How China’s AI Efficiency Could Gut the U.S. Economy

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Speaker 2 Today's number, 12 million. That's how many pigs there are in Denmark.
Twice the number of human inhabitants.

Speaker 2 True story had someone asked me how many sexual partners I'd had, and I started counting them and fell asleep.

Speaker 2 Get it? Takes a minute. Got it.

Speaker 7 I mean, it should be counting sheep, not pigs, right?

Speaker 2 Right. But that's the point that when I'm talking about my sexual partners, I start counting them and I'm counting sheep, Ed.

Speaker 7 I got it, but we're talking about pigs here, no?

Speaker 2 Yeah, I couldn't find, I couldn't find a good pig joke.

Speaker 2 Um,

Speaker 2 yeah, I was um accused of performing acts of bestiality

Speaker 2 at the London Zoo, and supposedly they saw me uh trying to escape while getting into a jaguar.

Speaker 2 That's better, we should have led with that one. Testing the material.
How are you, Ed?

Speaker 7 What's going on? Um, what is going on? Doing some more speaking stuff. Spoke at Aspen Ideas Festival, New Jersey, which is a spin-off of the real Aspen Ideas Festival.

Speaker 2 I'm sorry, the Ideas Festival, New Jersey. That's right.
Wow, I think that's probably the weakest flex you've ever made.

Speaker 2 Hey, I spoke at the Ideas Festival in New Jersey. In New Jersey.

Speaker 7 And then the other side note is that I wasn't, I wasn't, there was, I didn't realize this.

Speaker 7 There was the main room, and I didn't realize while I was speaking, Mark Zandi, who is, of course, our big guest, he was in the main room, and I was off in the side room with Kyla Scanlon.

Speaker 2 The first time I spoke at South by Southwest, I looked at the schedule and of course

Speaker 2 they scheduled at the same time Al Gore and this is back when

Speaker 2 anyone cared about the environment.

Speaker 7 Speak for yourself. That's right.

Speaker 2 You're young. I'm old.
I don't care. I'm going to be dead by the time we all have to engage in mass migration and super superfires.
And I'm not, and they put me in a room that held like 1,400 people.

Speaker 2 And I'm not exaggerating. I think 18 people showed up and like nine of them were from Vox.

Speaker 2 It was so humiliating. I'm like, should we bother? Should we just go get drinks at this point?

Speaker 2 When did you do this, Ed? And what was your topic?

Speaker 7 We talked about the casino economy, specifically Gen Z's perspective on all of this. And it was me and Kyla Scanlon.
And we keep on doing events together.

Speaker 7 We did a... Really?

Speaker 2 You guys are the voice of Gen Z, you and Kyla? Exactly.

Speaker 7 We're sort of the double header.

Speaker 7 Been on TV together a couple of times, which is great.

Speaker 7 But yeah, we spoke about Gen Z, we spoke about the casino economy.

Speaker 2 What is the casino economy? The gambling and the options trading and the sports betting, etc., and the crypto. Do you do any gambling or buy options, which is essentially gambling?

Speaker 2 Do you have any sort of a gambling bag? No, I don't.

Speaker 7 I've never been interested in gambling.

Speaker 7 Strangely. Yeah.
And I have a lot of friends who love gambling. They love sports betting.

Speaker 7 They find it fascinating. They find it fun.
I've never been interested interested in it. I've never found it fun.

Speaker 7 So I guess I'm kind of lucky in that regard because most of them lose money.

Speaker 2 Trying to find like what you're, you're like, you're one of those guys. You're like a Stepford wife.

Speaker 2 Like I want to stab you with a fork to see if like wires come out because everything I've learned about you so far, you are remarkably like well balanced and stable and have a good relationship with your parents and you're very humble and you're living with a woman and you seem to have a nice relationship and I just don't buy it.

Speaker 2 Something's going on here. We're going to find out you're like...

Speaker 7 Having sex with jaguars.

Speaker 2 Going to kids' birthdays parties dressed up as a clown and then taking them home and like killing them and eating them.

Speaker 7 I'm the Ed Gein of financial markets. Yeah,

Speaker 2 something's going on here.

Speaker 2 We're definitely, I don't know what it is.

Speaker 7 No, but it's fair. I mean, I like, look, I like partying.
I like drinking.

Speaker 2 But.

Speaker 7 Gambling has never been a vice that I've been interested in.

Speaker 2 I'm really not sure why. I don't think I've ever really seen you drink.
People don't like to drink around me. People don't like to drink around their boss.
They think they're going to get in trouble.

Speaker 7 What are you up to? This is one of the first times we've talked a bit more about me than we have you.

Speaker 2 It feels alien, doesn't it?

Speaker 2 I'm in London where it's starting to get cold and dark. And I started to realize

Speaker 2 I'm really excited to get back to America. So the countdown has already started.

Speaker 2 And I went to a dinner last night and I met the general manager. Is that what they call? The coach of Arsenal.
He's like a lovely guy.

Speaker 7 You met Mikel Arteta?

Speaker 2 Yeah, I met him.

Speaker 7 You met Mikel Arteta last night at dinner.

Speaker 2 I did, yeah. I think I've peaked.
It's time for me to leave London, right?

Speaker 7 Just so we're clear. That's the coolest flex you've said on the podcast probably of the year, at least in my book.
Mikel Arteta is very, that's, that's awesome.

Speaker 2 Well, his kids go to the same school as my kids, and he and his wife are really lovely.

Speaker 7 He's a good-looking guy, too, right?

Speaker 2 Oh my God, he's dreamy. I barely, he would start talking, and he has to.

Speaker 7 He's sort of the heartthrob of Irving Lemona.

Speaker 2 And he has this Spanish accent. And you're like, what? I see his lips moving, but I can't focus on what he's saying.
He's so good looking. He's very dreamy.

Speaker 2 He could be, he's like a James Bond kind of looking guy.

Speaker 7 And he's an incredible manager. He studied under Pep Guardiola for his age.

Speaker 2 Is he the most successful person in the prem right now?

Speaker 2 They don't get trophies, but they're always at the top. Yes, they're top of the table.
Always at the top of the table.

Speaker 7 And he turned around a mediocre team and turned them into a world-class team. That's amazing.
So you had a conversation with him?

Speaker 2 Did he know who you were? Well, of course he did. That's why he came.

Speaker 2 He wanted a chance to meet a professor.

Speaker 2 No, he had no idea who he was, but he's very friendly. And I asked him, I said, what's it like? What's it like now? He was a player for 17 years or something.

Speaker 2 And then he went right into coaching. And I said, what's it like?

Speaker 2 What are the young people like today versus, you know, because they're all young men. What are the players like today versus when you were playing?

Speaker 2 And he said, it's a much more chaotic environment now.

Speaker 2 The money, the fame, the social media, they're just, it's like constantly, there's no rest and no break for them. And I could kind of see that.

Speaker 2 It's so competitive and their careers are so short-lived. And the difference between making the league minimum of whatever it is, 150,000 pounds, and making 30 million is not that great.

Speaker 2 It's like when you get to those levels, it's like the best golfers in the world are, on average, score, you know, 0.4 strokes less than the guys who never get their PGA card.

Speaker 2 So

Speaker 2 what I need, this is all the way of saying I need you just to make a little bit more effort in this podcast. I need you just to go that extra mile.

Speaker 2 I like what you're wearing today. You look very stylish.
We're clearly paying you too much.

Speaker 2 What are you wearing? Let's do a shout out. Let's do, what are you wearing? I'll tell you what I'm wearing today.
I'm wearing Brunella Cuccinelli, which makes me feel 59 again.

Speaker 2 And then I'm wearing Viore

Speaker 2 pants because A, they're a sponsor, and B, this douche wear athleisure is so comfortable. I'm turning into a doctor's housewife.
I'm on my way to do Pilates.

Speaker 7 Pilates and Brunella, that sounds good.

Speaker 2 Well,

Speaker 7 they should be really sponsoring us if you're gonna give a shout out.

Speaker 7 This is Drake's, and again, they should sponsor us as well, which is an English brand that you'd probably love.

Speaker 2 Yeah, it's very handsome on you. Well done.
Thank you very much.

Speaker 7 Okay, shall we talk business?

Speaker 2 Sure.

Speaker 9 Now is the time to buy.

Speaker 9 I hope you have plenty of the wherewithal.

Speaker 7 The top open source AI models used to be American. Now that is changing.
Today, the top five open source AI models are all Chinese. And that is not the only story of AI evolution coming out of China.

Speaker 7 Chinese companies are also showing that they can do more with less. DeepSeek is using a new format that has allowed their training models to run 30% faster.

Speaker 7 Meanwhile, Alibaba last week said that its new computing pooling system cut the number of GPUs needed to run its AI models by 82%.

Speaker 7 So this is quite significant, Scott, following the conversation we had last week about how we're seeing all of this data center demand and we don't really have enough energy to power the data centers.

Speaker 7 Energy costs where data centers are being built have tripled. And as a reminder, if you want to build AI, you need to build the data center that powers the AI.

Speaker 7 OpenAI wants to build a chip network that would consume 250 gigawatts of energy, which is equivalent to a quarter of America's entire grid capacity. Point being

Speaker 7 a lot of AI and not enough energy to power the AI.

Speaker 7 And then we ask this question, okay, well, then maybe we need to figure out a way to either get more energy through solar or nuclear or perhaps drill baby drill, or you figure out a way to make the AI models more efficient.

Speaker 7 You figure out how to consume less power, how to do more with less. And it appears that China is making some headway on that front.
Alibaba just last week announcing this new system.

Speaker 7 It cuts their GPU usage by 82%.

Speaker 7 Basically, they can use 200 GPU chips and they'll perform at the same level of 1200 GPU chips. Don't ask me why or how they can do that, but that is what they're saying.

Speaker 7 And it appears that this may be a trend in China. So, Scott, your initial reactions to China winning the efficiency race or so, it appears.

Speaker 2 I was thinking in the editorial call yesterday when we were going over the stories. I kind of got my mind blown thinking about, as I heard you guys talk about

Speaker 2 AI and the energy requirements and open source slash weight models. And I got this, what I think is this, I don't want to call a revelation, but something that I thought was really exciting.

Speaker 2 And I thought, wow, maybe we do see something here in the matrix.

Speaker 2 And that is while everyone's talking about the gating factor is going to be energy and that there's no way that there'll be enough nuclear power coming online to quench the thirst of Sam Altman's unbelievable juggernaut called OpenAI.

Speaker 2 And I thought, well, maybe he's just trying to manifest it and these big energy projections that are running up the stocks of electric companies and scaring everyone that we're not going to have enough power.

Speaker 2 I wonder if, well, innovation can come from the other side. And that is people can start producing chips and LLMs that just require dramatically less energy.

Speaker 2 And then the other thing that sort of blew my mind, and now I think as I thought about it and slept on it, I think it's actually a pretty decent

Speaker 2 thesis is that if you look at the U.S. economy, it's run for profits and shareholder value.

Speaker 2 The life in America is so much better if you're wealthy than if you're middle class, and your life in the middle class is so much better than if you're in a low-income household that we make a series of incremental justifications every day where it's all about America is now all about the shit you have, or specifically your ability to buy more shit.

Speaker 2 Our economy and our society is run

Speaker 2 for profit. The Chinese economy is run for control and also long-term geopolitical power.
They make 50 and 100 year plans, which we would never have the ability to do.

Speaker 2 And part of that is because we pay the price for having governments, democracies that turn over and sometimes go zig and zag.

Speaker 2 But what I think is going on or what I think is going to happen is the following.

Speaker 2 China is really fed up and sees America as their enemy or is sick of America having this sclerotic trade policy that is really damaging them and then saying you can't have our chips.

Speaker 2 And they've said, okay, we've had it with these guys. So what do they do? They're much more strategic.

Speaker 2 And quite frankly, she is 10 times smarter than Trump and also has this incredible weapon in that he's willing to kind of

Speaker 2 think middle and, you know, think kind of medium and long term, which Trump has absolutely no ability to do. And I think what they've decided to do is the following.

Speaker 2 I think they are going to flood the market with cheap, open weight models, AI models.

Speaker 2 And if I were advising Xi and I said, okay, if you think of America as an adversary or America, essentially America has become a giant bet on AI.

Speaker 2 Specifically, 40% of their entire market is from the valuations, the exceptional valuations of 10 companies related to, directly related or related, adjacent to AI.

Speaker 2 And if we take down, if those 10 companies go down 50, 70, 90% like they did in the dot-com era, they are in a global recession. Trump is out of vogue.
We don't even need to stop buying soybeans.

Speaker 2 They are in a world of fucking hurt. How can we do that? Pretty easy.
Let's start pumping out a bunch of models that require less electricity, less power, less processing power, and are 90% as good.

Speaker 2 And another personal anecdote, my first strategy client, I started a strategy from Call Profit when I was 26.

Speaker 2 And my first client was the Gap. And they wanted a new brand.
And we came up with working with this really intelligent guy named Mark Bucco, who was at a strategy there at the time.

Speaker 2 We came up with what I thought and ended up being a great strategy.

Speaker 2 And that was, I just read Peter Drucker's book, and he said, every major business shift in society is largely reverse engineered to a demographic shift.

Speaker 2 And as someone who had personal experience with this, I said, one of the biggest demographic shifts in America, and this is 1993, is the explosion in single-parent homes.

Speaker 2 And it's almost, when we say single-parent, we mean a single mother.

Speaker 2 And single mothers, we did some research in some focus groups, are very cognizant, self-conscious, and focused on dressing their kids well because they're insecure and self-conscious about the fact they don't have as much money and the dad isn't around and they want the kid to feel good about themselves.

Speaker 2 And so we identified this segment and it was this fast-growing segment. And we said, okay, here's the positioning.
80% of the gap for 50% of the price.

Speaker 2 And that positioning took Old Navy from zero to a billion dollars faster than any retailer in history.

Speaker 2 And that is probably, if you look at at the fastest growing businesses in the world, oftentimes they're that 80% of the biggest airlines, America, Delta, and United for 50% of the cost.

Speaker 2 That's Southwest, now the most valuable or was the most valuable domestic airline. I think

Speaker 2 that the Chinese tax sector, under the direction and encouragement of the CCP, is about to old Navy the shit out of the U.S. economy.
And they've done it across BYD, electric vehicles.

Speaker 2 They generally, that's their business strategy, whether it's cell phone towers or clothes.

Speaker 2 But I think they are going to spend a ton of money and time and put their most talented scientists, of which there are a ton,

Speaker 2 to work on the following. Let's fucking go.

Speaker 2 We've been going for the heart and lungs after red states with these trade policies, whether it's rare earth minerals or canceling our contracts for soybeans.

Speaker 2 Now let's go for the fucking jugular and let's neuter their AI industry, specifically the valuations, and let's release a ton of near premier quality LLMs, open weight that anyone can use for near-free, that maybe requires much energy, but most likely don't, and certainly aren't nearly as expensive.

Speaker 2 And let's fuck with America's big bet here. Let's make this big bet

Speaker 2 not pay off.

Speaker 7 I think that is exactly what is happening. I would add that part of the reason why this has happened is because of the export controls that we put on chips to China.

Speaker 7 And this was the deep seek story that we discussed at the beginning of the year, where China had less capable and fewer chips to work with because of these export restrictions.

Speaker 7 And it forced them to get leaner and more efficient and work with what they had. That is exactly what they've done.
And I think to your point, they are doubling down on that.

Speaker 7 And I'm just going to go through some of the data that we've seen on how China is winning in this AI efficiency game. So I just talked about Alibaba and their AI model, which is called Quen.

Speaker 7 They're using 82% less GPU chips because they figured out this system that helps them do that. Again, as I said, I don't know exactly how that system works, but that's what they've told us.

Speaker 7 DeepSeek, they are also optimizing for efficiency.

Speaker 7 They're using this thing called the FP8 format, which essentially just cuts down the number of the decimal count on all of these long numbers that go into these models, which allows them to reduce the amount of usage of memory and it allows them to run their training models a lot faster.

Speaker 7 GLM is a model that is produced by this other Chinese AI company called ZAI. They are also using a lot less energy, and all of these efficiencies are being reflected in the costs of these models.

Speaker 7 So, just to go through the costs here: the cost per million tokens, if you're using OpenAI's model, which is GPT-5,

Speaker 7 the cost per million tokens is $10.

Speaker 7 Compare that to ZAI's model, which is called the GLM 4.6 model. The cost is $1.75.

Speaker 7 For Alibaba's model, Quen Plus, it is $1.20. For DeepSeek, it is $1.10.
Put another way, all of these Chinese models are nearly 10 times cheaper than their equivalents in the US.

Speaker 7 Now, I'm sure the US models are better and we'd want an AI engineer to come on and confirm that to us.

Speaker 7 But what is clear is that they are putting exactly, as you say, the old Navy strategy, 80% of the value or the quality or whatever you said, for not 50% of the price, but for 10% of the price.

Speaker 7 So they are doing

Speaker 7 to AI the same thing that they did to electronics, the same thing that they did to apparel, the same thing they did to consumer goods. It's the same thing again.
It is.

Speaker 7 reduce the costs dramatically and at the same time, and

Speaker 7 sort of upstream of that, reduce the amount of energy required to create these models dramatically. And they seem to be way ahead of the ball on this.

Speaker 7 And I do agree with your point that this could be,

Speaker 7 it could gut the American economy, which, as you say, has become incredibly reliant on AI. Now, I want to go through in a second

Speaker 7 just the history of efficiency in the business world, but I will pause there and see if you have any reactions to those numbers.

Speaker 2 So earlier in the year, we predicted that the rivers of capital into the U.S. were going to reverse flow.
That was mostly sort of right. And that is EU stocks have done really well.

Speaker 2 But also, to be fair, American stocks are up 12, 13 percent. The S P is up.
So clearly, the flows of, there's still massive flows of capital into the U.S.

Speaker 2 The most dangerous own goal over the medium and long term is there really has been a chill placed on the inbound rivers of human capital, the inflow.

Speaker 2 And that is some schools, some colleges are projecting there's going to be 20 to 40 percent fewer foreign applications.

Speaker 2 Every talented PhD student and every world-class researcher in the world had one thing in common. They had either come through U.S.

Speaker 2 universities, been trained here, or would seriously consider coming to work for our universities. And now what's happened? China's figured this out.
China produces 120,000 PhDs every year.

Speaker 2 That's three times what the U.S. produces.
In 2024, China's AI research publications,

Speaker 2 the output, the amount of peer-reviewed credible research matched the combined output of the U.S., UK, and European Union and now commands more than 40% of global citation attention.

Speaker 2 And AI, which let's be honest, is very IP and research heavy, technical heavy,

Speaker 2 they've got more coal in the furnace and they're going to use it strategically to reach that type of scale that you're about to talk about. Talk about the importance of scale in our winners.

Speaker 7 What I would describe is

Speaker 7 versus scale is the importance of efficiency.

Speaker 7 And if you look back through basically every great company in history and what they were good at and where they innovated, they all basically have one thing in common, and that is they were all incredibly innovative when it came to cutting down costs.

Speaker 7 And we can go back as far as the invention of the car. I mean, you look at Ford as a great example.
Their Their great innovation was the conveyor belt, the assembly line.

Speaker 7 And they basically, what they did was revolutionize how you make a car. And what used to take 12 and a half hours of manual labor, they were able to reduce it to just 90 minutes.

Speaker 7 And because of that, in less than a decade, Ford cut the price of cars in half.

Speaker 7 And then a decade later, they cut the price of cars in half again to the point where by the 20s, more than one in two cars in the world was a Ford. That's how they did it.

Speaker 7 They just innovated on, let's make it more efficient to build this thing, not let's make the coolest and sexiest and fastest car in the world. McDonald's, same thing.

Speaker 7 They reinvented the kitchen assembly line. They reduced the menu to just a few items.
They cut the cost of the hamburger in half. They became the biggest restaurant chain in the world.

Speaker 7 IKEA, another great example. Their big innovation was just how you ship the products.
Let's put them in flat, small packages. They shrunk the size of the box by 50%,

Speaker 7 which cut the logistics costs almost in half. And they can now ship 10 times more furniture than their competitors for the same amount of gas.
Now it's the largest furniture retailer in the world.

Speaker 7 Walmart, another good example too. cutting down logistics costs so they can sell products cheaper than their rivals.
SpaceX, a newer example, their big innovation. Let's just reuse the rocket.

Speaker 7 Let's make it cheaper and more energy efficient to do this. And they cut the cost cost of launching stuff into space by more than 95%.

Speaker 7 And as we've discussed, now they have 90% of the space launch market.

Speaker 7 So I think when we look through history, the most impactful companies, the companies that achieve the most amount of significance and dominance and revenue, it's the companies that figure out a way, how can we do more with less?

Speaker 7 And I think that is the big question that America now needs to ask itself, especially when we look over what's happening in China, where China is laser focused on addressing this problem.

Speaker 7 And I think if you look through history,

Speaker 7 what you would assume is that they're going to win on AI if they figure that out before we do.

Speaker 2 So there's this great economist at Stern named Bruce Buchanan,

Speaker 2 and he absolutely blew my mind and gave me a model through which I run almost every strategy. and every decision I make economically or in terms of positioning a company.

Speaker 2 And that is all shareholder value, all stakeholder value is a function of the relationship between three lines.

Speaker 2 At the very top, perceived value. In the middle, the price you're charging.
And the bottom line is the cost to produce that product.

Speaker 2 And companies can only increase stakeholder value by doing one of two things. They either push down the cost line, right? through scale, that's what we're talking about now.

Speaker 2 Hamburgers for less money, putting satellites into space, payload into space at a lower cost per kilogram, assembling a computer for less than anyone else, Dell, right?

Speaker 2 And then once you push that line down, you can pass on the savings as Walmart does and immediately lower the price concurrently.

Speaker 2 And that creates a gap between the price you're charging and the perceived value, which is greater, which should result in more market share, which is how these companies have created hundreds of billions of shareholder value.

Speaker 2 It's like, oh my God. So the old ad that was most effective for Walmart was if you start shopping at Walmart, it's like getting a promotion.

Speaker 2 And that is your quality of life, you're not going to have to buy Budweiser. You can buy Heineken.
You can now buy steaks instead of hamburger.

Speaker 2 It's like you got promoted because of that scale, because we're able to lower our costs, we're immediately going to pass it on lower prices.

Speaker 2 And the margin, if you will, of perceived value relative to price is greater, more market share.

Speaker 2 The flip side, and what actually America is, I would argue, better at, is taking the top line or perceived value and pushing it up through branding, through merchandising.

Speaker 2 Loosely speaking or very reductively, China wins by pushing the bottom line down, scale and passing along those price advantages to their customer.

Speaker 2 And America, generally speaking, has value add products through advertising, strategy distribution, whatever it might be. Scarcity, artisanship pushes the perceived value line up.

Speaker 7 I mean, open AI appears to be the king of the perceived value in the AI space. I mean, we keep on seeing these benchmarks.
And in a lot of cases, different models are actually beating

Speaker 7 GPT when it comes to reasoning and speed, all these things. And yet OpenAI is the premier brand in AI.
And I wonder if that is a function of, as you say, maybe they are really good.

Speaker 7 at doing the stuff that Apple's really good at, which is the branding and pushing up the perceived value.

Speaker 7 But I wonder if when you're talking about gigantic revolutionary technologies that expand beyond just retail, something like this, something like AI, which is supposed to take our entire economy, the global economy, into an entirely different direction, whether it is imprudent of America to spend their time on perceived value versus figuring out, okay, how can we deliver this to the most amount of people for the least amount of money possible?

Speaker 7 That to me seems like the right direction to go with when it comes to AI, especially if this is going to be as transformative as they say it is.

Speaker 2 It's an interesting question, but traditionally, the American economy has been about value add as opposed to scale. The Chinese,

Speaker 2 so think of value add as synonymous with brand value. Name a global brand that's come out of the second largest economy, China.

Speaker 2 It's tough. Isn't that weird? Think about it.

Speaker 2 There's great French brands. Louis Vuitton.

Speaker 7 BYD, I think, is probably the sexiest brand coming out of China right now.

Speaker 2 We hadn't heard about that until 24 months ago. Some people say TikTok.
Some people say Alibaba.

Speaker 2 But America probably has a, whether it's Coca-Cola or Harvard, America has like hundreds of amazing.

Speaker 2 We're really good at media. We're really good at creating value at the end of the day.
Our consultants are the most expensive in the world, right? Our schools are the most expensive in the world.

Speaker 2 The digital world, I think to your point, has become more about scale.

Speaker 2 And OpenAI was first zero to kind of, you know, whatever, zero to, what is it, zero to a million users in like five hours or something, whereas other technologies have taken months, if not years, zero to 10 billion in revenues faster than anybody else.

Speaker 2 So these digital products that are frictionless, I agree with you. It's more about scale.

Speaker 2 But generally speaking, American products are usually considered globally the premium product at a higher price and greater margin.

Speaker 7 Just to put a button on this, where do you stand on the US-China AI race? I mean, China is

Speaker 7 winning on energy capacity and energy build out. They're also winning on efficiency.
We are probably winning on quality and in some cases, scale and brand value.

Speaker 7 We do have some progress on efficiency. Google's developing these alternatives to the GPU called the TPU.
I think you're going to hear a lot about this TPU over the next few months.

Speaker 7 And they are more energy efficient.

Speaker 2 They just had this deal with Anthropic.

Speaker 7 Amazon is working on their trading chips, which are supposedly more efficient as well. We're getting that, but I think it's safe to say.

Speaker 7 China's winning on efficiency and they're winning on energy. So given that,

Speaker 7 where do you stand on the race? What's going to happen to you?

Speaker 2 My emotional reaction is: China is going to beat us because I think Donald Trump's policies are just incredibly sclerotic and short-term and just head-up your asserry like nothing before.

Speaker 2 The biggest own goals in history have been committed, in my view. Having said that,

Speaker 2 I have a tendency, and I think we have a tendency to overestimate the policies of a current administration relative to the underlying economy, which just turns on. And the U.S.

Speaker 2 economy, biggest gears in the world to grind on more. It's like, have you seen those TikTok videos of those things that crush metal?

Speaker 2 Like you put a car into the thing and it starts like eating it alive like it's a tomato. I mean, it barely even feels it.
It's like, oh my God, watch this. What?

Speaker 2 It can do, I mean, it can just eat anything. That's like the U.S.
economy. The U.S.
economy just appears to be so resilient and so powering on.

Speaker 7 So

Speaker 2 my answer would be, okay, does China win with scale and low cost, or does America win in AI with value add? I think the answer is yes.

Speaker 2 And that is, if you want to order a puffy winter jacket, it's going to be hard to get something for less than if you get it from Shein or another company that has manufacturing in Southeast Asia.

Speaker 2 At the same time, people are still going to love Northface. The existential threat here is a function of our valuations.

Speaker 2 And we've been saying this forever, that the cloud cover for the Trump administration right now and the cold comfort that people have in terms of confidence to spend more money, especially the wealthy who the top 10% now account for 50% of the consumer spending, which is basically the economy is resting on the top 10%.

Speaker 2 The top 10%'s consumer confidence comes from where the stock market is. And the stock market is up solely, solely because of 10 companies, you know, 77% of that growth.
So they don't need to win.

Speaker 2 All they need to do is show that these companies aren't going to dominate the world.

Speaker 2 Built into these valuations is an assumption that these 10 companies are going to own all of it.

Speaker 2 All of it. And so,

Speaker 2 if they still have the niche products, still amazing businesses, still get premium margin because people want to say, I'm on ChatGPT or Claude. I don't want to be on DeepSeek.

Speaker 2 I don't want to be on, you know, it's not great self-expensive benefit. Or if you're an American company, there might be security concerns.
Fine.

Speaker 2 But all they need to do is say, we're eating into their share. So I don't think there's a winner and a loser here.

Speaker 2 What I think is both will find their niches, if you will, or niche, or both will find a market. The problem is, is that these companies get cut in half and the stock market goes way down

Speaker 2 when it becomes clear these companies aren't going to have like 97 points of share of the global AI market.

Speaker 7 We'll be right back after the break. If you're enjoying the show so far, be sure to give Property Markets a follow wherever you get your podcasts.

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Speaker 7 We're back with Profit Markets. Four thieves carried out a daring heist at the Louvre in Paris last week.

Speaker 7 In just seven minutes, they broke in and stole eight of France's crown jewels valued at more than $100 million.

Speaker 7 While that burglary drew international attention for its scale and audacity, it does come amid a string of far more troubling crimes in the U.S.

Speaker 7 We've seen several high-profile murders in the last year. Political commentator Charlie Kirk was assassinated in September over the summer.

Speaker 7 Minnesota state lawmaker Melissa Hortman and her husband were murdered in their home.

Speaker 7 And late last year, United Healthcare CEO Brian Thompson was murdered just before the company's annual investor conference.

Speaker 7 So these incidents raise questions about how institutions, individuals, and even private companies can address safety concerns.

Speaker 7 As a result, one sector in particular has seen growing investment, and that is private security.

Speaker 7 So, Scott, we have been talking about this for a while, and we've been bringing up the possibility that in a less structurally sound society that is ailed with issues mostly to do with income inequality, that leads to more crime, that leads to more violence, which in turn leads to a need and demand for security.

Speaker 7 Now, I just want to go through a couple of statistics here. One,

Speaker 7 this comes from Goldman Sachs, which surveyed a bunch of companies, public companies, private companies, non-profit companies. And basically they found that three years ago, 17%

Speaker 7 of CEOs of the company surveyed, 17% had private security. As of last year, that number had risen to 27%.

Speaker 7 So it went from 17% to basically a third in two years. A third of companies in America are hiring private security professionals to protect the lives and the safety of CEOs.

Speaker 7 We've also seen residential security demand skyrocketing. Demand for residential security rose 20% last year.

Speaker 7 Also, after the United Health CEO shooting, there's this security company of a big company called Allied Universal, and they said that their executive travel protection business grew by 300%.

Speaker 2 So it quadrupled right after this.

Speaker 7 So we are seeing a lot of demand for security, for private security. And you actually called this right after the shooting in December.

Speaker 13 I would imagine the first reaction is we need to keep our executives safe. Those numbers that you quoted around CEO security are about to explode.

Speaker 13 That's a good business to be in right now, offering executive security.

Speaker 2 That is exactly what we're seeing.

Speaker 7 And we're seeing more and more high-profile crime, specifically

Speaker 7 attacking high-profile individuals or high-profile institutions. Scott, your reactions.

Speaker 2 I just went to one of these Master of the Universe conferences where,

Speaker 2 I don't know, probably 12 of the 30 wealthiest people in the world were there. And there was just security everywhere.

Speaker 2 And it's a real shame. And I think these people can't just take a walk.

Speaker 2 And something that always struck me is my father said to me, he said, the key to happiness is to be rich and anonymous. And that always struck me as very insightful.

Speaker 2 that you because he said famous people who are rich and famous eventually there's an industrial incentive to go after them and tear them down.

Speaker 2 Or that they become targets or, you know, they get sued more easily. He said, you want to be rich and anonymous.
And I said, how about if I'm famous and not rich? Anyways,

Speaker 7 that's what we're going for on this podcast.

Speaker 2 Someone once said to me, oh, your son's so smart. He'll probably be famous.
I'm like, as long as he's not infamous.

Speaker 2 But look,

Speaker 2 When you have guns everywhere, when you have income inequality, when you have people who can go down rabbit holes and get radicalized and go after famous people because they think in some sort of historic act of violence, they're going to regain social capital among a group of people that they think they've lost capital with and they suffer from mental illness and,

Speaker 2 you know, guns everywhere. What I'd be interested in knowing is like, okay, this is a market show.
How do you make money? Are there public companies or places you can invest

Speaker 2 that make the supplies of the materials for security, right? I got to think home security and things like that

Speaker 2 are are just going to boom because the number of wealthy people,

Speaker 2 just on a lighter note, when I was in a Biza this summer, I saw a friend of mine and he had a table up front and he had these two enormous security guards.

Speaker 2 And I said to him, I'm like, dude, you're not that famous. You don't need security.
He's like, no, no, no, no, no. He's like, it's a chick magnet.
It means I'm really important.

Speaker 2 And I'm like, let me get this. You're doing this for women? He's like, yeah, it's amazing.
He's like, everybody thinks I'm super famous. And he goes, but next year, he's like, the gangster move.

Speaker 2 I'm like, could these dudes be any bigger? And he's like, no, no, no, no, no. The new, this guy's really funny.

Speaker 2 He's like, the new gangster security is to have a hot Israeli woman who worked in the Mossad.

Speaker 2 And she just has kind of this resting bitch face.

Speaker 2 And

Speaker 2 I'm like, oh my God. So could you be any douchier? You're walking around with huge guys right now, but next year you got to find an Israeli security woman because that's the new flag.

Speaker 7 This guy would like pay to be on the Epstein list.

Speaker 2 Yeah, this guy.

Speaker 2 That's funny. Pay to be on the Epstein list.
That's funny. I got to tell him that.
I'm going to text him that. That's funny.

Speaker 7 I want to hear more about this Master of the Universe conference you went to and all of the security that was there. I assume there are a bunch of tech billionaires in this room.

Speaker 7 And you're observing, you're saying that you saw more security than you've ever seen.

Speaker 2 Is that right? It's a strange kind of security, though. There's no metal detectors.

Speaker 2 So we're all staying at some, we're all staying at the same hotel, but I'm not exaggerating.

Speaker 2 Every eight feet, if I was wearing a long-sleeve shirt and you have your wristband, the identifier you're supposed to be there, if your shirt was covering your wristband, some guy in plain clothes that looked like he's been on human growth hormone for the last 20 years, you know, like got

Speaker 2 cut after his first season at the New York Giants and has been pretty much just working out his whole life, comes up to you and goes, oh,

Speaker 2 can I see your wristband?

Speaker 2 I mean, everywhere in the bathroom, there were all these guys doing their best to be kind of out of the way and not obtrusive but everywhere i remember thinking hey i remember you know you have this i'm like what if i just

Speaker 2 like i wanted to go up and meet one of these guys and i thought i need to walk slowly because i think if i walk a little too fast i'm going to get shocked towards i'm going to like be tackled and tased And then if I, you know, if my wristband isn't present, they're just going to exit.

Speaker 2 You know, there was so, and you can understand understand these people, A, they have the money.

Speaker 2 And B, when they see

Speaker 2 these horrific events where a guy, the CEO of a publicly traded company who's anonymous, is walking down the street in Manhattan and is executed. So I don't know some of it.

Speaker 2 But anyways, back to the market standpoint, these have got to be great businesses because they're pretty, I would imagine, pretty high margin. I would imagine there's a lot of people who are

Speaker 2 looking for work like this. The people who don't want to round up our farmers and our servers and occasionally a U.S.

Speaker 2 citizen while wearing a mask would probably rather do private security for a very wealthy person.

Speaker 2 And by the way, what I would tell anybody, and this is kind of sad, but it's true, go to work for wealthy people.

Speaker 2 And that is, there's this cartoon that wealthy people are awful. And Monty Burns, I have generally found that really super wealthy people are generous and nice and treat their employees really well.

Speaker 2 And

Speaker 2 I just don't buy this notion. I'm like, if go to, and not only that, if your boss is making 10 million bucks a year, it's not easy for him to pay you $7.25 an hour.

Speaker 7 I think that's the more important point. It's like, it would be uncomfortable not to pay you well.

Speaker 2 Let's not even say it's the character thing. It's just that it's, you can't have people in your home organizing your jewels, you know, and picking up your kid from a school.

Speaker 2 And then, and then, you know, you can't pay your nanny 40,000 bucks a year when you're spending that, you know, when you're spending $100,000 to get to San Trope.

Speaker 2 So, and, and also, just generally speaking, I have found,

Speaker 2 yeah, I'll stick by it. Really, really wealthy people get there, not kids who've inherited money.

Speaker 2 I, I can't get over what fucking douchebags some of these rich kids are that I meet and how out of touch and non-empathetic and how,

Speaker 2 I don't know, just

Speaker 2 they're they're just so tone deaf as to their privilege and to the fact that, yeah, you'd be maybe the number two salesperson at Subaru of West Hollywood if your father wasn't a fucking billionaire.

Speaker 2 But they're under the impression that it was their grit and character that got them where they are.

Speaker 2 Anyways, those people, I generally believe the cartoon is pretty accurate, but the self-made billionaires, quote unquote,

Speaker 2 have been put in a room of opportunities constantly that they're not in physically because they're good people.

Speaker 2 And also, also, I think when you get a little bit older, you get excited about the opportunity to share time and work by giving, you know, by paying people well.

Speaker 2 But they're, you know, and that's what's so disappointing.

Speaker 2 I was about to call my socialist rant, but I'm not going to do it.

Speaker 2 But generally speaking, we were talking about there's a lot of opportunities probably for these guys.

Speaker 2 And they're usually guys unless you're a female former Mossad.

Speaker 2 I want to hire the K-pop demon hunters to be my security guards. I have a 3D anime following me around.

Speaker 2 I would like to have, I don't know, who would I like to have as my security guard?

Speaker 7 I'd like to have Erling Holland.

Speaker 2 I think Scott Bayo or maybe David Hasselhoff. I'd like to get David Hasselhoff incredibly fucked up and have him just walk around and introduce himself as my security.

Speaker 2 Or Bette Midler.

Speaker 2 Bette Midler should be my security. Anyways.

Speaker 7 The number of ultra-high net worth individuals surged 21% last year. The top 1% owns half of the market cap of the entire SP 500.
The top 19 households own 2% of all household wealth in America.

Speaker 7 50 years ago, it was 0.1%. So their share of the pie has 20x

Speaker 7 in the past 50 years. Compare it to the bottom half of Americans who control roughly the same amount.

Speaker 7 So you've got 19 households versus several hundred million households who control the same amount of money.

Speaker 7 And then

Speaker 7 you ask the question, like, what's good with all the crime? Like, why, why are people shooting each other in the street?

Speaker 7 Why are we seeing like Hollywood style heists capturing hundreds of millions of dollars worth of

Speaker 7 royal jewelry?

Speaker 7 And I think it's not a stretch to make the connection between what we're seeing with inequality and what we're seeing with crime, and therefore what we're seeing with the demand for executive security and private security.

Speaker 7 In fact, studies have shown that as the Gini Inequality Index rises, so too does the number of private security employees per capita. And of course, so too does crime in general.

Speaker 7 I just want to point you to this stat. There are now more than a million privately employed security guards in the US, which is more than the number of high school teachers in America.

Speaker 7 Compare it to the past two decades,

Speaker 7 the number of security guards in America has doubled. And for context, you might say, well, the population is grown.
No, the population has grown only 16% since then.

Speaker 7 So you've got America's population up 16% and the American security guard population up 100%

Speaker 7 over the past two decades. So it does appear that we are entering into a sort of,

Speaker 7 I don't know, post-law society where every man for himself and every man needs to get their own former Mossad agent to protect themselves, to protect their home, and protect their jewelry.

Speaker 7 And to your point about, you know,

Speaker 7 can this be an investment thesis, which I believe it can, it's a highly cynical investment thesis, but it's a real one. And that that might that could be something to discuss.

Speaker 7 We we have a few names that we could mention, but I used first, let's just get your reaction to that number. You know, more than a million security guards in America.

Speaker 2 That stat blew my mind. More security guards than teachers.
Look, this is the erosion of a society, but it's a continued pattern.

Speaker 2 And that is very talented, hardworking, and lucky people garner a disproportionate amount of their resources.

Speaker 2 They incrementally come up with candidates and ideas to lower their tax rates and make it such that they can sequester from the rest of society with private air travel, private infrastructure, private security.

Speaker 2 They don't need cops. They don't need teachers.
They don't need the FAA. They don't need,

Speaker 2 they have their own health care. They don't need

Speaker 2 hospital, rural hospital systems can be shut down. It doesn't affect them.
These huge cuts to Medicare

Speaker 2 and Medicaid, they don't affect them because they have their own concierge health care. They have doctors coming to their house.
Oh, teachers don't make enough money. I don't care.

Speaker 2 I've got my teachers in my private school make plenty of money. Oh, we're making cuts to the police force or fire department.
That's okay.

Speaker 2 I've got my own security. So this separates the people with the power from the realities of our society and makes them less invested in our society.

Speaker 2 And they keep on just voting for and giving money to people who will cut their taxes because the decline in the civility and social services they're immune from.

Speaker 2 And

Speaker 2 I'm not proud of this, but I don't know where to put my money right now. I don't, don't, I think the markets are overvalued.

Speaker 2 So, what I've been doing, and I've told you this, I've been buying real estate in what I call 0.1%

Speaker 2 communities.

Speaker 2 And when I meet with someone to talk about rental, I'm like, I say, this is simple. This house, I'm ultimately going to sell this house.

Speaker 2 I don't know if it's going to be three years or 10 years or 20 years, but who's it for? It's for a new billionaire.

Speaker 2 The only thing I'm fairly certain of is in the next 10 to 20 years, the regulatory capture, the income inequality is only going to get worse globally.

Speaker 2 And as capital becomes more global, they all want to live in the same small number of places, and they are price insensitive when it comes to their home.

Speaker 2 And so that's the best bet I can find right now is that, you know, it's why these, it's what private air travel is surging. And this is the dark side of that.
And that is

Speaker 2 the same pattern emerges.

Speaker 2 At some point, people realize that if one man is worth more than the lower 52% of America, the easiest thing to double our wealth, 160 million people, is to take his shit away.

Speaker 2 And that's a form of revolution, and it keeps happening over and over, but revolutions take on different complexions.

Speaker 2 And I've said this before, the Me Too movement, Black Lives Matter, the execution of a healthcare CEO.

Speaker 2 These are all forms of small revolutions. And that's not to say that Black Lives Matter and the Me Too movement didn't have righteous components to them.
But effectively,

Speaker 2 they weren't going after sexual harass or managing a taco truck. They weren't going after the racist small business owner.
They were going after rich people.

Speaker 2 So there is this populist anger. Mom Dami is probably going to win the mayoral race of a city that has a larger GDP than I think all but 12 or 14 countries

Speaker 2 on the notion.

Speaker 2 of essentially income inequality and unaffordability. People are angry.
And the income inequality isn't just about the poor versus the very rich. It trickles up.
What do I mean by that?

Speaker 2 There are so many people of your generation living in New York that are, they played by the rules. They've gone to great, they've worked their asses off in high school.
They're good people.

Speaker 2 They got into amazing schools. Their parents borrowed money for them to get through those schools and they worked hard and they got scholarships.
They got out. They got great jobs.

Speaker 2 And they still can't fucking afford to live in New York or San Francisco. I mean, they still can't afford.

Speaker 2 When I moved to New York, granted, I had to have two roommates, but I could afford to live in New York, making, back then I was working at Morgan Stanley, like 50, 55 grand a year.

Speaker 2 You have to either be in technology with Meta or Google working at JP Morgan or have rich parents who are putting you through New York and San Francisco.

Speaker 2 So it's not just poor people deciding to break into a jewelry store or committing crime. It's general dissatisfaction among New York voters who are like, fuck, I've played by the rules.

Speaker 2 I'm making a great living and I can't live here, but I see this pornographic wealth being shoved in my face 210 times a day.

Speaker 2 And I see people aggregating the GDP of a Latin American nation who are paying their lowest taxes ever. So this revolution is like happening kind of up and down the income ladder.

Speaker 2 People are dissatisfied who are making six figures right now. Like, okay, I was supposed to live a better life than this.

Speaker 2 The extraction of so much value and capital is going so much, not to the top 10%, but the top 0.1%,

Speaker 2 that even if you're in the 90th percentile right now, you're starting to feel pissed off.

Speaker 7 That's what, that's what it's so interesting about Mamdani. People are like, why is this? Why is this message working in New York? Why are people in Manhattan voting for this?

Speaker 7 It's like even the people who are making good livings feel that the city is unaffordable. That's why it resonates.
It doesn't just resonate

Speaker 7 for the bottom 50. It resonates for the bottom 90.

Speaker 2 I think it's an important point. So now

Speaker 7 we get to the part of the show where we

Speaker 2 make

Speaker 7 investment trades based on the collapse of society.

Speaker 2 So

Speaker 7 how do you invest in private security?

Speaker 7 Short answer is it's pretty hard.

Speaker 2 Yeah, most of it's private, right?

Speaker 7 Exactly.

Speaker 7 Most of them are privately owned. The biggest one is Allied Universal.
They have 26% market share.

Speaker 7 They're still private, but they said they're considering an IPO maybe next year or the year after because, of course, they're doing very well. There are some publicly traded stocks.

Speaker 7 There is Brinks. They provide ATM services and armored trucks.
There's Securitas, on-site guarding, and remote monitoring services. There's ADT, which provides professional home security.

Speaker 7 These are, we haven't done proper diligence on these companies,

Speaker 7 but

Speaker 7 so these are not, this is not investment advice.

Speaker 7 Certainly go look into this yourself.

Speaker 7 But, you know, those are a few of the names that are publicly traded if you want to get that exposure.

Speaker 7 Also, there are a lot of private equity firms that are investing in these kinds of security companies, and some of them are publicly traded.

Speaker 7 Aries, as an example, they invested in this company called Convergent, and they're sort of the global leader in building security. Apollo is a major investor in ADT.

Speaker 7 There's one of those private security companies. So there are some ways to get some distant forms of exposure, and there are some ways to get involved in the public markets.
But

Speaker 7 again, not investment advice. And I'm not saying you should go buy these stocks.

Speaker 2 So when my mom was diagnosed, when her cancer recurred, she went in for her second mastectomy. And while she was in the hospital, somebody broke into her condo.

Speaker 2 So obviously it was an inside job, right?

Speaker 2 That somebody at the hospital knew the names and addresses of people who are undergoing surgery and was providing it to other people to break into their homes knowing that no one would be there, which is pretty depraved, but pretty obvious.

Speaker 2 And my mom had rented out my room, you know, total cliche. The moment I go to college, she rents out my room because she needed the money.
to this lovely PhD student.

Speaker 2 And she was home and she heard something and opened the door and saw this guy and screamed and closed the door and the guy ran out of the house. And my mom was totally freaked out.

Speaker 2 Like she'd just come home from surgery. The house had been broken into.
She was just, you know, as you can imagine, upset, paranoid.

Speaker 2 And so my answer, being creative and, of course, a protector, was I went across the street to the Johnsons who were total fucking assholes and I stole their ADT sign and I planted it in front of her house that this home is protected by ADT.

Speaker 2 I'm like, we're fine because it's clearly the sign that scares people off. I love that.
Anyways, that's that's my home security story, Ed.

Speaker 7 You were a master of branding from a very young age.

Speaker 2 I'd love to see the data, but these home security systems are ineffective, in my view, and play on nothing but fear.

Speaker 7 And that might be right.

Speaker 7 And it could be that a lot of these billionaires who are hiring these 12-person security teams, maybe you don't actually need them, but the fact is they're scared and they're worried.

Speaker 2 I know, but what I'm saying is.

Speaker 2 Somebody, okay, you have an alarm system. Maybe that works fine.
But the idea, those commercials were like, we see an intruder and this nice lady is like, we're deploying the police now.

Speaker 2 Okay, folks, if you want it, if you look at the data, you know, hands down, and by the way, people think

Speaker 2 a good home security is a gun.

Speaker 2 No, that means you're much more likely to be shot. The moment you get a gun, you're much more likely to be shot because you don't sit there cocked with your gun cocked waiting for a criminal, right?

Speaker 2 And generally speaking, criminals aren't there to kill you. They're there to steal your shit unless you show up with a gun and then they shoot you.
The most effective home security system, hands down,

Speaker 2 hands down, is what, Ed.

Speaker 7 You just want me to get a dog, man.

Speaker 2 It's a dog.

Speaker 2 100%.

Speaker 2 They've done all these surveys. They've done all these surveys of people who've been incarcerated for home invasion or theft, and they all say the same thing.
We don't go into houses with dogs.

Speaker 7 I'm going to get a pet Chihuahua.

Speaker 2 If you get a Chihuahua, get one that is exactly 2.2 pounds and name it kilo. I think that is the best dog name I've ever heard.

Speaker 7 So this is really an investment trade on

Speaker 7 dogs. How do we go long dogs?

Speaker 2 Well, actually, pet food companies, pet supplies companies have been amazing investments. People will start eating cat food themselves before they cut off their cats' cat food.

Speaker 7 Seriously, people, that's like been it.

Speaker 2 It's been a great, a great sector, but I don't know how to invest. I don't know how to invest across this

Speaker 2 sector. Even like the TSA is all illusion.
It's not, but fear is a powerful thing and it makes a lot of money. Yeah, 100%.

Speaker 2 100%.

Speaker 7 We'll be right back. And for even more markets content, sign up for our newsletter at profitmarkets.com slash subscribe.

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Speaker 7 We're back with Profitty markets. It was a big week for streaming, and the industry looks closer than ever to consolidation.

Speaker 7 Warner Brothers Discovery stock jumped more than 9% after the company hinted it was open to a sale. Reports emerged that Paramount has already made three offers to buy it, all of which were rebuffed.

Speaker 7 Meanwhile, CNBC reported that Netflix could be a potential buyer. Netflix also made headlines of its own.

Speaker 7 Its third quarter earnings missed expectations, but mainly because of a $619 million tax settlement with Brazil. But beyond that, it was a solid quarter.
Revenue rose 17% to $11.5 billion.

Speaker 7 So, Scott, a lot of news in streaming and in entertainment. Another turn in the Warner Brothers saga.
Earlier this year, they announced they were going to split into two entities.

Speaker 7 Then we learned they're fielding interest from Paramount Skydance, aka David Ellison. And now we learn they are getting, quote, unsolicited interest from multiple parties.

Speaker 7 They say they are open to a sale. And then we're hearing from CNBC that among the interested parties are Netflix, also Comcast.

Speaker 7 Now, you actually highlighted Warner Brothers as one of your top stock picks for 2024. Here's what you said back in January of 2024.

Speaker 12 I think Disney and Warner Brothers Discovery are going to do really well this year. I think they're both going to be put into play.
They have become distressed assets.

Speaker 12 They are now trading at some of their lowest multiples in history. It's not because these guys will do anything that deft or that brilliant.

Speaker 12 It's because, quite frankly, they've just gotten so cheap they're going to attract a lot of sharks.

Speaker 12 They also are single-class shareholder companies, meaning that they're breakable, if you will, that someone can come in and start rattling their cage.

Speaker 7 So Warner Brothers has doubled since then.

Speaker 7 And it now looks like it will be acquired by someone.

Speaker 2 Your reactions. So Mark Zuckerberg and Schulz Sandberg have made more money while doing more damage to young people than any people in history.

Speaker 2 But from a shareholder perspective, they deserve every penny.

Speaker 2 With respect to shareholder value, the person who added the least value destroyed a ton of value, took EBITDA, cut EBITDA in half, and like almost fucked up the tax ramifications of their asset, which was Japan, the Japan division of their company, is Marissa Mayer for coming in and fucking up Yahoo, walked away with a quarter of a billion dollars.

Speaker 2 She's about to be bested by David Zaslov, who has already earned somewhere between a quarter and a third of a billion dollars for getting the stock back to where it was when he came came up with this idea to merge the two.

Speaker 2 And I have no doubt that he is, quite frankly, trying to figure out a way right now to get some crazy golden, I don't know, exit package from this acquisition and for basically selling the company for the same price he convinced shareholders to pay for it when this ill-fated dumbass merger was formed several years ago.

Speaker 2 This is going to happen.

Speaker 2 They are leaking false information. Comcast is smart.

Speaker 2 Comcast isn't going to buy this company because the only people who are willing to spend $24 or $26 a share for this thing is the Ellisons because the kid wants to go to the Academy Awards and wants to spend dad's money to be a media mocha.

Speaker 2 And the father, just who made $90 billion in one day, probably says, okay, we're going to sell the shitty cable assets and we're going to take Warner and HBO and we're going to AI the shit out of the content side of this and it'll be really interesting and we'll see if we can do something.

Speaker 2 And my son who's a good kid you know gets to go play in traffic but the idea they are leaking information that there's multiple suitors here bullshit this thing makes no financial sense and there's a reason that the only people involved in these companies are all the children of billionaires because no one else that has to answer to shareholders is willing to show up and pay anything anything close to this price.

Speaker 2 So Zaslov is leaking rumors that this is a multiple party bidder. There's one bidder and his last name is Ellison.
Yes.

Speaker 2 It'll end up going, they're trying to play the reluctant bride, so they come up to $24 or $26 a share. They will buy the thing.

Speaker 2 And right now, all Zaslov is doing is feathering his bed for a deal that he walks away with a quarter, another $100 to $500 million

Speaker 2 for basically adding no value. And these are trophy assets.

Speaker 2 I don't think it's a Machiavellian strategy for the Ellisons to control media.

Speaker 2 What this will be is an interesting application of AI and potentially taking colliding Warner Brothers and great content and IP with their U.S. division of TikTok if they get control of that.

Speaker 7 I totally agree with. Well, you said two things.
One,

Speaker 7 they're pretending that there are multiple bidders. I 100% agree with that.
I think that's definitely right. The second thing you said is that it will happen.
It will get sold. I'm not 100% sure.

Speaker 2 Why is that? What do you think is going to get in the way of it?

Speaker 7 Well, they've rejected the offer three times already.

Speaker 2 That's reluctant bride.

Speaker 7 just to play this out so warner brothers says we're open to a sale and here are some bidders that may or may not be involved and it gets leaks to the press and then now we're on the podcast talking about oh maybe netflix will buy it maybe comcast will buy it etc you're saying zaslov wants to sell he wants to create an illusion of an auction

Speaker 7 And that's why this is happening. And Netflix isn't actually interested.
I completely agree. What is interesting is the fact that the stock went up 10% on the news.

Speaker 7 So the market says, oh my gosh, something's happening. They're open to a sale.
And what you're saying is they were always open to a sale.

Speaker 7 They were dying for a sale, Zaslov specifically, and they're kind of pretending as if something has changed and nothing's really changed here. And yet the stock has gone up 10%.

Speaker 7 So that in and of itself is very interesting that we're seeing this stock explosion on not really anything at all, or at least something that appears to be kind of manufactured.

Speaker 7 But it does raise this question.

Speaker 7 Ellison has come to him and he's given him a few offers. He first offered $19 per share, then $22 per share, then $23.50 per share.
Zaslov said no every time.

Speaker 7 Supposedly, according to Rich Greenfield, who's a great media analyst, he thinks that Zazlov wants $30 per share. Before all of this was happening, Warner Brothers was at $11.

Speaker 7 So we've gone from 11, we're now looking at $21

Speaker 2 per share.

Speaker 7 And I wonder if he's overplaying his hand here. I wonder if he's getting a little carried away with it.
He loves saying no. He goes out and says, no, no.
Comcast really wants us.

Speaker 7 Netflix really wants us. And I wonder if at some point David Ellison says, you know what, dude, let's quit fucking around.
Netflix doesn't want you. They want IP.

Speaker 7 They don't want your shitty TV networks. Amazon can't buy you.
That's going to be a whole antitrust concern. I'm sick of this game.

Speaker 2 At the end of the day,

Speaker 2 really the most important job of an investment banker is to create the illusion of multiple bidders.

Speaker 2 Companies are bought, not sold. And people say, well, I'll decide to sell.
No, you don't get to decide when to sell. People get to decide when to buy.

Speaker 2 And what you need is when you get a, you have to have a credible inbound opportunity and offer.

Speaker 2 You give that credible inbound opportunity a chance to take you off the market at what you would call a rich, even irrational price. Otherwise, you're going to investigate other suitors.

Speaker 2 Fine, they don't want to give you an irrational price up front. You get it.
You get a first strike opportunity. Sometimes they do, sometimes they don't.

Speaker 2 When I sold my first company to Dentsu, I said, here's a price. It's above market, but if you take it, we won't talk to anybody else and it's yours.
They did that. Great.
With L2,

Speaker 2 We had a credible inbound opportunity. I countered at a much higher price.
They said, no, we can't do that. I said, fine, but just FYI, we're going to to do a market check.

Speaker 2 Go out with a book, data room, have people signed LOIs, seven players signed LOIs. It's a great business.
We got three term sheets, including the existing inbound offer.

Speaker 2 One was from Gartner, one was from Accenture, and one was from Corporate Executive Board.

Speaker 2 And I wake up and Accenture basically said, this is so exciting. You're going to love this, Scott.
We do business with 400 of the 500 global, you know, biggest, the Fortune 500 globally.

Speaker 2 We want to take your thought leadership and introduce you to everyone from, you know,

Speaker 2 De Beers in South Africa to Samsung. And they were acting as if, what a thrill for you as a professor.
You're going to get to.

Speaker 2 molest the globe and share your thought leadership with CEOs all over the world.

Speaker 2 And I thought, I can't imagine anything I would less rather do than get on a plane again for the rest of my life and be in shitty corporate hotels,

Speaker 2 again, renting my brain to old white guys or old brown guys around the world. I'm just done.
I'm fucking done. And they made it sound like I would love that.

Speaker 2 And I'm like, so I went back to them and I said, look, this isn't for me. And then I wake up on fucking Monday morning and there's an announcement that Gardner has acquired corporate executive board.

Speaker 2 So in about 72 hours, I go from three suitors to one.

Speaker 2 And I remember that thinking that I have to give them the impression that there are multiple suitors here. Otherwise, I'm fucked.

Speaker 2 And basically, I tried to talk my, there's only two things you have to remember in any negotiation. One, don't let emotion get involved.
Don't make it about win-lose. You're all good people.

Speaker 2 And if there's not a fit, there's not a fit, but don't, don't think of it as a win-lose. Two, always show a credible willingness to walk away.
Always show a credible willingness to walk away.

Speaker 2 And the way you can do that, or go with another partner, is the illusion of multiple bidders, or, you know, they get the sense, the tone of your voice, that you're willing to walk.

Speaker 2 And the only way Gartner closed was I walked. They kept coming back with additional terms and conditions.
And at one point, I said, I need you to let me out of this exclusive because I'm done.

Speaker 2 I'm kind of done going back and forth. And then the CEO called me and said, okay, let's close the deal.

Speaker 2 It's very rare that a deal closes without one party walking away at some point because basically you're sharks bumping each other to see, you know, to kind of bump each other and see if you respond.

Speaker 2 These guys, in my view, and I don't know the situation, nobody can rationalize to their public shareholders, whether it's Ted Sarandos or the Armstrongs at Comcast, can get on an earnings call and justify anything close to this.

Speaker 2 So Zaslov is, in my opinion, and his bankers are playing a total game. It was at 11 bucks.
If all of a sudden Ellison announced they were dropping out, I think this thing goes down 30%

Speaker 2 and maybe more. And within within three months, it's back to 11.
It's maybe not back to 11 because it's still in play. Kind of.

Speaker 7 I mean, we're saying that there's one bidder. He's pretending that he's got five.
And if suddenly people start to connect the dots and say, actually, hold on, this doesn't work. This doesn't work.

Speaker 7 This doesn't work. There's only one bidder.
Then suddenly that transforms the transaction in a huge way. And suddenly David Ellison has the leverage.

Speaker 2 If you look at Warner Brothers stock, right?

Speaker 2 In April of 25 and April of this year, I mean, eight months ago, it was at eight bucks a share, right?

Speaker 2 In October of 24, it was at 740. By the way, the business was better then.
This business gets worse every month because they're in the business of ad sported cable.

Speaker 2 So when the business was better at $7 a share, the only thing that's changed here is there's a kid with a preloaded credit card of $40 billion that showed up.

Speaker 7 And Zaslov is saying it's not good enough. He's saying it's not good enough at 23.

Speaker 2 That's the whole point of negotiation. It's never good enough.
They're going to play the reluctant bride and pretend that there's other idiots out there willing to pay 24 bucks a share, 26, 30.

Speaker 2 No, there aren't.

Speaker 2 And if Ellison tomorrow announces we're out, we're moving on,

Speaker 2 this thing is down 30%. And most likely, I would bet it's down to 11 or 12 bucks again in three to six months.
So they're all, and good for them. That's their job.

Speaker 2 He's trying to get the maximum, He's trying to get the maximum value for his shareholders. It's a trophy asset.
There are some assets here that are non-replicable. I get it.

Speaker 2 But be clear, there's only one irrational buyer right now. And his last name is Ellison.

Speaker 2 All right, let's take a look at the week ahead.

Speaker 7 We'll see earnings from big tech with Amazon, Apple, Google, Meta, and Microsoft all reporting. We'll also hear the Federal Reserve's October interest rate decision.

Speaker 7 Traders are betting on a quarter point cut with near 100% certainty. Scott, any predictions?

Speaker 2 Well, we talked about it earlier. I think that she is going to come for the jugular, and you're going to see a flurry of open way LLMs.

Speaker 2 The old navy of AI is about to come from the east, and I think it's going to have a pretty serious, could have a serious impact on.

Speaker 2 the companies that are totally dependent upon AI projections, which could have a big impact on the market. I think that

Speaker 2 China is,

Speaker 2 what was it that Tyrion Lannister said about, I forget that character's name. He said, this is a very serious man.

Speaker 2 I think she is very serious. And I think they are being very strategic.
I think it's no accident they went after the soybeans in red states.

Speaker 2 And I think that they, again, I just make, if I was advising Xi, this is exactly what I'd do. Flood the market with cheap AI LLMs that are irresistible to use.

Speaker 2 And these companies don't live up to the already irrational expectations. And all of a sudden, GDP growth in the economy in the U.S.
goes into recession right away.

Speaker 2 And this guy loses all of his cloud cover for these bullshit, sclerotic, irrational, geopolitical decisions around tariffs. And I think that's exactly what they're going to do.

Speaker 2 And he has the power to say to these companies, maybe it's not good for shareholder value, but you're going to come up with an amazing, with amazing LLMs and AI models that require less energy, and you're going to make them for free.

Speaker 7 This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss.

Speaker 7 Mia Silverio is our research leader research associates are Isabella Kinsell, Dan Jalan, and Kristen O'Donoghue. Drew Burrows is our technical director, and Catherine Dillon is our executive producer.

Speaker 7 Thank you for listening to Prof G Markets from Prof G Media.

Speaker 2 Tune in tomorrow for a fresh take on the markets.

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