The Prof G Pod with Scott Galloway - Prof G Markets: Nike’s Dramatic Downfall & Britain’s Road to Economic Recovery

Episode Date: July 15, 2024

Follow Prof G Markets: Apple Podcasts Spotify  Scott and Ed open the show with a discussion around why Microsoft and Apple have relinquished their board observer seats at OpenAI. Then Scott breaks down Nike’s fall from dominance, shares some insight from when Nike was a client at L2, and considers if the stock is a buy. Finally, Scott and Ed discuss the state of the UK economy post-election and Ed identifies his largest point of concern with the Labour party’s manifesto.  Order "The Algebra of Wealth," out now Subscribe to No Mercy / No Malice Follow the podcast across socials @profgpod: Instagram Threads X Reddit Follow Scott on Instagram Follow Ed on Instagram and X 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 Hi, Prof G listeners, Ed Elson here. Apologies for the interruption, but I have an important message. dot c-a. every week. Soon, you won't find us here at all. We'll be leaving the Prof G pod altogether, so don't miss out. Go listen and follow us at Prof G Markets, wherever you get your podcasts. Today's number, 85. That's the percentage increase in sales of adult fantasy novels in the first half of 2024. Ed, I took my cousin to see a sci-fi fantasy movie the other day, but the sex was way too graphic. Everyone

in the theater asked us to stop. You saw that coming, didn't you? Yeah, I'm sort of used to it. Welcome to Prop 2 Markets. Today, we're discussing the fall of Nike and Britain's economic future. But first, first, by the way, we just did two jokes and they were so profane and inappropriate and not funny. I think the word is cringe. Yeah, it's the synergy right there. There we go. But first, but first, speaking of cringe, here with the news, here with the news is PropG analyst Ed Elson.

Ed, what is the good word? I've got three words for you. It's coming home. That's all I have to say to start this episode. I am literally beside myself. I was in a beer garden last night. I was an American living in London, in Munich, watching Team England play the Netherlands in a beer garden. And I thought, life is so rich.

Were you with your kid? Of course, yeah. And we went and got a kid today. And by the way, we went and bought him these new Jude Bellingham cleats at the Adidas store or the Bayern Munich store. And yeah, so we're just thrilled to be here what's your prediction this is gonna come out the day after the the final so i'm gonna get proven wrong maybe but i don't know i'm gonna say uh two nil to england my prediction spain look pretty damn good they look good they look good but i have to have the money on england i mean, what do you think?

Oh, Gluck, I got a good, I mean, you're talking to someone who's ordering, paying a ridiculous amount of money to have two, you know, England kits shipped to me in Berlin on a Sunday. So, yeah, we're, I'm even trying to, I'm trying to find how I can find someone to paint our faces. By the way, you've entered the Munich store. Do you still have the shirt that I bought you from the Bayern Munich store a few, I want to say a year ago, I got you a Bayern Munich shirt with Prof G on the back. Do you still have that? Oh, of course, and I love it. What?

You bought me a shirt? No, no, yeah, oh yeah, we love it. We love it. I knew it. When we were in Munich a year ago, we got you a Bayern Munich jersey with Prof G on the back, presented it to you on your's one of those things, you know, those things are pretty perishable. It's not like I'm headed out for dinner one night and I think, oh, I'm going to wear my Bayern Munich kit. You should have framed it and put it up on the wall. This is the momentum of how much your employees love you.

These things have a shelf life of like the game, the shelf life of the game. I always buy it and I take a bunch of pictures of the game in the kit and then it doesn't get a lot of use out of that. Throw it in the bin with your Arsenal jersey and your Spurs jersey and your Chelsea jersey as well. Anyways, enough of this shit.

Get to the news. Just one note before we move on, we'll be recording an Ask Me Anything episode in the coming weeks. So if you have a question for me and Scott, send us a message to officehoursatprofgmedia.com, or you can tag us on X or threads at Prof G Pod. Or if you're watching on YouTube, just drop a comment below. Let's start with our weekly review of Market Vitals. The S&P 500 closed above 5600 for the first time, the dollar fell, Bitcoin climbed, and the yield

on 10-year treasuries dropped. Shifting to the headlines. OpenAI will no longer have board observers after Microsoft relinquished its existing observer role and Apple scrapped its plan to take up a similar position. Regulators have become increasingly concerned about Microsoft's relationship with OpenAI and its dominance in the industry. CNN announced it's cutting 100 jobs and launching a new digital subscription product. CEO Mark Thompson said CNN is working to create a billion-dollar digital business built mostly through CNN.com. Venture capital firm Andreessen Horowitz is collecting thousands of AI chips to help secure deals with AI startups. The firm has already started giving some startups access to those chips in exchange for equity

and plans to build an arsenal of more than 20,000 GPUs. And finally, talks for a server deal between Oracle and Elon Musk's AI startup XAI have reportedly come to an end. As we covered in a May episode, XAI was prepared to pay $10 billion to rent AI chips from Oracle, but Musk now says XAI will build a system on its own. Scott, thoughts? Well, I want you to take a little bit of a victory lap here, because you first highlighted to me

how just incestuous and concentrated the kind of current incumbent players were around dominance around AI. So anyways, what are your thoughts around the first story? Yeah, well, what I said was that the Microsoft's board seat on OpenAI was illegal and that there was just no way that this could last. And that's what happened. I think we have the clip. I guess we might as well play it right now. I can name you three illegal board positions in AI right now.

Name them, you high IQ bitch nominated for best co-host. Name them. I'm calling your bluff. Name them. Microsoft. Microsoft is on the board of OpenAI. It's, you know, they say it's a non-voting board seat, but that's still a board seat. And Microsoft is also an investor in Mistral and Inflection, which are both AI companies that

directly compete with OpenAI. All I can think is, what's going to happen when the DOJ launches a full-fledged investigation into this thing? Because I would bet that no AI company is safe. I mean, this was bound to happen sooner or later. And, you know, if you have that level of influence on three major AI startups, it's going to allow you to manipulate and control and tilt the marketplace in your favor. So regulators are finally catching on to this and Microsoft got scared.

It's now sort of jumping ship before it gets punished. Here's the problem though. I would argue that the damage here has already been done. And the example I would give is what happened with that other up-and-coming startup, AI startup, Inflection. You might remember within weeks of when I first made those comments, the CEO and founder of Inflection, this guy Mustafa Suleiman, we learned he was ditching the company. And where was he going to go? Microsoft. And who else left with him? His co-founder, Karen Simonian, and most of the staff,

they all work for Microsoft now. So think about what that means. OpenAI's biggest competitor was somehow convinced to just abandon ship and climb aboard OpenAI's biggest backer, Microsoft, which owns 49% of OpenAI's profits. So yes, Microsoft is leaving the board, but we should be very clear here. Microsoft has already gotten what it wanted. It embedded itself in the AI scene. It quietly formed all of these strange alliances between all these AI startups that should have been competing, but we didn't really keep track of it. And now the stage is set for Microsoft to

get exactly what it wanted, which is for the golden child, OpenAI, which it more or less owns, to go out and take over the industry. And that's exactly what's happening. So this may look like a win for competition. It really isn't. You were prescient in your comments around this. And there's a few things here. One, it reminds me of what, I had this fantastic lawyer at Envelope, a guy named Josh. I'm blanking on his name now. But when there were so many conflicts, Sequoia was on our board. And they would have a failing portfolio company. And then the Sequoia representative would show up and say, I have a great idea. Red envelope should and influence over other companies can be really helpful. That you want connections, you want, talking about, the founder of Inflection, was Reid Hoffman, or is Reid Hoffman, who is on the board of Microsoft, who owns and controls OpenAI.

So it is all sort of a Kentucky wedding, if you will. And what's quite interesting here is that they've both said, oh, just kidding. We don't want to be on the board. We don't need to be on the board. We don't need to be on the board. Clearly, either they're lobbyists or somebody from the FTC and the DOJ called these guys and said, just to be clear, this is not kosher. It's no accident that they both decided they're not going to be, quote unquote, in their observer board status at the same time. This is the most valuable and the second most valuable company in the world sitting on the board. This observer board status thing is just fucking ridiculous. So just an example, my venture capitalists at L2, two of them were on the board, really super

impressive guys. And they kept showing up with their associate who had done diligence on the deal for the board meetings. And the first time they did not even say anything. And the second time I'm like, why is he in these board meetings? And they said, well, he's done a lot of the work and it's really good learning for him. And I'm like, well, that's all fine and good, but I didn't give you guys three board seats. And what a shocker, every time the two of them said something, he would chime in and agree. And here's the thing about boards. They never come to a vote. That scene in Succession where they go board member by board member and vote on the acquisition and it ends up being seven to six, that never happens. I don't think I've ever seen— What do you mean? It's sort of like everyone has a conversation, you come to a decision, and you kind of unanimously agree on a path forward. You don't take a vote until it's unanimous. And so you work it out. The way you come to an agreement is one who owns the most shares. That person always has kind of the loudest voice because they're the ones that have put the

most money in. And quite frankly, they're the ones you might need to go back to and ask for more money. But the number of voices in the room, everyone has an equal voice. Voting or non-voting, it doesn't matter. So the fact that they, and not only that, if the guy from Apple and the guy from Microsoft both say, we'd rather you not do that, do you think they're going to do it? I mean, it's like, okay, we control Android and iOS. We control access to the entire, of any company to anyone. If they said, you know, if OpenAI said, we think there's an unbelievable opportunity to do something with Spotify,

you know, Apple Music is a competitor of Spotify. We'd really like to develop music and we think the best partner for some sort of AI relationship around generating music would be Spotify. Do you think the guy from Apple's gonna go, that's a great idea. You're about to see an FTC and DOJ investigation

launched here. And you pointed this out earlier, I didn't recognize the most seminal technology of the last 20 years, probably since handhelds, is more concentrated than any new technology in terms of concentration and benefits accruing to the incumbents, specifically the most valuable company in the world, I think today is the incumbents, specifically the most valuable company in the world. I think today is at Microsoft. And the second most valuable company in the world have way too much influence across this emerging technology. But the idea that the notion they both got out of Dodge on the same day means they both heard from the same person or people and realized, okay, shit's getting real. We need to try and create a misdirect and try and take the temperature down.

It's not going to work. You're going to see an FTC or a DOJ investigation here. But also, if you think that by them leaving the board, that's somehow going to relinquish their influence over OpenAI, then you're not grasping what humans are like. I mean, they're friends now. They're all friends now. And they have gutted all of the companies that were supposed to be competing that should have made this a competitive landscape. It's one team now. So it's a huge concern. We should move on to these other headlines. Any thoughts on CNN and this CNN Plus 2.0? Well, I think CNN Plus, I think an original scripted offering from CNN is just an outstanding idea. For the 1% of people listening to this podcast who don't know, I had a show on CNN Plus

and on a Tuesday night, five or four or five episodes in, my producer, this guy named Scott. Scott Matthews, I want to say. Oh, Scott, yeah. And either Scott called me or the other producer called me and said, I've got great news. And this is Tuesday night.

I'm in San Diego for a speaking gig. And they said, we're the number one most viewed weekly on CNN Plus. There were daily shows like CNN Five Things or whatever. And then there were daily shows like cnn five five things or whatever and then there were weekly shows anderson cooper on parenting jake tapper's book club i mean what is jake tapper reading this week oh god that's page turn anyway game of thrones

bridgerton euphoria or what is jake Tapper reading this week? Let me think. That's a toss-up. By the way, I love Jake Tapper. I'm serious. I do love the man. And so super excited. Send out an email to everybody. We're the number one show on CNN. Now, they didn't tell us how many people were watching. I don't know if that meant like 85 people were watching. Exactly. That's the key detail. That was the key question that no one would answer. And then I wake up Wednesday morning and I check my text messages. And obviously, Exactly. That's the key detail. happened? And I text her back and I'm like, wow, what's up? What's wrong? And she sent me the article, New York Times, CNN Plus being unplugged. Anyways, it kind of died an unceremonious death. My understanding here, and I'm not sure how much research you've done, is that they're going to put the wall or the paywall, they're going to bring it increasingly forward every day. And CNN needs

to do something. Its viewership has declined 15% with people aged 25 to 54, which is the only people advertisers care about. Because once you hit my age, you start getting smart and stop spending money on stupid shit like clothes and coffee and things like that. Total primetime viewers in that demographic for May for CNN were 96,000, whereas Fox had 199,000. So think about this. Fox is doing double the viewership in that core demo. And MSNBC had 110, so MSNBC is now beating CNN. So it's pretty ugly at CNN right now. They're going to have to figure out something. And by the way, no one's called me, Ed. No one's called me. That was going to be my question. Would you say yes? I think you will say yes.

A, I don't think I'm going to get that call. And B, I have firmly decided, figured out that I have a face for podcasting. Yeah, you say that. You say that a lot. I don't really believe you. I think if Netflix called you up and wanted to do some sort of Scott Galloway series on the story of Scott Galloway's life, I think you'd probably say yes within, I'll say, three milliseconds. UCLA failed startups and erectile dysfunction. There you go.

Let's turn it into an original scripted series. By the way, do you know there's a term for when you play a recording of yourself on your own podcast as you just did a few minutes ago? You know the term for that? It's called megalomania. I'm learning from the best, though. Oh, my God. I've been infected with that virus for a while i will i will when i'm speaking show a video of me above me and i'm like watching a video of me on top of me speaking is like shavings of shit on a shit salad but anyways you have gone full

full egomaniac i love it i'm loving every minute of it. Anyways, XAI and Oracle ending talks over its $10 billion server deal. This is, you want to talk about confirmation that Elon Musk is unreasonable? The person who runs Oracle is his mentor. Larry Ellison. They are very close. So for Larry Ellison to back away from this just says one thing, that Musk's demands, he just must be so, he must have been he fires them or, and crucially, in some cases, he says, figure it out, and they do, and it works. So I've always been a little bit ambivalent about this management style and how unreasonable Elon is because it's rude, it's disrespectful, and it's kind of lazy to just say, without knowing, without knowing any of the details of the technical details of how to get it done, you say, oh, just do it faster. But at the same time, it's also very effective. It's evident from what he's done at Tesla and

SpaceX. So we'll see if it's true at XAI as well. We'll see. Andriessen Horowitz, buying GPUs to get AI deals. I feel like this is an incredibly smart move. Your thoughts? So it used to be there were a small number of venture capitalists. It was a small industry. They made a shit ton of money. And then everyone realized technology was the future. And there was a lot of money to be made. And the amount of capital these guys were able to raise went up exponentially. And then junior partners would split off and start new companies, new venture capitalists. And the entire venture capital community, and as an asset class, has just absolutely exploded over the last couple decades. And the key now is how do you compete against each other? And they compete on brand, Andreessen Horowitz, Sequoia, General Catalyst.

They just get more deal flow. What they also do is they compete on downstream services, or what you would call verticalization. And that is some of the deeper pocketed VCs now have value-added services for their portfolio companies. So they'll say, we'll share or rent you a CFO. We have very strong contacts with venture debt firms. We will help you recruit talent. We have a full-time recruiter. If you take our money, we have a full-time recruiter that will help you build out your team. And this is going even more vertical. This is saying, hey, cool AI startup. You have great IP.

You have smart people. Maybe, who knows, maybe you might even have, quote unquote, product market fit with your limited beta testing or whatever. But the gaining factor here is compute. And these chips are expensive and hard to find. So we have bought a bunch and you can use our compute until you get out of the nest. So this is going very vertical. I think it's very smart. And not only that, it separates them. It basically creates pretty tangible differentiation from the other venture capitalists who don't have the money or the vision to go ahead and aggregate these GPUs.

So I think it's super interesting. I also think it's super smart. We'll be right back with a look at Nike. We're back with ProfgMarkets. In a terrible earnings report at the end of June, Nike lowered its full-year guidance and slashed its sales projections for the current quarter by 10%. That report sent the stock down 20% in a single day,

wiping out $28 billion in market value. It was the company's worst day on record, but the pain has continued. Nike was the biggest loser on the Dow last week as it slumped to a new 52-week low. And year to date, the stock is down more than 30%. Scott, Nike's downfall here has been slow and then quite sudden.

In the past three years, the stock has been cut in half. What do you think is happening here to Nike? I have some personal history with Nike because Nike was one of our biggest clients at L2. And it's, top to bottom, it's an outstanding firm. It's got smart management. It's obviously got, arguably, Nike is one of probably the 10 strongest brands, not only now, but over the last 30 or 40 years. They made a very strong transition into going vertical. It just has a history of innovation. And they also got out of the kind

of the brand era and said, all right, we need to be direct to consumer. And I have a bias towards them because when after Gartner purchased L2 and I gave the acquiring firm a list of the most talented people in the company, and within about six months, 11 of those 12 people had left. I mean, three of the most talented people at L2, Daniel Bailey, who is probably one of my best students ever, Ashley Tolbert, super talented young woman, and Maureen Mullen, who in many ways kind of built L2, all three of them went to Nike and I think worked in the direct-to-consumer group. And so I know that they have extraordinary talent there. They have an unbelievable brand. They're saying that they overinvested in direct-to-consumer such that when we came out of COVID, they didn't have the same amount of shelf space. I think most of it is that they're struggling with the same headwinds in China as like an Estee Lauder is. And also they say that the Hoka brand and On Running have eaten I think, a multiple of 17 versus an average of 28 over the last five years to have its stock cut in half versus a doubling of the S&P at that time, I think most likely the CEO's days are numbered. Because what this looks like is that to have this

kind of implosion, I think their stock's off, I forget what their stock's off substantially this year. 30% year-to-date. Year-to-date, it's off 30%, but I think Adidas is up 20%. That's right. So it's not the whole category, right? This is specific to Nike. So I would bet that, I think it's John Donahoe is his name. Yeah. I think he's on the green mile.

His background is very interesting. He was the CEO of eBay, and then he was the CEO of ServiceNow. He's been the chairman of PayPal. So he's kind of this software tech guru. And it was, I think, people were excited, but also a little ambivalent that Nike would bring him in. But I think the thesis there was that he would digitize the company. He sort of fixed the supply chain.

You know, he'd do all these things to bring the company into the future. What looks like has happened is that during that process, he has neglected the brand. I think bringing in a tech guy to run what is the largest or arguably one of the most important consumer brands ever is probably in this instance

just not paying off. He's been there a while. He owns this performance now. And the performance has been such a disaster from a shareholder standpoint. He's going to have to outline a pretty serious change in direction here and give investors confidence. Or like I said, there's going to be a switch at the top. This feels to me just like tailor-made to switch the CEO because this just hasn't worked. With a brand like this, with the human capital I know they have,

I remember I think I worked for a woman named Heidi Roizen, and she was so talented. And I remember when they brought in Donohoe, I remember thinking the hard thing about sexism or anti-Semitism or any ism is it's subtle. No one's going to say, no one's going to say, oh, you know, we'd rather just have a white guy running the company. But I remember I met several executives at Nike who were women in their 50s who I thought were just incredibly impressive, who I thought were going to be the next CEO. And then boom, pops up a white guy from Silicon Valley. At the end of the day, the reason the CEO can make so much fucking money is he or she, the buck stops with them. And so he's, I think, got three months to outline a vision and he's got 12 months to show some traction against that vision. Otherwise, I think he's out. As a matter of fact, I bet the board is having several what I call parking lot conversations,

and that is there's two board meetings typically. There's one that happens during the board meeting. And then there's a second one. And the two or three most important people on the board kind of get together in the parking lot or downstairs or they talk or whatever or they meet up and they're like, hey, what do you think's going on here? Like, do you think Bob is the right guy? And then there's a bunch of kind of one-off calls. Once those two or three people come to a consensus decision, there's a few more calls. And then in executive session, at some point, they'll do a call where they think, we have some concerns, what do you think? And then they'll make a decision, and then they'll go about trying to affect the decision. But right now, I can't see any reason for why all roads don't lead to a leadership change

because it's nothing obvious to me that you could blame this on. Yeah, it's interesting you say that. I don't think it's obvious, but just at a very simple level, sales growth is declining and they are giving up market share to other companies, other brands that we've mentioned, On, Lululemon, Allo, Hoka. These are all great brands, and the stocks of a lot of these companies are way up this year. On running is up almost 40% this year. I think, very simply, it wouldn't be unreasonable to say the Nike brand is just falling out of favor.

And that's what they have had to depend on. And just as a consumer, I don't know if you've been to a Nike store recently. It used to be like going to the Apple store when I was a kid. It was like the coolest experience going to Nike town in London. Last time I went into a Nike store, it feels cheap. It sort of feels like a, our English listeners will know this, a JD Sports. I don't know what the equivalent would be. Almost beginning to feel like a Dick's Sporting Goods.

Or even worse, Big Five, where I bought my first boogie board in Culver City. It's becoming Big Five, sure. To me, it feels like this is, plain and simple, a brand issue. So I just want to return to brand again. If you were advising Nike today, what would you do to sort of revitalize this brand that at one point seemed to own the premium luxury athletic wear market and whose market share has just been diluted down by these other companies like On Running, who are now the sexy sports brands. I don't think it's a big, bold, strategic move here. Again, you're right. It's a brand thing. And what you just said about the stores, that bubbles up to the CEO. That means the CEO has the wrong guy or gal in charge of retail operations. And I don't think there's what I call like an obvious quick fix here. I don't think it's, you know, fire the agency and have a new ad agency. I don't think it's buy on running, which is now probably too expensive to buy. I think this is unfortunately very boring shit around supply chain, trying to increase the pace of innovation with new products

to get people excited about the brand again. You know, this is just, to me, this is just blocking and tackling and bringing in a CEO who's going to make a lot of hard decisions. I'd be very interested to know what is the employee to revenue headcount? You know, is this in fact a company that's sort of fat? But this is the boring stuff of day-to-day operations. And what it sounds like is that the CEO has the wrong people making the wrong decisions across the strongest brand or one of the strongest brands in consumer history. But if I'm a shareholder here, actually, I am a shareholder. In my 401k, I have Nike and Oracle, although it's not a big position. But I'd be pissed off that the three,

I just mentioned my three colleagues that went to work for them five years ago. I mean, Elta, we were purchased by Gardner and it was not a cultural fit, but you just have to give it to the management team there. And a lot of people left and some of our most talented employees went to Nike. Gartner's up 160% and Nike is down 20%. So you got to think there's a lot of people internally who are just like, okay, so my stock options are worthless. Everybody, all of my buddies, I graduated from whatever, the University of Oregon and I took a job here and I had an offer with Google.

Maybe I'm very talented. I had an offer with Salesforce or I had a chance to go to work for Adidas. I mean, name the company. Those people have made a lot more money than people at Nike. The stock has been cut in half. I mean, that's just crazy. And at the end of the day, the only real litmus test or metric that matters for the CEO is the stock price. 17 times EBITDA, EBITDA multiple of 17. For Adidas, that number is 29. For On Running, it's 48. Nike is almost three times cheaper than On. Is it a good time to buy? I think comparing it to On is unfair because On is a hot new growth brand. And by the way, I'm wearing a pair of Ons. It's literally, you know, tell me you're a douchebag without telling me you're a douchebag. Every VC in the world is wearing On.

I haven't seen you not wear Ons for the past two years. Yeah, it's true. I sleep in them. I shower in them now. I love this brand. I absolutely love the brand. Anyway, that's not fair because it's a hot upstart brand that's growing fast. The better comparison is Adidas,

which is at 29 times. And the even better comparison is Nike's average over the last five years has been 27, and now it's at 17. But to your question, I don't like to make stock recommendations. I think everyone should invest in ETF or index funds. But to your question, I don't like to make stock recommendations. I think everyone should invest in ETF or index funds. But I think, yeah, the answer is I think Nike is a buy because this brand is so strong and the depth of human capital there is so deep that they can survive headwinds, some exogenous shocks, and even a bad CEO. I think we might look back on this and think it was a buying opportunity. Okay, well, Scott, I'm going to give you your own megalomaniac moment. Two

years ago in October of 2022, when Adidas was dealing with this crisis management with Kanye West, here's what you said about Adidas stock. The stock actually even looks cheap. And I think that's kind of a learning here is that there's when you have bad news and you have dislocation, you have tumult, no obvious answers, a lot of unknowns. That usually spells opportunity. And that is there's just a just the perfect storm of bad things right now at Adidas. There's loss of this hugely lucrative partnership. Their core business is weak. So as a result, Adidas market cap sits around $19 billion for an iconic century-old brand that has real aspirational value. And it's probably, it's maybe a distant number two, but it's a solid number two to Nike.

Nike, on a relative basis, is trading at about 3x the valuation of Adidas. So I would argue that the opportunity here from an investment standpoint is actually with Adidas. And by the way, the stock has doubled since then. So Scott, your reactions to your own prediction? Oh, Ed, I hate it when you do this. I just, you know, Ed, I don't like to draw attention to myself. And I think it's just inappropriate to talk about your wins. Daddy! But the truth is, my nipples are hard. My nipples are hard. Thank you, Ed. Thank you. We'll be back with a look at the road ahead for the UK. We're back with Profit Markets. In her first speech as Britain's new Chancellor of the Exchequer,

Rachel Reeves said the country's Labour government has inherited, quote, the worst set of circumstances since the Second World War. She cited new analysis from the Treasury which showed that if the UK economy had grown at the average rate of other OECD nations in the past 13 years, the economy would be £140 billion larger. We went over why the UK is struggling on our May 27th episode. But now the Labour Party needs to get out of this mess, and Reeves laid out the government's plan to do that. It includes increasing public sector investment by £5 billion a year, launching a national wealth fund for green sector investment, building one and a half million homes

over the next five years, and letting the world know that, quote, Britain is a place to do business. In short, Labour's economic agenda today is growth, growth, growth. Scott, do you have any reactions to Labour's first week in charge in the UK and the road ahead for the country? Everything here makes a lot of sense to me. And the thing I found really refreshing around these elections was I feel like they were trying to govern from the centre, and that is they said no to the far right and the far left. And I like this kind of leftward breeze that's coming back from continental Europe. France figured out a way to bind together to kind of body check or stiff arm the far right, which I thought was very encouraging. Although the far left in France is not as crazy, but they're still fucking crazy.

So I like this and I'm rooting for them. And I think everything they've outlined here makes a lot of sense. For green sector investments, now people would say the government shouldn't be picking winners. I think a better investment would be to come up with some sort of tax scheme or subsidization of venture capital. For every startup in Europe, there's 1 million in venture capital available. In the U.S., it's 5 million. So a lot of this is just they need to free up the purse strings to encourage more investment. In startups, I think increased public sector investment makes sense. More housing, I think that's a fantastic idea. We desperately need that in the United States, and the price of housing is outpaced

inflation. And also just being more kind of open for business and trying to encourage foreign investment. The only thing I would suggest, and I don't think if it's possible, is what I'm deeming or labeling backset, and basically say, Brexit was the stupidest fucking thing we'd done, and let's undo it. To basically say, a lot of the stupid shit here where we made things more expensive that made our own products less appealing and made our own economy less productive, we're going to try and counteract these things. But anyways, I'm hopeful. You're the Brit. Do you have any thoughts? Yeah, I think directionally speaking, the whole labor manifesto makes a lot of sense

for all of the reasons that you just described, and I agree with them. My concern, though, is that I looked at the actual numbers, and the numbers that they are proposing for this big national turnaround are shockingly small. So I'm just going to give some examples here. They want to boost public sector investment by £5 billion a year. That's not a lot of money. That's as much as Google spends on CapEx in a single quarter. And if you look at the Tories' proposals, what were the Tories' proposals to cut spending over the next several years, this plan would only undo a fifth of those cuts. So this is actually a very incremental change in public sector investment. The other issue that's happening in the UK right now is the NHS, the National Health Service, is in crisis. There are 7.6 million people on the waiting list right now to get treatment. Now, Labour has a whole plan. They've promised 2 million

hospital appointments per year, an extra 2 million per year, which, again, that's only a 2% increase from the year before. And even if everything goes to plan, it's going to take five years to clear that wait list. You mentioned home building. They want to build 1.5 million homes over the next five years. That's 300,000 homes a year. Back in the 60s, England was building 600,000 homes a year. Double what their plan is money. There's just not enough money in Britain. They don't have the capital or the credit. They're now at 100% debt to GDP to dig themselves out of the hole. think, you know, if you're American, you should feel lucky to be American. Because yes, America has its problems, but at the very least, America has the option to spend its way out of those problems. And I'm looking at what's happening in the UK right now, and these very small incremental changes. And I'm wondering if the UK has the option to spend its way out as well. You may be right, but it's

definitely classic half glass, half empty British thinking. It's the Southgate analysis. I don't care. We're in the finals. You suck. Look, the second greatest self-inflicted wound in geopolitical history of the last 50 years beyond the invasion of Iraq was Brexit. And there's something about the culture there that does not inspire a lot of organic value creation. Having said that, the quality of the educational institutions, specifically the universities, the fact that London is the new luxury item globally, what do I mean by that? I don't want to say I started a trend. I was part of a trend, but some of the wealthiest Americans with the most opportunity are moving to London. You started it. I'll give you credit. Yeah. Yeah. I started it.

But if you're opening a business, an American business or an Asian business in Europe, I think you put your headquarters still in London. There's all this talk about, oh, we're going to France. I have a lot of friends in Britain who do very well. And all this bullshit of two months ago, the non-dom thing, I'm moving back to Hong Kong. No, you're not. So people are saying that.

And give us a brief explanation of what this non-dom thing is. Well, basically, my understanding is the uk essentially had a tax status where you could be a non-domiciled resident of uk and pay taxes from your resident taxable place and now they're basically saying sorry if you're not paying taxes here you can't stay here and and there's this issue where you had all these rich people who have houses in the maldives or wherever and they basically weren't paying taxes in the UK. And it was a big problem. I have several friends who do really well and pay no tax, right?

So if you were a resident for whatever, for tax purposes out of Hong Kong or Portugal, and you can live in London, you can pay effectively no tax. And so this thing came through and I heard a lot of people bitching and moaning that they were going to leave the UK and was going to be just asked for a UK. But here's the thing. The UK, especially London, is one of the world's great cities. And when you get to a certain point of wealth, I mean, if you wanted to avoid taxes, if you're wealthy, I could move to Puerto Rico right now and basically not pay taxes. They have this deal. It's totally legal. You can go and you can pay, I think, 2% or 3% tax rate. It's either 2% or 3% or 7%, but dramatically decrease your taxes. But here's the thing. You got to live in Puerto Rico. And supposedly,

what's different about the Puerto Rican tax evasion is that you actually have to live there for 183 days a year. You have to prove that you're living there for 183 days. And supposedly, not supposedly, it's reported several billionaire hedge funders move there. And supposedly, almost all of them have moved back, and that's the thing that London has. It will always attract a disproportionate amount of capital because it's an outstanding city to live in. And I still think it's the capital of Europe. Everyone says eventually, no, it's not. It's Berlin or it's Frankfurt or it's startups are headed to Paris. No, they're not. I still think the center of Europe is in fact London. Your point is an interesting

one, and that is you're saying the tagline for all these initiatives should be the following. Think small. What you're saying is it's just not that dramatic. It's not that interesting. The other signs of life here are Raspberry Pi going public there. I think Sheehan going public there on the LSE is going to be a big deal. But the nation with the best players wins. And I do see a trend towards wealth and human capital continuing to aggregate in London. You've been predicting ever since Sheehan said it was probably going to list in London. And then we had this development where Raspberry Pi listed in London. You've been predicting that we were going to see a revival of the stock market in London.

I want to flag a new report from BlackRock. The note said, quote, we are now overweight UK equity market. Valuation is attractive. It has been the case for a while. But now we have a catalyst of potentially perceived political stability that could act as a trigger for international sentiment to warm up. Is it time to start reinvesting in the UK? So again, if you're going to do this, I would say put it in an index fund.

But if you look at the multiple on earnings for stocks in the FTSE, it looks cheap. And the markets are cyclical. And just about the time everybody says, it's all about America and it's all about tech and just throwing the towel, you see other markets outperform. And at some point, any market gets so cheap that it's irresistible. To me, it looks like the UK has been beaten up so badly for so long. You're right, it probably is a decent buying opportunity right now. Let's take a look at the weekend. Second quarter earnings season continues with the banks.

Golden Sachs, Charles Schwab, Bank of America, Morgan Stanley, and U.S. Bank are all reporting. And we'll also see earnings from Johnson & Johnson, Netflix, and American Express. Do you have any predictions, Scott? I think you're going to see an activist at Nike. It's just too juicy a target. I don't think it's hard to imagine. And these are famous last words that this company is going to trade that much lower than it's already gone. But the numbers here are just striking. their pencils out and are looking at this thing. So my prediction is in the next 90 days, you're going to see an iconic activist firm pop up and say, we're here and we're concerned. We're here and we're here to help, is how they'll position it. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Our executive producer

is Jason Stavis and Catherine Dillon. Mia Silverio is our research lead and Drew Burrows is our technical director. Thank you for listening to Prof G Markets from the Vox Media Podcast Network. Join us on Thursday for our conversation with Kyla Scanlon, only on Prof G Markets. You held me In kind Reunion As the world turns And the dove flies In love, love, love, love.