Country Risk, Tech Valuations, & How the Markets Lost their Predictive Power — ft. Aswath Damodaran

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Today's number?

35.

That's how many kilograms of skin the average human sheds in their lifetime.

It's also roughly half the amount of lifetime skin that is shed by the Burmese Python and also by Mark Zuckerberg.

Listen to me.

Markets are bigger than us.

What you have here is a structural change in the wealth distribution.

Cash is trash.

Stocks look pretty attractive.

Something's going to break.

Forget about it.

Welcome to Prof G Markets.

It is officially Scott Free August.

So I am flying solo for today's interview, but I have a Hall of Fame guest to keep me company.

And before I introduce him, just a quick note.

Prof G Markets will be taking a summer break from August 11th to August 22nd.

We won't have any new episodes during that time.

I'm sorry.

We will be taking vacation.

But we will be back on Monday, August 25th with the one and only Josh Brown.

In the meantime, we hope you'll enjoy the last few weeks of your summer too.

So with that, let's get into today's interview with Professor Aswath DeModarin, the Kershner Family Chair in Finance Education and Professor of Finance at NYU's Stern School of Business.

Professor DeModarin, thank you for joining me again on Property Markets.

It is great to have you back.

Thank you for having me.

I want to get your take on a lot of things.

The place I'd like to start is your most recent article on your blog, which I always recommend, Musings on Markets, your recent article titled Country Risk 2025, The Story Behind the Numbers.

And basically, in that article, you discuss what country risk is and how the valuation of a company is often pretty largely determined by the country it is in.

And you go through the different elements of country risk.

You go through legal rights, war and violence, political structure, corruption.

Those are your four elements.

And my first question to you is, why did you write that article?

And was it inspired at all by what's happening in America right now?

Actually not.

I write it once every year.

Every July, if you go back and look at my blog, you'll see my country risk post, partly because I update my equity risk premiums by country twice a year, once at the start of the year, once in the middle of the year.

I also do an annual update where I talk about country risk and everything I know about country risk.

I've been doing it for about 12 years.

So that happens in the middle of the year as well.

So it's just coincidence that it happened to be this year around all of the rest of the stuff that's happening around the world and especially in the U.S.

So it wasn't driven by any of those things, but it happened to coincidentally be at the same time.

And were you factoring in any of these risks that are happening in America?

I mean, to what extent were you factoring in what is happening in America right now in that article?

It made a difference.

I don't know whether it's what's happening in America.

It's actually been something that's been happening for the last 10, 15, maybe even 20 years.

If you go back pre-2008, the world was a very simple place.

You had developed markets where there was no country risk.

and emerging markets, Latin America, Africa, Asia, the vast part of the world where there was country risk.

So you live where in the US or Europe, you tend to think of yourself as a mature, safe market, and the rest of the world was risky.

That started to change in 2008, where we realized because of globalization that everybody is connected to everybody else.

Brazil's country risk doesn't just stay in Brazil.

It spills over into the US, into Europe.

So starting in 2008, we've seen the shades of gray instead of black and white developed and emerging, safe and risky.

You now have a continuum of risk.

And over the last 16 years, you've seen that continuum play out.

Britain slip from safe to slightly risky.

France did.

And over the last 12 years, the US has lost its AAA rating, first with SP in 2011, then with Fitch in 2023, and finally with Moody's in May of 2025.

So essentially, the US in that continuum of country risk is no longer safe as opposed to risky.

It's in the spectrum of risk.

Clearly not as risky as Brazil, but clearly not as safe as Switzerland.

So this really puts us into a period where almost every country is somewhere in that continuum of risk.

There are no truly safe countries left anymore.

And that's something I would say about all investing.

The notion of a safe place is becoming more and more difficult to find in the world we live in.

I feel like this is the big question of 2025, specifically in the U.S.

equity markets, which is, you know, what are the risks associated with America right now?

Because regardless of where you stand politically,

there is just a laundry list of things that have happened that have called America's low-risk status, whatever you want to call it, into question, whether it's, as you say, the Moody's downgrade that we saw in May, whether it's the tariffs or no tariffs or tariffs back on, just everything we've seen with tariffs.

If it's the big, beautiful bill or these threats to Jerome Powell and the Federal Federal Reserve, or we just saw last week firing the head of the BLS, there are just a lot of reasons to believe that the equity risk premium in America is just higher than it has been.

And yet, here we are, and the S ⁇ P and the NASDAQ are at record highs.

And I think that's the question investors are trying to figure out.

So how do you think about all those issues?

For a long time, especially starting with the Second World War, the u.s got a buffer where it was allowed to do things that the rest of the world could not do and get away with it as an example if any other country had run the trade and budget deficits that the u.s had they'd be treated as a basket case right we've been doing it for 40 years right barring that very brief period in the 1990s but the u.s was held to a different standard,

a standard where they could do things and still be viewed as safety.

Partly because they were the largest economy in the world, with the largest financial market in the world, people cut them a lot of slack.

What 2025 has done is essentially removed even the illusion of that slack.

The U.S.

is going to get treated in markets more like the rest of the world.

And you know what?

Equity markets have probably been doing it already.

The ratings agencies might have taken a while to get there.

But equity markets have been treating the U.S.

more like the rest of the world for the last seven, eight, 10, even 15 years.

And that's why you're not seeing the massive reaction in markets you'd get if they all suddenly woke up in May of 2025 and say, okay, my God, everything's got to be different.

This is more a continuum again.

Our institutions have been becoming less robust.

over the last two decades.

Trump might have pushed it over the edge, but I think in a sense, the institutional weakness, the legal protections, all of the things you talked about that set the U.S.

apart, they've been slipping for a while.

And what 2025 has done is we can no longer hide behind the illusion that everything's okay.

We're in the 20th century still.

So maybe markets are just, have adjusted already, and the experts are the ones who are being dragged to the table saying, hey, guys, you got to wake up.

This isn't the 20th century anymore.

So I am not as surprised as some are by the fact that markets are not reacting more because I think it's the nature of what happens.

But I think that the expert adjustment is actually going to be more wrenching because experts still are stuck in the pre-2008 view of the world.

And this is dragging them across the line, saying you can't do that anymore.

So if I were to just sort of, because I think the thing that we've been trying to figure out is how is it that all of this is happening and yet the S ⁇ P and the NASDAQ are sitting at record highs?

How is it that Wall Street views what's happening in America America and to your point says, no, it's fine.

This is all good.

And it sounds like what you're saying is that these risks have been priced in for a while by investors.

They've sort of gotten comfortable with it.

It's not new to investors what's happening in 2025.

They've been dealing with that for years.

And it's sort of

the media

that is waking up this year and saying

things are things are different now.

Is that sort of what you're saying?

That's partially what I'm saying.

Clearly, this year has been different.

Institutions are under pressure in ways they never were before.

But let's take the Fed.

The notion that the Fed was independent till 2025

is a delusion.

Right.

I mean, this is in 1981.

No, you know, Jerome Powell could not have done what Paul Volcker did in 1981.

In 1981, when Paul Volcker did what he did, I went back and looked.

There wasn't a single senator or house member who was out there saying, you got to stop this guy.

So I think that the independence of the Fed has been leaking out gradually over the last 20, 30 years.

Trump might be the person who puts it into words and actually makes it explicit.

But I think institutions in the U.S.

have been weakened because of politics.

When I first came to the U.S.

in 1979, what struck me was how close the two parties were to each other on most issues.

This was a country of consensus, where there were very few issues that truly divided people.

I mean, bills were bipartisan.

That was 1979.

I mean, that started to change 30 years ago.

So Trump might be the instrument delivering this message, but it's something that's been happening for years that finally is coming to the surface and markets have been adjusting to it for years, but experts are doing it almost discontinuously.

They're acting as 2025 was the year where everything changed.

Yeah, one thing that I've been trying to figure out for myself is what it would take to shake the markets at this point.

I mean, to your point, we've seen so much in 2025.

And as you say,

what we're seeing with the Fed, in a way, it's only served to strengthen the independence of the Fed.

That's sort of the learning that I've taken away from all of this.

So I can understand why the the markets look at what's happening and they say, okay, well, this isn't, this isn't sell time.

But I'm wondering if there's anything that you've seen that sort of pushes it.

And

what I would say is that firing the head of the Bureau of Labor Statistics because you believe that the data is lying and sort of entering into a world where we can't really trust any economic data.

Maybe the argument is that we've always been in that world.

But

that to me is pushing it.

And I asked the question last week, which was, maybe this is it.

Maybe this is the thing that gets investors to say, okay, we're really pushing up against the brink here.

So I'd love to get your views on what would qualify as a genuine problem, as genuine risk for the markets that would actually shake the confidence of Wall Street.

Ultimately, markets are not driven by talk.

They're driven by the economy and earnings.

To me, what will cause the market to readjust is we start getting real information that the economy is slowing, which we started to last week.

And that slowdown is translating into damage to earnings.

And that's why there are lots of things in this chain that have been played out.

So initially, when tariffs came out, people said, this is it.

This is going to cause the market to collapse.

And of course, people held their breath and said, will the economy collapse?

It didn't happen in the the second quarter.

Maybe it's starting to slow down now.

So that would be the first domino to fall is if you start to see economic growth become negative.

I see starting to recession territory.

But that won't be enough.

Investors will still wait to see, will this play out in earnings?

Because that link is becoming weaker.

That's going to take a while, right?

Third quarter earnings come out and you start to see more damage to earnings.

Then I think markets have to take pause and say things become different.

You can't be building in this growth of 7% in earnings.

So I think in many ways, that is the real number that's going to drive this market because at this stage,

it's almost become immunized to these stories floating around about horrific things that are coming down the pike.

And I think

it's become, you know, it's not showing up in stock prices and markets.

Look, I mean, I expected Monday to be a down day after last weekend, weekend,

but Monday you come in, it's a really strong day for markets.

So day to day, what markets do is become almost disconnected with what we see from experts and economists on what they think is coming down the pipe.

It seems as though the market, amid all of the turmoil, or at least the uncertainty that we're seeing around the world,

the markets used to have this job of being a prediction machine.

And the job was to be proactive and to predict what was was going to happen in the future.

And what you're kind of describing is a market that has decided: actually, we don't really want to do that.

We would rather be reactive.

We would rather wait and see until the actual economic data comes out, until the earnings show, yes, that was a bad policy decision.

Yes, the tariffs did affect the economy, and only then will we believe in this possibility that what we're doing in America might be not that great for the economy.

And to me, that is a new type of market.

The market's job used to be, no, we're going to make sure we understand before anyone else what's going to happen.

But it seems that that's not happening anymore.

Would you say that's right?

That's right.

But the question is, is the market therefore doing the right thing?

I mean, have you seen the quality of predictions from economists and market gurus for the last decade?

If the predictions actually come true, then maybe the market will go back to saying, okay, we've got to be a prediction machine.

But I think the market has learned the hard way that going with economist predictions doesn't quite work out because the actual numbers seem to be very different.

I have a feeling.

I mean, one of my favorite books is this book called Chaos.

It's James Gleich.

It goes back 40 years.

It's about a weather forecast.

It starts with this chapter on a computer with a weather forecast, a huge, you know, forecast, weather forecasting program, a computer program.

And computer programmer enters one input into this program with the sixth digit off.

And the predictions from the entire program go haywire, one small input.

I have a feeling we're in the chaos state of the global economy, where there are so many little inputs where small changes can make big differences, that predictors have lost their predictive power.

And

I think that's what you're seeing playing out.

It's not the predictor's fault.

It's that the machine is no longer the compact, predictable machine it used to be 40 or 50 years ago with domestic economies and without the interconnections we have today.

And I think the market is responding to that.

I think it's saying, look, it's getting really, really difficult to predict the future.

So why are we even trying?

We're going to be reactive until we can figure out a better predictive mechanism than these economists predicting what will happen in the future.

One scenario that I would pose to you, just in terms of the deterioration of the market's role as this prediction machine,

one dangerous scenario that I feel could happen under this new dynamic,

say things do go wrong, but the market has decided in the months, perhaps years leading up to that moment, that

we're not going to react until we see it, until we see it in the flesh.

And say the day comes that we do realize that these tariffs gutted our economy.

I'm being hyperbolic now because we're just pretending, let's say it happens.

Could it be that because the markets have lost their predictive power, because they have defaulted to a reactive state, that when that moment comes, you see an Armageddon-type reaction from the markets where they suddenly all of our fears come true in one moment versus bracing ourselves for the possibility that we might be slowly heading into a downturn.

Is that something you could see happening?

That's a good point, but I don't think it'll happen in a day.

It'll happen over a series of weeks and it'll take the form very similar to the employment report that came out on Friday.

Right?

You saw the markets react saying, this is bad news.

We've got to price it in.

And I think

you're going to get back and forth.

This isn't going to be a one-direction market.

You're going to get news that looks like good news and news that looks like bad news.

And eventually one group

will end up dominating, but it'll happen gradually.

Second, I mean, I respect markets.

Markets might be reactive today, but it doesn't mean they're stuck in a reactive mode.

If it turns out that they can find their predictive power again, it won't come from the experts.

It'll come from within the market.

I mean, I don't put it past markets to switch in a moment.

I've seen markets go from being reactive to predictive overnight when they feel they have power.

Markets are much more adaptable than experts are.

They have no egos.

They don't hold on to, hey, that used to work.

I'm going to keep using it.

I respect markets.

I don't always agree with markets.

I respect markets for their capacity to adjust to what's going on.

So I think if in fact this is going to be a catastrophic event for the economy, you're going to start to see it happen over time,

over the rest of the year in small bulbs with small recoveries built in.

It won't be just down, down, down every day.

It'll be down, down, maybe an up day because something happened on that day that looked like relatively good news.

But eventually bad news piles up.

We'll be right back after the break.

If you're enjoying the show so far and you haven't subscribed, be sure to give Prof G Markets a follow wherever you get your podcasts.

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We're back with Prof G Markets.

I'm going to pivot us to tech, big tech.

We saw big tech earnings in the past couple of weeks.

We saw Google beating on expectations.

Meta was a beat.

Microsoft was a beat.

Apple was a beat.

Amazon was a beat.

All of them climbed except for Amazon after their earnings.

Microsoft and Meta are having the best years of any of them,

sitting at record highs right now.

Microsoft recently hit a $4 trillion market cap.

Your initial reactions to this most recent round of tech earnings that we just saw, and then maybe we'll get into the specifics.

These companies are money machines.

They figure out a way to make money in good times and bad times and certain times and uncertain times.

And actually, they get an advantage over the rest of their competition when uncertainty goes up.

They have the cash reserves to go.

They don't need capital.

They can do things quickly, spend tens tens of billions of dollars if need be.

So in a strange way, as you up the uncertainty, you actually give these companies an advantage over the competition.

But there's also this question.

This is why the economic data has become much tougher to read.

I mean, if you take Apple, great quarter in terms of iPhone.

So if you're an optimist looking at this, look, you know, the tariffs are not affecting Apple.

They're selling a lot of phones.

But if you're a pessimist in looking at that same data saying, maybe people are predating their buying of phones to fight off the tariffs that they think are coming later in the year.

So the second quarter earnings, the question you're asking is, are these numbers really good because customers are spending more upfront to avoid what they think is paying down the pike?

Or are they reflective of a much healthier economy than we think?

And that's what I meant about this debate about is this heading towards a catastrophe or is this going to be okay?

That question is not going to be, or those questions are not going to be easy to resolve because the data is going to be readable by both sides as evidence for their side, which means this debate will continue through the third quarter as well.

One company that we've been looking at a lot that we find fascinating,

highly adaptable, absolutely crushing, all these different businesses.

14% growth in sales overall, 32% growth in cloud.

This is Google.

And yet, Google is still trading below the average PE multiple for the SP 500.

And we've been a little surprised by the valuation of Google when you factor in its role in AI

and the compute business, its role in media with YouTube,

its role in the autonomous wars with Waymo.

It feels as though there are just so many different growth vehicles for Google that the market doesn't seem to be pricing in.

As the valuation expert, I would just love to get your views on Google and how Google is trading right now.

Now, I'm going to take you back about a decade when Google renamed itself Alphabet.

When it did so, it said because it didn't want to be just a search engine, it put all these other businesses.

If you remember, the six other businesses, the bets.

And the problem is, for much of that decade, the bets were just cash drains and nothing came back in the form of revenues and earnings.

In my experience, there's never been a company that gets as many headlines for its top products, right?

Whether it's Waymo or whether it's any of its other products or Ness, but there's so little to show for it in the bottom line.

The question that investors keep asking is if all of this is working, How come you're so dependent on the ad business for so much of your value?

And I think Google has, you know, because of that decade of not delivering on all of its other bets, markets are skeptical.

They say, okay, that sounds great, but show me the money.

Yes.

And I think that, you know, but if I were an investor and I've never held any of the MAG 7 stocks and I want to enter, Alphabet would be my choice to enter this group.

You know, because I think it's a company that if it does deliver on its other products, will be able to beat expectations on earnings and revenues but a decade of not delivering has brought those expectations down and people are pricing in based on those lower expectations to follow up from how the story you described of google and this is a very interesting connection that i've just made

you describe

10 years ago, however long it was, when Google changes its name to Alphabet and they say, we're not just a search box.

We're doing all of this incredible stuff.

we're doing nest and we're doing the Google Glass and we have all of these ideas and we've got this incredible research lab working on these very fancy ideas and I would assume that maybe at the time the markets was were very excited about it and then you fast forward to 2025 and the markets I presume I mean I'm young so I don't really know what happened but I presume the markets go

we've seen this story before and we're not as interested in it as we were in 2012.

And so we're going to slap on a multiple that is actually lower than the average of the SP.

I wonder if that, it sounds very similar to the story of Tesla.

It sounds like Tesla is doing a similar thing.

We're not just a car company.

We are an AI company and a robotics company and a robot taxi company.

We're all of these things.

And I wonder if, you know, 10 years from now, it's a similar story to Google where the markets go,

we don't believe you anymore.

And even if you do prove your business, we're not as interested.

It'll happen.

Every company reaches a stage in the life cycle where the story is not going to be enough.

With Tesla, they've been able to put off this vomits for a moment.

I've used that word before of, hey,

when will we see the numbers?

But it'll happen.

It'll happen.

And I think...

But I do think, you know, that, you know, when you talk about Google, my question is, who's Google's narrative setup?

Who's Google's storyteller?

So the pitcher is not the storyteller for Google.

He's basically,

he's a good CEO.

I mean, the other company I think of that drove on narrative for decades was Amazon.

And you got to give Jeff Bezos credit.

He set the narrative and he sold the market on the narrative.

That's a CEO's real job.

It's not to fix supply chains.

It's to be the storyteller for the company.

So I think think both Tesla and Google illustrate the criticality of having somebody at the top who frames the narrative for the company.

In which case, maybe $30 billion is the right number to get Elon Musk to stick around.

To be full-time and actually be CEO again, right?

I mean, because

he's been CEO in Absentia.

And I think that there is a value to having a storyteller with a group of people who believe in a storytelling.

And I think, you know, when you have that, now you've got a narrative setter at the top.

I'd love to get your thoughts on NVIDIA right now.

A company recently hit $4 trillion in market cap.

It's now worth $4.4 trillion.

It is more valuable than the entire UK stock market.

Any thoughts on NVIDIA's valuation right now

and what we've seen with this massive run-up?

NVIDIA is an AI architecture company.

And if I frame out how much the architecture has to cost for NVIDIA to be worth 4.4 trillion, I don't see economics in it.

I mean, if the architecture costs 2 trillion or 3 trillion, you can justify NVIDIA's valuation.

But if you spend $3 trillion on AI architecture, AI products and services have to be 12 trillion, 15 trillion in value to make your money back.

think AI is great, but I don't see the market as that big.

That said, I understand why NVIDIA is doing what it's doing.

AI is the buzzword at the moment.

And if you're an investor and you want to invest in AI, guess what?

The one tangible place you're going to go where people are, where a company is actually making money.

It's NVIDIA.

There are, I mean, AI is a big buzzword, but there are relatively few companies that actually make money on AI.

NVIDIA does.

Maybe Palantir does on its commercial software.

But then it's mostly architecture companies, Constellation Energy, data center companies.

It's almost entirely in the architecture space.

So if you're a portfolio manager and your client says,

have you invested in AI?

Guess what the easy answer is?

Yeah, we own NVIDIA.

It's become the lazy investor's answer to, how much money do you have in AI?

Well, I have NVIDIA stock.

And I say it's a lazy investor because I do think that ultimately the AI business is also going to shake out.

And the architecture companies are going to go into the background.

And the product and service companies are going to go into the foreground.

I'll take you back to the dot-com era when all was said and done.

Cisco was not the biggest winner from the dot-com era.

It was Amazon.com.

I'm waiting to see who the Amazon.com of the AI boom will be, but I don't think it's going to be NVIDIA.

That's why the big win.

from AI investing will be to find that company that you think will emerge in the product and service business.

And that's a much, much tougher call to make.

And that's why portfolio managers are not even trying.

I would propose one to you right now, which is OpenAI, which is raised at 300 billion.

And,

you know, my response to that would be, perhaps they're lazy, but the only Amazon.com in the AI world, which in my view is OpenAI, you can't invest in because it's private.

And this has been a theme that we've discussed on this podcast, which I'd love to get your reactions to, which is all of the good companies in AI at least, OpenAI, Anthropic, even beyond AI.

If you look at SpaceX, you look at Stripe, you look at Databricks, all of the really great companies that might become the next Amazon.com, they're all staying private, which means that

if you're a retail investor,

it's very hard to invest in those companies.

I'm wondering if you have those same concerns.

Which is the reason Nvidia takes off, right?

Because if that is the only tangible company and your portfolio manager, your mutual fund manager helps to buy just public companies, you're stuck with it.

You're right.

Many of them are staying private.

They have no trouble raising capitalist private companies.

Many of them are corporate governance nightmares, which might be one reason they're staying private, right?

It allows them to do things that would never pass muster in a public company.

So I think that my worry is not that they stay private, but that the corporate governance nightmares that are embedded in these private companies will come back to bite them as companies.

It's not good for them in the long term.

I mean, I think that,

you know, OpenAI would be a much better company if Sam Altman were open to people who disagree with them, which is what markets do, which is what having a board of directors with different points of view, it makes the company better.

So people often think of strong corporate governance as putting a check on founders.

I don't think of it as that way I think it brings founders to reality when they get distracted when they start doing things it doesn't always work but my worry of them staying private companies is they might not grow in healthy ways as private companies because there's so little accountability even to their investors you think big VC investors will demand accountability I don't think they do VC investors especially in these big companies are passive investors they take their money, they put it in, and they hope to make their money from exits

two years, five years down the road.

And they're not asking the questions that need to be asked to make these companies truly great companies.

When I think about it from the investor perspective, And I think back to what you said about how big is the TAM on AI really?

Is it $12 trillion?

I mean, what is the number?

And show me your model and show me how the business is going to get to that number.

And I could imagine that with a frontier technology like AI, part of the

investment thesis is, look, don't worry about the TAM.

If this is what people think it might be, you just got to get in.

You just got to get on the train.

You got to get in NVIDIA or you got to get in OpenAI and,

you know,

be my guest, do the math, but you're loss because none of us really know what the TAM is.

None of us know what this is going to become.

You have to just sign up if you want a piece of this.

You cut to the heart of what separates investing from trading.

And I'm not passing any value judgment.

Investing is about assessing TAMs and estimating revenues and cash flows, even in the face of uncertainty and trying to ask, is this a reasonable price to pay for this company given the business it's entering?

Pricing is about demand and supply, mode and momentum.

AI is it.

You want to be in there.

You've got to pay what it's like wanting to buy a house in an expensive neighborhood, right?

You don't do an intrinsic value of the house.

You decide to be in that neighborhood.

Guess what?

You got to pay what other people are paying.

That's your entry point.

And I think that

95%,

maybe 99% of the money in AI now is just pricing and trading.

They want to be in the game.

They have no idea what the TAM is, they couldn't care less because they think it's like a very expensive game of past the cushion, which is, hey, even if you're wrong, if you can flip it to somebody else while the game is getting bigger, you're going to make money.

What difference does it make that eventually somebody is going to be left holding that cushion?

So I think that that's driving a lot of money into the AI space.

I am an investor.

I'm not comfortable doing that.

But I completely understand that if you're a portfolio manager, you often have no choice because your clients will push you towards trading AI because they want AI in their portfolios.

Well, it seems almost irresponsible to not have some level of AI allocation.

Especially if you're judged on a year-to-year basis, right?

I mean, it is irresponsible.

Exactly.

If you're going to be judged on an endowment fund or a pension fund, on the returns you make each year, not having NVIDIA will put you at a disadvantage.

But if you're an investor, your only responsibility is to yourself in the long term, right?

It's a very different game.

And I understand, therefore, why portfolio managers might disagree with me on this because they have a different mission, a different job to do.

I'm not going to point fingers at them saying you shouldn't be doing it.

What they're doing makes complete sense given their mission.

But what I'm doing makes complete sense given my mission, which is I am investing to preserve and grow my wealth.

for the long term.

And that effectively might mean staying out of spaces where I think I'm paying too much for the cash flows and earnings I'm going to get on it.

It's a different mindset.

It's not better.

It's not worse.

It's just different.

You sound somewhat bearish on AI.

And correct me if I'm wrong, but it sounds like your view is that there is just a lot of hype.

People just want to get in the door.

And because of the amount of demand to get in the door, it's the popular club.

Everyone wants to, they will pay anything.

And as a result, result

you know eventually the hype dies and prices go down it sounds like that is your view on ai in general it sounds like that's your view on on nvidia perhaps some of the other chip stocks open ai is that your view it's part of what i call the big market delusion i've written about it in fact i have a paper and it's chapter in one of my books It's because I've seen this movie before.

I saw it with online advertising 10 years ago with dot-com in the 1990s, with the PC business in the 1980s.

The big market illusion happens anytime there's this buzzword big market.

PCs early in the 80s, the internet early in the 90s,

online advertising, social media early in the last decade.

Near the big market, what it does, it attracts entrepreneurs who tend to be overconfident.

with capital coming from venture capitalists are also overconfident.

It's a feature of the game.

Each things they can conquer the big market.

So each, in a sense, overestimates their chance of success, overestimates their value.

But if you add up all of the pods of these overconfident groups, collectively, that value is going to be much greater than the value that can be delivered by the market.

I think of it as healthy because this is the way change comes about.

Eventually, there's a correction.

We wring our fingers and say, never again.

But guess what?

We come back to play the game again.

To me, I don't see why AI is going to be the exception to what's happened historically.

People overreach, they correct, they say, I will never do it again, but the world changes as a consequence, right?

The dot-com boom busts, but guess what?

It changed the way we live.

And I think the AI boom will have a correction, but AI will change the way we work and live.

And I think that's how human beings...

advance.

They overreach, they're overconfident.

They try for things that are beyond their reach and eventually they

and they feel some pain.

But the question I ask my class, whenever I bring this big market illusion up and people say, this is terrible, I say, would you want to live in a world run by actuaries?

I'm okay with bubbles.

I'm okay with overreaching.

Because ultimately, that's how change happens.

So I'm an optimist on bubbles.

This is the way the world works.

You overreach, you correct, you clean up, and then you move on.

And another bubble forms for the next big thing.

And AI is, I think, a big thing.

It is going to create change.

It is going to have a correction, but it is going to change the way we live and work.

To run with the dot-com analogy, to your point,

a lot of people lost a lot of money when the bubble burst.

And a lot of people got burned, the people who got too excited and just bought into the hype.

But

we saw Amazon, we saw Netflix, we saw the rise of Apple with the iPhone, which tapped into the internet.

We saw immense value creation.

And just to sort of steel man the AI hype men today,

I think a lot of people are thinking, well,

our job is to find the next Amazon.

It's to find the next Netflix.

That's certainly what I'm thinking about.

I'm looking around.

I'm like, which one is it going to be?

And I'm wondering if you're thinking the same thing.

Do you believe that we'll see another Amazon in the world of AI?

Are you looking for another Amazon?

And if so, do you have your eye on anything?

I'll be quite honest.

I think the search for multi-baggers, which is the stock which will go up tenfold, is one of the most dangerous things in investing, right?

Because we all want it.

I mean, let's face it, we all would love to have bought Amazon in 1997

or Microsoft in 1986.

The big winner from the PC business was not one of the PC companies, it was Microsoft.

But in our, and that's fine, right?

I mean, look back and say, I wish I'd done that.

But if you say, look, that's what I'm going to make my investing is about, is finding the next Microsoft circa 1986, the next Amazon circle.

It skews the way we invest because we go for the big hit.

And everything we do is about the big hit.

You know what?

If a big hit happens, I want it to happen almost accidentally in my portfolio.

I would love to get a big hit.

Nvidia was an amazing hit.

Apple in 99 for me was an amazing hit, but I didn't expect it to be.

I didn't go for it because I thought it was a fairly undervalued company.

I was going to make 5% more than the market.

It turned out in hindsight.

So I think sometimes letting the multi-baggers

happen rather than going out and making your entire investing venture, searching for them, is a much healthier way of investing than saying, I'm going to make my entire focus looking for that next big winner.

So sometimes we try too hard in investing.

And when we try too hard, most of the time it comes back to hurt us.

Stay with us.

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That's this month on Explain It to Me, presented by Pureleaf.

We're back with Profje Markets.

You recently wrote another article

which was was titled To Bitcoin or Not To Bitcoin.

And you discussed this new trend that's becoming very popular in the markets right now, where these companies are transitioning into Bitcoin treasury companies.

And this is what MicroStrategy did.

Our listeners will remember we had Michael Saylor on the podcast.

He took us through what what the plan is with MicroStrategy.

He and I got into a little bit of a tiff.

But you wrote about this.

I would love to hear your views on Bitcoin Treasury companies.

What are your thoughts?

What were your conclusions writing that article?

The question I was trying to address was the push you were seeing, not just in the Bitcoin Treasury companies, but in the rest of the market, to get companies to move cash out of where it's traditionally been, short-term liquid investments, treasuries, commercial paper into Bitcoin.

Microsoft had some shareholder proposed that they have, they voted it out.

Thank God for that.

So, my question is,

for a typical company, does it make sense to take cash, which is held in liquid, relatively riskless investments earning a low rate of return and put into Bitcoin?

With the benefit of hindsight, people say, of course, because think of how much more money you'd have made if that 100 billion that Apple had 10 years ago had been put into Bitcoin should have left in cash.

It's asking the wrong question because cash was never supposed to have that purpose of delivering high returns.

It's to provide safety.

It's a shock absorber.

So I started by listing out all the reasons companies hold cash, and none of them is to earn 30% returns.

You hold cash to stabilize the company, to get you to the bad times.

And I said, Bitcoin doesn't meet any of those requirements, even if you took its great history because it's too volatile.

It swings around too much.

And then I calmed out an exception for some companies where you think, where you allow people to get away with holding Bitcoin.

And I said, I would not be one of the investors, but if you're one of those investors, I understand what you do.

The first was for companies where you felt the company was run by what I call a Bitcoin savant.

I don't even know whether that's politically or right word to use, but a Bitcoin savant is somebody who senses the right time to buy Bitcoin.

They, therefore, they trade Bitcoin for you, but at much better prices than you could have.

So think of it almost like,

you know, how SPACs became popular five years ago.

So this is basically a company that you create as a SPAC, and all it does is trade Bitcoin for you, but you're willing to do it because the person doing it is much better than you are.

That's, I think, the story you can tell for investors in microstrategy.

The second is companies where Bitcoin is part of their business model, PayPal, Coinbase, where some of their transactions happen in Bitcoin.

You need Bitcoin.

as part of your treasury to deal with those transactions.

The third, and this is, I think, the most dangerous group of companies, is companies whose business model is broken.

There's no narrative you can tell for recovery.

AMC, GameStop, right?

Where you're not going to go back to malls and people coming into your mall stores.

The companies have become meme stocks.

Why?

Because, you know, if you're 25 or 30, you have some nostalgia for that game stop you stopped at,

and you feel you're saving the company from the bad guys.

The bad guy, of course, are the hedge funds.

So these companies have become meme stocks, which is just a fancy way of saying they've broken away from the gravitational push of pull of value.

Usually we have price and value.

Value operates as some kind of force pushing price back.

With meme stock, that link is broken.

You're just unmoored.

It's demand and supply, mood and momentum.

And once you've gone there, who cares what your business is anymore?

So what do you do?

You decide that you become even more of a meme stock by taking your money out of mall stores and buying Bitcoin.

If you're a game stop, you might as well do this.

At this point, nobody's betting on mall stores coming back.

So might as well just buy into the fact that I'm just a mean stock.

People trade me, so I'll give them something to trade.

For most of the rest of the market, though, I think it's a terrible idea to let CFOs take cash out of T-bills and buy Bitcoin.

Now, I tell people, look, what if I replace the word Bitcoin with Beanie Babies or picasos would you be okay with your cfos taking cash that belongs to the company and betting on the direction of you know fine art and where it's going to go or and the answer is of course not so why would you be okay with them doing it on bitcoin cfos are terrible traders They don't have a sense of what the bottom is, what the top is.

They often trade at the wrong times.

I don't want the CFO of a company I invest in putting my money in Bitcoin, even if I'm a Bitcoin believer.

I'd much rather they give me the cash and I'll go buy my own Bitcoin.

I don't want my CFO doing it for me.

I share those same concerns.

And I almost feel like

you're doing these

money managers, these Bitcoin managers, these Bitcoin treasury companies, you're almost doing them too much of a service to justify

what they're doing.

But I appreciate you doing it anyway.

And just to your point about

the whole idea of crypto, the whole idea of Bitcoin,

it's about independence, right?

It's about

not being dependent on someone else managing your money.

Own your keys, own your coins.

You don't want to depend on all these other people.

And then suddenly we have this new strategy, which is, you don't need to own the Bitcoin.

I'll do it for you.

Because why?

I'm a Bitcoin savant.

I know what the right price is.

I mean, whatever the justification is, none of it makes sense.

So I'm glad we agree on the Bitcoin Treasury companies.

I'd like to get your views on Bitcoin itself, because I don't think we've asked you about Bitcoin.

What are your views on Bitcoin?

What do you think of the price?

It's now comfortably more than $100,000 per Bitcoin.

What are your thoughts?

The question I often had for Bitcoin advocates is, is it a currency or is it a collective?

You have two choices here.

Initially, their point was it's a currency.

Well, if it's a currency, it's not a very good one.

It's very inefficiently designed.

And if it takes a thousand Ukrainian miners guessing a nine-digit number for me to buy my Starbucks cappuccino, it doesn't work for me.

And it's not worked.

In spite of all of the

press that Bitcoin has got over the last 15 years, If you look at the actual transactions where Bitcoin is used, it can buy and sell things.

It's minuscule.

It's never taken off because it's an inefficient currency.

Over the last few years, there's been a shift among Bitcoin advocates saying it's not a currency, it's the new collectible.

It does have one thing going for it.

Collectibles need to be scarce.

And Bitcoin comes with this impulse scarcity of 21 million if you think of Bitcoin as its own investment.

There are two other things you need for a collectible.

One is the demand has to endure.

Gold is a great collectible because people have been okay with it being a collectible now for what, thousands of years.

And the second is good collectibles operate as hedges against financial assets.

Put differently, when stocks and bonds go into collapse, a good collectible holds its value.

That's why people hold gold, because often it holds its value during crises, when fiat currency.

Bitcoin for its existence, and let's face it, it's been around only for 16, 17 years, has not behaved like a good collectible.

I mean, COVID, the first quarter of 2020, markets were down, S ⁇ P was down 33%.

Gold held itself.

You know what Bitcoin did?

It was down 56%.

Over the following six months, stocks come back 50%.

You know what Bitcoin did?

It doubled.

Bitcoin through its history has behaved like very risky stuff, which is not a characteristic of a good collectible.

The reason I can understand traders, you can't invest in Bitcoin.

You can only trade Bitcoin because it can only be price.

I can see why people trade Bitcoin is you're trying to get ahead of the demand and supply gap.

There's an insidious effect of getting companies to invest in Bitcoin, right?

Or mutual funds and endowment funds.

If they invest in Bitcoin, what do you do?

Increase the demand side for Bitcoin.

And since the supply is fixed, the price goes up.

So it's almost like...

you can you're gauging what will like well how many people can i get to buy bitcoin and if i can get more people to buy bitcoin it'll push up the price so i'll get ahead of that price rise There's a reason I think Bitcoin has done so well since the election last year, which is there is this feeling that more people are now going to be allowed to enter the Bitcoin buy side of the market.

And that's going to increase demand.

That increased demand will push up the price.

So this is a trading argument for Bitcoin that I understand.

The trading arguments can fall apart very quickly because All you need for that to change is a 30% drop in the Bitcoin price, because all of a sudden all that demand will start to dissipate.

So training, it's a pure trading instrument.

And as long as you accept it as such and you realize that if you're good at detecting mood and momentum, you'll be okay, then I'm okay with you betting on Bitcoin.

But don't ask me whether Bitcoin is undervalued or overvalued because it cannot be valued.

I'd like to just double click on gold

because, you know,

I agree that first the argument was, no, it's a currency.

We're going to use it to pay for stuff.

And now it's, no, it's collectible.

Now it is really, it's gold.

and i think that that is actually accurate and i i accept that analogy it's digital gold now the the trouble that i run into

um is gold itself i don't fully understand

because gold seems to have

its value seems to be determined by the same circular reason the same circular reasoning that determines bitcoin's value and you almost just said it just there you said why, why does gold work?

Well, because it's worked for thousands of years.

People have decided that it works.

You know, you can't really use it for much.

I mean, there are some

use cases.

I mean, we can talk about its use case in terms of jewelry,

some

metallurgical properties.

But overall,

I mean, this is a huge asset.

This is trillions of dollars.

It's actually been one of the best performing asset classes of the last several years.

And I couldn't really tell you why.

I mean, yeah, it's, it's a hedge against inflation.

It's a hedge against doomsday.

But whenever I try to project this out, like what happens when the world collapses and asset prices go to zero?

Oh, great.

I have my gold now.

I'm going to be fine.

And my question is always, well, why don't you get your bullets and your water and your food?

I mean, gold itself, I don't fully understand, but I can see a world in which the same, well, everyone likes gold argument works for Bitcoin.

Everyone likes Bitcoin.

Everyone just accepts it.

Could you see that happening?

I think that's where the enduring demand comes about.

There's a reason people pick gold.

It was compact enough that you could transport it.

It was very difficult to destroy.

You could make it into different things.

So whatever the reason, gold has endured.

So that's why I'm not willing to say Bitcoin

is going to go away because the demand will go away.

How do I know?

Maybe Bitcoin can pull off being digital gold.

And that's why when somebody says, should I buy Bitcoin, I don't give them the advice of you shouldn't buy, tell them

this is a traded instrument.

It's based on not just what you think the demand will be for the next year, but what the demand will be really long term.

Because nobody's ever seen a Bitcoin.

People have seen gold.

I mean, I grew up in India.

You know what, you know, gold used to be the way in which inheritances were passed down to daughters.

The sons could not inherit property.

This is, there's something about gold that I can't explain that has this

connect to people that cuts across cultures and cuts across time.

Does Bitcoin have it?

It might have it for the moment.

But I'm not sure it will, right?

You can't see it.

You can't hold on to it.

Its demand seems to come almost entirely from the fact that it's done well for the last decade.

If I take that away, will people still hold Bitcoin?

I'm not sure, but I have a feeling people hold gold even if it's down 50% because they like the feel of gold.

For some people, at least, there's something about gold that gives them comfort.

And, you know, pricing is based on emotional things, and that is an emotional need that it fills.

You know, for thousands of years, what the dream has been with gold, right?

Alchemy.

Yes.

If alchemy, and this is the irony of alchemy, if alchemy actually worked,

the price of gold would collapse towards zero.

So the very act of being successful.

So my question with Bitcoin is, what is the version of alchemy that people are trying on Bitcoin?

Because I have a feeling you're going to see something that looks like Bitcoin, meets the same you know paranoid requirements that Bitcoin has.

People are trying alchemy every day to come up with something like it.

And that's my concern if I'm a Bitcoin trader, that that alchemy is going to work.

And you're going to get some other crypto coin you're holding on to 15 years from now, in which case its value as a collective will start to dissipate very quickly.

Well, I'm going to start to wrap us up here.

And thank you so much for your time.

This has been tremendous.

As we finish,

we hope to see you in three months.

We try to get you on once a quarter.

What are you most focused on right now?

What are you thinking about in investing, perhaps in life?

What's on your mind as we head into the end of summer?

I'm just finishing up a piece that I'm going to post today on AI scams.

There's a scam going around me.

An Instagram scam that uses my likeness, my video.

And in the scam, I'm talking about talent here and NVIDIA.

And it's inviting people to join an investment club that I'm supposedly part of, that I will tell them how to make 60 to 80% returns.

And it's a scam that's collecting people's money.

And I, you know, my initial reaction was anger and outrage and frustration.

But then my teacher in me kicked in and I said, I'm going to grade the scam.

So I took the scam and I graded it on look and language, A minus, I graded on content, C minus, and graded on message consistency and F.

But I also talked about a template we have to start to use to think about, because there are more of them coming at us.

AI is changing the scam game.

It's upping the ante.

So that's going to be my next immediate topic.

But I'm a dabbler.

I mean, I couldn't tell you what I'm going to think about next week, but next week deliver that interesting question.

What was your final break?

on the scam.

My final bread for them is anybody who knew me, who read what i wrote knew it was scam the problem is that's not the target audience here the target audience of people who don't do their homework don't read what people are doing but want to invest in somebody's name yes so i'm not sure i'm reaching that target audience And I'm not sure that target audience can ever be protected, but I have a feeling that there's this entire space that's going to get scammed going forward.

Now, the scam is like a tango.

You need both sides for it to work.

You need a scammer and you need the scammed.

And I think we're too easy to put one in the victim's side and the villain's side.

But I think until the scam recognizes how much they're part of the scam,

scams are not going to go away.

Absolutely.

I will note we've seen a lot of these AI scams for our partners or for Scott, Scott Galloway.

Tons of AI scams out there of Scott.

But to your point, everyone knows.

They send us the link.

They say, hey, this is an obvious scam.

You should should go check it out.

And then we just go report it and it goes away.

So, as of now, I think I would give somewhere between a D and an F to most of these AI scams.

But of course, the question is if they're going to get better.

And I'm sure they will.

They will get better.

Yeah.

Exactly.

Asmath Demodrin is the Kershner Family Chair in Finance Education and Professor of Finance at NYU Stern School of Business, where he teaches corporate finance and valuation.

You can read his research on his blog, Musings on the Markets.

Professor DeModeran, this was wonderful.

Thank you so much for joining us.

Thank you for having me.

This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer.

Miel Silverio is our research lead.

Our research associates are Isabella Kinsel and Dan Shallan.

Drew Burroughs is our technical director, and Catherine Dylan is our executive producer.

Thank you for listening to Prof G Markets from the Vox Media Podcast Network.

If you liked what you heard, give us a follow.

And we will be back with a fresh take on the markets after our summer vacation with Josh Brown on August 25th.

See you then.

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