The Prof G Pod with Scott Galloway - Prof G Markets: Meta’s Monster Quarter, Buying Elon’s Twitter Debt, and America’s Deficit

Episode Date: October 30, 2023

Scott breaks down Meta’s and Snap’s earnings and explains why he’d be interested in taking some of Elon’s $13 billion in Twitter debt off the banks’ hands. He also discusses potential solutions to the U.S. deficit with Ed.  Learn more about your ad choices. Visit podcastchoices.com/adchoices

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NMLS 1617539. This week's number, 44%. That's the share of Gen Z single people who agree with the statement, I would rather clean the toilet than go on another online date. True story, I was dating a homeless girl. The good news, I could drop her off anywhere. Welcome to Prop G Markets. Today, we're discussing earnings from Snap and Meta,

the anniversary of Elon's Twitter acquisition, and America's deficit. Ed, guess where I am. Vegas, baby. I went to the Sphere last night and saw you two. It's incredible. I haven't seen that many white people since the Taylor Swift concert. Oh my God. It's literally every white person between the ages of 50 and 65 was at U2 last night. Have you got the kilt on yet? No, don't have the kilt on yet. I did a little bit

of gambling last night, but no, it's pretty, it was a Wednesday night here, so it wasn't that much fun. Anyways, enough about you. Give us the headlines here, Ed. Let's start with our monthly review of market vitals. The S&P 500 was down, the dollar was up slightly, Bitcoin rose, and the yield on 10-year treasuries climbed. Shifting to the headlines. U.. US GDP rose 4.9% in the third quarter. That's up more than expected from the 2.1% pace in the second quarter. It was also the fastest expansion in nearly two years. 41 states are suing Meta, alleging the company uses addictive features on its app to, quote, exploit young users for profit. Google reported lower than expected profit in its cloud unit,

and its stock dropped more than 10%. That wiped out nearly $180 billion in value in one day, the company's largest ever single session loss. Meanwhile, Microsoft beat expectations and posted 13% revenue growth. That growth is largely owed to AI-fueled demand for its products. Microsoft's stock rose nearly 5%, adding about $75 billion in value the day after the report. Scott, do you have any reactions?

GDP growth at 5% just blows me away. I just can't get over, and I don't know if that's going to be inflationary or not, or if people are worried that that growth is too good. But, I mean, effectively, if anyone was to project what would happen this year in terms of the economy in the face of this dramatic escalation in interest rates, I think they'd just be blown away that we're not only not going into a recession, I mean, growth of 4.9%.

That means about every 14, about every decade and a half, if you maintain that growth rate, you double the size of your economy. Was there any color or detail on why the growth was so strong? Everyone just says it's because consumers are back to spending. And the thing that I found, I mean, I agree, I thought it was a staggering number. And the thing that was so strange is that the markets barely reacted. The stock market didn't move, yields didn't move. So this was already priced in, basically. And I guess that would mean from an interest rate perspective, investors aren't that worried that we're going to see more rate hikes. But yeah, I mean, I thought that number was shocking. And you'd think that people would be a little bit more worried considering the whole point of this rate hike cycle was to stop this from happening. I'm just blown away by this. If you think about the fact that everyone's been predicting where everyone was predicting a recession, that is the technical definition, and maybe the wrong definition is two quarters of consecutive negative GDP growth. And we're essentially at 4.9%. I mean, this is just amazing. And then you compare it to our

closest analog, and that is Europe or the UK. They look as if they're probably going into a recession or already in a recession, and yet we're up. We're growing 4.9%. We are an outlier, Ed, but in a very, very good way. It's good news for America, and you could argue it's sort of a victory for our policymakers. In terms of 41 states suing Meta, my question is, who are the nine that are not? I don't know what the legal veracity is of a case like that. I would bet that Meta is going to deploy hundreds of lawyers and delay this thing, maybe settle, sign a consent decree, which they, and take a fine, and then they'll violate the consent decree slowly but surely over the next five or 10 years as they make $20 or $30 billion in cash flow a year, pay a fine of $1 to $5 billion. The problem here, Ed, is until we have a fine that is material for these guys or somebody does a perp walk, all of this stuff is just sort of the cost of doing business. This feels a little bit like the states getting together to go after tobacco. But what people forget is people talk about antitrust and they say that, you know, well, these products are free. Why would we break them up? The ultimate of all social, that that monopoly abuse has extracted

dramatically increased prices or costs, if you will, from consumers in the form of non-economic costs. And that is if Meta had 10 or 20 percent share as opposed to 66 percent share, I think advertisers and parents would have more options and decide that, you know, I'm under the impression based on every piece of data I've seen that they really don't care about children and are willing to put in place algorithms and allow unfettered, non-reviewed content to show up vis-a-vis an algorithm when the algorithm senses a kid is thinking about self-harm and starts sending them images of nooses, razors, and pills. And I believe that they could stop this, but they don't have much motivation to stop it because they're the only game in town. And the result is that parents all over the world are paying increased costs in

the form of incredible anxiety, incredible fear, because meta doesn't need to do anything about it. Well, I think we should just put a ban on using social media below the age of 16. Like enough with these lawsuits, just make that ban. It feels like that's something everyone agrees with on both sides of the aisle. I'm just confused why we haven't taken serious steps to actually do that. Well, they claim, Snapple claim that it age gates. And I think with Soul Instagram, the problem is there's no enforcement and they start going to this, well, you'd have to violate people's privacy to get age verification for every user and you need anonymous accounts. So some human rights activists in the Gulf can talk about

her important work without the fear of being unmasked. I mean, they just hide behind all this delay and obfuscation around anonymity and free speech and the importance of anonymous accounts. And the reality is we're not talking about the realm of the possible, we're talking about the realm of the profitable. They could absolutely figure this out. They could figure out a way to provide anonymity to politically sensitive accounts using the blockchain or some sort of third-party verification and still age-gate it. I mean, we figured out a way to age-gate the military, age-gate alcohol, driving. You know, we age-gate almost everything in our society, but these guys can't figure out a way

to keep 16-year-olds or 13-year-olds off of Instagram or Snap. I agree with you. Age-gating does seem like the most elegant way. And then with respect to Google and Microsoft, kind of the tale of two worlds here where Microsoft beat expectations, 13% revenue growth on a company that's doing almost a quarter of a trillion dollars in revenue each year. It's hard to grow double digits when you get to the law of big numbers like this. And also, there's just no getting around it. There has been an enormous transfer in power and market capitalization from the new kid, or arguably, relatively speaking, the new kid, and that is Alphabet, to Microsoft. And their incorporation of AI across Search and their Microsoft

Office suite, it just feels like this company is absolutely on fire. Meanwhile, almost overnight, Alphabet feels poorly managed and as if they are going to be the textbook case of the innovator's dilemma. You know, this is really man bites dog. Sort of the traditional player is more innovative, takes a bigger risk, and the newer player, the newish player, looks flat-footed. In sum, Satya Nadella should make a shit ton more money than Sundar Pichai this year. What are your thoughts, Ed? Put it this way. I feel like Microsoft is riding on an open AI wave right now.

It's like the premier enterprise product, and it's the only product that all these enterprises really know, hence why their cloud business is booming. But AI is getting so much investment. We're going to see billions of dollars going into all of these new AI alternatives. And already, companies are actually looking to get away from open AI because it's just getting so expensive. So, you know, Salesforce is

looking for alternatives. Wix is looking for alternatives. And I think what we're seeing is that AI is almost becoming commoditized, where people are going to be less obsessed with this new product that openAI is offering. And they're just going to say, okay, where can I get the cheapest option? So I think in that sense, we might be over punishing Google because there's a high probability that someone who doesn't want to pay OpenAI prices is just going to go to Google who may start offering lower prices. And then the other thing is their ad business is doing pretty

amazingly right now. I mean, the search ad revenue is up 11%. And then their YouTube ad revenue is up 13%. I think YouTube might be the most underhyped media asset in the world right now. I read recently it commands 9% of TV screen time, which is more than any streaming service, including Netflix. So it's basically the world's greatest streamer. So I don't know, I think Google might have been slightly overpunished on this one, and we'll see it come back. I think you might be right. I would argue the valuations or the kind of increase in market capitalization that are inspired by AI may have peaked. If you look at kind of a big five, not even a magnum, but seven, but five companies, I mean, it's Meta, Microsoft, NVIDIA, Tesla. Essentially, you have about $4 trillion in market capitalization increases since the beginning of the pandemic.

And some of that is earnings increases, but most of it is multiple expansion. And what people or the markets are so inspired by is sort of AI-inspired narrative. People are looking for reasons to love Microsoft right now because they say, wow, they have kind of shot ahead in terms of their investment in open AI and their ability to incorporate generative AI into products where they're not in the business of protecting a legacy business. And people are looking for reasons to beat down Alphabet, who is seen as being caught flat-footed. But if you look at the market capitalization gains in these companies, and I would argue reverse engineer to AI-inspired increases in value, I think you could argue that AI, regenerative AI, the story has created more shareholder value in the last 24 months faster than any technology in history. Now, is it warranted

or earned? We'll see. But if you look at the total number of startups in generative AI and how much money they've raised, they've raised about $200 billion at a valuation of approximately $1 trillion. So you could say, all right, startups have created $1 trillion in value if you market it where they've raised money. But that's dwarfed by the $4 trillion in increase in market capitalization that's been garnered by companies like Tesla, who on the day they announced the Dojo supercomputer, which is supposedly an AI computer that will help figure out self-driving. That day, the excitement around that kind of AI narrative increases the market capitalization of Tesla by the value of BMW. When Microsoft announces they're incorporating AI into their Microsoft Office suites, they increase their market capitalization by the value of Disney. So, AI is, at least from a perception standpoint, is the seminal breakthrough technology of at least the last decade, if not the last 25 years.

We'll be right back after the break with a look at Meta and Snap earnings. We're back with Profit Markets. Snap reported third quarter earnings that beat estimates. The company is back to sales growth after two straight quarters of declines. Revenue came in at $1.2 billion, up 5% from a year ago, and shares initially popped more than 10%. The next day, however, Meta eclipsed those earnings, reporting third quarter revenue of, get this, $34 billion. That's up 23% from a year ago, and it's the company's largest year-on-year sales growth since 2021.

Scott, insane results from Meta. What's your reaction? This may be Netflix and Meta. Netflix also had a blowout quarter. They may have pulled off something that we haven't seen before in markets. I mean, definitely not in tech, but maybe even across markets historically. And that is these companies have managed to do pull off nearly the impossible. Typically, the best companies in the world make massive investments, their costs go up, but they hit a point where their revenue growth acceleration is greater than their cost increases. But what happens when you have massive, right, massive increases in revenue?

Meta increased their revenues 23%. That basically means every three and a quarter years, the company would double its revenues. And then usually in an amazing company like Meta, revenue up 23%, expenses up 18%, profits up 20 or 30%. But Meta actually reduced their headcount by 24% and managed to increase revenues by 23%. So Ed, what happens when you have the champagne and cocaine of massive revenue growth while you're cutting costs? You have a nitro and glycerin explosion in earnings. The profits here in the third quarter doubled, doubled. And about, I don't know, nine, 12 months ago, everyone was saying that meta was running into problems and it was no longer the hot thing. And oh my God, I mean, I don't think Mark Zuckerberg acquits him well in terms of his concern for the Commonwealth or for our kids, but there's just no getting around it. has outstanding management when it comes to managing a business and making investments. This isn't, you know, drinking or chilies or red onion or whatever tacky place you take your dates at. This is drinking a cocktail at the polo lounge where daddy will be tomorrow night and

Saturday as he goes to LA for his favorite holiday. Hello, innovation called Halloween. Another story, Ed. Another story. I just don't think I've ever seen anything like this. Have you seen it in your 17 months in the professional world? No, this is the first time. And also that profit, it more than doubled. It was up 164%. I also want to rewind to a year ago when Meta's ad sales were actually declining. And part of that was the macro environment. But we also wrote a post on this about how it was Apple that was hurting the business. And we specifically made the point that Apple had this privacy change that made it impossible for Facebook to track user data, which meant that you had bad targeting and just overall poor performance. And at that time, I talked to several friends who

worked in e-commerce who told me that, yeah, my Facebook ads just don't work anymore because my customer acquisition costs are too high and I barely get any click through. Six months later, I checked in with these guys and I asked them, are you still having trouble with these Facebook ads? And they said, no, it's working now. I'm like, okay, well, what changed? They say, I don't know, but not only is it working, but it's working better than it was before Apple made that privacy change. So I was puzzling over this for a while. Turns out the solution was AI. And what Meta did was they pulled back from the metaverse and they quietly shifted literally billions of dollars of investment into AI. They created these dedicated AI teams. They built new algorithms that essentially overhauled the entire ad recommendation system.

And they even created this AI ad tool called Advantage Plus, which basically automates the entire ad process for marketers. And now they're working on a generative AI product that's going to be geared specifically for advertising. So I think the learning here with Meta is, you know, we think of all these AI winners as the guys with the chatbots, like OpenAI, Microsoft. But I feel like we've massively underestimated the extent to which AI has totally transformed Meta's business in the face of Apple's privacy change. And then you look at all of their accomplishments this year, you know, threads, reels, cost cutting. I feel like you could make the case at this point that Mark Zuckerberg has been the most successful CEO of the year.

Look, I hate to admit it, but you might be right. And again, see above $4 trillion of market capitalization inspired by AI. And AI is not only helping Meta on the ad side in figuring out a workaround over kind of the Apple attempt to kick Zuckerberg in the nuts. It's also helping on the consumer side. And that is they are leveraging AI to create more engagement across Reels within Instagram.

Yeah, 40% increase in time spent on Instagram because of Reels. You're right. It's incredible what they've pulled off. They're, you know, they're a mendacious fox, but they're an impressive

mendacious fox. And by the way, they mentioned AI 51 times on the earnings call. How many times did they mention the metaverse? God. Twice.

Well, I don't know if you noticed, but Reality Labs, their sales fell 26% year-on-year to $210 million. So So this business is going away. They have lost $25 billion on the metaverse. I think they're effectively, I don't want to say they're getting out, but they're definitely rationalizing the investment. Although as much as Apple hates the Zuck, specifically, I think Tim Cook really disdains them. Tim Cook is a quality person that recognizes people that aren't, and I think it really bothers him, the success that Zuck registers or the damage he's levying on the world. the Old Navy of technology. Old Navy is arguably or is the most successful retailer of the last 50 years in that it was the company or the retailer that went from zero to a billion faster

than any retailer in history. And the Old Navy algorithm has always been a fantastic algorithm to remember in business. And what was that? Old Navy was going to be 80% of the gap in terms of quality and merchandising and finishes and fabrics for 50% of the price. And that cocktail, that cocktail, basically, if you think about Southwest Airlines and JetBlue, they were 80% of American or Delta for a lot less money. That is an incredible cocktail for growing revenues really quickly. The same thing is true of the Oculus headset right now. And that is, I think, that the $2,500 announcement or the announcement of a $2,500 headset from Apple has actually brought kind of new value or perceived value to the Oculus headset. Anyways, distinct to that, there's nowhere to go

with this stupid thing. There's more people going to, no joke, there's greater traffic, daily active users on MySpace than Horizons World or whatever it is they call that in-cell panic room. But I think slowly but surely, they're rationalizing their big gulp ayahuasca consensual hallucination around the metaverse. their nephew or their niece that's in the same family, but is- Yeah, we forgot about Snap. Yeah, working at the, you know, instead of running General Electric, you know, our cousin is a barista somewhere. Not that there's anything wrong with that. But just to give you a sense of just how the numbers we're talking about, Meta added the revenue of Snap just this quarter. Their quarterly increase, their year-on-year quarterly increase in revenues was bigger than Snap's entire business. And Snap is doing well. They grew 5% after two consecutive quarters of decline. So that's nice to see them reverse the declines. And the platform saw a 12% increase in daily active users, up to 406 million. And most of

this growth came from outside of Europe and North America. Users outside of Europe and North America account for almost half of Snap's daily active users, with only 17% of revenue. That was similar to, or may still be similar to Facebook. Engagement on Snapchat increased, which is exciting for them. Users posted nearly three times more public stories posted in the U.S. compared to Q3 2022. But basically, these numbers are kind of, they're sort of a pimple on the elephant of social media. Now, granted, it's a very attractive pimple that my kids are obsessed with, and they own a nice niche. But they're sort of, you know, it's right now, it's meta in this space. It's meta in the seven dwarves. And Snap is, you know,

sleepy or dopey or tiny. You know, they're just a cute little version of Meta at this point. And those growth numbers, I don't understand why it got such a pop. Those are lame-o numbers. I mean, 5% revenue growth, then you compare it to Meta and the whole business is up 25%. And then that net loss, which is bigger than last year, I think it was around, I think it's like a 5% expansion in that net loss to $368 million, despite also laying off a fifth of the workforce. And meanwhile, they're still declining to offer any formal revenue guidance because their excuse is macro uncertainty. I just thought this was a kind of a giant dud. You're being a little harsh here.

Maybe this will convince you. Ready? So they lost almost $400 million. Their adjusted EBITDA was $40 million. Meanwhile, they paid employees $350 million in stock-based compensation. Is that sustainable? Well, they're being smart. They're like, our stock is down. I mean, I think their stock's off 90% since it's high. So we want to keep people around. So let's shuffle out the door, a bunch of options and tell everyone, Hey, if we get the stock back to 50% of where it was two years ago, you're going to make a shit ton of money. I think you have to do that. I think you have to keep your most talented people. Retention is the key to companies like this. The team with the best players wins. And I got to

imagine that people at Snap get a lot of calls from a lot of different platforms. They have reversed the revenue declines. They have a very nice niche. It's a nice little company. We're now in an era of just big is not only better, but big is singular. Big is just kicking the shit out of the lower 90. I asked Aswath Damodaran, I was at the Apollo conference this week and Aswath spoke and I said, is this, if you will, the top 10%, the biggest companies aggregating all the increases in market capitalization? I'm like, is that a cyclical thing? Meaning that arguably you should be investing in the lower 90? And he said, no, I think it's structural. I think with, you know, basically in an era where there's no antitrust, the big guys are running away with it. And here's the bottom line. Snap just doesn't have,

they can't say, hey, you 800 engineers, figure out AI to make advertising more robust and get a workaround Apple. Hey, you 300 engineers, figure out a way. I mean, Snap essentially is the little engine that could sort of right now. And the reality is Snap should probably be acquired. It's been a year since Elon Musk purchased Twitter for $44 billion.

At the time, seven banks, including Bank of America, Barclays, and Morgan Stanley, lent Musk $13 billion to help finance the deal. Now, typically, Wall Street investment firms would swoop in and take debt like that off of the bank's hands before too long. But clearly, they lost their appetite for Twitter under its new owner. That $13 billion in debt has remained on the bank's balance sheets ever since. Now, they're preparing to unload some of that debt at a discount of at least 15%. So, Scott, this is what's known as a hung deal. The banks are willing to take a hit of $2 billion at a minimum

because they haven't been able to clean this company off their balance sheets. How did we get here? Investment banks are in the moving business, not in the parking business or the storage business. And that is interest rates accelerated so fast. Just as you had the champagne and cocaine of increasing revenues and declining costs at Meta and at Netflix, you had the exact opposite at Twitter. And that is you had what is arguably the greatest revenue decline in corporate history of a company doing more than $1 billion. They're off somewhere

between 55% and 70%. We don't know because they just lie all the time. So it's hard to get real numbers. Third-party data people say they're down 55% in revenue. I mean, I'm just never seeing anything like that. So from a bondholder standpoint, they give these guys $13 billion in exchange for an agreement to pay 12% coupon on this debt. The revenues massively decline, interest rates massively decelerate, which makes that 12% number not as appealing. And the banks go, oh, fuck, if we get rid of this debt, we're going to have to market way down. And when we market way down upon a transaction, we have to report those losses in our next earnings call. And we

really don't want to do that. We're going to wait. We're going to wait till the market recovers. We think maybe Elon wants to buy it back, or we're going to wait for a good bid. And they have all kind of held hands together, which I always wondered how could they could, they're essentially coordinating. The three of them have decided they're not going to do anything until they can get offloaded at a decent price. The question is, does Musk buy it back or does a third party buy it back? I thought it was going to go out in more like a 50 or 60% price. In other words, that the bonds which were issued at par at 100 would go out at a 40% decline in value, which would mean that the yield on these bonds would be, I don't know, closer to 16 or 18 percent, maybe upwards of 20. If it goes out at a 15 percent discount,

let's call it a 20 percent discount, I think that's a nice return because I actually think these bonds are pretty safe because I don't think, given just how much money Musk has because of the acceleration in Tesla stock this year and also the increasing value in the private markets of SpaceX, where his stock is probably pretty liquid there. He could sell some. I don't think he's going to take the L and lose face and let this company go bankrupt and start and stop paying the interest payments on his bonds.

And if he did, and you bought the company at 80 cents, the bonds at 80 cents, you basically would own Twitter for nine and a half million million. And I think that any new owner could probably see a 20% or 30% increase in revenue over the next 12 months. Because I think a lot of these advertisers have decided to get the hell out of Dodge because A, they don't trust Elon Musk, or specifically, they don't trust his ability to keep the platform safe

or advertiser-friendly. And I think if you brought in kind of a responsible, I don't know, more trusted management team, I think a lot of big advertisers would return to the platform. What are your thoughts? Well, I wanted to follow up with another question, which is you said on a previous episode that you would consider buying that debt that we're talking about. But I'm wondering, you know, 85 cents on the dollar, is that good enough for you? Is that something you'd still be interested in buying? Well, so when I say buy it, I mean, come up with some money myself, go to with a capital partner and say, let's buy a big chunk of this. And I think he's going to continue to pay us. But if he doesn't, you know, this is kind of a nice loan to own, if you will. The folks I've talked to about partnering on this have said, well, we got to wait and see where it trades. Because while we like the deal, it's just trash the company or doesn't really care about

the revenue declines because he wants to buy all that debt back as cheaply as possible. And that he'll buy it back and then he'll have absolutely no third parties telling him what to do. He won't have to make any disclosures around numbers or revenues. And that he just wants to buy the debt back at a good price. I think that's a little Machiavellian. I can't imagine. Although I will say this, Linda Iaccarino is arguably the worst CEO I've ever witnessed. So maybe she is his attempt to signal total incompetence and drive the value of the bonds down. Oh, I feel so bad for her. Maybe he calls her and says, Linda, at the code conference, say this, be totally unprepared, be defensive, be just, Linda, I need you to be just incredibly

cringeworthy. And she delivered. She delivered, Ed. I wouldn't be surprised if at some point Elon calls these banks and says, okay, I'll buy it for 60 cents on the dollar. And I'm like, no, fuck you. We'll sell it to a big player for a lot more than that. At 85 cents, you know, I don't know. I don't know if you could get a big capital player in there for that. But if it trades somewhere between, call it $0.50 and $0.70, I think it's an incredible piece of paper. We'll be right back after the break with a look at the U.S. deficit. We're back with Profit Markets. The U.S. Treasury wrapped up the fiscal year with its September budget report.

The report broke down government spending and tax revenue, but the number that made headlines was the deficit, $1.7 trillion. That's 23% higher than last year's deficit and will add to our already staggering debt load of $33 trillion. Despite debt concerns, Treasury Secretary Janet Yellen said the economy remains resilient and added that the administration is, quote, committed to addressing challenges to our long-term fiscal outlook. Scott, the deficit has become the ultimate political debate. Where do you stand on this? I mean, I'm old school. This worries me. This is effectively, if you thought of the U.S. economy as a household, it makes about

$50,000 a year. It spends $65,000, and it has debt of $300,000 plus. It just feels like that's not sustainable. At the same time, economists on the other side will say, well, if the world was really worried about it, they'd be selling our bonds. Interest rates have accelerated, but the dollar is still incredibly strong. We're the world's reserve currency, so we can always kind of turn on the printing machine. But this just feels to me like, at the end of the day, the continuation of a trend over the last 40 years, and that is, we don't want to have the long-term fiscal discipline because our electoral system

is so kind of short-term, that nobody wants to make investments that'll pay off in 30 years, or people aren't afraid to make irresponsible decisions that you and your kids might wake up one day and go, this economy is no longer sustainable. Companies or countries don't go out of business. Civilizations don't decline because they're invaded. They decline because they go broke. And this feels to me like, with the interest rate acceleration and the increased debt payments, my understanding is next year we may have to pay more for the interest on our debt than we spend on our military. So I think this is a big issue. I'd like to think at some point that both Republicans and Democrats get to cut spending and cut services and increase taxes. We need more revenue and we need to spend less. It's got to happen. And we're going to have to go after entitlements, which are kind of the biggest part of it. So I'd like to see every year for the next, I don't know, every two years for the next

20 years, we raise the retirement age. I think we should eliminate capital gains, take it all to the top rate should be 37% for capital gains, not 22.8 or whatever it is. So what are your thoughts? Well, I have two major issues with the debates that happen whenever we talk about the deficit. And the first is, you know, there are two solutions that you mentioned, which are, you can increase revenues, that is, collect more taxes, or you can decrease spending. And it feels like the only thing that people are willing to talk about whenever this comes up is decreasing spending. Like there's this obsession with government bloat and debt to GDP ratios and deficit to

GDP ratios, but almost no attention is paid to our shocking and unique inability to collect taxes. So, you know, you look at the receipts in this budget statement. We collected $4.5 trillion in taxes this year. That's half a trillion lower than last year. And as a percentage of our GDP, it's less than 17%, which is down from our historical average of 19.5%, which, by the way, is already super low.

If you compare America to other nations like Germany, Germany has tax revenue as a percentage of GDP of 24%. UK has 27%. Australia has 30%. So in other words, not only are we bad at collecting taxes, we're not even trying. And you know, the one agency where we decided to cut spending this year was the IRS, whose one job is to collect taxes. So I did the math here. If we raised our tax revenue to 24% of GDP, which is very reasonable, that's what Germany's at right now, we would solve the deficit. All that means is, as you referenced, getting real about closing tax loopholes, potentially raising taxes, raising the capital gains tax, investing in auditing, all these things that

are about generating revenue that no one seems to want to talk about. Now, my second issue has to do with the spending conversation itself, because it feels like everyone talks a very big game about cutting spending, especially Republicans. Vivek Ramaswamy is a leading GOP candidate. He says, shut down all the federal agencies. He wants to start with the Department of Education, then the FBI, then the Department of Energy. And the idea is, if we stop spending money on these agencies, then we'll fix the deficit. So again, let's do the math. If we got rid of every single US government agency from the DOE to the DOJ, if we got rid of all of them, we'd reduce annual spending by barely a tenth. Barely. And the reason is that we spend 76%

of our budget on three things, defense, healthcare, and social security. But whenever anyone proposes cutting spending on any of those three things, Democrats and Republicans start throwing a fit because they know that the one thing that would prevent them from getting reelected would be for a 65-year-old senior to look down at a social security check and see a number that's smaller than last year. So it feels like the whole problem with this conversation is that people are willing to make sacrifices, but no one's willing to make meaningful sacrifices. They don't want to raise taxes because it'll piss people off. They don't want to cut defense because it'll make them look weak. They don't want to cut social security

because they'll lose 25% of the voting population. But these are the only ways that you'll actually solve the deficit. And I say this as a 24-year-old taxpayer who, as you referenced, will likely bear the burden of this debt load. If we're serious about until, quite frankly, if you want anything resembling around responsible long-term thinking, Ed, you and your other young friends are going to have to start voting because everyone is scared of seniors. And, oh, we're going to have a child tax credit for your grandkids. Oh, I don't really give a shit about them. I give them $100 and a Lego at Christmas, but I don't really care that much about them. But don't fuck with my Social Security. I don't know if you saw this,

but the EU Tax Observatory just came out with this paper and they're proposing a 2% global wealth tax on billionaires. And they said it would raise $250 billion a year. Now, I've always found these sort of billionaire posturing tax proposals to be stupid. But honestly, the more this goes on, the more I'm like, you know what? Yeah, let's just start taking these extreme measures. I'm sort of the same way. And that is, I've always thought of a wealth tax as a bit of like populist bullshit. And first off, just in terms of execution, you would need a multilateral agreement. Because when France passes laws that increase the taxes

on the wealthy, the wealthiest man in the world decides, I think I will move to Baruch. And now he's a Belgian citizen. And I can't imagine he loves the fondue or whatever it is they serve in Belgium. He's done it strictly for tax reasons. And the wealthy are the most mobile people in the world. They can move to London or Lisbon or whatever they need to do to avoid taxes. So it would need to be multilateral. But we're at a point now where it might be the only way to do it because it is politically palatable because the majority of people are not billionaires. They have recognized a disproportionate amount of the spoils. The question then becomes around execution. How do you value their wealth? But a wealth tax,

yeah, I agree. If power corrupts, there's too much wealth in a capitalist society. I'm sounding like Senator Warren right now, and I believe in private property, but something's got to give that. And what I would say is, first and foremost, you and your colleagues need to start voting. Okay, let's take a look at the week ahead. We've got earnings from Pfizer, CVS, Shopify, Airbnb, and Apple, and we'll see the next interest rate decision from the Federal Reserve. Do you have any predictions for us? This is more of a hope than a prediction

because I have a large position in it. I think that Airbnb, similar to what these other guys have done, I think they've managed the business pretty tightly. There's been a lot of negative, a lot of headline news about Airbnb struggling in certain cities, but I think their numbers are going to be to the upside.

Airbnb strikes me as one of the companies that's on the right side of the champagne and cocaine of growth and cost controls. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our executive producers are Jason Stabbers and Catherine Dillon. Neil Saverio is our research lead and Drew Burrows is our technical director. Thank you for listening to Prop G Markets from the Vox Media Podcast Network. Join us on Wednesday for office hours and we'll be back with a fresh take on markets every Monday. Lifetime You have me

In kind Reunion As the world turns And the dove flies In love, love, love, love