. And so I'm a big fan of these little incremental changes. I think that Amazon is about the boring shit and about shareholder

value, and this cuts a swath between the two. Yeah, I have a feeling we're not going to disagree on anything on this episode, which is going to be a little bit of a shame, but I think that's exactly right. I think when we think about AI, the predictions are that AI are going to come in and replace everyone, But that's not really what's going to happen. What's going to happen is exactly what's happening with Amazon here. It's going to just make everything we do a little bit faster, a little bit cheaper, a little bit easier. It'll be all incremental. And I like those numbers that you referenced there, the idea that just shaving off half an hour in the delivery

route will unlock more than a billion dollars in savings, which will translate to, you know, 20 to 30 billion dollars in enterprise value. I think this is how the AI story gets played out. Now, we can also have a conversation about how the drivers are going to get slightly screwed here, because the reality is that the drivers at Amazon are contract workers. They are gig workers, which they're not particularly happy about. So they're being paid per hour, which basically just means that you are taking that $1 billion and removing it from their pockets and putting it in the pocket of Amazon. And we can talk about how, you know, maybe you can make the argument that that is unfair to the drivers. But I think what really happens is that Amazon will be taking those savings and it'll be doing this in all parts of the business, but it'll take those savings

and it's going to invest it in other areas of the business, which will result in more value creation, in more commerce. And I think ultimately, and this is why I think this is actually a good thing, it will result in more jobs somewhere else. You're probably too young for this. I take it you didn't have a paper route when you were a kid? No. You were probably trying to influence people on TikTok or something. But speaking of LA, I had a paper route. And my route was the Holmby Hills for, I think it was the LA Examiner or some paper. And occasionally, you know, I'd be late for school or something and I'd have to do it very early in the morning. And my mom would agree to drive me around my paper route and I'd just throw papers out of her car.

And we would be so frenzied. My mom was a secretary in the Valley, a lot of traffic, and we'd be late. And I mean, you would not want to get in the way of our lime green Opel Manta, you know, when we were doing our paper route. Her kids, her irresponsible, you know, sleeping in kids paper route. You just did not want to be in the way of that car. We were flying through the Holmby Hills doing my paper route. I feel that way whenever I'm walking my dogs and I see those Amazon delivery people stay out of their fucking way. I mean, it's literally, they are hustling and they're not, the UPS folks, I mean, they're very professional, but they're in the brown uniform and they're kind of like, hi, how are you? The Amazon people are like, bitch, get out the way. If I don't deliver like 183 packages in the next 17 minutes, I come up on some AI automated thing and this stone on my hand turns green and I'm sent to the vaporizer or whatever. I mean, that company optimizes human capital. And those folks, I just think, I mean, it's a free market.

They are not under any pressure to work for Amazon. So I guess everyone's under pressure to have a job, but they just, there's a, just stay out the way of an Amazon delivery person. Let's talk about Google and this Department of Justice opinion, which is that they are recommending a breakup. Well, it somewhat resembles, it echoes back to the 1999 Microsoft antitrust case in which the DOJ ruled Microsoft had created a monopoly in the PC operating system space and blocked Netscape, which had kind of the premier browser from competing by bundling it and basically predatory pricing. The judge ordered Microsoft to be broken up, but Microsoft's appeal kept the company intact. Now, even if this ruling is overturned, which I don't think it will be, it's actually not antitrust that creates the most impact on the economy. It's the scrutiny during antitrust. And that is, you can bet that Alphabet is going to be very careful about not only

acquisitions, but more impactful, putting small and medium-sized companies out of business because they know they are being watched very, very closely. It's like when you're on probation, you tend to follow the law because you know you're on thin ice. I would love to see this company broken up. I thought that maybe there was a chance they would prophylactically spin YouTube because I think YouTube with a 10% share of all streaming versus Netflix's 7% could be accretive to shareholders. But it doesn't look like they're looking to do that. The DOJ appears to be considering separating Google's search business from Android, Chrome, and Google Play on the App Store. So I don't know exactly how those companies get spun as a

distinct, I guess, Android. Would those companies get spun as a distinct, I guess Android, would Android make a shit ton of money, wouldn't it? Anyways, if it was a distinct company. But I like this. I think we need more breakups everywhere. So back in 99, the lawsuit against Microsoft was a complaint that originated from the DOJ, that Microsoft was selling hardware

that was pre-downloaded with Microsoft software. So, you know, Internet Explorer, Windows 95, etc., which is basically the exact same complaint that we're seeing here, where Google is, you know, negotiating these partnerships such that Google Chrome is the default browser. It's a very, very similar dynamic, which ultimately, you know, first it went to the district court, then it went to the Supreme Court, who dismissed it, then it went back and forth

between the district court and the appeals court, and then ultimately, after four long, boring years, Microsoft and the DOJ settled on an agreement that essentially meant nothing. And so, you know, I think history would tell us that what's going to happen here is it'll go back and forth for four or five years. We'll keep on talking about it, but ultimately Google will remain intact. So, you know, we're in for a long four years of talking about this is what I will say.

Let's just wrap up here with Cerebrus. This investigation from the US government into Cerebrus, we discussed this company last week, this AI chip maker, which is backed and whose largest customer is G42, which is this AI firm based in Abu Dhabi. And this is very strange to me, because you might remember a few months ago, Microsoft invested in G42. And they were only able to do that after they got a national security clearance from the government. And the government basically forced G42 to sever its ties with China, which it did. And then Microsoft was free to invest. So now Microsoft is an investor in G42.

So I thought we had investor in G42. So I thought we had already been over this. I thought the government had already handled this national security problem as it relates to G42, but it seems like something else is afoot. Yeah, I don't know. I don't know how much of this is legitimate security concerns or some sort of protectionist slash jingoist attempt to make sure that USAI companies maintain their lead over any competition across foreign entities. But I think you have to

assume that their concerns are valid because what they're basically saying here is this is just going to be nothing but a truck stop for the transport of sensitive AI technologies to adversaries or competitors. And you're just so vulnerable when you aren't that diversified a company. I mean, I just don't – I'm curious if we're even hearing about this company in a year. It just kind of popped up really fast, AI, and the government sort of weighed in and said, okay, we don't understand this, but we just see that you're going to be able to get to take very sensitive technology and possibly it'll end up in the wrong hands. So I like it when our, I don't know, our regulators and our security apparatus are very thoughtful about our competitive advantage. And if you think about our security apparatus, there's sort of the perception of spying and espionage. And the majority of people think that it's a James Bond-like character saving the world from nuclear war and killing people and avoiding, or even like Homeland, you know, a CIA officer getting into very tense situations that involve the Islamic Republic or, you know,

kind of spy versus spy stuff. And the vast majority of espionage, as I understand it, is a very unassuming person who's an assistant in a company and every once in a while takes a thumb drive, downloads a bunch of sensitive information, and then before you know it, Huawei is producing cell towers that look like semen cell towers at a third of the price. The majority of espionage is actually corporate espionage. It's economic theft or IP theft that the majority of money in spying now, even I was reading Dow has all of these licenses on everything you know, everything in my room or a bunch of things in my room are this unique shade of kind of eggshell, whether it's my AirPods case or the cup, but this, I guess this color is fairly unique and requires a certain mixture of dyes from different

palettes. And they have trademarks on all these dyes and they make a shit ton of money. And they figured out somewhere along the lines that agents of the CCP downloaded all of the kind of corporate secrets around how to make all of these different colors, and now they produce them and offer them to Western customers for a fraction of the price. And so I like that we're very protective of our intellectual property and very sensitive to the idea that we need to get in the way of what is the ultimate economic strategy, and that is IP theft. And by the way, that was what built America. We went up and down the eastern seaboard and built factories based on stolen technology from textile factories in the UK. And we even kidnapped and hired artisans to kind of figure out these machinery and these factories. But IP theft is the best, is by far the highest ROI strategy for

any economy, and that is figure out a way, legally or illegally. I remember when China was launching a space shuttle, do you remember that? And it happened to look identical to the US space shuttle. That is the ultimate economic arbitrage, is let other people do the R&D, let other universities, let them figure it out, let them test it, and then find someone, put someone at headquarters there, and have them put that shit on a thumb drive and port it over to them. So I think they're smart to be thoughtful about this and very cautious about it.

We'll be right back after the break with a look at a short seller report on Roblox. And if you're enjoying the show so far, just a reminder, we have a new feed for ProfitG Markets where you'll be getting two episodes per week. So follow ProfitG Markets wherever you get your podcasts. Support for ProfitG comes from Ramp. There are a few things every finance Thank you. across expenses, vendor payments, and accounting, you might want to check out Ramp. Ramp is the corporate card and spend management software designed to help you save time and put money back in your pocket. Ramp gives finance teams unprecedented control and insight into company spend. With Ramp, it's easy to issue cards to every employee with limits and restrictions and automate expense reporting so you can stop sorting through receipts at the end of every

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ExpressVPN dot com slash markets. We're back with ProfitG Markets. Hindenburg Research has shorted Roblox, accusing the company of inflating its user metrics and operating a, quote, pedophile hellscape. Regarding that first accusation, Hindenburg estimates Roblox over-reports its daily user base by 25 to 42 percent and its engagement hours by 100 percent. And on the second, more alarming point, Hindenburg claims it found Roblox members trading child pornography and soliciting sex from minors on the platform. Roblox shares initially dropped 10% following Hindenburg's report, but the day after, they recovered. Scott, I know you've talked about Roblox in the past.

From my understanding, you were quite bullish on the company at one point. What do you make of this new development? So, I got this wrong. I mean, I don't know who to believe here, because obviously the incentives here are for Roblox or for Hindenburg to push the stock down, right? They've taken a huge short position. And when you call someone a pedophile hellscape or a company a pedophile hellscape? I mean, that's just not nice to say about the Catholic Church. Oh, wait, they're talking about Roblox. Sorry. Anyways, a little Freudian slip there.

A little Freudian slip. I don't know what to think here. Roblox has about 3,000 moderators. TikTok has three times the number of daily users, but 13 times more moderators. In 2023, Roblox reported over 13,000 incidents of child exploitation in the National Center for Missing and Exploited Children, up from 3,000 the year before. It also responded to more than 1,300 subpoenas and search warrants from law enforcement, a jump of almost one-third from 2022. I'm just sort of headed the same way here, and that is, I think that these companies could figure out a way to make sure that,

like, if you walk by a park, they have these signs that say, no adults allowed unless accompanied by children. They don't want strange adults hanging around in the kid park. I mean, first off, if you look at the data, we overprotect children offline and we underprotect them online. They could figure out a way to ensure that there are no adults on this platform or anonymous accounts messaging kids. And I don't doubt that it's difficult, but these firms manage to solve much more difficult problems when there's a profit incentive. The hard part here, Ed, is you have a company whose incentive is to exaggerate everything. And I'm not saying there's not a problem here, but if Surgeon General Vivek Murthy came out with this, I would give it a lot more credence, veracity. What are your thoughts? Yeah, the two accusations are, one, that they inflated their user numbers,

and the specific accusation is that there are many bots on Roblox. And so they're saying that Roblox is double counting and counting bots in their numbers. And the second is that it's a pedophile hellscape. And I think that both of those accusations are true. But to your point, I think those accusations are also true of basically every single platform on the internet. So from Twitter, which has openly admitted to overstating its user numbers, which was a huge problem during the whole Elon acquisition, to Instagram, which according to studies is a host of nearly a third of all child predator interactions, to Facebook, a platform from which 94% of child pornography originates, this is just a description of the internet.

Fake, lying about the numbers, and also hosting the exploitation and abuse of children. So it's just ubiquitous. And I think the reason we're paying a little bit more attention to Roblox here is because it is specifically targeted to children. So if you just look at the demographic numbers, 42% of Roblox users are under the age of 13 and 58% are under the age of 17. So this really is a children's platform. But I would hope that we can take this level of scrutiny, which I do think is warranted, and I would hope that we can start applying it to the rest of the internet companies.

Because for some reason, as you pointed pointed out we have a much higher bar for what constitutes illegal and immoral practices in the physical world far higher than we do in the digital world despite the fact that we are now leading the majority of our waking lives on the internet there's clearly a problem whether it qualifies as a pedophile hellscape is unfair relative the the other platforms. I think we're going to find out. But just looking at it through a shareholder lens, the stock is probably overvalued. It trades at 8.6 times sales, which is a 57% premium to gaming peers. And a 2022 survey found that 21% of children in the U.S. who played Roblox spent more

than 10 hours per week on the platform. There's just too much shareholder value in addiction. Especially the addiction of children. The addiction of kids. And you just think about how, quite frankly, just fucked up this is. It's really frightening. And I was kind of hoping Roblox would be the good guy or the good gal that spent a disproportionate amount of their money and created a safe place online for kids. But there's just so much money in addiction and going further and further downstream to younger people. And you can just see an environment where I think we're just going to punch out millions of kids who are just dopa monsters it's also interesting to me one that roblox is sort of built off of the back of the backs of developers because it's it's not roblox the company that is

developing games within the platform it's the users who are developing the games within the platform so that's a very interesting detail. And it was something that I think Roblox, you know, touted because it basically said that it's going to benefit from network effects and look how enthusiastic our users are. They're actually building within the game. But I've never really liked this company because you think about what that actually means. You think about that number, 42% of the usership is below the age of 13, which means that the developers are 12-year-old kids, actually. It's 12-year-olds who are going online and who are building these games on Roblox. And so when you really think about it, what Roblox has done is they have figured out a way to siphon value from children who are getting addicted to the platform and creating games on the platform and basically not paying them. The retort from Roblox would be actually, we do pay them. We pay them in Robux. My response is Robux is a virtual currency that you can only spend inside the game.

And this goes back to the early 1900s, this idea of script, where you'd have mining companies and logging companies who would pay their employees with internal currency that could only be used to buy things within the company's camp. And it essentially forced workers to spend money at the company. And this was something we banned in the US in the 30s. So this to me is a very similar thing that I think it's very easy to, I think they did an incredible job

of making it seem optimistic and exciting and it's encouraging children to be entrepreneurial. But when you really think about it, it's a very similar dynamic. If this weren't an online company, if this weren't happening on the internet, I think we'd be a lot more concerned about this business model.

And I think it's highly likely that we'd say, actually, this is illegal. I mean, even the sexual exploitation that we're seeing, and I'll just give you some anecdotes of what has happened in the past couple years. So this year in New Jersey, there was an 11-year-old girl who was kidnapped by a man that she met on Roblox. And last year in Indiana, there was a 15-year-old girl who was kidnapped by a man she met on Roblox. And in Utah, there was a 13-year-old boy who was abducted and sexually abused by a man that he met on Roblox. And in Utah, there was a 13-year-old boy who was abducted and sexually abused by a man that he met on Roblox. And there have been many, many others. As I

mentioned, this happens on the other platforms too. A lot of sexual predators meeting kids on Facebook, on Instagram, and on Snapchat, etc. But I think the question becomes, if this were a physical company, would we be saying that this is flat out illegal? To what extent is Roblox responsible for the fact that sexual crimes against children are originating on its platform? You're absolutely right. I was just thinking, just as you said that, you inspired a thought, and that is, what if over the last couple of years, Disney, which is a bigger company worth a lot more, what if three kids in the last, whatever it is, 24 months, three teenagers had been kidnapped and abused from a Disney park? I mean, they'd shut the fucking park down. Or there would be cameras everywhere and you would be able, I mean, airlines, what if all of a sudden on airlines, kids were being kidnapped? I used to travel when I was a kid, after my parents got divorced, I would travel alone on an airline.

My mom would drop me off, and I'd get a little sticker saying, I'm a traveling minor alone sons, sometimes I'm asked for a letter, like a notarized letter from their mother saying it's okay that I travel and take them out of the country. I need her permission. Because the airlines are like, we just can't have kids kidnapped. We can't. But if you do it online and it involves innovation and digital, it's the Wild West. And you're exactly right. What would happen if these kids were being kidnapped at Epcot or at Universal Studios? They just would shut the fucking thing down. I'm with you. I think what you said was really powerful. We'll be right back after the break with a look at Germany's struggling economy. And if you're enjoying the show, hit follow and leave us a review onitGMarkets. Germany's economy is expected to shrink for the second year in a row.

The government's 2024 GDP forecast was revised down from 0.3% growth to a 0.2% contraction. That's disappointing, though not entirely surprising news for the country. Last year, Germany's economy was the weakest of its large Eurozone peers. So, Scott, I can get into the details of what I think the main issues are, why this is happening in Germany, but I would like to just get your initial reaction, having just been in Germany, in Munich. Does this surprise you at all? What are your thoughts? Yeah, quite frankly, it does surprise me. So a lot of people would argue that our growth is artificial and masked by the fact that I'm taking your credit card and spending, pushing $2 trillion that are not being paid for, that are going on your credit card into the economy, which creates growth, or at least the illusion of growth that might come back and bite us in the ass. Like, I can

create the illusion of growth if you give me a credit card where I spent $70,000 on a household that's making $50,000, which is effectively what we're doing right now. They essentially have a balanced budget policy. The Germans are grownups, and they say they limit the federal deficit to 0.35% of GDP, which has limited their ability to make these sort of forward-leaning infrastructure investments that, quite frankly, sometimes pay off and grow the economy faster than the deficit, but in the short run, at a minimum, kind of juice the economy. And they've said, no, we're the adults in the room. We're not going to have this kind of sugar high of growth. And they kept through from 2014 to 2019, Germany posted budget surpluses and interest rates were negative. The government kept infrastructure investments to a minimum. Now German automakers, including Volkswagen, are struggling to compete with more modernized EV makers in China. I think that, I mean, if you look, the numbers are pretty striking here. So the GDP growth in 2024 in the

U.S. was 2.5%. In the U.K., it's 1.1%. The Eurozone, it's 0.7. Japan, negative 0.1. Germany, negative 0.2. India, plus 7. And then if you look at the stock markets, Germany's DAX over the last 10 years is up 37%. And the S&P has kept this up 200%. I mean, it's just amazing. The Nikkei is up 157, the Nifty 50 in India is up 216, but still on a risk-adjusted basis, we've just outperformed everyone. Germany's public investment to GDP ratio is 2.6%, which is lower than the Eurozone at 3.1 and the US at 3.3. If I were to try and talk about what is holding back the German economy, it's a weird duality. And that is, if you get out of Germany in high school and you took auto shop or you're just fairly talented or handy or disciplined,

you can get a pretty good job working in the auto industry and find a decent place to live. And if your partner works, you can have a pretty nice middle-class life there on a middle-class salary. And in the U.S., you can't. And so the motivation, America believes in winners and losers. And the upside to a lack of a safety net and a lack of opportunity, and I hate to frame it this way, is people in the U.S. are very motivated to take risks and start business and try and crawl up the ladder. I don't think the same incentives are in place in Germany. Germany has had an incredible lack of innovation. There's just strikingly few unicorns in Germany. It's an economy, it's the biggest economy in Europe, and I believe the UK net or the fact that you can have a nice life without taking the types of risks that Americans are more apt to take has hurt some of their innovation. Because name, well, let me do this. Can you name a unicorn to come out of Germany? Can you name any kind of Germany as the third largest economy in the world? What tech company can you name out of Germany right now? The company I think of is SAP, you know, enterprise SaaS, and they've done very well. But if you look at the rest of the economy,

you're exactly right. It's not tech companies. It's not software. It's not services. It's basically all industrial companies, mostly just auto companies. And the stat that I have here, which I just find remarkable,

is that NVIDIA alone is more valuable than the entire German stock market combined. But there are a couple of things that you said there in that macro data, which I think are quite interesting. One was you mentioning this public infrastructure spending, this public investment, which is only two.5% of GDP, and that's far lower than the rest of Europe, and it's also a lot lower than the US, and we're not even that big into public infrastructure. So that's one piece. The other piece is the debt that you mentioned. So the debt-to-GDP ratio in Germany is around 60%, which is way, way lower than us, way, way lower than the rest

of the G7. And if you look at the private sector in Germany, there is this big surplus of savings among companies. So private sector savings make up roughly a third of GDP in Germany, which is, again, far higher than the rest of its peers. So two main insights here, which is that Germany is very, very scared slash reluctant about spending. And two, they're very, very afraid of debt. It's basically the polar opposite of theS. And I think that you can argue, maybe you could argue that that is, that demonstrates that they are fiscally responsible. They don't want to just overspend, they don't want to just borrow to the hilt like we do. But what's interesting is we're also seeing the other side of being perhaps too responsible, perhaps not risk aggressive enough, which is the great thing about

debt is that you borrow money and you take the risk and then you invest that capital into building things into the future. And that's what a lot of companies do too. So I'd be interested to see here how you view that balance, because I'm looking at Germany's economy right now. And to me, this is the dark side of being responsible. This is the dark side of being fiscally conservative. Your economy just starts to wither and wilt. And now they are officially in a two-year long recession. Well, there is good debt in the sense that when I was on the board of Urban Outfitters back in the, I was there for four years from, I think, 2018 to 2022, and we had Goldman, our bankers, come present. And I asked, how much can we borrow money at? We didn't need money. We were spending our cash. And they said, well, you could

probably borrow money. I think it was like a two and a half percent. And I'm like, why wouldn't we go borrow a couple billion dollars and either get very aggressive around acquisitions or buy stock back? I mean, if you can borrow money, there is good debt. And as long as you can justify forward-leaning investment, and sometimes when your economy goes into the doldrums, it does make sense to, quite frankly, turn the printing presses on and try and jumpstart the economy. The tough part in what economies typically don't do is that, or we haven't done since the Clinton years, is when the economy is strong, to maintain some discipline, even cut some costs while the economy is strong, because cutting costs while the economy is strong, you're not going to send

it into recession because hopefully the economic tailwinds supersede or are greater than the headwinds of cutting your spending. We don't do that anymore. It's like, okay, we can make an excuse to pump $7 trillion in the economy during COVID. You can make a really rational argument, and they made it, that it's better to overdo it than to underdo it. But then when the economy comes ripping back and company stocks are going fucking crazy, do we say, okay, now it's time to pay a little bit more back? No, we don't. So I would, you know, Germany is probably also, I think the thing we haven't been talking about also is that Germany made a very big bet, I forget the term, where they would engage Russia. And I would have made the same argument. Basically, when a country opens a McDonald's, it's less likely to go to war with us. And they said,

if we engage Russia in commerce, specifically around energy, it'll be good for us. They started unplugging their nuclear reactors, and they became way too dependent. Their energy costs skyrocketed through their economy into a bit of a freeze. Just to clarify on that point, though, because that was the beginning of their problems. And I think they're still blaming their issues on the Russia problem, where they were too reliant on Russian energy. But if you look at gas prices, they have sort of normalized. So at this point, they can't be making that argument.

But to your point, yes, that's where it all sort of began. The final point I want to make here is that the most important company in my view right now in Germany is a company that's a unicorn. It's a company called Solonis. It's a SaaS business workflow company that helps optimize decision-making for businesses, creates efficiencies, finds where business improvement processes are most ripe, where they should invest. Sounds very boring and very profitable. This company's on fire. And I think they're going to do $600 or $700 million in revenue. They're growing like crazy, super impressive founders. And what happens is when you have

one unicorn, hopefully it goes public, hopefully it has a huge pop, and then the wealth that creates internally, people decide, I have family in Stuttgart or I have family in Hamburg, I'm going to stick here. And they become rich and they start a venture capital firm and they start investing locally. Germany is dying for a unicorn. the central hub for innovation and tech. Okay, who? Like what? What's come out of there? So they need a big win. The reason why I think Germany will, I mean, I'm just an enormous fan of Germany. One, I think culture matters. I think quality of life. I mean, Munich is just a spectacular city. If I spoke German, I would live in Munich. They have fantastic football, which is obviously very important. But these are wonderful cities.

England basically has London. France basically has Paris, and I'm going to get shit for that. But they have one economic center. Germany has five or six really strong industrial centers. They work hard. They play hard. The other thing about Germany, and this is totally off topic, if you know anything about German history,

and it's kind of a cautionary tale, if you were to pick the society that has been the most progressive, the most forward-thinking, the embrace of jury trials, the embrace of immigrants, the embrace of academia, the embrace of a thriving gay community over the last 200 years, who would be the most progressive over that 200-year frame? It would be Germany with a huge asterisk around this 11-year descent into darkness. But Germany is really arguably one of the most progressive, enlightened societies in the world. And so I think people, and not only that, it's the economic engine of Europe. If they sneeze, all of Europe catches a cold. You know, you got to root for Germany. Anyone who spent time in Germany, you just realize that this is kind of, this is just

a wonderful Western nation. So I'm rooting for them, but they, oh my gosh, they are desperate. No country has been more ripe or deserving of a unicorn right now that re-inspires, reignites the tech community than Germany. and start investing in them and making slightly bolder bets. The one other detail which I think is very important when it comes to Germany's economy is this demographic problem. So in the US, the average age, the median age in the US is 39. The median age in Germany is 47. It is the fourth oldest country in the world. And as a result, they have been seeing their labor force start to shrink, which they have slightly been addressing through immigration,

but immigration has become a political issue and an actual issue in some cases. And so that might not continue. So it's continuing to shrink. And it is expected, the labor force, the working age population is expected to decrease over the next five years, three times faster than the Eurozone average, and six times faster than the US. So this is a very, very old nation, which means you're going to see a lot more pressure on its pension program, its social security program, and also it's going to be just a far less productive society, a less productive economy. So it's sort of the worst of both worlds here, where they've already got their issues. They need to start figuring out a way to get out of that hole. But if you look at

the demographics issue, which I agree with you on, I believe is one of the most important forces in economics. It does not look good for Germany. Well, as Peter Drucker said, kind of my role model around economics, he just always said demographics are destiny. If you look at any industry, it can usually, its decline or its ascent can be reverse engineered to demographics. And what you're saying is it's a really ugly picture. The advantage they have is that they will always be an attractive place for immigrants. And I would think they'd be able to solve that birthed earth. But anyways, it'll be interesting.

But I'm a huge fan. I think we're rooting for Germany. I think they're a fantastic ally and just a wonderful culture. Let's take a look at the week ahead. Second quarter earnings season continues with the banks. Goldman Sachs, Bank of America, U.S. Bank, and Morgan Stanley are all reporting. And we'll also see earnings from Johnson & Johnson, American Express, and Netflix. Scott, do you have any predictions for us?

Well, I just think we're about to see the first major externality of AI. And that is, I believe that some of the misinformation around FEMA, which is really dangerous and has been spread by people, including this guy who owns an EV company and sends shit into space, spreading misinformation that, you know, you can't trust FEMA or that they're spending their run out of money and they're spending it on illegal immigrants, all of this misinformation creates confusion across people who are really suffering and need good information on how to access resources when in need. That is a dumpster fire compared to the nuclear mushroom cloud we're going to experience over the next three weeks in terms of the run-up to the election. A combination of increased social media activity, the ability to generate content

through AI, just spin up tens of thousands of fake accounts, test a million times per second the iteration of content that goes viral, a polarized media environment. I think we're going to see all sorts of videos, deepfake videos of violence at polling stations and key swing districts. I think that just the zone is going to get so flooded with misinformation that it's going to discourage people to vote and not know what's true, what isn't. And all the platforms are going to feel really bad about it the day after the election. And the fear is, you know, what happens, not only what happens leading up to the election, but the misinformation that then gets distributed around, quote unquote, a fake election. You know, what happens when two people show up on inauguration day, each with their own,

you know, supporters and even their own army potentially? I mean, this shit could, this shit could, it could spin out of control pretty fast. And the ability to generate misinformation, test it, and then distribute it across these porous platforms who don't, as you referenced, just have not put in place safeguards, this is the first big externality. This is the first big puff of carbon into the air of AI. It's going to be misinformation over the next three to four weeks leading up to the election. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Our executive producer is Catherine Dillon.

Mia Silverio is our research lead. And Drew Burrows is our technical director. Thank you for listening to Profit Markets from the Vox Media Podcast Network. Join us on Thursday for a conversation with Alice Hahn only on Profiteer Markets. Reunion As the world turns And the dove flies In love, love, love, love