The Fed’s September Dilemma: Is it Really Time to Cut Rates?

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Today's Today's number, 60%.

New research shows that if you remove alcohol and edibles from your life, you will lose 60%

of your will to live.

Ed, what's going on?

Not much.

Yeah.

All right.

You just got back from Germany.

Today's show was produced by.

I did just get back from Germany.

I was in Cologne.

How was that?

It was great.

I went to the Cologne Cathedral and

did this long kind of video about the Reichstag fire act and how we can descend into fascism and that institutions like great buildings like the Cologne Cathedral, which took 650 years to build, are built brick by brick, but being tore down fast.

And I thought it's probably not the moment to put out a video.

saying that Trump is a fascist.

So anyways, that video is still in the can.

But yeah, I was in Cologne, Germany.

The moment being what happened with Charlie Koch?

Yeah, yeah, I thought this wasn't a time.

I do think I'm evolving, though.

And I'm being serious.

I was asked to come on a bunch of shows, including CNN last night.

And I'm like, you know what?

Everything is not demanding my judgment.

I don't have to express an opinion on everything.

I went on last night and within like 30 minutes of the murder.

My DJ and my personal trainer were talking about it.

I'm like, okay,

I don't have much to add here.

Anyways, I wasn't expecting us to go here.

I was expecting to talk about the Oracle of Oracle, Ed Elson.

Well, it is interesting.

We were sort of debating, do we talk about it on this show?

Because it is one of those things.

It's just

such a big deal and such a hit to everyone.

And

it's hard to talk about issues and not and not.

recognize that.

So I'm kind of glad that we are recognizing it.

But at the same time, the job of this show is to talk about the markets and talk about the economy.

It's not really ours to talk about, it's yours to talk about on your other show with

Jesse Tarlov.

We just did an emergency episode or quick drop with Jess.

She was actually quite emotional about it.

She was, anyways, tune in to the

Raging Moderate's quick hit.

But

I think you're absolutely right.

So, with that,

let's get to the headlines.

Now is the time to fly.

I hope you have plenty of the whereof all.

August inflation numbers are out, giving the Fed one last data point before Wednesday's interest rate decision.

The producer price index slipped 0.1% from July, but was up 2.6% year over year.

Meanwhile, consumer prices climbed 0.4% on the month and 2.9%

on the year.

That was the highest annual increase we have seen this year.

After these inflation readings, investors are still expecting a 25-basis point rate cut this week um

so scott we had two reports here producer price index and then the next day we had the consumer price index report let's just start with the producer price index uh as i said on a monthly basis wholesale prices fell so that is probably a good thing um interesting we saw this very celebratory reaction from the administration that this is proof that there is no inflation.

I'm just going to read you these quotes here that we collected.

Caroline Levitt, press secretary, she said, quote, the latest PPI report shows there is no inflation.

She went on to say, quote, President Trump has defeated Joe Biden's inflation crisis while successfully implementing powerful tariffs, which haven't hiked prices like the so-called experts claimed, end quote.

Then Trump went on Truth Social.

He said, quote, just out, no inflation, too late, referring to Jerome Powell, too late must lower the rate big right now powell is a total disaster who doesn't have a clue three exclamation points end quote so that is the administration's response to these numbers now i would just like for us to dig into the actual numbers So the PPI, the producer price index, this is measuring the cost that producers are paying.

This is measuring wholesale prices.

So the PPI, it fell 0.1% month over month, which means means that wholesale prices between July and August fell 0.1%.

Now we can call that prices falling, or we can call that flatlining.

My view, that's flatlining.

0.1%, that's not really anything.

Okay, so that happened.

Then you need to factor in the fact that in the previous month, in July, prices rose 0.9%.

in one month, which was the largest PPI increase in three years.

On an annual basis, they rose 3.3%.

So essentially what happened here is we had one of the largest jumps we've seen in many years in July.

And then from that jump, prices basically remain the same.

So is that a victory?

I don't really know.

Then you take into account the core PPI reading for this month, which many people view as a more accurate reading of inflation.

On that reading, prices rose month over month, 0.3%.

So in sum, there is more nuance here.

and there are lots of ways to read the data, lots of ways to sort of massage it to better fit your political narrative, whichever one you want to go with.

And we have discussed that at length on the podcast before.

But what I can say definitively right now, to read this PPI reading and say

that this is proof that inflation is not happening,

that is either incredibly stupid and wrong, or it's just a bold-faced lie.

It's just not true at all.

You cannot reach that conclusion.

And so that was why I was a little bit annoyed about the response that we saw from the administration, this 0.1% month-over-month decrease.

And then, you know,

it simply is not proof of anything.

And then what happened a day later?

We got the CPI number, and the CPI told us consumer inflation rose to 2.9%.

So that's what's happening in the inflation picture.

Scott, your reactions?

The PPI is generally a leading indicator or CPI, consumer prices lag PPI because PPI is an indication of the cost of inputs, right?

You're selling into consumer companies from producers, and then those price increases should start to show up later in CPI.

And right now, to your point, PPI is elevated, and it looks as if CPI is fairly, you know, has jumped a little bit.

And the target,

the Fed's target rate for inflation is 2%.

So if we're well above that, which we're about 90 basis points above that, that doesn't,

you can make a theoretical argument.

That begs for a rate increase, not a rate cut.

The market has said there's 100% likelihood of a rate cut.

I don't think it's 100%.

I think we're looking at most likely 25 bips, but nothing more, because you're trying to balance,

at a very basic level, you're trying to balance inflation inflation versus job growth or job loss.

And it appears right now, and we talked about this yesterday with Professor Wolfers from Michigan, that we have the worst of both worlds.

It looks like inflation appears to be pretty sticky and leveling off on one dimension from an elevated level, increasing on

a consumer level.

And we had the worst revision downward in history of jobs, right?

From the reported numbers, we revised it down by, I think, over like a million jobs.

911,000 jobs.

So that all kind of adds up to static flation.

But as it relates to the rate cut, other than pressure and the markets expecting a rate cut, if we were on a blank screen here and you just said, okay, if the Fed's target inflation rate is 2% and it's a 2.9%,

and okay, our jobs are down, so maybe

we want to cut rates to inspire the economy a little bit, but at the same time, our inflation is almost 90 bips above our target rate.

That to me says you either keep it flat or you slightly increase it.

But just given where we are in the narrative and all the expectations being priced in and the president's pressure,

but I don't see an intellectual argument right now that is honest to substantially cut rates.

What are your thoughts?

It is so interesting that rate cut probability.

It is 100%.

And to your point, it's actually almost greater than 100% now because now there are expectations for, as you said, a half-point rate cut, 50 bips versus 25 bips.

I think the probability right now, it's around, I think it's almost 90% for the 25 basis point cut, and then 10% for the 50 basis point cut, 0% for no cuts.

And this is all very striking when you consider, as we just saw with this CPI reading,

2.9% year over year, fastest inflation rate of the year.

We had 2.7 in July, July, and we're up.

The month over month increases was 0.4%.

Prices excluding food and energy, so core prices, they're up 3.1% in the past 12 months.

So prices are rising.

And

we can ask the question, like, why are they rising?

And the answer is simple.

It's what we've said for months now.

It's because of the tariffs.

I mean, the price increases we're seeing are all among the most tariff sensitive items.

And meanwhile, as we're getting the economic data from the government that is telling us this story, we are also getting the story told to us in earnings from companies.

You've got companies like Walmart, Target, Best Buy, JM Smucker, Ace Hardware.

They are all raising prices and they are also all attributing those price increases to the tariffs.

Now,

are we seeing dramatic price increases?

No.

I mean, to your point, 90 bips above the target rate is quite substantial.

But having said that, we've been above 2% for a long time now.

But we're not seeing a huge dramatic jump in prices right now.

But we are seeing an increase in prices.

And will this continue?

Are we going to see prices continue to rise?

We're at 2.9 right now.

We were at 2.7 last month.

Yeah, of course we're going to see this continue.

Because as we've said from the very beginning, this is how the tariff impact works.

It takes several months.

It's a slow and steady process.

And we are officially seeing that play out right now.

Now, with all of that in mind,

you've got this potentially runaway trend, which is inflation.

And at the same time, you've got the Fed, which has decided, or at least according to Wall Street, it has decided, we're going to cut rates anyway.

Why?

Not because they've gotten inflation under control.

They haven't.

In fact, it's getting away from them.

They're doing it because of this labor market issue where you've got a declining labor market, only 22,000 jobs added in August.

We thought we were going to have 80,000.

And meanwhile, on the same day of the CPI report, we got this jobless claims number.

263,000 jobless claims this month, way higher than expected, and the highest in nearly four years.

So we're probably going to cut rates,

but for none of the reasons we want to.

We're cutting rates because of a bad reason, which is unemployment.

And I would like to get your reaction to some quotes that we collected from guests that we've had on the show over the past few weeks talking about the September rate cut, which, as I say, is inevitable according to predictions.

We had Catherine Edwards,

we had a a senior economist at Bank of America, Aditya Babe.

We had Mark Zandi from Moody's Analytics, and we also had Josh Brown.

And I just want to play you

what they said about this rate cut.

Granted, they didn't see the CPI number.

This was before they saw this CPI number.

But here is what everyone said so far.

I know the market is counting on it and that the market has priced it in.

I just

I worry that it's being a little premature.

Our call is still that they don't cut in September.

We still think that they are risking a policy mistake by cutting rates just because the economy might be reaccelerating and inflation is headed towards 3%.

It makes sense for them to start cutting rates at the September meeting.

Go slow because, again, you have to be worried about inflation becoming entrenched and persistent.

I also don't think a rate cut would be so crazy.

Rates are too tight for a 1% to 2% GDP growth environment.

So we've had

predictions and opinions all over the board here.

If you had to just put an opinion out there, what is your opinion on this rate cut?

Should we get that rate cut?

Well, what I think is going to happen and what should happen are two different things.

I think they're going to do a 25 bips cut just to say, okay,

you know, otherwise you're kind of creating a confrontation of maybe more agata and conflict than there needs to be.

The Fed's been politicized, regardless of how much we like to think they're independent, and Jerome Pyle is a great leader.

I just think that there's probably some people, the Fed governor's probably trying to

split the baby, if you will, it's going to be a 25-bit brave cut.

But generally speaking, economists would say that if it's a choice between greater unemployment or greater inflation, you would choose greater unemployment.

And that is, unemployment is bad, but unemployment rates right now, historically, are pretty,

pretty low.

Inflation is how nations collapse.

If inflation starts an upward spiral and you get to a point where you have sort of panic buying where people think, oh, buy now because it's about to go up in price, that's when you just lose,

you know, you lose control and

that brings down society.

So generally speaking,

if you said, okay, we're...

we're equally worried about the jobs number as we are about inflation, that means you wouldn't cut rates.

So I would be willing to wager, and we should, I think it's a 25-bit rate cut.

And the president gets angry.

Gets angry that he didn't get 50.

Yeah, that rate cut means is everybody's upset, which probably means it's the right decision.

I think I'm with you.

I think

you go for the 25 basis point cut.

I think that's what they should do.

And I think it's what they will do.

The reason I think they should do it is because of this unemployment problem, which is becoming more and more of a problem, especially after we saw that revision.

We had a million fewer jobs than we thought

last year.

And

so, yeah, a rate cut to

counteract that issue.

But we should be very clear about why we're doing this.

And this is what I worry about.

This is why I'm so sensitive to the inflation is not happening argument.

Inflation is happening.

The reason we're cutting rates is because of a separate issue, which is the unemployment issue.

And what we have essentially done with these tariffs,

if we want to say that the unemployment issue was baked in the pie beforehand, that's probably what people are saying, given that revision downward, that this issue was starting before Trump came into office, which I would accept.

But

if we had that issue brewing earlier on, What is certainly clear is that we were getting this inflation thing under control.

That was what was was happening.

Inflation was coming down.

And then we put up these tariffs.

And what do you know?

Inflation is coming back up.

So we had what was probably supposed to be one problem, which we had prepared ourselves very well for.

And we had this great mechanism called monetary policy, which was supposed to counteract that.

Instead, what is happening, we're still going to try to counteract that.

But then we also have another problem that's been put on our plate.

And that is the inflation problem.

And I'm sorry, but this is going to get worse.

I mean, we had 2.7, 2.7, 2.9.

We said this from the beginning:

we're going to see the inflationary impact from tariffs by the fall.

That was what we said.

We're going to see it in the fall, maybe before Christmas.

That is exactly what we're seeing.

And if we were to put, if I had to put another prediction out there, we're going to see an even higher reading next month and the month after that.

I mean, we have officially

the inflation die has been cast now.

And at the same time, we don't have the ability to raise rates like we used to.

We talk a lot about rates, but just a clear primer.

When you lower rates, effectively think of it as you're putting more money in people's pockets.

Inflation is too much money facing or chasing too few goods.

You lower the rates, you put more money in people's pockets.

So, and maybe they spend more, hire more.

So one way to deduce employment or get economic growth is to lower rates because instead of your car payment being $600 a month, it's $540 because the interest rate is lower.

Your mortgage is lower if you have a variable rate mortgage, your credit card bills go down.

So, when we say a rate cut, we mean put more money in people's pockets so they'll spend more and hopefully it creates economic growth.

The problem is, is that we don't have a demand-side problem right now, right?

Consumers are buying stuff.

What we have is companies are suffering because

they're suffering because of high input prices, because of these tariffs.

So giving consumers more money is probably just going to create more cloud cover for businesses and producers to keep their prices high or maybe even raise them.

So I just intellectually,

I don't think you can justify a rate cut.

We'll be right back after the break with a look at why companies aren't going public.

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The number of public companies in the US keeps shrinking.

Today, there are only 3,700 publicly traded companies in the US.

That is down 17% in the past three years, and it is also half of what it was in 1997.

But last week, the Long-Term Stock Exchange, which is a new stock exchange that is trying to compete with the New York Stock Exchange and the NASDAQ, they pitched an idea to change that.

They want the SEC to scrap quarterly earnings reports and let companies report just twice a year.

The exchange argues this would free up time for executives, save millions in costs, and allow companies to focus on the future rather than quarterly expectations.

So, Scott,

I find this so interesting.

They're pointing out an issue which we've been discussing on the program for a while now, which is that there are simply fewer public companies today.

I mean, 3,700 in the US, that is down 55% since 1997.

So there are less than half the amount of public companies in America today than there were 30 years ago.

So you've had this decline in the public markets.

Meanwhile, private markets exploding.

Over that same period since 1997, the number of private equity-backed companies has gone from 1,900 to 11,200.

It's a 500% increase.

We've seen this explosion in venture capital as well,

explosion in the amount of money that is surging through the private markets.

And nothing to me, as we've discussed, demonstrates this more than the AI landscape, where you've got a company like Open AI reaching a valuation of a half a trillion dollars, one of the most valuable companies in the world, and yet it's still private.

And as I've argued before, the reason it's private is because There's so much money in the private markets now, so much liquidity that you don't really need the public markets anymore.

You might as well stay private and not deal with the hassle and the regulatory burden of going public.

And one of those burdens is, of course, these quarterly filings and these quarterly reports.

So it kind of makes sense for companies, but at the same time, it screws the retail investor who's left with only so many investment options now.

Because if you're a retail, you're only allowed to invest in public stocks.

Can you invest in OpenAI or Anthropic?

No, you cannot.

You can only invest in those few companies that are going public and fewer and fewer companies are going public.

So this proposal basically says, well, why don't we make it easier for public companies?

Instead of reporting four times a year, you just report twice a year.

And that way we can perhaps incentivize more companies to list on the public stock exchanges.

So I kind of like the idea.

I think it's creative.

Allow them to report less, make things easier.

What do you think?

Just to be clear, this isn't an attempt to help companies think more long term.

This is an attempt to attract companies to go public on their their exchange in exchange for a lower regulatory burden.

And you've been talking about this for a while, and that is

not enough great companies are going public, and the best returns are being sequestered even further to private market investors who tend to be more institutional and wealthy people in private family offices.

So the public markets were sort of a place where, at some point, when you wanted to raise more than $10 or $20 million, you had to go public because the VC community had a fraction of the capital to invest that they have now.

You would get a liquid currency.

You could make acquisitions.

Other companies didn't want to take private stock for acquisitions.

You had a means of more sort of visible compensation for your employees.

You know, there were all sorts of good things.

Almost all of those things have been solved in the private markets.

Companies have no trouble.

You know, OpenAI, I think, just gave, what, a $1.7 million bonus to the employees.

Every one of its employees in a private company,

you can do secondaries.

You can raise a ton of capital if it's a good company.

And the private market investors like you to stay private because Google, you know, Sequoia Capital, which invested in Google, would have liked to have not taken Google public because since it went public, it was trading at $2.13.

And now it's trading at $239.

So it's up 100x since its IPO.

It's unlikely right now the companies that are going public are going to 100x in 20 years because as long as it feels like there's juice and the company's growing, the private market investors say, no, we'll give you everything you need.

We'll give you liquidity for secondaries for employees.

We'll give you more capital to go to the company, lower regulatory burden.

And we, your private market investors, get to get all the juice.

And essentially, the public markets have kind of become a place for one, it is a branding event, and two, the last stop on the valuation train when private investors have sort of said, no, we're kind of done.

We don't think there's a lot of juice left here.

So you're right.

A lot of returns, unfortunately, are being sequestered to the private market, and public market investors no longer have the same type of upside.

Now,

you think, well, the easiest thing to do is to do what these guys are doing, and that is vastly lower regulation and reporting requirements to make it easier to go public.

So, first off, good private companies, every private company I've run, we have quarterly reports for our investors.

We just, it's good planning, it's good discipline.

So, it's not that they don't want to do quarterly reports, it's the administration bureaucracy, communications, and investor relations bureaucracy that is so expensive and so difficult.

The CEO is now mandated to sign his earnings report.

The IR committee and the lawyers have to review everything, parse the language.

I bet in a big public company, 20 to 30 people are working, including the CFO and the CEO, for weeks and days.

If you're the CEO and the CFO before earnings call, and they're like, Jesus Christ, this is a pain in the ass.

Cause if you get a number wrong, I think like what it lift, they got one number wrong and it sent the stock up 30% and then down 10%.

Think, you know what?

I'm getting everything I need in the private markets.

I don't want, I just, you know,

I don't need this shit, right?

Yeah, that's a good point.

The straw man argument here is the following.

I was approached by a guy who was starting a hedge fund in, it was like 10, 15 years ago.

And he said, all we do is find fraudulent companies in China that because of a lack of regulation to go public there, I can find companies that are literally downright fraud.

Here's a company that claims it has 3,000 gas stations.

And I went to China and did an audit, and I think they have 30.

I think they're literally lying.

I think they're, they are saying they have 100 times the number of gas stations that they actually have because the lower the regulation and the reporting requirements, the greater the likelihood for fraud, right?

So, there is one of the reasons our SP trades at a greater multiple than any other market is because we're more risk aggressive, our companies are better, access to capital, but also rule of law and regulation.

Because if you're a widow or an orphan and you invest in SPY, the SP, you're unlikely to get made-offed.

You're unlikely to find out, oh, there's very few Enrons in the S ⁇ P 500.

That doesn't happen very often because of these reporting requirements.

Now, what's the answer?

How do you kind of thread the needle here?

I would argue that you could bring down regulatory requirements and reporting requirements for companies to go public, to try and incent them to go public such that retail investors had more access.

I think the delta here or the solution or the plug, if you will, might be AI.

And that is, I think at some point, if you say, all right, I'm going to release all my data, but maybe I'm not going to get on the phone every three months and ask analysts questions.

And, you know, I don't need all sorts of regulatory submissions.

You need to make it less expensive.

I think AI is going to be able to look at every single fraud that's happened in about one second and then ask for a series of inputs from a company on a regular basis and then put out a fraud rating and say, this smells funny.

This doesn't feel right.

And then for other ones, say, everything seems seems legit here and they don't need to have this incredible regulatory burden.

The average U.S.

publicly listed company today spends 136 hours working on every quarterly report and 1,720 hours working on every annual report, which means that S ⁇ P 500 companies are together spending a million hours a year.

filling out forms basically to to disclose their financials.

And that to me, right to your point, you got to AIFY that 100%.

So it's extremely burdensome in terms of time.

It's also expensive, costs roughly $2 million a year to comply with reporting requirements.

In total, SB companies are paying more than $5 billion per year to auditing firms for their financial disclosures.

So really expensive too.

And you would think that AI would step in here.

But it does raise this point where, you know,

as the public markets have dwindled in terms of the amount of capital and the amount of activity and the amount of companies that are listing on these exchanges, the financial disclosure requirements and the regulatory burden, it has increased a lot.

And just as an example, back in 2020,

the SEC decided to increase the reporting requirements, especially around risk.

There are now more than 30 risk factors reported on

every public company report on average now.

And, you know, as an investor, you read these risk disclosures and it's getting pretty ridiculous.

I mean, we might have discussed this before, but the average length of just an annual report since 1997, it's increased 200%.

So these filings and these disclosure forms are getting so, so long.

And it's all in the name of, you know, investor protections and informing the investor and making sure the investors know all of the risks, et cetera, et cetera.

But it gets to the point where we're like, this is just way too long.

I'm not paying attention to any of this.

Like these risks are getting ridiculous.

And just some, some of the dumbest and most meaningless risk factors that we have collected here, that our team collected.

So Amazon on their recent report, one of these risks, quote, we face intense competition.

Like, okay, got it.

We understand.

Thank you.

Thanks, Captain Abbias.

Apple, quote, the company's operations and performance depend significantly on global and regional economic conditions.

Great.

Here's one from Berkja Hathaway: quote, a cyber, biological, nuclear, or chemical terrorist attack could produce significant losses to our worldwide operations.

Like,

you talk about infantilizing the investor.

All of those risk factors right there, that is like peak infantilization.

Like, why is Berkshire Hathaway telling us that a nuclear or chemical terrorist attack is going to have an effect on the business?

Like, we all already know this.

So, in my view, it is getting to the point where, as you say, there is a balance when it comes to regulation.

You know, having investor protections, having robust investor protections is a good thing, which is why you see this massive premium in the U.S.

markets.

Yes, the US has a lot of things going for it.

But one of the great things about listing on a US exchange is that you can pretty much guarantee, or at least you have a fair amount of assurance, that whatever you're buying isn't totally fraudulent.

And the same is not true of many other exchanges, especially emerging markets.

But then there's the other side, which is it's getting a little bit much.

And if this is a pain in the ass for the companies, and also as an investor, I'll say it's a pain in the ass for me.

I don't want to read 100 pages of risk.

I don't care.

I can do it on my own.

I can figure it out.

It seems like there is a happy medium and we're probably erring too far on the side of regulation here.

My favorite in terms of what the team dug up was the disclosure and the warning.

And this is in the S1 or in an earnings report from SeaWorld, which I think is owned by Blackstone.

SeaWorld warned investors that its orca whales killed a trainer and might kill more.

That's my favorite.

And might kill more.

Tilla Columb, was that his name?

Tilla Cum is in a bad fucking mood.

And he's upset.

He's upset about the Padres losing.

And we just get the sense he's in an eating trainer mood.

I like that.

I want Prof G Media to go public and just disclose risks around me.

He's in the midst of a midlife crisis.

Yeah, yeah.

What would our publicly filed risk disclosures look like at Prof G Media?

His judgment is really poor.

Oh my God.

Likes drugs, experiments with all sorts of substances,

has no fear of death.

Even if we loosen up the regulation, I would still opt to put that in there.

We're very, very dependent on this individual.

The investors should know that.

Oh, my God.

We should absolutely put together a prospectus with our risk disclosures and see what we come up with.

Claire is just about had it with Scott.

She has just about

had it.

Oh my God, I love that.

Ed's head is getting fucking enormous.

Ed is getting very annoying.

Yeah, no, Ed, Ed's had it.

Oh my God.

I love it.

But I do think...

I mean, I'd be interested to hear where you ultimately land on this.

And just some quotes from some CEOs who are complaining about this.

Jamie Dimon complained about, quote, intensified reporting requirements, higher litigation expenses, cookie-cutter board governance, and the relentless pressure of quarterly earnings.

Warren Buffett wrote an op-ed.

He said, quote, quarterly earnings guidance often leads to an unhealthy focus on short-term profits at the expense of long-term strategy growth and sustainability.

James Gorman,

he called the

disclosure requirements for quarterly filings, he called them, quote, asinine.

CEOs are annoyed about the the amount of regulation.

And it's, I find it interesting that I am in landing in a place.

I'm usually very pro-regulation.

I usually feel that we just don't have enough.

I do feel that we've gone overboard here

on this IPO question.

And so then the next question is, like, okay, well, what do we do about it?

So

maybe we loosen.

the laws.

Maybe we just expand access to private markets and just sort of enough with this delineation.

I mean, if you were to design a solution to this problem, specifically companies not going public, what would it be?

When demand was so great for tech-related companies and companies didn't want to go through the hassle and the regulation of going public, we invented a plug and it was called a SPAC.

And that did not end well for consumers.

In the face of unprecedented market gains, this lower regulation, lower hurdle way of just add water in your public did not work out well for consumers who thought they were getting in quick and easy on some great little tech companies.

No,

you know, these companies just,

they shouldn't have gone public.

And since then, investors have really paid the price.

So I think there's a happy medium here.

It's a little bit like me.

I wonder if there's just an exchange, and this is already sort of emerging.

I mean, the problem is you have these secondary exchanges emerging like Setter and other places where you can buy shares in great private companies.

The problem is, is that they're really inefficient.

A guy will call me and say, Scott, are you interested in increasing your exposure

to Epic?

I own shares in Epic.

Are you interested in selling your shares in multiverse?

Whatever.

They make a market.

They charge 4% to 7%.

Exactly.

And whereas I think Schwab charges 10 to 15 basis points.

So they're very inefficient.

And also because there's not a mark or a liquid market, you don't, I'm always insecure around, am I getting a good price or not?

So there's not enough liquidity in this marketplace.

And a lot of market makers, people don't appreciate that a market maker will actually make the market in it and even sometimes buy your stock ahead of time, not knowing there's a buyer because they're willing to take that risk.

So,

I mean, I think we've gone overboard in terms of protecting consumers.

We let consumers bet on whether or not there'll be a Fed rate hike.

We let consumers bet on everything.

So the idea that we need to protect people from stocks has gotten a little bit overboard.

I'm a little bit on your side.

I'd like to see an Olympics where there's absolutely no restriction on performance-enhanced drugs.

I'd like to see a woman show up who's 800 pounds and all muscle.

Peter Thiel's built that, by the way.

Really?

Yeah, we have the performance-enhanced Olympics.

It has arrived.

Thanks to Peter Thiel.

I think that'll be a lot of fun to watch.

I agree.

I kind of feel the same way about the markets.

I think there should probably be a market, and there is

for, look, if you want to...

If you want to have at it, but I do think that there will be a company that builds a layer on top of an LLM that says, all right,

we issue ratings similar to Fitch or SP or Moody's or whatever, right?

Who, by the way, I think rated some of the companies the week before they went bankrupt as like AAA or defaulting on their bonds.

But I think there was going to be a ratings agency that is AI-powered that basically says, all right, you want to go public or you want to trade on an exchange.

We need the following data sets from you, the following APIs, and we're going to issue a rating on you in about two seconds.

And it'll serve as

a endorser brand, similar to a Moody's or a Fitch or whoever, or even some of the endorser brands right now is that if Goldman Sachs is taking you public, you're probably a pretty legitimate company unless you're a company renting out desks called WeWork.

But most of the companies that Morgan Stanley, JP Morgan, and Goldman Sachs take public have kind of passed a smell test.

So there's definitely a need for innovation here.

I agree with you that we need to stop infantilizing consumers because they're spending money on stupider shit and taking bigger risks now that they have a casino in their pocket and can bet on almost anything.

Why shouldn't they be able to bet on companies?

So I'm with you.

I was down with the argument for investor protections, but it doesn't make any sense that we have all of these investor protections when it comes to stocks.

And then at the same time, the crypto industry exists.

Like, why is it that we're protecting people from and making sure that people really understand what stocks they're buying?

And then at the same time, we've got this thing called Fort Coin, which is perfectly permitted and allowed to issue those tokens on any crypto exchange.

And then you have all these people buying Fort Coin and CumRocket and PepeCoin and Trump coin.

Like those two things should not be true at the same time.

It doesn't make any sense.

And then to your point as well, we've got these prediction markets, the fact that it's legal to bet on the rotten tomato score of the new Avengers movie.

Like we need to figure out where we land on this thing.

And I think it's really interesting that you bring up this point of having some sort of more publicly available information on credit ratings as an example for private companies.

And it's so interesting following what we've seen recently with Oracle and OpenAI and the conversation I had with Gil Luria recently, the head of technology research at D.A.

Davidson, where basically what you've got right now is the Oracle's valuation is pretty much dependent on the how much you believe OpenAI is going to pay them $300 billion over the next five years for their compute.

And of course, OpenAI doesn't have $300 billion right now, which means they're going to have to borrow, which means that all of this is dependent on the credit worthiness of OpenAI.

Now,

how do we determine the credit worthiness of OpenAI?

We don't have access to those filings.

Maybe OpenAI's investors do, but the rest of us and reporters, we don't really know what's going on at OpenAI.

And yet, what is happening there, they've gotten so big that the moves that they are making is causing hundreds of billions of dollars of market cap to be created within basically a day for one of the largest tech companies in the world.

It has basically minted

now the world's richest man in Larry Ellison.

And so all of this is to say these private companies are so important now that we are beginning to see there is a reason why we need to know about what is going on with them.

But if they stay private, we can't know anything.

So someone needs to enter that void.

Maybe it's AI, as you say, or maybe the other possibility is maybe we need more disclosures of private companies.

Maybe that's how you level the playing field here.

This feels like a technology saw for me.

People want access to great private companies.

And also, I have made,

actually, my biggest gains have been buying, investing in B and C round companies and then selling them.

You know, I've invested in a great company.

I'm not surprised.

That's where all the returns are.

Yeah.

And by the way, but also it's risky.

The way I would say it is, and this is what I think we're trying to do in the show,

financial literacy is really important because what I've also done, I always make sure if I have $10 million to invest in private companies, I invest in three to five because I know one of them is going to go to zero.

And the problem is I don't know which one.

And so I do think that you need people to go, I just remember Kleiner Perkins, I got into my first private deal was with Kleiner Perkins.

We were doing some brand work for them, my first strategy firm profit.

And what a thrill.

They let us invest in this thing called, I think it was called, not Delon James, but it was a wedding registry.

And we got to invest alongside Kleiner Perkins.

Oh my God, what a thrill.

Can't go wrong.

This is the best VC firm in the world.

John Doerr was on this deal.

And so I called my partner.

I said, we got to back up the truck here, borrow whatever we have.

And we managed to scrape together a quarter of a million dollars, which was everything we had.

We were like, I think 27, 28, just started profit.

Six months later, the thing is out of business.

Out of business.

But if I had invested.

And it's gone.

And

thank you very much.

And your money's gone.

That's a great South Park.

Okay.

Hold on.

Let me see.

And your money's gone.

And it's gone.

So

I didn't understand the power of diversification because what you find with these private companies is you just don't,

you know, you just don't know.

You try to make good investments.

You look at the valuation and everything.

But the bottom line is the private market is more volatile.

And essentially what regulators have decided to do is they feel like they need to protect non-quote unquote accredited investors from volatility.

But you can invest in Faultcoin.

Or you can bet on Kamala Harris to win the presidency.

It's a 0-1 game.

I get it.

You win.

I'm in.

Just what I can tell you, folks, is just spread it around because these things, you just don't know what's going to happen.

We'll be right back up for the break with the rising Gen Z unemployment rate.

If you're enjoying the show so far, hit follow and leave us a review on the profit markets.

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There is a lot to talk about when we talk about Donald Trump and Jimmy Kimmel.

One big question I've got is why in 2025 are late night TV shows like Jimmy Kimmel's show still on TV?

Even in our diminished times, Jimmy Kimmel, Stephen Colbert, they're just some of the biggest faces of their networks.

If you start taking the biggest faces off your networks, you might save some nickels and dimes.

But what are you even anymore?

What even is your brand anymore?

I'm Peter Kafka, the host of Channels.

And that was James Ponowosek, the TV critic for the New York Times.

And this week, we're talking about Trump and Kimmel, free speech, and a TV format that's remained surprisingly durable for now.

That's this week on Channels, wherever you get your favorite podcasts.

We're back with Profit Markets.

Unemployment is rising and young people are feeling it the most.

Overall US unemployment hit 4.3% in August, the highest since 2021.

But for 16 to 24 year olds, the rate is 10.5%.

By the way, this isn't just a problem in the US.

Across the globe, youth unemployment is climbing, with similar trends emerging in many other countries.

To give just a couple of examples, in Canada, youth unemployment is at its highest level since 2010.

In China, youth unemployment hit nearly 18%.

And in India, more than 40% of college graduates under the age of 25 are currently unemployed.

So Scott, let's start with America here.

As I said, more than one in 10 Americans under 25 are unemployed right now.

That's one of the highest rates of youth unemployment in years.

Entry-level job postings are also in decline, down 35% since January of 2023.

What do you think is happening here?

I think the economy is slowing down.

I think that AI is coming for entry-level information age

workers who were sort of the bell of the ball the last 10 or 15 years.

I mean, these companies could not hoover up recent grads fast enough.

At Berkeley, people stopped recruiting at Haas because the kids were getting five and six offers.

And they're like, like, it's not worth our time because no one's accepting our offers.

So these kids were so in vogue.

And now when I think about the 85 people that were in my analyst class at Morgan Stanley and I think about the work I did over two years,

I think that work could be done in four to 12 weeks, meaning that I'd just be curious to know what their analyst class is.

I bet for the same amount of work, it's 20 or 30 people.

Now, they say they're not checking back on hiring.

I think that's bullshit.

But

it strikes me that AI is really going for young entry-level information age workers the consultants the bankers the analysts to me the the new lawyers my god i would really be curious to see an honest appraisal of what is happening to the first-year classes at places like scatten or some of the tier two firms that still hire a ton of lawyers right out of law school and also the employment rate is substantially higher for young men than it is for young women But as we've seen in Nepal, when you young people get upset, it oftentimes leads to revolution.

There's a variety of factors here.

When you look at income inequality and the expectations it has raised for people, a lot of people say correctly, your life right now, you'd rather be a middle-class person right now than the wealthiest person in America 50 years ago.

You didn't have Novocaine, you didn't have Netflix.

There is something to that, right?

But that's not how the human brain works.

Young people see the life of their parents along the lines of mom and dad got married, had a home, had kids, could afford to have kids, right?

And all this wealth porn is being shoved in my face, convincing me that that is the life I am supposed to have.

And if I don't have a boyfriend with ripped abs and I can't take my girlfriend to Sardinia, then I'm a fucking failure because it feels like everyone but me is doing it.

So the expectations have gone higher.

The core things that people need to spend on to establish what I call a more meaningful life, that is finding a mate, having kids, a house, paying, not having debt, that shit's getting more and more expensive.

And unfortunately, I think that the new technology, AI, is coming straight for young professionals.

It's really scary for young people because when you just think about it from the company's perspective, when it comes to AI, there's the incentive to

cut jobs and use AI and

get rid of your employees to cut costs.

So there's the business incentive.

But because this AI thing is so powerful in Wall Street specifically right now, there's also a valuation incentive to show, yeah, we are using AI and yeah, we are getting rid of people.

It's become almost a bragging point.

And that's one interesting shift that we've seen.

It used to be that layoffs were kind of a negative indicator, like, oh, what's, what went wrong?

Why did you lay all these people off?

It's flipped now.

It's now a sign of strength.

Yes, we are using AI so well that we don't need people anymore.

It's become a bragging point.

And in fact, we are already seeing that, especially in big tech right now.

According to Saty Nadella, CEO of Microsoft, 30% of the code written at Microsoft now is written by AI.

That's striking in and of itself, but also it's striking that he's bragging about that.

It's basically that there is a reason, if you want to get a nice premium, there is a reason and an incentive to go out there and say, look how many people we don't need right now.

Look how many young people we didn't hire.

Meta is saying the same thing.

Half of its code, according to Mark Zuckerberg, half of the code written at Meta will be written by AI by 2026.

And so there's this very dark thing happening where the market is basically saying,

you know,

we love you, young people.

You guys are great.

However, we really need to make sure that we can prove to Wall Street how much we do not need you.

And we are already seeing that right now.

And then we had that Stanford study, which was so so alarming, which found that young people with AI-exposed jobs have seen a 13% reduction in employment.

One of two things needs to happen here, and we don't want to talk, people don't want to talk honestly about this.

If you look at the valuations of AI and AI-related companies, the Magnificent 10

baked into those valuations is that they're either going to be able to help companies increase their revenues by a trillion dollars.

That's a number I heard from the analyst at

it was either Jeffries or Apollo, or cut costs by a trillion dollars.

I have not heard of a company saying, we're putting out a new moisturizer we developed with AI.

Oh, it's a new car developed with AI.

It's all,

we're finding efficiencies.

It's all about efficiencies.

So those trillion dollars, that trillion dollars has got to come out from cost savings or efficiencies from the clients spending a shit ton of money on site licenses or LLMs or

NVIDIA chips or have promised their shareholders that they're going to get all sorts of efficiencies.

And

in order to cut a trillion dollars in expenses, and given that maybe half of the industry is somewhat immune from AI, whether it's a chiropractor or a dentist or Masus's or whoever or welders, that means the industries, the information intensive industries are going to have to register a massive

increase in efficiency, which is Latin for people being fired.

So one of two things has to happen in the next 24 to 36 months.

Okay, one of three things.

They find an immense new world of new products from AI, which I have not seen yet, that increases incremental revenue.

I have not seen any evidence that's going to happen.

They find massive efficiencies through layoffs of people they don't need or they need less of.

I am seeing that everywhere.

Or the Magnificent 10 gets cut in half.

So in the next 24 to 36 months, we either see massive destruction in human capital across certain industries, especially at the junior levels, maybe also the senior levels, I don't know.

Or we're going to see a serious correction in the valuation of these companies because baked into the valuation of these companies is that they're clients and everyone announcing they're spending more and more money on AI.

And how are they going to register a return on that investment in AI?

Through efficiencies, which again, is not reducing the cost of electricity in their factory or making it cheaper and easier to build a building.

It's all about layoffs and people and redundancies.

Catherine Ann Edwards, who is the labor economist who we had on the podcast, she made the other point here, which is,

you know, there's the AI problem, but there's the other side of this, which is the unemployment rate among young people is usually a leading indicator of a larger economic recession.

As she said, young people are the last to be hired and the first to be fired.

So the other side to this

And we've seen this in many recessions before.

We saw it in the 80s.

We saw it in 2007.

The recession was preceded by a big surge in youth unemployment.

The other side to this, and perhaps AI is part of that story, is that this could be a leading indicator to something larger.

It could be, yeah, we're going to not hire these young people right now.

We're going to hold on to our senior people because we have a nice relationship with them, we like them, they've worked with us for a while, but a year down the road, perhaps, we're going to have to let you go.

And that could be the story, too.

So we have some breaking news here, Ed.

Paramount Skydance prepares Ellison-backed bid for Warner Brothers Discovery.

So

you have been kind of the oracle of Oracle.

You said before it was cool that Oracle was really well positioned.

Larry Ellison, 38%, what was it, gain in one day?

Larry Ellison gained 100 and increased his net worth by $130 billion.

We don't have a sense for these numbers because effectively,

his son purchased Paramount for $8 billion.

He could purchase 15 Paramounts with the increase in wealth of Larry Ellison yesterday.

So, I mean, you now have basically the entire media ecosystem is being consolidated because of the Oracle earnings call.

Like two of the most important media companies and, you know, Warner Brothers Discovery is basically going to be soaked up.

I don't know the market cap for Warner Brothers' Discovery, but

I mean, tech is literally driving everything now.

Anyways, I thought that was interesting.

Breaking news.

Breaking news, Ed.

By the way, it reminds me of my favorite text exchange in the history of texts.

What's his name and how much did it cost?

Just wait till you're my age, Ed.

It won't sound that alien or that weird.

Few beers, little more open-minded.

Sorry, Ed.

Go ahead.

Your favorite text exchange.

My favorite text exchange.

Speaking of very rich people throwing money around, Elon to Larry Ellison during the Twitter deal.

Any interest in participating in the Twitter deal?

Larry Ellison, yes, of course.

Elon, cool.

Roughly what, dollar size, not holding you to anything.

Larry Ellison, a billion.

Or whatever you recommend.

Must be nice, right?

Must be nice.

Also, Larry Ellison, 81, just married a 33-year-old, or his wife is 33.

He looks good.

We were talking about this.

He looks very good.

I don't know what he did.

Oh, what

did the Peter Thiel blood transfusion, the vampire strategy?

I don't know what he's doing, but he does look good.

Oh, by the way, well, this is Property Markets.

Warner Brothers Discovery just in the last hour is up 27%.

So get this.

All right.

God, we should have figured this out.

Basically, Larry Ellison goes a mature company, and this is the difference between Larry Ellison and, quite frankly, Tim Cook right now.

He goes, okay, I'm a mature company returning cash to shareholders through buybacks.

Oh, no, there needs to be a number two in infrastructure to NVIDIA.

It should be Oracle.

I'm pivoting back to my younger days.

I'm going aggressive.

I'm going to make massive investments in the cloud.

It hugely pays off.

He announces that they're going to do, they have a $300 billion deal over five years with OpenAI, which is just staggering when you think about the fact that OpenAI, which is making about $10 billion a year, anticipates they can spend $60 billion a year on compute, which gives you a sense of how confidence they are about the revenue growth.

He announces this unbelievable, staggering quarter, and that results in Warner Brothers' discovery the next day going up 26%

because his son, who wants to go to the Academy Awards, and I'm sure he wants, you know, his dad likes the idea of hanging out at the Vanity Fair Oscars party, goes, fine, go play in traffic with 20% of my wealth gains from today and to tie it back to this gen z unemployment thing

this is the problem where all of the value of ai that is being created is creating a lot of momentum and a lot of action only among equities basically It's only all of the action is happening in the stock market, and it's all shareholder gains that we're seeing.

So AI is great if you're an investor.

I mean, you're crushing it right now.

But as we know, young people are not invested in the stock market because they don't have the money.

And the value of that AI is not being accrued in the real economy in terms of salaries and employment.

It's, it is, I mean, People said this was going to happen.

It is what is happening.

It's taking young people's jobs.

It's creating all of this value.

The value is being accrued to the richest few people in the world who are then passing that money on to their children, David Ellison.

We are seeing the inheritocracy arise as we speak.

And then David Ellison is spending that money on ridiculous valuations for pet projects such as the free press, because he's probably into sort of edgy right-wing content.

I'm not saying that's exactly what the free press is, but you know, rest assured, he likes the ideological views of Barry Weiss, whatever it is.

He's paying $200 million for that media company.

Now he's going to go pay a ridiculous premium for Warner Brothers Discovery, up 30%.

All of that value is AI value that is being spent in an extremely inefficient way, where you have young billionaires who are the children of billionaires spending it on ridiculous things, and Ferraris aren't good enough anymore.

You have to buy multi-billion dollar media companies.

AI made Larry Ellison rich.

He gave a bunch of that money to his son to go buy these online movie studios, these iconic trophy properties, and you're you're going to see AI.

I can't imagine that the younger Ellison isn't going to spend a lot of time with the senior Ellison and immediately start applying AI to all of those properties.

Just to wrap up here,

you know, one of the things you pointed out is that youth unemployment and general youth dissatisfaction is a pretty accurate indicator of anarchy and revolution.

I mean, that is,

if there's a reason why revolutions happen, generally speaking, it's because young people are very upset.

And generally speaking, why are young people very upset?

Because they don't have money, because they don't have opportunities, because they don't have jobs.

And right now we have all of this alarming data about the depression of young people, the fact that 41% of Gen Z says they're proud to be American.

compared to 75% and 84% for the boomers and the silent generation,

the fact that a third of us are living with our parents.

I mean, we've discussed the Gen Z data many, many times before.

But

as you say, it is a real problem, maybe not right now for the overall economy, but possibly tomorrow.

And then I sort of look at what happened,

I'm sorry to say it, with Charlie Kirk

last week.

It feels like we're entering kind of scary territory here.

So

I guess I would ask you: you know,

if you agree that this is a real problem.

And then, two,

what do we do about it?

And what does a young person do about it?

Well, Ed, I'm not here with a message of hope.

Like, I just did this Times of

London radio hit, and

I I was at the Cologne Cathedral yesterday, as you know,

and I'm just so struck by this structure.

I remember going there on my proverbial backpacking trip out of college with my friends Lee Lotus and David Kingsdale.

And I remember seeing the Cologne Cathedral and thinking it was the most impressive man-made thing I'd ever seen.

Have you seen it?

No.

It doesn't sound that exciting.

It's a big cathedral, but it's so magnificent and artisanal or baroque and just so huge, you think, how did humans build this thing?

It took 650 years to build the thing.

And then in World War II, it was subject to the largest single bombing raid in history, a thousand bombers.

It was the first time a thousand bombers had been allocated towards a raid.

It was severely damaged.

80% of Cologne was flat.

90% of the population was either evacuated or killed.

20,000 people were killed.

And it was repaired.

And I started thinking about Germany.

And basically, you know, Germany didn't start, or the descent into darkness didn't start with camps.

It started with paper, the Reichschuttfire Act, which basically diminished the rights of free press,

overrode privacy laws, started weaponizing private industry or intimidating private industry in the media.

And then kind of the, I would argue, the thing that always ignites this dissent or revolution or anger is when young people have a lack of opportunity.

And I feel like we're one real economic shock.

And by the way, we have not felt an economic shock yet, not even a tremor, as far as I know, based on what I saw in 08.

and in 2000.

But if we do experience the kind of shock I think that we're due for, I think that that would be the spark on this kindling.

America is so culturally strained right now that it overshadows some of our incredible accomplishments.

So I'm not hopeful.

I think we're in very dangerous.

It feels like things are really hot and the temperature is really high and that our blood pressure is really high, meaning that we're just more prone for a cardiac arrest or some sort of stroke or some sort of really negative event.

And what do we have here?

We have a cocktail of the following things.

We have the deepest pocketed, most talented people in the world with godlike technology

and Paleolithic institutions to regulate them, all trying to pit each of us against each other because there's profit in it.

Nothing creates engagement like enragement and Nissan ads.

So what's my prediction?

I hate to say this.

Violence.

And we aren't doing anything.

We aren't acknowledging the problem.

Instead, we want to blame each other.

No, if anyone was serious, including the left, including the right, if anyone was really serious about taking violence down, they would try and take the temperature down and the rhetoric.

I don't think that's going to happen.

There's too much money in keeping the rhetoric ugly.

Beyond economic shocks, I can't predict those.

Revolution, who the fuck knows?

Unemployment.

Okay, fine.

Let's focus on tangible solutions.

We have minority rule in the United States.

We have fallen to this cold comfort of believing we're democracy and that a passive populace makes our decisions.

No.

Who makes our decisions are well-funded, very well-organized special interest groups, chief among them the NRA and people who conflate rights with gun rights in Congress when 70% of America wants

some sort of sensible gun control.

And sitting here in London, I can tell you a free gift with purchase having moved to London is that I do not have the same level of fear that I'm going to wake up and see my kids school on CNN.

That does not happen here.

So a long-winded way of saying, I don't know, but a good place to start would be our elected leaders, do what the governor of Utah did and try and take the temperature down and express sympathy for both sides on the aisle who are subject to violence and start to have reasonable practical discussions around gun control in the United States.

All right, let's take a look at the week ahead.

We will see retail sales, housing starts, and the import price index for August.

And of course, all eyes will be on the Federal Reserve, which will meet and announce its interest rate decision on Wednesday.

Usually I ask you for a prediction.

I think you just gave it to me.

More violence.

Well, no, I'll give you a better one.

I went off script there because

I can't help but cosplay an angry Democrat.

Those drones from Russia flying into Poland is Putin poking what he believes is a weakened Trump and EU.

An EU plane or a plane with the EU minister on it was forced to do an emergency landing because of a cyber attack on the controls of that plane.

And now they are purposely flying attack drones into Poland, who I would remind you is a member of NATO and subject to Article 5, meaning if they are attacked and this could qualify as an attack, all 32 EU member nations are obligated to respond.

What does that mean, bringing it back to the markets?

The best performing stocks over the fourth quarter are going to be EU defense stocks because you are about to see the EU really increase spending even more than our previous predictions around spending.

This shit is getting real over there.

The EU is panicked about the fact that Putin saw fit to start sending attack drones into Poland.

And there just aren't that many places to put that increase in spending because they're not going to buy Andorell or Boeing or Northrop Grumman planes, missiles, and launch vehicles.

They're going to try and buy as many as they can of that equipment from EU defense contractors, and there just aren't that many.

The EU defense stocks are going to see an AI-like surge in the remainder of the year.

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

Our associate producer is Alison Weiss.

Mir Savario is our research lead, and our research associates are Dan Shalon, Isabella Kinsel, and Kristen O'Donoghue.

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

Thank you for listening to Prof G Markets from Prof G Media.

Tune in tomorrow for a fresh take on the markets.

You have

in kind

reunion

as the water

and the love of

love.