EA Goes Private for $55B in Biggest LBO Ever, U.S. TikTok Valued at $14B & GDP Revised Upward

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Welcome to Property Markets.

I'm Ed Elson.

It is September 30th.

Let's check in on yesterday's market vitals.

The major indices all rose to start the week.

Meanwhile, treasury yields fell in anticipation of the jobs report due Friday.

The price of gold breached $3,800 for the first time ever on the pending threat of a government shutdown.

And finally, Etsy's stock popped 16%

after OpenAI announced instant checkout, a feature for shopping within ChatGPT.

OpenAI is piloting a feature with Etsy, but more than 1 million Shopify merchants will soon be available.

OpenAI will collect a transaction fee from every purchase made within ChatGPT.

Okay, what else is happening?

Video game maker Electronic Auts is set to go private in the largest leverage buyout ever, valued at $55 billion.

The investor group includes Saudi Arabia's sovereign wealth fund, Jared Kushner's investment firm, and also private equity firm Silverlake.

The deal still requires approval from the Committee on Foreign Investment in the US, which evaluates foreign transactions for national security risk.

The stock soared 15% to a record high last week, and shares climbed another 5% yesterday after it was confirmed.

So, EA, Electronic Arts, Arts is being taken private for $55 billion, the largest leveraged buyout ever.

This is the company behind all of your favorite video games, Madden, The Sims, FIFA, which is my favorite game of all time.

To be clear, this isn't the largest acquisition ever.

We have seen larger, but it is the largest LBO ever.

So, a quick reminder: what is an LBO?

What is the difference between that and just a regular acquisition?

Well, the difference lies in how the deal is financed.

With leveraged buyouts, the financing is mostly provided by leverage, i.e.

debt.

So that's what's happening here.

JP Morgan is providing the debt to the investor group, and the investor group will then use that debt financing to take the company private.

So the other question is, why are they doing this?

What do these investors see in EA?

I mean, yes, it is a great business.

They're doing around $7 billion in revenue.

On the other hand, though, it is also a business that isn't really growing.

In fact, revenue was flat this year.

And that's been a theme, not just for EA, but also for the video game industry at large.

I mean, ever since COVID, you had this explosion in the video game industry, and then revenue started to fall back down, started to flatline.

And since 2021, video game spending has fallen 12%.

Video game stocks have been underperforming.

And that also includes EA, Electronic Arts.

So to help us understand this take-private deal, why did they pay $55 billion for EA?

Our producer, Claire Miller, spoke with Michael Pachter.

He is the managing director of equity research at Wedbush Securities.

The Saudis have been pretty vocal that they want to be in the game space for a long time.

And while they've made some meaningful deals, they haven't really gotten into anything other than mobile so far.

So they made a tiny esports acquisition and then two big mobile acquisitions that have worked really well.

But their stated goal from the beginning was that they wanted to create jobs in Saudi Arabia.

And I think that's generational.

I don't think they're looking to fire several thousand people and move them to Saudi Arabia.

But they're hoping in the next 20 years that as these companies grow, they can replace workers and build out an economy in Saudi Arabia.

And that's noble.

They should be doing that for their people.

It is the public investment fund.

So nominally, that money belongs to the people of Saudi Arabia.

I think that this is a good step to making that happen.

So the deal from their perspective makes makes sense because if you're going to get involved, get involved in a big way, you know, pick off the biggest remaining guy that's that's available.

I mean, 10 cents bigger, but not available.

I think EA, from their perspective, it makes a lot of sense to sell while they can.

Andrew Wilson got there and the stock was in the teens.

You know, it's up to the, it was up to the 170s before this deal, now over 200.

Shareholders are getting rewarded.

He's getting rewarded.

And, you know, to be fair, EA had kind of stopped innovating.

They had stopped really growing their core business.

The Saudis, I think, can fix the business quickly by exploiting mobile, which they're great at with Scoply and Niantic, and by taking some of the core EA properties and making them free to play globally, like EA Sports Football Club Ultimate Team.

If they do those two things, they pay for the deal.

And those are two things EA wasn't going to execute properly.

So I think the Saudis actually add value here.

Why are the Saudis interested in the gaming space specifically?

Why is that part of their long-term investment strategy?

I wish I could give you insight into their minds.

I mean, I think that the prince is a gamer.

You know, he's the right generation.

And I think that they have a very young population.

And shockingly, Middle East and North Africa are the biggest, it's the biggest growth area for games.

So I think it's something that resonates with the public.

They haven't yet institutionalized that where they have a lot of people in degree programs making games, but I think they see that as an emerging economy and emerging opportunity.

Everybody on the planet likes entertainment.

And it's a, you know, you're seeing like Arizona with opportunity zones for film.

You're seeing everybody trying to get a piece of entertainment.

Games is kind of the last bastion, last untouched area that people make games essentially at home.

I mean, they don't, you don't have to have a core,

group of people in a particular location.

So I think that the Saudis look at this as a growth opportunity.

The aging population is going to buy more and more games in the next hundred years.

And I think they just see it as a growth opportunity they can participate in.

They're paying a 25% premium to the closing price from before the deal.

What do you make of that premium?

Is it warranted?

It's enough to hold off anybody else.

So the answer is nobody else is going to bid.

Warranted.

EA probably generates around 2 billion of free cash flow.

So they're paying 26 times free cash flow.

The simple math for your listeners is

divide one by 26.

So it's a 4% free cash flow yield.

You'd be better off investing in treasury bonds.

So clearly, this is not a financial transaction.

But if the Saudis can monetize by expanding EA into mobile, because EA sucks at mobile, so if they're able to take these these properties like

soccer and football and Star Wars and Battlefield and The Sims and make mobile games that work, they'll double that cash flow.

If they take Ultimate Team, which is the free-to-play part of the sports and take it from behind a paywall to free, I think you double that.

So I could see these guys getting the six, seven billion in free cash flow by running the business more aggressively than EA has been running it.

And that would pay for the deal.

I'd like to get your thoughts on the video game space more more generally.

The industry is bigger than the music and movie industries combined.

And Gen Z spends more time playing video games than they do on social media.

So you would think that video game stocks would be ripping.

But over the past five years, they've actually lagged the SP 500.

So before the deal was announced, Yay's stock was up 27% in that timeframe.

You compare that to the SP at nearly 100%.

Why do you think gaming has lagged the market?

Because the public companies aren't really pure play

for participating in game growth.

The game opportunity, simply stated, the $200 billion global games market that's bigger than movies and music,

that's about $150 billion mobile.

And then the remaining $50 billion is about $30 billion of free-to-play on PC and console and $20 billion of game sales.

The EAs of the world, most of their revenue comes from game sales.

You know, they're probably 60% from game sales and 40% from other.

So you really weren't participating in that mobile business at all, and that's really where the growth is, or in that free-to-play market, just a little bit.

And that's where the growth has been.

Console and PC buying games, that's yesterday's business.

Your kids aren't going to ever buy a game.

Your kids are going to play free-to-play all the way.

And they're not going to ever own a console.

They're going to play on a connected TV.

So the opportunity in gaming isn't EA.

The opportunity in gaming is, you know, Microsoft and Amazon and Google with cloud and Nvidia with cloud chips and anybody else who creates the cloud infrastructure to make that happen.

So AI and tools, Roblox, Roblox is the one that actually will participate in that because they have that.

They're essentially the YouTube of game creation.

So they'll participate, but it's hard to buy the rest of these guys.

So look at Roblox stock.

That's outpaced the SP by a lot because because the market gets that.

EAs lagged because they weren't participating in the areas that are growing.

I found it interesting that

the candidate for the largest LBO in history was a gaming company.

Was that surprising to you at all?

And if not, do you think this will be kind of a starting gun for VCs to re-enter the gaming space?

I don't think that being the largest makes any difference at all.

Like I can't remember the name of the book, but I read a book and they they made a movie out of the RJR LBO, which I think.

Barbarians at the gate.

Yeah, there you go.

That was it.

It was like 20 billion or something.

And, you know, that's back when we all valued consumer packaged goods.

So now all this is really telling you is that people are looking for IP as a as a play.

But, you know, ultimately, no, there'll be a bigger deal.

You know, there, there are plenty of companies that are worth a lot more.

I mean, Microsoft is worth a lot more.

Amazon is worth a lot more.

Not that anybody's going to buy them, but Tesla's battery business is worth more, you know, so, and Tesla's self-driving car business is worth more.

So, no,

I'm surprised it took this long to buy a game company.

EA was for sale back in 2000 and again in like seven and again in 15 and again in 19.

You know, they've constantly been for sale.

The problem is that they didn't have a buyer.

It was always, oh, the big media companies, Comcast has its own problems.

They're not buying anybody.

You know, Warner Brothers has its own problems.

I mean, look what's going on with Paramount and with Warner Brothers now.

It's like Larry Ellison, the knight on the white horse, is coming in to save, you know, traditional media.

So I think it really is just that it takes somebody weird and thinking different like the Saudis.

By weird, I mean their motive is not.

to make money.

Their motive is to drive

business to Saudi Arabia.

And that's different.

And that's, they can afford to pull this off.

They will, in fact, make money because I think they will do things EA was really afraid to do, like make FIFA ultimate team, EA Sports Football Club, ultimate team free to play.

So, yeah, I guess I was surprised, but it's not surprising.

Got it.

It's very interesting.

Thank you, Michael.

I appreciate you joining us.

It's my pleasure.

Say hi to Professor G, my idol.

I will.

Thank you.

Take care.

That was Michael Pacha, Managing Director of Equity Research at at Wedbush Securities.

Ultimately, what this really comes down to is attention.

I mean, the truth about the video game industry is that it is one of the most powerful attention arbiters in the world.

Young people spend a quarter of their entertainment time playing video games.

Gamers play an average of 15 hours per week, which is roughly the same amount that Americans spend eating, caring for their children, and socializing combined.

So these are total attention merchants.

They are absolutely crushing it in terms of locking in our attention.

What these companies lack, however, is an ability to monetize that attention, or at least an ability to monetize it as effectively as companies like Meta and Google and ByteDance.

In fact, despite the amount of attention they receive, video games account for only 3% of global advertising spend.

You compare that to television, which commands roughly 23%

of global ad spend.

In addition, there was this other study that found that brands spend less than 5% of their marketing budgets on video games.

So, what you have here

is a surplus of attention that is not really being monetized all that well.

I mean, if attention is the new oil, then this is basically an oil field that has been identified, it's been surveyed, it's been tapped, it's been drilled.

The only thing left to do now is to sell that oil.

That's what they need to do now.

And perhaps that is what makes EA such a great target for an LBO, for a leveraged buyout.

And that is the hard part here has already been done.

These tech companies, these video game companies, they have gotten the attention.

They've already done that part.

And now it's time for the private equity guys to step in and do what they do best, and that is monetizing, taking the asset and figuring out how to squeeze as much cash as possible out of that asset.

And by the way, private equity is incredible at this.

They did it with healthcare.

They did it with industrials and retail.

And so now, now it's perhaps time to do it with video games.

This is the perfect opportunity in a lot of ways because ultimately there's a lot still left to be squeezed out of the video game industry.

Now, does that mean that EA games are going to get better?

Probably not.

This probably isn't great news for gamers.

And as Michael said, EA will move towards the mobile and free-to-play markets.

In other words, more banner ads are on the way.

But it does mean that EA games are about to get a lot more profitable.

And that is the opportunity here.

That's why they paid $55 billion, a 25% premium, the largest LBO in history.

But in our view, that was worth every penny.

The White House revealed that the TikTok deal will value the US version of the the company at $14 billion.

That announcement came after President Trump signed an executive order approving the proposal, which will keep TikTok operating in the US.

ByteDance, however, has not confirmed any agreement.

So a couple of weeks ago, we asked this question.

What will the pricing of the TikTok deal look like?

And what will that pricing tell us about the nature of this deal?

Well, we now have our answer.

It is $14 billion.

That values the new entity at roughly one time sales.

That's about the same multiple as General Mills.

And for comparison, Meta trades at roughly 11 times sales.

So 11 times sales versus one time sales.

And this is for a company that is actually growing faster than Meta.

It's the fastest growing social media platform in the world.

It's the platform from which 40% of young Americans get their news.

Supposedly, that company is worth $14 billion.

Supposedly, it is actually less valuable than Domino's Pizza.

So right off the bat, the deal looks rigged.

I mean, if this were a company that were trading on the open market, if this were a free auction, if this were going public, for example, you'd probably be looking at a valuation above $50 billion, maybe closer to $100 billion.

And even that, depending on your perspective, even that might be cheap.

This is $14 billion.

Now, there are some caveats.

Supposedly, Byte Dance is going to charge a licensing fee, and apparently that will translate to roughly 20% of the company's revenue.

So that partially explains how cheap the pricing is here, but it certainly does not explain all of it.

How did they land on $14 billion

for the US version of TikTok?

I don't know,

but something certainly seems off here.

Let's bring in Scott Galloway.

Let's see what he makes of this new detail.

Scott, good to see you.

Good to be seen, my brother Eduardo.

Edge Monte, Eduino.

This is good.

Yeah, this is good.

Nice new nicknames.

We want to get your reaction to the TikTok news.

TikTok, we finally have a valuation.

We have a price on the deal.

$14 billion for TikTok U.S.

Your thoughts on the valuation?

Well, depending on who you talk to, whether it's that guy, Ashwan, who's the tech analyst or other analysts who try to put a fair value on it or just looking at multiples on other companies, it's going for somewhere between

70 and 90 percent off of retail, off of what it would get if this was a true deal and people were allowed to bid on it.

As a matter of fact, I think earlier in the deer, earlier in the year, I forget his name, the guy who owned the Dodgers at one point, put together an investor group and offered, I think, 50%

more.

And my understanding is that the deal includes sort of a tail or or a claim on up to 40 or 50% of the profits back to ByteDance.

But even if you double the valuation to 28 billion, it's still basically a massive discount to its free market value.

Well, I was interested to hear some of those valuation numbers there.

I saw reports that or

estimates that this company, this U.S.

company, should be worth around $50 billion,

which I also thought that was low.

I mean, TikTok U.S.

compared to, let's look at Reddit, for example, 40 around $45 billion, or Twitter, which was in the same ballpark, $40 to $45 billion.

And this is $14.

So if we're going to play the valuation game, I think they'll do somewhere around $15 billion this year, somewhere between $20 and $15 billion, just in the US.

If it got the same valuation as Meta, and I don't see why it wouldn't,

10 times revenues, you're looking at $150 billion.

If these guys, if this deal actually goes through, and I'm still suspect the deal is going to close, you're looking at an IPO that values the thing probably at $150 billion to a quarter of a trillion dollars, which will be a 10X markup for basically either investing in one of Trump's shit coins or investing in his campaign.

So if you're an ally of the president's, you get an investment that will likely be marked up 10x on billions of dollars of deployed capital within the next 24 months.

That's just straight oligarchy.

Socialism deciding who gets who gets, you know, deciding picking winners and losers amongst your friends.

It's a cross between corruption, socialism, and oligarchy.

And my disappointment is that there aren't more Democrats kind of raising their hand and saying, yo, Ellison and Susquehanna, this is an illegal deal.

You are engaging in illegal business activity.

And as soon as there's a real attorney general in office and the next three and a quarter years will go fast, we're going to unwind this fucking Frankenstein of a deal.

It's just, I find it very frustrating that the rule of of law and the basics.

You know, I met somebody who's participating in this deal, and all of these guys are just, they are such quote-unquote free marketer warriors.

They talk about the markets and competition.

And then when they get a chance to participate in what is corrupt oligarchy, they're all for it.

You know, Sequoia, General Atlantic, all of these guys know this is total bullshit.

You know, something tells me the Soros funds weren't invited to bid bid on this deal right something tells me even a guy like

ken griffin who's a moderate unless you've already given to the trump campaign and you're hardcore on his side no matter what he does you do not get to participate in what has traditionally been a free market around this so your friend who got in on the deal do you know how he or she got the call

Yeah, he's given a shit ton of money to Trump.

And And by the way, it's not my friend.

Which

your acquaintance.

It's somebody I know and I know and is and is going to get to participate in the deal.

Got it.

But and has been hateful.

Which seems to be a very key detail.

I mean, the thing that we're describing here, the thing that you're describing is illegal is the nature by which this deal was

finalized.

I mean, the idea that only a select set of people are getting access to this deal that prices the company at what I believe and what it sounds like you believe is a ridiculously cheap valuation.

This is a question that we asked several weeks ago.

It was, we'll know if this deal stinks because we'll look at the price of the company.

And if it's a joke of a price, which in my view, $14 billion is, then we know this was a setup and the people who got in on the setup were friends of the president.

And you have first-hand evidence right here.

Name a Democrat in this deal.

I mean,

here's, okay, so first off, it's probably a violation of all sorts of intra, you know, international trade agreements.

We're not supposed to do this.

Having said this, China pulls this kind of shit all the time.

So

let's walk past the back.

Let's give the president some credit and say this thing is a threat to the U.S.

and I have figured out a way to capture some economic value while reducing the risk of the defense threat of a propaganda machine affecting our youth.

Okay.

And he wants Americans.

to because they've created the value by spending so much money on this thing they want americans to capture it all right that violates all sorts of international trade treaties, but okay, fine.

Then the way you would do this is you would say, okay, here's the company.

It will be owned by something called TikTok US Co.

Now it's an auction.

Exactly.

Who's going to pay the most for it?

And then those people pay a market price.

And by the way, the existing investors either get cashed out or they can roll their stake or they can bid on new TikTok US Co.

But to price it at an incredibly low price and then hand it out like a birthday cake to your donors is flat out corruption.

So, okay, I'll tell you what.

Ed and Scott will bid $14 billion.

I'm not exaggerating, Ed.

We could raise it in a second.

If they said yes, we don't raise.

If all of a sudden we had a tangible chance of getting TikTok, the rights to U.S.

TikTok,

you and I could raise that money in about 72 hours.

You know what?

I think we should try to do it.

I think that's what we need to do.

Well, here's the thing.

If there's a case,

I mean, if you really, and I'm down for this kind of stuff, put together an LLC, bid 15 billion, and then when you don't get it, which you won't,

you

basically have a suit, in my opinion.

You have a very tangible legal case against the government

for not going to the highest bidder.

That is what you are supposed to do.

If they're closing DMVs or they're closing Veterans Affairs buildings, right?

They take that real estate.

There are emoluments clauses, or I don't know what the term is, where when you sell that real estate, you're not allowed.

Westwood Park or in Westwood, the VA has some of the most prime real estate, Veterans Affairs building.

I don't know if they're closing that building or not, but that real estate is probably worth $300 or $400 million.

There are all sorts of laws saying you have to sell it to the highest bidder because

U.S.

citizens own that land.

And if you just carve it up and give it to the most right-wing LA real estate developer who happens to support Trump at a blow market price, you are cheating U.S.

taxpayers out of money.

And that's the same thing as here.

They are taking somewhere between $30 and $60 billion

of gains from U.S.

citizens and investors that should have the opportunity to buy this thing and bid it up.

Well, you recently predicted that this wouldn't go through.

This is the update we have right now is that this is still a framework.

We still don't have any signed terms.

We don't have any, I mean, we don't really have anything.

The White House has said that Xi Jinping has signed off, but the Chinese government has not approved of the deal, or at least they haven't said anything publicly.

So it appears maybe this is going through, still not totally clear, but let's just get an update on your prediction.

Do you think a deal is going to go through?

Last time we spoke, you said no, it's not going to happen.

Do you think it do you think it might?

Look, there's no doubt about it.

The likelihood it's going to close has gone up.

Yeah.

And

I don't, I don't, you're going to find this hard to believe, Ed, but occasionally I'm wrong.

I know that, I know it doesn't seem that way,

but

yeah, maybe it closes.

I guess my question is:

one,

does it get overturned in some sort of court?

Two, is Xi Shin Bing just playing, you know, slowball with a president that has the attention span of a cat on mess?

I mean, so what,

you know, I don't know, but I would put it at,

you know, it's now, I would say, kind of 50-50, maybe 60-40 that the deal closes.

And this is,

I don't know, what was the term I used?

Bullshit.

This is bullshit, Ed.

Well, Galloway and Elson Co.

will be putting in a bid for $15 million, so stay tuned.

It makes a comeback.

That's right.

You're the Jack Welch, the podcast co-host.

There you go.

By the way,

I'm in my gym just because I'm shocked you even recognize me.

I just worked out.

I'm so jacked.

And

I'm trying to up our

female base here.

Hello, ladies.

Hello.

That's right.

You come for the young and the handsome.

You stay for the old and sort of rich.

Please.

All right, Ed.

Kick him out, Claire.

See you guys.

Thank you.

After the break, a look at the revised GDP data.

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we're back with prof g markets new gdp revision data recently came in and the results were promising second quarter gdp was revised upward to an annualized rate of 3.8 percent that is well above the second estimate of 3.3 percent and well above the first estimate of three percent the boost came from stronger than expected consumer spending data and looking ahead the Atlanta Fed projects third quarter GDP to come in at 3.3 percent so the economy looks stronger on paper, and it is the consumer that is keeping it going.

Personal consumption expenditures rose 0.6% in August.

Spending was especially strong for physical items with a 0.8% rise in both durable and non-durable goods.

However, the question that we have raised before and which we must again raise here is how much does this actually tell us about America overall versus rich America.

I mean, as we've discussed before, there's this groundbreaking data from Mark Zandi, which found that the top 10% of Americans are accounting for half of all consumer spending right now, the highest share in American history.

We are obsessed with this number, and rightly so, because it appears maybe if GDP growth is growing because of the consumer spending here, could it be that that is what is driving the GDP growth?

Could it be that rich people are driving the real economy?

Or is it that America is overall doing very well right now?

Well, to answer this question, we are speaking again with Mark Zandi, chief economist of Moody's Analytics.

Mark, thank you for joining us once again on Property Markets.

Thanks, Ed.

It's good to be with you.

So GDP has been revised up to 3.8%.

People are feeling pretty good about it.

The White House is feeling pretty good about it.

But I just want to point our audience to something you wrote today.

You wrote, quote, recession risks appear to have receded with the revised GDP numbers, but they remain uncomfortably high.

Could you elaborate on what you meant by that?

Yeah, sure.

Well, the upward revisions are good.

I'll take them, particularly to consumer spending.

It looked like the American consumer was going to take a hike here, but it's back in the game.

So that's really good.

But

even with the better numbers, the economy is growing below its potential, which means it's not creating any kind of jobs that will keep unemployment low.

Unemployment is it's low, but it's on the rise.

So

the economy is, I would characterize it as struggling.

And that's most evident, again, in the job market.

We're just not seeing any job creation.

And what job creation we are seeing is just concentrated in a couple of industries.

So yeah, the economy is growing.

It's not recession.

That's really, really good.

But the coast is not clear.

We're still growing well below where we should be, and we're very vulnerable to anything else that could go wrong.

You mentioned consumer spending there.

The big revision was consumer spending, which was originally reported to have grown 1.6%

from the previous year.

It's now been revised to 2.5% annual growth, which is strong.

But this does bring us back to your data once again, specifically the fact that, as we've discussed on the show many times now, the top 10% are making up half of all consumer spending in the US.

So there is this question we have to kind of ask again,

if it was consumer spending that drove up that GDP number and rich people are making up half of consumer spending, does this not just tell us the same story again, that the real story isn't that the economy is growing, but actually that it's growing specifically for rich people?

Well, I mean, it is growing for rich people.

I mean, and I do think, you know, what probably happened here was, you know, the more stock market rallied big time, you know, in late April through May and June.

And of course, high income, high net worth households are focused on their stock portfolios.

If they see green on the screen, they feel a lot better.

They go out and they spend more aggressively and, you know, with less caution.

And I think that's what we saw here.

I think, and that's what we're seeing coming into the third quarter as well,

that so-called wealth effect.

But as you point out, it does mean that the economy is very

dependent on these high-income, high-net worth households, the wealth to do, and thus very dependent on the stock market.

And that's just not a very comfortable place to be.

Thus, you know, my comment that the recession risks are still uncomfortably high, because if anything goes off in the equity market, and there's lots of things to be nervous about there, we can talk about it.

That will weigh heavily on that group and by extension, the broader broader economy.

Let's talk about it.

I mean, what I wanted to talk about it, you mentioned, I saw you on Twitter today, you were pointing out your favorite measure of the stock market, which is the Wilshire 5,000

to the after-tax corporate profits ratio, sort of like a basically a PE ratio.

Ratio is currently at 20.

Last time it was that high was wait for it, the dot-com bubble,

which doesn't paint a particularly comforting picture of what's happening in the economy right now.

Your thoughts on what is going on in the equity markets and perhaps what it might say about the recession risk going forward?

Well, you know, I don't want to draw too strong a parallel back to Y2K and the internet bubble.

I do think the companies that are driving the stock market higher today

are real companies, obviously joggernauts, making lots of money, and they have a very important technology that's going to advance the ball here and drive a lot of growth.

So they, you know, I think are on solid ground.

But even saying that, uh, prices are up an awful lot.

Investors are expecting an awful lot from these companies.

You know, you can see the capex they're doing and compare that to just even the revenues that they're generating.

They're rising very rapidly, but it's hard to square the circle and make the economics of all this work.

So valuations are high.

And again, you know, I point out this is not atypical when you you get into periods like this.

Investors take something

to the nth power, to the extreme.

They go, this is great.

And then they drive stock prices up, anticipating even greater greatness.

So it feels like it's getting ahead of itself.

And that's the point of that ratio of the Wilshire 5,000 after tax corporate earnings, like an economy-wide PE ratio, price earnings multiple.

And it is awfully high and headed straight north.

So, you know, it gives you another reason to be nervous about what's going on.

That the, you know, if the stock market, if these companies stumble in any little way, it can be simply,

and I'm making this up, they're not growing 100%, they're growing 93%.

You know, that might be enough to send the stock market from green to red.

And that would be enough to upend kind of the spending by this high-income group.

And thus, the economy is vulnerable to that and those recession risks.

Just to spell out what you're kind of describing here, basically, you've got, so you've got GDP growing at a pretty high clip.

So, you've got strong economic growth, but then you dig into it and you realize why is it growing and what is the reason behind this big revision?

It's because of the consumer spending.

That's what's really driving the growth.

Then, you think, okay, why is the consumer spending up?

As you've said, half of that is being driven by the top 10% of Americans.

25% is being driven by the top 3% of Americans.

So, it's rich people that are really driving that growth in the real economy and then it's okay why are rich people spending so much why why are we seeing that growth because the stock market is so high and so they have that as you say that wealth effect they feel rich right now especially rich today hence why they're spending like this and so what we have if i were to just sort of simplify things is you've got the stock market which is almost driving the real economy.

And I think that's interesting because I think the way we often think about it in economics is that it's the real economy that drives the stock market.

If things are growing, then investors sort of see what's happening, they process that and

they lift up valuations.

It seems to me that the dynamic has switched, that actually now it's valuations that are driving economic growth.

And therefore, if valuations for whatever reason come down, there's some snap in the narrative, then actually you're not just going to see a stock market crash, you're also going to see a real crash in the real economy too.

Yeah, I mean, you laid that out very nicely.

Just two things that I just put more color around.

First, where you began, the economy is growing quickly.

No, I mean,

in the second quarter, it grew quickly, but in the first quarter, it actually declined, right?

So

that's because of the ups and downs and all arounds related to the tariffs.

So if you kind of look at the underlying growth rate in the economy, I'd say it's still pretty punk.

I mean, as I said, it's below the economy's potential, which means it's not growing fast enough to absorb even the weakened labor force.

And we're seeing unemployment continue to rise.

So the economy isn't growing strongly.

It's growing.

You know, it's not in recession, but it's not growing all that well.

And then I just reinforce something you said about the stock market and causality.

You know, obviously

the causality works in both directions.

You know, stock market impacts the economy, economy impacts the stock market.

Most times the direction of travel here is the economy is driving the equity market.

But at times, you know, in times of euphoria, like the ones we're in now, the causality shifts and the stock market drives economic activity.

And that's the environment we're now in.

And historically, when you're in that kind of environment, it doesn't generally end well.

Generally,

the stock market takes things too far.

There's real reasons why the stock market are up.

It should be up, but it's up a lot and getting ahead of itself and it's getting over its skis and it doesn't take a whole lot of something not sticking to script and the stock market you know goes down and that then the the positive uh

from the equity market to the economy turns into a negative from the economy from the stock market to the economy so

you did a really great job it's just those two things i would just uh hone a little bit yeah just in case you decide you want to explain that to somebody else yeah yes thank you sir uh one final uh narrative violation is what i would call it that that I'd like to get your reaction to.

We see consumer spending is up.

That's, again, what drove this revision.

But we also have consumer sentiment, the consumer sentiment index from the University of Michigan, which actually fell another 5% this month.

It's down more than 20% from a year ago, which does not seem to fit with the consumer spending narrative.

To me, it seems to reinforce your point about that this is really the rich people economy.

I just want to get your reactions to that consumer sentiment index, the fact that it is down 20%.

Is that something that we should be taking seriously?

Yeah, I mean, I think it goes to the point, the broader point that look, you know, the folks in the top part of the distribution of income and wealth, let's say the top 10, 20% of the population, they're fine, no problem.

They're feeling good.

In fact, they're feeling great now with the stock market up.

But the rest of the population, the 80%,

not so much.

I mean, they don't own much in the way of stock, if any.

Many of those folks don't even own their own home.

And unlike the folks in the top part of the distribution, they owe money, right?

It's not like they own a lot of stuff, but they owe money.

They own credit card, on credit cards, on auto loans, student loans.

If they're lucky, they own a home, a mortgage.

So they're in a very different spot.

And now they're seeing inflation on the rise because of tariffs and immigration policy.

And their incomes are not rising.

any faster than the rate of inflation.

So you add that all up doesn't make for the kind of environment where you feel really good about the the economy.

And that explains this seeming disconnect between the top line numbers and what most Americans think about the economy.

All right, Mark Zandi, as always, we really appreciate your time.

Thank you.

Yeah, anytime, and I appreciate the opportunity.

That was Mark Zandi, chief economist of Moody's Analytics.

So, yes.

GDP is growing.

Yes, consumer spending is rising.

But again, we go back to this question, this point that we keep on running into.

It's not happening across the economy.

It is happening specifically among the rich, affluent households at the top.

And what does that really mean?

Well, as Mark pointed out, it basically tells us that this consumer story is really more of a stock market story.

Wealthy households are spending a lot.

Why are they spending a lot?

Because the stock market is booming, which essentially tells us that the U.S.

economy is more dependent now on the stock market than it has been ever before.

Okay, that's it for today.

This episode was produced by Claire Miller, edited by Jill Patterson, and engineered by Benjamin Spencer.

Our associate producer is Alison Weiss.

Our research team is Dan Shalan, Isabella Kinsel, Kristen O'Donoghue, and Mir Silverio.

And our technical director is Drew Burrows.

Thank you for listening to Profit Markets from Profit Media.

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

I'm Ed Elson.

I'll see you tomorrow.

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