The Prof G Pod with Scott Galloway - Prof G Markets: The Biggest Stories of 2022

Episode Date: December 19, 2022

This week on Prof G Markets, Scott reflects on a year in markets defined by the war in Ukraine, inflation, and the decline of risk capital. He shares his main takeaways from 2022 as well as what he hopes investors learned from the year. Music: https://www.davidcuttermusic.com / @dcuttermusic Learn more about your ad choices. Visit podcastchoices.com/adchoices

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cards, savings accounts, mortgage rates, and more. NerdWallet, finance smarter. NerdWallet Compare Incorporated. NMLS 1617539. This week's number, 20 million. That's how many times Prof G listeners downloaded one of our episodes this year. That's the equivalent of every person in New York City, LA, Chicago, San Francisco, Houston, and Phoenix downloading one of our episodes. True story on my trip to Dubai with my wife. My wife said that flight attendant seems gay. and I'm like, I don't know if he's gay, but he gives great head in the bathroom. That's why you come here. Welcome to a special episode of Prof G Markets. It's our last markets episode of the year before we break for the holidays. So today we're reflecting on the market moving stories that shape 2022.

First off, just a little bit of insight into our business. I expect to eat CNBC from the bottom up. We will be seen as a disruptor that devours CNBC and then shits them out like a bad version of Bloomberg, or I'm trying to think of a financial news network. Anyways, that was graphic. The lesson here is every year we try and find growth. And rather than launch a newsletter or try and figure out some sort of different medium, we've done TV, we are cursed with opportunities here. We decided to extend the Prof G franchise and start a markets episode and a No Mercy, No Malice. And No Mercy, No Malice

reading is something we really enjoy. I don't think it's going to be a big business, but it's something we enjoy and it's modestly profitable. But the markets brand extension, if you will, we think has real legs and is already almost as big as our core brand after just a few months. And I think young people are looking for sort of fun, irreverent financial news information that is educational. And that's what we're trying to do here. Our mission is to help younger people be more economically and emotionally viable. So just as our strategic imperative for 2022 was to extend the PropG franchise into no mercy, no malice and PropG markets, our strategic imperative for 2023 is to launch a more robust video version of PropG markets. with her person on the street showing Jason and Ed in their studios. And we want to attack business television from the ground up. And that is going through the podcast window and then overlay graphics and visuals as opposed

to doing another business show. Anyways, about 97 or 98% of all incremental dollar volume at consumer companies is through brand extensions, not new brands. A rookie move is to start a new brand. But if you have something that's working and the PropG franchise was working, it's much better to extend the brand. So in sum, Diet Coke is going to have a much easier time than launching a new brand. And that's what we've done here. A long-winded way of saying we appreciate your support. Thanks for a great year and on to 2023. Ed, what are the headlines? Enough about

Prof G. What's going on in the world outside of the Prof G empire? Let's start with our weekly review of market vitals. Today, we're taking a look at how the vitals move throughout the entire year, as opposed to just the week. The S&P 500 started 2022 at a record high on the first trading day of the year. By the end of January, it was down 5%. And that pretty much set the tone for the rest of the year. It hit its 2022 low in October off about 25%, and is now down around 15%. Meanwhile, the dollar had one of its strongest years ever. In the first nine months of the year, the dollar rallied 20%, reaching a two-decade high. It has since given up about half of those gains.

Bitcoin's plummet this year was spectacular. The cryptocurrency began 2022 at $48,000, fresh off its all-time high of $68,000 in November 2021. Exactly one year after setting that record, though, the coin hit a two-year low of $15,800 amid the FTX fallout. That's a 77% collapse. As the Fed aggressively raised interest rates, the yield on 10-year treasuries climbed. The yield on two-year treasuries, however, rose even faster. This caused something called a yield curve inversion, where the yield on short-term government bonds is higher than on long-term bonds. The inverted yield curve is notoriously

a recession indicator. It expresses more risk in the short-term versus the long-term. And today, the yield curve inversion is at its deepest level in 40 years. Scott, this has felt like a crazy year for markets to me, at least, but that might be one, because I'm young, and two, I'm also paying more attention now. Have you ever seen a year like this before? Well, some aspects of the year have been over-dramatized. So people under the age of 36 have never really seen a bear market. And so there's a lot of the sky is falling kind of rhetoric right now. And as someone who was in their starting businesses in the 90s and then 2000 came, it was literally as if a tap got shut off. I used to go to the World Economic Forum, and when I went in 1999, I was treated like a god. All these masters of the universe wanted

to meet me and get insight on how their big businesses could be transformed into internet companies. And then by 2001, when I went back for the third time, I felt like a pariah. The correction was so violent, and business just collapsed and the markets collapsed. And then again in 2008, people forget this has been an Easter picnic compared to what happened in 2000 and 2008, except maybe for some growthy stocks. But the reason they collapsed is they just got so out of control. The thing that is different this time is this mania resulted in a series of asset classes and vehicles that felt really Ponzi-like, sort of near fraudulent, whether it was crypto or Web3 or someone who doesn't shower moving to the Bahamas and not having a board or audited

financials. The companies in 99 that went down were sort of consensual hallucination, but they weren't fraudulent. They were publishing their numbers. So I've never seen this type of grift before. Russia is picking off Ukraine's military facilities one after another, but Ukrainian troops are fighting back. Explosions rocking several cities, including the capital of Kyiv. Ukraine is fighting for its right to exist as a sovereign country. There is no purgatory for war criminals. They go straight to hell, Ambassador. Ukraine wants peace. Europe wants peace.

The world wants peace. And we have seen who is the only one who wants war. The biggest story this year was probably Ukraine. Vladimir Putin announced a full-scale invasion on February 24th, which immediately impacted markets around the globe. The first to get hit were the currency markets. The Russian ruble collapsed, then quickly rebounded, and the US dollar went on to have one of its strongest years in history as investors around the world flocked to safety. The greatest effects, though, were felt in the energy market. Russia restricted its oil and gas supplies, which sent energy prices around the world soaring.

Energy was the best-performing sector of 2022, up more than 50% compared to the S&P's 15% decline. I want to jog your memory, Scott, and go back to the early days of the war. So here's a clip from the Prof G pod in March. The great ferocious Russian army has been diminished from a perception standpoint. There is, for the first time, purpose with NATO, which was near brain death, as far as I could tell. Republicans and Democrats are even getting along for the first time. It feels as if, while there's tremendous costs being borne by the Ukrainian people, that every day this continues. Geopolitical advantage perception is seeded from Russia to the West. Scott, it's been 10 months since this all started.

What has been your main takeaway from the war in Ukraine? It's the stuff you're really worried about that doesn't happen. And it makes sense. If you see tall grasses shaking and all you can think about is there must be a lion behind it, there usually isn't. The lion that gets you is the one you're just not expecting. No one was expecting this. No one saw it coming. And the fact that Putin going into Ukraine could cause or set off this type of inflation through food and energy supply chain interruptions. To me, that was, you know, the world has its plans and then God laughs. I thought it was really interesting and how important it is for unity across the West. And it was, I think

that's the story of 2022. What do you think? You're young. What do young people think was the story of 2022? Well, I thought this was just a reminder of how vulnerable we are. I think coming out of 2021, we sort of felt a little bit invincible in a way, and then at least from an energy perspective, and then suddenly this idea of being self-sufficient became really important. So I guess here's a sort of difficult question for you. As you reflect on Ukraine, should we be willing to sacrifice climate progress in exchange for energy self-sufficiency? So investing in oil, investing in gas, such that we don't get put in the same position that, say, Germany and the rest of Europe was? I think in the short term, yes. I think we should drill. I think we should be absolutely doing whatever is required in the short run to diminish or minimize the leverage that

an autocrat has who has shown a willingness to invade a neighbor and shell maternity wards. I think that is a bigger threat in the short run and the medium run. I think we have to push back on autocrats. And I think we should be drilling in every fucking hole possible such that we take oil down to 10 bucks a barrel and then taxing the shit out of it and investing in sustainable energy. But the threat on the short and medium, and even the long-term, if we don't send a strong signal to autocrats around the world, is that we are not afraid to take price increases.

We're not afraid to endure inflation. We're not afraid to endure an erosion in the quality of our life. But if you start essentially murdering people, we're willing to take sacrifice. Prices are up 9.1% over the past year. That's the highest level in 40 years. That is presenting real questions for the Federal Reserve, which is tasked with promoting stable prices.

We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2%. 2022 was the year we all became macroeconomic experts. And that was for two big reasons, inflation and interest rates. Prices across the globe soared this year. From Germany to the UK to the US, many nations saw their highest inflation in decades. Here in America, prices rose as much as 9% from a year earlier, before cooling down to roughly 7% inflation in November. In response, the Fed took forceful action. Fed Chair Jerome Powell raised interest rates at the fastest pace in 40 years, with a target rate of roughly 4.5%. This increased borrowing costs and costs

of capital, it tightened demand, and it sent chills through the stock market. Scott, on the very first episode of this show, we discussed interest rate hikes. Here's a clip from July 18th. I'd be shocked if we didn't see 100 basis point increase from the Fed, and I don't think there's any signal that they're going to slow down for fear that they're going to cool the economy too much. People are spending money. We also have unemployment at record lows, historical lows, still a ton of jobs out there, still multiple jobs available for every person looking for a job. So I don't think he's worried about putting us into a hard landing or a depression. So the rate hikes have been aggressive, but not 100 basis points aggressive.

How has your stance on interest rates changed, Scott, if at all? I think they've done exactly the right thing. I mean, you could argue that they were a little bit late. Interest rates, as we sit here today, aren't historically high. They're kind of average to maybe even a little bit below average. And so when Chamath Palapatthai says that the reason SPACs have crashed 90% is because of Jerome Powell's increase in interest rates, that's just total bullshit. The reason that SPACs have crashed is that these companies are shitty companies that were not subject to any sort

of disclosure. Space tourism makes absolutely no sense. Or, you know, Clover Health is a shitty business. My favorite is this most recent SPAC he took public, a software company or a video game company that was going to help treat kids' ADHD. That is the perfect SPAC company. A company with no revenues, a company built on a wing and a prayer, but it sounds really cool and shouldn't be subject to the scrutiny of the SEC. So I think the interest rate increases were overdue. I think they're doing their job. I think Jerome Powell has done a good job. And this notion that we should do anything to avoid a recession, I don't think that's the right strategy. Jamie Dimon summarized it perfectly when asked what a recession was. He said something that happens every seven years.

It's good that housing prices are coming down. Young people deserve a shot at owning a home. And just because it erodes some equity of people who already own homes, there's no free lunch. Some people will get hurt. But young people, just as I had a chance to buy a house in San Francisco for $285,000, that's what my first house cost in Potrero Hill in 1994, I think. Young people got to get their shot.

So let the gale force winds of disruption howl. Yeah, I mean, inflation is still pretty high, though. It's sort of set the political tone this year. Everyone's been trying to answer this question of what is causing inflation. And people have been saying, oh, it's the stimulus payments, or it's supply chain issues, or it's the war, or it's price gouging. What do you think now that we have some perspective? What has caused inflation? Well, it's all of that except for price gouging, and I'll come back to it. So we had the perfect storm of two, inflation is too many dollars facing too few products. So on the

supply side, you had a shock around supply chain with near total COVID lockdowns in China were still up until I think last week, a quarter of the population was under partial or full lockdown. So fewer products, fewer grains, fewer barrels of oil because of the war in Ukraine. So supply shock. On the demand side, we took 27% of GDP and flushed it into the economy. One in three dollars has been printed since COVID, so too many dollars facing too few products. Fairly straightforward. We set ourselves up for inflation. Some of it we could have seen or should have seen. Some of it was totally unexpected, and no one saw what was happening or going to happen in Ukraine. The notion of price gouging really bothers me, and that is companies have an obligation to their shareholders when times are good and they can

raise prices. If Home Depot in the midst of a hurricane quintuples the price of lumber for rebuilding homes, that's price gouging. That's exploiting people. If you're taking hand sanitizer and hoarding it and marking it up 10x, that's price gouging. The real price gouging, though, that's taking place in America is probably across the medical industrial complex where you can produce penicillin for 20 cents and you charge 10 bucks. So you realize that insulin can, if you increase the price of insulin fivefold, they have no choice and there's not enough competitors to bring the price down. That is price gouging. It's antitrust. It's monopoly abuse. But raising the price of oil because prices go up and oil companies finally have the chance to make money, that's kind of their obligation. And there are enough big oil

companies such that it's a fairly competitive market. And when gas prices went up 100 days in a row, there were 112 articles in the New York Times on it. When it went down 100 days in a row, which it did, or 95 in 100, there were 12 articles on it. So this notion of price gouging, it's like, well, what do you mean exactly? Oil companies haven't made a lot of money. Their stocks got the shit kicked out of them

in the previous 10 years. And then now they're making a lot of money and that's called capitalism. So I don't buy this notion of price gouging across competitive industries. But this was the perfect storm for inflation. And now, in my opinion, we have the perfect storm for inflation to come down. We have an incredibly strong dollar. And in an import economy, which is what we are, things should get a lot cheaper, whether it's Pellegrino Water or Toyotas, where the prices of these goods should come down. Two, I think that we're going to see some sort of path to peace in Ukraine in 2023, and the markets will perceive that. We're already seeing oil prices come down. We're seeing energy prices come down. We're seeing the prices of chicken

have plummeted. We're seeing the prices of containers on ships come way down. And interest rates will do its job and will dampen demand. So you have the reverse. You have more supply. We're seeing the supply chain get ungunked. We're seeing a reduction in demand, fewer dollars facing more products, which should result in a dampening of inflation. I think we're going to see inflation come down almost as fast as it went up. Thanks, Scott.

We'll be right back after a quick break with our final story of the year. Support for this show comes from Constant Contact. You know what's not easy? Marketing. And when you're starting your small business, while you're so focused on the day-to-day, the personnel, and the finances, marketing is the last thing on your mind. But if customers don't know about you,

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Invest 30 minutes in an episode today. Subscribe wherever you get your podcasts. Published by Capital Client Group, Inc. We're back with Prof G Markets. This is the worst single day on Wall Street since June of 2020 after the pandemic. Big tech announcing a slew of layoffs. What goes up must come down. And in the volatile world of cryptocurrency, that's proving to be a brutal truth. Nothing better summarizes 2022 than what happened to tech, venture, and crypto. In a word, pain. This was the year investors fled

from growth assets, or as Aswath Damodaran calls it, risk capital, and they reallocated towards safer investments, specifically bonds and treasuries. As a result, the tech sector suffered unprecedented losses. In one year, shares in Google, Amazon, Meta, and Snap declined 30%, 50, 70, and 80% respectively. Big tech ended up shedding more than $3 trillion in value, and tech companies laid off employees to the tune of tens of thousands. Meanwhile, crypto got crushed and startups struggled. U.S. venture investment is down 50% from a year ago, and many hot private companies have suffered down rounds. In other words, they raised money at lower valuations. Scott, I think you pretty much called all of this.

Well, we knew this was coming. We just didn't know when. The growth economy has gone from something like 7% of GDP to 12%. Companies kept on hiring even when they saw the growth was slowing. It's overdue. And even if you look at the S&P, it's now trading, I think, at a PE multiple of 15 or 16. So it's about average. And I think we're going to see additional pain. And again, I think we're just getting going in terms of layoffs around the growth economy. The Patagonia Vest recession is what we have labeled it. I just would think it's impossible for the

CEO of every tech company to not take notice of what Elon Musk has done at Twitter. And that is, he's laid off 70 or 80% of the staff and the site is still functioning. So they're probably going to think, well, could we thread the needle and not be an incredible asshole and hold onto the majority of our revenues while potentially not necessarily firing 70% to 80% of our employees, but getting rid of 10% or 20%. So one of my predictions is that next year, you're going to see Meta and Google's revenues slow, but they're going to register record profits, as I think they're going to decide that after 13 years of stuffing ice cream down the throat of these companies, that they've

built up a lot of fatty deposits that they can work off, which is a kind of a fancy way of saying there are many more layoffs to come in 2023 across the growth economy. Before we go, Scott, any major takeaways from 2022? And what do you hope that young investors have learned this year? Well, 2022 was sort of the year of inflation. But what it also was, was it looks as if we have mostly exited the pandemic. 2020 and 2021, I think, just took such a huge toll on so many people. So 2022, I think, will be seen as a good year for America. No one was lining up for Russian or Chinese vaccines.

I think we said no to autocracy, the largest democracy in Latin America, Brazil. The institution is holding strong, peaceful transfer of power. I'm very heartened by the elections, the midterm elections, where every election denier, almost every election denier was not elected, where Trump's endorsement ended up being the kiss of death. And on average, anyone who was endorsed by Trump got, they estimate, 2.3% less votes than they would have had they not been endorsed by Trump. And I think in the media, and technically we're in the media, we have this both-sideism where we try to understand Trump voters. I think you're voting for someone who has been probably the worst thing for America in the last, I don't know,

50, 100 years forever. So I think that our flirtation with autocracy has come to an end in 2022. I think that was really positive in terms of what young people can take away. There is no easy money. And while at your age, it's fine to take risks that have asymmetric upside, have some fun. The key is low cost, diversification, and then not day trading. And the way you make a lot of money is you get very focused on your work. If you have a side hustle, it means your main hustle isn't working and you should get another one. You work hard, you try and go from being good at something to great at something, you try and spend less than you make, and you put it away in diversified, low-cost ETFs and index funds, and you let time take over because you're going to wake up and you're going to be staring into a podcast camera and think, how the fuck did I get

this old? And it's going to happen really, really fast. I'm talented. I work hard. But the reason I'm economically secure is that I have been reasonably smart and rational. You know, in sum, I know how to get you rich. That's the good news. The bad news is the answer is slowly. We've been working to bring you the latest news and insights about the world of finance throughout 2022. But we also want to know how your 2022 went. That's the topic of this week's Mia on the Street. How would you describe your 2022? My 2022 was good, but hard. A very big year for growth, personal growth. I got fired.

You got fired? Oh dear. Well, I think a lot of people could empathize with that this year. I would say my year was very reflective. 2022 was when I moved to New York and I learned a lot about myself during the move and I think rather than you know looking outward I looked a lot inward in myself.

So what would you say your highlight of 2022 was? I'm a chef so I opened up about three restaurants this year which is pretty good. We hiked a mountain in New Zealand which took like four hours but had the most amazing view from the top over all of these fjords and these lakes and it was like that sense of achievement at the end of it which was so nice. We looked kind of back and the car was like really tiny kind of off in the distance. The air was like thin at the top of the mountain and we kind of just sat there. Couldn't really breathe properly.

We had a sandwich that we made at home. Nice, that sounds awesome. Yeah, I think that was pretty special. You had to rate it on a scale of one to five, five being the best year. I'd say about a two and a half. That's not very good. Because you know, the best year ever? No, that would be 1988 for me.

Oh, okay, how come 1988? Well, I was 16, I didn't have a care in the world. Do you have any New Year's resolutions? New Year's resolution is to get out in the world more, to experience life, Love it. and to take better care of myself. I think now I kind of want to spend more of my time investing in building quality connections.

So that's now my new goal. I do want to become more intentional about nurturing my relationships with friends. I am just struck. My big kind of learning, if you will, in 2022 that has really shocked me is a crisis in loneliness and friendship. And there is new studies showing that one in 10 women and one in seven men don't have a single friend. And it's a mix of factors. Polarization, we like each other less. We go on social media and we get angry at each other. COVID, not going to the mall, not going to work, not going to the movies. And I do think there's a real crisis of

loneliness. And what I have asked my kids to do, what I'm going to try and do, although I'm not good at it, try and push the limits of your comfort zone and establish a friendship outside of your immediate circle. And there's very few investments you can make that have an immediate 100% return. And what do I mean by that? You will likely get rewards from that relationship. And also, you know they will.

There are so many people who don't have friends. Marriage is on the decline. So there are so many people that don't have kin. There are so many people working from their homes that don't have the same access to a context to meet other friends, whether it's the office. A lot of young people missed their last two years in high school, their last two years in college. So I think we have an obligation to try and, if we're in a position where we have the time and the energy and the resources, to reach out to people and try and establish more bonds and more connective tissue around friendship. So invest in the country, try and make a new friend, Ed. Say hi in that cool workspace you are to somebody. And I'm not

just saying the hotties, Ed. Establish a friendship. That's all for this episode. Our producers are Claire Miller and Jason Staver. Special thanks to Catherine Dillon, Ed Elson, Mia Silverio, and the PropG Media team. If you like what you heard, please follow, download, and subscribe. Thank you for listening to PropG Markets from the Vox Media Podcast Network. We look forward to seeing you in 2023.

After you get through what is the most overrated holiday, New Year's, my suggestion, experiment with some sort of psychedelic and kiss someone strange. What software do you use at work? The answer to that question is probably more complicated than you want it to be. The average U.S. company deploys more than 100 apps, and ideas about the work we do can be radically changed by the tools we use to do it. So what is enterprise software anyway? What is productivity software?

How will AI affect both? And how are these tools changing the way we use our computers to make stuff, communicate, and plan for the future? In this three-part special series, Decoder is surveying the IT landscape presented by AWS. Check it out wherever you get your podcasts. Hey, it's Scott Galloway, and on our podcast, Pivot, we are bringing you a special series about the basics of artificial intelligence. We're answering all your questions. What should you use it for?

What tools are right for you? And what privacy issues should you ultimately watch out for? And to help us out, we are joined by Kylie Robeson, the senior AI reporter for The Verge, to give you a primer on how to integrate AI into your life. So, tune into AI Basics, How and When to Use AI, a special series from Pivot sponsored by AWS, wherever you get your podcasts.